IMS HEALTH INC - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549

FORM 10-Q

(Mark one)

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

For the quarterly period ended JUNE 30, 2002

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 number 001-14049

IMS HEALTH INCORPORATED
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)

Delaware 06-1506026
- ---------------------------------------- ------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)

1499 Post Road, Fairfield, CT 06824
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(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code (203) 319-4700

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:

Title Shares Outstanding
of Class At July 31, 2002
----------------- --------------------
Common Stock, par value $.01 per share 283,746,652

IMS HEALTH INCORPORATED

INDEX TO FORM 10-Q

2

PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS

IMS HEALTH INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

SEE ACCOMPANYING NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.

3

IMS HEALTH INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

SEE ACCOMPANYING NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.

4

IMS HEALTH INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

SEE ACCOMPANYING NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.

5

IMS HEALTH INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

SEE ACCOMPANYING NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.

6

IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 1. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The accompanying unaudited Condensed Consolidated Financial Statements have
been prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and Article 10 of
Regulation S-X under the Securities and Exchange Act of 1934, as amended. The
Condensed Consolidated Financial Statements and related notes should be read in
conjunction with the Consolidated Financial Statements and related notes of IMS
Health Incorporated (the "Company" or "IMS") included in its 2001 Annual Report
on Form 10-K and in its previous filings on Form 10-Q. Accordingly, the
accompanying Condensed Consolidated Financial Statements do not include all the
information and notes required by accounting principles generally accepted in
the United States of America for complete financial statements. In the opinion
of management, all adjustments, all of which are of a normal recurring nature,
considered necessary for a fair presentation of financial position, results of
operations and cash flows for the periods presented have been included. The
results of operations for interim periods are not necessarily indicative of the
results expected for the full year.

NOTE 2. BASIS OF PRESENTATION

IMS is a leading global provider of information solutions to the
pharmaceutical and healthcare industries. IMS operates in more than 100
countries and consists of the following segments:

- The IMS Segment provides market information, sales management and
decision-support services to the pharmaceutical and healthcare industries.
Its key products include sales management information to optimize sales
force productivity, marketing effectiveness research for prescription and
over-the-counter pharmaceutical products, consulting and other services.
IMS also owns a venture capital entity, Enterprise Associates, LLC
("Enterprises") which is focused on investments in emerging businesses, and
a 26.6% equity interest in The TriZetto Group, Inc. ("TriZetto").

- The Cognizant Technology Solutions Corporation Segment ("CTS") provides
custom software development, integration and maintenance services that link
e-business with core information systems for companies worldwide. These
services are delivered through the use of a seamless on-site and offshore
consulting project team. CTS's primary service offerings include
application development and integration and application management. CTS is
a publicly traded corporation on the Nasdaq national market system. IMS
owned 57.3% of the common shares outstanding of CTS (93.1% of the
outstanding voting power) as of June 30, 2002 and 58.3% as of December 31,
2001 (93.3% of the outstanding voting power). IMS accounts for CTS as a
consolidated subsidiary.

On July 26, 1999, the Company completed a spin-off of the majority of its
equity investment in Gartner, Inc. ("Gartner", formerly known as "Gartner Group,
Inc.") to the Company's shareholders (the "Gartner Spin-Off"). The Company sold
its remaining interest in Gartner during the third quarter of 2001.

7

IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 3. SUMMARY OF RECENT ACCOUNTING PRONOUNCEMENTS

In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 146, "Accounting for Exit or
Disposal Activities" ("SFAS No. 146"). SFAS No. 146 addresses the accounting for
costs to terminate a contract that is not a capital lease, costs to consolidate
facilities and relocate employees, and involuntary termination benefits under
one-time benefit arrangements that are not an ongoing benefit program or an
individual deferred compensation contract. A liability for contract termination
costs should be recognized and measured at fair value either when the contract
is terminated or when the entity ceases to use the right conveyed by the
contract. A liability for one-time termination benefits should be recognized and
measured at fair value at the communication date if the employee would not be
retained beyond a minimum retention period (i.e., either a legal notification
period or sixty days, if no legal requirement exists). For employees retained
beyond the minimum retention period, a liability should be accrued ratably over
the future service period. The provisions of the statement will be effective for
disposal activities initiated after December 31, 2002. IMS is currently
evaluating the financial impact of adoption of SFAS No. 146.

NOTE 4. ACQUISITIONS AND DISPOSITIONS

In February 2002, the Company acquired Infoplex Durdaut & Jassmann GmbH,
based in Germany. The purchase price for this acquisition, including direct and
incremental transaction costs, amounted to $7,013, paid in cash. After an
allocation of the purchase price to the net assets acquired, the Company
recorded goodwill of $3,758. Had this acquisition occurred as of January 1, 2002
or 2001, the impact on the Company's results of operations would not have been
material.

During the first six months of 2001, the Company exercised its option to
purchase the remaining interest in Medicare Audits Limited ("Medicare"), a U.K.
based hospital research firm, for a net cash payment of $7,889. After the final
allocation of the purchase price to the net assets acquired, goodwill of $7,921
was recorded.

In addition, during the first six months of 2001, the Company recorded
$2,375 of pre-tax net gains from dispositions. This includes a gain of $1,990
resulting from the sale of IDRAC Holdings Inc. ("IDRAC"), a non-strategic
property that provides information on pharmaceutical product registrations, to a
wholly-owned subsidiary of Information Holdings, Inc. ("IHI"). The operating
results of IDRAC were not significant to the results of operations of the
Company.

In a separate transaction, the Company also granted a non-exclusive
perpetual license to IHI to use certain data for aggregate cash consideration of
approximately $17,000, all of which was recognized on delivery as revenue in the
first half of 2001.

On June 30, 2002, Cognizant Technology Solutions Ireland Limited ("CTS
Ireland") a newly formed, wholly-owned subsidiary of CTS, purchased certain
assets and assumed certain liabilities from UnitedHealthcare Ireland Limited
("UHC Ireland"), a subsidiary of UnitedHealth Group, for $2,900. UHC Ireland
previously provided, and will continue to provide through CTS Ireland, software
development and maintenance services, using the existing staff of seventy highly
skilled software professionals. The acquisition of the operations of UHC Ireland
will provide a wide range of services to CTS's clients in Europe and worldwide
and represents the implementation of

8

IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

CTS's previously announced international expansion strategy.

CTS has commenced a preliminary assessment of the allocation of the
purchase price to the tangible and amortizable assets and liabilities acquired.
Based upon that preliminary assessment, CTS expects that the amortization of
such intangible assets will not have a material effect on its results of
operations. In the interim, the purchase price, net of amounts assigned to fixed
assets of approximately $260 has been included in long-term "Other Assets" in
the accompanying Condensed Consolidated Statements of Financial Position.

Since the acquisition closed on June 30, 2002, the results of operations of
CTS Ireland will be included in the Condensed Consolidated Financial Statements
of the Company effective July 1, 2002. Had this acquisition occurred as of
January 1, 2002 or January 1, 2001, the impact on the Company's results of
operations would not have been material.

During the three months ended June 30, 2002 the Company finalized its
purchase price allocation related to its acquisition of Cambridge Pharma
Consultancy, Ltd. No material adjustments were required.

During the six months ended June 30, 2002 the Company sold investments with
a cost basis of $14,505. These sales resulted in gross proceeds of $22,020 and a
pretax gain of $7,515. In addition, the Company recorded $4,907 of write-downs
associated with other-than-temporary declines in the fair value of its venture
capital investments, which occurred primarily during the three-month period
ended June 30, 2002. Furthermore, the Company's unrealized gains on
available-for-sale securities declined by $7,122 since January 1, 2002.

