**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549**

**FORM10-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, 2006**                                                                                                                                                                                                                                                        |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **o**      | **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)                                 |
|                                                                                |
| **(203)  319-4700**                                                                 |
| (Registrant’s  telephone number, including area code)                          |
|                                                                                |
| ** **                                                                          |
| (Former name,  former address and former fiscal year, if changed since last report) |

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d)of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to the filing requirements for the past 90 days.

x  Yes     o  No

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or non-accelerated filer.  See definition of “accelerated filer andlarge accelerated filer” in rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x               Acceleratedfiler  o               Non-acceleratedfiler  o

Indicate by check mark whether the registrant is a shellcompany (as defined in Rule 12b-2 of the Exchange Act).  o  Yes     x  No

Indicate the number of shares outstanding of each ofthe issuer’s classes of Common Stock, as of the latest practicable date.  At September 30, 2006, there were198,439,909 shares of IMS Health Incorporated Common Stock, $0.01 parvalue, outstanding.

 

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**IMS HEALTH INCORPORATED**

**INDEX TO FORM 10-Q**

 
| **PART I. FINANCIAL  INFORMATION**                                                                      | **PAGE(S)** |
|---------------------------------------------------------------------------------------------------------|-------------|
| ** **                                                                                              |        |
| **Item  1. Financial Statements (Unaudited)**                                                           |        |
| ** **                                                                                              |        |
| Condensed Consolidated Statements of Financial  Position                                                |        |
|                                                                                                    |        |
| As of September 30, 2006 and December 31, 2005                                                          | 3           |
|                                                                                                    |        |
| Condensed Consolidated Statements of Income                                                             |        |
|                                                                                                    |        |
| Three Months Ended September 30, 2006 and 2005                                                          | 4           |
|                                                                                                    |        |
| Condensed Consolidated Statements of Income                                                             |        |
|                                                                                                    |        |
| Nine Months Ended September 30, 2006 and 2005                                                           | 5           |
|                                                                                                    |        |
| Condensed Consolidated Statements of Cash Flows                                                         |        |
|                                                                                                    |        |
| Nine Months Ended September 30, 2006 and 2005                                                           | 6           |
|                                                                                                    |        |
| Notes to Condensed Consolidated Financial Statements                                                    | 7           |
|                                                                                                    |        |
| **Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations** | 33          |
| ** **                                                                                              |        |
| **Item 3. Quantitative and Qualitative Disclosures About  Market Risk**                                 | 52          |
| ** **                                                                                              |        |
| **Item 4. Controls and Procedures**                                                                     | 52          |
| ** **                                                                                              |        |
| **PART  II. OTHER INFORMATION**                                                                         |        |
| ** **                                                                                              |        |
| **Item  1. Legal Proceedings**                                                                          | 54          |
| ** **                                                                                              |        |
| **Item  1A. Risk Factors**                                                                              | 54          |
| ** **                                                                                              |        |
| **Item 2. Changes in Securities, Use of Proceeds and  Issuer Purchases of Equity Securities**           | 59          |
| ** **                                                                                              |        |
| **Item 6. Exhibits**                                                                                    | 60          |
| ** **                                                                                              |        |
| **SIGNATURES**                                                                                          | 61          |
| ** **                                                                                              |        |
| **EXHIBITS**                                                                                            | 62          |

 

2

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**PART I. FINANCIAL INFORMATION**

**Item 1. FINANCIALSTATEMENTS**

**IMS HEALTH INCORPORATED**

**CONDENSED CONSOLIDATED STATEMENTS OF FINANCIALPOSITION (Unaudited)**

*(Dollars andshares in thousands, except per share data)*

 
| ** **                                                                                                               | ** ** | **As of September 30,  2006** | ** **    | **As of December 31,  2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------|---------------|---------------------------------------------|------------|
| **Assets:**                                                                                                              |       |                                         |          |                                        |       |
| **Current Assets:**                                                                                                      | ** ** | ** **                                   |          |                                        |       |
| Cash and cash  equivalents                                                                                               | ** ** | **$**                                        | **147,712**   |                                        | $          | 362,943 |   |
| Accounts receivable,  net of allowances of $6,448and  $7,629 in 2006 and 2005, respectively                              | ** ** | **324,331**                                  |          | 297,302                                     |       |
| Other current assets                                                                                                     | ** ** | **173,098**                                  |          | 160,765                                     |       |
| **Total Current Assets**                                                                                                 | ** ** | **645,141**                                  |          | 821,010                                     |       |
| Securities and other  investments                                                                                        | ** ** | **5,893**                                    |          | 6,037                                       |       |
| Property, plant and  equipment, net of accumulated depreciation of $198,737 and $180,576 in 2006  and 2005, respectively | ** ** | **155,642**                                  |          | 148,586                                     |       |
| Computer software                                                                                                        | ** ** | **247,336**                                  |          | 241,298                                     |       |
| Goodwill                                                                                                                 | ** ** | **499,952**                                  |          | 457,006                                     |       |
| Other assets                                                                                                             | ** ** | **329,032**                                  |          | 299,083                                     |       |
| **Total Assets**                                                                                                         | ** ** | **$**                                        | **1,882,996** |                                        | $          | 1,973,020 |   |
| **Liabilities,  Minority Interests and Shareholders’ (Deficit) Equity:**                                            | ** ** | ** **                                   |          |                                        |       |
| **Current Liabilities:**                                                                                                 | ** ** | ** **                                   |          |                                        |       |
| Accounts payable                                                                                                         | ** ** | **$**                                        | **53,007**    |                                        | $          | 71,737 |   |
| Accrued and other  current liabilities                                                                                   | ** ** | **222,329**                                  |          | 231,475                                     |       |
| Accrued income taxes                                                                                                     | ** ** | **82,648**                                   |          | 114,325                                     |       |
| Short-term deferred tax  liability                                                                                       | ** ** | **11,497**                                   |          | 8,627                                       |       |
| Deferred revenues                                                                                                        | ** ** | **117,460**                                  |          | 122,884                                     |       |
| **Total Current Liabilities**                                                                                            | ** ** | **486,941**                                  |          | 549,048                                     |       |
| Postretirement and  postemployment benefits                                                                              | ** ** | **114,887**                                  |          | 110,782                                     |       |
| Long-term debt (Note  10)                                                                                                | ** ** | **1,105,240**                                |          | 611,431                                     |       |
| Other liabilities                                                                                                        | ** ** | **154,117**                                  |          | 186,839                                     |       |
| **Total Liabilities**                                                                                                    | ** ** | **$**                                        | **1,861,185** |                                        | $          | 1,458,100 |   |
| **Commitments  and Contingencies (Note 8)**                                                                              | ** ** | ** **                                   |          |                                        |       |
| **Minority Interests**                                                                                                   | ** ** | **$**                                        | **100,229**   |                                        | $          | 99,865 |   |
| **Shareholders’  (Deficit) Equity:**                                                                                | ** ** | ** **                                   |          |                                        |       |
| Common Stock, par value  $.01, authorized 800,000 shares; issued 335,045 shares in 2006 and 2005,  respectively          | ** ** | **$**                                        | **3,350**     |                                        | $          | 3,350 |   |
| Capital in excess of  par                                                                                                | ** ** | **490,593**                                  |          | 468,299                                     |       |
| Retained earnings                                                                                                        | ** ** | **2,553,517**                                |          | 2,321,765                                   |       |
| Treasury stock, at  cost, 136,605 and 107,075 shares in 2006 and 2005, respectively                                      | ** ** | **(3,095,995**                               | **)**         | (2,315,404                                  | )          |
| Cumulative translation  adjustment                                                                                       | ** ** | **1,454**                                    |          | (31,521                                     | )          |
| Minimum pension  liability adjustment, net of taxesof $14,484 in 2006 and 2005, respectively                             | ** ** | **(31,408**                                  | **)**         | (31,408                                     | )          |
| Unrealized gain (loss)  on changes in fair value of cash flow hedges, net of tax                                         | ** ** | **6**                                        |          | (59                                         | )          |
| Unrealized gain on  investments, net of tax                                                                              | ** ** | **65**                                       |          | 33                                          |       |
| **Total Shareholders’ (Deficit)  Equity**                                                                           | ** ** | **$**                                        | **(78,418**   | **)**                                       | $          | 415,055 |   |
| **Total Liabilities, Minority Interests and  Shareholders’ (Deficit) Equity**                                       | ** ** | **$**                                        | **1,882,996** |                                        | $          | 1,973,020 |   |

 

*See accompanying Notes to the CondensedConsolidated Financial Statements (Unaudited).*

3

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**IMS HEALTH INCORPORATED**

**CONDENSED CONSOLIDATED STATEMENTS OF INCOME(Unaudited)**

*(Dollars andshares in thousands, except per share data)*
| ** **                                                                                               | ** ** | **Three Months Ended  September 30,** | ** **  |
|----------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|-------------|
| ** **                                                                                               | ** ** | **2006**                                             | ** **  | **2005** | ** ** |
| ** **                                                                                               | ** ** | ** **                                           |        |   |   |
| **Operating  Revenue**                                                                                   | ** ** | **$**                                                | **482,706** |   | $ | 432,796 |   |
|                                                                                                     | ** ** | ** **                                           |        |   |   |
| Operating costs*(exclusive of Depreciation and amortization shown separately below)*                     | ** ** | **209,178**                                          |        | 195,484 |   |
| Selling and administrative  expenses                                                                     | ** ** | **129,144**                                          |        | 100,268 |   |
| Depreciation and  amortization                                                                           | ** ** | **28,995**                                           |        | 26,339 |   |
| Merger costs  (Note 17)                                                                                  | ** ** | **—**                                           |        | 8,474 |   |
| **Operating  Income**                                                                                    | ** ** | **115,389**                                          |        | 102,231 |   |
| Interest income                                                                                          | ** ** | **1,322**                                            |        | 2,448 |   |
| Interest expense                                                                                         | ** ** | **(10,623**                                          | **)**       | (7,140 | ) |
| (Losses) gains  from investments, net                                                                    | ** ** | **(305**                                             | **)**       | 252 |   |
| Other (expense)  income, net                                                                             | ** ** | **(425**                                             | **)**       | 7,655 |   |
| **Non-Operating  (Loss) Income, Net**                                                                    | ** ** | **(10,031**                                          | **)**       | 3,215 |   |
| Income before  provision for income taxes                                                                | ** ** | **105,358**                                          |        | 105,446 |   |
| Provision for  income taxes (Note 12)                                                                    | ** ** | **(36,094**                                          | **)**       | (34,306 | ) |
| **Net  Income**                                                                                          | ** ** | **$**                                                | **69,264**  |   | $ | 71,140 |   |
|                                                                                                     | ** ** | ** **                                           |        |   |   |
| **Basic  Earnings Per Share of Common Stock**                                                            | ** ** | **$**                                                | **0.34**    |   | $ | 0.31 |   |
| **Diluted  Earnings Per Share of Common Stock**                                                          | ** ** | **$**                                                | **0.34**    |   | $ | 0.30 |   |
| Weighted average  number of shares outstanding — Basic                                              | ** ** | **200,900**                                          |        | 229,945 |   |
| Dilutive effect  of shares issuable as of period-end under Stock-based compensation plans and  other     | ** ** | **3,702**                                            |        | 4,090 |   |
| Adjustment of  shares outstanding applicable to exercised and cancelled stock options during  the period | ** ** | **340**                                              |        | 600 |   |
| **Weighted Average Number of  Shares Outstanding — Diluted**                                        | ** ** | **204,942**                                          |        | 234,635 |   |

 

*See accompanying Notes to the CondensedConsolidated Financial Statements (Unaudited).*

4

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**IMS HEALTH INCORPORATED**

**CONDENSED CONSOLIDATED STATEMENTS OF INCOME(Unaudited)**

*(Dollars andshares in thousands, except per share data)*
| ** **                                                                                               | ** ** | **Nine Months Ended  September 30,** | ** **    |
|----------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|---------------|
| ** **                                                                                               | ** ** | **2006**                                            | ** **    | **2005** | ** ** |
| ** **                                                                                               | ** ** | ** **                                          |          |   |   |
| **Operating Revenue**                                                                                    | ** ** | **$**                                               | **1,415,080** |   | $ | 1,277,062 |   |
|                                                                                                     | ** ** | ** **                                          |          |   |   |
| *Operating costs (exclusive of  Depreciation and amortization shown separately below)*                   | ** ** | **618,967**                                         |          | 560,801 |   |
| Selling and  administrative expenses                                                                     | ** ** | **386,537**                                         |          | 321,329 |   |
| Depreciation and  amortization                                                                           | ** ** | **85,109**                                          |          | 76,658 |   |
| Merger costs (Note 17)                                                                                   | ** ** | **6,016**                                           |          | 15,874 |   |
| **Operating Income**                                                                                     | ** ** | **318,451**                                         |          | 302,400 |   |
| Interest income                                                                                          | ** ** | **4,077**                                           |          | 7,195 |   |
| Interest expense                                                                                         | ** ** | **(29,270**                                         | **)**         | (20,292 | ) |
| Gains from investments,  net                                                                             | ** ** | **2,443**                                           |          | 2,624 |   |
| Other income, net                                                                                        | ** ** | **38,207**                                          |          | 25,555 |   |
| **Non-Operating Income, Net**                                                                            | ** ** | **15,457**                                          |          | 15,082 |   |
| Income before provision  for income taxes                                                                | ** ** | **333,908**                                         |          | 317,482 |   |
| Provision for income  taxes (Note 12)                                                                    | ** ** | **(83,864**                                         | **)**         | (122,820 | ) |
| **Net Income**                                                                                           | ** ** | **$**                                               | **250,044**   |   | 194,662 |   |
|                                                                                                     | ** ** | ** **                                          |          |   |   |
| **Basic Earnings Per Share of  Common Stock**                                                            | ** ** | **$**                                               | **1.23**      |   | $ | 0.85 |   |
| **Diluted Earnings Per Share of  Common Stock**                                                          | ** ** | **$**                                               | **1.20**      |   | $ | 0.84 |   |
| Weighted average number  of shares outstanding — Basic                                              | ** ** | **203,610**                                         |          | 227,901 |   |
| Dilutive effect of  shares issuable as of period-end under stock-based compensation plans and  other     | ** ** | **3,100**                                           |          | 2,999 |   |
| Adjustment of shares  outstanding applicable to exercised and cancelled stock options during the  period | ** ** | **807**                                             |          | 1,234 |   |
| **Weighted Average Number of Shares Outstanding —  Diluted**                                        | ** ** | **207,517**                                         |          | 232,134 |   |

 

*See accompanying Notes to theCondensed Consolidated Financial Statements (Unaudited).*

5

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**IMS HEALTH INCORPORATED**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)**

*(Dollars andshares in thousands, except per share data)*
| ** **                                                                               | ** ** | **Nine Months Ended  September 30,** | ** **  |
|------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|-------------|
| ** **                                                                               | ** ** | **2006**                                            | ** **  | **2005** | ** ** |
| **Cash  Flows from Operating Activities:**                                               |       |                                                |        |   |   |
| Net income                                                                               | ** ** | **$**                                               | **250,044** |   | $ | 194,662 |   |
| **Adjustments  to reconcile net income to net cash**                                     | ** ** | ** **                                          |        |   |   |
| **Provided by operating activities:**                                                    | ** ** | ** **                                          |        |   |   |
| Depreciation and amortization                                                            | ** ** | **85,109**                                          |        | 76,658 |   |
| Bad debt expense                                                                         | ** ** | **444**                                             |        | 2,552 |   |
| Deferred income taxes                                                                    | ** ** | **(8,375**                                          | **)**       | 8,559 |   |
| Gains from investments, net                                                              | ** ** | **(2,443**                                          | **)**       | (2,624 | ) |
| Minority interests in net income of consolidated  companies                              | ** ** | **2,645**                                           |        | 2,525 |   |
| Non-cash stock-based compensation charges                                                | ** ** | **32,987**                                          |        | 3,511 |   |
| Excess tax benefits from stock-based compensation                                        | ** ** | **(4,262**                                          | **)**       | **—** |   |
| Change in assets  and liabilities, excluding effects from acquisitions and dispositions: | ** ** | ** **                                          |        |   |   |
| Net increase in restricted cash                                                          | ** ** | **—**                                          |        | (105,404 | ) |
| Net increase in accounts receivable                                                      | ** ** | **(25,577**                                         | **)**       | (11,383 | ) |
| Net (increase) decrease in inventory                                                     | ** ** | **(3,898**                                          | **)**       | 5,037 |   |
| Net increase in prepaid expenses and other current  assets                               | ** ** | **(4,433**                                          | **)**       | (37,098 | ) |
| Net decrease in accounts payable                                                         | ** ** | **(19,945**                                         | **)**       | (11,089 | ) |
| Net decrease in accrued and other current  liabilities                                   | ** ** | **(1,341**                                          | **)**       | (11,957 | ) |
| Net decrease in accrued severance, impairment and  other charges                         | ** ** | **(13,907**                                         | **)**       | (25,034 | ) |
| Net decrease in deferred revenues                                                        | ** ** | **(8,144**                                          | **)**       | (15,293 | ) |
| Net decrease in accrued income taxes                                                     | ** ** | **(68,643**                                         | **)**       | (11,369 | ) |
| Net increase in pension assets (net of liabilities)                                      | ** ** | **(13,296**                                         | **)**       | (2,332 | ) |
| Net (increase) decrease in other long-term assets  (net of other long-term liabilities)  | ** ** | **(366**                                            | **)**       | 2,402 |   |
| Net tax benefit on stock-based compensation                                              | ** ** | **10,182**                                          |        | 13,450 |   |
| **Net  Cash Provided by Operating Activities**                                           | ** ** | **206,781**                                         |        | 75,773 |   |
| **Cash  Flows Used in Investing Activities:**                                            | ** ** | ** **                                          |        |   |   |
| Capital expenditures                                                                     | ** ** | **(18,472**                                         | **)**       | (13,384 | ) |
| Additions to computer software                                                           | ** ** | **(58,254**                                         | **)**       | (60,724 | ) |
| Proceeds from sale of TriZetto                                                           | ** ** | **—**                                          |        | 37,414 |   |
| Investments in short-term marketable securities                                          | ** ** | **—**                                          |        | 15,351 |   |
| Payments for acquisitions of businesses, net of cash  acquired                           | ** ** | **(42,113**                                         | **)**       | (191,840 | ) |
| Funding of venture capital investments                                                   | ** ** | **(1,400**                                          | **)**       | (1,000 | ) |
| Other investing activities, net                                                          | ** ** | **(642**                                            | **)**       | 2,398 |   |
| **Net  Cash Used in Investing Activities**                                               | ** ** | **(120,881**                                        | **)**       | (211,785 | ) |
| **Cash  Flows Used in Financing Activities:**                                            | ** ** | ** **                                          |        |   |   |
| Net increase (decrease) in revolving credit facility  and other                          | ** ** | **125**                                             |        | (53,602 | ) |
| Proceeds from short-term credit agreement, bank term  loan and private placement notes   | ** ** | **650,000**                                         |        | **—** |   |
| Repayment of short-term credit agreement                                                 | ** ** | **(150,000**                                        | **)**       | **—** |   |
| Payments for purchase of treasury stock                                                  | ** ** | **(880,407**                                        | **)**       | (147,945 | ) |
| Proceeds from exercise of stock options                                                  | ** ** | **77,364**                                          |        | 162,310 |   |
| Excess tax benefits from stock-based compensation                                        | ** ** | **4,262**                                           |        | **—** |   |
| Dividends paid                                                                           | ** ** | **(18,292**                                         | **)**       | (13,734 | ) |
| Proceeds from employee stock purchase plan                                               | ** ** | **2,942**                                           |        | 2,391 |   |
| Increase in cash overdrafts                                                              | ** ** | **14,235**                                          |        | 3,976 |   |
| Payments to minority interests and other financing  activities                           | ** ** | **(2,281**                                          | **)**       | (2,418 | ) |
| **Net  Cash Used in Financing Activities**                                               | ** ** | **(302,052**                                        | **)**       | (49,022 | ) |
| Effect of  Exchange Rate Changes on Cash and Cash Equivalents                            | ** ** | **921**                                             | ** **  | **(13,670** | **)** |
| **Decrease  in Cash and Cash Equivalents**                                               | ** ** | **(215,231**                                        | **)**       | **(198,704** | **)** |
| **Cash  and Cash Equivalents, Beginning of Period**                                      | ** ** | **362,943**                                         | ** **  | **444,903** | ** ** |
| **Cash and Cash Equivalents, End  of Period**                                            | ** ** | **$**                                               | **147,712** | ** ** | **$** | **246,199** | ** ** |

