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 September 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
- ----------------------------------------- -------------------------------------
(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 October 31, 2002
-------- -------------------
Common Stock, par value $.01 per share 280,915,233

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 (UNAUDITED)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)

SEE ACCOMPANYING NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED).

3

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

SEE ACCOMPANYING NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED).

4

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

SEE ACCOMPANYING NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED).

5

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

SEE ACCOMPANYING NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6

IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 1. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The accompanying Condensed Consolidated Financial Statements (unaudited)
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 (unaudited) 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
(unaudited) 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. Certain prior year amounts have been reclassified to conform with the 2002
presentation.

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 unit,
Enterprise Associates, LLC ("Enterprises") which is focused on
investments in emerging businesses, and a 26.5% equity interest in The
TriZetto Group, Inc. ("TriZetto").

- The Cognizant Technology Solutions Corporation Segment ("CTS")
provides custom Information Technology ("IT") design, development,
integration and maintenance services. CTS's core competencies
include web-centric applications, data warehousing, component-based
development and legacy and client-server systems. CTS provides the
IT services it offers using an integrated on-site/offshore business
model. This seamless on-site/offshore business model combines
technical and account management teams located on-site at the
customer location and offshore at dedicated development centers
located in India and Ireland. CTS is a publicly traded corporation
on the Nasdaq national market system. IMS owned 56.4% of the common
shares outstanding of CTS (92.8% of the outstanding voting power) as
of September 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 (see Note 5).

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IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS AND SHARES 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 60 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

ACQUISITIONS

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.

On June 30, 2002, Cognizant Technology Solutions Ireland Limited ("CTS
Ireland"), a newly formed, wholly-owned subsidiary of CTS, purchased certain
assets from and assumed certain liabilities of 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, application design, development and maintenance services, using the
existing staff of 70 IT professionals. The acquisition of the assets of UHC
Ireland will enable CTS to provide a wide range of services to its clients in
Europe and worldwide and represents the initial phase of the implementation
of CTS's previously announced international expansion strategy.

CTS has completed a preliminary assessment of the allocation of the
purchase price to the tangible and amortizable intangible assets acquired and
liabilities assumed. Based upon that preliminary assessment, CTS has assigned
estimated values to the workforce and customer relationship acquired, and
expects the useful lives of such assets to range between three and ten years.
Amortization expense associated with intangible assets of $114 has been included
in the Condensed Consolidated Statements of Income (unaudited) for the three and
nine months ended September 30, 2002. The Company expects that adjustments
related to the finalization of the valuation of such intangible assets will not
have a material effect on its results of operations. Pending finalization of the
valuation, 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
(unaudited).

Had these acquisitions occurred as of January 1, 2002 or January 1, 2001,
the impact on the

8

IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)

Company's results of operations would not have been material.

During the nine months ended September 30, 2002, the Company finalized its
purchase price allocation related to its acquisition of Cambridge Pharma
Consultancy, Ltd. ("Cambridge"). Accordingly, additional goodwill of $9,844 was
recorded as a result of the finalization of the purchase price allocation,
including $5,982 relating to the recognition of deferred tax liabilities
resulting from non-amortizable intangibles associated with the Cambridge
acquisition.

During the first nine 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, the Company purchased the remaining interest it did
not own in GPI Krankenhaus-forschung Gesellschaft fur Pharma-informationssysteme
mbH ("GPI"), a German hospital market research firm, for $4,807. After the
final allocation of the purchase price to the assets acquired, goodwill of
$4,505 was recorded.

DISPOSITIONS

During the nine months ended September 30, 2002, the Company and its
venture capital funds sold investments with a cost basis of $14,762 and realized
a pre-tax gain of $12,417. These sales resulted in cash proceeds of $26,819. Of
the cash proceeds, $2,730 will be received in the fourth quarter, while $2,069
was retained by the venture capital funds. In addition, the Company recorded
$7,620 of write-downs associated with other-than-temporary declines in the fair
value of its venture capital investments. Furthermore, the Company's unrealized
gains on available-for-sale securities declined by $8,996 since January 1, 2002.

In addition, during the first nine months of 2001, the Company recorded
$594 of pre-tax net losses from dispositions included in Gains (losses) from
investments, net. 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. The IDRAC gain
was offset primarily by the write down of investments held by Enterprises, the
Company's venture capital unit.

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.

NOTE 5. INVESTMENT IN GARTNER, INC. ("GARTNER") STOCK

On November 11, 1998, the Company announced that its Board of Directors had
approved a plan to spin-off substantially all of its equity ownership of Gartner
(the "Gartner Spin-Off"). On July 16, 1999, the Company's Board of Directors
declared a dividend of all Gartner Class B Shares, which was distributed on July
26, 1999 to holders of the Company's Common Stock of record as of July 17, 1999.
The transaction was structured as a tax-free distribution of Gartner stock to
IMS shareholders and the Company received a favorable ruling from the Internal
Revenue Service ("IRS"). The distribution consisted of 0.1302 Gartner Class B
Shares for each outstanding share of the Company's Common Stock (the "Gartner
Distribution").

