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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended May 28, 2004

or

For the transition period from              to             .

Commission File No. 001-12392

NDCHealth Corporation

(Exact name of registrant as specified in its charter)

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

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: NONE

(Title of Class)

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨

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

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The aggregate market value of the voting stock held by non-affiliates of the registrant was $934,574,434 based upon the last reported sale price on The New York Stock Exchange on November 28, 2003 using beneficial ownership of stock rules adopted pursuant to Section 13 of the Securities Exchange Act of 1934 to exclude voting and non-voting common equity owned by all directors and officers of the registrant, some of whom may not be held to be affiliates upon judicial determination.

The number of shares of the registrant’s common stock, par value $.125, outstanding as of August 5, 2004 was 36,081,294.

DOCUMENTS INCORPORATED BY REFERENCE

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NDCHEALTH CORPORATION

2004 FORM 10-K ANNUAL REPORT

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CAUTIONARY NOTICE REGARDING

FORWARD LOOKING STATEMENTS

This report contains forward-looking statements within the meaning of the federal securities laws. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements include statements preceded by, followed by or that include the words “may,” “could,” “would,” “should,” “believe,” “expect,” “anticipate,” “plan,” “estimate,” “target,” “project,” “intend,” or similar expressions. These statements include, among others, statements regarding our expected business outlook, anticipated financial and operating results, our business strategy and means to implement the strategy, our objectives, the amount and timing of future capital expenditures, the likelihood of our success in developing and introducing new products and expanding our business, the timing of the introduction of new and modified products or services, financing plans, working capital needs and sources of liquidity.

Forward-looking statements are only predictions and are not guarantees of performance. These statements are based on our management’s beliefs and assumptions, which in turn are based on currently available information. Important assumptions relating to the forward-looking statements include, among others, assumptions regarding our ability to expand in new and existing markets, demand for our products and services, the cost and timing of product upgrades and new product introductions, gains in market share, industry conditions affecting our customers, expected pricing levels, expected growth of revenue and net income, the timing and cost of planned capital expenditures, the timing of recognition of certain revenue, expected outcomes of pending litigation and expected synergies relating to acquisitions, joint ventures and strategic alliances, expected proceeds from the disposition of certain assets, ability to meet bank financial covenants and ability to obtain waivers of any covenant default or amend credit agreements to avoid any covenant default. These assumptions could prove inaccurate. Forward-looking statements also involve risks and uncertainties, which could cause actual results to differ materially from those contained in any forward-looking statement. Many of these factors are beyond our ability to control or predict. Additional risk factors are discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in this report.

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

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PART I

Item 1. BUSINESS

Unless the context requires otherwise, references in this report to “the Company,” “we,” “our,” “us” and similar expressions refer to NDCHealth Corporation and its consolidated subsidiaries. Unless otherwise noted, all references in this report to a particular fiscal year means our fiscal year as described in our “Management’s Discussion and Analysis of Financial Condition and Results of Operation” contained in this report.

General

NDCHealth Corporation is a Delaware corporation incorporated in 1967, and is a leading healthcare information solutions company that provides products and services to the major segments of the healthcare industry – pharmacies, hospitals, physicians, payers and pharmaceutical manufacturers.

We are a leading provider of value-added electronic health information processing services, in terms of the number of electronic transactions processed. We are connected to over 85% of United States and Canadian pharmacies, more than 20% of the nation’s hospitals and over 1,000 healthcare payers. We also provide information services and solutions to more than 100 pharmaceutical manufacturers and have sold practice management systems to more than 140,000 healthcare professionals. We believe that our connectivity and relationships across multiple segments of the healthcare industry position us to provide integrated information solutions to improve the efficiency and effectiveness of healthcare.

Our strategy starts with the fundamental transaction in healthcare’s revenue cycle – the submission of claims from providers to third party payers through our NDCHealth Intelligent Network^™. From our network, where authorized by our customers, we capture the claim and related transaction information, combine that information with data we purchase, and create information solutions for pharmaceutical manufacturers and providers. Our information strategy is to continue to aggregate and integrate data from our processing network to create unique new products which build additional streams of revenue and expand margins.

