2002 COGNIZANT FINANCIAL REVIEW Notes to Consolidated Financial Statements (in thousands, except share and per share data) 9. Related Party Transactions and Transactions with Affiliates  At December 31, 2002, 5,182,293 options (each option exercisable into one (1) share of the Company’s Class A common stock) were available for future issuance under the Company’s option plans. ed-average fair value of the Company’s options granted during 2002, 2001 and 2000 was $6.68, $5.56, and $7.24, respectively. The following summarizes information about the Company’s stock options outstanding and exercisable by price range at December 31, 2002:  Revenues. The Company and IMS Health have entered into Master Services Agreements pursuant to which the Company provides certain IT services to IMS Health. The Company recognized related party revenues from IMS Health totaling $20,429 and $18,809 in 2002 and 2001, respectively. In 2000, the Company recognized related party revenues totaling $14,273, including revenues from IMS Health and Strategic Technologies, a then affiliated subsidiary, (through August 30, 2000). Compensation cost recognized by the Company under APB 25 was $0, $11, and $35 for 2002, 2001 and 2000, respectively. Had compensation cost for the Company’s stock-based compensation plans, as well as the IMS Health options held by certain executive officers (See Note 9 to the Consolidated Financial Statements), been determined based on the fair value at the grant dates for awards under those plans, consistent with the method prescribed by SFAS No. 123, the Company’s net income and net income per share would have been reduced to the pro forma amounts indicated below: Affiliated Agreements. In 1997, the Company entered into various agree- ments with Cognizant Corporation, which were assigned to IMS Health as part of the 1998 Reorganization. The agreements included an Intercompany Services Agreement for services provided by IMS Health such as payroll and payables processing, tax, real estate and risk management services, a License Agreement to use the “Cognizant” trade name and an Intercompany Agreement. On July 1, 1998, IMS Health transferred all of its rights to the “Cognizant” name and related trade and service marks to the Company.  Services. In 2002 and 2001, IMS Health provided the Company with certain administrative services, including payroll and payables processing and per- mitted the Company to participate in IMS Health’s business insurance plans. In prior periods, IMS Health provided certain other services such as tax plan- ning and compliance, which have now been transitioned to the Company. All services were performed under the CTS/IMS Health intercompany services agreement. Total costs charged to the Company by IMS Health in connection with these services were $656, $440 and $254 for the years ended December 31, 2002, 2001 and 2000, respectively. In December 2001, the Company paid IMS Health a one-time fee of approxi- mately $825 under an alliance agreement in which the Company was named “vendor of choice” for IT services to the pharmaceutical industry. In addition, the Company has a certain relationship with the former Erisco Managed Care Technologies (“Erisco”), which is now a wholly owned sub- sidiary of The Trizetto Group, Inc. (“Trizetto”). As of December 31, 2002, IMS Health owned approximately 26.4% of the outstanding common stock of Trizetto. During 2002 and 2001, the Company recorded revenues from Erisco of approximately $2,577 and $401, respectively and payments to Erisco for commissions and marketing fees of approximately $697 and $1,012, respec- tively. The pro forma disclosures shown above are not representative of the effects on net income and earnings per share in future years.  For purposes of pro forma disclosures only, the fair value for all Company options was estimated at the date of grant using the Black-Scholes option model with the following weighted average assumptions in 2002: risk-free interest rate of 2.71%, expected dividend yield of 0.0%, expected volatility of 65% and weighted average expected life of 2.9 years. 2001 assumptions; risk-free interest rate of 4.3%, expected dividend yield of 0.0%, expected volatility of 78% and weighted average expected life of 3.0 years. 2000 assumptions; risk-free interest rate of 6.1%, expected dividend yield of 0.0%, expected volatility of 75% and expected life of 3.9 years. The weight- Pension Plans. Certain U.S. employees of the Company participated in IMS Health's defined benefit pension plans. The plans are cash balance pension plans under which six percent of creditable compensation plus interest is credited to the employee’s retirement account on a monthly basis. The cash balance earns monthly investment credits based on the 30-year Treasury bond yield. At the time of retirement, the vested employee's account balance is actuarially converted into an annuity. The Company’s cost for these plans is included in the allocation of expense from IMS Health for employee bene- fits plans.  36 December 31, 2002 2001 2000 Net income, as reported $34,562 $22,160 $17,683 Deduct Total stock-based compensation expense determined under the fair value method for all awards, net of related tax benefits 11,562 7,127 4,868 Pro forma net income $23,000 $15,033 $12,815 Earnings per share: Net income, as reported-basic $0.58 $0.39 $0.32 Pro forma-basic $0.39 $0.26 $0.23 Net income, as reported-diluted $0.54 $0.36 $0.29 Pro forma-diluted $0.36 $0.25 $0.21 Options Outstanding Options Exercisable Weighted Average Weighted Weighted Range of Remaining Average Average Exercise Number Contractual Life Exercise Exercise Prices Outstanding in Years Price Options Price $0.64 - $0.64 371,700 4.6 Years $ 0.64 371,700 $ 0.64 $1.15 - $1.67 277,590 5.3 Years $  1.39 277,590 $ 1.39 $1.81 - $2.69 21,000 5.7 Years $  2.19 21,000 $ 2.19 $3.67 - $5.10 2,562,771 6.4 Years $ 4.11 1,506,927 $ 4.10 $6.93 - $10.31 2,777,760 8.3 Years $ 9.38 406,335 $ 9.41 $10.50 - $15.17 3,850,932 8.2 Years $ 12.04 838,482 $ 11.88 $15.97 - $22.92 1,566,900 9.2 Years $ 17.17 221,700 $ 19.27 Total 11,428,653 7.8 Years $ 9.67 3,643,734 $ 6.84