9

IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)

The unrealized gain as of the date of the Gartner Distribution (based on
the then market price per share of $22.75 of Gartner Stock, the price at the
time of the Gartner Distribution) was recorded as Other comprehensive income and
included as a component of Shareholders' equity. Subsequent changes in the per
share price of Gartner Stock since the date of the Gartner Distribution were
also recorded as Other comprehensive income. Upon the sale of these securities,
the unrealized gain measured based on the value of the Gartner shares as of the
date of the Gartner Distribution was recognized in discontinued operations. The
unrealized losses in the market value subsequent to the date of the Gartner
Distribution were recognized in continuing operations as shares were sold.

During the third quarter of 2001, IMS decided to sell, and by August 29,
2001, completed the sale of 1,555 shares of Class A common stock of Gartner
("Gartner Shares") to Gartner and its remaining holding in Gartner Shares to
several institutional investors. The Company received aggregate proceeds of
$65.2 million, or $9.88 per share, from these sales. The Company's original cost
basis in these shares was $77.7 million, or $11.78 per share. These sales
divested IMS of its then remaining equity interest in Gartner. The sale of
shares to Gartner was part of Gartner's $75 million stock buyback program
announced on July 19, 2001. These sales resulted in a pre-tax realized loss of
$12,536 ($8,146, net of applicable taxes), which was recorded in two different
lines in the income statement: (i) Income from Discontinued Operations of
$72,344 ($47,025 net of applicable taxes), to reflect the difference between the
fair market value at the date of the Gartner Spin-Off (July 26, 1999) and the
book value of those shares; (ii) a loss from dispositions in continuing
operations of $84,880 which was recorded as Loss on Gartner investment, to
reflect the difference between the fair market value at the date of the Gartner
Spin-Off and the disposal proceeds.

NOTE 6. 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 nine months of 2002.

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

10

IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)

During the nine months ended September 30, 2002, the Company recorded
additional goodwill of $15,366 (see Note 4). As of September 30, 2002, goodwill
amounted to $165,760 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 material intangible assets during the nine months
ended September 30, 2002. Intangible asset amortization expense was $644 and
$1,705 during the three and nine months ended September 30, 2002. At September
30, 2002, intangible assets (included in Other assets) were primarily composed
of Customer Relationships and Trade Names. The gross carrying amounts and
related accumulated amortization of Customer Relationships and Trade Names were
$17,650 and $1,189 and $2,980 and $402, respectively, at September 30, 2002.

Amortization expense associated with intangible assets at September 30,
2002 is estimated to be $742 for the last quarter of 2002 and approximately
$2,968 for each year beginning in 2003 through 2006.

NOTE 7. INVESTMENTS IN EQUITY INVESTEES AND SUBSIDIARIES

TRIZETTO

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

11

IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)

The market value of the Company's investment in TriZetto was $60,471 as of
September 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
has 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 long-term basis if necessary. Additionally,
the market value of the Company's investment in TriZetto has increased
significantly since September 30, 2002. The Company concluded that evidence
existed at September 30, 2002 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 September
30, 2002 was temporary in nature and has not adjusted the cost basis of its
investment. If the decline in value continues or should the Company's assessment
change, the Company would take a charge to its earnings for the amount that is
deemed unrecoverable.

CTS

The Company recorded net gains of $3,940 and $7,508 in Gains (losses)
from issuance of investees' stock, net, for the three and nine months ending
September 30, 2002, primarily relating 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." Minority interest expense of $4,361 and $11,091 for the three
and nine months ended September 30, 2002, respectively, and $2,596 and $7,247
for the three and nine months ended September 30, 2001, respectively, was
recorded in Other expense, net.

NOTE 8. 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.

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

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IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)

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
("ACNielsen," which is 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 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

13

IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)

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

Complaints have been filed against the Company 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. The Commission informed the Company on October 1,
2002 that it had decided to close the file on this matter and that the
complainants had withdrawn their complaints.

Another of the EC complaints is an application lodged with the Commission
by National Data Corporation ("NDC") on December 19, 2000. This complaint
requested 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 concerned 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 requested 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. AzyX Deutschland GmbH ("AzyX"), another
competitor, intervened in the same proceedings against the Company.

In response to the Application, on March 8, 2001, the Commission decided to
initiate formal proceedings against the Company through the adoption of a
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

14

IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)

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
stated that the expert(s) shall communicate its determination to the Commission
for approval within two weeks of being chosen. Finally, the Interim Decision
provided for a penalty of 1,000 Euros per day should the Company fail to comply
with the Interim Decision.

On August 6, 2001, the Company filed an appeal with the Court of First
Instance ("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. In October 2002, the CFI informed
the Company that it has suspended the Annulment Appeal until such time as the
ECJ renders a decision on questions referred to the ECJ by the German courts
that are presiding over certain litigations that the Company commenced against
NDC and others in Germany for misappropriation of the Company's intellectual
property rights.

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.

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."