We are currently executing a business strategy to evolve from a value added intelligent network and information products provider to an integrated healthcare information solutions company. Our strategy is to continue to expand our markets and add new product and service applications as we offer our customers high quality, quantifiable value-added information solutions in healthcare. We seek to achieve this strategy by leveraging the assets of our three business segments, Network Services and Systems, Information Management, and Pharmacy Benefit Services, and growing a sustainable business model with a consistent base of predictable, recurring revenue.

As a result of regular strategy reviews, during the fourth quarter of fiscal 2004 the decision was made to dispose of our European businesses, which include NDCHealth Limited, NDCHealth Holdings UK Ltd, and NDCHealth GmbH. The discontinuance allows us to eliminate the negative financial impact of our European information businesses and focus on accelerating the rollout of new pharmacy and hospital solutions, integrating the acquired ArcLight business, and developing new information solutions for the pharmacy and pharmaceutical industries in North America.

The NDCHealth Intelligent Network is the cornerstone of our Network Services and Systems segment and transmits information from pharmacies and hospitals to third party payers for reimbursement. These payers include private insurance carriers, managed care organizations, pharmacy benefit managers (“PBMs”) and government programs. We also link pharmaceutical manufacturers and wholesalers with providers and payers. We offer to our pharmacy customers transaction processes such as claims submission, customized validation and proprietary message editing, eligibility verification, remittance advice, referral authorization, prescription ordering, and refill authorization. The acquisition of TechRx Incorporated (“TechRx”) in fiscal 2002 strengthened our position in the point-of-service prescription fulfillment area, and our new T-Rex line of products is being sold to customers in a manner which is designed to create a recurring revenue stream.

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We also offer claims processing for hospitals, as well as providing claims editing, to increase the acceptance rate by payers of hospital claims and assist hospital management in improving cash flow and reducing their accounts receivable outstanding. NDC ePREMIS^™, our newest platform for revenue cycle management launched in late fiscal 2003, expands functional attributes and creates the base upon which new applications can be built. Using new application internet technology, this offering allows us to upgrade our existing base of over 1,500 hospital customers, add new large hospitals and provides the opportunity to penetrate the smaller (under 400 beds) hospital market. Similar to our pharmacy offerings, the new workflow features of NDC ePREMIS permit multiple people to work with claims simultaneously, yielding greater efficiency and better workload balancing. NDC ePREMIS can also be integrated into hospital information systems provided by various major companies to further extend our market reach.

In the physician space, we are focused on a niche in the one-to-three physician practice group market, and have sold our solutions to more than 100,000 medical practices. Physician’s offices utilize our software and systems to handle patient scheduling and billing, and to manage their accounts receivable. Because of the relative lack of automation in small physician offices, we believe these customers represent a unique opportunity for expanded electronic claims processing services. This electronic connection also assists our customers in improving their cash flow and provides an important communication channel between the payer and the physician. We have already connected systems for approximately 14,000 physicians to a third party on-line network to process claims using an electronic data interchange (“EDI”) network.

Our pharmacy, hospital, and physician systems are the entry and exit points for information to and from our NDCHealth Intelligent Network. Through our network, we are partnering with our customers to improve efficiency and effectiveness in healthcare. Some examples include: real time eligibility verification, drug formulary and inventory management, and facilitation of prompt payment.

Our Information Management segment provides innovative decision support solutions enabling pharmaceutical manufacturers to evaluate performance and develop strategies for improved marketing and sales efforts. We collect data from retail pharmacies, drug wholesalers, our NDCHealth Intelligent Network and manufacturers to give our customers a complete source of information on which to base their business decisions. We also offer solutions from our NDCHealth Intelligent Health Repository^™, a diagnosis-to-drug linked database of healthcare business information which includes pharmaceutical distribution, pharmaceutical sales, and medical services information. We transform this large volume of drug sales, prescribing physician, and de-identified patient data into information solutions that can help our customers better analyze their markets, more effectively develop and position their product offerings, and ultimately better understand the effectiveness of drug therapies.

