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 November 26, 2004

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 – 36,054,270 shares

outstanding as of March 8, 2005

NDCHEALTH CORPORATION

FORM 10-Q

FOR THE FISCAL QUARTER ENDED NOVEMBER 26, 2004

TABLE OF CONTENTS

	Part I    FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Statement of Operations for the three months ended November 26, 2004 and November 28, 2003 (Unaudited)	2
	Condensed Consolidated Statement of Operations for the six months ended November 26, 2004 and November 28, 2003 (Unaudited)	3
	Condensed Consolidated Statement of Cash Flows for the six months ended November 26, 2004 and November 28, 2003 (Unaudited)	4
	Condensed Consolidated Balance Sheets at November 26, 2004 and May 28, 2004 (Unaudited)	5
	Notes to Condensed Consolidated Financial Statements (Unaudited)	6
Item 2.	Management Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	42
Item 4.	Controls and Procedures	42
	Part II    OTHER INFORMATION
Item 1.	Legal Proceedings	44
Item 2.	Unregistered Sales of Securities and Use of Proceeds	45
Item 3.	Default upon Senior Securities	45
Item 4.	Submission Of Matters to a Vote of Security Holders	45
Item 5.	Other Information	46
Item 6.	Exhibits and Reports on Form 8-K	46
Signatures		48

PART I—FINANCIAL INFORMATION

Item 1—FINANCIAL STATEMENTS

NDCHealth Corporation and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three Months Ended
(In thousands, except per share data)	November 26, 2004			November 28, 2003
				(As Restated)
Revenue	$	117,407		$	109,238
Operating Expenses:
Cost of Service		70,962			53,593
Sales, General and Administrative		26,123			23,618
Depreciation and Amortization		10,399			8,756
Restructuring and Other Charges		2,216			1,798
		109,700			87,765
Operating Income		7,707			21,473
Other Income (Expense):
Interest and Other Income		78			155
Interest and Other Expense		(6,175	)		(7,319	)
Minority Interest in Earnings		(135	)		(267	)
		(6,232	)		(7,431	)
Income from Continuing Operations before Income Taxes		1,475			14,042
Provision for Income Taxes		574			5,256
Income from Continuing Operations		901			8,786
(Loss) from Discontinued Operations		(5,670	)		(1,221	)
Net Income (Loss)	$	(4,769	)	$	7,565
Basic (Loss) Earnings Per Share:
Income from Continuing Operations	$	0.03		$	0.25
Discontinued Operations	$	(0.16	)	$	(0.04	)
Basic (Loss) Income Per Share	$	(0.13	)	$	0.22
Weighted Average Shares		35,667			34,824
Diluted (Loss) Earnings Per Share:
Income from Continuing Operations	$	0.03		$	0.25
Discontinued Operations	$	(0.16	)	$	(0.03	)
Diluted (Loss) Income Per Share	$	(0.13	)	$	0.21
Weighted Average Shares		35,894			35,619

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

2

NDCHealth Corporation and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Six Months Ended
(In thousands, except per share data)	November 26, 2004			November 28, 2003
				(As Restated)
Revenue	$	226,535		$	211,903
Operating Expenses:
Cost of Service		137,673			105,089
Sales, General and Administrative		49,852			45,920
Depreciation and Amortization		20,836			17,397
Restructuring and Other Charges		2,216			3,297
		210,577			171,703
Operating Income		15,958			40,200
Other Income (Expense):
Interest and Other Income		143			257
Interest and Other Expense		(12,579	)		(14,540	)
Minority Interest in Earnings		(243	)		(418	)
		(12,679	)		(14,701	)
Income from Continuing Operations before Income Taxes		3,279			25,499
Provision for Income Taxes		1,278			9,552
Income from Continuing Operations		2,001			15,947
Loss from Discontinued Operations		(13,735	)		(1,755	)
Net (Loss) Income	$	(11,734	)	$	14,192
Basic (Loss) Earnings Per Share:
Income from Continuing Operations	$	0.06		$	0.46
Discontinued Operations	$	(0.39	)	$	(0.05	)
Basic (Loss) Income Per Share	$	(0.33	)	$	0.41
Weighted Average Shares		35,653			34,785
Diluted (Loss) Earnings Per Share:
Income from Continuing Operations	$	0.06		$	0.45
Discontinued Operations	$	(0.38	)	$	(0.05	)
Diluted (Loss) Income Per Share	$	(0.33	)	$	0.40
Weighted Average Shares		35,948			35,367

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

3

NDCHealth Corporation and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Six Months Ended
(In thousands)	November 26, 2004			November 28, 2003
				(As Restated)
Cash flows from operating activities:
Net (loss) income	$	(11,734	)	$	14,192
Adjustments to reconcile net (loss) income to cash provided by operating activities:
Loss on discontinued operations		13,735			1,755
Non-cash restructuring and other charges		317			453
Depreciation and amortization		20,836			17,397
Deferred income taxes		1,083			8,156
Allowance for doubtful accounts		4,213			4,459
Other, net		2,640			2,410
Total		31,090			48,822
Changes in assets and liabilities, net of the effects of acquisitions:
Accounts receivable		(1,014	)		(8,908	)
Prepaid expenses and other assets		7,310			978
Accounts payable and accrued liabilities		(9,240	)		7,881
Accrued interest on long-term debt		(210	)		(214	)
Deferred revenue		(15,536	)		4,423
Net cash provided by operating activities		12,400			52,982
Cash flows from investing activities:
Capital expenditures		(17,963	)		(21,639	)
Proceeds from the sale of equipment		513			2,148
Acquisitions and other investing activities		(2,412	)		(6,347	)
Net cash used in investing activities		(19,862	)		(25,838	)
Cash flows from financing activities:
Net borrowings under lines of credit		38,500			—
Net principal payments under long-term debt arrangements		(39,208	)		(1,916	)
Net cash used in refinancing activities		—			(395	)
Net cash received related to stock activities		510			2,647
Dividends paid		(2,880	)		(2,820	)
Net cash used in financing activities		(3,078	)		(2,484	)
Net cash used in discontinued operations		(2,834	)		(2,285	)
(Decrease) increase in cash and cash equivalents		(13,374	)		22,375
Cash and cash equivalents, beginning of period		27,617			15,150
Cash and cash equivalents, end of period	$	14,243		$	37,525
Supplemental Disclosures
Cash paid for
Interest	$	10,433		$	14,971
Income taxes (refunded) paid	$	(499	)	$	755

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

4

NDCHealth Corporation and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(In thousands, except share data)	November 26, 2004			May 28, 2004
				(As Restated)
ASSETS
Current Assets:
Cash and Cash Equivalents	$	14,243		$	27,617
Accounts Receivable (Less Allowance of $8,218 and $7,568, respectively.)		64,829			69,110
Deferred Income Taxes		1,076			28,389
Prepaid Expenses		18,810			22,146
Other Current Assets		12,564			15,389
Total Assets of Discontinued Operations		44,047			70,459
Total Current Assets		155,569			233,110
Property and Equipment, Net		78,815			80,666
Capitalized External Use Software, Net		65,724			61,567
Goodwill		363,829			362,429
Intangible Assets, Net		66,823			71,760
Debt Issuance Cost		12,543			12,963
Deferred Income Taxes		11,771			—
Other Assets		23,278			22,561
Total Assets	$	778,352		$	845,056
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current Portion of Long-term Debt	$	42,318		$	33,656
Trade Accounts Payable		25,681			29,693
Accrued Compensation and Benefits		7,754			6,252
Accrued Interest		10,713			10,923
Deferred Revenue		42,667			54,214
Other Accrued Liabilities		30,751			35,757
Total Liabilities of Discontinued Operations		11,591			24,761
Total Current Liabilities		171,475			195,256
Deferred Revenue		2,655			7,208
Deferred Income Taxes		—			14,600
Other Non-current Liabilities		26,984			29,225
Long-term Debt		260,249			269,619
Total Liabilities		461,363			515,908
Commitments and Contingencies		—			—
Minority Interest in Equity of Subsidiaries		1,556			1,313
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; 36,025,273 and 36,006,641 shares issued, respectively.		4,503			4,501
Capital in excess of par value		245,921			245,314
Retained Earnings		65,813			80,426
Deferred Compensation		(6,715	)		(7,694	)
Other Comprehensive Income		5,911			5,288
Total Stockholders' Equity		315,433			327,835
Total Liabilities and Stockholders' Equity	$	778,352		$	845,056

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Financial Statements.

5

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(UNAUDITED)

Note 1—Nature of Operations

NDCHealth Corporation (“NDCHealth,” the “Company,” or “we” and other similar pronouns) conducts its business through three reportable segments: Network Services and Systems, Information Management and Pharmacy Benefit Services. The Network Services and Systems segment provides network-based information processing services and systems to healthcare providers, including pharmacies, hospitals and physicians, in the U.S. and Canada. The Information Management segment provides data products and solutions primarily to pharmaceutical manufacturers. The Pharmacy Benefit Services segment, a consolidated subsidiary in which we maintain a 49% controlling ownership interest, provides various pharmacy benefit plan services primarily to healthcare payers.

Note 2—Summary of Significant Accounting Policies

Basis of Consolidation

The Condensed Consolidated Financial Statements include the accounts of NDCHealth Corporation and its majority-owned and controlled companies. Significant inter-company transactions and balances have been eliminated in consolidation. Certain prior-year amounts have been reclassified to conform to the current year presentation. Our fiscal year begins on the Saturday closest to June 1 and ends on the Friday closest to May 31. Interim quarters typically consist of thirteen weeks ending the Friday closest to the last calendar day of August, November, and February. Unless otherwise noted, all references to a particular year shall mean the Company’s fiscal year.

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared based upon Securities and Exchange Commission (“SEC”) rules that permit reduced disclosure for interim periods. In our opinion, these statements include all adjustments necessary for a fair presentation of the results of the interim periods presented. All adjustments are of a normal recurring nature unless otherwise disclosed. Revenue, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be the same as those for the full year. For a more complete discussion of our significant accounting policies and other information, you should read this report in conjunction with our financial statements and notes thereto contained in our Annual Report on Form 10-K/A for the year ended May 28, 2004 filed with the SEC.

In May 2004, we made the decision to divest our European businesses. As a result, our financial statements have been prepared with our European businesses’ assets and liabilities, results of operations, and cash flows displayed separately as Discontinued Operations with all historical financial statements restated to conform to this presentation, in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”.

Restatement of Financial Statements

The restated financial statements for the fiscal years ended May 28, 2004, May 30, 2003, and May 31, 2002 are reflected in the Company’s Annual Report on Form 10-K/A for the fiscal year ended May 28, 2004, which is being filed concurrently with this Quarterly Report on Form 10-Q for the quarter ended November 26, 2004. In addition, the Company’s Quarterly Report on Form 10-Q/A for the quarter ended August 27, 2004 is being filed concurrently with this Quarterly Report and reflects the restated financial statements for the periods covered by that Quarterly Report. Throughout this Quarterly Report on Form 10-Q, all referenced amounts for prior periods and prior period comparisons reflect the balances and amounts on a restated basis.

6

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

Earnings Per Share

SFAS No. 128, “Earnings per Share,” requires a dual presentation of basic and diluted earnings (loss) per share (“EPS”). Basic earnings per share is computed by dividing reported Net Income (Loss) by weighted average shares outstanding during the period. Diluted earnings per share is computed by dividing reported Net Income (Loss) by weighted average shares outstanding during the period and the impact of securities that, if exercised, would have a dilutive effect on earnings per share. 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 tables set forth the computation of basic and diluted earnings for the three and six months ending November 26, 2004 and November 28, 2003:

	Three Months Ended
	November 26, 2004							November 28, 2003
(In thousands, except per share data)	Income			Shares	Per Share			Income		Shares	Per Share
								(As Restated)			(As Restated)
Basic EPS:
Net (Loss) Income	$	(4,769	)	35,667	$	(0.13	)	$	7,565	34,824	$	0.22
Diluted EPS:
Effect of dilutive securities:
Stock options and restricted stock				227						795
Net (Loss) Income plus assumed conversions	$	(4,769	)	35,894	$	(0.13	)	$	7,565	35,619	$	0.21
	Six Months Ended
	November 26, 2004							November 28, 2003
(In thousands, except per share data)	Income			Shares	Per Share			Income		Shares	Per Share
								(As Restated)			(As Restated)
Basic EPS:
Net (Loss) Income	$	(11,734	)	35,653	$	(0.33	)	$	14,192	34,785	$	0.41
Diluted EPS:
Effect of dilutive securities:
Stock options and restricted stock				295						582
Net (Loss) Income plus assumed conversions	$	(11,734	)	35,948	$	(0.33	)	$	14,192	35,367	$	0.40

Income from Continuing Operations of $0.9 million and $8.8 million in the three months ended November 26, 2004 and November 28, 2003 resulted in basic earnings per share of $0.03 and $0.25 and diluted earnings per share of $0.03 and $0.25, respectively. Income from Continuing Operations of $2.0 million and $15.9 million in the six months ended November 26, 2004 and November 28, 2003 resulted in basic earnings per share of $0.06 and $0.46 and diluted earnings per share of $0.06 and $0.45, respectively.

Outstanding options to purchase 2,881,500 and 1,682,000 shares of common stock were not included in the computation of diluted earnings per share for the three months ended November 26, 2004 and November 28, 2003, respectively, because the options’ exercise prices were greater than the average market price of NDCHealth common stock for those periods. Outstanding options to purchase 3,516,000 and 843,000 shares of common stock were not included in the computation of diluted earnings per share for the six months ended November 26, 2004 and November 28, 2003, respectively, because the options’ exercise prices were greater than the average market price of NDCHealth common stock for those periods. For the three months ended November 26, 2004 and November 28, 2003, dividends declared per common share were $0.04. For the six months ended November 26, 2004 and November 28, 2003, dividends declared per common share were $0.08.

7

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

Stock Options

We have chosen the disclosure option under SFAS No. 123, “Accounting for Stock Based Compensation” (“SFAS 123”) 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,” (“APB 25”) and related interpretations in accounting for our plans. Accordingly, no compensation cost has been recognized for options granted under the plans. The weighted average fair value of options granted during the three months ended November 26, 2004 and November 28, 2003 was approximately $8.17 and $11.54, respectively. The weighted average fair value of options granted during the six months ended November 26, 2004 and November 28, 2003 was $6.78 and $9.20, respectively. Had compensation cost for these plans been recognized based on the fair value of the options at the grant dates in accordance with SFAS No. 123, the effect on our Net (Loss) Income and Earnings (Loss) Per Share would have been as follows:

	Three Months Ended
(In thousands, except per share data)	November 26, 2004			November 28, 2003
				(As Restated)
Net (Loss) Income:
As reported	$	(4,769	)	$	7,565
Add: Stock-based compensation (restricted stock) expense included in reported Net (Loss) Income, net of related tax effects		592			404
Deduct: Total stock-based compensation expense determined under fair value based methods for all awards, net of related tax effects		(2,218	)		(2,006	)
Pro forma	$	(6,395	)	$	5,963
Basic (Loss) Earnings Per Share:
As reported	$	(0.13	)	$	0.22
Pro forma	$	(0.18	)	$	0.17
Diluted (Loss) Earnings Per Share:
As reported	$	(0.13	)	$	0.21
Pro forma	$	(0.18	)	$	0.17

	Six Months Ended
(In thousands, except per share data)	November 26, 2004			November 28, 2003
				(As Restated)
Net (Loss) Income:
As reported	$	(11,734	)	$	14,192
Add: Stock-based compensation (restricted stock) expense included in reported Net (Loss) Income, net of related tax effects		958			854
Deduct: Total stock-based compensation expense determined under fair value based methods for all awards, net of related tax effects		(4,500	)		(4,451	)
Pro forma	$	(15,276	)	$	10,595
Basic (Loss) Earnings Per Share:
As reported	$	(0.33	)	$	0.41
Pro forma	$	(0.43	)	$	0.30
Diluted (Loss) Earnings Per Share:
As reported	$	(0.33	)	$	0.40
Pro forma	$	(0.42	)	$	0.30

8

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

New Accounting Pronouncements

In December 2004, the FASB issued SFAS 123 (R), “Share-Based Payment,” (“SFAS 123 (R)”) which replaces SFAS 123 and supersedes APB 25. SFAS No. 123 (R) requires that compensation cost relating to all share-based payment transactions, including grants of employee stock options, be recognized in the statement of operations based on their fair values. Pro forma disclosure is no longer an alternative. SFAS 123 (R) is effective the first interim or annual reporting period that begins after June 15, 2005. NDCHealth expects to adopt SFAS 123 (R) on September 3, 2005 and expects to apply the modified prospective method upon adoption. The modified prospective method requires companies to record compensation cost beginning with the effective date (a) based on the requirements of SFAS 123 (R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date of SFAS 123 (R) that remain unvested on the effective date.

Note 3—Discontinued Operations

During the fourth fiscal quarter of 2004, NDCHealth’s management performed a review of our European businesses to determine alternatives to mitigate losses associated with these operations. As a result of this review, our Board of Directors authorized the disposition of our European businesses. Accordingly, our financial statements have been prepared with the net assets and liabilities, results of operations, and cash flows of these operations displayed separately as Discontinued Operations with all historical financial statements restated to conform to this presentation.

In the second quarter of fiscal 2005 the Company completed the sale of its United Kingdom operations which resulted in a net gain of $1.7 million or $0.05 per share. The Company is also negotiating with interested buyers for the remaining German portion of its European business.

The loss from operations for the three months ended November 26, 2004 from the European businesses was less than $0.1 million. The loss from operations for the three months ended November 28, 2003 was $1.2 million, or $0.03 per share. The loss from operations for the European businesses was $0.5 million, or $0.01 per share for the six months ended November 26, 2004. The loss from operations for the six months ended November 28, 2003 was $1.8 million, or $0.05 per share. In the first and second quarters of fiscal 2005 management determined the Company would receive lower than previously expected total transaction proceeds based on current negotiations as of the filing date for each quarterly report. As a result, the carrying value of this asset was reduced, which increased the Loss from Discontinued Operations by $7.6 million, or $0.21 per share and $7.4 million, or $0.20 per share in the first and second quarter of fiscal 2005, respectively. For the six months ended November 26, 2004 the total Loss from Discontinued Operations was $(13.7) million or $0.38 per diluted share.