15

IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)

The maximum contingent consideration payable with respect to any given year in
the earn out period is $12,420. As of September 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 together with certain other legacy tax matters
(the "Donnelley Legacy Tax Matters") 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. Accordingly, the Company has a
receivable of $35,428, which includes the outstanding principal and accumulated
accrued interest income of $4,822. During the three and nine months ended
September 30, 2002, $689 and $2,067, respectively, of interest income was
accrued in accordance with the terms of the applicable agreements. The Company
recorded $2,067 of interest income on the NMR receivable during the three and
nine months ended September 30, 2001. These amounts are reflected in Other
receivable in the Condensed Consolidated Statements of Financial Position
(unaudited). 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, which occurred in July 1999, the
Company and Gartner entered into a Distribution Agreement and an Agreement and
Plan of Merger (together, the "1999

16

IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)

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.

IMS and Synavant, Inc. ("Synavant") entered into a Distribution
Agreement (the "Synavant Distribution Agreement") as part of the Synavant
Spin-Off, which occurred in August 2000. Synavant was formerly a wholly-owned
subsidiary of IMS. 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.

During the second quarter of this year, in connection with another
Donnelley Legacy Tax Matter, the Company was informed that the IRS had issued
Notices of Proposed Adjustments ("Notices") with respect to a certain
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
Agreements, would be approximately $53,000, net of income tax benefit. In
addition the Company has been informed by D&B II that in recent verbal
communications that D&B II had with the IRS, the IRS indicated an intention to
assert penalties for 1995 and 1996 based on its interpretation of applicable
law. The Company has been advised by D&B II that Donnelley would challenge this
interpretation. If the IRS were to prevail in its assertion of penalties and
interest thereon, the Company's share of such penalties and interest, as
determined in accordance with the 1996 and 1998 Distribution Agreements, would
be approximately $7,000, net of income tax benefit. In the opinion of management
it is not probable that the Company will incur a liability for this matter which
is materially in excess of the amounts provided for in the Financial Statements.

17

IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)

Although the Company has recorded its best estimates of 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 flows, 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, cash flows or financial
position in the period in which such matters are adversely resolved.

The Company consolidates the assets, liabilities, results of operations and
cash flows of businesses and investments over which it has control. Third
parties' ownership interests are reflected as minority interests on the
Company's financial statements. Two of the Company's subsidiaries contributed
assets to, and participate in, a limited partnership. One subsidiary serves as
general partner, and all other partners hold limited partnership interests. The
partnership, which is a separate and distinct legal entity, is in the business
of licensing database assets and computer software. In 1997, third-party
investors contributed $100,000 to the partnership in exchange for minority
ownership interests. The Company and its subsidiaries maintain a controlling
(88%) interest in the partnership. Under the terms of the partnership
agreements, the third-party investors have the right to take steps that would
result in the liquidation of their partnership interest on June 30, 2003. In
the event that the third party investors liquidate their partnership
interest, the Company would take steps to replace the minority interest with
new investors prior to such termination.

NOTE 9. 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 September 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
resulted in a net pre-tax gain (loss) of $1,196 and $(8,981) during the three
and nine months ended September 30, 2002,

18

IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)

and $(301) and $2,327 during the three and nine months ended September 30,
2001. Gains and losses on these contracts are included in the Condensed
Consolidated Statements of Income (unaudited) in Other expense, net. At
September 30, 2002, the Company had foreign exchange forward contracts
outstanding with a contractual value of $190,469 hedging non-functional
currency assets and liabilities and other foreign exchange exposures. These
contracts have expiration dates through December 2002. At September 30, 2002,
the fair value of these contracts approximated their contractual value.

FAIR VALUE OF FINANCIAL INSTRUMENTS

At September 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 value of these
instruments approximated their carrying value at September 30, 2002.

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 September 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 maintained accounts receivable balances of $247,506 and
$228,626, net of allowances for doubtful accounts, at September 30, 2002 and
December 31, 2001, respectively, principally from customers in the
pharmaceutical industry. The Company believes its trade receivables do not
represent significant concentrations of credit risk at September 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 $620,000. Total borrowings
were $556,522 and $347,675 at September 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 2.35% and 2.34% at
September 30, 2002 and December 31, 2001, respectively. The weighted average
interest rates for the long-term lines were 3.67% and 2.48% at September 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 September 30, 2002 and December 31, 2001, the Company was in
compliance with all such covenants.

19

IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)

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 September 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 $381,522 and $197,675 at September 30,
2002 and December 31, 2001, respectively. Borrowings have maturity dates of up
to 90 days from their inception.

In March and April 2002, the Company entered into interest rate swaps on a
portion of its 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. 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 three and nine months ended
September 30, 2002 was an unrealized net loss of $1,802 and $3,017,
respectively.

At September 30, 2002, the Company's Total Current Liabilities exceed its
Total Current Assets by $20,694 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 Securities and other investments, the ability to monetize
other assets including its investment in CTS (see Note 15) as well as the
Company's ability to utilize existing unused 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 10. 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 2002, the Company's tax rate was impacted by CTS's decision that
effective January 1, 2002, pursuant to Accounting Principles Board ("APB")
Opinion No. 23, "Accounting For Income Taxes-Special Areas," CTS will no
longer accrue taxes on the repatriation of Indian earnings realized in 2002
and subsequent periods as these earnings are now considered to be indefinitely
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 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 nine months of 2002,
compared to an effective tax rate for CTS of 37.4% in the first nine months
of 2001. Additionally,

20

IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)

the Company's effective tax rate reflects true-ups of current and deferred
income tax liabilities.