 

*See accompanyingNotes to the Condensed Consolidated Financial Statements (Unaudited).*

6

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**IMS HEALTH INCORPORATED**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)**

**(Dollarsand shares in thousands, except per share data)**

**Note 1.   InterimCondensed Consolidated Financial Statements (Unaudited)**

The accompanying Condensed Consolidated FinancialStatements (Unaudited) have been prepared in accordance with accountingprinciples generally accepted in the United States of America for interimfinancial information and Article 10 of Regulation S-X under the Securities andExchange Act of 1934, as amended.  TheCondensed Consolidated Financial Statements (Unaudited) do not include all theinformation and notes required by accounting principles generally accepted inthe United States of America for complete financial statements.  In the opinion of management, alladjustments, all of which are of a normal recurring nature, considerednecessary for a fair presentation of financial position, results of operationsand cash flows for the periods presented have been included.  The results of operations for interim periodsare not necessarily indicative of the results expected for the full year.  The December 31, 2005 balance sheet data wasderived from audited financial statements, but does not include all disclosuresrequired by accounting principles generally accepted in the United States ofAmerica.  The Condensed ConsolidatedFinancial Statements (Unaudited) and related notes should be read inconjunction with the Consolidated Financial Statements and related notes of IMSHealth Incorporated (the “Company” or “IMS”) included in its 2005 Annual Reporton Form 10-K.  Certain prior year amounts have been reclassified to conform to the 2006presentation.  Amounts presented in theCondensed Consolidated Financial Statements (Unaudited) may not add due torounding.

**Note 2.   Basisof Presentation**

IMS is the leading globalprovider of market intelligence to the pharmaceutical and healthcareindustries.  The Company offersleading-edge business intelligence products and services that are integral toour clients’ day-to-day operations, including portfolio optimizationcapabilities; launch and brand management solutions; sales force effectivenessinnovations; managed care and over-the-counter offerings; and consulting andservices solutions that improve ROI and the delivery of quality healthcareworldwide.  The Company’s information products are developed to meet client needs byusing data secured from a worldwide network of suppliers in the markets whereoperations exist.  Key informationproducts include:

·                  Sales Force Effectiveness to optimize sales forceproductivity and territory management;

·                  Portfolio Optimization to provide clients withinsights into market opportunity and business development assessment; and

·                  Launch, Brand Management and Other to support clientneeds relative to market segmentation and positioning and life cycle managementfor prescription and over-the-counter pharmaceutical products.

Within these key information products, the Companyprovides consulting and services that use in-house capabilities andmethodologies to assist pharmaceutical clients in analyzing and evaluatingmarket trends, strategies and tactics, and to help in the development andimplementation of customized software applications and data warehouse tools.

7

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The Company operates in more than 100 countries.  Until December 21, 2004, the Company alsoowned approximately a 25.0% equity interest in the TriZetto Group, Inc. (“TriZetto”)(See Note 7).

The Company is managed on a global business model withglobal leaders for the majority of its critical business processes andaccordingly has one reportable segment (See Note 16).

**Note 3.   Summaryof Recent Accounting Pronouncements**

In February 2006, the Financial Accounting StandardsBoard (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No.155, “Accounting for Certain Hybrid Financial Instruments — an amendment ofFASB Statements No. 133 and 140.”  Thisstatement clarifies the application of SFAS No. 133, “Accounting for DerivativeInstruments and Hedging Activities,” to beneficial interests in securitizedfinancial assets and improves the consistency of accounting for similarfinancial instruments. This statement also amends SFAS No. 140, “Accounting forTransfers and Servicing of Financial Assets and Extinguishments of Liabilities —a replacement of FASB Statement No. 125,” to eliminate the prohibition on aqualifying special-purpose entity from holding a derivative financialinstrument that pertains to a beneficial interest other than another derivativefinancial instrument.  This statement iseffective for all financial instruments acquired or issued after the beginningof an entity’s first fiscal year that begins after September 15, 2006.  The Company is currently evaluating thisstatement to determine any potential impact that it may have on its financialresults.

In March 2006, the FASB issued SFAS No. 156, “Accountingfor Servicing of Financial Assets — an amendment of FASB Statement No. 140.”This statement amends SFAS 140 and clarifies the accounting for, measurementof, and disclosure of servicing assets and servicing liabilities.  This statement should be adopted as of thebeginning of an entity’s first fiscal year that begins after September 15,2006, but earlier adoption is permitted. The Company is currently evaluating this statement to determine anypotential impact that it may have on its financial results.

In June 2006, the FASB issued FASB Interpretation No.48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASBStatement No. 109” (“FIN 48”).  Thisinterpretation prescribes a recognition threshold and measurement attribute forthe financial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. It also provides guidance on derecognition,classification, interest and penalties, accounting in interim periods,disclosure, and transition.  Thisinterpretation is effective for fiscal years beginning after December 15, 2006,but earlier adoption is permitted.  TheCompany is currently evaluating this interpretation to determine any potentialimpact that it may have on its financial results.

In September 2006, the FASB issued SFAS No. 157, “FairValue Measurements.”  This statementdefines fair value, establishes a framework for measuring fair value undergenerally accepted accounting principles, and expands disclosures about fairvalue measurements.  This statement iseffective for financial statements issued for fiscal years beginning afterNovember 15, 2007, and interim periods within those fiscal years.  The Company is currently evaluating thisstatement to determine any potential impact that it may have on its financialresults.

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In September 2006, the FASB issued SFAS No. 158, “Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans — anamendment of FASB Statements No. 87, 88, 106, and 132(R)” (“SFAS 158”), whichrequires recognition of the funded status of pension and other postretirementbenefit plans on the balance sheet. This statement amends and clarifies the financialaccounting and reporting guidance for defined benefit pension and otherpostretirement plans.  Under SFAS 158,gains and losses, prior service costs and credits, and any remaining transitionamounts under SFAS 87 and SFAS 106 that have not yet been recognized throughnet periodic benefit cost will be recognized in accumulated other comprehensiveincome (AOCI), a component of shareholders’ equity, net of tax effects. Themeasurement date, the date at which the benefit obligation and plan assets aremeasured, is required to be the company’s fiscal year end.  SFAS 158 is effective for publicly-heldcompanies for fiscal years ending after December 15, 2006, except for themeasurement date provisions, which are effective for fiscal years ending afterDecember 15, 2008. Since the Company already utilizes a fiscal year endmeasurement date, this particular provision does not affect the financialstatements. Based on the Company’s financial statements as of December 31,2005, the adoption of SFAS 158 would have reduced Shareholders’ Equity (withinAOCI) by approximately $34,000, increased the Postretirement and Postemploymentbenefit liability by approximately $50,000, decreased the intangible asset(within Other Assets) by approximately $1,000 and increased the long-termdeferred tax asset (within Other Assets) by approximately $17,000.  SFAS 158 does not affect the results ofoperations.

At this time, the Company is unable to estimate theeffect of SFAS 158 on its financial position upon adoption at December 31,2006. This will be determined once the actuarial and plan asset calculationsare performed which are dependent on, among other things, the year-end discountrate and fair value of plan assets, which are not known until after December31, 2006.

**Note 4.   Summaryof Significant Accounting Policies**

*Stock-BasedCompensation Expense*

On January 1, 2006, the Company adopted SFASNo. 123 (revised 2004), “Share-Based Payment,” (“SFAS 123R”) whichrequires the measurement and recognition of compensation expense for allshare-based payment awards made to employees and directors including employeestock options, restricted stock and employee stock purchases related to theEmployee Stock Purchase Plan based on estimated fair values. SFAS 123Rsupersedes the Company’s previous accounting under Accounting Principles Board(“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB25”) for periods beginning in fiscal 2006. In March 2005, the Securities and Exchange Commission (“SEC”) issuedStaff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS 123R. TheCompany has applied the provisions of SAB 107 in its adoption of SFAS 123R.

The Company adopted SFAS 123R using the modifiedprospective transition method, which requires the application of the accountingstandard as of January 1, 2006, the first day of the Company’s fiscal year2006. The Company’s Condensed Consolidated Financial Statements (Unaudited) asof and for the three and nine months ended September 30, 2006, respectively,reflect the impact of SFAS 123R. In accordance with the modified prospectivetransition method, the Company’s Condensed Consolidated Financial Statements(Unaudited) for prior periods have not been

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retrospectively adjusted to reflect, and do notinclude, the impact of SFAS 123R. See Note 9 for additional information.

SFAS 123R requires companies to estimate the fairvalue of share-based payment awards on the date of grant using anoption-pricing model. The value of the portion of the award that is ultimatelyexpected to vest is recognized as expense over the requisite service period ofthe award in the Company’s Condensed Consolidated Statements of Income(Unaudited). Prior to the adoption of SFAS 123R, the Company accounted forstock-based awards to employees and directors using the intrinsic value methodin accordance with APB 25 as allowed under SFAS No. 123, “Accounting forStock-Based Compensation” (“SFAS 123”). Under the intrinsic value method,stock-based compensation expense had been recognized in the Company’s CondensedConsolidated Statements of Income (Unaudited) only for stock optionmodifications and restricted stock units because the exercise price of theCompany’s stock options granted to employees and directors equaled the fairmarket value of the underlying stock at the date of grant.

Stock-based compensation expense recognized during theperiod is based on the value of the portion of share-based payment awards thatis ultimately expected to vest during the period. Stock-based compensationexpense recognized in the Company’s Condensed Consolidated Statements of Income(Unaudited) for the first nine months of fiscal 2006 included compensationexpense for share-based payment awards granted prior to, but not yet vested asof January 1, 2006, based on the grant date fair value estimated in accordancewith the pro forma provisions of SFAS 123, and compensation expense for theshare-based payment awards granted subsequent to January 1, 2006, based on thegrant date fair value estimated in accordance with the provisions of SFAS123R.   Prior to the adoption of SFAS123R, the Company used the straight-line method of attributing the value ofstock-based compensation and continued to use that method after the adoption.  As stock-based compensation expenserecognized in the Condensed Consolidated Statements of Income (Unaudited) forthe first nine months of fiscal 2006 is based on awards ultimately expected tovest, it has been reduced for estimated forfeitures. SFAS 123R requiresforfeitures to be estimated at the time of grant and revised, if necessary, insubsequent periods if actual forfeitures differ from those estimates. In theCompany’s pro forma information required under SFAS 123 for the periods priorto fiscal 2006, the Company accounted for estimated forfeitures for stockoption grants and for forfeitures as they occurred for restricted stockgrants.  The Company’s method ofvaluation for share-based awards granted after January 1, 2006 is theBlack-Scholes option-pricing model, which was also previously used for theCompany’s pro forma information required under SFAS 123. See Note 9 foradditional information.

*Computation of NetIncome per Share*

Basic net income per share is computed using theweighted-average number of common shares outstanding during the period. Dilutednet income per share is computed using the weighted-average number of commonshares and dilutive potential common shares outstanding during the period.Dilutive potential common shares primarily consist of employee stock optionsand restricted stock units.

SFAS No. 128, “Earnings per Share,” requires thatemployee equity share options, restricted stock units and similar equityinstruments granted by the Company be treated as potential common shares

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outstanding in computing diluted earnings per share.Diluted shares outstanding include restricted stock units and the dilutiveeffect of in-the-money options which is calculated based on the average shareprice for each fiscal period using the treasury stock method. Under thetreasury stock method, the amount the employee must pay for exercising stockoptions, the amount of compensation cost for future service that the Companyhas not yet recognized, and the amount of benefits that would be recorded inadditional paid-in capital when the award becomes deductible for tax purposesare assumed to be used to repurchase shares.

For a description of the Company’s other criticalaccounting policies, please refer to the Company’s 2005 Annual Report on Form10-K as filed with the SEC.

**Note 5.   Acquisitions**

The Company makes acquisitions in order to expand itsproducts, services and geographic reach. During the nine months ended September 30, 2006, the Company completedthree acquisitions for an aggregate cost of approximately $24,500. These acquisitionswere Läkemedelsstatistik AB (Sweden), Health Outcomes Research Europe, S.L.(Spain) and GenexisServicos de Informacao Ltda. (Brazil). These acquisitions were accounted for under the purchase method ofaccounting.  The aggregate purchase pricehas been allocated on a preliminary basis to the assets acquired andliabilities assumed based on estimated fair values as of the closing date.  The purchase price allocations will befinalized after the completion of the valuation of certain assets and liabilities.  Any adjustments resulting from thefinalization of the purchase price allocations are not expected to have amaterial impact on the Company’s financial position and results ofoperations.  The Condensed ConsolidatedFinancial Statements (Unaudited) include the results of these acquiredcompanies subsequent to the closing of these acquisitions.  Had these acquisitions occurred as of January1, 2006 or 2005, the impact on the Company’s results of operations would nothave been significant.  Goodwill ofapproximately $18,388 was recorded in connection with these acquisitions, ofwhich none is deductible for tax purposes.

During the nine months ended September 30, 2005, theCompany completed nine acquisitions for an aggregate cost of approximately $151,000.  These acquisitions were Taskarena SoftwareEngineering GmbH (Germany), SAI Healthcare (U.S.), Synchronous Knowledge, Inc.(U.S.), M-Tag (Australia and UK), Fricke & Pirk (Germany), BASS (Korea),Areks (France, Japan, Switzerland and U.S.), Pharmetrics (U.S.) and Envision(U.S.) and were accounted for under the purchase method of accounting.  The aggregate purchase price had beenallocated on a preliminary basis to the assets acquired and liabilities assumedbased on estimated fair values as of the closing date.  The Company finalized the purchase priceallocations for these acquisitions prior to the end of the third quarter of2006, which did not have a material impact on the Company’s financial positionand results of operations.  The CondensedConsolidated Financial Statements (Unaudited) include the results of theseacquired companies subsequent to the closing of the acquisitions.  Had each of these acquisitions occurred as ofJanuary 1, 2005 or 2004, the impact on the Company’s results of operationswould not have been significant. Goodwill of approximately $112,301 was recorded in connection with theseacquisitions.  For tax purposes,approximately $45,700 of goodwill is deductible in connection with theseacquisitions.

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Additionally, during January 2005, the Company paidapproximately $36,000 to acquire the 50% interest in IMS Health GmbH (“IHA”)not owned by IMS.  The Company accountedfor this purchase as a step transaction and allocated the purchase price toacquired intangible assets and goodwill. Prior to 2005, the Company consolidated the results of IHA and recordedminority interest expense for the 50% not owned by the Company.

**Note 6.   Goodwilland Intangible Assets**

During the first nine months of 2006, the Companyrecorded additional goodwill of approximately $24,972 related primarily to thepreliminary allocation of purchase price for the three acquisitions completedduring the first nine months of 2006 and also to earn-out agreements foracquisitions completed prior to 2006 (see Note 8).  During the nine months ended September 30,2005, the Company recorded additional goodwill of approximately $148,508related primarily to the acquisition of the remaining 50% of IHA in January2005, the preliminary allocation of purchase price for the nine acquisitionscompleted in the first nine months of 2005 (see Note 5) and payments onearn-out agreements for acquisitions completed prior to 2005.