NOTE 5. GOODWILL AND INTANGIBLE ASSETS

Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets" ("SFAS No. 142"). SFAS No. 142 addresses the initial
recognition and measurement of intangible assets acquired outside of a business
combination and the accounting for goodwill and other intangible assets
subsequent to their acquisition. SFAS No. 142 provides that goodwill and
intangible assets which have indefinite useful lives will not be amortized but
rather will be tested at least annually for impairment. It also provides that
intangible assets that have finite useful lives be amortized. There was no
impairment of goodwill upon adoption of SFAS No. 142 and as such, the Company
did not recognize a transition adjustment during the first half of 2002.

Net income and earnings per share for the three and six months ended June
30, 2001, adjusted to exclude goodwill amortization expense (net of taxes) are
as follows:

9

IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

During the six months ended June 30, 2002, the Company recorded additional
goodwill of $3,989. As of June 30, 2002, goodwill amounted to $156,175 at the
IMS Segment and $878 at the CTS Segment.

All of the Company's acquired intangibles are subject to amortization. The
Company did not acquire any intangible assets during the six months ended June
30, 2002. Intangible asset amortization expense was $531 and $1,061 during the
three and six months ended June 30, 2002. At June 30, 2002, intangible assets
(included in Other assets) were composed of Customer Relationships and Trade
Names. The gross carrying amounts and related accumulated amortization of
Customer Relationships and Trade Names were $15,850 and $793 and $2,680 and
$268, respectively, at June 30, 2002.

Amortization expense associated with intangible assets at June 30, 2002 is
estimated to be $1,060 for the last two quarters of 2002 and $2,121 for each
year beginning in 2003 through 2006.

10

IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 6. INVESTMENTS IN EQUITY INVESTEES AND SUBSIDIARIES

TRIZETTO

Summary financial information for TriZetto for the three and six months
ended June 30, 2002 and 2001 is presented below. The amounts shown represent
TriZetto's unaudited consolidated operating results, based on publicly available
information.

The market value of the Company's investment in TriZetto was $103,821 as of
June 30, 2002. The investment in TriZetto is accounted for under the equity
method of accounting. Following a decline in the market value of TriZetto stock
below cost in the latter part of the second quarter of 2002, the Company
performed, and continues to perform, a periodic assessment in accordance with
its policy to determine whether an other-than-temporary decline in fair value
had occurred. The Company evaluated the recoverability of the investment by
reviewing recent information related to the industry and the operating results
and financial position of TriZetto and by considering the Company's ability and
intent to hold the investment on a short or long-term basis if need be. The
Company concluded that evidence existed to support the recoverability of its
carrying value, that there were no events or changes in circumstances
specifically relating to TriZetto, that the underlying business fundamentals are
strong and that the decline in the market value is consistent with the
historical volatility of the stock and is attributable to the general market
conditions since the middle of the second quarter of 2002. Accordingly, the
Company concluded that the decline in market value of the TriZetto stock as of
June 30, 2002 was temporary in nature and has not adjusted the cost basis of its
investment.

CTS

The Company recorded net gains of approximately $3,082 and $3,568 for the
three and six months ending June 30, 2002, relating primarily to the exercise of
stock options by CTS employees. This gain has been recognized in accordance with
Staff Accounting Bulletin ("SAB") No. 51, "Accounting for Sales of Stock by a
Subsidiary."

NOTE 7. CONTINGENCIES

The Company and its subsidiaries are involved in miscellaneous legal
proceedings, claims litigation and tax matters arising in the ordinary course of
business. Although the outcome of such matters cannot be predicted with
certainty, in the opinion of management, the ultimate liability of the Company
in connection with such matters will not have a material effect on the Company's
results of operations, cash flows or financial position.

11

IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

In addition, the Company is subject to certain other contingencies
discussed below:

INFORMATION RESOURCES LITIGATION

On July 29, 1996, Information Resources, Inc. ("IRI") filed a complaint in
the United States District Court for the Southern District of New York, naming
as defendants the corporation then known as "The Dun and Bradstreet Corporation"
and now known as "R. H. Donnelley Corporation" ("Donnelley"), A.C. Nielsen
Company and I.M.S. International, Inc. (a predecessor of IMS) (the "IRI
Action"). At the time of the filing of the complaint, each of the other
defendants was a subsidiary of Donnelley.

The complaint alleges various violations of the antitrust laws of the
United States, including alleged violations of Sections 1 and 2 of the Sherman
Act. The complaint also alleges a claim of tortious interference with a contract
and a claim of tortious interference with a prospective business relationship.
These latter claims relate to the acquisition by the defendants of Survey
Research Group Limited ("SRG"). IRI alleges that SRG violated an alleged
agreement with IRI when it agreed to be acquired by the defendants and that the
defendants induced SRG to breach that agreement. IRI's complaint alleges damages
in excess of $350,000, which amount IRI has asked to be trebled under the
antitrust laws. IRI also seeks punitive damages in an unspecified amount.

In light of the potentially significant liabilities which could arise from
the IRI Action and in order to facilitate the distribution by Donnelley of
shares of Cognizant Corporation ("Cognizant") and ACNielsen Corporation (the
parent company of A.C. Nielsen Company) in 1996, Donnelley, ACNielsen and
Cognizant entered into an Indemnity and Joint Defense Agreement pursuant to
which they agreed (i) to certain arrangements allocating liabilities that may
arise out of or in connection with the IRI Action, and (ii) to conduct a joint
defense of such action. In particular, the Indemnity and Joint Defense Agreement
provides that, in the event of an adverse decision, ACNielsen will assume
exclusive liability for liabilities up to a maximum amount to be calculated at
the time such liabilities, if any, become payable (the "ACN Maximum Amount") and
that Cognizant and Donnelley will share liability equally for any amounts in
excess of the ACN Maximum Amount. The ACN Maximum Amount will be determined by
an investment banking firm as the maximum amount ACNielsen will be able to pay
after giving effect to (i) any plan submitted by such investment bank that is
designed to maximize the claims paying ability of ACNielsen without impairing
the investment banking firm's ability to deliver a viability opinion (but which
will not require any action requiring shareholder approval), and (ii) payment of
related fees and expenses. For these purposes, financial viability means the
ability of ACNielsen, after giving effect to such plan, the payment of related
fees and expenses and the payment of the ACN Maximum Amount, to pay its debts as
they become due and to finance the current and anticipated operating and capital
requirements of its business, as reconstituted by such plan, for two years from
the date any such plan is expected to be implemented. On February 19, 2001,
ACNielsen announced that it merged with VNU N.V. Pursuant to the Indemnity and
Joint Defense Agreement, VNU is to be included with ACNielsen for purposes of
determining the ACN Maximum Amount.

In 1998, IMS was spun-off from Cognizant (the "1998 Spin-Off"), which then
changed its name to Nielsen Media Research, Inc. ("NMR"). IMS and NMR are
jointly and severally liable to

12

IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

Donnelley and ACNielsen for Cognizant's obligations under the terms of the
Distribution Agreement dated October 28, 1996 among Donnelley, Cognizant and
ACNielsen (the "1996 Distribution Agreement"). In connection with the 1998
Spin-Off, IMS and NMR agreed that, as between themselves, IMS will assume 75%,
and NMR will assume 25%, of any payments to be made in respect of the IRI Action
under the Indemnity and Joint Defense Agreement or otherwise, including any
legal fees and expenses related thereto incurred in 1999 or thereafter. IMS
agreed to be fully responsible for any legal fees and expenses incurred during
1998. NMR's aggregate liability to IMS for payments in respect of the IRI Action
and certain other contingent liabilities shall not exceed $125,000.

During 1998, Donnelley separated into two companies (the "1998 Donnelley
Spin"), Donnelley and The Dun & Bradstreet Corporation ("D&B I"). As a result,
Donnelley and D&B I are each jointly and severally liable for all Donnelley
liabilities under the Indemnity and Joint Defense Agreement and the 1996
Distribution Agreement. During 2000, D&B I separated into two companies, Moody's
Corporation ("Moody's") and The Dun & Bradstreet Corporation ("D&B II"). Moody's
and D&B II are each jointly and severally liable for all liabilities under the
Indemnity and Joint Defense Agreement and the 1996 Distribution Agreement that
were assumed by D&B I in the 1998 Donnelley Spin.