In 2001, the Company's effective tax rate was reduced by the tax benefit
at the U.S. federal rate on the loss from the sale of Gartner Shares recorded
in continuing operations (see Note 5), the result of the expiration, without
adjustment, on September 30, 2001 of the statute of limitations on certain
previously reserved for Donnelley legacy transactions (approximately $21,800
recorded in the quarter ended September 30, 2001), and the recognition of
additional tax benefits arising from a 1998 non-U.S. reorganization which
gave rise to tax deductible non-U.S. intangible assets (approximately $11,700
recorded in the quarter ended March 31, 2001), which resulted from the
reassessment of the tax benefits from the 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 maintain its overall tax
rate.

NOTE 11. IMS HEALTH CAPITAL STOCK

On July 19, 2000, the Board of Directors authorized a stock repurchase
program to buy up to 40,000 shares, marking the fourth consecutive repurchase
program the Company has implemented. Shares acquired through the repurchase
program are open-market purchases in compliance with Rule 10b-18 under the
Securities Exchange Act of 1934, as amended.

During the third quarter of 2002, the Company repurchased approximately
4,300 shares of outstanding common stock under this program at a total cost of
$68,322. For the first nine months of 2002 the Company repurchased approximately
13,700 shares of outstanding common stock under this program at a total cost of
$260,543 compared with total repurchases of $255,921 for the first nine months
in 2001. As of September 30, 2002, approximately 34,300 shares had been
repurchased since the inception of the program, at a total cost of $777,699. As
a result of these repurchases, the weighted average of shares outstanding on a
diluted basis for the three months ended September 30, 2002 declined to 283,300
from 301,255 for the same period in 2001.

The Company re-issued approximately 202 treasury shares under option
exercises for proceeds of $3,224 during the three months ended September 30,
2002. For the first nine months of 2002, the Company re-issued 900 shares for
proceeds of $14,883. In addition, the Company paid dividends of $0.02 per share
for a total of $5,698 during the three months ended September 30, 2002. For the
first nine months of 2002, the Company paid dividends of $0.06 per share for a
total of $17,324.

NOTE 12. COMPREHENSIVE INCOME

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

21

IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)

Included in the reclassification adjustment of $4,901 and $12,417 for the
three and nine months ended September 30, 2002 were gains on sales of securities
of $4,901 and $14,793, respectively, and losses on sales of securities of $0 and
$2,376, respectively.

NOTE 13. SEVERANCE, IMPAIRMENT AND OTHER CHARGES

During the first nine months of 2002, the Company paid approximately
$27,467 under its Competitive Fitness Program (the "Program"), which was
announced in the fourth quarter of 2001. The Company terminated approximately
276 employees during the first nine months of 2002. This included 74 employee
terminations and cash payments of approximately $2,654 against the $6,277 charge
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)." Total terminations to date under the Program stand at 466.
Although the total cost of the Program is still expected to be in line with the
original estimate, the total number of employees to be terminated will be lower
by approximately 15%. The reduction in the planned number of employee
terminations is the result of a different mix of employee terminations than
originally planned. Due to the change in the mix of employee terminations, the
Company has experienced a higher level of severance cost per employee, thereby
offsetting any cost savings from fewer actual terminations. As a direct result
of the change in the mix of employee terminations, the cost savings are still
expected to be in line with original estimates under the Program. As expected,
the Program will be substantially complete by the end of 2002.

NOTE 14. 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.

22

IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)

At September 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 26.5% equity
interest in TriZetto.

2. The CTS Segment provides custom IT design, development, integration and
maintenance services. CTS's core competencies include web-centric
applications, data warehousing, component-based development and legacy and
client-server systems. CTS provides the IT services it offers using an
integrated on-site/offshore business model. This seamless on-site/offshore
business model combines technical and account management teams located
on-site at the customer location and offshore at dedicated development
centers located in India and Ireland.

NOTES TO OPERATIONS BY BUSINESS SEGMENTS:

1. Eliminations relate to sales and corresponding receivables from the
CTS Segment to the IMS Segment.

2. CTS Segment assets include Cash and cash equivalents of $123,082 and
$79,767 at September 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.

23

IMS HEALTH INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)

NOTE 15. SUBSEQUENT EVENTS

ACQUISITIONS

Subsequent to September 30, 2002, the IMS Segment completed two
acquisitions with an aggregate purchase price of $9,050. The companies acquired
were Rosenblatt-Klauber Group (U.S. and Canada) and Marketing Initiatives, Inc.
(U.S.). Under the terms of these purchase agreements, the Company may be
required to make additional payments in relation to 2002 to 2007 as contingent
consideration, all of which will be recorded as additional goodwill.

On October 29, 2002, CTS completed the transfer of Silverline Technologies,
Inc.'s American Express practice to CTS. CTS will now provide application
design, development and maintenance services to American Express through an
acquired workforce of approximately 300 IT and support professionals located
primarily in the U.S. and India. CTS has commenced a preliminary assessment
of the allocation of the consideration paid of approximately $10,400 to the
amortizable intangible assets acquired in this transaction. Based upon that
preliminary assessment, the Company expects that the amortization of such
intangible assets will not have a material effect on the Company's results of
operations.