9

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

The operating results of our Discontinued Operations are summarized as follows:

	Three months ended
(In thousands, except per share data)	November 26, 2004			November 28, 2003
Revenue	$	4,935		$	4,811
Operating Income / (Loss)	$	304		$	(2,058	)
Income / (Loss) from Operations, net of Tax	$	(15	)	$	(1,221	)
Gain on Sale of UK Businesses	$	1,702		$	—
Asset Valuation Adjustment	$	(7,357	)	$	—
Income / (Loss) from Discontinued Operations	$	(5,670	)	$	(1,221	)
Diluted Earnings / (Loss) per Share:
From Operations	$	—		$	(0.03	)
Gain on Sale of UK Businesses	$	0.05		$	—
From Asset Valuation Adjustment	$	(0.20	)	$	—
Total	$	(0.16	)	$	(0.03	)

	Six months ended
(In thousands, except per share data)	November 26, 2004			November 28, 2003
Revenue	$	10,221		$	10,061
Operating Loss	$	(253	)	$	(2,400	)
Loss from Operations, net of Tax	$	(472	)	$	(1,755	)
Gain on Sale of UK Businesses	$	1,702		$	—
Asset Valuation Adjustment	$	(14,965	)	$	—
Loss from Discontinued Operations	$	(13,735	)	$	(1,755	)
Diluted Earnings / (Loss) per Share:
From Operations	$	(0.01	)	$	(0.05	)
Gain on Sale of UK Businesses	$	0.05		$	—
From Asset Valuation Adjustment	$	(0.42	)	$	—
Total	$	(0.38	)	$	(0.05	)

The Net Loss from Discontinued Operations for the three months November 28, 2003 is net of a tax benefit of $0.6 million. The Net Loss from Discontinued Operations for the six months ended November 26, 2004 and November 28, 2003 is net of a tax benefit of approximately $0.1 million and $0.7 million, respectively.

10

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

The total assets and liabilities of Discontinued Operations are summarized as follows:

(In thousands)	November 26, 2004		May 28, 2004
Assets
Cash and Cash Equivalents	$	808	$	983
Accounts Receivable, Net		1,481		2,173
Prepaid and Other Assets		12,534		13,608
Property and Equipment, Net		1,468		1,776
Goodwill		26,482		50,739
Intangible Assets, Net		1,274		1,180
Total Assets of Discontinued Operations	$	44,047	$	70,459
Liabilities
Accounts Payable and Accrued Liabilities	$	3,462	$	15,210
Deferred Revenue		984		2,246
Other Long-Term Liabilities		2,732		2,531
Minority Interest		4,413		4,774
Total Liabilities of Discontinued Operations	$	11,591	$	24,761

Material contingent liabilities related to Discontinued Operations are discussed in Note 8—Commitments and Contingencies.

Note 4—Restructuring and Other Charges

In the first six months of fiscal year 2004, with the completion of the TechRx acquisition, we began a review of NDCHealth to identify opportunities for increased operational efficiencies. Consequently, in the first six months of fiscal 2004, we recorded a charge of $3.0 million for severance related costs, $0.1 million related to lease terminations, and $0.2 million related to impairment of a note receivable we received as partial payment for the sale of a non-core operation.

During the second quarter of fiscal 2005, in an effort to reduce costs and consolidate certain senior management positions within the organization, we terminated five positions. Eliminations of these positions will allow the company to better align its resources with key opportunities and bring decision making closer to the customers. We recorded a charge of $2.2 million for severance related costs, which include $0.9 million in the Network Services and Systems segment, $0.4 million in the Information Management Segment, and $0.9 million in the Other segment. Of the $2.2 million incurred in the second quarter of fiscal 2005, $1.9 million was cash and $0.3 million was a non-cash charge in accordance with FASB Interpretation Number 44, “Accounting for Certain Transactions Involving Stock Compensation.”

11

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

	Three Months Ended
(In thousands)	November 26, 2004		November 28, 2003
			(As Restated)
By Expense Type:
Severance	$	2,216	$	1,415
Exit-related costs		—		32
Asset reserves		—		187
Acquisition related costs		—		164
Total	$	2,216	$	1,798
By Segment:
Network Services and Systems	$	911	$	757
Information Management		433		58
Other		872		983
Total	$	2,216	$	1,798

	Six Months Ended
(In thousands)	November 26, 2004		November 28, 2003
			(As Restated)
By Expense Type:
Severance	$	2,216	$	2,698
Exit-related costs		—		147
Asset reserves		—		187
Acquisition related costs		—		265
Total	$	2,216	$	3,297
By Segment:
Network Services and Systems	$	911	$	1,426
Information Management		433		613
Other		872		1,258
Total	$	2,216	$	3,297

The following table shows the fiscal 2005 activity related to the restructuring liabilities, which are included in Other Accrued Liabilities in the Condensed Consolidated Balance Sheets:

	Network Services and Systems						Information Management			Other
	Severance			Exit-Related			Severance			Severance			Total
Balance, May 28, 2004 (As Restated)	$	729		$	837		$	175		$	799		$	2,540
Restructuring		731			—			433			735			1,899
Cash expenditures		(603	)		(189	)		(155	)		(692	)		(1,639	)
Balance, November 26, 2004	$	857		$	648		$	453		$	842		$	2,800

12

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

Note 5—Goodwill

The changes in the carrying amount of Goodwill for the six months ended November 26, 2004 are as follows:

(In thousands)
Goodwill	Network Services and Systems		Information Management		Total
Balance as of May 28, 2004 (As Restated)	$	323,411	$	39,018	$	362,429
Purchase price adjustments and currency translation		1,195		205		1,400
Balance as of November 26, 2004	$	324,606	$	39,223	$	363,829

We assess the recoverability of goodwill on at least an annual basis during the Company’s second quarter, or more frequently if circumstances suggest potential impairment. Recoverability of goodwill is evaluated using a two-step process. The first step involves a comparison of the fair value of a reporting unit with its carrying value. If the carrying amount of the reporting unit exceeds its fair value, the second step of the process involves a comparison of the fair value and carrying value of the goodwill of that reporting unit. If the carrying value of the goodwill of a reporting unit exceeds the fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess. We completed our annual impairment testing during the second quarter of fiscal 2005. 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 of the impairment test was not necessary.

Note 6—Intangible Assets, Net

The table below presents Intangible Assets by asset class:

(In thousands)	As of November 26, 2004							As of May 28, 2004
	Gross Carrying Amount		Accumulated Amortization			Total		Gross Carrying Amount		Accumulated Amortization			Total
Customer base	$	80,828	$	(25,807	)	$	55,021	$	80,828	$	(22,012	)	$	58,816
Data rights agreement		10,409		(1,363	)		9,046		10,409		(620	)		9,789
Reseller and other		3,600		(844	)		2,756		3,600		(445	)		3,155
Total Intangible Assets	$	94,837	$	(28,014	)	$	66,823	$	94,837	$	(23,077	)	$	71,760

The aggregate amortization expense for the three months and six months ended November 26, 2004 was $2.5 million and $4.9 million, respectively, and estimated amortization expense for the next five fiscal years is as follows:

Estimated Amortization Expense	(In thousands)
For year Ending May 27, 2005	$	9,873
For year Ending June 02, 2006	$	9,873
For year Ending June 01, 2007	$	9,823
For year Ending May 30, 2008	$	9,533
For year Ending May 29, 2009	$	9,418

13

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

Note 7—Segment Information

Segment information for the three months and six months ended November 26, 2004 and November 28, 2003 is presented below. We operate our business as three fundamental reportable segments: Network Services and Systems, which we offer to healthcare providers and payers; Information Management, which we offer primarily to pharmaceutical manufacturers; and Pharmacy Benefit Services, which we offer to third party payers. 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 analytic services primarily to pharmaceutical manufacturers. Pharmacy Benefit Services provides prescription benefit management services. Other includes Restructuring and Other Charges not attributable to a specific segment. The information presented below excludes Discontinued Operations. There has been no significant change in the composition of the reportable segments from the presentation of fiscal 2004 segment information included in our Annual Report on Form 10-K/A for the fiscal year ended May 28, 2004 filed with the SEC.

	Three Months Ended
(In thousands)	November 26, 2004			November 28, 2003
				(As Restated)
Revenue:
Network Services and Systems	$	60,354		$	66,799
Information Management		38,402			37,637
Pharmacy Benefit Services		18,651			4,802
Total Revenue	$	117,407		$	109,238
Income (Loss) from Continuing Operations before Income Taxes:
Network Services and Systems	$	(263	)	$	9,970
Information Management		2,477			4,794
Pharmacy Benefit Services		133			261
Other		(872	)		(983	)
Total Income from Continuing Operations before Income Taxes	$	1,475		$	14,042

	Six Months Ended
(In thousands)	November 26, 2004			November 28, 2003
				(As Restated)
Revenue:
Network Services and Systems	$	117,930		$	129,065
Information Management		73,722			73,394
Pharmacy Benefit Services		34,883			9,444
Total Revenue	$	226,535		$	211,903
Income (Loss) from Continuing Operations before Income Taxes:
Network Services and Systems	$	1,141		$	18,993
Information Management		2,773			7,355
Pharmacy Benefit Services		237			409
Other		(872	)		(1,258	)
Total Income from Continuing Operations before Income Taxes	$	3,279		$	25,499

14

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

Note 8—Commitments And Contingencies

Our Board of Directors has authorized the disposition of our European operations in Germany and the United Kingdom, which are recorded as discontinued operations. 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 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, and only 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 from the European Commission ordering 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 (“ECJ”) stayed this decision pending a complete review of the underlying substantive matters. Those matters are still proceeding.

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. On April 29, 2004, and upon referral by the Frankfurt Regional Courts on questions involving interpretations of European Competition laws, the European Court of Justice in Luxembourg found in favor of the Company, finding that if IMS Health holds a valid, enforceable copyright, then the Company should be entitled to a compulsory license from IMS Health to the extent it can demonstrate that it offers “a new product” in circumstances where IMS Health is “capable of eliminating all competition on the relevant market.” This clarification of law has been referred back to the Frankfurt Regional Court and is pending review.

On October 14, 2003, we filed suit in the 96th Judicial District Court, Tarrant County, Texas, against 1-Rex, Inc., FDS, Inc., Healthcare Computer Corporation, Freedom Drug Stores, Inc., Freedom Data Services, Inc. and William Rex Akers (collectively the “Defendants”) for breach of contract, misappropriation of trade secrets, fraud, and negligent misrepresentation, seeking unspecified damages for Defendants’ wrongful conduct. On March 5, 2004, Defendants filed a counterclaim against us, asserting claims for tortious interference with a prospective contract, violations of Section 15.05(b) of the Texas Business and Commerce Code, civil conspiracy, and seeking a declaratory judgment in connection with various claims made by us. Defendants seek over $25 million in damages, plus attorneys’ fees, pre-judgment and post-judgment interest, and punitive damages. We

15

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

intend to vigorously prosecute our causes of action against the Defendants, have denied all liability and damages sought in the counterclaim, and are vigorously defending the claims asserted against us.

On April 7, 2004, a putative securities class-action, captioned Garfield v. NDCHealth Corporation, et al., was filed in the United States District Court for the Northern District of Georgia against NDCHealth and Messrs. Hoff and Hutto. On September 1, 2004, a second amended complaint was filed. The second amended complaint added Messrs. Miller, Shenk, FitzGibbons and Adrean, as well as Ernst and Young, as defendants. The second amended complaint generally alleges, among other things, that members of a purported class of stockholders who purchased common stock between October 1, 2003 and August 9, 2004 were damaged as a result of (i) improper revenue recognition practices in the Company’s physician business unit; (ii) the failure to timely write-down the Company’s investment in MedUnite; and (iii) the improper capitalization and amortization of costs associated with software development. The second amended complaint alleges that, as a result of such conduct, the Company’s previously issued financial statements were materially false and misleading, thereby causing the prices of the Company’s common stock to be inflated artificially. The second amended complaint asserts violations of Section 10(b) and 20(a) of the Exchange Act, and Rule 10b-5 promulgated thereunder, and seeks unspecified monetary damages and other relief. On October 13, 2004, the Company and the individual defendants filed a motion to dismiss the second amended complaint. The motion is fully briefed and the parties are currently awaiting a decision by the court.

On April 28, 2004, a lawsuit was filed against us in the General Court of Justice, Superior Court Division, in the State of North Carolina, County of Forsyth, by Carolina Coupon Clearing, Inc., d/b/a Carolina Services Company, Inc. (“CSC”). This matter was settled by the parties on a confidential basis which settlement did not require either party to pay any funds to the other.

The Internal Revenue Service (“IRS”) is currently auditing our fiscal year 2001 consolidated federal income tax return. The primary issue is a worthless stock loss deduction claimed as a result of the divestiture of the management services business (“PHSS”). This deduction created a net operating loss which was used to offset most of the tax liability for fiscal years 2002 and 2003. In fiscal year 2001, we provided a tax contingency reserve of approximately 50% of the $25.0 million tax benefit claimed for the worthless stock loss deduction.

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 9—Comprehensive (Loss) Income

Comprehensive (loss) income includes unrealized gains and losses which are excluded from the Condensed Consolidated Statements of Operations. The components of comprehensive (loss) income are as follows:

	Three months ended
(In thousands)	November 26, 2004			November 28, 2003
				(As Restated)
Net (loss) income	$	(4,769	)	$	7,565
Foreign currency translation adjustment		1,043			5,166
Unrealized holding loss, net of tax		—			4
Pension liability adjustment, net of tax		—			—
Total comprehensive (loss) income	$	(3,726	)	$	12,735

16

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

	Six months ended
(In thousands)	November 26, 2004			November 28, 2003
				(As Restated)
Net (loss) income	$	(11,734	)	$	14,192
Foreign currency translation adjustment		623			1,285
Unrealized holding loss, net of tax		—			4
Pension liability adjustment, net of tax		—			(712	)
Total comprehensive (loss) income	$	(11,111	)	$	14,769

Note 10—Retirement Benefits

The NDCHealth noncontributory defined benefit pension plan (the “Plan”) covers substantially all of our United States employees who have met the eligibility provisions of the Plan as of May 31, 1998. The defined benefit pension plan was closed to new participants beginning June 1, 1998, and benefit accruals for years of service ceased on July 31, 1998. Additionally, benefit accruals for compensation level increases ceased on June 30, 2003. Plan provisions and funding meet the requirements of the Employee Retirement Income Security Act of 1974, as amended.

Net periodic pension cost for our pension plan during the first two quarters of fiscal 2005 and 2004 included the following components:

	Three Months Ended						Six Months Ended
(In thousands)	November 26 2004			November 28 2003			November 26 2004			November 28 2003
Interest cost on projected benefit obligation	$	483		$	470		$	967		$	940
Expected return on plan assets		(424	)		(359	)		(849	)		(718	)
Recognized actuarial loss		145			184			289			368
Net periodic pension cost	$	204		$	295		$	407		$	590

The expense listed above relates to continuing operations. There were no pension costs related to discontinued operations.

In the first fiscal quarter of 2005, we did not make any pension contributions. In the second quarter, we made a contribution of $0.6 million. We presently anticipate contributing an additional $2.5 million to fund our pension plan during the remainder of our 2005 fiscal year.

17

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

Note 11—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., 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 November 26, 2004 (In thousands)	NDCHealth Corporation			Subsidiary Guarantors			Subsidiary Non-Guarantors			Eliminations			Consolidated
Revenue	$	55,877		$	42,043		$	19,487		$	—		$	117,407
Operating Expenses
Cost of Service		25,190			27,513			18,259			—			70,962
Other Operating Expenses		24,318			13,103			1,317			—			38,738
		49,508			40,616			19,576			—			109,700
Operating Income		6,369			1,427			(89	)		—			7,707
Other Income/Expense		(6,086	)		(15	)		(131	)		—			(6,232	)
Income from Continuing Operations		283			1,412			(220	)		—			1,475
Provision for Income Taxes		(56	)		716			(86	)		—			574
Discontinued Operations		—			—			(3,721	)		(1,949	)		(5,670	)
Net (Loss) Income	$	339		$	696		$	(3,855	)	$	(1,949	)	$	(4,769	)

Statement of Operations for the Three months ended November 28, 2003 (In thousands) (As Restated)	NDCHealth Corporation			Subsidiary Guarantors			Subsidiary Non-Guarantors			Eliminations			Consolidated
Revenue	$	62,691		$	41,091		$	5,456		$	—		$	109,238
Operating Expenses
Cost of Service		23,622			25,525			4,446			—			53,593
Other Operating Expenses		22,244			11,054			874			—			34,172
		45,866			36,579			5,320			—			87,765
Operating Income		16,825			4,512			136			—			21,473
Other Income/Expense		(7,085	)		(56	)		(271	)		(19	)		(7,431	)
Income from Continuing Operations		9,740			4,456			(135	)		(19	)		14,042
Provision for Income Taxes		3,743			1,571			(51	)		(7	)		5,256
Discontinued Operations		—			—			(1,221	)		—			(1,221	)
Net Income	$	5,997		$	2,885		$	(1,305	)	$	(12	)	$	7,565

18

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

Statement of Operations for the Six months ended November 26, 2004 (In thousands)	NDCHealth Corporation			Subsidiary Guarantors			Subsidiary Non-Guarantors			Eliminations			Consolidated
Revenue	$	108,873		$	80,981		$	36,681					$	226,535
Operating Expenses
Cost of Service		49,463			54,072			34,138						137,673
Other Operating Expenses		43,958			26,432			2,514						72,904
		93,421			80,504			36,652			—			210,577
Operating Income		15,452			477			29			—			15,958
Other Income/Expense		(12,409	)		(20	)		(250	)					(12,679	)
Income from Continuing Operations		3,043			457			(221	)		—			3,279
Provision for Income Taxes		1,186			178			(86	)		—			1,278
Discontinued Operations		—			—			(11,786	)		(1,949	)		(13,735	)
Net (Loss) Income	$	1,857		$	279		$	(11,921	)	$	(1,949	)	$	(11,734	)
Statement of Operations for the Three months ended November 28, 2003 (In thousands) (As Restated)	NDCHealth Corporation			Subsidiary Guarantors			Subsidiary Non-Guarantors			Eliminations			Consolidated
Revenue	$	120,726		$	80,390		$	10,787					$	211,903
Operating Expenses
Cost of Service		45,628			50,623			8,838						105,089
Other Operating Expenses		42,708			22,143			1,763						66,614
		88,336			72,766			10,601			—			171,703
Operating Income		32,390			7,624			186			—			40,200
Other Income/Expense		(14,191	)		973			(423	)		(1,060	)		(14,701	)
Income from Continuing Operations		18,199			8,597			(237	)		(1,060	)		25,499
Provision for Income Taxes		6,778			3,267			(90	)		(403	)		9,552
Discontinued Operations		—			—			(1,755	)		—			(1,755	)
Net Income	$	11,421		$	5,330		$	(1,902	)	$	(657	)	$	14,192

19

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

Balance Sheet as of November 26, 2004 (In thousands)	NDCHealth Corporation		Subsidiary Guarantor			Subsidiary Non-Guarantors		Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	12,418	$	382		$	1,443	$	—		$	14,243
Accounts receivable		42,448		16,027			6,354		—			64,829
Prepaid expenses and other current assets		36,253		12,630			575		(17,008	)		32,450
Total assets from discontinued operations							35,791		8,256			44,047
Total current assets		91,119		29,039			44,163		(8,752	)		155,569
Property, equipment and capital use software, net		112,212		30,548			1,779		—			144,539
Goodwill and intangible assets, net		384,860		36,812			8,980		—			430,652
Investments and other		278,643		683			—		(231,734	)		47,592
Intercompany receivables		71,480		(14,726	)		839		(57,593	)		—
Total Assets	$	938,314	$	82,356		$	55,761	$	(298,079	)	$	778,352
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	42,048	$	126		$	144	$	—		$	42,318
Accounts payable, accrued liabilities and other		82,150		29,823			5,593		—			117,566
Total liabilities from discontinued operations							38,883		(27,292	)		11,591
Total current liabilities		124,198		29,949			44,620		(27,292	)		171,475
Long-term liabilities		299,019		3,168			6,403		(18,702	)		289,888
Total liabilities		423,217		33,117			51,023		(45,994	)		461,363
Minority interest in equity of subsidiaries		—		—			1,556		—			1,556
Stockholders’ equity		515,097		49,239			3,182		(252,085	)		315,433
Total Liabilities and Stockholders’ Equity	$	938,314	$	82,356		$	55,761	$	(298,079	)	$	778,352