All of the Company’s other acquired intangibles aresubject to amortization.  Intangible asset amortization expense was $4,286and $12,870 during the three and nine months ended September 30, 2006,respectively and $5,038 and $13,333 during the three and nine months endedSeptember 30, 2005, respectively. At September 30, 2006, intangible assets wereprimarily composed of customer relationships, databases and trade names(included in Other assets) and computer software.  The gross carrying amounts and relatedaccumulated amortization of these intangibles were $136,231 and $56,599,respectively, at September 30, 2006 and $131,338 and $41,978, respectively, atDecember 31, 2005.  These intangibles areamortized over periods ranging from two to twenty years.  As of September 30, 2006, the weightedaverage amortization periods of the acquired intangibles by asset class arelisted in the following table:

| Intangible Asset Type   | ** ** | ** ** | ** ** | **Weighted Average  Amortization (Years) Period** | ** ** |
|-----------------------------------|------------|------------|------------|------------------------------------------------------------------|------------|
| Customer Relationships            |       | 10.1       |       |
| Computer  Software and Algorithms |       | 7.0        |       |
| Databases                         |       | 4.7        |       |
| Trade Names                       |       | 4.4        |       |
| Other                             |       | 3.9        |       |
| Weighted average                  |       | 8.8        |       |

 

Based on current estimated useful lives, amortizationexpense associated with intangible assets at September 30, 2006 is estimated tobe approximately $4,400 for the remaining quarter in 2006.  Thereafter, annual amortization expenseassociated with intangible assets is estimated to be as follows:

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| Year Ended December 31, | ** ** | ** ** | ** ** | **Amortization Expense** | ** ** |
|----------------------------------------|------------|------------|------------|-------------------------------|------------|
| 2007                                   |       | $          | 14,578     |                          |
| 2008                                   |       | 13,058     |       |
| 2009                                   |       | 11,020     |       |
| 2010                                   |       | 7,927      |       |
| 2011                                   |       | 6,629      |       |
| Thereafter                             |       | $          | 21,994     |                          |

 

**Note 7.   Investmentsin Equity Investees**

On December 21, 2004, the Company and TriZetto enteredinto a share purchase agreement pursuant to which, the Company sold to TriZettoall of the 12,142,857 shares of Common Stock, par value $0.001 per share, ofTriZetto owned by the Company for an aggregate cash consideration of $81,964.The Company received $44,550 in December 2004 and the balance of $37,414 inJanuary 2005.

**Note 8.**   Contingencies

The Company and its subsidiaries are involved in legaland tax proceedings, claims and litigation arising in the ordinary course ofbusiness.  Management periodicallyassesses the Company’s liabilities and contingencies in connection with thesematters based upon the latest information available.  For those matters where management currentlybelieves it is probable that the Company will incur a loss and that theprobable loss or range of loss can be reasonably estimated, the Company hasrecorded reserves in the Condensed Consolidated Financial Statements(Unaudited) based on its best estimates of such loss.  In other instances, because of theuncertainties related to either the probable outcome or the amount or range ofloss, management is unable to make a reasonable estimate of a liability, ifany.  However, even in many instances wherethe Company has recorded a reserve, the Company is unable to predict withcertainty the final outcome of the matter or whether resolution of the matterwill materially affect the Company’s results of operations, financial positionor cash flows.  As additional informationbecomes available, the Company adjusts its assessment and estimates of suchliabilities accordingly.

The Company routinely enters into agreements with itssuppliers to acquire data and with its customers to sell data, all in the normalcourse of business.  In these agreements,the Company sometimes agrees to indemnify and hold harmless the other party forany damages such other party may suffer as a result of potential intellectualproperty infringement and other claims related to the use of the data.  These indemnities typically have terms ofapproximately two years.  The Company hasnot accrued a liability with respect to these matters, as the exposure is consideredremote.

In connection with the agreements (the “LLC Agreements”)governing the relationship among the Company and two of its subsidiaries andtwo third-party investors with respect to IMS Health Licensing Associates,L.L.C., the Company also entered into a guaranty agreement.  Under the terms of

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this guaranty agreement, the Company guarantees infavor of the third-party investors the performance of the Company’ssubsidiaries under the LLC Agreements and agrees to indemnify and hold harmlessthe third-party investors against damages, including specified delay damages,the third-party investors may suffer as a result of failures to perform underthe LLC Agreements by the Company and its subsidiaries.

Based on its review of the latest informationavailable, in the opinion of management, the ultimate liability of the Companyin connection with pending tax and legal proceedings, claims and litigationwill not have a material effect on the Company’s results of operations, cashflows or financial position, with the possible exception of the mattersdescribed below.

*D&B Legacy andRelated Tax Matters*

*Sharing Disputes.  *In 1996 the company then known as The Dun &Bradstreet Corporation (“D&B”) and now known as R.H. Donnelley (“Donnelley”)separated into three public companies by spinning-off ACNielsen Corporation (“ACNielsen”)and the company then known as Cognizant Corporation (“Cognizant”) and now knownas Nielsen Media Research, Inc. (“NMR”) (the “1996 Spin-Off”).  The agreements effecting the 1996 Spin-Offallocated tax-related liability with respect to certain prior businesstransactions (the “Legacy Tax Controversies”) between D&B andCognizant.  The D&B portion of suchliability is now shared among Donnelley and certain of its former affiliates(the “Donnelley Parties”), and the Cognizant portion of such liability isshared between NMR and the Company pursuant to the agreements effectingCognizant’s spin-off of the Company in 1998 (the “1998 Spin-Off”).

The underlying taxcontroversies with the Internal Revenue Service (the “IRS”) have substantiallyall been resolved and the Company paid to the IRS the amounts that itbelieved were due and owing.  In thefirst quarter of 2006, Donnelley indicated that it disputed the amountscontributed by the Company toward the resolution of these matters based on theDonnelley Parties’ interpretation of the allocation of liability under the 1996Spin-Off agreements.  The DonnelleyParties on the one hand, and NMR and the Company, on the other hand, haveattempted to resolve thesedisputes through negotiation.  The 1996Spin-Off agreements provide that if the parties cannot reach agreement throughnegotiation they must arbitrate the disputes.

On August 14, 2006, the Donnelley Parties commencedarbitration regarding one of these disputes (referred to herein as the “DutchPartnership Dispute”) by filing a Notice of Arbitration and Statement of Claim(the “Donnelley Statement”) with the American Arbitration AssociationInternational Center for Dispute Resolution (the “AAA”).  In the Donnelley Statement, the DonnelleyParties claim that the Company and NMR collectively owe approximately an additional$10,800 with respect to the Dutch Partnership Dispute; (if determined liable,the Company’s share of this amount would be approximately $5,800 (tax andinterest, net of federal income tax benefit)). On October 16, 2006, the Company and NMR filed a Statement of Defensedenying all claims made by the Donnelley Parties in the Donnelley Statement.

The Company accrued approximately $24,900 for theDutch Partnership Dispute and the remaining

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disputes in the first quarter of 2006. In June 2006,the Company made payments with regard to one of the disputes of approximately$5,800 (including tax and interest, net of federal income tax benefit) relatedto certain 1995 and 1996 shared state and local legacy tax liabilities. As ofSeptember 30, 2006 the Company has a reserve of approximately $20,400 for theremainder of these matters. The Company intends to vigorously defend itselfwith respect to the Dutch Partnership Dispute and the remaining disputes.

*The Partnership(Tax Year 1997).  *TheIRS is seeking to reallocate certain items of partnership income and expense aswell as disallow certain items of partnership expense with respect to apartnership now substantially owned by the Company (the “Partnership”) on thePartnership’s 1997 tax return.  During1997, the Partnership was substantially owned by Cognizant, but liability forthis matter was allocated to the Company pursuant to the agreements effectingthe 1998 Spin-Off.  The Company has fileda formal protest relating to the proposed assessment for 1997 with the IRSOffice of Appeals.  The Company isattempting to resolve this matter in the administrative appeals process beforeproceeding to litigation if necessary. If the IRS were to ultimately prevail inits position, the Company’s liability (tax and interest, net of tax benefit)with respect to tax year 1997 would be approximately $19,900, which amount theCompany had reserved in current accrued income taxes payable at September 30,2006.

In addition to these matters, the Company and itspredecessors have entered, and the Company continues to enter, into global taxplanning initiatives in the normal course of their businesses.  These activities are subject to review byapplicable tax authorities.  As a resultof the review process, uncertainties exist and it is possible that some ofthese matters could be resolved adversely to the Company.

*MattersBefore the Belgian Competition Service*

Complaints were filed in 1998 and 1999against the Company with the Belgian Competition Service (“BCS”) alleging abuseof a dominant position on the Belgian market. In October 1999 and 2000, the Chairman of the Belgian CompetitionCouncil (“BCC”) adopted interim measures against the Company, with which theCompany complied.  In December 2004, theCompany received a formal statement of objections alleging that the Company hadabused its dominant position on the Belgian market in violation of Article 82of the EC Treaty and corresponding Belgian law. The Company submitted its comments to the statement of objections inwriting to the BCC in February 2005.

In a separate matter, in October 2004, theBCS notified IMS of a request for information in connection with IMS’sacquisition in April 2004 of a competitor in the Belgian market, SourceInformatics Belgium S.A.  The BCS is investigatingwhether such acquisition may have violated Article 82 of the EC Treaty andcorresponding Belgian law.  The Companyresponded to the request for information in December 2004.

The Company intends to continue to vigorouslydefend itself in these matters before the Belgian competition authorities.  Management of the Company is unable topredict at this time the final outcome of these matters or whether adverseresolutions thereof could materially affect the Company’s results ofoperations, cash flows or financial position in the period in which suchadverse resolution

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occurs.

*OtherContingencies*

*CTSSplit-Off.*   OnFebruary 6, 2003, the Company completed an exchange offer to distribute itsmajority interest in Cognizant Technology Solutions (“CTS”) in a transactionqualifying as tax free under Section 355 of the IRC.  If, contrary to expectations, the CTS distributionwere not to qualify as tax free under Section 355, then the Company wouldgenerally be liable for the resulting corporate tax.  However, pursuant to the distributionagreement entered into between theCompany and CTS in connection with the distribution, CTS agreed to indemnify the Company in the event the transaction istaxable as a result of a breach of certain representations made by CTS, subjectto certain exceptions.  In the opinion ofmanagement and based on the opinion of tax counsel, McDermott, Will &Emery, it is not probable, but may be reasonably possible, that the Company will incur liability for this matter;therefore, the Company has not recorded reserves for this matter.  The Companyestimates that the aggregate tax liability in this regard would not exceed$215,725.

*Contingent Consideration.*   Underthe terms of the purchase agreements related to acquisitions made from 2001through 2006, the Company may be required to pay additional amounts ascontingent consideration based on the achievement of certain targets during2003 through 2008.  Substantially all ofthese additional payments will be recorded as goodwill in accordance withEmerging Issues Task Force Issue (“EITF”) No. 95-8, “Accounting for ContingentConsideration Paid to the Shareholders of an Acquired Enterprise in a PurchaseBusiness Combination.”  As of September30, 2006, approximately $30,000 had been earned under these contingencies.  Based on current estimates, managementexpects that additional contingent payments under these agreements may totalapproximately $36,000.  It is expectedthat these contingent payments will be resolved within a specified time periodafter the end of each respective calendar year from 2006 through 2008.

*Other Tax Contingencies.*   Inaddition to the tax items discussed above, the Company has net tax reserves ofapproximately $17,000 that relate to various positions it has taken on taxreturns filed in numerous countries over the last several years.  These reserves represent the Company’s bestestimate of the probable liability should the tax return positions bechallenged by the relevant tax authorities. While the amount is material in the aggregate, no individual item ismaterial and no single event will have a material impact related to thesereserves.  See Note 12 for additional taxrelated matters.

**Note 9.   Stock-BasedCompensation**

Effective January 1, 2006, the Company adopted SFAS123R.  The Company elected to use themodified prospective transition method, therefore, prior period results werenot retrospectively adjusted. Prior to the adoption of SFAS 123R, stock-basedcompensation expense related to stock options was not recognized in the resultsof operations if the exercise price was at least equal to the market value ofthe Common Stock on the grant date, in accordance with APB 25.  As a result, the recognition of stock-basedcompensation expense was generally limited to the expense attributed torestricted stock units and stock option modifications.

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SFAS 123R requires allshare-based payments to employees, including grants of employee stock options,to be recognized as compensation expense over the requisite service period(generally the vesting period) in the consolidated financial statements based ontheir fair values. For options with graded vesting, the Company values thestock option grants and recognizes compensation expense as if each vestingportion of the award was part of the total award and not a separate award.Under the modified prospective method, awards that were granted, modified, orsettled on or after January 1, 2006 are measured and accounted for inaccordance with SFAS 123R. Unvested equity-classified awards that were grantedprior to January 1, 2006 will continue to be accounted for in accordance withthe pro forma provisions of SFAS 123, except that all awards are recognized inthe results of operations over the remaining vesting periods. SFAS 123Rrequires the recognition of stock-based compensation for the number of awardsthat are ultimately expected to vest. As a result, for most awards, recognizedstock compensation was reduced for estimated forfeitures prior to vestingprimarily based on historical annual forfeiture rates. Estimated forfeitureswill be reassessed in subsequent periods and may change based on new facts andcircumstances. Prior to January 1, 2006, forfeitures were estimated for stockoption grants for purposes of required pro forma stock compensation disclosuresand were recognized as they occurred for restricted stock grants. In addition,realized tax benefits in excess of amounts recognized in the CondensedConsolidated Statements of Income (Unaudited) are recognized as a financingactivity rather than an operating activity subsequent to SFAS 123R adoption forpurposes of the Condensed Consolidated Statement of Cash Flows (Unaudited).

TheCompany maintains four Stock Incentive Plans, which provide for the grant ofstock options, restricted stock and restricted stock units to eligibleemployees and Non-Employee Directors.  AtSeptember 30, 2006, there were 59,279 shares of Common Stock reserved forissuance under all of the Company’s stock plans, of which 13,195 shares arestill available for future grants. Common Stock reserved for issuance includes 18,448 shares from the 2000Stock Incentive Plan, which the Board of Directors approved during 2000, 36,484shares from the 1998 Employees’ Stock Incentive Plan, 29,784 of which wasapproved by the shareholders during 1998 and 6,700 of which were approved bythe shareholders in May 2006, 3,437 shares from the 1998 Employees’ StockPurchase Plan, which was approved by the shareholders during 1998, and 910shares from the 1998 Non-Employee Directors’ Stock Incentive Plan, 410 sharesof which were approved by the shareholders during 1998 and an additional 500shares of which were approved by the shareholders in May 2003.  Historically, stock options have been granted to broad groups ofemployees on a discretionary basis. Beginning in fiscal 2006, employees aregenerally eligible to receive restricted stock units with a service conditionof four years instead of stock options with a service condition of threeyears.  Certain senior employees willcontinue to be eligible to receive restricted stock units which contain bothperformance and service conditions.

TheEmployee Stock PurchasePlan (“ESPP”) was originally adopted in 1998 with a quarterly purchase periodand a price equal to the lesser of 90% of the fair market value on the firsttrading day or the last trading day of the period.  The Company amended its Employee StockPurchase Plan in 2001 to allow employees to purchase a limited amount of CommonStock at the end of each six-month period at a price equal to the lesser of 85%of fair market value on (a) the first trading day of the period, or (b) thelast trading day of the period. Beginning with the first purchase of 2006, the plan has been amended toallow employees to purchase a limited amount of Common Stock at the end of eachsix-month period at a price equal to 85% of the fair market value on the lasttrading day of the period.  

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Fair marketvalue is defined as the average of the high and low prices of the shares on therelevant day.  The 15% discount makes the plan compensatoryunder SFAS 123R.

Stock options are grantedwith an exercise price equal to the fair market value of a share of CommonStock on the date of grant.  Stockoptions expire within five, seven, or ten years and generallyvest ratably over three years for employees and one to three years fornon-employee directors.  The vesting period and option term forgrants to employees is at the discretion of the Compensation and BenefitsCommittee of the Board of Directors.

Restricted stock units aregranted at a price equal to the fair market value of a share of Common Stock onthe date of grant.  Restricted stockunits with service vesting generally vest ratably over three to four years. Thevesting period for grants to employees is at the discretion of the Compensationand Benefits Committee of the Board of Directors.

Participation in thePerformance Restricted Stock Units program (“PERS”), under which performancerestricted stock units are granted, is limited to key senior executives.  The target award is denominated in cash andis equal to each eligible executive’s annual incentive target.  These awards are subject to fair valueadjustments for any changes in the underlying market value of our Common Stockuntil the end of the performance period. The performance period is one year during which performance against theestablished financial criterion is measured. The actual award is quantified and granted to eligible employees inrestricted stock units at the February Compensation and Benefits Committeeof the Board of Directorsmeeting in the year following the one year performance period.  Upon grant, there is an additional two yearcliff vest service requirement which begins on the first business day of theyear following the performance period. If performance criterion is not met, the award is forfeited and norestricted stock units are granted.  Thefinal value of the restricted stock units granted are at fair market valuebased on the average high/low stock price for the last 20 business days of theperformance period in accordance with the PERS plan document.

Participation in the Long Term Incentive program (“LTI”), under whichperformance restricted stock units are granted, is at the CEO’s discretion withparticipants varying from year to year. The target awards, by person, are approved by the Compensation andBenefits Committee of the Company’s Board of Directors prior to the end of thefirst quarter of the performance cycle. The target award is denominated 50% in cash, or in non-restricted sharesof stock at the fair market value of IMS Common Stock on the day of grant,which are payable after the two year performance period.  The remaining 50% is payable in restrictedstock units, which are granted after the two year performance period with anadditional two year cliff vest service requirement.  A restricted stock unit, if earned, may onlybe settled by issuance or delivery of a share. These awards are subject to fair value adjustments for any changes inthe underlying market value of our Common Stock until the end of the two yearperformance period.  At the end of theperformance period, achievement against the established financial criterion ismeasured and the actual payout percentage is quantified and approved by theCompensation and Benefits Committee of the Board of Directors followingapproval of year end results by the Board of Directors.  If performance criterion is not met, theaward is forfeited and no restricted stock units are granted, or cashpaid.  The final value of the restrictedstock units granted are at fair market value based on the average high/lowstock price for the last 20 business days of the performance period inaccordance with the LTI plan document.