Management of the Company is unable to predict at this time the final
outcome of this matter or whether the resolution of this matter could
materially affect the Company's future results of operations, cash flows or
financial position.

MATTERS BEFORE THE EUROPEAN COMMISSION

The Company is the subject of complaints filed with the European Commission
("EC" or the "Commission") pursuant to Article 3 of Council Regulation No. 17 of
1972. The EC complaints allege that the Company has and continues to be engaged
in certain commercial practices that violate Articles 81 and 82 of the EC
Treaty, which relate to agreements or abuses of a dominant position that
adversely affect competition.

As a result of certain of these complaints, on October 19, 2000, the
Commission initiated formal proceedings against the Company through the adoption
of a statement of objections alleging that certain of the Company's commercial
practices constituted an abuse of a dominant position in contravention of
Article 82 of the EC Treaty. A statement of objections is a preliminary document
that does not represent the Commission's final view on the practices at issue.
Under Commission procedures, the Company has full rights of defense, including
access to the Commission's files, the right to answer the statement of
objections in writing and produce evidence of its own, and the right to request
the opportunity to present its defense at an oral hearing. On February 6, 2001,
the Company filed its written answer to the statement of objections. The
Commission will ultimately determine whether a decision requiring the Company to
end some or all of the contested practices is necessary and may impose fines
against the Company. If such a decision is rendered against the Company, the
Company could appeal that decision before the European Court of First Instance.
The Company intends to vigorously defend this matter.

One of the EC complaints is an application lodged with the Commission by
National Data

13

IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

Corporation ("NDC") on December 19, 2000. This complaint requests that the
Commission initiate a proceeding against the Company for an alleged infringement
of Article 82 of the EC Treaty and grant interim measures (the "Application").
The Application concerns an IMS geographic mapping structure used for the
reporting of regional sales data in Germany, which the German courts have ruled
is copyright protected. The Application requests that the Commission grant
interim relief requiring the Company to grant NDC a compulsory license to enable
NDC to use this structure in its competing regional sales data service in
Germany.

In response to the Application, on March 8, 2001, the Commission decided to
initiate formal proceedings against the Company through the adoption of another
statement of objections alleging that the Company's refusal to enter into
negotiations with NDC following NDC's request for a license to use the
aforementioned geographic mapping structure could constitute an abuse of a
dominant position in contravention of Article 82 of the EC Treaty. In addition,
the Commission proposed the granting of interim measures requiring the Company
to license this structure to third parties, including NDC, until the Commission
adopts a final decision on the merits of the case.

On July 3, 2001, the Commission announced its interim decision in these
proceedings (the "Interim Decision") ordering interim measures pending a final
decision on the Application. The Interim Decision required the Company to grant
a license of the geographic mapping structure on commercially reasonable terms
without delay to NDC and to any other competitor currently present on the German
regional sales data market, should it request a license. The terms and royalties
to be paid for the license were to be agreed upon between the Company and the
requesting party, and if an agreement could not be reached in a two week period,
then the terms and royalties for the license would be determined by one or more
independent experts agreed to by the parties, or if the parties could not agree,
then the Commission would appoint one or more experts. The Interim Decision
states that the expert(s) shall communicate its determination to the Commission
for approval within two weeks of being chosen. Finally, the Interim Decision
provides for a penalty of 1,000 Euros per day should the Company fail to comply
with the Interim Decision.

Following issuance of the Interim Decision, NDC and AzyX Deutschland GmbH
("AzyX") requested from the Company a license to the geographic mapping
structure. The Company was not able to agree with NDC or AzyX on the terms and
royalties to be paid for the license or the determination of one or more
independent experts. Before the Commission appointed any independent experts,
the Interim Decision was suspended by the President of the European Court of
First Instance (the "CFI") as noted below.

On August 6, 2001, the Company filed an appeal with the CFI seeking the
annulment of the Interim Decision in its entirety (the "Annulment Appeal") and
requesting that operation of the Interim Decision be suspended until the CFI
renders judgement on the Annulment Appeal. On October 26, 2001, the President of
the CFI ruled in the Company's favor and suspended the operation of the Interim
Decision until the Annulment Appeal is heard and decided. On December 12, 2001,
NDC filed an appeal to the European Court of Justice ("ECJ") seeking annulment
of the October 26 decision against it. On April 11, 2002, the ECJ denied NDC's
appeal. The Company intends to continue to vigorously assert that its refusal to
grant licenses for the use of its copyright protected geographic mapping
structure to its direct competitors in Germany, which compete in the same market
for which the copyright exists, is not in contravention of Article 82 of the EC
Treaty.

Management of the Company is unable to predict at this time the final
outcome of the matters described above or whether the resolution of these
matters could materially affect the Company's future results of operations,
cash flows or financial position.

14

IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

OTHER CONTINGENCIES

Under the terms of the purchase agreements related to acquisitions made in
2001, the Company may be required to pay up to $36,720 in relation to
performance results for the period from 2002 to 2004 as contingent
consideration. Of the contingent consideration, up to $13,760 will be recorded
as additional goodwill, while up to $22,960 will be recorded as compensation as
earned in accordance with the provisions of Emerging Issues Task Force ("EITF")
Statement No. 95-8, "Accounting for Contingent Consideration Paid to the
Shareholders of an Acquired Enterprise in a Purchase Business Combination." The
maximum contingent consideration payable with respect to any given year in the
earn out period is $12,420. As of June 30, 2002, no accrual has been recorded as
the contingency has not been resolved. The annual contingent payments will be
resolved at the end of each respective calendar year from 2002 through 2004.

The Company and its predecessors have entered, and the Company continues to
enter, into global tax planning initiatives in the normal course of their
businesses. These activities are subject to review by applicable tax
authorities. As a result of the review process, uncertainties exist and it is
possible that some of these matters could be resolved adversely to the Company.

In 1999, the Company was informed by D&B I, acting as agent for Donnelley,
that the IRS was reviewing Donnelley's utilization of certain capital losses
during 1989 and 1990. In response, D&B I advised that it intended to file an
amended tax return for these periods and to pay this amount in order to prevent
further interest from accruing. In May 2000, D&B I paid $349,291 of this amount
and the Company paid $212,291 pursuant to its obligation under the 1996
Distribution Agreement and the Distribution Agreement between Cognizant (renamed
NMR) and the Company (the "1998 Distribution Agreement"), whereby the Company is
in effect obligated to pay an amount equal to one-half of the tax and interest
owed to the IRS for this matter to the extent the liability exceeds $137,000
(subject to reimbursement to the Company of a portion of this amount by NMR). In
the second quarter of 2000, Donnelley received a formal assessment from the IRS
with respect to this matter in the amount of $561,582, for additional tax and
interest due, which was satisfied by the payments made by D&B I and the Company
in May 2000. D&B I has advised the Company that, notwithstanding the filing and
payment, it intends to contest the assessment and would also contest the
assessment of amounts, if any, in excess of the amounts paid. The Company had
previously accrued for this liability and, therefore, this payment did not
result in an expense in 2000.

Pursuant to the 1998 Distribution Agreement, NMR is responsible for a
portion of the amount that the Company paid pursuant to the 1996 Distribution
Agreement ($41,136 according to the Company's calculations). NMR was not
obligated to pay its share to the Company until January 2, 2001. In December
2000, the Company requested reimbursement of this amount from NMR. On January 2,
2001, NMR made a payment of $10,530 in respect of such matter but refused to pay
the remaining $30,606 based on its interpretation of the applicable agreements.
The Company believes that NMR's position has no merit and plainly contravenes
the terms of the applicable agreements.