20

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

Balance Sheet as of May 28, 2004 (In thousands) (As Restated)	NDCHealth Corporation		Subsidiary Guarantors			Subsidiary Non-Guarantors			Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	24,438	$	727		$	2,452		$	—		$	27,617
Accounts receivable		42,495		20,933			5,682			—			69,110
Prepaid expenses and other current assets		65,193		14,003			413			(13,685	)		65,924
Total assets from discontinued operations		—		—			76,528			(6,069	)		70,459
Total current assets		132,126		35,663			85,075			(19,754	)		233,110
Property, equipment and capital use software, net		108,243		31,512			2,478			—			142,233
Goodwill and intangible assets, net		389,279		37,126			7,784			—			434,189
Investments and other		258,484		—			28			(222,988	)		35,524
Intercompany receivables		79,070		(23,127	)		(6,396	)		(49,547	)		—
Total Assets	$	967,202	$	81,174		$	88,969		$	(292,289	)	$	845,056
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	33,011	$	500		$	145		$	—		$	33,656
Accounts payable, accrued liabilities and other		91,928		38,641			6,517			(247	)		136,839
Total liabilities from discontinued operations		—		—			40,581			(15,820	)		24,761
Total current liabilities		124,939		39,141			47,243			(16,067	)		195,256
Long-term liabilities		317,533		2,881			272			(34	)		320,652
Total liabilities		442,472		42,022			47,515			(16,101	)		515,908
Minority interest in equity of subsidiaries		—		—			1,312			1			1,313
Stockholders’ equity		524,730		39,152			40,142			(276,189	)		327,835
Total Liabilities and Stockholders’ Equity	$	967,202	$	81,174		$	88,969		$	(292,289	)	$	845,056

21

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

Statement of Cash Flows for the Six Months Ended November 26, 2004 (In thousands)	NDCHealth Corporation			Subsidiary Guarantors			Subsidiary Non-Guarantors			Eliminations			Consolidated
Cash flows from operating activities:
Net income (loss)	$	1,857		$	279		$	(11,921	)	$	(1,949	)	$	(11,734	)
Adjustments to reconcile net income (loss) to cash provided by operating activities:		22,032			6,293			14,499			—			42,824
Changes in assets and liabilities which provided (used) cash, net of the effects of acquisitions:		(4,917	)		(15,413	)		(17,569	)		19,209			(18,690	)
Net cash provided by operating activities		18,972			(8,841	)		(14,991	)		17,260			12,400
Cash flows from investing activities:		(28,350	)		8,870			(382	)		—			(19,862	)
Cash flows from financing activities:		(2,632	)		(374	)		17,188			(17,260	)		(3,078	)
Cash flows from discontinued operations:		—			—			(2,834	)		—			(2,834	)
Increase (decrease) in cash and cash equivalents		(12,010	)		(345	)		(1,019	)		—			(13,374	)
Cash and cash equivalents, beginning of period		24,438			727			2,452			—			27,617
Cash and cash equivalents, end of period	$	12,428		$	382		$	1,433		$	—		$	14,243
Statement of Cash Flows for the Six Months Ended November 28, 2003 (In thousands)	NDCHealth Corporation			Subsidiary Guarantors			Subsidiary Non-Guarantors			Eliminations			Consolidated
Cash flows from operating activities:
Net income (loss)	$	11,421		$	5,330		$	(1,902	)	$	(657	)	$	14,192
Adjustments to reconcile net income (loss) to cash provided by operating activities:		25,588			6,780			9,690			(7,428	)		34,630
Changes in assets and liabilities which provided (used) cash, net of the effects of acquisitions:		11,476			(10,475	)		(6,198	)		9,357			4,160
Net cash provided by operating activities		48,485			1,635			1,590			1,272			52,982
Cash flows from investing activities:		(22,312	)		(2,340	)		(1,186	)					(25,838	)
Cash flows from financing activities:		(2,537	)		(359	)		1,684			(1,272	)		(2,484	)
Cash flows from discontinued operations:								(2,285	)					(2,285	)
Increase (decrease) in cash and cash equivalents		23,636			(1,064	)		(197	)		—			22,375
Cash and cash equivalents, beginning of period		12,698			1,491			961						15,150
Cash and cash equivalents, end of period	$	36,334		$	427		$	764		$	—		$	37,525

22

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

Note 12—Subsequent Events

SEC Investigation

As disclosed by the Company on January 12, 2005, the Securities and Exchange Commission (the “SEC”) has informed us that its previously disclosed informal inquiry was converted to a formal investigation. The Company is cooperating with the SEC in its investigation. At this time we cannot predict how long the investigation will last or what the results of the investigation will be.

Debt and Equity Update

On February 23, 2005, the Company’s Senior Credit Facility was amended to allow the Company to make an additional borrowing under the Revolving Credit Line of the Senior Credit Facility and to, among other things, revise the Company’s total leverage ratio for the third quarter of fiscal 2005.

The Company’s delay in providing its financial statements to its senior lenders under its Senior Credit Facility and in filing its Quarterly Report on Form 10-Q for the quarter ended November 26, 2004 with the SEC as required by the indenture for its 10½% Senior Subordinated Notes due 2012 constituted defaults under its Senior Credit Facility and Note indenture, respectively. On March 16, 2005, the Company secured conditional waivers from the requisite number of lenders under its Senior Credit Facility and the requisite number of holders of its Notes pursuant to which the senior lenders and Note holders have agreed to waive the defaults under the Senior Credit Facility and the Note indenture provided the Company files its Quarterly Report on Form 10-Q for the quarterly period ended November 26, 2004 and restated financial results on Annual Report on Form 10-K/A for the fiscal year ended May 28, 2004 and Quarterly Report on Form 10-Q/A for the quarterly period ended August 27, 2004 and delivers current and amended financial statements to the senior lenders as filed with the SEC. By making such filings, the Company satisfied the condition precedent to these waivers and the waivers became effective. The Company expects to be in compliance with the Senior Credit Facility’s financial covenants for the next twelve months.

On February 3, 2005, the Company announced that it would not pay its regular quarterly dividend of $0.04 for the second fiscal quarter ended November 26, 2004 due to the delay in filing the financial statements for its second fiscal quarter as the payment of dividends by the Company is restricted as long as any default or event of default under its Senior Credit Facility and its 10½ % Senior Subordinated Notes continues.

Sale of Assets

On March 17, 2005, the Company completed the sale of its Canadian pharmacy transaction business and signed a definitive agreement to sell its Canadian pharmacy system assets for a combined $14.5 million. The Company expects to record a loss related to these sales in the amount of approximately $3.5 million. The proceeds from the sale will be used to pay down senior debt.

The Company’s Pharmacy Benefit Services business is a 49.5%-owned subsidiary in which the Company has voting control. The contribution of this business to the Company’s total profit is currently not significant. As part of the Company’s consideration of strategic alternatives for increasing focus and reducing debt outstanding, the Company has entered into a definitive agreement for the sale of its interest to one of the minority partners in this business which includes members of management of this business. This agreement is subject to the satisfaction of certain conditions and there can be no assurance that these conditions will be satisfied. If this transaction is not consummated, the Company’s current plans are to continue its ownership of this business with its current partners.

23

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

Strategic Alternatives

On February 24, 2005, the Board of Directors of NDCHealth issued a press release announcing that the independent directors of the Board approved the engagement of The Blackstone Group L.P. to assist the Board in its evaluation of strategic alternatives with the objective of maximizing stockholder value over a reasonable period of time.

24

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

Certain statements in this Form 10-Q are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. The words “estimate,” “plan,” “intend,” “expect,” “anticipate,” “believe,” and similar expressions are intended to identify forward-looking statements. These forward-looking statements are found at various places throughout this report. NDCHealth disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Although NDCHealth believes that its expectations are based on reasonable assumptions, there can be no assurance that its goals will be achieved. Important factors that could cause actual results to differ from estimates or projections contained in the forward-looking statements are described under “Safe Harbor Statement” in this Item 2.

The following discussion of our financial condition and results of operations should be read in conjunction with the accompanying Unaudited Condensed Consolidated Financial Statements and notes thereto included elsewhere in this Report. For a more complete understanding of our industry, the drivers of our business and our current period results, you should read the following Management’s Discussion and Analysis of Financial Condition and Results of Operations in conjunction with our latest Annual Report on Form 10-K/A for the year ended May 28, 2004 and our other filings with the SEC.

The restated financial statements for the fiscal years ended May 28, 2004, May 30, 2003, and May 31, 2002 are reflected in the Company’s Annual Report on Form 10-K/A for the fiscal year ended May 28, 2004 which is being filed concurrently with this Quarterly Report on Form 10-Q for the quarter ended November 26, 2004. In addition, the Company’s Quarterly Report on Form 10-Q/A for the quarter ended August 27, 2004 is being filed concurrently with this Quarterly Report and reflects the restated financial statements for the periods covered by that Quarterly Report. Throughout this Quarterly Report on Form 10-Q, all referenced amounts for prior periods and prior period comparisons reflect the balances and amounts on a restated basis.

Overview

We operate our business as three fundamental segments: Network Services and Systems, Information Management, and Pharmacy Benefit Services. Network Services and Systems provides electronic connectivity to our NDCHealth Intelligent Network for transaction processing and system solutions throughout the healthcare industry. Information Management provides management information, research and analytic services primarily to pharmaceutical manufacturers. Pharmacy Benefit Services, a consolidated subsidiary of which we maintain a 49% controlling ownership interest, provides pharmacy plan management services to health care third party payers. More information concerning segments can be found in Note 7 of the Notes to Condensed Consolidated Financial Statements.

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Results of Operations

Revenue

	Three Months Ended
(In thousands)	November 26, 2004		November 28, 2003		Change
Revenue:			(As Restated)		Dollars			Percent
Network Services and Systems	$	60,354	$	66,799	$	(6,445	)	(9.6	)%
Information Management		38,402		37,637		765		2.0	%
Pharmacy Benefit Services		18,651		4,802		13,849		288.4	%
Total	$	117,407	$	109,238	$	8,169		7.5	%
	Six Months Ended
(In thousands)	November 26, 2004		November 28, 2003		Change
Revenue:			(As Restated)		Dollars			Percent
Network Services and Systems	$	117,930	$	129,065	$	(11,135	)	(8.6	)%
Information Management		73,722		73,394		328		0.4	%
Pharmacy Benefit Services		34,883		9,444		25,439		269.4	%
Total	$	226,535	$	211,903	$	14,632		6.9	%

Revenue growth in the second quarter and first six months of fiscal year 2005 as compared to the comparable prior year periods was driven by significant growth in Pharmacy Benefit Services, partially offset by a decline in both the Network Services and Systems. The decline in Network Services and Systems segment revenue was primarily caused by lower physician software sales and the transition to next-generation pharmacy systems, which offset growth in pharmacy network services. The Information Management segment generated lower revenue from non-recurring ad hoc research and analytic services and was impacted by price compression from certain pharmaceutical manufacturer customers renewed over the last year.

Network Services and Systems

Network Services and Systems revenue decreased $6.4 million, or 9.6%, to $60.4 million in the second quarter of fiscal 2005 from $66.8 million in the second quarter of fiscal 2004. Network Services and Systems revenue decreased $11.1 million, or 8.6%, to $117.9 million in the first six months of fiscal 2005 from $129.1 million in the first six months of fiscal 2004. The decrease in revenue is detailed below by our major customer groups.

Revenue by Customer Group

	Three Months Ended
	November 26, 2004		November 28, 2003		Change
(In thousands)			(As Restated)		Dollars			Percent
Pharmacy	$	35,670	$	36,155	$	(485	)	(1.3	)%
Hospital		13,371		15,099		(1,728	)	(11.4	)%
Physician		8,011		11,967		(3,956	)	(33.1	)%
Other		3,302		3,578		(276	)	(7.7	)%
Total	$	60,354	$	66,799	$	(6,445	)	(9.6	)%

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	Six Months Ended
	November 26, 2004		November 28, 2003		Change
(In thousands)			(As Restated)		Dollars			Percent
Pharmacy	$	69,652	$	70,403	$	(751	)	(1.1	)%
Hospital		27,223		29,765		(2,542	)	(8.5	)%
Physician		14,279		21,407		(7,128	)	(33.3	)%
Other		6,776		7,490		(714	)	(9.5	)%
Total	$	117,930	$	129,065	$	(11,135	)	(8.6	)%

Revenue from Pharmacy customers declined $0.5 million, or 1.3%, to $35.7 million in the second quarter of fiscal 2005 from $36.2 million in the second quarter of fiscal 2004. Revenue from Pharmacy customers declined $0.8 million, or 1.1%, to $69.7 million in the first six months of fiscal 2005 from $70.4 million in the first six months of fiscal 2004. This decline was due to lower information product sales as well as lower pharmacy systems revenue as new NDC PharmacyRx^™ system sales and the transition to recurring, transaction-based revenue do not yet offset a decrease in legacy systems sales. This decrease was offset by the overall revenue growth of approximately 10% in our pharmacy transaction business, which was attributed to increases of 10% in network transactions and 22% in pre and post edit transactions. Transaction revenue growth lagged the growth in transactions due to the transaction growth being derived primarily from the largest pharmacy chains, who receive our best per-transaction pricing due to their large volumes. Transaction-based revenue is expected to continue to grow more slowly than transactions due to market share gains by large national chains and competitive price pressure for transaction-based services.

Revenue from Hospital customers declined $1.7 million, or 11.4%, to $13.4 million in the second quarter of fiscal 2005 from $15.1 million in the second quarter of fiscal 2004. Revenue from Hospital customers declined $2.5 million, or 8.5%, to $27.2 million in the first six months of fiscal 2005 from $29.8 million in the first six months of fiscal 2004 as transaction revenue growth from NDC ePREMIS^™ continued to be offset by a lower level of customization and professional services fees.

Revenue from the Physician customer group decreased $4.0 million, or 33.1%, to $8.0 million in the second quarter of fiscal 2005 from $12.0 million in the second quarter of fiscal 2004. Revenue from the Physician customer group decreased $7.1 million, or 33.3%, to $14.3 million in the first six months of fiscal 2005 from $21.4 million in the first six months of fiscal 2004. The decrease in both periods was due to our change in selling software to value added resellers (“VARs”) on a cash basis instead of granting credit terms, which led to significantly fewer system sales in the second quarter and first six months of fiscal 2005 compared to the second quarter and first six months of fiscal 2004. During the fourth quarter of fiscal 2004, we changed our agreements with our VARs and eliminated the requirement to maintain evidence of contract support and advertising support. Therefore, we have ceased recording items in revenue and expenses that were recognized in accordance with EITF 01-9. This change contributed $2.4 million and $4.1 million to the three and six-month revenue declines, respectively. We expect physician system sales to continue its recovery in the third quarter of fiscal 2005 following the release of a second product upgrade as VARs purchase software with new HIPAA security functionality.

Other revenue, which includes data processing services provided to our former affiliate Global Payments, Inc. and a third-party paper claims and statement printing service, decreased $0.3 million, or 7.7%, to $3.3 million in the second quarter of fiscal 2005 from $3.6 million in the second quarter of fiscal 2004. Other revenue decreased $0.7 million, or 9.5%, to $6.8 million in the first six months of fiscal 2005 from $7.5 million in the first six months of fiscal 2004. As previously disclosed, Global Payments is expected to discontinue the service agreement on or after September 30, 2005, eliminating a portion of the other revenue stream.

27

Information Management

Information Management Revenue increased $0.8 million, or 2.0%, to $38.4 million in the second quarter of fiscal 2005 from $37.6 million in the second quarter of fiscal 2004. Information Management Revenue increased $0.3 million, or 0.4%, to $73.7 million in the first six months of fiscal 2005 from $73.4 million in the first six months of fiscal 2004. The increase in both periods was a result of growth in new product revenue, such as the Intelligent Health Repository services and other emerging products, offset by declines in certain legacy product offerings and compression from certain of our pharmaceutical manufacturer customers. The Information Management business is expected to face continued pricing pressure from its pharmaceutical customers and will need to continue to develop and sell new, more advanced information products in order to grow revenue in the future.

Pharmacy Benefit Services

Pharmacy Benefit Services Revenue increased $13.8 million, or 288.4%, to $18.7 million in the second quarter of fiscal 2005 from $4.8 million in the second quarter of fiscal 2004. Pharmacy Benefit Services Revenue increased $25.4 million, or 269.4%, to $34.9 million in the first six months of fiscal 2005 from $9.4 million in the first six months of fiscal 2004. The increase was due to the rapid expansion of the administrative services component, and comprised 15.9% of total company revenue in the second quarter of fiscal 2005 and 15.4% of total company revenue in the first six months of fiscal 2005. Because a majority of the revenue in the Pharmacy Benefit Services segment includes the underlying cost of the prescription drug being administered on behalf of customers, margins are low and reported revenue growth in the segment did not contribute notably to profits.

Cost of Service

Cost of Service (“COS”) includes certain compensation, computer operations, data costs, consulting services, telecommunications, customer support, and application maintenance expenses. COS increased $17.4 million, or 32.4%, to $71.0 million in the second quarter of fiscal 2005 from $53.6 million in the second quarter of fiscal 2004. COS increased $32.6 million, or 31.0%, to $137.7 million in the first six months of fiscal 2005 from $105.1 million in the first six months of fiscal 2004. The increase was due primarily to variable costs directly related to increased Revenue in our Pharmacy Benefit Services segment, as well as increased software development and customer implementation expenses in the network services and systems segment and increased data costs in the Information Management segment.