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The following table summarizes activity of stock options for theperiods indicated:
| ** **                                                   | ** ** | **Shares** | ** ** | **Weighted   Average   Exercise Price  Per Share** | ** ** | **Weighted   Average   Remaining   Term** | ** ** | **Aggregate   Intrinsic   Value** | ** ** |
|--------------------------------------------------------------|------------|------------|------------|------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------|------------|
| Options  Outstanding, December 31, 2003                 |       | 37,021     |       | $                                                                      | 20.89      |                                                     |       |                                        |       |   |
| Granted                                                      |       | 6,003      |       | $                                                                      | 23.90      |                                                     |       |                                        |       |   |
| Exercised                                                    |       | (5,598     | )          | $                                                                      | 17.25      |                                                     |       |                                        |       |   |
| Forfeited                                                    |       | (1,020     | )          | $                                                                      | 18.89      |                                                     |       |                                        |       |   |
| Cancelled                                                    |       | (906       | )          | $                                                                      | 27.50      |                                                     |       |                                        |       |   |
| Options  Outstanding, December 31, 2004                 |       | 35,500     |       | $                                                                      | 21.86      |                                                     |       |                                        |       |   |
| Granted                                                      |       | 4,813      |       | $                                                                      | 24.12      |                                                     |       |                                        |       |   |
| Exercised                                                    |       | (8,726     | )          | $                                                                      | 18.97      |                                                     |       |                                        |       |   |
| Forfeited                                                    |       | (575       | )          | $                                                                      | 20.63      |                                                     |       |                                        |       |   |
| Cancelled                                                    |       | (1,028     | )          | $                                                                      | 26.93      |                                                     |       |                                        |       |   |
| Options  Outstanding, December 31, 2005                 |       | 29,984     |       | $                                                                      | 22.91      |                                                     |       |                                        |       |   |
| Granted                                                      |       | 11         |       | $                                                                      | 24.54      |                                                     |       |                                        |       |   |
| Exercised                                                    |       | (4,044     | )          | $                                                                      | 19.13      |                                                     |       |                                        |       |   |
| Forfeited                                                    |       | (618       | )          | $                                                                      | 23.49      |                                                     |       |                                        |       |   |
| Cancelled                                                    |       | (800       | )          | $                                                                      | 28.36      |                                                     |       |                                        |       |   |
| Options  Outstanding, September 30, 2006                     |       | 24,533     |       | $                                                                      | 23.35      |                                                     | 3.52       |                                        | $          | 99,914 |   |
| Options Vested  or Expected to Vest, September 30, 2006 |       | 24,186     |       | $                                                                      | 23.34      |                                                     | 3.51       |                                        | $          | 98,956 |   |
| Exercisable, September  30, 2006                             |       | 19,991     |       | $                                                                      | 23.19      |                                                     | 3.14       |                                        | $          | 87,202 |   |

 

The intrinsic value for stock options is calculatedbased on the exercise price of the underlying awards and the market price of ourCommon Stock as of the end of the period. As of September 30, 2006,approximately $21,848 of unrecognized stock compensation related to unvestedstock options (net of estimated forfeitures) is expected to be recognized overa weighted-average period of 1.19 years. As of September 30, 2005, approximately $52,061 of unrecognized stockcompensation related to unvested stock options (net of estimated forfeitures)was expected to be recognized over a weighted-average period of 1.81years.  Proceeds received from theexercise of stock options were $36,016 and $77,364 for the three and ninemonths ended September 30, 2006, respectively, and $114,806 and $162,310 forthe three and nine months ended September 30, 2005, respectively.  The intrinsic value of stock options thatwere exercised was $14,724 and $31,489 for the three and nine months endedSeptember 30, 2006, respectively, the majority of which is currentlydeductible for tax purposes, and $46,294 and $62,390 for the three and ninemonths ended September 30, 2005, respectively.

The fair value of stockoptions was estimated using the Black-Scholes option-pricing model. This modelrequires the input of subjective assumptions that will usually have asignificant impact on the fair value estimate. The assumptions for the currentperiod grants were developed based on SFAS 123R and SEC guidance contained inSAB 107. The following table summarizes the assumptions used to compute theweighted average fair value of stock option grants:

19

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| ** **                                      | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                      | ** ** | **2006 (1)**                     | ** ** | **2005**                             | ** ** | **2006** | ** ** | **2005** | ** ** |
| Dividend Yield                                  |       | n/a                                   |       | 0.3                                  | %          | 0.5 | % | 0.3 | % |
| Weighted Average  Volatility                    |       | n/a                                   |       | 29.4                                 | %          | 29.4 | % | 29.6 | % |
| Risk Free  Interest Rate                        |       | n/a                                   |       | 3.93                                 | %          | 4.49 | % | 3.87 | % |
| Expected Term                                   |       | n/a                                   |       | 4.39 years                           |       | 4.39 years |   | 4.39 years |   |
| Weighted Average  Fair Value of Options Granted |       | n/a                                   |       | $                                    | 8.37       |   | $ | 7.82 |   | $ | 7.45 |   |
| Weighted Average Grant  Price                   |       | n/a                                   |       | $                                    | 27.09      |   | $ | 24.54 |   | $ | 24.11 |   |

----

*(1)**          Thecompany did not grant stock options during the three months ended September 30,2006.*

·                  The dividend yield is equal to the annualizeddividend divided by the closing stock price on the date of payment.  The increase in the dividend yield from 2005to 2006 was due to a $0.01 per share increase in the quarterly dividendpayment.  An increase in the dividendyield will decrease stock compensation expense.

·                  The weighted average volatility for thecurrent periods was developed using historical volatility for periods equal tothe expected life of the options. An increase in the weighted averagevolatility assumption will increase stock compensation expense.

·                  The risk-free interest rate was developedusing the U.S. Treasury yield curve for periods equal to the expected life ofthe options on the grant date. An increase in the risk-free interest rate willincrease stock compensation expense.

·                  The expected term for the current period andprior period grants was estimated by reviewing the historical exerciseexperience of a fully vested material grant that was close to maturity.  An increase in the expected holding periodwill increase stock compensation expense.

The following tablesummarizes activity of restricted stock units with service conditions:

|                               | ** ** | **Shares** | ** ** | **Weighted   Average   Grant Date  Fair Value** | ** ** | **Aggregate   Intrinsic   Value** | ** ** |
|-------------------------------|------------|------------|------------|---------------------------------------------------------------------|------------|---------------------------------------------|------------|
| Unvested,  December 31, 2003  |       | 411        |       | $                                                                   | 19.65      |                                        |       |   |
| Granted                       |       | 38         |       | $                                                                   | 24.39      |                                        |       |   |
| Vested                        |       | (29        | )          | $                                                                   | 20.79      |                                        |       |   |
| Forfeited                     |       | (10        | )          | $                                                                   | 19.37      |                                        |       |   |
| Unvested,  December 31, 2004  |       | 410        |       | $                                                                   | 20.01      |                                        |       |   |
| Granted                       |       | 153        |       | $                                                                   | 24.46      |                                        |       |   |
| Vested                        |       | (119       | )          | $                                                                   | 24.41      |                                        |       |   |
| Forfeited                     |       | 0          |       | $                                                                   | 0.00       |                                        |       |   |
| Unvested,  December 31, 2005  |       | 444        |       | $                                                                   | 20.30      |                                        |       |   |
| Granted                       |       | 1,294      |       | $                                                                   | 26.04      |                                        |       |   |
| Vested                        |       | (211       | )          | $                                                                   | 22.02      |                                        |       |   |
| Forfeited                     |       | (39        | )          | $                                                                   | 25.68      |                                        |       |   |
| Unvested,  September 30, 2006 |       | 1,488      |       | $                                                                   | 24.90      |                                        | $          | 39,907 |   |
|                               |            |            |            |                                                                     |            |                                             |            |  |  |

 

The intrinsic value for restricted stock units iscalculated based on the market price of our Common Stock as of the end of theperiod.  As of September 30, 2006,approximately $23,197 of unrecognized 

20

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stock compensationexpense related to unvested restricted stock units (net of estimatedforfeitures) is expected to be recognized over a weighted-average period of3.21 years. As of September 30, 2005, approximately $2,574 of unrecognizedstock compensation related to unvested restricted stock units was expected tobe recognized over a weighted-average period of 2.18 years.  The total fair value of restricted stockunits with service conditions which vested during the periods ended September30, 2006 and 2005 was $4,321 and $2,802, respectively.

The following tablesummarizes activity of restricted stock units with performance conditions.
| ** **                    | ** ** | **Shares** | ** ** | **Weighted   Average   Grant Date  Fair Value** | ** ** | **Aggregate   Intrinsic  Value** | ** ** |
|-------------------------------|------------|------------|------------|---------------------------------------------------------------------|------------|---------------------------------------|------------|
| Unvested,  December 31, 2003  |       | 106        |       | $                                                                   | 17.82      |                                  |       |   |
| Granted                       |       | 156        |       | $                                                                   | 23.19      |                                  |       |   |
| Vested                        |       | 0          |       | $                                                                   | 0.00       |                                  |       |   |
| Forfeited                     |       | (21        | )          | $                                                                   | 21.63      |                                  |       |   |
| Unvested,  December 31, 2004  |       | 241        |       | $                                                                   | 20.96      |                                  |       |   |
| Granted                       |       | 194        |       | $                                                                   | 20.62      |                                  |       |   |
| Vested                        |       | (53        | )          | $                                                                   | 18.97      |                                  |       |   |
| Forfeited                     |       | (7         | )          | $                                                                   | 17.72      |                                  |       |   |
| Unvested,  December 31, 2005  |       | 375        |       | $                                                                   | 21.12      |                                  |       |   |
| Granted                       |       | 154        |       | $                                                                   | 24.53      |                                  |       |   |
| Vested                        |       | (145       | )          | $                                                                   | 23.18      |                                  |       |   |
| Forfeited                     |       | (28        | )          | $                                                                   | 24.08      |                                  |       |   |
| Unvested,  September 30, 2006 |       | 356        |       | $                                                                   | 21.52      |                                  | $          | 9,539 |   |
|                               |            |            |            |                                                                     |            |                                       |            |  |  |

 

The intrinsic value for restricted stock units iscalculated based on the market price of our Common Stock as of the end of theperiod.  As of September 30, 2006,approximately $1,733 of unrecognized stock compensation expense related tounvested restricted stock units (net of estimated forfeitures) is expected tobe recognized over a weighted-average period of 0.76 years. As of September 30,2005, approximately $2,793 of unrecognized stock compensation related tounvested restricted stock units was expected to be recognized over aweighted-average period of 0.83 years. The total fair value of restricted stock units with a performancecondition which vested during the periods ended September 30, 2006 and 2005 was$4,630 and $1,231, respectively.

The following tablesummarizes the pro forma effect of stock-based compensation as if the fairvalue method of accounting for stock compensation had been applied:

21

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| ** **          | ** **                                                                                                         | **Three months   ended  September 30,  2005** | ** ** | **Nine months  ended  September 30,  2005** | ** **  |
|---------------------|--------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------|------------|-------------------------------------------------------|-------------|
| Net Income:         | As reported                                                                                                        | ** **                                                   | **$**      | **71,140**                                            | ** **  | **$** | **194,662** | ** ** |
|                | Add:  Stock-based  employee compensation expense included in reported net income, net of tax                  | ** **                                                   | **1,059**  | ** **                                            | **2,991**   | ** ** |
|                | Deduct:  Total  stock-based employee compensation expense under fair value method for all  awards, net of tax | ** **                                                   | **(6,884** | **)**                                                 | **(21,254** | **)** |
|                | Pro forma                                                                                                          | ** **                                                   | **$**      | **65,315**                                            | ** **  | **$** | **176,399** | ** ** |
| Earnings Per Share: | ** **                                                                                                         | ** **                                                   | ** ** | ** **                                            | ** **  |
| Basic     | As reported                                                                                                        | ** **                                                   | **$**      | **0.31**                                              | ** **  | **$** | **0.85** | ** ** |
|                | Pro forma                                                                                                          | ** **                                                   | **$**      | **0.28**                                              | ** **  | **$** | **0.77** | ** ** |
|                |                                                                                                               | ** **                                                   | ** ** | ** **                                            | ** **  | ** ** |
| Diluted             |                                                                                                               |                                                         |       |                                                  |        |   |
|                | As reported                                                                                                        | ** **                                                   | **$**      | **0.30**                                              | ** **  | **$** | **0.84** | ** ** |
|                | Pro forma                                                                                                          | ** **                                                   | **$**      | **0.28**                                              | ** **  | **$** | **0.76** | ** ** |

 

The following tablesummarizes the components and classification of stock-based compensationexpense:
| ** **                                       | ** ** | **Three Months Ended  September 30,   2006** | ** ** | **Nine Months Ended  September 30,   2006** | ** ** |
|--------------------------------------------------|------------|------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| Stock Options                                    |       | $                                                                | 5,693      |                                                            | $          | 24,316 |   |
| Restricted Stock  Units                          |       | $                                                                | 2,774      |                                                            | $          | 7,991 |   |
| Employee Stock  Purchase Plan                    |       | $                                                                | 166        |                                                            | $          | 680 |   |
| Total  Stock-Based Compensation Expense          | ** ** | **$**                                                            | **8,633**  | ** **                                                      | **$**      | **32,987** | ** ** |
|                                             |       |                                                             |       |                                                            |       |
| Operating Costs                                  |       | $                                                                | 1,449      |                                                            | $          | 5,073 |   |
| Selling and  Administrative Expenses             |       | $                                                                | 7,184      |                                                            | $          | 27,914 |   |
| Total  Stock-Based Compensation Expense          | ** ** | **$**                                                            | **8,633**  | ** **                                                      | **$**      | **32,987** | ** ** |
| Tax Benefit on  Stock-Based Compensation Expense | ** ** | **$**                                                            | **2,583**  | ** **                                                      | **$**      | **10,054** | ** ** |

 

The Company satisfies stock option exercises, vested restrictedstock units and ESPP shares with repurchased treasury stock on hand.  For further information regarding the Company’sshare repurchase programs and shares available for repurchase under suchprograms, see Note 13.

22

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**Note 10.   FinancialInstruments**

*ForeignExchange Risk Management*

The Company transacts business in more than 100countries and is subject to risks associated with changing foreign exchangerates.  The Company’s objective is toreduce earnings and cash flow volatility associated with foreign exchange ratechanges.  Accordingly, the Company entersinto foreign currency forward contracts to minimize the impact of foreignexchange movements on net income and non-US Dollar anticipated royalties, andon the value of non-functional currency assets and liabilities.

It is the Company’s policy to enter into foreigncurrency transactions only to the extent necessary to meet its objectives asstated above.  The Company does not enterinto foreign currency transactions for investment or speculative purposes.  The principal currencies hedged are the Euro,the Japanese Yen, the British Pound, the Swiss Franc and the Canadian Dollar.

The impact of foreign exchange risk managementactivities on pre-tax income in the three and nine months ended September 30,2006 was a net gain of $502 and a net loss of $4,030, respectively and netgains in the three and nine months ended September 30, 2005 of $8,611 and$29,443, respectively.  In addition, atSeptember 30, 2006, the Company had approximately $443,530 in foreign exchangeforward contracts outstanding with various expiration dates through August 2007relating to net income and non-US Dollar anticipated royalties andnon-functional currency assets and liabilities. Foreign exchange forward contracts are recorded at estimated fairvalue.  The estimated fair values of theforward contracts are based on quoted market prices.

Unrealized and realized gains and losses on thecontracts hedging net income and non-functional currency assets and liabilitiesdo not qualify for hedge accounting in accordance with SFAS 133 “Accounting forDerivative Instruments and Hedging Activities,” as amended by SFAS No. 138, “Accountingfor Certain Derivative Instruments and Certain Hedging Activities,” and SFASNo. 149, “Amendment of Statement 133 on Derivative Instruments and HedgingActivities,” (collectively, “SFAS No. 133”), and therefore are not deferred and are included in the CondensedConsolidated Statements of Income (Unaudited) in Other income, net.

Unrealized gains and losses on the contracts hedgingnon-US Dollar anticipated royalties qualify for hedge accounting under SFAS No.133 and are therefore deferred and included in OCI “Other Comprehensive Income.”

*FairValue of Financial Instruments*

At September 30, 2006, the Company’s financialinstruments included cash, cash equivalents, receivables, accounts payable andlong-term debt.  At September 30, 2006,the fair values of cash, cash equivalents, receivables and accounts payableapproximated carrying values due to the short-term nature of theseinstruments.  At September 30, 2006, thefair value of long-term debt approximated carrying value.

23

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*CreditConcentrations*

The Company continually monitors its positions with,and the credit quality of, the financial institutions that are counterpartiesto its financial instruments and does not anticipate non-performance by thecounterparties.  The Company would notrealize a material loss as of September 30, 2006 in the event ofnon-performance by any one counterparty. The Company enters into transactions only with financial institutioncounterparties that have a credit rating of A or better.  In addition, the Company limits the amount ofcredit exposure with any one institution.

The Company maintains accounts receivable balances($324,331 and $297,302, net of allowances, at September 30, 2006 and December31, 2005, respectively), principally from customers in the pharmaceuticalindustry.  The Company’s tradereceivables do not represent significant concentrations of credit risk atSeptember 30, 2006 due to the high quality of its customers and theirdispersion across many geographic areas.

*Linesof Credit*

The following table summarizes the Company’s long-termdebt at September 30, 2006 and December 31, 2005:
| ** **                                                                                                                                       | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| 4.6% Private  Placement Note, principal payment of $150,000 due January 2008, net of  interest rate swaps of $(2,626) and $(2,710), respectively |       | $                            | 147,374    |                        | $          | 147,290 |   |
|                                                                                                                                             |       |                         |       |                        |       |
| 5.55% Private  Placement Notes, principal payment of $150,000 due April 2016                                                                     |       | 150,000                      |       | —                      |       |
|                                                                                                                                             |       |                         |       |                        |       |
| 1.70% Private  Placement Note, principal payment of 34,395,000 Japanese Yen due January 2013                                                     |       | 293,600                      |       | —                      |       |
|                                                                                                                                             |       |                         |       |                        |       |
| Revolving Credit  Facility:                                                                                                                      |       |                         |       |                        |       |
| Japanese Yen denominated borrowings at average  floating rates of approximately 0.70%                                                            |       | 76,653                       |       | 371,924                     |       |
| Swiss Franc denominated borrowings at average  floating rates of approximately 2.02%                                                             |       | 74,413                       |       | 92,217                      |       |
| U.S. Dollar denominated borrowings at average  floating rates of approximately 5.63%                                                             |       | 313,200                      |       | —                      |       |
|                                                                                                                                             |       |                         |       |                        |       |
| Bank Term Loan,  principal payment of $50,000 due June, 2009 at average floating rate of  approximately 5.58%                                    |       | 50,000                       |       | —                      |       |
|                                                                                                                                             |       |                         |       |                        |       |
| Total Long-Term Debt                                                                                                                             |       | $                            | 1,105,240  |                        | $          | 611,431 |   |

 

In July 2006, the Company entered into a $1,000,000revolving credit facility with a syndicate of 12 banks (“Revolving CreditFacility”) replacing its existing $700,000 Amended and Restated Facility (seebelow).  The terms of the RevolvingCredit Facility extended the maturity of the facility in its entirety to a termof five years, maturing July 2011, reduced the borrowing margins, and increasedsubsidiary borrowing limits.  Totalborrowings under the Revolving Credit Facility were $464,266 and 

24

----

 

$464,141 at September 30,2006 and December 31, 2005, respectively, all of which were classified aslong-term.  In April 2004, the Companyentered into a $700,000 revolving credit facility with a syndicate of 12 banks(the “Unsecured Facility”).  TheUnsecured Facility replaced the Company’s lines of credit with several domesticand international banks.  On March 9,2005, the Company renegotiated with the syndicate of 12 banks to amend andrestate the Unsecured Facility (the “Amended and Restated Facility”).  The terms of the Amended and RestatedFacility extended the maturity of the facility in its entirety to a term offive years, maturing March 2010, reduced the borrowing margins and increasedsubsidiary borrowing limits.