During the fourth quarter of fiscal 2004, we established a third business segment – Pharmacy Benefit Services – to reflect actions taken to expand our adjudication and administrative transaction services. This business was formerly reported as a part of the Network Services and Systems segment, and provides our customers with tools, resources and data that allow them to more efficiently manage their pharmacy benefit plans. The services provided are claims processing and adjudication, consulting on clinical guidelines, formulary and rebate management, pharmacy network development and administration, and various reporting services.

Our business model generates revenue consisting of transaction processing fees, maintenance and support fees, information management subscription fees and single-use service sales, consulting services and software license revenue. Our applications help customers better manage their revenue cycle and accelerate cash flow, reduce overhead costs, react quickly to changing market conditions, improve business operations and streamline administrative processes.

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We believe that the healthcare market offers attractive opportunities for renewed growth. As we execute our strategy, we seek to increase both our penetration of existing markets and to enter new, related markets through the development of new integrated information solutions. Additionally, we are expanding our distribution channels and, where appropriate, working with other companies with complementary products, services, development, and/or distribution capabilities to achieve our vision of being the leading integrated healthcare information solutions company.

Acquisitions, Investments and Strategic Alliances

From time to time, we have made acquisitions and investments and entered into strategic alliances in an effort to obtain a competitive advantage or an expanded presence in targeted markets. We believe that selective acquisitions, investments and strategic alliances are important to our ability to compete effectively.

In May 2003, we completed the acquisition of TechRx, a leading provider of pharmacy software that automates the prescription fulfillment process, with systems in over 20% of pharmacies in the United States. TechRx systems provide pharmacy customers with an integrated solution for in-store operations, centralized processing, and connectivity to payers and physicians. We were formerly a minority shareholder in TechRx and, in the fourth quarter of fiscal 2002, entered into an Agreement and Plan of Merger under which we agreed to acquire the remaining stock in a two-step transaction. Under the first step in May 2002, we acquired a controlling interest through the purchase of additional common stock and the conversion of non-voting convertible preferred stock for an additional investment in TechRx common stock of approximately $51.0 million. Under the second step, which closed in May 2003, we acquired the remaining shares in TechRx from minority shareholders for approximately $109.7 million cash, net. The purchase price of $5.55 per TechRx common share was determined on the basis of satisfaction of certain financial and operational milestones by TechRx as set forth in the merger agreement.

On December 31, 2003, we acquired the continuing operations of ArcLight Systems LLC (“ArcLight”), an information management company. We acquired fixed assets and employees and obtained a seven year exclusive license to certain of its assets, The purchase price included 381,098 shares of unregistered NDCHealth common stock with a market value as of the date of issuance of $10.0 million and a five-year warrant to purchase an additional 381,098 shares of NDCHealth common stock at an exercise price of $26.24 per share with an estimated value as of the date of issuance using the Black-Scholes option pricing model of $4.4 million. The assumptions used in estimating the warrant’s value were a risk-free interest rate of 3.3%, an expected dividend yield of 0.6%, an expected life of five years, and expected volatility of 48%.

The acquisition required the recording of transaction and lease termination costs totaling $3.1 million and a $0.7 million receivable for future cash payments from the remaining ArcLight business to NDCHealth relating to a previous agreement between the two parties. ArcLight made a transition payment of $2.0 million to NDCHealth at closing. The transition payment resulted in a reduction in the consideration we paid for ArcLight’s business. Future cash payments from ArcLight to NDCHealth relating to the previous agreement will reduce the net purchase price in subsequent periods.

Additionally, we will pay ArcLight royalties on our future sales of products utilizing ArcLight data and the agreement to use certain data may be extended for three additional years if certain financial and business objectives are met. If the agreement is extended for an additional three years, ArcLight will have the option to receive an additional $10.0 million in either cash or NDCHealth common stock. ArcLight is an information management company owned by a major wholesale drug distribution company, Cardinal Health, Inc., and a number of major retail pharmacy chains, including Albertson’s Inc., CVS Corporation, Kmart Corporation and Wal-Mart Stores, Inc.