15

IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

Accordingly, the Company has a receivable of $34,739, which includes the
outstanding principal and accumulated accrued interest income of $4,133. During
the three and six months ended June 30, 2002, $689 and $1,378, respectively, of
interest income was accrued in accordance with the terms of the applicable
agreements. The Company did not record any interest income on the NMR receivable
during the three and six months ended June 30, 2001. These amounts are reflected
in other receivable in the Condensed Consolidated Statements of Financial
Position. The Company has commenced arbitration regarding this matter by filing
a Demand for Arbitration with the American Arbitration Association International
Center for Dispute Resolution. The Company believes it will prevail in this
matter, and it intends to vigorously pursue it.

In connection with the Gartner Spin-Off, the Company and Gartner entered
into a Distribution Agreement and an Agreement and Plan of Merger (together, the
"1999 Distribution Agreements"). Pursuant to the 1999 Distribution Agreements,
Gartner agreed to indemnify the Company and its stockholders for additional
taxes which may become payable as a result of certain actions that may be taken
by Gartner that adversely affect the tax-free treatment of the Gartner Spin-Off.
However, the Company may become obligated for certain tax liabilities in the
event the Gartner Spin-Off is deemed to be a taxable transaction as a result of
certain Gartner share transactions that may be undertaken following the Gartner
Spin-Off. In the opinion of management, it is not probable that any material
liabilities will be incurred by the Company with respect to this matter.

As part of the Synavant Spin-Off, IMS and Synavant entered into a
Distribution Agreement (the "Synavant Distribution Agreement"). In connection
with the distribution, Synavant will be jointly and severally liable to the
other parties to the 1996 and 1998 Distribution Agreements for the liabilities
relating to certain tax matters as well as those relating to the IRI Action.
Under the Synavant Distribution Agreement, as between IMS and Synavant, each
will bear 50% of IMS's share of these liabilities (net of the liability borne by
NMR), up to a maximum liability of $9,000 for Synavant. If, contrary to
expectations, the Synavant Spin-Off were not to qualify as tax free under
Section 355 of the Internal Revenue Code, then, in general, a corporate tax
would be payable by the consolidated group, of which IMS is a common parent and
Synavant is a member, based on the difference between (x) the fair market value
of the Synavant Common Stock on the date of the Synavant Spin-Off and (y) the
adjusted basis of such Synavant Common Stock. In addition, under the
consolidated return rules, each member of the consolidated group would be
severally liable for such tax liability. IMS estimates that the aggregate tax
liability in this regard is not expected to exceed $100,000. Pursuant to the Tax
Allocation Agreement, IMS would be liable for the resulting corporate tax,
except as provided in the Synavant Distribution Agreement. In the opinion of
management and based on the opinion of tax counsel, it is not probable that the
Company will incur any liability.

The Company has been informed that the IRS had issued Notices of Proposed
Adjustments ("Notices") with respect to a transaction entered into by
Donnelley in 1993. In these Notices, the IRS proposed to disallow certain
royalty expense deductions claimed by Donnelly on its 1995 and 1996 tax
returns and by Cognizant on its 1997 tax return. The IRS previously concluded
an audit of the 1993 and 1994 Donnelley federal income tax returns and did
not disallow any similar claimed deductions. D&B II and the Company disagree
with the position taken by the IRS in its Notices and a responsive brief has
been filed to this effect with the IRS. If the IRS were to issue a formal
assessment consistent with such Notices and such assessment were ultimately
upheld in full by the courts, the Company's share of the total liability, as
determined in accordance with the 1996 and 1998 Distribution

16

IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

Agreements, would be approximately $50,000 net of income tax benefit.

Although the Company has recorded provisions where these Other
Contingencies are considered to be probable and reasonably estimable, it is
unable to predict with certainty at this time the final outcome of these
matters or whether the resolution of these matters could materially affect
the Company's results of operations, cash flow or financial position. If
these matters are resolved adversely to the Company, there could be a
material affect on the Company's results of operations and cash flows in the
period in which such matters are adversely resolved.

NOTE 8. FINANCIAL INSTRUMENTS

FOREIGN EXCHANGE RISK MANAGEMENT

On January 1, 2001, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" and SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities, an amendment of
SFAS No. 133." These statements standardize the accounting for derivative
instruments. The Company is required to record all derivative instruments on the
balance sheet at fair value. Derivatives that are not classified as hedges are
adjusted to fair value through earnings. Changes in fair value of the
derivatives that the Company has designated and that qualify as effective hedges
are recorded in either other comprehensive income or earnings. Any ineffective
portion of the Company's derivatives that are classified as hedges is
immediately recognized in earnings. This change in accounting principle did not
have a material impact on the Company's financial position, results of
operations or cash flow at the date of adoption.

The Company transacts business in more than 100 countries and is subject to
risks associated with changing foreign exchange rates. The Company's objective
is to reduce earnings and cash flow volatility associated with foreign exchange
rate changes. Accordingly, the Company enters into foreign currency forward
contracts to minimize the impact of foreign exchange movements on net income and
on the value of non-functional currency assets and liabilities.

It is the Company's policy to enter into foreign currency transactions only
to the extent necessary to meet its objectives as stated above. The Company does
not enter into foreign currency transactions for investment or speculative
purposes. At June 30, 2002, all foreign currency forward contracts had a term of
less than one year. The principal currencies hedged are the Japanese yen, the
Euro, the Swiss franc, the Canadian dollar and the British pound sterling.

The impact of foreign exchange risk management activities on pre-tax income
during the three and six months ended June 30, 2002 and 2001 resulted in a net
pre-tax gain (loss) of $(14,209) and $103, and $(11,941) and $1,500,
respectively. At June 30, 2002, the Company had approximately $252,000 in
foreign exchange forward contracts outstanding with expiration dates through
September 2002 hedging non-functional currency assets and liabilities. Gains and
losses on these contracts are included in the Condensed Consolidated Statements
of Income in Other expense, net.

FAIR VALUE OF FINANCIAL INSTRUMENTS

At June 30, 2002, the Company's financial instruments included cash, cash
equivalents, receivables, accounts payable, short-term debt, including
short-term borrowings reclassified as long-term debt, and foreign currency
forward contracts. Due to their short-term nature, the fair

17

IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

value of these instruments approximated their carrying value at June 30, 2002.
At June 30, 2002, the fair value of the Company's foreign currency forward
contracts was approximately $252,000 and all contracts mature in 2002. The fair
values of the forward contracts were estimated based on quoted market prices.

CREDIT CONCENTRATIONS

The Company continually monitors its positions with, and the credit quality
of, the financial institutions that are counter parties to its financial
instruments and does not anticipate non-performance by the counter parties. The
Company would not realize a material loss as of June 30, 2002 in the event of
non-performance by any one counter party. The Company enters into transactions
only with high credit quality financial institution counter parties. In
addition, the Company limits the amount of credit exposure with any one
institution.

The Company maintains accounts receivable balances of $269,253 and
$228,626, net of allowances for doubtful accounts, at June 30, 2002 and December
31, 2001, respectively, principally from customers in the pharmaceutical
industry. The Company's trade receivables do not represent significant
concentrations of credit risk at June 30, 2002, due to the high quality of its
customers and their dispersion across many geographic areas.

LINES OF CREDIT AND LIQUIDITY

The Company has borrowing arrangements with several international banks to
provide short and long-term lines of credit up to $580,000. Total borrowings
were $508,100 and $346,463 at June 30, 2002 and December 31, 2001, respectively.
In general, the terms of the lines of credit give the Company the option to
borrow at an interest rate equal to LIBOR plus 37.5 basis points for short-term
lines and LIBOR plus 65 basis points for long-term lines. The weighted average
interest rates for the short-term lines were 2.38% and 2.34% at June 30, 2002
and December 31, 2001, respectively. The weighted average interest rates for the
long-term lines were 3.70% and 2.48% at June 30, 2002 and December 31, 2001
respectively. The commitment fee associated with the unused short-term lines of
credit is 22.5 basis points per year, increasing to 28.75 basis points per year
if the facilities are less than 50% utilized. Under the long-term lines the
commitment fee is 52.5 basis points per year. The borrowing arrangements require
the Company to comply with certain financial covenants and at June 30, 2002 and
December 31, 2001, the Company was in compliance with all such covenants.