	Three Months Ended
(In thousands)	November 26, 2004			November 28, 2003			Change
Revenue by Segment				(As Restated)			Dollars			Percent
Network Services and Systems	$	60,354		$	66,799		$	(6,445	)	(9.6	)%
Information Management		38,402			37,637			765		2.0	%
Pharmacy Benefit Services		18,651			4,802			13,849		288.4	%
Total Revenue	$	117,407		$	109,238		$	8,169		7.5	%
Cost of Service by Segment
Network Services and Systems	$	32,788		$	30,112		$	2,676		8.9	%
Information Management		20,766			19,828			938		4.7	%
Pharmacy Benefit Services		17,408			3,653			13,755		376.5	%
Total Cost of Service	$	70,962		$	53,593		$	17,369		32.4	%
Cost of Service as Percent of Revenue
Network Services and Systems		54.3	%		45.1	%
Information Management		54.1	%		52.7	%
Pharmacy Benefit Services		93.3	%		76.1	%
Total		60.4	%		49.1	%

28

	Six Months Ended
(In thousands)	November 26, 2004			November 28, 2003			Change
Revenue by Segment				(As Restated)			Dollars			Percent
Network Services and Systems	$	117,930		$	129,065		$	(11,135	)	(8.6	)%
Information Management		73,722			73,394			328		0.4	%
Pharmacy Benefit Services		34,883			9,444			25,439		269.4	%
Total Revenue	$	226,535		$	211,903		$	14,632		6.9	%
Cost of Service by Segment
Network Services and Systems	$	64,044		$	58,113		$	5,931		10.2	%
Information Management		41,158			39,638			1,520		3.8	%
Pharmacy Benefit Services		32,471			7,338			25,133		342.5	%
Total Cost of Service	$	137,673		$	105,089		$	32,584		31.0	%
Cost of Service as Percent of Revenue
Network Services and Systems		54.3	%		45.0	%
Information Management		55.8	%		54.0	%
Pharmacy Benefit Services		93.1	%		77.7	%
Total		60.8	%		49.6	%

COS in the Network Services and Systems segment increased by $2.7 million, or 8.9%, to $32.8 million in the second quarter of fiscal 2005 from $30.1 million in the second quarter of fiscal 2004. COS in the Network Services and Systems segment increased by $5.9 million or, 10.2%, to $64.0 million in the first six months of fiscal 2005 from $58.1 million in the first six months of fiscal 2004. This increase is primarily due to higher staffing related product development expense and a larger percentage of our software development costs being expensed particularly as we develop subsequent releases of our NDC EnterpriseRx^TM system prior to establishing technological feasibility for those releases which would allow for capitalization of the development costs.

COS in the Information Management segment increased $0.9 million, or 4.7%, to $20.8 million in the second quarter of fiscal 2005 from $19.8 million in the second quarter of fiscal 2004 due to increased data costs discussed below, costs related to the development of Intelligent Health Repository products and ongoing costs associated with the integration of Arclight data into Information Management products. COS in the Information Management segment increased $1.5 million, or 3.8%, to $41.2 million in the first six months of fiscal 2005 from $39.6 million in the first six months of fiscal 2004 due to increased data costs discussed below, costs related to the development of Intelligent Health Repository products and ongoing costs associated with the integration of Arclight data into Information Management products partially offset by lower staffing levels.

COS in the Pharmacy Benefit Services segment increased $13.8 million, or 376.5%, to $17.4 million in the second quarter of fiscal 2005 from $3.7 million in the second quarter of fiscal 2004 due to substantial Revenue growth. COS in the Pharmacy Benefit Services segment increased $25.4 million, or 269.4%, to $34.9 million in the first six months of fiscal 2005 from $9.4 million in the first six months of fiscal 2004. COS as a percent of Revenue increased to 93.3% in the second quarter of fiscal 2005 from 76.1% in the second quarter of fiscal 2004, and increased to 93.1% in the first six months of fiscal 2005 from 77.7% in the first six months of fiscal 2004 as the mix of services sold shifted to pharmacy benefit administrative services, for which Revenue and COS both include the underlying cost of the prescription drug being administered on behalf of customers, thereby providing very low contribution margins. The segment’s traditional pharmacy claim adjudication services offer higher percent margins, but represent a declining portion of this segment’s Revenue.

29

Data Costs

Data costs are primarily recorded within the Information Management segment in COS, but some data costs are also recorded in Network Services and Systems segment COS. Data costs increased $1.4 million, or 10.8%, to $14.4 million in the second quarter of fiscal 2005 from $13.0 million in the second quarter of fiscal 2004. Data costs increased $2.9 million, or 11.2%, to $28.8 million in the first six months of fiscal 2005 from $25.9 million in the first six months of fiscal 2004. The increases in both periods were due to an increase in volume of data purchased and an increase in the costs of such data. As a percent of Revenue, data costs increased from the second quarter of fiscal 2004 to the second quarter of fiscal 2005, and increased from the first six months of fiscal 2004 to the first six months of fiscal 2005. We are continuing to actively pursue programs to contain data costs.

	Three Months Ended
	November 26, 2004			November 28, 2003			Change
(In thousands)				(As Restated)			Dollars		Percent
Revenue	$	117,407		$	109,238		$	8,169	7.5	%
Data costs	$	14,436		$	13,034		$	1,402	10.8	%
Data costs as a Percent of Revenue		12.3	%		11.9	%
	Six Months Ended
	November 26, 2004			November 28, 2003			Change
(In thousands)				(As Restated)			Dollars		Percent
Revenue	$	226,535		$	211,903		$	14,632	6.9	%
Data costs	$	28,840		$	25,945		$	2,895	11.2	%
Data costs as a Percent of Revenue		12.7	%		12.2	%

Software Costs

Software costs are related to the development of new products and maintenance and enhancement of existing products. We capitalize certain costs of developing software held for sale to our customers as well as software used internally to provide services to our customers. We expense costs associated with maintenance of existing products and costs associated with developing products prior to the products reaching technological feasibility.

The primary engine of growth for NDCHealth is the creation of new and enhanced products. As such, software costs are an investment in the growth of the Company. As new products are developed, sold and installed, we expect to grow revenue, operating income, and increase cash flow. Our current focus is on developing products such as NDC EnterpriseRx^™, NDC MailRx^™, and our Intelligent Health Repository and ArcLight-related information products.

Total costs associated with software development increased by $0.1 million, or 1.6%, to $10.9 million in the second quarter of fiscal 2005 from $10.8 million in the second quarter of fiscal 2004. Of the total, costs associated with software development for our new pharmacy system, EnterpriseRx, were $4.7 million in the second quarter of fiscal 2005 versus $5.0 million in the second quarter of fiscal 2004. In the second quarter of fiscal 2005, approximately $2.9 million of these development costs were capitalized, resulting in net development expense associated with our new pharmacy system of approximately $1.8 million. In the second quarter of fiscal 2004, approximately $4.1 million of these development costs were capitalized resulting in net development expense associated with our new pharmacy system of approximately $0.9 million.

Total costs associated with software development increased by $0.3 million, or 1.6%, to $21.3 million for the six months of fiscal 2005 from $21.0 million for the six months of fiscal 2004. Of the total, costs associated with software development for our new pharmacy system were $9.6 million for the six months of fiscal 2005

30

versus $9.5 million for the six months of fiscal 2004. For the six months of fiscal 2005, approximately $6.1 million of these development costs were capitalized, resulting in net development expense associated with our new pharmacy system of approximately $3.5 million. For the six months of fiscal 2004, approximately $7.5 million of these development costs were capitalized resulting in net development expense associated with our new pharmacy system of approximately $2.0 million.

As of November 26, 2004 we have capitalized $45 million for NDC EnterpriseRx^TM in the aggregate. NDC EnterpriseRx^TM must achieve anticipated market acceptance over the next few years in order for future cash flows to support this asset. Failure to achieve anticipated market acceptance could lead to a write down of the software asset.

As discussed above, development costs capitalized as a percent of total development costs decreased to 54.3% in the second quarter of fiscal 2005 from 76.4% in the second quarter of fiscal 2004 as a result of the initial release of our EnterpriseRx system approaching completion and the initiation of design work for subsequent releases.

	Three Months Ended
	November 26, 2004			November 28, 2003			Change
(In thousands)				(As Restated)			Dollars		Percent
Total costs associated with software development	$	10,908		$	10,838		$	70	0.6	%
Less: capitalization of internally developed software		(6,095	)		(8,257	)		2,162	26.2	%
Net software development expense		4,813			2,581			2,232	86.5	%
Software maintenance expense		2,744			2,112			632	29.9	%
Total net software expense	$	7,557		$	4,693		$	2,864	61.0	%
Revenue	$	117,407		$	109,238		$	8,169	7.5	%
Capitalization as a % of Revenue		5.2	%		7.6	%
Total net software expense as a % of Revenue		6.4	%		4.3	%
Capitalization of developed software as a % of total costs associated with software development		55.9	%		76.2	%

	Six Months Ended
	November 26, 2004			November 28, 2003			Change
(In thousands)				(As Restated)			Dollars		Percent
Total costs associated with software development	$	21,256		$	20,931		$	325	1.6	%
Less: capitalization of internally developed software		(11,902	)		(15,461	)		3,559	23.0	%
Net software development expense		9,354			5,470			3,884	71.0	%
Software maintenance expense		4,975			4,118			857	20.8	%
Total net software expense	$	14,329		$	9,588		$	4,741	49.4	%
Revenue	$	226,535		$	211,903		$	14,632	6.9	%
Capitalization as a % of Revenue		5.3	%		7.3	%
Total net software expense as a % of Revenue		6.3	%		4.5	%
Capitalization of developed software as a % of total costs associated with software development		56.0	%		73.9	%

31

Sales, General and Administrative Expense

	Three Months Ended
	November 26, 2004			November 28, 2003			Change
(In thousands)				(As Restated)			Dollars		Percent
Revenue	$	117,407		$	109,238		$	8,169	7.5	%
SG&A	$	26,123		$	23,618		$	2,505	10.6	%
SG&A as a Percent of Revenue		22.2	%		21.6	%
	Six Months Ended
	November 26, 2004			November 28, 2003			Change
(In thousands)				(As Restated)			Dollars		Percent
Revenue	$	226,535		$	211,903		$	14,632	6.9	%
SG&A	$	49,852		$	45,920		$	3,932	8.6	%
SG&A as a Percent of Revenue		22.0	%		21.7	%

Sales, General and Administrative (“SG&A”) expense consists primarily of salaries, wages and expenses relating to sales, marketing, administrative and management employees, employee training costs, occupancy of leased space, insurance costs and outside professional fees, particularly for legal and audit services. Corporate expenses not attributable to a specific segment are allocated to the Network Services and Systems and Information Management segments on a weighted relative basis based on Revenue. We do not allocate corporate costs to our minority owned Pharmacy Benefit Services segment.

The increase in SG&A expense in both absolute dollars and as a percent of Revenue was caused by increased corporate staff and professional fees in response to increased complexity and regulatory requirements of our business including expenses related to Sarbanes-Oxley compliance, higher audit and insurance expenses, increased legal fees as a result of shareholder litigation and expenses related to the SEC investigation and professional fees associated with the Board of Directors evaluation of strategic alternatives to maximize shareholder value.

We expect that SG&A expense as a percentage of Revenue will increase in fiscal 2005 due to continued investment in our sales and marketing programs to support the roll out of new products, increased professional fees associated with litigation resulting from shareholder lawsuits and increased corporate governance expenses related to Sarbanes-Oxley compliance and expenses related to the SEC investigation.

Depreciation and Amortization

	Three Months Ended
	November 26, 2004		November 28, 2003		Change
(In thousands)			(As Restated)		Dollars			Percent
Network Services and Systems	$	7,032	$	5,875	$	1,157		19.7	%
Information Management		3,250		2,763		487		17.6	%
Pharmacy Benefit Services		117		118		(1	)	(0.8	)%
Total Depreciation and Amortization	$	10,399	$	8,756	$	1,643		18.8	%

32

	Six Months Ended
	November 26, 2004		November 28, 2003		Change
			(As Restated)		Dollars		Percent
(In thousands)
Network Services and Systems	$	13,959	$	11,600	$	2,359	20.3	%
Information Management		6,648		5,570		1,078	19.4	%
Pharmacy Benefit Services		229		227		2	0.9	%
Total Depreciation and Amortization	$	20,836	$	17,397	$	3,439	19.8	%

Depreciation and Amortization expense increased in the second quarter of fiscal 2005 from the second quarter of fiscal 2004, and increased in the first six months of fiscal 2005 from the first six months of fiscal 2004 as a result of new products being placed into service and the amortization of intangible acquired assets.

Following the general availability of EnterpriseRx, currently anticipated in the first or second quarter of fiscal 2006, Depreciation and Amortization will increase by approximately $2.6 million per quarter or $10.4 million per year due to the amortization of this asset.

When material intangible assets, such as goodwill and customer bases, are acquired in conjunction with the purchase of a company, NDCHealth undertakes a study by an independent third party to determine the allocation of the purchase price to the assets acquired. Intangible assets are amortized over their estimated useful life ranging from 3 to 10 years. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” we do not amortize goodwill. We do, however, assess the recoverability of goodwill on at least an annual basis during our second quarter, or more frequently if circumstances suggest potential impairment. We completed our annual impairment testing during the second quarter of fiscal 2005. For each of our reporting units, we found that the estimated fair value exceeded the net book value of the unit and therefore impairment was not necessary.

However, the amount by which the estimated fair value exceeded the net book value was less than in previous years due to declines in operating earnings of our Pharmacy and Physician reporting units. If earnings do not recover as expected in each of these reporting units, we may face a write-down of goodwill in the future. To achieve the expected recovery in our Pharmacy unit, we must successfully introduce our EnterpriseRx pharmacy system and achieve reasonable market acceptance and sales, and we must continue to grow pharmacy network services revenue from transaction growth, added penetration of value-added pre and post editing services, and further success in selling informatics services to pharmacy customers. To achieve the expected recovery in our Physician unit operating earnings, we must see continued recovery in Physician system sales to our value-added reseller channel, which declined following our conversion to offering only cash terms to our resellers at the end of our fiscal year 2004 but which showed improvement in our fiscal second quarter.

Additionally, goodwill is tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. These events or circumstances would include a significant change in the business climate, legal factors, operating performance indicators, competition, sale or disposition of a significant portion of the business or other factors. An evaluation of the company’s strategic alternatives is being conducted by the company’s Board of Directors and management, including a reexamination of the strategies and prospects of each line of business, which could lead to a reevaluation of our goodwill fair values before the next annual test of goodwill.

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Goodwill by business is shown below:

(In thousands)	Goodwill as of November 26, 2004
Business
Hospital	$	49,582
Pharmacy		231,814
Physician		43,210
Information Management		39,223
Total Goodwill	$	363,829

There is a risk of impairment of goodwill in our Pharmacy business if our EnterpriseRx system does not achieve market acceptance, or if legacy systems products decline faster than expected.

Restructuring and Other Charges

In the first six months of fiscal year 2004, with the completion of the TechRx acquisition, we began a review of NDCHealth to identify opportunities for increased operational efficiencies. Consequently, during the first six months of fiscal 2004, we recorded charges of $3.0 million for severance related costs, $0.1 million related to lease terminations, and $0.2 million related to impairment of a note receivable we received as partial payment for the sale of a non-core operation.

During the second quarter of fiscal 2005, in an effort to reduce costs and consolidate certain senior management positions within the organization, we terminated five positions. Eliminations of these positions will allow the company to better align its resources with key opportunities and bring decision making closer to the customers. Of the $2.2 million incurred the second quarter of fiscal 2005, $1.9 million was cash and $0.3 million was a non-cash charge in accordance with FASB Interpretation Number 44, “Accounting for Certain Transactions Involving Stock Compensation”.

	Three Months Ended
(In thousands)	November 26, 2004		November 28, 2003
			(As Restated)
By Expense Type:
Severance	$	2,216	$	1,415
Exit-related costs		—		32
Asset reserves		—		187
Acquisition related costs		—		164
Total	$	2,216	$	1,798
By Segment:
Network Services and Systems	$	911	$	757
Information Management		433		58
Other		872		983
Total	$	2,216	$	1,798

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	Six Months Ended
	November 26, 2004		November 28, 2003
(In thousands)			(As Restated)
By Expense Type:
Severance	$	2,216	$	2,698
Exit-related costs		—		147
Asset reserves		—		187
Acquisition related costs		—		265
Total	$	2,216	$	3,297
By Segment:
Network Services and Systems	$	911	$	1,426
Information Management		433		613
Other		872		1,258
Total	$	2,216	$	3,297

Operating Income

	Three Months Ended
	November 26, 2004			November 28, 2003			Change
(In thousands)				(As Restated)			Dollars			Percent
Operating Income:
Network Services and Systems	$	3,463		$	14,550		$	(11,087	)	(76.2	)%
Information Management		4,847			7,375			(2,528	)	(34.3	)%
Pharmacy Benefit Services		269			531			(262	)	(49.3	)%
Other		(872	)		(983	)		111		11.3	%
Total Operating Income	$	7,707		$	21,473		$	(13,766	)	(64.1	)%
	Six Months Ended
	November 26, 2004			November 28, 2003			Change
(In thousands)				(As Restated)			Dollars			Percent
Operating Income:
Network Services and Systems	$	8,792		$	28,095		$	(19,303	)	(68.7	)%
Information Management		7,551			12,532			(4,981	)	(39.7	)%
Pharmacy Benefit Services		487			831			(344	)	(41.4	)%
Other		(872	)		(1,258	)		386		30.7	%
Total Operating Income	$	15,958		$	40,200		$	(24,242	)	(60.3	)%

Operating Income in the Network Services and Systems segment decreased $11.1 million, or 76.2%, to $3.5 million in the second quarter of fiscal 2005 from $14.6 million in the second quarter of fiscal 2004. Operating Income in the Network Services and Systems segment decreased $19.3 million, or 68.7%, to $8.8 million in the first six months of fiscal 2005 from $28.1 million in the first six months of fiscal 2004. The decrease in both periods was due to decreased Revenue, increases in COS, and increased Depreciation and Amortization discussed earlier.

Operating Income in the Information Management segment decreased $2.5 million, or 34.3%, to $4.8 million in the second quarter of fiscal 2005 from $7.4 million in the second quarter of fiscal 2004. Operating Income in the Information Management segment decreased $5.0 million, or 39.7%, to $7.6 million in the first six

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months of fiscal 2005 from $12.5 million in the first six months of fiscal 2004. The decrease in both periods was due to decreased Revenue, increased data costs, increased SG&A, and increased Depreciation and Amortization discussed earlier.

Operating Income in the Pharmacy Benefit Services segment decreased $0.3 million, or 49.3%, to $0.3 million in the second quarter of fiscal 2005 from $0.5 million in the second quarter of fiscal 2004. Operating Income in the Pharmacy Benefit Services segment decreased $0.3 million, or 41.4%, to $0.5 million in the first six months of fiscal 2005 from $0.8 million in the first six months of fiscal 2004. The decrease in both periods was due to increased COS and SG&A expenses, reflecting expenses to add certain capabilities needed to continue to grow and to begin achieving economies of scale.

Operating Income in Other in the second quarter and first six months of fiscal 2004 and fiscal 2005 was related to Restructuring and Other Charges mentioned above that are not attributable to a specific segment.

Other Income (Expense)

	Three Months Ended
	November 26, 2004			November 28, 2003			Change
(In thousands)				(As Restated)			Dollars			Percent
Other Income (Expense)
Interest and Other Income	$	78		$	155		$	(77	)	(49.7	%)
Interest and Other Expense		(6,175	)		(7,319	)		1,144		15.6	%
Minority Interest in Earnings		(135	)		(267	)		132		49.4	%
Total	$	(6,232	)	$	(7,431	)	$	1,199		16.1	%
	Six Months Ended
	November 26, 2004			November 28, 2003			Change
(In thousands)				(As Restated)			Dollars			Percent
Other Income (Expense)
Interest and Other Income	$	143		$	257		$	(114	)	(44.4	%)
Interest and Other Expense		(12,579	)		(14,540	)		1,961		13.5	%
Minority Interest in Earnings		(243	)		(418	)		175		41.9	%
Total	$	(12,679	)	$	(14,701	)	$	2,022		13.8	%

Interest and Other Income results primarily from interest earned in overnight money market funds.