The Company defines long-term lines as those where the lines arenon-cancellable for more than 365 days from the balance sheet date by thefinancial institutions except for specified, objectively measurable violationsof the provisions of the agreement.  Ingeneral, rates for borrowing under the Revolving Credit Facility are LIBOR plus30 basis points and can vary based on the Company’s Debt to EBITDA ratio.  The weighted average interest rates for theCompany’s lines were 4.37% and 0.62% at September 30, 2006 and December 31, 2005,respectively.  In addition, the Companyis required to pay a commitment fee on any unused portion of the facilities of0.075%.  At September 30, 2006, theCompany had approximately $535,734 available under its existing bank creditfacilities.

In June 2006, the Company closed a $50,000three year term loan with a bank.  Theterm loan allows the Company to borrow at a floating rate with a lowerborrowing margin than the Company’s revolving credit facility, and provides theCompany with an option to extend the term up to an additional two years.  The Company used the proceeds to refinanceexisting debt borrowed under the revolving credit facility.

In April 2006, the Companyclosed a private placement transaction pursuant to which it issued $150,000 often-year notes to two highly rated insurance companies at a fixed rate of 5.55%.  The Company used theproceeds to refinance existing debt of $150,000 drawn under a short termcredit agreement with a bank in January 2006.

In January 2006, the Company closed a privateplacement transaction pursuant to which its Japanese subsidiary issued34,395,000 Japanese Yen seven-year debt (equal to $300,000 at date of issuance)to several highly rated insurance companies at a fixed rate of 1.70%.  TheCompany used the proceeds to refinance existing debt in Japan borrowed underthe Company’s Amended and Restated Facility.

In January 2003, the Company closed a private placement transactionpursuant to which it issued $150,000 of five-year debt to several highly ratedinsurance companies at a fixed rate of 4.60%. The Company used the proceeds to pay down short-term debt.  The Company also swapped $100,000 of itsfixed rate debt to floating rate based on six-month LIBOR plus a margin ofapproximately 107 basis points.  TheCompany accounted for these swaps as fair value hedges under the provisions ofSFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.”  The Company determined the fair values basedon estimated prices quoted by financial institutions.  The fair values of these swaps were $(2,626)and $(2,710) as of September 30, 2006 and December 31, 2005, respectively.

25

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In March and April2002, the Company entered into interest rate swaps on a portion of its variablerate debt portfolio.  These swaps maturedin March 2005 and April 2006.  The Companyaccounted for the interest rate swaps as cash flow hedges and recorded anychanges in fair value in Other Comprehensive Income.  The Company determined the fair values basedon estimated prices quoted by financial institutions.  The fair values of these swaps were $(100) asof December 31, 2005.

The Company’s financingarrangements provide for certain covenants and events of default customary forsimilar instruments, including in the case of its main bank arrangements,the  private placement transactions, andthe term loan, covenants to maintain specific ratios of consolidated totalindebtedness to EBITDA and of EBITDA to certain fixed charges.  At September 30, 2006, the Company was incompliance with these financial debt covenants.

**Note 11.   Pension and PostretirementBenefits**

Thefollowing table provides the Company’s expense associated with pension benefitsthat are accounted for under SFAS No. 87, “Employers’ Accounting for Pensions,”and postretirement benefits that are accounted for under SFAS No. 106, “Employers’Accounting for Postretirement Benefits Other Than Pensions.”  For a complete description of the Company’spension and postretirement benefits, refer to Note 12 of the Company’s 2005Annual Report on Form 10-K as filed with the SEC.
| **Components of Net Periodic Benefit Cost for the** | ** ** | **Pension Benefits** | ** ** | **Other Benefits** | ** ** |
|----------------------------------------------------------------------------------------|------------|---------------------------|------------|-------------------------|------------|
| **Three Months Ended September 30,**                               | ** ** | **2006**                  | ** ** | **2005**                | ** ** | **2006** | ** ** | **2005** | ** ** |
| Service cost                                                                           |       | $                         | 3,527      |                    | $          | 2,456 |   | $ | (3 | ) | $ | 8 |   |
| Interest cost                                                                          |       | 4,027                     |       | 3,591                   |       | 114 |   | 191 |   |
| Expected return on plan  assets                                                        |       | (6,513                    | )          | (5,466                  | )          | 0 |   | 0 |   |
| Amortization of prior  service cost (credit)                                           |       | (45                       | )          | (55                     | )          | (9 | ) | (247 | ) |
| Amortization of  transition obligation                                                 |       | (1                        | )          | (1                      | )          | 0 |   | 0 |   |
| Amortization of net  loss (gain)                                                       |       | 1,197                     |       | 771                     |       | (73 | ) | 119 |   |
| Net periodic benefit  cost                                                             |       | $                         | 2,192      |                    | $          | 1,296 |   | $ | 29 |   | $ | 71 |   |

 
| **Components of Net Periodic Benefit Cost for the** | ** ** | **Pension Benefits** | ** ** | **Other Benefits** | ** ** |
|----------------------------------------------------------------------------------------|------------|---------------------------|------------|-------------------------|------------|
| **Nine Months Ended September 30,**                                | ** ** | **2006**                  | ** ** | **2005**                | ** ** | **2006** | ** ** | **2005** | ** ** |
| Service cost                                                                           |       | $                         | 10,590     |                    | $          | 7,073 |   | $ | 17 |   | $ | 44 |   |
| Interest cost                                                                          |       | 11,916                    |       | 10,857                  |       | 500 |   | 525 |   |
| Expected return on plan  assets                                                        |       | (19,304                   | )          | (16,615                 | )          | 0 |   | 0 |   |
| Amortization of prior  service cost (credit)                                           |       | (134                      | )          | (166                    | )          | (159 | ) | (741 | ) |
| Amortization of  transition obligation                                                 |       | (3                        | )          | (3                      | )          | 0 |   | 0 |   |
| Amortization of net  loss                                                              |       | 3,484                     |       | 2,222                   |       | 231 |   | 245 |   |
| Net periodic benefit cost                                                              |       | $                         | 6,549      |                    | $          | 3,368 |   | $ | 589 |   | $ | 73 |   |

**Note12.   Income Taxes**

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

For the three months ended September 30, 2006, the Company’s effectivetax rate was reduced by approximately $4,500 related to a non-U.S. auditsettlement.  For the nine months ended September 30, 2006,the Company’s effective tax rate was reduced due to a favorable U.S.partnership audit

 

26

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settlement ofapproximately $69,200 for the tax years 1998 through 2003 and a favorable U.S.corporate audit settlement of approximately $17,600 for the tax years 2000 through 2003.  Also in the first nine months of 2006,approximately $21,400 of tax expense was recorded related to a reorganizationof several of the Company’s subsidiaries. Further, approximately $24,800 of tax expense was recorded in the firstquarter of 2006 related to disputes between the Company and NMR, on the onehand, and Donnelley and certain of its former affiliates on the other hand, asto proper interpretation of, and allocation of tax liabilities under, the 1996Spin-Off agreements (see Note 8).

Forthe nine months ended September 30, 2005, the Company’s effective tax rate wasreduced due to a favorable non-U.S. audit settlement of approximately $29,300.  For the nine months ended September 30, 2005,the effective tax rate was also impacted by $39,600 of tax expense related tothe decision to repatriate approximately $647,000 of foreign earnings back tothe U.S. during 2005 under the American Jobs Creation Act of 2004 (“AJCA”).  In the first quarter of 2005, $67,100 of taxexpense was recorded related to the AJCA of which, $24,300 and $3,200 werereversed in the second and third quarters of 2005, respectively, as a result ofa technical correction passed by Congress to the AJCA.

The Company accrues for tax loss contingencies in the period in whichthey are probable and estimable in accordance with SFAS No. 5, “Accounting forContingencies.”  These reserves areincluded in current income taxes payable to the extent the related amounts areexpected to be paid within the next twelve-month period.  If the Company expects the liability to besettled beyond one year, these amounts are classified as a long-term liability.

**Note 13.   IMS Health Capital Stock**

The Company’s sharerepurchase program has been developed to buy opportunistically, when theCompany believes that its share price provides it with an attractive use of itscash flow and debt capacity.

On January 25, 2006, theBoard of Directors authorized a stock repurchase program to buy up to 30,000shares.  As of September 30, 2006, 6,444shares remained available for repurchase under the January 2006 program.

On November 16, 2005, theBoard of Directors authorized a stock repurchase program to buy up to 10,000shares.  This program was completed inFebruary 2006 at a total cost of $251,619.

On December 14, 2004, theBoard of Directors authorized a stock repurchase program to buy up to 10,000shares.  This program was completed inJanuary 2006 at a total cost of $242,680.

On February 10, 2004, theBoard of Directors authorized a stock repurchase program to buy up to 10,000shares.  This program was completed inJanuary 2005 at a total cost of $232,770.

During the first ninemonths of 2006, the Company repurchased 33,931 shares of outstanding CommonStock under these programs at a total cost of $880,407, including therepurchase of 25,000 shares on January 30, 2006 pursuant to an accelerated sharerepurchase program (“ASR”).  During the

 

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nine months endedSeptember 30, 2005, the Company repurchased approximately 6,213 shares ofoutstanding Common Stock at a total cost of approximately $147,945 under theseprograms.

Shares acquired throughthe Company’s repurchase programs described above are open-market purchases orprivately negotiated transactions in compliance with Securities and ExchangeCommission Rule 10b-18, with the exception of purchases pursuant to the ASR.

Under the Company’sRestated Certificate of Incorporation as amended, the Company has authority toissue 820,000 shares with a par value of $.01 per share of which 800,000represent shares of Common Stock, 10,000 represent shares of preferred stockand 10,000 represent shares of Series Common Stock.  The preferred and series Common Stock can beissued with varying terms, as determined by the Board of Directors.

The Company paidcash dividends of $0.03 and $0.02 per share which amounted to $6,150 and $4,615during the three months ended September 30, 2006 and 2005, respectively.  The Company paid cash dividends of $0.09 and$0.06 per share which amounted to $18,292 and $13,734 during the nine monthsended September 30, 2006 and 2005, respectively.  The payments and level of cash dividends madeby the Company are subject to the discretion of the Board of Directors.

**Note 14.   Comprehensive Income**

The following table sets forth the components ofcomprehensive income, net of income tax expense:
| ** **                                          | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                          | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Net Income**                                      | ** ** | **$**                                                | **69,264** |                                                | $          | 71,140 | ** ** | **$** | **250,044** |   | $ | 194,662 |   |
| Other comprehensive  income, net of taxes:          | ** ** | ** **                                           |       |                                                | ** ** | ** ** |   |   |   |
| Unrealized  (losses) gains on:                      | ** ** | ** **                                           |       |                                                | ** ** | ** ** |   |   |   |
| Available-for-sale  equity securities               | ** ** | **168**                                              |       | 37                                                  | ** ** | **50** |   | (40 | ) |
| Tax benefit  (provision) on above                   | ** ** | **(59**                                              | **)**      | (13                                                 | )          | **(18** | **)** | 14 |   |
| Change in  unrealized (losses) gains on investments | ** ** | **109**                                              |       | 24                                                  | ** ** | **32** |   | (26 | ) |
| Foreign currency  translation gains (losses)        | ** ** | **14,517**                                           |       | (9,868                                              | )          | **32,975** |   | (57,758 | ) |
| Changes in fair  value of cash flow hedges          | ** ** | **—**                                           |       | 105                                                 | ** ** | **65** |   | 535 |   |
| Total other  comprehensive income (loss)            | ** ** | **14,626**                                           |       | (9,739                                              | )          | **33,072** |   | (57,249 | ) |
| **Comprehensive Income**                            | ** ** | **$**                                                | **83,890** |                                                | $          | 61,401 | ** ** | **$** | **283,116** |   | $ | 137,413 |   |

**Note 15.   Severance, Impairment andOther Charges**

Duringthe fourth quarter of 2004, the Company recorded $36,890 of severance,impairment and other charges as a component of operating income.  As a result of leveraging prior investmentsin technology and process improvements, the Company committed to a plan toeliminate selected positions involved primarily in production and development.  The plan resulted in a charge for one-timetermination benefits relating to a headcount reduction of approximately 490employees located primarily in Europe and the U.S.  These severance benefits werecalculated pursuant to the terms of

 

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established employeeprotection plans, in accordance with local statutory minimum requirements orindividual employee contracts, as applicable.

All of the 2004 fourthquarter charge will be settled in cash. Substantially all termination actions under this plan have beencompleted.

|                               | ** ** | **Severance Related  Reserves** | ** ** |
|-------------------------------|------------|--------------------------------------|------------|
| Charge at December 31,  2004  |       | $                                    | 36,890     |   |
| 2004 utilization              |       | (452                                 | )          |
| 2005 utilization              |       | (24,052                              | )          |
| 2006 utilization              |       | (10,170                              | )          |
| Balance at September 30, 2006 |       | $                                    | 2,216      |   |

The Company currentlyexpects that a substantial portion of the cash outlays relating to the 2004fourth quarter charge will be applied against the remaining September 30, 2006balance during the remainder of 2006.

During the three monthsended March 31, 2003, the Company recorded $37,220 of severance, impairment andother charges as a component of operating income.  These charges were designed to furtherstreamline operations and increase productivity through a worldwide reductionin headcount of approximately 80 employees and charges related to impairedcontracts and assets.   Thecontract-related charges were for impaired data supply and data processingcontacts primarily in the Company’s U.S. and Japanese operations.  The asset write-downs portion of the 2003charge related to the Company’s decision to abandon certain products and assuch, certain computer software primarily in the U.S., Japan and Europe waswritten-down to its net realizable value.

|                               | ** ** | **Severance  Related  Reserves** | ** ** | **Contract  Related  Reserves** | ** ** | **Asset Write-  Downs** | ** ** | **Total** | ** ** |
|-------------------------------|------------|----------------------------------|------------|---------------------------------|------------|------------------------------|------------|-----------|------------|
| Charge at March 31, 2003      |       | $                                | 9,958      |                            | $          | 22,307                       |       | $         | 4,955      |   | $ | 37,220 |   |
| 2003 utilization              |       | (6,197                           | )          | (7,047                          | )          | (6,634                       | )          | (19,878   | )          |
| 2004 utilization              |       | (1,637                           | )          | (3,614                          | )          | —                       |       | (5,251    | )          |
| 2005 utilization              |       | (378                             | )          | (6,747                          | )          | —                       |       | (7,125    | )          |
| 2006 utilization              |       | —                           |       | (2,138                          | )          | —                       |       | (2,138    | )          |
| Adjustments                   |       | (1,746                           | )          | 67                              |       | 1,679                        |       | —    |       |
| Balance at September 30, 2006 |       | $                                | —     |                            | $          | 2,828                        |       | $         | —     |   | $ | 2,828 |   |

Approximately $9,958 of the2003 charge related to a worldwide reduction in headcount of approximately 80employees.  These severancebenefits were calculated pursuant to the terms of established employeeprotection plans, in accordance with local statutory minimum requirements orindividual employee contracts, as applicable.

 

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Thecash portion of the first quarter 2003 charge amounted to $30,586, of which theCompany paid approximately $2,138 during the first nine months of 2006 forcontract related charges.  The remainingaccrual of $2,828 at September 30, 2006 relates to lease obligations.

The Company expects thatcash outlays will be applied against the $2,828 balance remaining of the firstquarter 2003 charge at September 30, 2006 as follows:

| Year Ended  December 31, | ** ** | ** ** | ** ** | **Cash Outlays** | ** ** |
|------------------------------------|------------|------------|------------|-----------------------|------------|
| 2006                               |       | $          | 146        |                  |
| 2007                               |       | 2,682      |       |
| Total                              |       | $          | 2,828      |                  |

During 2003, the Companyreversed approximately $1,750 of severance related charges originally includedin the first quarter 2003 charge due to the Company’s refinement ofestimates.  The Company also recordedadditional charges during 2003 of approximately $1,700 related primarily to asoftware impairment.

During the fourth quarterof 2001, the Company completed the assessment of its Competitive FitnessProgram.  This program was designed tostreamline operations, increase productivity, and improve client service.  In connection with this program, the Companyrecorded $94,616 of severance, impairment and other charges during the fourthquarter of 2001 as a component of operating income.

|                               | ** ** | **Severance  Related Reserves** | ** ** | **Contract  Related  Reserves** | ** ** | **Asset Write-  Downs** | ** ** | **Total** | ** ** |
|-------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|------------------------------|------------|-----------|------------|
| Charge at December 31,  2001  |       | $                                    | 39,652     |                            | $          | 26,324                       |       | $         | 28,640     |   | $ | 94,616 |   |
| 2001 utilization              |       | (3,692                               | )          | (6,663                          | )          | (27,887                      | )          | (38,242   | )          |
| 2002 utilization              |       | (26,277                              | )          | (9,819                          | )          | (1,474                       | )          | (37,570   | )          |
| 2003 utilization              |       | (6,384                               | )          | (2,720                          | )          | (241                         | )          | (9,345    | )          |
| 2004 utilization              |       | (455                                 | )          | (1,232                          | )          | —                       |       | (1,687    | )          |
| 2005 utilization              |       | (262                                 | )          | (1,881                          | )          | —                       |       | (2,143    | )          |
| 2006 utilization              |       | (198                                 | )          | (1,401                          | )          | —                       |       | (1,599    | )          |
| Adjustments                   |       | (688                                 | )          | (274                            | )          | 962                          |       | —    |       |
| Balance at September 30, 2006 |       | $                                    | 1,696      |                            | $          | 2,334                        |       | $         | —     |   | $ | 4,030 |   |

The Company expects thatcash outlays will be applied against the $4,030 balance remaining in theprogram at September 30, 2006 as follows:

| Year Ended  December 31, | ** ** | **Cash Outlays** | ** ** |
|------------------------------------|------------|-----------------------|------------|
| 2006                               |       | $                     | 622        |   |
| 2007                               |       | 1,903                 |       |
| 2008                               |       | 262                   |       |
| 2009                               |       | 262                   |       |
| 2010                               |       | 262                   |       |
| Thereafter                         |       | 719                   |       |
| Total                              |       | $                     | 4,030      |   |

 

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**Note 16.   Operations by Business Segment**

Operating segments aredefined as components of an enterprise about which financial information isavailable that is evaluated on a regular basis by the chief operatingdecision-maker, or decision-making groups, in deciding how to allocateresources to an individual segment and in assessing performance of thesegment.  The Company operates a globallyconsistent business model, offering pharmaceutical business information andrelated services to its customers in more than 100 countries.  See Note 2.