During the fourth quarter of 2001, the Company renegotiated certain
borrowing arrangements and entered into three-year lines of credit for up to
$175,000. Borrowings under these three-year facilities are short-term in nature;
however, the Company has the ability and the intent to refinance the short-term
borrowings through December 2004 as they come due under existing long-term
lines. As such, at June 30, 2002, the Company reclassified $175,000 of its then
outstanding debt as long-term debt pursuant to the provisions of SFAS No. 6,
"Classification of Short-Term Obligations Expected to be Refinanced." Borrowings
classified as short-term were $333,139 and $196,463 at June 30, 2002 and
December 31, 2001, respectively. Borrowings have maturity dates of up to ninety
days from their inception.

In March and April 2002, the Company entered into interest rate swaps on a
portion of its

18

IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

variable rate debt portfolio. These arrangements convert the variable interest
rates to a fixed interest rate on a notional amount of $75,000 and mature at
various times from March 2005 through April 2006. At June 30, 2002, the fixed
rates range from 4.05% to 5.08%. The interest rate swaps are accounted for as
cash flow hedges and any changes in fair value are recorded in other
comprehensive income. The mark-to-market adjustment for the quarter ended June
30, 2002 was an unrealized net loss of $1,215.

At June 30, 2002, the Company's Total Current Liabilities exceed its Total
Current Assets by $24,051 primarily as a result of management's decision to
maintain a greater proportion of short-term borrowings versus longer-term debt
instruments. This strategy allows the Company to achieve lower borrowing costs
while providing flexibility to repay debt with cash flow from operations and
proceeds from the exercise of stock options and the liquidation of equity
holdings. Based on estimated future cash flows from operations, the continued
monetization of its investments, the ability to monetize other assets including
its investment in CTS as well as the Company's ability to utilize existing lines
of credit, the Company believes it will have sufficient cash and other resources
to fund its short-term and long-term business plans, including its current and
long-term obligations, its contingent payments, its stock repurchase program and
its operations.

NOTE 9. INCOME TAXES

The Company operates in more than 100 countries around the world and its
earnings are taxed at the applicable income tax rate in each of these countries.

In the first half of 2002, the Company's tax rate was impacted by CTS's
decision that effective January 1, 2002, pursuant to Accounting Principles
Bulletin No. 23, CTS will no longer accrue taxes on the repatriation of Indian
earnings recognized in 2002 and subsequent periods as these earnings are
considered to be permanently reinvested outside of the United States. During the
first quarter of 2002, CTS made a strategic decision to pursue an international
strategy that includes expanded infrastructure investments in India and
geographic expansion in Europe and Asia. As a component of this strategy, CTS
intends to use 2002 and future Indian earnings to expand operations outside of
the United States instead of repatriating these earnings to the United States.
During the second quarter of 2002, there was a change in the manner in which
repatriated earnings are taxed in India. These changes resulted in an effective
tax rate for CTS of 23.4% during the first six months of 2002, compared to an
effective tax rate for CTS of 37.4% in the first six months of 2001.
Additionally, the Company's effective tax rate reflects true-ups of current and
deferred income tax liabilities.

In the first half of 2001, the Company's tax rate was reduced by
approximately $10,200, primarily relating to the recognition of approximately
$11,700 of additional tax benefits arising from a 1998 non-U.S. reorganization
which gave rise to tax deductible amortization of non-U.S. intangible assets.
This change in estimate resulted from the reassessment of the tax benefits from
this reorganization following certain new non-U.S. tax legislation enacted at
the end of the first quarter of 2001.

While the Company intends to continue to seek global tax planning
initiatives, there can be no assurance that the Company will be able to
successfully implement such initiatives to reduce or

19

IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

maintain its overall tax rate.

NOTE 10. IMS HEALTH CAPITAL STOCK

On July 19, 2000, the Board of Directors authorized a stock repurchase
program to buy up to 40 million shares, marking the fourth consecutive
repurchase program the Company has implemented. Shares acquired through the
repurchase program are open-market purchases in compliance with Securities and
Exchange Commission Rule 10b-18.

During the second quarter of 2002, the Company repurchased approximately
4,400 shares of outstanding common stock under this program at a total cost of
$92,514. For the first six months of 2002 the Company repurchased approximately
9,400 shares of outstanding common stock under this program at a total cost of
$192,221. As of June 30, 2002, approximately 30,100 shares had been repurchased
since the inception of the program, at a total cost of $709,377. As a result of
these repurchases, the weighted average shares outstanding diluted for the three
months ended June 30, 2002 declined to 289,270 from 302,264 for the same period
in 2001.

The Company re-issued approximately 300 treasury shares under option
exercises for proceeds of $4,476 during the three months ended June 30, 2002.
For the first half of 2002, the Company re-issued 700 shares for proceeds of
$11,658. In addition, the Company paid dividends of $0.02 per share for a total
of $5,786 during the three months ended June 30, 2002. For the first half of
2002, the Company paid dividends of $0.04 per share for a total of $11,626.

NOTE 11. COMPREHENSIVE INCOME

THE FOLLOWING TABLE SETS FORTH THE COMPONENTS OF COMPREHENSIVE INCOME, NET OF
INCOME TAX EXPENSE:

Included in the reclassification adjustment of $8,007 and $7,515 for the
three and six months ended June 30, 2002 were gains on sales of securities of
$9,025 and $9,891, respectively, and losses on sales of securities of $1,018 and
$2,376, respectively.

20

IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 12. SEVERANCE, IMPAIRMENT AND OTHER CHARGES

During the first half of 2002, the Company paid approximately $16,160 under
its Competitive Fitness Program, which was announced in the fourth quarter of
2001. As planned, the Company terminated approximately two hundred sixty-one
employees during the first six months of 2002. This included fifty-one employee
terminations and cash payments of approximately $2,511 against the $6,277
accrual recorded in the fourth quarter of 2001 as part of this program in
accordance with EITF 94-3, "Liability Recognition of Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in Restructuring)." The actions are proceeding in accordance with
the original plan and will be substantially complete by the end of 2002.

NOTE 13. OPERATIONS BY BUSINESS SEGMENT

Operating segments are defined as components of an enterprise about which
financial information is available that is evaluated on a regular basis by the
chief operating decision maker, or decision making groups, in deciding how to
allocate resources to an individual segment and in assessing the performance of
the segment. The Company operates globally and is principally managed by way of
and delivers information, software and related services through, the strategic
business segments referenced below.

The chief operating decision-makers evaluate performance and allocate
resources based on revenue and operating income data. All inter-segment
transactions are excluded from management's analysis of operations by business
segment.

At June 30, 2002 and 2001, the Company consisted of the following segments:

1. The IMS Segment provides market information, sales management and
decision-support services to the pharmaceutical and healthcare industries.
Its key products include sales management information to optimize sales force
productivity, marketing effectiveness research for prescription and
over-the-counter pharmaceutical products, consulting and other services. The
IMS Segment is managed on a global business model with global leaders for the
majority of its critical business processes. In addition, the IMS Segment
includes the Company's venture capital unit, Enterprises, which is focused on
investments in emerging businesses, and IMS's 26.6% equity interest in
TriZetto.

2. The CTS Segment provides custom software development, integration and
maintenance services that link e-business with core information systems for
companies worldwide. These services are delivered through the use of a
seamless on-site and offshore consulting project team. CTS's primary service
offerings include application development and integration and application
management.