Interest and Other Expense consists of interest expense, amortization of debt issuance costs and other miscellaneous non-operating expense. Interest and Other Expense decreased $1.1 million, or 15.6%, to $6.2 million in the second quarter of fiscal 2005 from $7.3 million in the second quarter of fiscal 2004. Interest and Other Expense decreased $2.0 million, or 13.5%, to $12.6 million in the first six months of fiscal 2005 from $14.5 million in the first six months of fiscal 2004. The decrease in both periods was due to lower interest expense as a result of lower interest rates as negotiated in December 2003 and a reduction in the balance owed under our term loan and revolving credit agreement.

Minority Interest in Earnings results from our 49% controlling interest in our consolidated subsidiary engaged in providing Pharmacy Benefit Services and is driven by their profitability. When this subsidiary is profitable, we are required to share the profits and record a charge. When this subsidiary is not profitable, we share in the loss and record a benefit.

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Provision for Income Taxes

Our estimated continuing effective tax rate in the first six months of fiscal years 2005 and 2004 was 39.0% and 37.5%, respectively. The tax rate for the first six months of fiscal 2005 was higher than the first six months of fiscal 2004 due to our permanent book to tax differences being a larger percentage of our total tax expense because of lower income.

The Internal Revenue Service (“IRS”) is currently auditing our fiscal year 2001 consolidated federal income tax return. The primary issue is a worthless stock loss deduction claimed as a result of the divestiture of the management services business (“PHSS”). This deduction created a net operating loss which was used to offset most of the tax liability for fiscal years 2002 and 2003. In fiscal year 2001, we provided a tax contingency reserve of approximately 50% of the $25.0 million tax benefit claimed for the worthless stock loss deduction. We believe that our current reserve of the ultimate settlement of this issue is properly stated as of November 26, 2004. However, if the worthless stock loss and certain other issues are settled in the IRS’ favor, we estimate that we would incur an incremental tax expense of $12.8 million and would have to pay approximately $8.0 million of additional cash taxes, excluding interest and penalties. This expense, if incurred, would be reflected in the results from Discontinued Operations as PHSS was treated as a Discontinued Operation beginning in Fiscal 2000. We are unable to predict the timing of the completion of this audit.

Discontinued Operations

During the fourth fiscal quarter of 2004, NDCHealth’s management performed a review of our European businesses to determine alternatives to mitigate losses associated with these operations. As a result of this review, our board of directors authorized the disposition of our European businesses. Accordingly, our financial statements have been prepared with the net assets and liabilities, results of operations, and cash flows of these operations displayed separately as Discontinued Operations with all historical financial statements restated to conform to this presentation.

In the second quarter of fiscal 2005 the Company completed the sale of its United Kingdom operations which resulted in a net gain of $1.7 million or $0.05 per share. The Company is also negotiating with interested buyers for the remaining German portion of its European business.

The loss from operations for the three months ended November 26, 2004 from the European businesses was less than $0.1 million. The loss from operations for the three months ended November 28, 2003 was $1.2 million, or $0.03 per share. The loss from operations for the European businesses was $0.5 million, or $0.01 per share for the six months ended November 26, 2004. The loss from operations for the six months ended November 28, 2003 was $1.8 million, or $0.05 per share. In the first and second quarters of fiscal 2005 management determined the Company would receive lower than previously expected total transaction proceeds based on current negotiations as of the filing date for each quarterly report. As a result, the carrying value of this asset was reduced, which increased the Loss from Discontinued Operations by $7.6 million, or $0.21 per share and $7.4 million, or $0.20 per share in the first and second quarter of fiscal 2005, respectively. For the six months ended November 26, 2004 the total Loss from Discontinued Operations was $13.7 million or $0.38 per diluted share.

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The operating results of our Discontinued Operations are summarized as follows:

	Three months ended
	November 26, 2004			November 28, 2003
(In thousands, except per share data)				(As Restated)
Revenue	$	4,935		$	4,811
Operating Income / (Loss)	$	304		$	(2,058	)
Income / (Loss) from Operations, net of Tax	$	(15	)	$	(1,221	)
Gain on Sale of UK Businesses	$	1,702		$	—
Asset Valuation Adjustment	$	(7,357	)	$	—
Income / (Loss) from Discontinued Operations	$	(5,670	)	$	(1,221	)
Diluted Earnings / (Loss) per Share:
From Operations	$	—		$	(0.03	)
Gain on Sale of UK Businesses	$	0.05		$	—
From Asset Valuation Adjustment	$	(0.20	)	$	—
Total	$	(0.16	)	$	(0.03	)

	Six months ended
	November 26, 2004			November 28, 2003
(In thousands, except per share data)				(As Restated)
Revenue	$	10,221		$	10,061
Operating Loss	$	(253	)	$	(2,400	)
Loss from Operations, net of Tax	$	(472	)	$	(1,755	)
Gain on Sale of UK Businesses	$	1,702		$	—
Asset Valuation Adjustment	$	(14,965	)	$	—
Loss from Discontinued Operations	$	(13,735	)	$	(1,755	)
Diluted Earnings / (Loss) per Share:
From Operations	$	(0.01	)	$	(0.05	)
Gain on Sale of UK Businesses	$	0.05		$	—
From Asset Valuation Adjustment	$	(0.42	)	$	—
Total	$	(0.38	)	$	(0.05	)

The Net Loss from Discontinued Operations for the three months ended November 28, 2003 is net of a tax benefit of $0.6 million. The Net Loss from Discontinued Operations for the six months ended November 26, 2004 and November 28, 2003 is net of a tax benefit of approximately $0.1 million and $0.7 million, respectively.

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 capital equipment, development of additional products, investments in alliances, acquisitions, payment of taxes, payment of dividends, extension of credit to our customers, repayment of debt, and other general funding of our day-to-day operations.

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Cash needed or cash that we generate after satisfying all of our continuing operating requirements is shown on our statement of cash flows as net cash used in or provided by operating activities, respectively. 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 $12.4 million in the first six months of fiscal 2005, a $40.6 million decrease from the $53.0 million of cash provided by operating activities in the first six months of fiscal 2004.

Net cash provided by operating activities was negatively impacted by a reduction in the income from continuing operations adjusted for non-cash items and an increase in use of working capital. We used $18.7 million of working capital in the first six months of fiscal 2005 compared to providing $4.2 million in the first six months of fiscal 2004. Significant differences between the first six months of fiscal 2005 and the first six months of fiscal 2004 are accounts receivable, accounts payable and accrued liabilities, prepaid expenses and other assets, and deferred revenue. Collectively, these changes in working capital used $18.5 million of cash in the first six months of fiscal 2005 and provided $4.4 million of cash in the first six months of fiscal 2004. Changes in working capital are the result of the timing of payments to our vendors and the timing difference between billing customers for services as required by their contracts and our recognition of related revenue. Accounts receivable used $1.0 million of cash in the first six months of fiscal 2005 and used $8.9 million of cash in the first six months of fiscal 2004. Accounts payable and accrued liabilities used $9.2 million of cash in the first six months of fiscal 2005 compared to providing $7.9 million in the first six months of fiscal 2004. During fiscal 2005, we have made an effort to improve the working relationship with our vendors and we have reduced the number of days our payables remain outstanding. Prepaid expenses and other assets provided $7.3 million of cash in the first six months of fiscal 2005 and provided $1.0 million of cash in the first six months of fiscal 2004. Deferred revenue used $15.5 million in the first six months of fiscal 2005 compared to providing $4.4 million in the first six months of fiscal 2004.

The nature of an information services business is such that it requires a substantial continuing investment in data, technology equipment and product development in order to expand the business. Creation of new and enhanced products is the engine of growth for NDCHealth and we continue to invest in our future growth through focus on product development. 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 capitalized software costs discussed above, were $18.0 million in the first six months of fiscal 2005, including $11.9 million in capitalized software costs and $1.7 million in capitalized interest; and $21.6 million in the first six months of fiscal 2004, including $15.5 million in capitalized software costs and $1.4 million in capitalized interest. As we continue the launch of new products in fiscal 2005, we expect a similar level of capital expenditures as in 2004.

We used $2.4 million of cash in the first six months of fiscal 2005 for payment of the annual premium of a Supplemental Executive Retirement Plan (“SERP”) for certain executives, all of whom are either retired or no longer with the Company, and for payment of other miscellaneous investments. During the first six months of fiscal 2004 we used $6.3 million of cash 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 as well as payment of the annual SERP premium discussed above.

We currently have in place a $225 million senior credit facility, consisting of a $100 million five-year revolving credit facility and a $125 million six-year term loan, and have $200 million in 10½% senior subordinated notes due 2012 outstanding. As of November 26, 2004, the fair market value of the notes was approximately $213.3 million.

The Company’s delay in providing its financial statements to its senior lenders under its Senior Credit Facility and in filing its Quarterly Report on Form 10-Q for the quarter ended November 26, 2004 with the SEC

39

as required by the indenture for its 10½% Senior Subordinated Notes due 2012 constituted defaults under its Senior Credit Facility and Note indenture, respectively. On March 16, 2005, the Company secured conditional waivers from the requisite number of lenders under its Senior Credit Facility and the requisite number of holders of its Notes pursuant to which the senior lenders and Note holders have agreed to waive the defaults under the Senior Credit Facility and the Note indenture provided the Company files its Quarterly Report on Form 10-Q for the quarterly period ended November 26, 2004 and restated financial results on Annual Report on Form 10-K/A for the fiscal year ended May 28, 2004 and Quarterly Report on Form 10-Q/A for the quarterly period ended August 27, 2004 and delivers current and amended financial statements to the senior lenders as filed with the SEC. By making such filings, the Company satisfied the condition precedent to these waivers and the waivers became effective. The Company expects to be in compliance with the Senior Credit Facility’s financial covenants for the next twelve months.

Mandatory prepayments are required after 90 days following the end of each fiscal year beginning with fiscal year 2004. NDCHealth is obligated to prepay an aggregate principal amount of the loans, and cash collateralize any Letter of Credit obligations in an amount equal to: (i) 75% of excess cash flow for such fiscal year if the consolidated total leverage ratio is greater than 2.00:1.00 at the end of such fiscal year, and (ii) 50% of such excess cash flow for such fiscal year if the consolidated total leverage ratio is less than or equal to 2.00:1.00 at the end of the fiscal year. Each such prepayment shall be applied first to the term facility pro rata to the scheduled amortization payments until all are paid in full and second to the revolving credit facility. Under the mandatory prepayment agreement, a $28.0 million prepayment of the term loan was made on August 26, 2004. As of November 26, 2004, $63.3 million was outstanding on the term loan and there was $38.5 million outstanding under the revolving credit facility. Proceeds from the sale of our United Kingdom operations were used to pay down $8.3 million of the term loan on October 29, 2004. The Company made $15 million draws on the revolving credit facility on November 30, 2004 and February 28, 2005, and we made a $5 million payment on December 31, 2004 and a $10 million payment on March 18, 2004.

The $100 million revolving credit facility is available for working capital and general corporate purposes and has a variable interest rate based on market rates. On August 20, 2004, November 22, 2004, and February 23, 2005, the credit facility was amended to relax certain covenants to provide us additional flexibility for fiscal year 2005. The credit facility contains certain financial and non-financial covenants customary for financings of this nature.

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 2005 and the first half of fiscal 2006.

We 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 reducing our level of senior debt. Free cash flow is not a Generally Accepted Accounting Principle (“GAAP”) measurement and may not be comparable to free cash flow reported by other companies. Free cash flow decreased to $(8.1) million in the first six months of fiscal 2005 compared to $28.5 million in the first six months of fiscal 2004 due to decreased Net cash provided by operating activities and partially offset by reduced Capital expenditures in the first six months of fiscal 2005.

	Six Months Ended
	November 26, 2004			November 28, 2003
(In thousands)				(As Restated)
Net cash provided by operating activities	$	12,400		$	52,982
Capital expenditures		(17,963	)		(21,639	)
Dividends paid		(2,880	)		(2,820	)
Free cash flow	$	(8,443	)	$	28,523

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Stock activities provide us an additional source of liquidity. Stock activities are primarily related to the exercises of employee stock options and issues under the employee stock purchase plan. In the first six months of fiscal 2005, issuance of shares of our common stock provided $0.5 million versus providing $2.6 million in the first three months of fiscal 2004. 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 $2.9 million in the first six months of fiscal 2005 and $2.8 million in the first six months of fiscal 2004.

Discontinued Operations used $2.8 million of cash in the first six months of fiscal 2005 and used $2.3 million in the first six months of fiscal 2004. Cash used in the first six months of fiscal 2005 was related to payments for renegotiated data contracts in Germany partially offset by proceeds from the sale of the United Kingdom business of $8.6 million.

Recently Issued Accounting Pronouncements

In December 2004, the FASB issued SFAS 123 (R), “Share-Based Payment,” (“SFAS 123(R)”) which replaces SFAS No. 123 and supersedes APB Opinion No. 25. SFAS 123 (R) requires that compensation cost relating to all share-based payment transactions, including grants of employee stock options, be recognized in the statement of operations based on their fair values. Pro forma disclosure is no longer an alternative. SFAS 123 (R) is effective the first interim or annual reporting period that begins after June 15, 2005. NDCHealth expects to adopt SFAS 123 (R) on September 3, 2005 and expects to apply the modified prospective method upon adoption. The modified prospective method requires companies to record compensation cost beginning with the effective date (a) based on the requirements of SFAS 123 (R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date of SFAS 123 (R) that remain unvested on the effective date.

Safe Harbor Statement

The Management’s Discussion and Analysis of Financial Condition and Results of Operations, and other portions of this report, include “forward-looking” statements (rather than historical facts) within the meaning of the federal securities laws that are subject to risks and uncertainties that could cause actual results to differ materially from those described. Forward-looking statements are only predictions and are not guarantees of performance, and 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 include, among others, statements regarding our expected business outlook, anticipated financial and operating results, our business strategy and means to implement the strategy, our objectives, the amount and timing of future capital expenditures, the likelihood of our success in developing and introducing new products and expanding our business, the timing of the introduction of new and modified products or services, financing plans, working capital needs and sources of liquidity.

These forward-looking statements are based on our management’s beliefs and assumptions, which in turn are based on currently available information. Important risks and assumptions relating to the forward-looking statements include, without limitation: (1) our ability to expand in new and existing markets; (2) demand for our products and services; (3) the cost of product development; (4) the timely completion, market demand and acceptance of our new products; (5) competitive forces; (6) gains in market share; (7) industry conditions affecting our customers; (8) expected pricing levels; (9) expected growth of revenue and net income; (10) the timing and cost of planned capital expenditures; (11) the availability of capital to invest in business growth and expansion; (12) the timing of recognition of certain revenue; (13) access to data from suppliers; (14) the potential for information or network services interruptions; (15) adequate protection of proprietary technology; (16) unanticipated changes in accounting rules and/or interpretations; (17) complex state and federal regulations and their impact on the demand for information products or availability of certain data; (18) outcomes and cost of pending litigation and/or the pending SEC investigation; (19) expected synergies relating to acquisitions, joint

41

ventures and strategic alliances; (20) expected proceeds from the disposition of certain assets; (21) our ability to maintain compliance with certain restrictive debt covenants; (22) our substantial indebtedness, which could adversely affect our financial condition, results of operations and liquidity; (23) actions that were or may be taken by credit rating agencies; and (24) our ability to comply with Sarbanes-Oxley. Many of these risk factors and assumptions are beyond our ability to control or predict, and are not intended to represent a complete list of all risks and uncertainties inherent in our business, and should be read in conjunction with the more detailed cautionary statements included in later filings with the SEC.

We believe our forward-looking statements contained herein are reasonable; however, you should not place undue reliance on any forward-looking statements, which are based on our current assumptions and expectations. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update publicly any of them in light of new information or future events.

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 28, 2004.

ITEM 4—CONTROLS AND PROCEDURES

The Company conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures as of the end of the quarterly period covered by this report. The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported on a timely basis.

Based upon the evaluation it was determined that, for the reasons described below, the Company’s disclosure controls and procedures were not effective as of the end of the fiscal period covered by this report to give reasonable assurance in alerting it in a timely fashion to material information relating to NDCHealth that is required to be included in the reports that the Company files under the Exchange Act.

As previously disclosed in January 2005, we engaged in a review and analysis of practices regarding software exchanges in our Physician business and their impact on revenue recognition. Additionally, we have revised our revenue recognition practices for our IHR products within our Information Management segment. As a result of our efforts, we have determined that Net Income should be adjusted. In addition, in reviewing our past practices, procedures and processes, we determined that there needed to be revisions to such practices, procedures and processes. In this regard, we concluded there were material weaknesses in our internal controls over revenue recognition and over the financial statement close process. We have taken, and continue to take, steps to rectify these matters.

Based upon our review and analysis, we determined that adjustments related to Physician software exchanges and Information Management revenue recognition should be recorded. We also determined that the adjustment required a restatement of our financial results for each of the fiscal years ended May 28, 2004, May 30, 2003, and May 31, 2002, as well as our interim results for the quarter ended August 27, 2004, to reflect the impact of the adjustments on each of the periods presented.

In connection with the aforementioned review, we also determined that adjustments relating to other items should be recorded. These adjustments are also reflected in the restatement of financial results described above.

Furthermore, on March 17, 2005 we received a material weakness letter from our Independent Registered Public Accounting Firm, Ernst & Young LLP, regarding these same issues.

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To date, we have taken steps to improve our internal controls including the following:

• Revised our practices in Physician services to terminate all software exchanges in policy and practice with our VARs except when both the purchase and associated exchange of products occur within the same fiscal quarter that a new software version is released;

• Brought a new general manager and a new financial manager into our Physician unit;

• Added resources to the corporate accounting department to allow for more thorough analysis and determination of appropriate revenue recognition and to improve the financial statement close process;

• Enhanced process for reviewing and monitoring sales contracts to properly develop revenue recognition;

• Augmented review of these transactions to ensure adherence to our revenue recognition policies; and

• Improved process for documentation and review of significant accounting entries, including revenue recognition.

We intend to continue to monitor our internal controls, and if further improvements or enhancements are identified, we will take steps to implement such improvements or enhancements. In addition, the Company is undertaking a thorough review of its internal controls as part of the Company’s preparation for compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. Section 404 requires the Company’s management to report on, and the Independent Registered Public Accounting Firm to attest to, the effectiveness of the Company’s internal control structure and procedures for financial reporting. The Company expects it will not be able to fully remediate these deficiencies by May 27, 2005, given the efforts needed to completely remediate the internal control material weaknesses associated with revenue recognition and the financial statement close process, as described above. In the event the Company has material weaknesses in internal controls relating to the process of revenue recognition and/or the financial statement close process at May 27, 2005, the Company’s management will disclose such weaknesses in its report and will not be able to conclude that the Company’s internal control over financial reporting was effective at such date. Similarly, the Company believes that such material weaknesses would be referenced in an adverse opinion on the effectiveness of internal controls over financial reporting from our Independent Registered Public Accounting Firm around internal controls. A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.