Since these transactions were effected subsequent to September 30, 2002,
the results of operations of these transactions will be included in the
consolidated financial statements of the Company in the fourth quarter of 2002.
The operating results from the above transactions are not expected to be
material to the Company.

COGNIZANT SPLIT-OFF

CTS intends to file a registration statement on Form S-4 with the Securities
and Exchange Commission ("SEC") concurrently with the filing of the CTS
quarterly report on Form 10-Q for the period ended September 30, 2002. The
purpose of the filing is to register the offer by IMS to exchange shares of
CTS Class B common stock owned by IMS for a number of shares of common stock
of IMS that will be determined according to an exchange ratio that will be
established at a later time (the "Exchange Offer"). IMS is offering to
exchange up to 11,291 shares of CTS Class B common stock in the Exchange
Offer, representing all the CTS shares that are currently owned by IMS.

The shares of IMS common stock received by the Company pursuant to the
Exchange Offer will be recorded as an acquisition of treasury stock at a cost
equal to the market value of such shares received at the date of completion
of the exchange offer. Any excess of the market value of the IMS shares
acquired above the net book value of the Company's investment in CTS at that
date will be recognized by the Company as a gain on the disposal of the CTS
shares after deducting direct and incremental expenses of the Exchange Offer.
Depending on the market value and the number of IMS shares received by the
Company in the Exchange Offer, the gain on the disposal may be significant.

The disposal of the Company's investment in CTS will be accounted for as a
tax-free split-off for federal income tax purposes.

Subject to the SEC's review of the registration statement and
satisfaction of the conditions of the Exchange Offer, this transaction is
expected to be completed during the first quarter of 2003.

We urge you to read the documents that IMS and CTS have filed and will
file in the future with the SEC in connection with the Exchange Offer. These
documents contain important information about the Exchange Offer and its
effect on the companies and their shareholders. These documents are available
free at the SEC's website (http://www.sec.gov) or from IMS Investor Relations
at 1499 Post Road, Fairfield, Connecticut 06824.

24

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

THIS DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE ACCOMPANYING
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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 unit Enterprise Associates, LLC ("Enterprises"), which
is focused on investments in emerging businesses, and IMS's 26.5%
equity interest in the TriZetto Group, Inc. ("TriZetto").

- The Cognizant Technology Solutions Corporation Segment ("CTS")
provides custom Information Technology ("IT") design, development,
integration and maintenance services. CTS's core competencies include
web-centric applications, data warehousing, component-based
development and legacy and client-server systems. CTS provides the IT
services it offers using an integrated on-site/offshore business
model. This seamless on-site/offshore business model combines
technical and account management teams located on-site at the
customer location and offshore at dedicated development centers
located in India and Ireland. CTS is a publicly traded corporation
on the Nasdaq national market system. IMS owned 56.4% of the common
shares outstanding of CTS (92.8% of the outstanding voting power)
as of September 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.

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

OPERATING RESULTS

Operating revenue for the third quarter of 2002 grew 10.2% to $361,762
from $328,137 in the third quarter of the prior year. On a constant dollar
basis (i.e., a basis that eliminates the impact of year-over-year foreign
currency fluctuations), revenue growth was 8.4% in the third 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,
partially offset by the adverse impact of transitioning certain products to a
more competitive pricing structure and a data supply interruption in two of
our new products in Japan.

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 18.2% to $134,692 in the third quarter of 2002 from
$113,909 in the third 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.

25

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

Selling and administrative expenses consist primarily of the costs
attributable to sales, marketing, client service and administration, including
personnel, promotion, communications, management, finance and occupancy. IMS's
selling and administrative expenses grew 17.5% during the third quarter of 2002
to $88,047 from $74,933 in the third quarter of the prior year primarily due to
additional investment to support revenue growth at CTS.

Depreciation and amortization charges increased by 3.5% to $16,403 in the
third quarter of 2002 from $15,853 in the third quarter of 2001, arising from
increased software amortization associated with new product development,
partially offset by the fact that the Company ceased amortization of goodwill
effective January 1, 2002 in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" ("SFAS No.
142") (as described in Note 6 to the unaudited Condensed Consolidated Financial
Statements).

Operating income for the third quarter of 2002 declined 0.7% to $122,620
from $123,442 in the third quarter of 2001. On a constant dollar basis operating
income declined 1.4%.

Net interest expense was $1,937 in the third quarter of 2002, compared with
income of $86 in the third quarter of the prior year. The higher level of
interest expense results from the recognition of cumulative interest income on
the NMR receivable recorded during the third quarter of the prior year.