On April 8, 2004, we announced the acquisition of McKesson Corporation’s OmniLink^SM pre- and post-editing (PPE) assets and customer base for pharmacy claims processing and editing for

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approximately $14.0 million in cash. In connection with the transaction, we signed an agreement to form a strategic alliance with McKesson’s pharmacy systems company that will enhance our offering of value-added transactions services to pharmacies. We will jointly market our NDC Pre & Post Editing Service solutions to the base of 2,300 McKesson Pharmacy Systems customers. This asset purchase will allow us to add more than 2,000 OmniLink store locations to our existing base of more than 30,000 pharmacies currently using our PPE services.

For additional information regarding our acquisitions, please see Note 3 – Business Acquisitions and Investments in the Notes to the Consolidated Financial Statements.

Products, Services and Distribution Channels

All of our products are designed to be compliant with the U.S. government’s Health Insurance Portability and Accountability Act, or HIPAA, regulations. We conduct our business in three primary segments: Network Services and Systems, which we offer primarily to healthcare providers and payers; Information Management, which we offer to pharmaceutical manufacturers; and Pharmacy Benefit Services, which we offer to payers. Financial information about segments and geographic areas can be found in Note 13 – Segment Information in the Notes to Consolidated Financial Statements.

Our Network Services and Systems segment represented approximately 59% of our total revenue, while our Information Management and Pharmacy Benefit Services segments were approximately 34% and 7% of our total revenue, respectively.

Network Services and Systems

We believe our NDCHealth Intelligent Network and point-of-service systems offer opportunities to streamline our customers’ workflow, improve their cash flow, provide real-time information to help providers better manage their practices, and give the healthcare industry methods to assure a higher quality of care at a lower cost. Our NDCHealth Intelligent Network connects pharmacies and hospitals to hundreds of benefit plans, using batch and real-time online connectivity. On a current run rate basis, we process over 5.1 billion healthcare transactions annually. The point-of-service systems that we offer help our customers improve efficiency and reduce costs while also serving as an additional source of transaction volume for our intelligent network. We offer real-time electronic connectivity through our NDCHealth Intelligent Network for claims/encounter editing, submission, eligibility verification, remittance advice, referral authorization, and claim status and tracking.

We believe that with the growing acceptance of healthcare technology and the need to speed payment while reducing costs and improving the quality of care, there will be an increase in the number and types of electronic healthcare transactions. Many of the new transaction types may have broad impact across the healthcare continuum. For example, new solutions such as electronic prescriptions can create new information management needs and directly impact the way physicians, hospitals, pharmacies and payers practice and do business. Other examples include electronic referrals by physicians to hospitals and the increased use of electronically available medical data by physicians, hospitals and other providers to satisfy new types of healthcare information needs.

We believe we are positioned to take advantage of these opportunities. Accordingly, we expect growth opportunities over time by helping to further automate our existing customers. We also expect transactions to increase as the population ages and use of electronic transmission for both existing and new transaction sets grows. We have developed and continue to expand distribution channels for our solutions through our direct sales force, alliances, value-added resellers and direct mail.

Our primary competitors in providing Network Services and Systems solutions are providers’ own in-house solutions, WebMD Corporation (“WebMD”) and numerous smaller regional companies.

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Pharmacy Solutions

Our pharmacy offerings allow our customers to increase claims management accuracy and efficiency, to enhance the accuracy of reimbursements thereby reducing costs, to understand and react quickly to changing market conditions, to improve productivity and management of pharmacy operations, and gain valuable insight into revenue management and profit improvement. Our pharmacy solutions are available to independent, regional and national chain and mail-order pharmacies, and include:

Claims management solutions

Revenue management programs

Decision support solutions

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Pharmacy management systems and services solutions

More than 85% of the pharmacies in North America are connected to our Intelligent Network, totaling over 50,000 chain, independent, mail order, managed care and institutional outlets.

Our pharmacy solutions are currently offered in the United States and Canada through our direct sales force and alliances. As a provider of pharmacy solutions, we compete with in-house capabilities as well as many companies including, McKesson Pharmacy Systems, PDX, Inc. and QS/1 Data Systems. Based on the number of pharmacies served, we believe that we are the largest provider of pharmacy systems and transaction processing solutions in North America.