The Company maintainsregional geographic management to facilitate local execution of its globalstrategies.  However, the Companymaintains global leaders for the majority ofits critical business processes; and the most significant performanceevaluations and resource allocations made by the Company’s chief operatingdecision makers are made on a global basis. As such, the Company has concluded that it maintains one operating andreportable segment.

**GeographicFinancial Information:**

The following representsselected geographic information for the regions in which we operate for thethree and nine months ended September 30, 2006 and 2005:
| ** **                                  | ** ** | **Americas  (1)** | ** ** | **Europe  (2)** | ** ** | **Asia Pacific  (3)** | ** ** | **Corporate &  Other** | ** ** | **Total  IMS** | ** ** |
|---------------------------------------------|------------|-------------------|------------|-----------------|------------|----------------------------|------------|---------------------------------|------------|----------------|------------|
| **Three months ended September  30, 2006:** |       |              |       |            |       |                       |       |                            |       |           |       |
| Operating  Revenue (4)                      |       | $                 | 215,603    |            | $          | 199,874                    |       | $                               | 67,229     |           | —     |   | $ | 482,706 |   |
| Operating Income  (Loss) (5)                |       | $                 | 75,876     |            | $          | 30,932                     |       | $                               | 27,826     |           | $          | (19,245 | ) | $ | 115,389 |   |
| **Nine months ended September 30,  2006:**  | ** ** | ** **        | ** ** | ** **      | ** ** | ** **                 | ** ** | ** **                      | ** ** | ** **     | ** ** |
| Operating  Revenue (4)                      |       | $                 | 641,248    |            | $          | 577,670                    |       | $                               | 196,162    |           | —     |   | $ | 1,415,080 |   |
| Operating Income  (Loss) (5)                |       | $                 | 221,673    |            | $          | 83,572                     |       | $                               | 82,779     |           | $          | (69,573 | ) | $ | 318,451 |   |
| **Three months ended September  30, 2005:** |       |              |       |            |       |                       |       |                            |       |           |       |
| Operating  Revenue (4)                      |       | $                 | 198,787    |            | $          | 171,830                    |       | $                               | 62,179     |           | —     |   | $ | 432,796 |   |
| Operating Income  (Loss) (5)                |       | $                 | 74,820     |            | $          | 24,075                     |       | $                               | 26,761     |           | $          | (23,425 | ) | $ | 102,231 |   |
| **Nine months ended September 30,  2005:**  | ** ** | ** **        | ** ** | ** **      | ** ** | ** **                 | ** ** | ** **                      | ** ** | ** **     | ** ** |
| Operating  Revenue (4)                      |       | $                 | 564,364    |            | $          | 534,170                    |       | $                               | 178,528    |           | —     |   | $ | 1,277,062 |   |
| Operating Income (Loss)  (5)                |       | $                 | 211,103    |            | $          | 72,894                     |       | $                               | 80,707     |           | $          | (62,304 | ) | $ | 302,400 |   |

**Notes toGeographic Financial Information:**

*(1)*         *Americas includes theUnited States, Canada and Latin America.*

*(2)**         Europeincludes countries in Europe, the Middle East and Africa.*

*(3)**         AsiaPacific includes Japan, Australia and other countries in the Asia Pacificregion.*

*(4)**         Operatingrevenue relates to external customers and is primarily based on the location ofthe customer.  The operating revenue forthe geographic regions includes the impact of foreign exchange in converting resultsinto U.S. dollars.*

*(5)**         Operatingincome for the three geographic regions does not reflect the allocation ofcertain expenses that are maintained in Corporate and Other and as such, is nota true measure of the respective regions’ profitability.   The operating income for the geographicsegments includes the impact of foreign exchange in converting results intoU.S. dollars.*

 

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Asummary of the Company’s operating revenue by product line for the three andnine months ended September 30, 2006 and 2005 is presented below:
| ** **                 | ** ** | **Three Months Ended  September 30,** | ** **  | **Nine Months Ended  September 30,** | ** ** |
|----------------------------|------------|------------------------------------------------------|-------------|-----------------------------------------------------|------------|
| ** **                 | ** ** | **2006**                                             | ** **  | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Sales Force  Effectiveness | ** ** | **$**                                                | **226,118** |                                                | $          | 207,073 | ** ** | **$** | **670,250** |   | $ | 614,128 |   |
| Portfolio Optimization     | ** ** | **134,676**                                          |        | 126,201                                             | ** ** | **403,039** |   | 377,533 |   |
| Launch, brand and other    | ** ** | **121,912**                                          |        | 99,522                                              | ** ** | **341,791** |   | 285,401 |   |
| Total Operating Revenue    | ** ** | **$**                                                | **482,706** |                                                | $          | 432,796 | ** ** | **$** | **1,415,080** |   | $ | 1,277,062 |   |

**Note 17.  Merger Costs**

On July 11, 2005, the Company announced a definitive agreement to mergewith VNU, a global information and media company based in Haarlem, TheNetherlands.  On November 17, 2005, theCompany announced the termination of the proposed merger with VNU.

In accordance with the terms of the merger terminationagreement, VNU was required to pay the Company $45,000 as a result of theacquisition of VNU by a private equity group in June 2006.  This $45,000 payment was received during thesecond quarter of 2006 and has been reflected in Other income, net in theCondensed Consolidated Statements of Income (Unaudited) for the nine monthsended September 30, 2006.  Additionally,the Company was required to pay $6,016 during the second quarter of 2006 ofinvestment banker fees and expenses related to the $45,000 payment received,which are included in Merger costs in the Condensed Consolidated Statements ofIncome (Unaudited) for the nine months ended September 30, 2006.  The Company had incurred merger costs of$8,474 and $15,874 for the three and nine months ended September 30, 2005,respectively, primarily for professional fees.

 

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**Item 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations**

**(Dollars andshares in thousands, except per share data)**

*This discussionand analysis should be read in conjunction with the accompanying CondensedConsolidated Financial Statements (Unaudited) and related notes.*

**Executive Summary**

**Our Business**

IMS Health Incorporated (“we”, “us” or “our”) is theleading global provider of market intelligence to the pharmaceutical andhealthcare industries.  We offer leading-edge business intelligenceproducts and services that are integral to our clients’ day-to-day operations,including portfolio optimization capabilities; launch and brand managementsolutions; sales force effectiveness innovations; managed care andover-the-counter offerings; and consulting and services solutions that improveROI and the delivery of quality healthcare worldwide.  Our information products are developed tomeet client needs by using data secured from a worldwide network of suppliersin the markets where operations exist.  Key information products include:

·                  Sales ForceEffectiveness to optimize sales force productivity and territory management;

·                  Portfolio Optimizationto provide clients with insights into market opportunity and businessdevelopment assessment; and

·                  Launch, Brand Management and Other to supportclient needs relative to market segmentation and positioning and life cyclemanagement for prescription and over-the-counter pharmaceutical products.

Within these business lines, we provide consulting andservices that use in-house capabilities and methodologies to assistpharmaceutical clients in analyzing and evaluating market trends, strategiesand tactics, and to help in the development and implementation of customizedsoftware applications and data warehouse tools.

We operate in more than 100 countries.  Until December 21, 2004, we also ownedapproximately a 25% equity interest in the TriZetto Group, Inc. (“TriZetto”)(see Note 7 to the Condensed Consolidated Financial Statements (Unaudited)).

We manage on a global business model with globalleaders for the majority of our critical business processes and accordinglyhave one reportable segment.

We believe that important measures of our financialcondition and results of operations include operating revenue, constant dollarrevenue growth, operating income, constant dollar operating income growth,operating margin and cash flows.

**PerformanceOverview**

Our operating revenue grew 11.5% to $482,706 in thethird quarter of 2006 as compared to $432,796 in the third quarter of2005.  Our operating revenue grew 10.8%to $1,415,080 in the nine

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months ended September 30, 2006 as compared to$1,277,062 in the nine months ended September 30, 2005. The quarterly and ninemonth operating revenue increases were a result of growth in all three of ourbusiness lines.  Our operating incomegrew 12.9% to $115,389 in the third quarter of 2006 as compared to $102,231 inthe third quarter of 2005.  Our operatingincome grew 5.3% to $318,451 in the nine months ended September 30, 2006 ascompared to $302,400 in the nine months ended September 30, 2005.  Both the quarterly and nine month operatingincome growth were a result of increased operating revenues offset by increasesin operating costs, selling and administrative expenses and depreciation andamortization, as discussed below. Our net income was $69,264 for the thirdquarter of 2006 as compared to $71,140 for the third quarter of 2005 and$250,044 for the nine months ended September 30, 2006 compared to $194,662 forthe nine months ended September 30, 2005, due to the Non-Operating Income, netitems discussed below and certain tax items as discussed in Note 12 of theCondensed Consolidated Financial Statements (Unaudited).  Our diluted earnings per share of CommonStock increased to $0.34 for the third quarter of 2006 as compared to $0.30 forthe third quarter of 2005 and increased to $1.20 for the nine months endedSeptember 30, 2006 as compared to $0.84 for the nine months ended September 30,2005.

**Results of Operations**

*Reclassifications*.   Certain prior-year amounts have beenreclassified to conform to the 2006 presentation.

*References toconstant dollar results.  *Wereport results in U.S. dollars, but we do business on a global basis.  Exchange rate fluctuations affect the rate atwhich we translate foreign revenues and expenses into U.S. dollars and haveimportant effects on our results.  Inorder to illustrate these effects, the discussion of our business in thisreport sometimes describes the magnitude of changes in constant dollarterms.  We believe this informationfacilitates a comparative view of business growth.  In the first nine months of 2006, the U.S.dollar was generally stronger against most other currencies as compared to thefirst nine months of 2005, so growth at constant dollar exchange rates wasgenerally higher than growth at actual currency exchange rates.  See “How Exchange Rates Affect Our Results”below and the discussion of “Market Risk” in the Management Discussion andAnalysis section of our annual report on Form 10-K for the year ended December31, 2005 for a more complete discussion regarding the impact of foreigncurrency translation on our business.

***Stock-Based Compensation Expense***

SFAS 123R was adoptedon January 1, 2006, which now requires among other items, the recognition ofstock option expense in the results of operations. The modified prospectivetransition method was elected; therefore, prior period results were notretrospectively adjusted.  Prior to theadoption of SFAS 123R, stock-based compensation expense related to stockoptions was not recognized in the results of operations if the exercise pricewas at least equal to the market value of the Common Stock on the grant date,in accordance with Accounting Principles Board (“APB”) Opinion No. 25, “Accountingfor Stock Issued to Employees,” (“APB 25”). As a result, the recognition ofstock-based compensation expense was generally limited to the expenseattributed to restricted stock units and stock option modifications.  Historically, stock options have been grantedto broad groups of employees on a discretionary basis. Beginning in fiscal2006, employees are eligible to receive restricted stock units with a servicecondition of four years instead of stock options with a

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service condition of three years. Employees in moreadvanced leadership positions will continue to be eligible to receiverestricted stock units which contain performance and service conditions.

As a result of adopting SFAS 123R on January 1, 2006,our income before income taxes and net income for the three months endedSeptember 30, 2006 are $7,965 lower and $5,617 lower, respectively, and for thenine months ended September 30, 2006 are $29,656 lower and $20,857 lower,respectively, than if the company had continued to account for share-basedcompensation under APB 25.  Basic anddiluted earnings per share for the three months ended September 30, 2006 were$0.34 and $0.34, respectively, but would have been $0.37 and $0.37, respectively,if we had not adopted SFAS 123R.  Basicand diluted earnings per share for the nine months ended September 30, 2006were $1.23 and $1.20, respectively, but would have been $1.33 and $1.30,respectively, if we had not adopted SFAS 123R. Stock-based compensation expense was $8,633 and $32,987 before taxesduring the three and nine months ended September 30, 2006, respectively, and$9,353 and $28,873 before taxes during the three and nine months endedSeptember 30, 2005, respectively. Stock-based compensation expense recognized in the results of operationsfor the three months ended September 30, 2006 was $720 lower than the pro formaamount determined under the fair value-based method and disclosed in accordancewith SFAS No. 123, “Accountingfor Stock-Based Compensation” (“SFAS 123”), for the comparable prior yearperiod.  This decrease was due to thereversal of restricted stock and stock option amortization expense due toterminated employees and the reduction in the current quarter’s stock awardgrants versus prior year.  Stock-basedcompensation expense recognized in the results of operations for the ninemonths ended September 30, 2006 was $4,114 higher than the pro formaamount determined under the fair value-based method and disclosed in accordancewith SFAS 123 for the comparable prioryear period.  This increase, offset bythe activity that decreased the current quarter’s expense, was primarily due tohigher fair value amounts attributed to the more recent awards,acceleration of the vesting of restricted stock units and stock options of oneemployee in an advanced leadership position due to retirement, and an increasein restricted stock unit amortization expense due to the timing of the Company’sannual employee stock awards.

**Summary ofOperating Results**
| ** **                                                                             | ** ** | ** **                                               | ** **  | **% Variance** | ** ** |
|----------------------------------------------------------------------------------------|------------|----------------------------------------------------------|-------------|---------------------|------------|
| ** **                                                                             | ** ** | **Three Months Ended September 30,** | ** **  | **2006**            | ** ** |
| ** **                                                                             | ** ** | **2006**                                                 | ** **  | **2005**            | ** ** | **vs 2005** | ** ** |
| Operating  revenue                                                                     | ** ** | **$**                                                    | **482,706** |                | $          | 432,796 |   | 11.5 | % |
| *Operating  costs (exclusive of Depreciation and amortization shown separately below)* | ** ** | **209,178**                                              |        | 195,484             |       | 7.0 | % |
| Selling and  administrative expenses                                                   | ** ** | **129,144**                                              |        | 100,268             |       | 28.8 | % |
| Depreciation and  amortization                                                         | ** ** | **28,995**                                               |        | 26,339              |       | 10.1 | % |
| Merger costs                                                                           | ** ** | **0**                                                    |        | 8,474               |       | (100.0 | %) |
| Operating income                                                                       | ** ** | **$**                                                    | **115,389** |                | $          | 102,231 |   | 12.9 | % |

 

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* *
| ** **                                                                             | ** ** | ** **                                              | ** **    | **% Variance** | ** ** |
|----------------------------------------------------------------------------------------|------------|---------------------------------------------------------|---------------|---------------------|------------|
| ** **                                                                             | ** ** | **Nine Months Ended September 30,** | ** **    | **2006**            | ** ** |
| ** **                                                                             | ** ** | **2006**                                                | ** **    | **2005**            | ** ** | **vs 2005** | ** ** |
| Operating  revenue                                                                     | ** ** | **$**                                                   | **1,415,080** |                | $          | 1,277,062 |   | 10.8 | % |
| *Operating  costs (exclusive of Depreciation and amortization shown separately below)* | ** ** | **618,967**                                             |          | 560,801             |       | 10.4 | % |
| Selling and  administrative expenses                                                   | ** ** | **386,537**                                             |          | 321,329             |       | 20.3 | % |
| Depreciation and  amortization                                                         | ** ** | **85,109**                                              |          | 76,658              |       | 11.0 | % |
| Merger costs                                                                           | ** ** | **6,016**                                               |          | 15,874              |       | (62.1 | %) |
| Operating income                                                                       | ** ** | **$**                                                   | **318,451**   |                | $          | 302,400 |   | 5.3 | % |

 

***Operating Income***

Our operating income for the third quarter of 2006grew 12.9% to $115,389 from $102,231 in the third quarter of 2005.  This was due to the increase in our operatingrevenue, offset by increases in our operating costs and selling andadministrative expenses driven by increased cost of data, investments inconsulting and services capabilities, the adoption of SFAS 123R, and decreased mergercosts, as discussed below.  Our operatingincome increased 12.5% in constant dollar terms.  Excluding the effects of our adoption of SFAS123R and merger costs, our operating income increased 11.9% on a reported basisand 11.5% in constant dollar terms.  Ouroperating income for the first nine months of 2006 grew 5.3% to $318,451 from$302,400 in the first nine months of 2005. This was due to the increase in our operating revenue, offset byincreases in our operating costs and selling and administrative expenses drivenby increased cost of data, investments in consulting and services capabilities,the adoption of SFAS 123R, and decreased merger costs, as discussed below.  Our operating income increased 5.7% in constantdollar terms.  Excluding the effect ofour adoption of SFAS 123R and merger costs, our operating income increased11.4% on a reported basis and 11.8% in constant dollar terms.

***Operating Revenue***

Revenue in 2005 reflects a reclassification betweenour three business lines to conform to the 2006 presentation.

Our operating revenue for the third quarter of 2006grew 11.5% to $482,706 from $432,796 in the third quarter of 2005. On aconstant dollar basis our operating revenue growth was 9.9%.  Our operating revenue for the first ninemonths of 2006 grew 10.8% to $1,415,080 from $1,277,062 in the first ninemonths of 2005. On a constant dollar basis our operating revenue growth was11.6%.  Acquisitions made during the last12 months contributed approximately 0.7 percentage points for the third quarterand 2.7 percentage points for the first nine months of 2006 to both reportedand constant dollar operating revenue growth. The increase in our operating revenue resulted from growth in revenue inall three of our business lines, together with the effect of currencytranslation.  On a constant dollar basis,all business lines grew.