During the third quarter of 2001, IMS decided to sell, and by August 29,
2001, completed the sale of 1,555 shares of Class A common stock of Gartner,
Inc. ("Gartner Shares") to Gartner and its remaining holding in Gartner Shares
to several institutional investors. The Company received aggregate proceeds of
$65.2 million, or $9.88 per share, from these sales. The Company's original cost
basis in these shares was $77.7 million, or $11.78 per share. These sales
divested IMS of its then remaining equity interest in Gartner. The sale of
shares to Gartner was part of Gartner's $75 million stock buyback program
announced on July 19, 2001. These sales resulted in a pre-tax realized loss of
$12,536 ($8,146, net of applicable taxes), which was recorded in two different
lines in the income statement: (i) Income from Discontinued Operations of
$72,344 ($47,025 net of applicable taxes), to reflect the difference between the
fair market value at the date of the Gartner Spin-Off (July 26, 1999) and the
book value of those shares; (ii) a loss from dispositions in continuing
operations of $84,880 which was recorded as Loss on Gartner investment, to
reflect the difference between the fair market value at the date of the Gartner
Spin-Off and the disposal proceeds (see Note 5 to the unaudited Condensed
Consolidated Financial Statements).

Gains from investments, net, amounted to $1,200 in the third quarter of
2002 as compared to a loss of $2,969 in the third quarter of the prior year. The
net gain in the third quarter of 2002 is due primarily to $4,901 of net gains
realized on the sale of investments within IMS's Enterprises portfolio,
partially offset by write downs related to other-than-temporary declines in
value of the venture capital investments amounting to $2,713. The $2,969 loss
recognized in the third quarter of 2001 related primarily to the write down of
investments held within the Enterprises portfolio.

A $3,940 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
third 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 $3,082 net gain in the third quarter of the prior year resulted

26

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

primarily from the issuance by CTS of shares relating to the exercise of
employee stock options.

Other expense, net, decreased in the third quarter of 2002 to $5,851 from
$6,966 in the third quarter of the prior year, due to foreign exchange hedge
gains in the current year, primarily resulting from the weakness of the U.S.
dollar relative to the Japanese yen and the Euro and lower legal fees, partially
offset by increased minority interest expense in 2002 for CTS.

In the third quarter of 2002, the effective tax rate was 30.8%, compared to
32.0% in the third quarter of 2001. This is more fully described in Note 10 to
the Condensed Consolidated Financial Statements (unaudited).

A TriZetto equity loss, net, of $406 was recorded in the third quarter of
2002, compared with a net loss of $1,747 in the third quarter of 2001. The
improvement resulted primarily from the absence of goodwill amortization expense
in 2002 in accordance with SFAS No. 142 (see Note 6 to the unaudited Condensed
Consolidated Financial Statements), and lower TriZetto reported operating
losses.

RESULTS BY BUSINESS SEGMENT

IMS SEGMENT

IMS Segment revenue was $306,048 in the third quarter of 2002, an increase
of 6.4% from $287,734 in the prior year. Excluding the impact of a generally
weaker U.S. dollar in the third quarter of 2002, revenue grew 4.3%. Sales
Management revenue of $186,993 in the third quarter of 2002 reflects an increase
of 3.3% from the prior year, and a growth of 1.0% on a constant-dollar basis,
driven by new product sales, primarily EarlyView(TM) and Prescriber
Validation(TM) in the United States, Xponent(R), Pharmascope(TM), Sales
Analyzer(TM) and IMS Sales Strategy Evaluator(TM) in Europe, Xplorer.web(TM) in
Canada and Weekly GP / Pharma(TM) in Japan. Market Research revenue improved
5.2% to $106,033 in the third quarter of 2002, and grew 3.7% constant dollar,
reflecting growth from new clients and expansion of product capabilities. Other
Services generated revenue of $13,023 in the third quarter of 2002, compared
with $5,894 in the third quarter of 2001, primarily reflecting the impact of an
acquisition in the Company's consulting business.

IMS Segment operating income for the third quarter of 2002, after excluding
legal fees associated with the European Union Litigation of $2,336 for the three
months ending September 30, 2001, was $110,512, down 5.1% from the comparable
period from prior year and down 5.9% 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 (see Note 6 to the unaudited Condensed
Consolidated Financial Statements).

CTS SEGMENT

CTS revenue for the third quarter of 2002, net of inter-segment sales of
$5,519, grew 37.9% to $55,714 from $40,403 in the comparable period of the prior
year due to higher revenues from application management services. CTS operating
income for the three months ended

27

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

September 30, 2002 increased 29.9% to $12,108 from $9,323 in the comparable
period of the prior year. The decrease in operating margin was due primarily to
higher incentive compensation expense associated with better than expected
performance.

NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 2001

OPERATING RESULTS

Operating revenue for the first nine months of 2002 grew 5.5% to $1,046,172
from $992,048 in the first nine months of the prior year. On a constant dollar
basis, revenue growth was 6.2% in the nine months. 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 unaudited
Condensed Consolidated Financial Statements).

IMS's operating costs grew 14.3% to $412,851 in the first nine months of
2002 from $361,052 in the first nine months of the prior year. The increase
resulted primarily from higher data collection costs in the IMS Segment to
support revenue growth, the investment in our global consulting business and the
additional investment to support revenue growth at CTS.

IMS's selling and administrative expenses grew during the first nine months
of 2002 to $270,603 from $253,508 in the first nine months of the prior year.
Selling and administrative expenses grew at 6.7%, primarily due to additional
investment to support revenue growth at CTS.