21

IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTES TO OPERATIONS BY BUSINESS SEGMENTS:

1. Elimination relates to sales from the CTS segment to the IMS segment.

2. CTS segment assets include Cash and cash equivalents of $103,843 and $67,659
at June 30, 2002 and 2001, respectively.

3. The IMS segment operates principally in the United States, Japan, Germany,
the United Kingdom, Canada, Australia and other countries within Europe,
Latin America and the Asia-Pacific region.

4. The CTS Segment operates principally in the United States and India.

22

IMS HEALTH INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

THIS DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE ACCOMPANYING
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES.

IMS Health Incorporated ("IMS" or the "Company") is a leading global
provider of information solutions to the pharmaceutical and healthcare
industries. IMS operates in more than 100 countries and consists of the
following business segments:

- The IMS Segment provides market information, sales management and
decision-support services to the pharmaceutical and healthcare industries.
Its key products include sales management information to optimize sales
force productivity, marketing effectiveness research for prescription and
over-the-counter pharmaceutical products, consulting and other services.
The IMS Segment is managed on a global business model with global leaders
for the majority of its critical business processes. In addition, the IMS
Segment includes IMS's venture capital entity Enterprise Associates, LLC
("Enterprises"), which is focused on investments in emerging businesses,
and IMS's 26.6% equity interest in the TriZetto Group, Inc. ("TriZetto").

- The Cognizant Technology Solutions Corporation ("CTS") Segment provides
custom software development, integration and maintenance services that link
e-business with core information systems for companies worldwide. These
services are delivered through the use of a seamless on-site and offshore
consulting project team. CTS's primary service offerings include
application development and integration and application management. CTS is
a publicly traded corporation on the Nasdaq national market system. IMS
owned 57.3% of the common shares outstanding (93.1% of the outstanding
voting power) as of June 30, 2002 and 58.3% as of December 31, 2001. IMS
accounts for CTS as a consolidated subsidiary.

THREE MONTHS ENDED JUNE 30, 2002 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2001

OPERATING RESULTS

Operating revenue for the second quarter of 2002 grew 5.6% to $353,046 from
$334,349 in the second quarter of the prior year. On a constant dollar basis
(i.e., a basis that eliminates year-over-year currency rate fluctuations),
revenue growth was 5.2% in the second quarter. The increase was primarily due to
the introduction of new products at IMS, the expansion of the consulting
business through acquisitions and growth at CTS (see Note 4 to the Condensed
Consolidated Financial Statements).

IMS's operating costs include data processing costs, the costs of data
collection and production, and costs attributable to personnel involved in
production, data management and the processing and delivery of IMS's services.
IMS's operating costs grew 17.1% to $143,554 in the second quarter of 2002 from
$122,548 in the second quarter of the prior year. The increase resulted
primarily from higher data collection costs in the IMS Segment to support
revenue growth and the investment in our global consulting business, and
additional investment to support revenue growth at CTS.

Selling and administrative expenses consist primarily of the costs
attributable to sales, marketing, client service and administration, including
personnel, promotion, communications,

23

IMS HEALTH INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

management, finance and occupancy. IMS's selling and administrative expenses
grew during the second quarter of 2002 to $90,752 from $88,709 in the second
quarter of the prior year. Selling and administrative expenses grew at only
2.3%, reflecting the results of cost reduction actions initiated in the fourth
quarter of 2001 at the IMS Segment, and by cost controls at CTS.

Depreciation and amortization charges decreased by 13.4% to $13,761 in the
second quarter of 2002 from $15,885 in the second quarter of 2001. The decline
was due primarily to the fact that the Company ceased amortization of goodwill
effective January 1, 2002 in accordance with SFAS (Statement of Financial
Accounting Standards) No. 142, "Goodwill and Other Intangible Assets" (see Note
5 to the Condensed Consolidated Financial Statements), and to the impact of the
write down of certain deferred software costs to their net realizable value as
part of the Severance, impairment and other charges recorded in the fourth
quarter of 2001.

Operating income for the second quarter of 2002 declined 2.1% to $104,979
from $107,207 in the second quarter of 2001. Excluding the impact of a generally
weaker U.S. dollar, primarily against the Euro, operating income declined 1.8%.

Net interest expense was $1,841 in the second quarter of 2002, compared
with $3,763 in the second quarter of the prior year. The expense reduction
resulted primarily from lower interest rates achieved on our borrowings and the
accrual of interest income on the NMR receivable of $689.

Gains from investments, net, amounted to $2,470 in the second quarter of
2002 as compared to $975 in the second quarter of the prior year. The net gain
in the second quarter of 2002 is due mainly to $8,007 of net gains realized on
the sale of investments primarily within IMS's Enterprises portfolio and a
$4,236 write down related to other-than-temporary declines in value of the
venture capital investments.

A $3,082 net gain on the issuance of CTS and TriZetto stock, relating to
the exercise of stock options by CTS and TriZetto employees, was recorded in the
second quarter of 2002. This gain has been recognized in accordance with Staff
Accounting Bulletin ("SAB") No. 51, "Accounting for Sales of Stock by a
Subsidiary." A $3,062 loss in the second quarter of the prior year resulted
primarily from the issuance by TriZetto of shares of common stock in a follow-on
offering and the issuance of shares in connection with an acquisition completed
in April 2001. The 2001 loss was partially offset by a gain on exercise of stock
options by CTS employees.

Other expense, net, increased in the second quarter of 2002 to $19,318 from
$1,330 in the second quarter of the prior year, due to foreign exchange hedge
losses in the current year, primarily resulting from the weakness of the U.S.
dollar relative to the Japanese yen and the Euro, and increased minority
interest expense in 2002 for CTS.

In the second quarter of 2002, the effective tax rate was 30.5%, compared
to 34.2% in the second quarter of 2001. This is more fully described in Note 9
to the Condensed Consolidated Financial Statements.

A TriZetto equity loss, net, of $93 was recorded in the second quarter of
2002, compared with a net loss of $1,243 in the second quarter of 2001. The
improvement resulted from the

24

IMS HEALTH INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

absence of goodwill amortization expense in 2002 in accordance with SFAS No.
142.

RESULTS BY BUSINESS SEGMENT

IMS SEGMENT

IMS Segment revenue was $303,900 in the second quarter of 2002, an increase
of 3.4% from $293,935 in the prior year. Excluding the impact of a generally
weaker U.S. dollar in the second quarter of 2002, revenue grew 3.0%. Sales
Management revenue of $184,470 in the second quarter of 2002 reflects an
increase of 2.4% from the prior year, and a growth of 2.0% on a constant-dollar
basis, driven by new product sales, primarily EarlyView and Prescriber
Validation in the United States, Xponent, Pharmascope, Sales Analyzer and
Strategy Evaluator in Europe, Xplorer.web in Canada and Weekly GP / Pharma in
Japan. Market Research revenue improved 3.1% to $106,201 in the second quarter
of 2002, and grew 2.5% constant dollar, reflecting growth from new clients and
expansion of product capabilities. Other Services generated revenue of $13,228
in the second quarter of 2002, compared with $10,724 in the second quarter of
2001, primarily reflecting the impact of an acquisition in the Company's
consulting business.

IMS Segment operating income for the second quarter of 2002 was $94,277,
down 4.1% from the comparable period from prior year and down 3.8%
constant-dollar. The constant-dollar decline resulted from higher data
collection costs and the investment in our global consulting business, partially
offset by higher revenues, the benefits of cost-reduction actions initiated in
the fourth quarter of 2001, and the absence of goodwill amortization expense in
2002.

CTS SEGMENT

CTS revenue for the second quarter of 2002, net of inter-segment sales of
$5,212, grew 21.6% to $49,146 from $40,414 in the comparable period of the prior
year due to higher revenues from application management services. CTS operating
income for the three months ended June 30, 2002 increased 20.6% to $10,702 from
$8,874 in the comparable period of the prior year, due to CTS's ability to
leverage previous investments in infrastructure and sales and marketing
activities.