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**Summary ofOperating Revenue**
| ** **                 | ** ** | ** **                       | ** **  | **% Variance**        | ** ** |
|----------------------------|------------|----------------------------------|-------------|----------------------------|------------|
| ** **                 | ** ** | **Three Months Ended** | ** **  | **2006 vs 2005** | ** ** |
| ** **                 | ** ** | **September 30,**           | ** **  | **Reported**               | ** ** | **Constant** | ** ** |
| ** **                 | ** ** | **2006**                         | ** **  | **2005**                   | ** ** | **Rates** | ** ** | **Dollar** | ** ** |
| Sales force  effectiveness | ** ** | **$**                            | **226,118** |                       | $          | 207,073 |   | 9.2 | % | 7.6 | % |
| Portfolio  optimization    | ** ** | **134,676**                      |        | 126,201                    |       | 6.7 | % | 5.3 | % |
| Launch, brand  and other   | ** ** | **121,912**                      |        | 99,522                     |       | 22.5 | % | 20.4 | % |
| Operating revenue          | ** ** | **$**                            | **482,706** |                       | $          | 432,796 |   | 11.5 | % | 9.9 | % |

 
| ** **                 | ** ** | ** **                      | ** **    | **% Variance**        | ** ** |
|----------------------------|------------|---------------------------------|---------------|----------------------------|------------|
| ** **                 | ** ** | **Nine Months Ended** | ** **    | **2006 vs 2005** | ** ** |
| ** **                 | ** ** | **September 30,**          | ** **    | **Reported**               | ** ** | **Constant** | ** ** |
| ** **                 | ** ** | **2006**                        | ** **    | **2005**                   | ** ** | **Rates** | ** ** | **Dollar** | ** ** |
| Sales force  effectiveness | ** ** | **$**                           | **670,250**   |                       | $          | 614,128 |   | 9.1 | % | 9.8 | % |
| Portfolio  optimization    | ** ** | **403,039**                     |          | 377,533                    |       | 6.8 | % | 7.8 | % |
| Launch, brand  and other   | ** ** | **341,791**                     |          | 285,401                    |       | 19.8 | % | 20.4 | % |
| Operating revenue          | ** ** | **$**                           | **1,415,080** |                       | $          | 1,277,062 |   | 10.8 | % | 11.6 | % |

 

·                  *Sales Force Effectiveness:* The Americas, Europe and AsiaPacific regions contributed about equally to the revenue growth for the thirdquarter and first nine months of 2006.

·                  *Portfolio Optimization:* Europe contributed more thanthree-quarters of the growth during the third quarter of 2006 and two-thirds ofthe growth for the first nine months of 2006.

·                  *Launch, Brand Management and Other product lines:* TheAmericas and Europe regions contributed about equally to the revenue growth forthe third quarter of 2006. The Americas region contributed more thanthree-quarters of the growth for the first nine months of 2006 due toacquisitions completed in 2005.

***Operating Costs***

Our operatingcosts include data processing costs, the costs of data collection andproduction, and costs attributable to personnel involved in production, datamanagement and the processing and delivery of our consulting and servicesofferings.  Our operating costs grew 7.0%to $209,178 in the third quarter of 2006, from $195,484 in the third quarter of2005.  Our operating costs grew 10.4% to$618,967 in the first nine months of 2006, from $560,801 in the first ninemonths of 2005.

·                  *SFAS 123R*: The effect of the adoption of SFAS 123R increasedour operating costs by approximately $2,000 and $5,000 for the third quarterand first nine months of 2006 as compared to 2005, respectively (See Note 9 toour Condensed Consolidated Financial Statements (Unaudited)).

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·                  *Foreign Currency Translation*: The effect of foreign currencytranslation increased our operating costs by approximately $4,000 for the thirdquarter of 2006 as compared to the third quarter of 2005.  The effect of foreign currency decreased ouroperating costs by approximately $6,000 for the first nine months of 2006 ascompared to the first nine months of 2005.

Excluding the effect of SFAS 123R and the change dueto foreign currency translation, our operating costs grew 4.3% and 10.5% in thethird quarter and first nine months of 2006, respectively, as compared to thethird quarter and first nine months of 2005.

·                  *Data*: Data costs increased by approximately $3,000 and$24,000 in the third quarter and first nine months of 2006, compared to 2005,respectively.

·                  *Consulting*: Consulting and services costs increased by $2,000 and $20,000 in thethird quarter and first nine months of 2006 compared to 2005, respectively.

·                  *Production, Client Services and Other*:  Production, client services and other costsincreased by approximately $3,000 and $15,000 in the third quarter and firstnine months of 2006 compared to 2005, respectively.

***Selling and Administrative Expenses***

Our selling and administrative expenses consistprimarily of the expenses attributable to sales, marketing, and administration,including human resources, legal, management and finance.  Our selling and administrative expenses grew28.8% in the third quarter of 2006 to $129,144 from $100,268 in the thirdquarter of 2005.  Our selling andadministrative expenses grew 20.3% in the first nine months of 2006 to $386,537from $321,329 in the first nine months of 2005:

·                  *SFAS 123R*: The effect of the adoption of SFAS 123R increasedour selling and administrative expenses by approximately $7,000 and $25,000 forthe third quarter and first nine months of 2006 as compared to 2005,respectively (See Note 9 to our Condensed Consolidated Financial Statements(Unaudited)).

·                  *Foreign Currency Translation*: The effect of foreign currencytranslation increased our selling and administrative expenses by approximately$3,000 for the third quarter of 2006 as compared to the third quarter of2005.  The effect of foreign currencydecreased our selling and administrative expenses by approximately $2,000 forthe first nine months of 2006 as compared to the first nine months of 2005.

Excluding the effect of SFAS 123R and the change dueto foreign currency translation, our selling and administrative expenses grew19.2% and 13.2% in the third quarter and first nine months of 2006,respectively, as compared to the third quarter and first nine months of 2005.

·                  *Sales and Marketing*: Sales and marketing expense increasedby approximately $3,000 and $11,000 in the third quarter and first nine monthsof 2006, compared to 2005, respectively, to support revenue growth.

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·                  *Consulting*: Consulting and services expenses increased by approximately $9,000 and$26,000 in the third quarter and first nine months of 2006 compared to 2005,respectively, to support the growth in this revenue stream.

·                  *Administrative and Other*: Administrative and other expenses increased by approximately $7,000 and$5,000 in the third quarter and first nine months of 2006, compared to 2005,respectively, to support revenue growth.

***Depreciation and Amortization***

Our depreciation and amortization charges increased10.1% to $28,995 in the third quarter of 2006, from $26,339 in the thirdquarter of 2005, and 11.0% to $85,109 in the first nine months of 2006, from$76,658 in the first nine months of 2005, primarily due to computer softwareamortization associated with new products which increased by approximately$2,000 and $7,000, and amortization of intangibles related to recentacquisitions, which decreased by approximately $600 and increased byapproximately $1,000 in the third quarter and first nine months of 2006 ascompared to 2005, respectively.

***Merger Costs***

During the second quarter of 2006, we incurred $6,016of investment banker fees and expenses related to a payment received from VNUin accordance with the terms of the merger termination agreement (see OtherIncome, net below).  During the thirdquarter and first nine months of 2005, we incurred $8,474 and $15,874,respectively, of costs in connection with the terminated merger with VNUprimarily for professional fees.  SeeNote 17 to our Condensed Consolidated Financial Statements (Unaudited).

***Trends in our Operating Margins***

Our operating margin for the third quarter of 2006 was23.9%, as compared to 23.6% in the third quarter of 2005.  The increase in our operating margins for thethird quarter of 2006 is due to the elimination of prior year merger costs,partially offset by the adoption of SFAS 123R in 2006.  Excluding the effect of SFAS 123R and mergercosts, our operating margin would have been relatively flat at 25.7% in thethird quarter of 2006 compared to 25.6% in the third quarter of 2005.  Our operating margin for the first ninemonths of 2006 was 22.5%, as compared to 23.7% in the first nine months of2005.  The decrease in our operatingmargins for the first nine months of 2006 is primarily due to the adoption ofSFAS 123R and costs related to the terminated merger with VNU.  Excluding the effect of SFAS 123R and mergercosts, our operating margin would have increased 0.2 percentage points to 25.1%in the first nine months of 2006 from 24.9% in the first nine months of 2005.

Recent acquisitions have had an adverse effect on ouroperating margins due to the fact that some of our small business acquisitionshave historically experienced lower operating margins than ours, and therevenue and cost synergies that we incorporate into our business plans are notall immediately realized.  We alsoexperience higher intangible amortization in the first years after completingan acquisition and may incur additional costs in integrating the acquired operationsinto ours, both of which tend to

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increase our costs and thus decrease our operatingmargins in the initial years of each completed acquisition.

Excluding the effect of SFAS 123R and merger costs,our operating margin stabilized during the third quarter and first nine monthsof 2006.

***Non-Operating (Loss) Income, net***

Our non-operating (loss) income, net decreased to aloss of $10,031 in the third quarter of 2006 from income of $3,215 in the thirdquarter of 2005.  Our non-operatingincome, net increased to $15,457 in the first nine months of 2006 from incomeof $15,082 in the first nine months of 2005. This was due to the following factors:

·                  *Interest Expense, net*: Net interest expense was $9,301 and$25,193 for the third quarter and first nine months of 2006, respectively,compared with $4,692 and $13,097 for the third quarter and first nine months of2005, respectively, due to both higher debt levels (see Note 10 to ourCondensed Consolidated Financial Statements (Unaudited)) and higher interest rates.

·                  *Gains (Losses) from Investments, net*: We had losses frominvestments of $305 during the third quarter of 2006, as a result of managementfees related to our Enterprise portfolio. We had gains from investments of $252 during the third quarter of 2005within the Enterprise portfolio.  We hadgains from investments of $2,443 during the first nine months of 2006 as aresult of the sale of our investment in Allscripts Healthcare Solutions, Inc.  Gains from investments of $2,624 in the firstnine months of 2005 were as a result of a divestiture of an interest we had ina German company.

·                  *Other Income, net*: Other income, net, decreased by $8,080due to net foreign exchange gains of $502 in the third quarter of 2006 ascompared with $8,611 in the third quarter of 2005.  Other income, net, increased $12,652 in thefirst nine months of 2006 as compared with 2005 due to the receipt of $45,000in the second quarter of 2006 from VNU as a result of the agreement toterminate the proposed merger (see Note 17 to our Condensed ConsolidatedFinancial Statements (Unaudited)).  Thisincome was offset by net foreign exchange losses of $4,030 in the first ninemonths of 2006 compared with net foreign exchange gains of $29,443 in the firstnine months of 2005.

***Taxes***

For the three months ended September 30, 2006, oureffective tax rate was reduced by approximately $4,500 related to a non-U.S.audit settlement.  For the nine monthsended September 30, 2006, our effective tax rate was reduced due to a favorableU.S. partnership audit settlement of approximately $69,200 for the tax years1998 through 2003 and a favorable U.S. corporate audit settlement ofapproximately $17,600 for the tax years 2000 through 2003.  Also in the first nine months of 2006,approximately $21,400 of tax expense was recorded related to a reorganizationof several of our subsidiaries.  Further,approximately $24,800 of tax expense was recorded in the first quarter of 2006related to disputes between the Company and NMR, on the one hand, and Donnelley

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and certain of its former affiliates on the otherhand, as to proper interpretation of, and allocation of tax liabilities under,the 1996 Spin-Off agreements (See Note 8 to our Condensed ConsolidatedFinancial Statements (Unaudited)).

For the nine months endedSeptember 30, 2005, our effective tax rate was reduced due to afavorable non-U.S. audit settlement of approximately $29,300. For the nine months ended September 30, 2005, the effective tax rate wasalso impacted by $39,600 of tax expense related to the decision to repatriateapproximately $647,000 of foreign earnings back to the U.S. during 2005 underthe American Jobs Creation Act of 2004 (“AJCA”).  In the first quarter of 2005, $67,100 of taxexpense was recorded related to the AJCA of which, $24,300 and $3,200 werereversed in the second and third quarters of 2005, respectively, as a result ofa technical correction passed by Congress to the AJCA.

For all periods presented, our effective tax rate wasreduced as a result of global tax planning initiatives.  While we intend to continue to seek globaltax planning initiatives, there can be no assurance that we will be able tosuccessfully identify and implement such initiatives to reduce or maintain ouroverall tax rate.

**Operating Resultsby Geographic Region**

The following represents selected geographicinformation for the regions in which we operate for the three and nine monthsended September 30, 2006 and 2005:
| ** **                                  | ** ** | **Americas  (1)** | ** ** | **Europe  (2)** | ** ** | **Asia Pacific  (3)** | ** ** | **Corporate  & Other** | ** ** | **Total  IMS** | ** ** |
|---------------------------------------------|------------|-------------------|------------|-----------------|------------|----------------------------|------------|---------------------------------|------------|----------------|------------|
| **Three  months ended September 30, 2006:** |       |              |       |            |       |                       |       |                            |       |           |       |
| Operating  Revenue (4)                      |       | $                 | 215,603    |            | $          | 199,874                    |       | $                               | 67,229     |           | —     |   | $ | 482,706 |   |
| Operating Income  (Loss) (5)                |       | $                 | 75,876     |            | $          | 30,932                     |       | $                               | 27,826     |           | $          | (19,245 | ) | $ | 115,389 |   |
| **Nine  months ended September 30, 2006:**  | ** ** | ** **        | ** ** | ** **      | ** ** | ** **                 | ** ** | ** **                      | ** ** | ** **     | ** ** |
| Operating Revenue  (4)                      |       | $                 | 641,248    |            | $          | 577,670                    |       | $                               | 196,162    |           | —     |   | $ | 1,415,080 |   |
| Operating Income  (Loss) (5)                |       | $                 | 221,673    |            | $          | 83,572                     |       | $                               | 82,779     |           | $          | (69,573 | ) | $ | 318,451 |   |
| **Three  months ended September 30, 2005:** |       |              |       |            |       |                       |       |                            |       |           |       |
| Operating  Revenue (4)                      |       | $                 | 198,787    |            | $          | 171,830                    |       | $                               | 62,179     |           | —     |   | $ | 432,796 |   |
| Operating Income  (Loss) (5)                |       | $                 | 74,820     |            | $          | 24,075                     |       | $                               | 26,761     |           | $          | (23,425 | ) | $ | 102,231 |   |
| **Nine  months ended September 30, 2005:**  | ** ** | ** **        | ** ** | ** **      | ** ** | ** **                 | ** ** | ** **                      | ** ** | ** **     | ** ** |
| Operating  Revenue (4)                      |       | $                 | 564,364    |            | $          | 534,170                    |       | $                               | 178,528    |           | —     |   | $ | 1,277,062 |   |
| Operating Income  (Loss) (5)                |       | $                 | 211,103    |            | $          | 72,894                     |       | $                               | 80,707     |           | $          | (62,304 | ) | $ | 302,400 |   |

 

***Notesto Geographic Financial Information:***

*(1)**                               Americasincludes the United States, Canada and Latin America.*

*(2)**                               Europeincludes countries in Europe, the Middle East and Africa.*

*(3)**                               AsiaPacific includes Japan, Australia and other countries in the Asia Pacificregion.*

*(4)**                               Operatingrevenue relates to external customers and is recognized primarily based on thelocation of the customer.  The operatingrevenue for the geographic regions includes the impact of foreign exchange inconverting results into U.S. dollars.*

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*(5)**                               Operatingincome for the three geographic regions does not reflect the allocation ofcertain expenses that are maintained in Corporate and Other and as such, is nota true measure of the respective regions’ profitability.   The operating income for the geographicsegments includes the impact of foreign exchange in converting results intoU.S. dollars.*

The factors affecting the regional operating marginperformance discussed below were generally consistent with overall operatingmargin factors.  The notable exceptionwas in our Europe region where for the third quarter of 2006, we had data andproduction cost reductions of approximately $2,000 whereas these costs increasedin all other regions.

***Americas Region***

Operating revenue growth in the Americas region was8.5% and 13.6% in the third quarter and first nine months of 2006,respectively, compared to the third quarter and first nine months of 2005.  Excluding the effect of foreign currencytranslations, operating revenue grew 7.7% and 12.6%, respectively.  About two thirds of this growth is driven byour Launch, Brand Management and Other business line and about one-third bySales Force Effectiveness for the third quarter and first nine months of 2006.

Operating income in the Americas region grew 1.4% and5.0% in the third quarter and first nine months of 2006, respectively, comparedto the third quarter and first nine months of 2005.  Excluding the effect of foreign currencytranslations, operating income grew by 0.6% and 4.0%, respectively.  Excluding the effect of SFAS 123R, afteradjusting for currency, operating income grew 4.0% and 5.2%, respectively, inthe Americas region.

***Europe Region***

Operating revenue increased in the Europe region by16.3% and 8.1% in the third quarter and first nine months of 2006, compared tothe third quarter and first nine months of 2005.  Excluding the effect of foreign currencytranslations, operating revenue grew 12.3% and 9.5%, respectively.  About half of this growth is driven byLaunch, Brand Management and Other for the third quarter of 2006.  In the first nine months of 2006 more thanthree-quarters of this growth is driven by Sales Force Effectiveness andPortfolio Optimization, about equally.

Operating income in the Europe region increased by28.5% and 14.6% in the third quarter and first nine months of 2006,respectively, compared to the third quarter and first nine months of 2005.  Excluding the effect of foreign currency translations,operating income grew by 27.0% and 14.2%, respectively.  Excluding the effect of SFAS 123R, afteradjusting for currency, operating income grew 38.2% and 17.9%, respectively.

***Asia Pacific Region***

Operating revenue in the AsiaPacific region increased 8.1% and 9.9%, respectively, in the third quarter andfirst nine months of 2006, compared to the third quarter and first nine monthsof 2005.  Excluding the effect of foreigncurrency translations, operating revenue grew 10.2% and 14.6%,

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respectively.  About three-quarters of this growth is drivenby Sales Force Effectiveness for the third quarter and first nine months of2006.

Operating income in the AsiaPacific region increased by 4.0% and 2.6% in the third quarter and first ninemonths of 2006, respectively, compared to the third quarter and first ninemonths of 2005.  Excluding theeffect of foreign currency translations, operating income grew by 5.9% and7.5%, respectively.  Excluding the effectof SFAS 123R, after adjusting for currency, operating income grew by 8.0% and8.2% in the Asia Pacific region.