Other than the changes identified above, there have been no changes to the Company’s internal controls over financial reporting that occurred since the beginning of the Company’s second quarter fiscal year 2005 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

It should be noted that the design of any system of controls is based upon certain assumptions about the likelihood of future events, and there can be no assurance that such design will succeed in achieving its stated objective under all potential future conditions, regardless of how remote.

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PART II—OTHER INFORMATION

ITEM 1—LEGAL PROCEEDINGS

Our Board of Directors has authorized the disposition of our European operations in Germany and the United Kingdom, which are recorded as discontinued operations. 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 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, and only 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 from the European Commission ordering 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 (“ECJ”) stayed this decision pending a complete review of the underlying substantive matters. Those matters are still proceeding.

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. On April 29, 2004, and upon referral by the Frankfurt Regional Courts on questions involving interpretations of European Competition laws, the European Court of Justice in Luxembourg found in favor of the Company, finding that if IMS Health holds a valid, enforceable copyright, then the Company should be entitled to a compulsory license from IMS Health to the extent it can demonstrate that it offers “a new product” in circumstances where IMS Health is “capable of eliminating all competition on the relevant market.” This clarification of law has been referred back to the Frankfurt Regional Court and is pending review.

On October 14, 2003, we filed suit in the 96th Judicial District Court, Tarrant County, Texas, against 1-Rex, Inc., FDS, Inc., Healthcare Computer Corporation, Freedom Drug Stores, Inc., Freedom Data Services, Inc. and William Rex Akers (collectively the “Defendants”) for breach of contract, misappropriation of trade secrets, fraud, and negligent misrepresentation, seeking unspecified damages for Defendants’ wrongful conduct. On March 5, 2004, Defendants filed a counterclaim against us, asserting claims for tortious interference with a prospective contract, violations of Section 15.05(b) of the Texas Business and Commerce Code, civil conspiracy, and seeking a declaratory judgment in connection with various claims made by us. Defendants seek over $25 million in damages, plus attorneys’ fees, pre-judgment and post-judgment interest, and punitive damages. We intend to vigorously prosecute our causes of action against the Defendants, have denied all liability and damages sought in the counterclaim, and are vigorously defending the claims asserted against us.

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On April 7, 2004, a putative securities class-action, captioned Garfield v. NDCHealth Corporation, et al., was filed in the United States District Court for the Northern District of Georgia against NDCHealth and Messrs. Hoff and Hutto. On September 1, 2004, a second amended complaint was filed. The second amended complaint added Messrs. Miller, Shenk, FitzGibbons and Adrean, as well as Ernst & Young, as defendants. The second amended complaint generally alleges, among other things, that members of a purported class of stockholders who purchased common stock between October 1, 2003 and August 9, 2004 were damaged as a result of (i) improper revenue recognition practices in the Company’s physician business unit; (ii) the failure to timely write-down the Company’s investment in MedUnite; and (iii) the improper capitalization and amortization of costs associated with software development. The second amended complaint alleges that, as a result of such conduct, the Company’s previously issued financial statements were materially false and misleading, thereby causing the prices of the Company’s common stock to be inflated artificially. The second amended complaint asserts violations of Section 10(b) and 20(a) of the Exchange Act, and Rule 10b-5 promulgated thereunder, and seeks unspecified monetary damages and other relief. On October 13, 2004, the Company and the individual defendants filed a motion to dismiss the second amended complaint. The motion is fully briefed and the parties are currently awaiting a decision by the court.

On April 28, 2004, a lawsuit was filed against us in the General Court of Justice, Superior Court Division, in the State of North Carolina, County of Forsyth, by Carolina Coupon Clearing, Inc., d/b/a Carolina Services Company, Inc. (“CSC”). This matter was settled by the parties on a confidential basis which settlement did not require either party to pay any funds to the other.

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—UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

There were no unregistered sales of equity securities during the quarter ended November 26, 2004.

ITEM 3—DEFAULTS UPON SENIOR SECURITIES

There were no defaults upon our senior securities during the quarter ended November 26, 2004.

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

The 2004 Annual Meeting of Stockholders of NDCHealth Corporation was held in Atlanta, Georgia on October 24, 2004. At the annual meeting, the stockholders of the Company voted on the following items:

1. Election of three directors in Class III to serve until the annual meeting of stockholders in 2007, or until a successor is duly elected and qualified. Votes cast were as follows:

	In Favor	Withheld
J. Veronica Biggins	16,443,625	3,693,003
Terri A. Dial	18,042,607	2,094,021
Kurt M. Landgraf	16,758,049	3,378,579

Besides J. Veronica Biggins, Terri A. Dial and Kurt M. Langraf, elected at the 2004 Annual Meeting of Stockholders, the terms of office as directors of Laurie H. Glimcher M.D., James F. McDonald, Jeffrey P. Koplan, M.D., Walter M. Hoff, Steven J. Shulman, and Neil Williams continued after the meeting.

2. Approval of the NDCHealth Corporation 2005 Incentive Plan. Votes cast were: For 9,383,539; Against 10,246,287; Abstain 3,608,169.

3. Stockholder proposal recommending engagement of an investment bank. Votes cast were: For 18,889,019; Against 3,476,848; Abstain 402,348

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ITEM 5—OTHER INFORMATION

None

ITEM 6—EXHIBITS AND REPORTS ON FORM 8-K

(a)	Exhibits:
3(ii)	Amended and Restated By-laws of the corporation adopted on September 21, 2004 (filed as exhibit 99.1 to the Registrant’s Current Report on Form 8-K dated September 24, 2004, file No. 12392, and incorporated herein by reference.)
10	Letter Amendment No. 6 to Credit Agreement dated as of November 22, 2004 by and among the Registrant, Merrill Lynch Capital, and the Lenders and agents from time to time party thereto (filed as exhibit 99.2 to the Registrant’s Current Report on Form 8-K dated November 24, 2004, file No. 12392, and incorporated herein by reference.)
10(i)	Employment Agreement between Charlene Crusoe-Ingram and the Registrant dated October 5, 2004.
10(ii)	Letter Amendment No. 6 to Credit Agreement dated as of November 22, 2004 by and among the Registrant, Merrill Lynch Capital, and the Lenders and agents from time to time party thereto (filed as exhibit 99.2 to the Registrant’s Current Report on Form 8-K dated November 24, 2004, file No. 12392, and incorporated herein by reference.)
31(i)	Exchange Act Rule 13a-14(a)/15d-14(a) Certification of Walter M. Hoff
31(ii)	Exchange Act Rule 13a-14(a)/15d-14(a) Certification of Lee Adrean
32	18 U.S.C. Section 1350 Certification
(b)	Reports on Form 8-K were filed or furnished during the quarter ending November 26, 2004. 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 September 22, 2004, announcing a change in the Company’s senior management under Item 5.02 and furnishing a press release as an exhibit under Item 9.01
(ii)	NDCHealth Corporation’s Current Report on Form 8-K filed on September 24, 2004, reporting under Item 5.03 the amendment of the Company’s By-Laws and furnishing the By-Laws, as amended, as an exhibit under Item 9.01.
(iii)	NDCHealth Corporation’s Current Report on Form 8-K furnished on September 30, 2004, announcing the Company’s financial results for its quarter ended August 27, 2004 under Item 2.02 and furnishing a press release and financial information as exhibits under Item 9.01.
(iv)	NDCHealth Corporation’s Current Report on Form 8-K furnished on October 13, 2004, announcing a further request by the Securities and Exchange Commission with respect to the Company’s accounting for software development costs under Item 7.01 and furnishing a press release as an exhibit under Item 9.01.
(v)	NDCHealth Corporation’s Current Report on Form 8-K furnished on October 28, 2004, announcing an internal review of the Company’s physician software exchange practices under Item 7.01 and furnishing a press release as an exhibit under Item 9.01.
(vi)	NDCHealth Corporation’s Current Report on Form 8-K furnished on October 29, 2004, announcing the completion of the sale of its business operations in the United Kingdom under Item 7.01 and furnishing a press release as an exhibit under Item 9.01.
(vii)	NDCHealth Corporation’s Current Report on Form 8-K furnished on November 4, 2004, announcing the results of matters submitted to a vote of the Company’s stockholders at their Annual Meeting on October 28, 2004 under Item 7.01 and furnishing a press release as an exhibit under Item 9.01.

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(viii)

NDCHealth Corporation’s Current Report on Form 8-K furnished on November 9, 2004, announcing the final results of matters submitted to a vote of the Company’s stockholders at their Annual Meeting on October 28, 2004 and announcing the Board of Directors’ decision to commence an orderly process to retain an investment bank to assist in a review and analysis of strategic alternatives available to the Company under Item 7.01 and furnishing a press release as an exhibit under Item 9.01.

(iv)

NDCHealth Corporation’s Current Report on Form 8-K furnished on November 24, 2004, reporting under Item 1.01 the amendment of the Company’s Credit Agreement, reporting under item 7.01 the Company’s press release dated November 23, 2004 announcing the amendment, anticipated restructuring charges, and EPS guidance for the quarter, and furnishing the press release and Letter Amendment No. 6 to Credit Agreement dated as of November 22, 2004 as exhibits under Item 9.01.

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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/ JAMES W. FITZGIBBONS
	James W. FitzGibbons   Chief Accounting Officer   (Authorized Signing Officer and Principal Accounting Officer)

Date: March 21, 2005

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INDEX TO EXHIBITS

Exhibit Numbers		Description
10	(i)	Employment Agreement between Charlene Crusoe-Ingram and the Registrant dated October 5, 2004.
10	(ii)	Letter Amendment No. 6 to Credit Agreement dated as of November 22, 2004 by and among the Registrant, Merrill Lynch Capital, and the Lenders and agents from time to time party thereto (filed as exhibit 99.2 to the Registrant’s Current Report on Form 8-K dated November 24, 2004, file No. 12392, and incorporated herein by reference.)
31	(i)	Exchange Act Rule 13a-14(a)/15d-14(a) Certification of Walter M. Hoff
31	(ii)	Exchange Act Rule 13a-14(a)/15d-14(a) Certification of Lee Adrean
32		18 U.S.C. Section 1350 Certification

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EX-10.I

Exhibit 10(i)

EMPLOYMENT AGREEMENT

BETWEEN

Charlene Crusoe-Ingram

AND

NDCHEALTH CORPORATION

Dated: October 5, 2004

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (this “Agreement”) is made and entered into this 5^th day of October, 2004 by and between NDCHealth Corporation, a Delaware corporation with its principal executive offices located in Atlanta, Georgia (the “Company”), and Charlene Crusoe-Ingram, an individual resident in the State of Georgia (“Executive”), to be effective as of the Effective Date, as defined in Section 1.

WHEREAS, the Company has offered to Executive the position of Executive Vice President, Human Resources of the Company and Executive has accepted such offer on the terms and conditions set forth in an offer letter to Executive dated September 23, 2004; and

WHEREAS, Executive and the Company desire to memorialize the terms of such employment in this Agreement.

NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and Executive do hereby agree as follows:

1. Effective Date. The effective date of this Agreement (the “Effective Date”) is October 5, 2004.

2. Employment. Executive is hereby employed as the Executive Vice President, Human Resources, of the Company. In such capacity, Executive will have the responsibilities commensurate with such position as will be assigned to her by the Chief Executive Officer of the Company (the “CEO”), in accordance with the policies and objectives established by the Board of Directors of the Company (the “Board”). Executive’s reporting responsibilities will be to the CEO or such other executive officer that the CEO may designate from time to time.

3. Employment Period. Executive’s employment hereunder will begin on the Effective Date and end on the third anniversary of the Effective Date, unless extended as hereinafter provided in this Section 3 or terminated in accordance with the provisions of Section 7 (the “Employment Period”). As of the third anniversary of the Effective Date and on each succeeding anniversary of the Effective Date during the Employment Period, Executive’s Employment Period will automatically be extended by one year so as to end on the next anniversary of the Effective Date, unless the Company provides Executive with written notice of non-renewal at least 60 days prior to the anniversary of the Effective Date or, following any automatic extension, any succeeding anniversary of the Effective Date.

4. Extent of Service. During the Employment Period, Executive will render her services to the Company (or to its successors or assigns following a Change in Control, as defined below) in conformity with professional standards, in a prudent and workmanlike manner and in a manner consistent with the obligations imposed on officers of corporations under applicable law. Executive will promote the interests of the Company and its subsidiaries and affiliated entities in carrying out Executive’s duties and will not deliberately take any action which could, or fail to take any action which failure could, reasonably be expected to have a material adverse impact upon the business of the Company or any of its subsidiaries or any of their respective affiliates. Executive agrees to devote her business time, attention, skill and efforts exclusively to the faithful performance of her duties hereunder (both before and after a Change in Control); provided, however, that it will not be a violation of this Agreement for Executive to (i) devote reasonable periods of time to charitable and community activities and, with the approval of the Company, industry or professional activities, and (ii) manage personal investments, so long as such activities do not materially interfere with the performance of Executive’s responsibilities under this Agreement.

5. Compensation and Benefits.

(a) Base Salary. During the Employment Period, Executive will be entitled to receive a base salary in the amount of Two Hundred Ninety Thousand and no/100 Dollars ($290,000.00) (“Base Salary”), less normal withholdings and benefit costs, payable in equal bi-weekly installments or such other installments as are

2

customary under the Company’s payroll practices from time to time. The Compensation Committee of the Board will review Executive’s Base Salary periodically and in its sole discretion, subject to approval of the Board, may increase Executive’s Base Salary from time to time. The periodic review of Executive’s salary by the Board will consider, among other things, Executive’s own performance and the Company’s performance.

(b) Incentive and Savings Plans. During the Employment Period, Executive will be entitled to participate in incentive and savings plans, practices, policies and programs applicable generally to employees of the Company. Certain executive programs may be made available on a selective basis at the discretion of the CEO or the Compensation Committee of the Board. Without limiting the foregoing, the following will apply:

(i) Annual Bonus. Executive will have an annual bonus opportunity of not less than Two Hundred Thousand and no/100 Dollars ($200,000.00), based on 100% achievement of financial and other objectives (including objectives based on each of Company performance and personal performance of the Executive) established by the CEO or his designee (the “Bonus Opportunity”). The Bonus Opportunity and specific performance objectives will be set annually and included in Executive’s individual performance and incentive plan for each fiscal year.

(ii) Incentive Awards. On or about the Effective Date, the Company will make a grant to Executive of options to purchase 50,000 shares of the Company’s common stock pursuant to the Company’s 2000 Incentive Stock Option Plan as a long-term incentive for performance and in consideration for entering into this Agreement. During early fiscal 2006, the CEO will recommend to the Compensation Committee a further grant to Executive of options to purchase 30,000 shares of the Company’s common stock, which recommendation shall be subject to the approval of the Compensation Committee in its sole discretion. Further grants of incentive awards (including, without limitation, stock option grants, restricted stock awards, restricted stock units, stock appreciation rights and similar stock-based awards or grants) may be made to Executive in future years at the discretion of the Compensation Committee of the Board.

(c) Welfare Benefit Plans. During the Employment Period, Executive and Executive’s family will be eligible to participate in, and will receive all benefits elected under, the welfare benefit plans, practices, policies and programs provided by the Company (including, without limitation, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs), subject to the same terms upon which such benefits are made available to other senior executives of the Company generally.

(d) Expenses. During the Employment Period, Executive will be entitled to receive prompt reimbursement for all reasonable expenses incurred by Executive in accordance with the then-current policies, practices and procedures of the Company governing such reimbursements.

(e) Fringe Benefits. During the Employment Period, Executive will be entitled to fringe benefits in accordance with the plans, practices, programs and policies of the Company as in effect from time to time.

6. Change in Control. For purposes of this Agreement, a “Change in Control” means:

(a) the acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) (a “Person”) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 35% or more of the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); provided, however, that for purposes of this subsection (a), the following acquisitions will not constitute a Change in Control: (1) any acquisition by a Person who is on the Effective Date the beneficial owner of 35% or more of the Outstanding Company Voting Securities, (ii) any acquisition directly from the Company, (iii) any acquisition of by the Company which reduces the number of Outstanding Company Voting Securities and thereby results in any Person having beneficial ownership of more than 35% of the Outstanding Company Voting Securities, (iv) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (v) any acquisition by any corporation pursuant to a transaction that complies with clauses (i) and (ii) of subsection (b) of this Section 6; or

3

(b) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a “Business Combination”), in each case, unless, following such Business Combination, (i) outstanding Company common stock (or outstanding securities issued by a surviving entity in exchange therefore) constitutes more than 50% of the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination, and (ii) no Person (excluding the Company or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 35% or more of the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination; or

(c) The election of a majority of the members of the Board, without the recommendation or approval by a majority of the existing Board members; or

(d) The shareholders of the Company approve a plan of complete liquidation or dissolution of the Company (other than by a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company).

Notwithstanding anything in this definition to the contrary, a restructuring and/or separation of any line of business or business unit from the Company will not in and of itself constitute a Change in Control.

For the avoidance of doubt, the term “Person” as used in this Section 6 includes the shareholders of a corporation or other entity that is a party to a merger, consolidation or business combination to which the Company also is a party, including a forward or reverse subsidiary merger pursuant to which voting securities of the Company are issued to such shareholders.

7. Termination of Employment.

(a) Death, Retirement or Disability. Executive’s employment and the Employment Period will terminate automatically upon Executive’s death or Retirement. For purposes of this Agreement, “Retirement” means normal retirement as defined in the Company’s then-current retirement plan, or if there is no such retirement plan, “Retirement” means voluntary termination after age 65 with ten years of service. If the Company determines in good faith that a Disability of Executive has occurred (pursuant to the definition of Disability set forth below), it may give to Executive written notice of its intention to terminate Executive’s employment. In such event, Executive’s employment with the Company will terminate effective on the 30th day after receipt of such written notice by Executive (the “Disability Effective Date”), provided that, within the 30 days after such receipt, Executive has not returned to full-time performance of Executive’s duties or, if Executive has returned, Executive consistently fails to meet reasonable expectations in her work performance due to any incapacity resulting from a physical or mental illness. For purposes of this Agreement, “Disability” means a mental or physical disability as determined by the Board in accordance with standards and procedures similar to those under the Company’s employee long-term disability plan, if any. At any time that the Company does not maintain such a long-term disability plan, Disability will mean the inability of Executive, as determined by the Board, to substantially perform the essential functions of her regular duties and responsibilities due to a medically determinable physical or mental illness which has lasted (or can reasonably be expected to last) for a period of six consecutive months.