Depreciation and amortization charges decreased by 13.0% to $43,836 in the
first nine months of 2002 from $50,362 in the first nine months 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 (see Note 6
to the unaudited 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, partially offset by higher software amortization
associated with new product development.

Operating income for the first nine months of 2002 declined 2.5% to
$318,882 from $327,126 in the first nine 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 $4,643 in the first nine months of 2002, compared
with $8,748 in the first nine months of the prior year. The expense reduction
resulted primarily from lower interest rates achieved on our borrowings.

Gains from investments, net, amounted to a net gain of $2,450 in the first
nine months of 2002. The net gain is due primarily to a $12,417 net gain
realized on the sale of investments primarily within IMS's Enterprises portfolio
offset by a $9,967 write down related to other-than-temporary declines in value
of the venture capital and available for sale investments and other charges.
The net loss of $594 in the first nine months of 2001 was due primarily to
the write down due to other-than-temporary declines in value of the venture
capital investments in Enterprises, offset by IMS's disposal of IDRAC
Holdings Inc. ("IDRAC"), a non-strategic property providing information on

28

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

pharmaceutical product registration, for a gain of $1,990.

Gain on issuance of investees stock net amounted to $7,508 in the first
nine months of 2002 versus $753 in the prior year. The increase relates
primarily to an increase of $3,405 in SAB No. 51 gains relating to issuances of
CTS stock and a decrease of $3,350 in SAB No. 51 losses on issuances of TriZetto
shares.

Other expense, net, increased in the first nine months of 2002 to $29,003
from $14,775 in the first nine months of the prior year, due to foreign exchange
hedge losses in 2002, 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 nine months of 2002, the effective tax rate was 30.8% compared
to 32.0% in the first nine months of 2001. This is more fully described in Note
10 to the Condensed Consolidated Financial Statements (unaudited).

A TriZetto equity loss, net, of $701 was recorded in the first nine months
of 2002, compared with a net loss of $5,547 in the first nine months of 2001.
The improvement resulted from the absence of goodwill amortization expense in
2002 in accordance with SFAS No. 142 (see Note 6 to the unaudited Condensed
Consolidated Financial Statements), and lower TriZetto reported operating
losses.

RESULTS BY BUSINESS SEGMENT

IMS SEGMENT

IMS Segment revenue was $899,662 in the first nine months of 2002, an
increase of 3.3% from $871,245 in the comparable period of the prior year.
Excluding the impact of fluctuations in the U.S. dollar in the first nine months
of 2002, revenue grew 4.1%. Sales Management revenue of $546,345 in the first
nine months of 2002 reflects an increase of 1.6% from the prior year, but grew
2.2% on a constant-dollar basis driven by new product sales, primarily
EarlyView(TM) and Prescriber Validation(TM) in the United States, Xponent(R),
Pharmascope(TM), Sales Analyzer(TM) and IMS Sales Strategy Evaluator(TM) in
Europe, Xplorer.web(TM) in Canada and Weekly GP / Pharma(TM) in Japan. Market
Research revenue increased 2.2% to $315,030 in the first nine months of 2002,
but grew 2.8% constant dollar, reflecting growth from new clients and expansion
of product capabilities. Other Services generated revenue of $38,288 in the
first nine months of 2002, compared with $25,242 in the first nine months of
2001, primarily reflecting the impact of an acquisition in the Company's
consulting business.

IMS Segment operating income for the first nine months of 2002 was
$286,926, down 4.5% from the comparable period from prior year, but down 3.1% 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 (see Note 4 to the unaudited Condensed Consolidated Financial Statements).

29

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

CTS SEGMENT

CTS revenue for the first nine months of 2002, net of inter-segment
sales of $15,565, grew 21.3% to $146,510 from $120,803 in the comparable
period of the prior year due to higher revenues from application management
services. CTS operating income for the nine months ended September 30, 2002
increased 20.2% to $31,956 from $26,586 in the comparable period of the prior
year. However, operating margins decreased slightly due to higher incentive
compensation expense associated with better than expected performance.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities amounted to $243,226 for the nine
months ended September 30, 2002, a decrease of $1,405 over the comparable period
in 2001. The decrease relates primarily to lower tax benefits from stock option
exercises, 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 and greater cash requirements in funding the
Company's accounts receivable. Offsetting these items were lower cash
requirements in funding the Company's accrued liabilities, primarily reduced
bonus payments. During the first nine months of 2002, the Company paid
approximately $27,467 under its Competitive Fitness Program ("the Program"),
which was announced in the fourth quarter of 2001. Although the total cost of
the Program is still expected to be in line with the original estimate, the
total number of employees to be terminated will be lower by approximately 15%,
but still represents over 10% of IMS employees.

Net cash used in investing activities amounted to $71,538 for the nine
months ended September 30, 2002, an increase in cash used of $60,871 over the
comparable period in 2001. The greater cash requirements during 2002 relate
primarily to $21,468 in higher spending on deferred software relating to new
product development, a required $3,000 funding of a venture capital investment
and cash receipts of $67,847 received in the prior year for proceeds from the
sale of the Gartner investment and IDRAC Holdings Inc., for which there were no
comparable receipts in 2002. These items were offset by an increase in proceeds
received from the sales of investments of $19,758, lower payments for capital
expenditures by $3,601, lower payments for business acquisitions by $4,185 and a
decrease in cash used in other investing activities by $3,900.