Hospital Solutions

We have over 1,500 hospital and health system customers. As an established industry leader in revenue cycle management, we offer our customers software and services solutions that provide workflow management offerings and support for many different transactions. Our hospital solution set, NDC ePREMIS, provides tools to allow our customers to manage the claims and remittance process, accelerate and improve cash flow, reduce bad debt, track accounts receivable and costs, and improve productivity. We offer world-class service and support professionals to help our customers maximize the benefits they receive from our solutions. Our hospital offerings include:

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We compete with many companies in offering hospital solutions including Per-Se Technologies, Inc., SSI Group, XactiMed and smaller regional providers. We believe that we are among the largest providers of network transaction solutions to hospitals in North America in terms of number of hospitals. Our hospital solutions are offered in the United States through our direct sales force as well as through multiple strategic alliances such as with Siemens Medical Solutions.

Physician Solutions

We provide small-office physicians with the resources necessary to streamline billing and other internal processes such as scheduling, increasing productivity and optimizing accurate reimbursement. We offer our physician customers enhanced practice management capabilities, electronic commerce solutions, and interactive training. Our physician solutions include:

Our physician solutions are offered in the United States through value-added resellers, direct mail, our direct sales force, and alliance partners. Our major competitors in providing physician solutions are WebMD, Misys plc, VitalWorks, Inc., and numerous smaller competitors.

Information Management

We provide innovative decision support solutions enabling pharmaceutical manufacturers to evaluate performance and develop strategies for improved marketing and sales efforts. We collect data from retail pharmacies, drug wholesalers, our NDCHealth Intelligent Network and manufacturers to give our customers a complete source of information on which to base their business decisions.

Our sales compensation solutions empower pharmaceutical manufacturers to be more competitive and efficient. We offer a suite of products and services to monitor sales force performance; provide decision support for sales compensation, sales force sizing and alignment; and improve sales detailing effectiveness through more accurate physician demographic information. Our products and services in this segment are offered for the domestic United States and may be delivered to customers in a variety of media, including electronically via file transfer protocol, e-mail, CD-ROM or magnetic tape, and paper reports.

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Our sales compensation offerings include:

Our Physician Targeting and Profiling Suite includes:

Our Managed Care Solutions link prescription information to the form of payment in order to target prescribers by their plan affiliations, evaluate sales performance by managed care plans and monitor contract compliance. Offerings include:

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Our Intelligent Health Repository business provides information, solutions and industry expertise to help sales and marketing professionals transform market data into successful marketing strategies:

We provide information management solutions to more than 100 pharmaceutical manufacturers. Our information solutions are offered in the United States. Our primary competition in providing these solutions includes IMS Health, Verispan and a number of smaller companies providing managed care consulting or other analytical products.

Pharmacy Benefit Services

Our Pharmacy Benefit Services segment provides its customers, primarily health plans and self insured employers, with tools, resources and data that allow them to more efficiently manage their pharmacy benefit plans. Among the services provided are claims processing and adjudication, consulting on clinical guidelines, formulary and rebate management, pharmacy network development and administration, and various reporting services.

Our Pharmacy Benefit Services are offered in the United States. Our competition includes companies offering pharmacy benefit management services as well as a number of smaller companies that provide pharmacy benefit administrative services.

Operations and Systems Infrastructure

We operate multiple data and customer support facilities with primary sites located in Atlanta, Georgia; Phoenix and Gilbert, Arizona; Tulsa, Oklahoma; Pittsburgh, Pennsylvania; and Toronto, Ontario, Canada. During fiscal 2004, we focused on leveraging technology to reduce operating costs, expanding business continuity operations to ensure reliable services, and enhancing security of our networks consistent with HIPAA mandates.

Due to the large number and variety of our products and services, we do not rely on a single technology to satisfy our sophisticated computer systems needs. We employ technology suited to the

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particular processing requirements for each of our business markets focusing on (1) fault-tolerant computers for high volume, real-time transaction processing; (2) client-server technology for end-user database applications; (3) large scale transaction and batch data processing systems for central host system requirements; and (4) Hewlett-Packard, SUN, IBM, UNIX, Dell, Linux, Oracle, NT and Windows-based systems for specialized communication and database applications systems. In addition, stringent procedures are in place within our data centers and networks to ensure informational integrity and customer privacy for personal health information data from the point of data entry to claim adjudication.