SIX MONTHS ENDED JUNE 30, 2002 COMPARED WITH SIX MONTHS ENDED JUNE 30, 2001

OPERATING RESULTS

Operating revenue for the first half of 2002 grew 3.1% to $684,410 from
$663,911 in the first half of the prior year. On a constant dollar basis,
revenue growth was 5.0% in the first half. The increase was primarily due to the
introduction of new products at IMS, the expansion of the consulting business
through acquisitions and growth at CTS (see Note 4 to the Condensed Consolidated
Financial Statements).

IMS's operating costs grew 12.5% to $278,160 in the first half of 2002 from
$247,162 in the first half of the prior year. The increase resulted primarily
from higher data collection costs in the IMS Segment to support revenue growth,
the addition of Cambridge Pharma Consultancy, Ltd. ("Cambridge"), the investment
in our global consulting business and the additional investment to

25

IMS HEALTH INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

support revenue growth at CTS.

IMS's selling and administrative expenses grew during the first six months
of 2002 to $182,556 from $178,575 in the first six months of the prior year.
Selling and administrative expenses grew at only 2.2%, reflecting the results of
cost reduction actions initiated in the fourth quarter of 2001 at the IMS
Segment, and by cost controls at CTS.

Depreciation and amortization charges decreased by 20.5% to $27,432 in the
first half of 2002 from $34,509 in the first half of 2001. The decline was due
primarily to the fact that the Company ceased amortization of goodwill effective
January 1, 2002 in accordance with SFAS No. 142, "Goodwill and Other Intangible
Assets" (see Note 5 to the Condensed Consolidated Financial Statements), and to
the impact of the write down of certain deferred software costs to their net
realizable value as part of the Severance, impairment and other charges recorded
in the fourth quarter of 2001.

Operating income for the first six months of 2002 declined 3.6% to $196,262
from $203,665 in the first six months of 2001. Excluding the impact of
fluctuations in the U.S. dollar, primarily against the Japanese yen and the
Euro, operating income was essentially flat.

Net interest expense was $2,706 in the first six months of 2002, compared
with $8,834 in the first six months of the prior year. The expense reduction
resulted primarily from lower interest rates achieved on our borrowings and
interest income on the NMR receivable of $1,378.

Gains from investments, net, amounted to a net gain of $1,250 in the first
half of 2002. The net gain in the first half of 2002 is due primarily to a
$7,515 net gain realized on the sale of investments within IMS's Enterprises
portfolio and a $4,907 write down related to other-than-temporary declines in
value of the venture capital investments. The net gains of $2,375 in the first
half of 2001 were due primarily to IMS's disposal of IDRAC Holdings Inc.
("IDRAC"), a non-strategic property providing information on pharmaceutical
product registration, for a gain of $1,990 (see Note 4 to the Condensed
Consolidated Financial Statements).

A $3,568 net gain on the issuance of CTS and TriZetto stock, relating to
the exercise of stock options by CTS and TriZetto employees, was recorded in the
first half of 2002. This gain has been recognized in accordance with SAB No. 51,
"Accounting for Sales of Stock by a Subsidiary." A $2,329 loss in the first half
of the prior year resulted primarily from the issuance by TriZetto of shares of
common stock in a follow-on offering and shares used in connection with an
acquisition completed in April 2001. The 2001 loss was partially offset by a
gain on exercise of stock options by CTS employees.

Other expense, net, increased in the first half of 2002 to $23,152 from
$7,809 in the first half of the prior year, due to foreign exchange hedge
losses, primarily related to the Japanese yen and the Euro and increased
minority interest expense in 2002 for CTS, compared with the prior year.

In the first six months of 2002, the effective tax rate was 30.7% compared
to 28.3% in the first six months of 2001. This is more fully described in Note 9
to the Condensed Consolidated

26

IMS HEALTH INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

Financial Statements.

A TriZetto equity loss, net, of $295 was recorded in the first six months
of 2002, compared with a net loss of $3,800 in the first six months of 2001. The
improvement resulted from the absence of goodwill amortization expense in 2002
in accordance with SFAS No. 142.

RESULTS BY BUSINESS SEGMENT

IMS SEGMENT

IMS Segment revenue was $593,614 in the first half of 2002, an increase of
1.7% from $583,511 in the comparable period of the prior year. Excluding the
impact of fluctuations in the U.S. dollar in the first half of 2002, revenue
grew 3.9%. Sales Management revenue of $359,354 in the first half of 2002
reflects an increase of 0.8% from the prior year, but grew 2.8% on a
constant-dollar basis driven by new product sales, primarily EarlyView and
Prescriber Validation in the United States, Xponent, Pharmascope, Sales Analyzer
and Strategy Evaluator in Europe, Xplorer.web in Canada and Weekly GP / Pharma
in Japan. Market Research revenue increased 0.7% to $208,996 in the first six
months of 2002, but grew 2.4% constant dollar, reflecting growth from new
clients and expansion of product capabilities. Other Services generated revenue
of $25,264 in the first six months of 2002, compared with $19,347 in the first
six months of 2001, primarily reflecting the impact of an acquisition in the
Company's consulting business.

IMS Segment operating income for the first half of 2002 was $176,414, down
5.4% from the comparable period from prior year, but down only 1.4% on a
constant-dollar basis. The constant-dollar decline resulted from higher data
collection costs and the investment in our global consulting business, partially
offset by higher revenues, the benefits of cost-reduction actions initiated in
the fourth quarter of 2001, and the absence of goodwill amortization expense in
2002.

CTS SEGMENT

CTS revenue for the first half of 2002, net of inter-segment sales of
$10,046, grew 12.9% to $90,796 from $80,400 in the comparable period of the
prior year due to higher revenues from application management services. CTS
operating income for the six months ended June 30, 2002 increased 15.0% to
$19,848 from $17,263 in the comparable period of the prior year, due to CTS's
ability to leverage previous investments in infrastructure and sales and
marketing activities.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities amounted to $111,376 for the six
months ended June 30, 2002, an increase of $2,447 over the comparable period in
2001. The increase relates primarily to lower cash requirements in funding the
Company's accrued liabilities, offset by lower cash flows from operations and a
$10,530 cash receipt received in the prior year from Nielsen Media Research in
respect of the Donnelley legacy tax contingency, for which there was no
comparable receipt in 2002.

Net cash used in investing activities amounted to $34,914 for the six
months ended June 30, 2002, an increase in cash used of $2,570 over the
comparable period in 2001. The greater cash

27

IMS HEALTH INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

requirements during 2002 relate primarily to $13,966 in higher spending on
deferred software relating to new product development, a required $3,000 funding
of a venture capital investment, an increase of $1,081 in capital expenditures
and an increase in cash used in other investing activities of $5,386. These
items were offset by an increase in proceeds received from the sales of
investments of $17,734 and lower payments for business acquisitions by $3,092.

Net cash used in financing activities amounted to $16,430 for the six
months ended June 30, 2002, an increase in cash used of $4,164 over the prior
period. This was primarily due to an additional $21,260 in share repurchases
during 2002 funded primarily through $214,778 in additional borrowings as cash
received from exercise of stock options was lower than in the year ago period by
$199,889.

At June 30, 2002, the Company's Total Current Liabilities exceed its Total
Current Assets by $24,051 primarily as a result of management's decision to
maintain a greater proportion of short-term borrowings versus longer-term debt
instruments. This strategy allows the Company to achieve lower borrowing costs
while providing flexibility to repay debt with cash flow from operations and
proceeds from the exercise of stock options and the liquidation of equity
holdings. Based on estimated future cash flows from operations, the continued
monetization of its venture capital investments, the ability to monetize other
assets including its investment in CTS as well as the Company's ability to
utilize existing lines of credit (see Note 8 to the Condensed Consolidated
Financial Statements), the Company believes it will have sufficient cash and
other resources to fund its short-term and long-term business plans, including
its current and long-term obligations, its contingent payments, its stock
repurchase program and its operations.