Net cash used in financing activities amounted to $52,742 for the nine
months ended September 30, 2002, a decrease in cash used of $57,605 over the
prior period. This was primarily due to $284,082 in higher borrowings used to
fund the share repurchase program during 2002 as a result of $224,120 in lower
proceeds received from the exercise of stock options in the prior year period.

At September 30, 2002, the Company's Total Current Liabilities exceed its
Total Current Assets by $20,694 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 if the exchange offer is not consummated
(see Note 15 to the unaudited Condensed Consolidated Financial

30

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

Statements) as well as the Company's ability to utilize unused existing lines of
credit (see Note 9 to the unaudited 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 40,000 shares, marking the fourth consecutive repurchase
program the Company has implemented. Shares acquired through the repurchase
program are open-market purchases in compliance with Rule 10b-18 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). During the
first nine months of 2002, the Company repurchased approximately 13,700 shares
of outstanding common stock at a total cost of $260,543. As of September 30,
2002, approximately 34,300 shares have been acquired under this program at a
total cost of $777,699.

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 including an estimate of approximately $9,000 to $14,000 in fees
associated with the Cognizant Split-off (see Note 15 to the unaudited
Condensed Consolidated Financial Statements). 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 $123,082 and $84,977 as
of September 30, 2002 and December 31, 2001, respectively. The Company owned
56.4% of the CTS common shares outstanding which represented 92.8% of the voting
power at September 30, 2002. To access these cash and cash equivalents, the
Company would have to require CTS to declare and pay a dividend. 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 6 to the Condensed Consolidated Financial Statements (unaudited). Goodwill
may become impaired as a result of several factors such as increased competition
and lower demand for the Company's products and services.

31

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

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 60 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. Investors 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 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; 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,

32

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

financial markets and general economic conditions; the concentration of CTS's
operations in India and the related geo-political risks of local and
cross-border conflicts and uncertainties regarding the satisfaction or waiver
of the conditions to the Exchange Offer and the effects on the Exchange Offer
of market conditions, economic conditions, tax treatment, regulatory and
legal requirements and the results of negotiations between CTS and IMS.
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 (unaudited) and notes
thereto for the three and nine month periods ended September 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.

33

IMS HEALTH INCORPORATED

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Information in response to this Item is set forth in "Note 9. Financial
Instruments" in the Notes to the Condensed Consolidated Financial Statements
(unaudited) on pages 18 through 20 hereof.

ITEM 4. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Based on their evaluation as of a date within 90 days of the filing date of
this report, the Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14(c) and 15d-14(c)) were effective as of such date to
ensure that material information required to be disclosed by the Company in
reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms.

CHANGES IN CONTROLS AND PROCEDURES

Subsequent to the date of their evaluation, there were no significant
changes in the Company's internal controls or in other factors that could
significantly affect the disclosure controls, including any corrective actions
with regard to significant deficiencies and material weaknesses.

34

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 8. Contingencies" in the Notes to the Condensed
Consolidated Financial Statements (unaudited) on pages 12 through 18 hereof.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

10.1 IMS Health Incorporated Executive Deferred Compensation Plan as
Amended and Restated August 1, 2002.

10.2 1998 IMS Health Incorporated Non-Employee Directors' Deferred
Compensation Plan as Amended and Restated Through August 1, 2002.

(b) Reports on 8-K:

On August 12, 2002, the Company filed a Current Report on Form 8-K
whereby the Company made a disclosure under Item 9, Regulation FD
Disclosure, relating to the announcement that its Chief Executive
Officer and the Chief Financial Officer had filed sworn statements
with the Securities and Exchange Commission in compliance with SEC
Order No. 4-460 and Section 906 of the Sarbanes-Oxley Act of 2002.

35

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: November 14, 2002 Nancy E. Cooper
Senior Vice President and
Chief Financial Officer
(principal financial officer)

/s/ Leslye G. Katz
Date: November 14, 2002 Leslye G. Katz
Vice President, Controller
(principal accounting officer)

36

IMS HEALTH INCORPORATED

CERTIFICATIONS

I, David M. Thomas, certify that:

1. I have reviewed this quarterly report on Form 10-Q of IMS Health
Incorporated;

2. Based on my knowledge, this quarterly 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 quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures 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
quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and

6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.

/s/ David M. Thomas
--------------------------------------
Date: November 14, 2002 David M. Thomas
Chairman and Chief Executive Officer

37

IMS HEALTH INCORPORATED

I, Nancy E. Cooper, certify that:

1. I have reviewed this quarterly report on Form 10-Q of IMS Health
Incorporated;

2. Based on my knowledge, this quarterly 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 quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures 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
quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and

6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.

/s/ Nancy E. Cooper
--------------------------------
Date: November 14, 2002 Nancy E. Cooper
Senior Vice President and
Chief Financial Officer

38