Our data centers are linked together to maximize the speed and transfer of data between geographic locations. Larger systems are linked via high speed, fiber-optic based networked backbones for file exchange and inter-system communication purposes; other systems use high speed LAN and WAN connections with the bulk of these connections utilizing the TCP/IP protocol. Business continuity necessitates using fault-tolerant or redundant communications equipment to provide “non-stop” operation or to enable service to be quickly restored. Our primary network control center and backup control center are connected by a matrix communication switch allowing key communications lines to be moved between control centers. Distributed network communications equipment employs remote diagnostics and automated error reporting, and auto-reloading of software from local ROMs. Our data and network equipment is supported 24 hours a day, 7 days a week by maintenance and operations personnel. We also maintain storage systems connected to the backbones, including robotic tape libraries and optical storage, for archival purposes. Our systems are supported using advanced network control by our experienced systems, operations and production control staffs.

Our communications infrastructure linking us to customers and payers is composed of numerous discrete networks, each designed for the particular requirements of our market segments. In addition to our expanding support of the public Internet, we maintain four primary communications networks using fault-tolerant SONET ring technology. This technology includes a dial-up, short transaction network; a private line nationwide high bandwidth network; a frame relay network; and, a dial-up voice/data network for interactive and voice traffic for file transfer systems. We also provide full-time, full-bandwidth, dial back-up capabilities to both our leased line and frame relay networks. Additionally, we use multiple telecommunications providers to further limit network service vulnerabilities. We also maintain a number of support services offering Internet and ISDN connectivity. The network environment supports a diverse set of telecommunication protocols to respond to individual customer requirements.

Intellectual Property

We rely upon a combination of the following to protect the intellectual property used in our business: (i) patent, trademark, copyright, trade secret and other intellectual property related laws; (ii) contractual covenants in license and service agreements, employee agreements and nondisclosure agreements; and (iii) certain technical measures.

We use numerous trademarks, trade names and service marks to identify our products and services, including without limitation NDC®, NDCHealth®, NDCHealth Information Services®, Premis®, ePremis^™, Lytec®, Concept®, NDC RxSafety Advisor^™, T-Rex®, T-Rex One®, National Community Pharmacy Network® and NCPN®. In addition, we have several issued patents and pending patent applications covering certain of our network and systems technologies. While our patents provide certain protections for our intellectual property, our success depends more on our ability to further develop, enhance and modify our current products and services.

Our inability to protect our trademarks, patents and other intellectual property adequately could have a material adverse effect on our business and hurt us in maintaining our existing brands and establishing new ones. The steps we have taken to protect our proprietary rights may not be adequate. Third parties may infringe upon or misappropriate our marks, patents and similar proprietary rights. In the future, litigation may be necessary to enforce and protect our trademarks, patents and other intellectual property rights. Litigation would divert management resources and be expensive and may not effectively protect our intellectual property.

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Substantial litigation regarding intellectual property rights exists in the technology industry, and we expect that software products and other technologies may be increasingly subject to third party infringement claims. Although we believe that our products do not infringe on the intellectual property rights of others, we cannot provide assurance that such a claim will not be asserted against us in the future, or that a license or similar agreement will be available on reasonable terms in the event of an unfavorable ruling on any such claim. The defense of an infringement claim against us could divert management and monetary resources, and have a negative impact on our ability to conduct our business in the manner we desire.

We also rely on a variety of intellectual property rights that we license from third parties for use in certain systems and products. These third party licenses may not continue to be available to us on commercially reasonable terms. Our loss of or inability to maintain or obtain upgrades to any of these licenses could have a material adverse effect on our business.

Research and Development

During fiscal 2004, 2003, and 2002, we expended approximately $44.9 million, $37.7 million, and $18.9 million, respectively, on activities relating to the development and improvement of new and existing products and services.