On July 19, 2000, the Board of Directors authorized a stock repurchase
program to buy up to 40 million shares, marking the fourth consecutive
repurchase program the Company has implemented. Shares acquired through the
repurchase program are open-market purchases in compliance with Securities and
Exchange Commission Rule 10b-18. During the first half of 2002, the Company
repurchased approximately 9,400 shares of outstanding common stock at a total
cost of $192,221. As of June 30, 2002, approximately 30,100 shares have been
acquired under this program at a total cost of $709,377.

IMS believes that its available funds, credit facilities and the cash flows
expected to be generated from operations will be adequate to satisfy its current
and planned operations and needs and contingent payments for at least the next
12 months. IMS's ability to expand and grow its business in accordance with
current plans, to make acquisitions, repurchase stock and to meet its long-term
capital requirements beyond this 12-month period will depend on many factors,
including the rate, if any, at which its cash flow increases, its ability and
willingness to accomplish acquisitions, repurchase treasury stock and the
availability to IMS of public and private debt and equity financing, including
its current ability to secure bank lines of credit. IMS cannot be certain that
additional financing, if required, will be available on terms favorable to it,
if at all.

Cash and cash equivalents include amounts at CTS of $103,843 and $84,977 as
of June 30, 2002 and December 31, 2001, respectively. The Company owned 57.3% of
the CTS common shares outstanding which represented 93.1% of the voting power at
June 30, 2002. To access these cash and cash equivalents, the Company would have
to require CTS to declare and pay a dividend.

28

IMS HEALTH INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

Furthermore, a portion of the dividend would be paid to the minority
shareholders of CTS.

CHANGES IN CRITICAL ACCOUNTING POLICIES

Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets" ("SFAS No. 142"). SFAS No. 142 addresses the initial
recognition and measurement of intangible assets acquired outside of a business
combination and the accounting for goodwill and other intangible assets
subsequent to their acquisition. SFAS No. 142 provides that goodwill and
intangible assets which have indefinite useful lives will not be amortized but
rather will be tested at least annually for impairment at the reporting unit
level. It also provides that intangible assets that have finite useful lives be
amortized. There was no impairment of goodwill upon adoption of SFAS No. 142 and
as such, the Company did not recognize a transition adjustment during the first
half of 2002. The effect of adopting SFAS No. 142 is more fully explained in
Note 5 to the Condensed Consolidated Financial Statements. Goodwill may become
impaired as a result of several factors such as increased competition and lower
demand for the Company's products and services.

RECENTLY ISSUED ACCOUNTING STANDARDS

In June 2002, the Financial Accounting Standards Board issued SFAS No. 146,
"Accounting for Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 146
addresses the accounting for costs to terminate a contract that is not a capital
lease, costs to consolidate facilities and relocate employees, and involuntary
termination benefits under one-time benefit arrangements that are not an ongoing
benefit program or an individual deferred compensation contract. A liability for
contract termination costs should be recognized and measured at fair value
either when the contract is terminated or when the entity ceases to use the
right conveyed by the contract. A liability for one-time termination benefits
should be recognized and measured at fair value at the communication date if the
employee would not be retained beyond a minimum retention period (i.e., either a
legal notification period or sixty days, if no legal requirement exists). For
employees retained beyond the minimum retention period, a liability should be
accrued ratably over the future service period. The provisions of the statement
will be effective for disposal activities initiated after December 31, 2002. IMS
is currently evaluating the financial impact of adoption of SFAS No. 146.

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, as well as information included in oral
statements or other written statements made or to be made by IMS, contain
statements which, in the opinion of IMS, may constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements appear in a number of places in this Quarterly Report
and include, but are not limited to, all statements relating to plans for future
growth and other business development activities as well as capital
expenditures, financing sources, dividends and the effects of regulation and
competition, and all other statements regarding the intent, plans, beliefs or
expectations of IMS or its directors or officers. Stockholders are cautioned
that such forward-looking statements are not assurances for future performance
or events and involve risks and uncertainties that could cause actual results
and developments to differ materially from those

29

IMS HEALTH INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

covered in such forward-looking statements. These risks and uncertainties
include, but are not limited to, risks associated with operating on a global
basis, including fluctuations in the value of foreign currencies relative to the
U.S. dollar, and the ability to successfully hedge such risks; to the extent IMS
seeks growth through acquisitions, alliances or joint ventures, the ability to
identify, consummate and integrate acquisitions, alliances and ventures on
satisfactory terms; the ability to develop new or advanced technologies, systems
and products for their businesses on time and on a cost-effective basis
including but not limited to those that use or are related to the Internet; the
ability to identify and implement cost-containment measures; the ability to
successfully maintain historic effective tax rates and to achieve estimated
corporate overhead levels; competition, particularly in the markets for
pharmaceutical information; regulatory, legislative and enforcement initiatives,
particularly in the area of medical privacy and tax; the ability to obtain
future financing on satisfactory terms; deterioration in economic conditions,
particularly in the pharmaceutical, healthcare, or other industries in which
IMS's customers may operate; consolidation in the pharmaceutical industry and
the other industries in which IMS's customers operate; conditions in the
securities markets which may effect the value or liquidity of portfolio
investments, including the investment in TriZetto and management's estimates of
lives of assets, recoverability of assets, fair market value, estimates and
liabilities and accrued income tax benefits and liabilities; to the extent
unforeseen cash needs arise, the ability to obtain financing on favorable terms;
and terrorist activity, the threat of such activity, and responses to and
results of such activity and threats, including but not limited to effects,
domestically and/or internationally, on IMS, its personnel and facilities, its
customers and suppliers, financial markets and general economic conditions.
Consequently, all the forward-looking statements contained in this Quarterly
Report on Form 10-Q are qualified by the information contained herein,
including, but not limited to, the information contained under this heading and
the Condensed Consolidated Financial Statements and notes thereto for the three
and six month periods ended June 30, 2002 and by the material set forth under
the headings "Business" and "Factors that May Affect Future Results" in the
Company's Annual Report on Form 10-K for the year ended December 31, 2001. IMS
is under no obligation to publicly release any revision to any forward-looking
statement contained or incorporated herein to reflect any future events or
occurrences.

30

IMS HEALTH INCORPORATED

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Information in response to this Item is set forth in "Note 8. Financial
Instruments" in the Notes to the Condensed Consolidated Financial Statements
(unaudited) on pages 15 through 17 hereof.

31

IMS HEALTH INCORPORATED

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Information in response to this Item is incorporated by reference to the
information set forth in "Note 7. Contingencies" in the Notes to the Condensed
Consolidated Financial Statements (unaudited) on pages 10 through 15 hereof.

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

The Annual Meeting of Shareholders of IMS Health Incorporated was held on May 3,
2002.

The following nominees for director named in the Proxy Statement dated March 29,
2002 were elected at the Meeting by the votes indicated:

The votes in favor of the election of the nominees represent at least 98% of the
shares present at the meeting.

Approval of the appointment of PricewaterhouseCoopers LLP as Independent Public
Accountants was approved by the following vote:

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

None.

(b) Reports on 8-K:

None.

32

IMS HEALTH INCORPORATED

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.

IMS Health Incorporated

By: /s/ Nancy E. Cooper
--------------------------------------------
Date: August 12, 2002 Nancy E. Cooper
Senior Vice President and
Chief Financial Officer
(principal financial officer)

/s/ Leslye G. Katz
--------------------------------------------
Date: August 12, 2002 Leslye G. Katz
Vice President, Controller
(principal accounting officer)

33