(b) Termination by the Company. The Company may terminate Executive’s employment for Poor Performance or with or without Cause. For purposes of this Agreement:

“Poor Performance” means the consistent failure of Executive to meet reasonable performance expectations (other than any such failure resulting from incapacity due to physical or mental illness); provided, however, that termination for Poor Performance will not be effective unless at least 30 days prior to such termination Executive has received written notice from the CEO or the Board which specifically identifies the

4

manner in which the CEO or the Board believes that Executive has not met performance expectations and Executive has failed after receipt of such notice to resume the diligent performance of her duties to the satisfaction of the CEO or the Board; and

“Cause” means:

(i) the willful and continued failure of Executive substantially to perform Executive’s duties with the Company (other than any such failure resulting from incapacity due to physical or mental illness, and specifically excluding any failure by Executive, after reasonable efforts, to meet performance expectations), after a written demand for substantial performance is delivered to Executive by the CEO or the Board which specifically identifies the manner in which the CEO or Board believes that Executive has not substantially performed Executive’s duties, or

(ii) any act of fraud, misappropriation, embezzlement or similar dishonest or wrongful act by Executive, or

(iii) Executive’s abuse of alcohol or any substance which materially interferes with Executive’s ability to perform services on behalf of the Company, or

(iv) Executive’s conviction for, or plea of guilty or nolo contendere to, a felony, or

(v) Executive’s acceptance of employment with an employer other than the Company or any subsidiary of the Company.

(c) Termination by Executive. Executive’s employment may be terminated by Executive for Good Reason or no reason. For purposes of this Agreement, “Good Reason” means:

(i) a reduction by the Company in Executive’s Base Salary or benefits as in effect on the Effective Date or as the same may be increased from time to time, unless a similar reduction is made in salary or benefits of all senior executives of the Company (or any of its subsidiaries and any of their respective affiliates with respect to which the Company exerts control over compensation policies); or

(ii) the Company’s requiring Executive, without her consent, to be based at any office or location other than in the greater Atlanta, Georgia metropolitan area.

(d) Notice of Termination. Any termination by the Company for Poor Performance or Cause, or by Executive for Good Reason, will be communicated by Notice of Termination to the other party hereto given in accordance with Section 17(f) of this Agreement. For purposes of this Agreement, a “Notice of Termination” means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive’s employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date will be not more than 30 days after the giving of such notice). The failure by Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason, Poor Performance or Cause will not waive any right of Executive or the Company, respectively, hereunder or preclude Executive or the Company, respectively, from asserting such fact or circumstance in enforcing Executive’s or the Company’s rights hereunder. For purposes of this Agreement, “Date of Termination” means (i) if Executive’s employment is terminated other than by reason of death, Disability or Retirement, the date of receipt of the Notice of Termination, or any later date specified therein (which will not be more than 30 days after the date of delivery of the Notice of Termination), or (ii) if Executive’s employment is terminated by reason of death, Disability or Retirement, the Date of Termination will be the date of death or Retirement, or the Disability Effective Date, as the case may be. In no event will the Date of Termination be after the end of Executive’s Employment Period, as provided for in Section 3 of this Agreement.

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8. Obligations of the Company upon Termination.

(a) Upon Normal Expiration of Employment Period. Upon the expiration of Executive’s Employment Period, as described in Section 3:

(i) the Company will pay to Executive in a lump sum in cash within 30 days after the expiration of her Employment Period the sum of (A) Executive’s Base Salary through the expiration of her Employment Period to the extent not theretofore paid, and (B) any accrued vacation pay to the extent not theretofore paid (the sum of the amounts described in clauses (A) and (B) will be hereinafter referred to as the “Accrued Obligations”); and

(ii) to the extent not theretofore paid or provided, the Company will timely pay or provide to Executive any other amounts or benefits required to be paid or provided or which Executive is eligible to receive under any plan, program, policy or practice or contract or agreement of the Company, including any rights to which she is entitled under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“COBRA”), (such other amounts and benefits will be hereinafter referred to as the “Other Benefits”).

(b) Prior to a Change in Control: Termination by Executive for Good Reason; Termination by the Company Other Than for Poor Performance, Cause or Disability. If, prior to a Change in Control and during the Executive’s Employment Period, the Company terminates Executive’s employment other than for Poor Performance, Cause or Disability, or Executive terminates employment for Good Reason within a period of 90 days after the occurrence of the event giving rise to Good Reason, then (and with respect to the payments and benefits described in clauses (ii) through (vii) below, only if Executive executes a Release in substantially the form of Exhibit A hereto (the “Release”)):

(i) the Company will pay to Executive in a lump sum in cash within 30 days after the Date of Termination the Accrued Obligations;

(ii) for the longer of six months or until Executive becomes employed with a subsequent employer, but in no event to exceed the lesser of (A) 18 months from the Date of Termination or (B) the remaining term of Executive’s Employment Period (the “Normal Severance Period”), the Company will continue to pay Executive an amount equal to her monthly Base Salary, payable in equal monthly or more frequent installments as are customary under the Company’s payroll practices from time to time; provided, however, that the Company’s obligation to make or continue such payments will cease if Executive violates any of the Restrictive Covenants (as defined in Section 13(b) of this Agreement) and fails to remedy such violation to the satisfaction of the Board within 10 days of notice of such violation;

(iii) during the Normal Severance Period, if and to the extent Executive timely elects COBRA continuation coverage, the Company will pay for the full premium amount of such COBRA continuation coverage and will impute taxable income to the Executive equal to the full premium amount; provided, however that the Company’s obligation to provide such benefits will cease if Executive violates any of the Restrictive Covenants (as defined in Section 13(b) of this Agreement) and fails to remedy such violation to the satisfaction of the Board within 10 days of notice of such violation; provided further, that to the extent Executive continues COBRA continuation coverage beyond her Normal Severance Period, Executive will be responsible for paying the full cost of the COBRA continuation coverage in accordance with the procedures of the Company generally applicable to all qualified beneficiaries receiving COBRA continuation coverage;

(iv) not later than 30 days after the Date of Termination, Executive will be paid a bonus for the year in which the Date of Termination occurs in a lump sum cash amount equal to 100% of her Bonus Opportunity (prorated through the Date of Termination) adjusted up or down by reference to her year-to-date performance at the Date of Termination in relation to the prior established performance objectives under Executive’s bonus plan for such year; provided, however that the bonus payment described in this Section 8(b)(iv) will be reduced by the amount (if any) of the Bonus Opportunity that Executive had previously elected to receive in the form of restricted stock of the Company;

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all grants of restricted stock, restricted stock units and similar Company stock-based awards (“Restricted Stock”) held by Executive as of the Date of Termination will become immediately vested as of the Date of Termination;

(vi) all of Executive’s options to acquire Common Stock of the Company, stock appreciation rights in Common Stock of the Company and similar Company stock-based awards (“Options”) that would have become vested (by lapse of time) within the 24-month period following the Date of Termination had Executive remained employed during such period will become immediately vested as of the Date of Termination;

(vii) notwithstanding the provisions of the applicable Option agreement, all of Executive’s vested but unexercised Options as of the Date of Termination (including those with accelerated vesting pursuant to Section 8(b)(vi) above) will remain exercisable through the earlier of (A) the original expiration date of the Option, or (B) the 90th day following the end of the Normal Severance Period; and

(viii) to the extent not theretofore paid or provided, the Company will timely pay or provide to Executive her Other Benefits.

(c) Prior to a Change in Control: Termination by the Company for Poor Performance. If, prior to the occurrence of a Change in Control, the Company terminates Executive’s employment for Poor Performance, then (and with respect to the payments and benefits described in clauses (ii) through (vii) below, only if Executive executes the Release):

(i) the Company will pay to Executive the Accrued Obligations in a lump sum in cash within 30 days after the Date of Termination;

(ii) for the shortest of (a) 12 months after the Date of Termination; (b) the remaining term of Executive’s Employment Period; or (c) until Executive becomes employed with a subsequent employer (the “Poor Performance Severance Period”), the Company will continue to pay Executive an amount equal to her monthly Base Salary, payable in equal bi-weekly installments or more frequent installments as are customary under the Company’s payroll practices from time to time; provided, however that the Company’s obligation to make or continue such payments will cease if Executive violates any of the Restrictive Covenants (as defined in Section 13(b) of this Agreement) and fails to remedy such violation to the satisfaction of the Board within 10 days of notice of such violation;

(iii) during the Poor Performance Severance Period, if and to the extent Executive timely elects COBRA continuation coverage, the Company will pay for the full premium amount of such COBRA continuation coverage and will impute taxable income to the Executive equal to the full premium amount; provided, however that the Company’s obligation to provide such benefits will cease if Executive violates any of the Restrictive Covenants (as defined in Section 13(b) of this Agreement) and fails to remedy such violation to the satisfaction of the Board within 10 days of notice of such violation; provided further, that to the extent Executive continues COBRA continuation coverage beyond her Poor Performance Severance Period, Executive will be responsible for paying the full cost of the COBRA continuation coverage in accordance with the procedures of the Company generally applicable to all qualified beneficiaries receiving COBRA continuation coverage;

(iv) all grants of Restricted Stock held by Executive as of the Date of Termination that would have become vested (by lapse of time) within the 12-month period following the Date of Termination had Executive remained employed during such period will become immediately vested as of the Date of Termination;

(v) all of Executive’s Options that would have become vested (by lapse of time) within the 12-month period following the Date of Termination had Executive remained employed during such period will become immediately vested and exercisable as of the Date of Termination;

(vi) notwithstanding the provisions of the applicable Option agreement, all of Executive’s vested but unexercised Options as of the Date of Termination (including those with accelerated vesting pursuant to the

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Section 8(c)(vi) above) will remain exercisable through the earlier of (A) the original expiration date of the Option, or (B) the 90’h day following the end of the later of (1) six months from the Date of Termination, or (2) the end of the Poor Performance Severance Period;

(vii) to the extent not theretofore paid or provided, the Company will timely pay or provide to Executive her Other Benefits.

(d) After or in Connection with a Change in Control: Termination by Executive for Good Reason; Termination by the Company Other Than for Cause or Disability. If a Change in Control occurs and, within 36 months following such Change in Control (or if Executive can reasonably show that such termination by the Executive or by the Company was in anticipation of the Change in Control), the Company terminates Executive’s employment other than for Cause or Disability or does not extend the Employment Period as permitted under Section 3, or Executive terminates employment for Good Reason, then (and with respect to the payments and benefits described in clauses (ii) through (vii) below, only if Executive executes the Release):

(i) the Company (or its successor) will pay to Executive the Accrued Obligations in a lump sum in cash within 30 days after the Date of Termination;

(ii) the Company (or its successor) will pay to Executive a lump sum cash amount equal to 24 times her monthly Base Salary within 30 days after the Date of Termination;

(iii) for 18 months after the Date of Termination, if and to the extent Executive timely elects COBRA continuation coverage, the Company will pay for the full premium amount of such COBRA continuation coverage and will impute taxable income to the Executive equal to the full premium amount; provided, however that the Company’s obligation to provide such benefits will cease if Executive violates any of the Restrictive Covenants (as defined in Section 13(b) of this Agreement) and fails to remedy such violation to the satisfaction of the Board within 10 days of notice of such violation;

(iv) not later than 30 days after the Date of Termination, Executive will be paid a lump sum cash amount equal to 100% of her Bonus Opportunity for the year in which the Date of Termination occurs (as defined in Section 5(b)(i)); provided, however that the total bonus payment described in this Section 8(d)(iv) will be reduced by the amount (if any) of the Bonus Opportunity that Executive had previously elected to receive in the form of restricted stock of the Company;

(v) all grants of Restricted Stock held by Executive as of the Date of Termination will become immediately vested as of the Date of Termination;

(vi) all of Executive’s Options held by Executive as of the Date of Termination will become immediately vested and exercisable as of the Date of Termination; notwithstanding the provisions of the applicable Option agreement, all of Executive’s vested but unexercised Options as of the Date of Termination (including those with accelerated vesting pursuant to the Section 8(d)(vi) above) will remain exercisable through the earlier of (A) the original expiration date of the Option, or (B) the 90th day following the end of the 24-month period beginning on the Date of Termination;

(vii) to the extent not theretofore paid or provided, the Company will timely pay or provide to Executive her Other Benefits;

(viii) the restrictions on Executive’s conduct outlined in Section 13 of this Agreement will cease to apply.

(e) Death, Disability or Retirement. Regardless of whether or not a Change in Control has occurred, if Executive’s employment is terminated by reason of Executive’s death, Disability or Retirement, this Agreement will terminate without further obligations to Executive or her estate or legal representatives under this Agreement, other than for payment of Accrued Obligations and the timely payment or provision of Other

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Benefits. Accrued Obligations will be paid to Executive’s estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as used in this Section 8(e) will include, without limitation, and Executive or her estate and/or beneficiaries will be entitled to receive, benefits under such plans, programs, practices and policies relating to death, disability or retirement benefits, if any, as are applicable to Executive on the Date of Termination.

(f) Cause or Voluntary Termination without Good Reason. Regardless of whether or not a Change in Control has occurred, if Executive’s employment is terminated for Cause, or if Executive voluntarily terminates employment without Good Reason, this Agreement will terminate without further obligations to Executive, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits.

9. Non-exclusivity of Rights. Nothing in this Agreement will prevent or limit Executive’s continuing or future participation in any plan, program, policy or practice provided by the Company and for which Executive may qualify, nor, subject to Section 16(d), will anything herein limit or otherwise affect such rights as Executive may have under any contract or agreement with the Company. Amounts which are vested benefits or which Executive is otherwise entitled to receive under any plan, policy, practice or program of the Company or under any contract or agreement with the Company at or subsequent to the Date of Termination will be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement.

10. Certain Additional Payments by the Company.

(a) Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it will be determined that any payment or distribution by the Company to or for the benefit of Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 10) (a “Payment”) would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the “Excise Tax”), then Executive will be entitled to receive an additional payment (a “Gross-Up Payment”) in an amount such that after payment by Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing provisions of this Section 10(a), if it is determined that Executive is entitled to a Gross-Up Payment, but that Executive, after taking into account the Payments and the Gross-Up Payment, would not receive a net after-tax benefit of at least $50,000 (taking into account both income taxes and any Excise Tax) as compared to the net after-tax proceeds to Executive resulting from an elimination of the Gross-Up Payment and a reduction of the Payments, in the aggregate, to an amount (the “Reduced Amount”) such that the receipt of Payments would not give rise to any Excise Tax, then no Gross-Up Payment will be made to Executive and the Payments, in the aggregate, will be reduced to the Reduced Amount. In that event, Executive will direct which Payments are to be modified or reduced.

(b) Subject to the provisions of Section 10(c), all determinations required to be made under this Section 10, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, will be made by Ernst & Young LLP or such other certified public accounting firm reasonably acceptable to the Company as may be designated by Executive (the “Accounting Firm”) which will provide detailed supporting calculations both to the Company and Executive within 15 business days of the receipt of notice from Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the accounting firm is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, or in the event that serving as the Accounting Firm for purposes of this Section 10(b) would jeopardize the accounting firm’s status as the Company’s independent auditor, Executive will appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm will then be referred to as the Accounting Firm

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hereunder). All fees and expenses of the Accounting Firm will be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 10, will be paid by the Company to Executive within five days of the receipt of the Accounting Firm’s determination. Any determination by the Accounting Firm will be binding upon the Company and Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made (“Underpayment”), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 10(c) and Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm will determine the amount of the Underpayment that has occurred and any such Underpayment will be promptly paid by the Company to or for the benefit of Executive.

(c) The Executive will notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification will be given as soon as practicable but no later than ten business days after Executive is informed in writing of such claim and apprises the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive will not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies Executive in writing prior to the expiration of such period that it desires to contest such claim, Executive will:

(i) give the Company any information reasonably requested by the Company relating to such claim;

(ii) take such action in connection with contesting such claim as the Company reasonably requests in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company;

(iii) cooperate with the Company in good faith in order effectively to contest such claim, and

(iv) permit the Company to participate in any proceedings relating to such claim.

provided, however, that the Company will bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and will indemnify and hold Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation of the foregoing provisions of this Section 10(c), the Company will control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company will determine; provided, however, that if the Company directs Executive to pay such claim and sue for a refund, the Company will advance the amount of such payment to Executive, on an interest-free basis and will indemnify and hold Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company’s control of the contest will be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and Executive will be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority.

(d) If, after the receipt by Executive of an amount advanced by the Company pursuant to Section 10(c), Executive becomes entitled to receive any refund with respect to such claim, Executive will (subject to the Company’s complying with the requirements of Section 10(c)) promptly pay to the Company the amount of such

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refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by Executive of an amount advanced by the Company pursuant to Section 10(c), a determination is made that Executive is not entitled to any refund with respect to such claim and the Company does not notify Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance will be forgiven and will not be required to be repaid and the amount of such advance will offset, to the extent thereof, the amount of Gross-Up Payment required to be paid.

11. Costs of Enforcement. Unless otherwise provided by the arbitrator(s) in an arbitration proceeding pursuant to Section 14 hereof, in any action taken in good faith relating to the enforcement of this Agreement or any provision herein, Executive will be entitled to be paid any and all costs and expenses incurred by her in enforcing or establishing her rights thereunder, including, without limitation, reasonable attorneys’ fees, whether suit be brought or not, and whether or not incurred in trial, bankruptcy or appellate proceedings, but only if Executive is determined to be the substantially prevailing party in the enforcement proceeding.

12. Representations and Warranties. Executive hereby represents and warrants to the Company that Executive is not a party to, or otherwise subject to, any covenant not to compete with any person or entity, and Executive’s execution of this Agreement and performance of her obligations hereunder will not violate the terms or conditions of any contract or obligation, written or oral, between Executive and any other person or entity.

13. Restrictions on Conduct of Executive.

(a) General. Executive and the Company understand and agree that the purpose of the provisions of this Section 13 is to protect legitimate business interests of the Company, as more fully described below, and is not intended to eliminate Executive’s post-employment competition with the Company per se, nor is it intended to impair or infringe upon Executive’s right to work, earn a living, or acquire and possess property from the fruits of her labor. Executive hereby acknowledges that the post-employment restrictions set forth in this Section 13 are reasonable and that they do not, and will not, unduly impair her ability to earn a living after the termination of this Agreement. Therefore, subject to the limitations of reasonableness imposed by law, Executive will be subject to the restrictions set forth in this Section 13.

(b) Definitions. The following terms used in this Section 13 have the meanings assigned to them below, which definitions apply to both the singular and the plural forms of such terms:

“Competitive Position” means any employment with a Competitor in which Executive will use or is likely to use any Confidential Information or Trade Secrets, or in which Executive has duties for such Competitor that relate to Competitive Services and that are the same or similar to those services actually performed by Executive for the Company;

“Competitive Services” means the provision of health information products and services, including, without limitation, practice management systems, value-added networks, information management, health management services and health-related e-commerce.

“Competitor” means any Person engaged, wholly or in part, in Competitive Services, including, but not limited to, as of the date of this Agreement, Siemens Medical Solutions; McKesson Corporation and its subsidiaries; Verispan; IMS Health Incorporated; PDX and its affiliates; DX Systems Corporation; WebMD Corporation including Envoy; Cardinal Health and its subsidiaries; QS1; Ateb Inc; and PCS.