We capitalize the cost of developing software held for sale to our customers as well as software used internally to provide services to our customers. In accordance with Statement of Financial Accounting Standard No. 86, “Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed” and Statement of Position 98-1, “Accounting for the Cost of Computer Software Developed or Obtained for Internal Use,” capitalization of costs begins when technological feasibility has been established, or during the application development phase, and ends when the product is available for general release to customers. In accordance with these standards, approximately $32.8 million, $31.6 million, and $12.0 million of our total development costs were capitalized in fiscal 2004, 2003, and 2002, respectively, resulting in net development expenses of approximately $12.1 million, $6.1 million, and $6.9 million, respectively. Our current focus is developing new products such as T-Rex Enterprise, T-Rex Mail Order, and our Intelligent Health Repository and ArcLight-related information products.

Employees

On May 28, 2004, we had approximately 1,715 employees. Many of our employees are professionals and are highly skilled in technical areas specific to the healthcare industry, and we believe that our current and future operations depend substantially on retaining such employees. Our employees are not represented by any labor union and we believe our employee relations are good. We are committed to sustaining a workplace that enables all employees to contribute their full skills, talents, and knowledge toward company goals.

Available Information

Our Internet address is www.ndchealth.com. We make available on our Internet website, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) of 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with the SEC. In addition, the charters of the various committees of our Board of Directors, our board-adopted Corporate Governance Guidelines and our Code of Business Conduct and Ethics are available on our website under “Investor Relations.”

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EXECUTIVE OFFICERS OF THE REGISTRANT

The names, titles, ages, and business experience of our executive officers are listed below. All executive officers are elected annually by and hold office at the pleasure of the Board of Directors, unless they earlier retire or resign.

Item 2. PROPERTIES

Our corporate headquarters is located at NDC Plaza in Atlanta, Georgia. We own and occupy a two building campus with a total of 202,000 square feet. There is no outstanding debt on the facility.

Additionally, we lease or rent facilities in five primary locations. In the Network Services and Systems Segment: Gilbert, Arizona; Tulsa, Oklahoma; Pittsburgh, Pennsylvania; in the Information Management segment: Phoenix, Arizona; and in the Pharmacy Benefit Services segment: Denver, Colorado. We also lease or rent 23 sales and support offices throughout the US and Canada.

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We believe that our properties are suitable and adequate for our business as presently conducted. See Note 11 – Debt and Lease Obligations in the Notes to the Consolidated Financial Statements for more information about leased properties.

Item 3. LEGAL PROCEEDINGS

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

In the proceedings before the European Commission instituted by us on December 19, 2000, we are alleging that to the extent, and only to the extent, this format is copyrighted by IMS Health, the format constitutes an industry standard and an essential facility to competition and must be made available to competitors of IMS Health. We obtained a ruling from the European Commission ordering IMS Health to license its structure for organizing pharmaceutical sales data to us. However, subsequent to this decision, the Court of First Instance and later the European Court Of Justice (“ECJ”) stayed this decision pending a complete review of the underlying substantive matters. Those matters are still proceeding.

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

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the data structure. We have not sold or used the data structure initially used by PI. We do not own PI and PI is no longer actively conducting business. The case against us remains pending before the Frankfurt Regional Court at this time. On April 29, 2004, and upon referral by the Frankfurt Regional Courts on questions involving interpretations of European Competition laws, the European Court of Justice in Luxembourg, found in favor of the Company, finding that if IMS holds a valid, enforceable copyright, then the Company should be entitled to a compulsory license from IMS Health to the extent it can demonstrate that it offers “a new product” in circumstances where IMS Health is “capable of eliminating all competition on the relevant market.” This clarification of law has been referred back to the Frankfurt Regional Court and is pending review.

On October 14, 2003, we filed suit in the 96th Judicial District Court, Tarrant County, Texas, against 1-Rex, Inc., FDS, Inc., Healthcare Computer Corporation, Freedom Drug Stores, Inc., Freedom Data Services, Inc. and William Rex Akers (collectively the “Defendants”) for breach of contract, misappropriation of trade secrets, fraud, and negligent misrepresentation, seeking unspecified damages for Defendants’ wrongful conduct. On March 5, 2004, Defendants filed a c