“Confidential Information” means all information regarding the Company, its activities, business or clients that is the subject of reasonable efforts by the Company to maintain its confidentiality and that is not generally disclosed by practice or authority to persons not employed by the Company, but that does not rise to the level of a Trade Secret. “Confidential Information” includes, but is not limited to, financial plans and data concerning the Company; management planning information; business plans; operational methods; market studies; marketing plans or strategies; product development techniques or plans; lists of current or prospective

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customers; details of customer contracts; current and anticipated customer requirements; past, current and planned research and development; business acquisition plans; and new personnel acquisition plans. “Confidential Information” does not include information that has become generally available to the public by the act of one who has the right to disclose such information without violating any right or privilege of the Company. This definition will not limit any definition of “confidential information” or any equivalent term under state or federal law.

“Determination Date” means the date of termination of Executive’s employment with the Company for any reason whatsoever or any earlier date of an alleged breach of the Restrictive Covenants by Executive.

“Person” means any individual or any corporation, partnership, joint venture, limited liability company, association or other entity or enterprise.

“Principal or Representative” means a principal, owner, partner, shareholder, joint venturer, investor, member, trustee, director, officer, manager, employee, agent, representative or consultant.

“Protected Customers” means any Person to whom the Company has sold its products or services or solicited to sell its products or services during the twelve (12) months prior to the Determination Date.

“Protected Employees” means employees of the Company who were employed by the Company at any time within six (6) months prior to the Determination Date.

“Restricted Period” means the Employment Period and a period extending eighteen (18) months from the termination of Executive’s employment with the Company.

“Restricted Territory” means the state of Georgia, any other state in which the Company has an office location, and any country outside of the United States in which the Company has an office location.

“Restrictive Covenants” means the restrictive covenants contained in Section 13(c) hereof.

“Trade Secret” means all information, without regard to form, including, but not limited to, technical or nontechnical data, a formula, a pattern, a compilation, a program, a device, a method, a technique, a drawing, a process, financial data, financial plans, product plans, distribution lists or a list of actual or potential customers, advertisers or suppliers which is not commonly known by or available to the public and which information: (A) derives economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and (B) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. Without limiting the foregoing, Trade Secret means any item of Confidential Information that constitutes a “trade secret(s)” under the common law or applicable state law.

(c) Restrictive Covenants.

(i) Restriction on Disclosure and Use of Confidential Information and Trade Secrets. Executive understands and agrees that the Confidential Information and Trade Secrets constitute valuable assets of the Company and its affiliated entities, and may not be converted to Executive’s own use. Accordingly, Executive hereby agrees that Executive will not, directly or indirectly, at any time during the Restricted Period reveal, divulge, or disclose to any Person not expressly authorized by the Company any Confidential Information, and Executive will not, directly or indirectly, at any time during the Restricted Period use or make use of any Confidential Information in connection with any business activity other than that of the Company. Throughout the term of this Agreement and at all times after the date that this Agreement terminates for any reason, Executive will not directly or indirectly transmit or disclose any Trade Secret of the Company to any Person, and will not make use of any such Trade Secret, directly or indirectly, for herself or for others, without the prior written consent of the Company. The parties acknowledge and agree that this Agreement is not intended to, and does not, alter either the Company’s rights or Executive’s obligations under any state or federal statutory or

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common law regarding trade secrets and unfair trade practices. Anything herein to the contrary notwithstanding, Executive will not be restricted from disclosing or using Confidential Information that is required to be disclosed by law, court order or other legal process; provided, however, that in the event disclosure is required by law, Executive will provide the Company with prompt notice of such requirement so that the Company may seek an appropriate protective order prior to any such required disclosure by Executive.

(ii) Nonsolicitation of Protected Employees. Executive understands and agrees that the relationship between the Company and each of its Protected Employees constitutes a valuable asset of the Company and may not be converted to Executive’s own use. Accordingly, Executive hereby agrees that during the Restricted Period Executive will not directly or indirectly on Executive’s own behalf or as a Principal or Representative of any Person or otherwise solicit or induce any Protected Employee to terminate her employment relationship with the Company or to enter into employment with any other Person.

(iii) Restriction on Relationships with Protected Customers. Executive understands and agrees that the relationship between the Company and each of its Protected Customers constitutes a valuable asset of the Company and may not be converted to Executive’s own use. Accordingly, Executive hereby agrees that, during the Restricted Period, Executive will not, without the prior written consent of the Company, directly or indirectly, on Executive’s own behalf or as a Principal or Representative of any Person, solicit, divert, take away or attempt to solicit, divert or take away a Protected Customer for the purpose of providing or selling Competitive Services; provided, however, that the prohibition of this covenant will apply only to Protected Customers with whom Executive had Material Contact on the Company’s behalf during the twelve (12) months immediately preceding the termination of her employment hereunder. For purposes of this Agreement, Executive had “Material Contact” with a Protected Customer if (a) she had business dealings with the Protected Customer on the Company’s behalf; (b) she was responsible for supervising or coordinating the dealings between the Company and the Protected Customer; or (c) she obtained Trade Secrets or Confidential Information about the Protected Customer as a result of her association with the Company.

(iv) Noncompetition with the Company. The parties acknowledge: (A) that Executive’s services under this Agreement require special expertise and talent in the provision of Competitive Services and that Executive will have substantial contacts with customers, suppliers, advertisers and vendors of the Company; (B) that pursuant to this Agreement, Executive will be placed in a position of trust and responsibility and she will have access to a substantial amount of Confidential Information and Trade Secrets and that the Company is placing her in such position and giving her access to such information in reliance upon her agreement not to compete with the Company during the Restricted Period; (C) that due to her management duties, Executive will be the repository of a substantial portion of the goodwill of the Company and would have an unfair advantage in competing with the Company; (D) that due to Executive’s special experience and talent, the loss of Executive’s services to the Company under this Agreement cannot reasonably or adequately be compensated solely by damages in an action at law; (E) that Executive is capable of competing with the Company; and (F) that Executive is capable of obtaining gainful, lucrative and desirable employment that does not violate the restrictions contained in this Agreement. In consideration of the compensation and benefits being paid and to be paid by the Company to Executive hereunder, Executive hereby agrees that, during the Restricted Period, Executive will not, without prior written consent of the Company, directly or indirectly seek or obtain a Competitive Position in the Restricted Territory with a Competitor; provided, however, that the provisions of this Agreement will not be deemed to prohibit the ownership by Executive of any securities of the Company or its affiliated entities or not more than five percent (5%) of any class of securities of any corporation having a class of securities registered pursuant to the Securities Exchange Act of 1934, as amended.

(v) Cooperation. Throughout the term of this Agreement and at all times after the date that this Agreement terminates for any reason, Executive will not make statements detrimental to the interests of nor engage in any activities detrimental to the Company or its officers, directors, stockholders, trustees, employees, agents, parent corporations, subsidiaries, affiliates, estates, successors, assigns and attorneys, nor will Executive make any statements about any of the aforementioned parties to the press (including without limitation any newspaper, magazine, radio station or television station) without the prior written consent of the Company.

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Executive will also cooperate with the Company and its affiliates as a witness in all matters about which she has knowledge as a result of her position with the Company and its affiliates if the Company requests her testimony.

(d) Enforcement of Restrictive Covenants.

(i) Rights and Remedies Upon Breach. In the event Executive breaches, or threatens to commit a breach of, any of the provisions of the Restrictive Covenants, the Company will have the following rights and remedies, which will be independent of any others and severally enforceable, and will be in addition to, and not in lieu of, any other rights and remedies available to the Company at law or in equity:

(A) the right and remedy to enjoin, preliminarily and permanently, Executive from violating or threatening to violate the Restrictive Covenants and to have the Restrictive Covenants specifically enforced by any court of competent jurisdiction, it being agreed that any breach or threatened breach of the Restrictive Covenants would cause irreparable injury to the Company and that money damages would not provide an adequate remedy to the Company; and

(B) the right and remedy to require Executive to account for and pay over to the Company all compensation, profits, monies, accruals, increments or other benefits derived or received by Executive hereunder after the Date of Termination, excluding any Accrued Obligations.

(ii) Severability of Covenants. Executive acknowledges and agrees that the Restrictive Covenants are reasonable and valid in time and scope and in all other respects. The covenants set forth in this Agreement will be considered and construed as separate and independent covenants. Should any part or provision of any covenant be held invalid, void or unenforceable in any court of competent jurisdiction, such invalidity, voidness or unenforceability will not render invalid, void or unenforceable any other part or provision of this Agreement. If any portion of the foregoing provisions is found to be invalid or unenforceable by a court of competent jurisdiction because its duration, the territory, the definition of activities or the definition of information covered is considered to be invalid or unreasonable in scope, the invalid or unreasonable term will be redefined, or a new enforceable term provided, such that the intent of the Company and Executive in agreeing to the provisions of this Agreement will not be impaired and the provision in question will be enforceable to the fullest extent of the applicable laws.

14. Arbitration. Any claim or dispute arising under this Agreement (other than under Section 13) will be subject to arbitration, and prior to commencing any court action, the parties agree that they will arbitrate all such controversies. The arbitration will be conducted in Atlanta, Georgia, in accordance with the Employment Dispute Rules of the American Arbitration Association and the Federal Arbitration Act, 9 U.S.C. §1, et seq. The arbitrator(s) will be authorized to award both liquidated and actual damages, in addition to injunctive relief, but no punitive damages. The arbitrator(s) may also award attorney’s fees and costs, without regard to any restriction on the amount of such award under Georgia or other applicable law. Such an award will be binding and conclusive upon the parties hereto, subject to 9 U.S.C. §10. Each party will have the right to have the award made the judgment of a court of competent jurisdiction.

Initials:              Executive:             

    Company:             

15. Assignment and Successors.

(a) This Agreement is personal to Executive and without the prior written consent of the Company will not be assignable by Executive otherwise than by will or the laws of descent and distribution. This Agreement will inure to the benefit of and be enforceable by the Executive’s legal representatives.

(b) This Agreement will inure to the benefit of and be binding upon the Company and its successors and assigns.

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(c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, “Company” means the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise.

16. Miscellaneous.

(a) Waiver. Failure of either party to insist, in one or more instances, on performance by the other in strict accordance with the terms and conditions of this Agreement will not be deemed a waiver or relinquishment of any right granted in this Agreement or of the future performance of any such term or condition or of any other term or condition of this Agreement, unless such waiver is contained in a writing signed by the party making the waiver.

(b) Severability. If any provision or covenant, or any part thereof, of this Agreement should be held by any court to be invalid, illegal or unenforceable, either in whole or in part, such invalidity, illegality or unenforceability will not affect the validity, legality or enforceability of the remaining provisions or covenants, or any part thereof, of this Agreement, all of which will remain in full force and effect.

(c) Other Agents. Nothing in this Agreement is to be interpreted as limiting the Company from employing other personnel on such terms and conditions as may be satisfactory to it.

(d) Entire Agreement. Except as provided herein, this Agreement contains the entire agreement between the Company and Executive with respect to the subject matter hereof and, from and after the Effective Date, this Agreement will supersede any other agreement between the parties with respect to the subject matter hereof.

(e) Governing Law. Except to the extent preempted by federal law, and without regard to conflict of laws principles, the laws of the State of Georgia will govern this Agreement in all respects, whether as to its validity, construction, capacity, performance or otherwise.

(f) Notices. All notices, requests, demands and other communications required or permitted hereunder will be in writing and will be deemed to have been duly given if delivered or three days after mailing if mailed, first class, certified mail, postage prepaid:

To Company:	NDCHealth Corporation
	NDC Plaza
	Atlanta, Georgia 30329-2010
	Attn: General Counsel
To Executive:	Charlene Crusoe-Ingram
	2660 Peachtree Road NW
	Unit SG
	Atlanta, GA 30305

Any party may change the address to which notices, requests, demands and other communications will be delivered by giving notice thereof to the other party in the same manner provided herein.

(g) Amendments and Modifications. This Agreement may be amended or modified only by a writing signed by both parties hereto, which makes specific reference to this Agreement.

(h) Binding Effect. Except as otherwise provided in this Agreement, every covenant, term and provision of this Agreement will bind and inure to the benefit of each party’s respective successors, transferees and permitted assigns.

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(i) Construction. In construing and enforcing this Agreement, the following rules will be followed:

(1) Each provision of this Agreement will be construed simply according to its fair meaning and not strictly for or against any party. No consideration will be given to the fact or presumption that any party had a greater or lesser hand in drafting this Agreement.

(2) In construing and enforcing this Agreement, no consideration will be given to the captions of the articles, sections, subsections, and clauses of this Agreement, which are inserted for convenience in organizing and locating the provisions of this Agreement, not as an aid in its construction.

(3) Plural words will be understood to include their singular forms, and vice versa.

(4) The word “include” and its syntactical forms mean “include, but are not limited to,” and corresponding syntactical forms. The principal of ejusdem generis will not be used to limit the scope of the category of things illustrated by the items mentioned in a clause introduced by the word “including.”

(5) A defined term has its defined meaning through this Agreement, regardless of where in this Agreement the term is defined.

(6) Except as otherwise provided in this Agreement, a reference to an Article, Section, or clause means an article, section, or clause of this Agreement and may be understood to mean, for example, “Section 5.1 of this Agreement” or “Section 5.1 hereof.” The term “Section” may be used variously to identify entire Sections (as in “Section 6.8”), subsections (as in “Section 6.8(a)”), and clauses (as in “Section 6.8(h)(iii)”).

(j) Incorporation by Reference. Any exhibits to this Agreement are incorporated in this Agreement by reference.

(k) Time. Time is of the essence in this Agreement.

(l) Counterparts. This Agreement may be executed in any number of counterparts with the same effect as if all of the parties had signed the same document. All counterparts will be construed together and will constitute one agreement.

IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Employment Agreement as of the date first above written.

NDCHEALTH CORPORATION
By:	/s/    Walter M. Hoff
	Walter M. Hoff Chief Executive Officer

EXECUTIVE:
By:	/s/    Charlene Crusoe-Ingram
	Charlene Crusoe-Ingram

16

EXHIBIT A

Form of Release

This Release is granted effective as of the              day of             , 200_,              (“Executive”) in favor of NDCHealth Corporation (the “Company”). This is the Release referred to in that certain Employment Agreement dated as of by and between the Company and Executive (the ‘Employment Agreement”). Executive gives this Release in consideration of the Company’s promises and covenants as recited in the Employment Agreement, with respect to which this Release is an integral part.

1. Release of the Company. Executive, for herself, her successors, assigns, attorneys, and all those entitled to assert her rights, now and forever hereby releases and discharges the Company and its respective officers, directors, stockholders, trustees, employees, agents, parent corporations, subsidiaries, affiliates, estates, successors, assigns and attorneys (“the Released Parties”), from any and all claims, actions, causes of action, sums of money due, suits, debts, liens, covenants, contracts, obligations, costs, expenses, damages, judgments, agreements, promises, demands, claims for attorney’s fees and costs, or liabilities whatsoever, in law or in equity, which Executive ever had or now has against the Released Parties, including any claims arising by reason of or in any way connected with any employment relationship which existed between the Company or any of its parents, subsidiaries, affiliates, or predecessors, and Executive. It is understood and agreed that this Release is intended to cover all actions, causes of action, claims or demands for any damage, loss or injury, which may be traced either directly or indirectly to the aforesaid employment relationship, or the termination of that relationship, that Executive has, had or purports to have, from the beginning of time to the date of this Release, whether known or unknown, that now exists, no matter how remotely they may be related to the aforesaid employment relationship including but not limited to claims for employment discrimination under federal or state law, except as provided in Paragraph 2; claims arising under Title VII of the Civil Rights Act, 42 U.S.C. § 2000(e), et seq. or the Americans With Disabilities Act, 42 U.S.C. § 12101 et seq.; claims for statutory or common law wrongful discharge, including any claims arising under the Fair Labor Standards Act, 29 U.S.C. § 201 et seq.; claims for attorney’s fees, expenses and costs; claims for defamation; claims for wages or vacation pay; claims for benefits, including any claims arising under the Employee Retirement Income Security Act, 29 U.S.C. § 1001, et seq.; and provided, however, that nothing herein will release the Company of its obligations to Executive under the Employment Agreement or any other contractual obligations between the Company or its affiliates and Executive, or any indemnification obligations to Executive under the Company’s bylaws, certificate of incorporation, Delaware law or otherwise.

2. Release of Claims Under Age Discrimination in Employment Act. Without limiting the generality of the foregoing, Executive agrees that by executing this Release, she has released and waived any and all claims she has or may have as of the date of this Release for age discrimination under the Age Discrimination in Employment Act, 29 U.S.C. § 621, et seq. It is understood that Executive is advised to consult with an attorney prior to executing this Release; that she in fact has consulted a knowledgeable, competent attorney regarding this Release; that she may, before executing this Release, consider this Release for a period of twenty-one (21) calendar days; and that the consideration she receives for this Release is in addition to amounts to which she was already entitled. It is further understood that this Release is not effective until seven (7) calendar days after the execution of this Release and that Executive may revoke this Release within seven (7) calendar days from the date of execution hereof.

Executive agrees that she has carefully read this Release and is signing it voluntarily. Executive acknowledges that she has had twenty one (21) days from receipt of this Release to review it prior to signing or that, if Executive is signing this Release prior to the expiration of such 21-day period, Executive is waiving her right to review the Release for such full 21-day period prior to signing it. Executive has the right to revoke this release within seven (7) days following the date of its execution by her. However, if Executive revokes this Release within such seven (7) day period, no severance benefit will be payable to her under the Employment Agreement and she will return to the Company any such payment received prior to that date.

17

EXECUTIVE HAS CAREFULLY READ THIS RELEASE AND ACKNOWLEDGES THAT IT CONSTITUTES A GENERAL RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS AGAINST THE COMPANY UNDER THE AGE DISCRIMINATION IN EMPLOYMENT ACT. EXECUTIVE ACKNOWLEDGES THAT SHE HAS HAD A FULL OPPORTUNITY TO CONSULT WITH AN ATTORNEY OR OTHER ADVISOR OF HER CHOOSING CONCERNING HER EXECUTION OF THIS RELEASE AND THAT SHE IS SIGNING THIS RELEASE VOLUNTARILY AND WITH THE FULL INTENT OF RELEASING THE COMPANY FROM ALL SUCH CLAIMS.

IN WITNESS WHEREOF, Executive has duly executed this Release effective as of the eighth day after October 5, 2004.

/s/    Charlene Crusoe-Ingram

Charlene Crusoe-Ingram

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EX-31.I

Exhibit 31 (i)

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: March 21, 2005
	/s/ Walter M. Hoff
	Walter M. Hoff Chief Executive Officer

EX-32.II

Exhibit 31 (ii)

CERTIFICATIONS

I, Lee Adrean, 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: March 21, 2005

/s/ Lee Adrean

Lee Adrean

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)

March 21, 2005

By:	/S/    LEE ADREAN
	Lee Adrean Chief Financial Officer (Principal Financial Officer)

March 21, 2005