**How Exchange RatesAffect Our Results**

We operate globally, deriving a significant portion ofour operating income from non-U.S. operations. As a result, fluctuations in the value of foreign currencies relative tothe U.S. dollar may increase the volatility of U.S. dollar operatingresults.  We enter into foreign currencyforward contracts to partially offset the effect of currency fluctuations.  In 2006, foreign currency translationincreased U.S. dollar revenue growth by approximately 1.6 percentage points inthe third quarter of 2006 and decreased U.S. dollar revenue growth byapproximately 0.8 percentage points in the first nine months of 2006, while theimpact on operating income growth was an approximate increase of 0.4 percentagepoints in the third quarter of 2006 and an approximate decrease of 0.4percentage points in the first nine months of 2006.

Non-U.S. monetary assets are maintained in currenciesother than the U.S. dollar, principally the Euro, the Japanese Yen and theSwiss Franc.  Where monetary assets areheld in the functional currency of the local entity, changes in the value ofthese currencies relative to the U.S. dollar are charged or credited toCumulative translation adjustment in the Condensed Consolidated Statements ofFinancial Position (Unaudited).  Theeffect of exchange rate changes during the first nine months of 2006 increasedthe U.S. dollar amount of Cash and cash equivalents by $921.

**Liquidity andCapital Resources**

Our cash and cash equivalents decreased $215,231during the first nine months of 2006 to $147,712 at September 30, 2006 comparedto $362,943 at December 31, 2005.  Thedecrease reflects cash provided by operating activities of $206,781, offset by cash used ininvesting activities of $120,881 andfinancing activities of $302,052.

We currently expect that we will use our cash and cashequivalents primarily to fund:

·                  developmentof software to be used in our new products and capital expenditures to expandand upgrade our information technology capabilities and to build or acquirefacilities to house our growing business (we currently expect to spendapproximately $99,000 to $106,000 during 2006 for software development andcapital expenditures);

·                  acquisitions(see Note 5 to our Condensed Consolidated Financial Statements (Unaudited));

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·                  sharerepurchases (see Note 13 to our Condensed Consolidated Financial Statements(Unaudited));

·                  dividends to ourshareholders (we expect 2006 dividends will be $0.12 per share or approximately$24,000);

·                  paymentsfor tax-related matters, including the D&B Legacy Tax Matters discussedfurther in Note 8 to our Condensed Consolidated Financial Statements(Unaudited).  Payments for certain of theD&B Legacy Tax Matters could be up to approximately $40,200 prior toSeptember 30, 2007; and

·                  pension and other postretirementbenefit plan contributions (we currently expect contributions to U.S. andnon-U.S. pension and other postretirement benefit plans to total approximately$11,300 in 2006, in addition to approximately $10,500 paid in January 2006).

Net cash provided by operating activities amounted to$206,781 for the nine months ended September 30, 2006, an increase of cashprovided of $131,008 over the comparable period in 2005.  The increase relates primarily to higher netincome, the subsequent reversal of $105,404 of funding to a Rabbi Trust duringthe third quarter of 2005 as a result of the terminated merger with VNU, andlower funding of prepaid expenses (related to prepayments in the first ninemonths of 2005 on the purchase of an airplane) and accounts payable, partiallyoffset by the funding of accounts receivable, inventory, accrued and othercurrent liabilities, and accrued severance, impairment and other charges.  Cash invested in accounts receivable is drivenby the increase in revenues, and DSO (days sales outstanding) for each of thefirst three quarters of 2006 was at or below the comparable quarter in 2005.

Net cash used in investing activities amounted to$120,881 for the nine months ended September 30, 2006, a decrease in cash usedof $90,904 over the comparable period in 2005. The decrease relates primarily to lower payments for acquisitions duringthe first nine months of 2006 as compared to the first nine months of 2005 (seeNote 5 to our Condensed Consolidated Financial Statements (Unaudited)),partially offset by proceeds from the sale of our investment in TriZetto duringthe first quarter of 2005 (see Note 7 of the Condensed Consolidated FinancialStatements (Unaudited)), and a reduction in short-term marketable securityinvestments.

Net cash used in financing activities amounted to$302,052 for the nine months ended September 30, 2006, an increase of $253,030over the comparable period in 2005.  Thisincrease in cash used was primarily due to an increase of $732,462 in purchasesof our stock and a decrease of $84,946 in proceeds from the exercise of stockoptions during the first nine months of 2006 compared to the first nine monthsof 2005, partially offset by an increase of $553,727 in debt during the firstnine months of 2006 compared to the first nine months of 2005.  Refer to the Stock Repurchase Programs andDebt sections for further information on our variance between the first ninemonths of 2006 and 2005.

Our financing activities include cash dividends wepaid of $0.03 and $0.02 per share quarterly for 2006 and 2005, respectively,which amounted to $18,292 and $13,734 during the first nine months of 2006 and2005, respectively.  The payments andlevel of cash dividends made by us are subject to the 

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discretion of ourBoard of Directors.  Any futuredividends, other than the $0.03 per share dividend for the fourth quarter of2006, which was declared by our Board of Directors in October 2006, will bebased on, and affected by, a number of factors, including our operating resultsand financial requirements.

Prior to the adoption of SFAS 123R, we presented alltax benefits of deductions resulting from the exercise of stock options asoperating cash flows in the Statement of Cash Flows.  Beginning on January 1, 2006, we changed ourcash flow presentation in accordance with SFAS 123R which requires the cashflows from tax benefits resulting from tax deductions in excess of thecompensation cost recognized for those options (excess tax benefits) to beclassified as financing cash flows.

**Taxand Other Contingencies**

We are exposed to certainknown tax and other contingencies that are material to our investors.  Thefacts and circumstances surrounding these contingencies and a discussion of their effect on us are included inNote 8 to our Condensed Consolidated Financial Statements (Unaudited) for theperiod ended September 30, 2006.  We donot know of any material tax or other contingencies, other than those describedin Note 8 to our CondensedConsolidated Financial Statements (Unaudited).

These contingencies may havea material effect on our liquidity, capital resources or results ofoperations.  Although we have established reserves for D&B Legacy TaxMatters in accordance with SFAS No. 5, “Accounting for Contingencies,” theactual liability mayexceed the amount of the reserve.  Wehave not established any reserves in respect of the other contingencies otherthan those discussed in Note 8 of our Notes to Condensed Consolidated FinancialStatements (Unaudited).  In addition, even where our reserves areadequate, the incurrence of any of these liabilities may have a material effecton our liquidity and the amount of cash available to us for other purposes.

Management believes that wehave made appropriate arrangements in respect of the future effect on us ofthese known tax and other contingencies.  Management also believes that the amount of cash available to us fromour operations, together with cash from financing, will be sufficient for us topay any known tax and other contingencies as they become due without materiallyaffecting our ability to conduct our operations and invest in the growthof our business.

**StockRepurchase Programs**

Our share repurchase program has been developed to buyopportunistically, when we believe that our share price provides us with anattractive use of our cash flow and debt capacity.

On January 25, 2006, the Board of Directors authorizeda stock repurchase program to buy up to 30,000 shares.  As of September 30, 2006, 6,444 sharesremained available for repurchase under the January 2006 program.

On November 16, 2005, the Board of Directorsauthorized a stock repurchase program to buy up to 10,000 shares.  This program was completed in February 2006at a total cost of $251,619.

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On December 14, 2004, the Board of Directorsauthorized a stock repurchase program to buy up to 10,000 shares.  This program was completed in January 2006 ata total cost of $242,680.

On February 10, 2004, the Board of Directorsauthorized a stock repurchase program to buy up to 10,000 shares.  This program was completed in January 2005 ata total cost of $232,770.

During the first nine months of 2006, we repurchased33,931 shares of outstanding Common Stock under these programs at a total costof $880,407, including the repurchase of 25,000 shares on January 30, 2006pursuant to an accelerated share repurchase program (“ASR”).  During the nine months ended September 30,2005, we repurchased approximately 6,213 shares of outstanding Common Stock ata total cost of approximately $147,945 under these programs.

Shares acquired through our repurchase programsdescribed above are open-market purchases or privately negotiated transactionsin compliance with Securities and Exchange Commission Rule 10b-18, with theexception of purchases pursuant to the ASR.

Under our Restated Certificate of Incorporation asamended, we have authority to issue 820,000 shares with a par value of $.01 pershare of which 800,000 represent shares of Common Stock, 10,000 representshares of preferred stock and 10,000 represent shares of Series CommonStock.  The preferred and series CommonStock can be issued with varying terms, as determined by the Board ofDirectors.

**Debt     **

In recent years, we have increased debt levels to balanceappropriately the objective of generating an attractive cost of capital withproviding us a reasonable amount of financial flexibility.  At September 30, 2006, our debt totaled$1,105,240 and management does not believe that this level of debt poses a material risk to us due to thefollowing factors:

·                  ineach of the last three years, we have generated strong net cash provided byoperating activities in excess of $300,000;

·                  atSeptember 30, 2006, we had $147,712 in worldwide cash and cash equivalents;

·                  atSeptember 30, 2006, we had $535,734 of unused debt capacity under our existingbank credit facilities; and

·                  webelieve that we have the ability to obtain additional debt capacity outside ofour existing debt arrangements.

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The following table summarizes our long-term debt atSeptember 30, 2006 and December 31, 2005:
| ** **                                                                                                                                       | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| 4.6% Private  Placement Note, principal payment of $150,000 due January 2008, net of  interest rate swaps of $(2,626) and $(2,710), respectively |       | $                            | 147,374    |                        | $          | 147,290 |   |
|                                                                                                                                             |       |                         |       |                        |       |
| 5.55% Private  Placement Notes, principal payment of $150,000 due April 2016                                                                     |       | 150,000                      |       | —                      |       |
|                                                                                                                                             |       |                         |       |                        |       |
| 1.70% Private  Placement Note, principal payment of 34,395,000 Japanese Yen due January 2013                                                     |       | 293,600                      |       | —                      |       |
|                                                                                                                                             |       |                         |       |                        |       |
| Revolving Credit  Facility:                                                                                                                      |       |                         |       |                        |       |
| Japanese Yen denominated borrowings at average  floating rates of approximately 0.70%                                                            |       | 76,653                       |       | 371,924                     |       |
| Swiss Franc denominated borrowings at average  floating rates of approximately 2.02%                                                             |       | 74,413                       |       | 92,217                      |       |
| U.S. Dollar denominated borrowings at average  floating rates of approximately 5.63%                                                             |       | 313,200                      |       | —                      |       |
|                                                                                                                                             |       |                         |       |                        |       |
| Bank Term Loan,  principal payment of $50,000 due June, 2009 at average floating rate of  approximately 5.58%                                    |       | 50,000                       |       | —                      |       |
| Total Long-Term  Debt                                                                                                                            |       | $                            | 1,105,240  |                        | $          | 611,431 |   |

 

In July 2006, we entered into a $1,000,000 revolvingcredit facility with a syndicate of 12 banks (“Revolving Credit Facility”)replacing its existing $700,000 Amended and Restated Facility (see below).  The terms of the Revolving Credit Facilityextended the maturity of the facility in its entirety to a term of five years,maturing July 2011, reduced the borrowing margins, and increased subsidiaryborrowing limits.  Total borrowings underthe Revolving Credit Facility were $464,266 and $464,141 at September 30, 2006and December 31, 2005, respectively, all of which were classified aslong-term.  In April 2004, we enteredinto a $700,000 revolving credit facility with a syndicate of 12 banks (the “UnsecuredFacility”).  The Unsecured Facilityreplaced our lines of credit with several domestic and international banks.  On March 9, 2005, we renegotiated with thesyndicate of 12 banks to amend and restate the Unsecured Facility (the “Amendedand Restated Facility”).  The terms ofthe Amended and Restated Facility extended the maturity of the facility in itsentirety to a term of five years, maturing March 2010, reduced the borrowingmargins and increased subsidiary borrowing limits.

We define long-term lines as those where the lines arenon-cancellable for more than 365 days from the balance sheet date by thefinancial institutions except for specified, objectively measurable violationsof the provisions of the agreement.  Ingeneral, rates for borrowing under the Revolving Credit Facility are LIBOR plus30 basis points and can vary based on our Debt to EBITDA ratio.  The weighted average interest rates for ourlines were 4.37% and 0.62% at September 30, 2006 and December 31, 2005,respectively.  In addition, we arerequired to pay a commitment fee on any unused portion of the facilities of0.075%.  At September 30, 2006, we hadapproximately $535,734 available under its existing bank credit facilities.

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In June 2006, we closed a$50,000 three year term loan with a bank. The term loan allows us to borrow at a floating rate with a lowerborrowing margin than our revolving credit facility, and provides us with anoption to extend the term up to an additional two years.  We used the proceeds to refinance existing debt borrowed under the revolvingcredit facility.

In April 2006, we closed aprivate placement transaction pursuant to which we issued $150,000 of ten-yearnotes to two highly rated insurance companies at a fixed rate of 5.55%.  We used the proceeds to refinanceexisting debt of $150,000 drawn under a short term credit agreement witha bank in January 2006.

In January 2006, we closed aprivate placement transaction pursuant to which our Japanese subsidiary issued34,395,000 Japanese Yen seven-year debt (equal to $300,000 at date of issuance) to several highly ratedinsurance companies at a fixed rate of 1.70%.  We used the proceeds torefinance existing debt in Japan borrowed under our Amended and RestatedFacility.

In January 2003, we closed a private placementtransaction pursuant to which we issued $150,000 of five-year debt to severalhighly rated insurance companies at a fixed rate of 4.60%.  We used the proceeds to pay down short-termdebt.  We also swapped $100,000 of ourfixed rate debt to floating rate based on six-month LIBOR plus a margin ofapproximately 107 basis points.  Weaccounted for these swaps as fair value hedges under the provisions of SFAS No.133, “Accounting for Derivative Instruments and Hedging Activities.”  We determined the fair values based onestimated prices quoted by financial institutions.  The fair values of these swaps were $(2,626) and$(2,710) as of September 30, 2006 and December 31, 2005, respectively.

In March and April 2002, we entered into interest rateswaps on a portion of our variable rate debt portfolio.  These swaps matured in March 2005 and April2006.  We accounted for the interest rateswaps as cash flow hedges and recorded any changes in fair value in OtherComprehensive Income.  We determined thefair values based on estimated prices quoted by financial institutions.  The fair values of these swaps were $(100) asof December 31, 2005.

Our financing arrangements provide for certaincovenants and events of default customary for similar instruments, including inthe case of our main bank arrangements, the private placement transactions, and the term loan, covenants to maintainspecific ratios of consolidated total indebtedness to EBITDA and of EBITDA tocertain fixed charges.  At September 30,2006, we were in compliancewith these financial debt covenants.

**Severance,Impairment and Other Charges**

During the fourth quarter of2004, we recorded $36,890 of severance, impairment and other charges as acomponent of operating income.  As aresult of leveraging priorinvestments in technology and process improvements, we committed to a plan toeliminate selected positions involved primarily in production anddevelopment.  The plan resulted in acharge for one-time termination benefits relating to a headcount reduction of approximately 490 employees locatedprimarily in Europe and the U.S.  Theseseverance benefits were calculated pursuant to the terms of 

 

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establishedemployee protection plans, in accordance with local statutory minimumrequirements or individual employee contracts, as applicable.

All of the2004 fourth quarter charge will be settled in cash.  Substantially all termination actions underthis plan have been completed.

|                                | ** ** | **Severance Related  Reserves** | ** ** |
|--------------------------------|------------|--------------------------------------|------------|
| Charge at  December 31, 2004   |       | $                                    | 36,890     |   |
| 2004 utilization               |       | (452                                 | )          |
| 2005 utilization               |       | (24,052                              | )          |
| 2006 utilization               |       | (10,170                              | )          |
| Balance at  September 30, 2006 |       | $                                    | 2,216      |   |

 

We currently expect that asubstantial portion of the cashoutlays relating to the 2004 fourth quarter charge will be applied against theremaining September 30, 2006 balance during the remainder of 2006.

See Note 15 of our CondensedConsolidated Financial Statements (Unaudited) for a description of our 2001 and2003 restructuring programs.

We expect that futureresults will benefit from the 2001 and 2003 restructuring charges to the extentof the contract-related charges and asset write-downs primarily through2007.  Our severance actions in the 2001and 2003 programs related to a shifting of resources around the Company.  The benefits from the 2004 severance actions will be partially offset by headcountadditions in selected locations.  Thebenefits will be realized primarily in Operating costs and Selling andadministrative expense, with a partial year of benefit realized in 2005 and afull year of benefit expected to be realized in 2006.  For the 2001 and 2003 charges the income statementlines that will be impacted in future periods are Operating costs for thecontract-related charges and Depreciation and amortization related to the assetwrite-downs.  However, we do not expect amaterial impact on future cash flows due to the fact that we are stillcontractually obligated to continue to make payments under impaired contracts.

**Recently Issued AccountingStandards**

In February 2006, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 155, “Accounting for Certain Hybrid FinancialInstruments — an amendment of FASB Statements No. 133 and 140.”  This statement clarifies the application of SFAS No. 133, “Accounting for DerivativeInstruments and Hedging Activities,” to beneficial interests in securitizedfinancial assets and improves the consistency of accounting for similarfinancial instruments. This statement also amends SFAS No. 140, “Accounting forTransfers and Servicing of Financial Assets and Extinguishments of Liabilities —a replacement of FASB Statement No. 125,” to eliminate the prohibition on aqualifying special-purpose entity from holding a derivative financialinstrument that pertains to a beneficial interest other than another derivativefinancial instrument.  This statement iseffective for all financial instruments acquired or issued after 

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the beginning of an entity’sfirst fiscal year that begins after September 15, 2006.  We are currently evaluating this statement todetermine any potential impact that it may have on our financial results.

In March 2006, the FASBissued SFAS No. 156, “Accounting for Servicing of Financial Assets — anamendment of FASB Statement No. 140.” This statement amends SFAS 140 andclarifies the accounting for, measurement of, and disclosure of servicingassets and servicing liabilities.  Thisstatement should be adopted as of the beginning of an entity’s first fiscalyear that begins after September 15, 2006, but earlier adoption is permitted.  We are currently evaluating this statement todetermine any potential impact that it may have on our financial results.

In June 2006, the FASB issued FASB Interpretation No.48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASBStatement No. 109” (“FIN 48”).  Thisinterpretation prescribes a recognition threshold and measurement attribute forthe financial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. It also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure, and transition. This interpretation is effective for fiscal years beginning afterDecember 15, 2006, but earlier adoption is permitted.  We are currently evaluating thisinterpretation to determine any potential impact that it may have on ourfinancial results.

In September 2006, the FASB issued SFAS No. 157, “FairValue Measurements.”  This statementdefines fair value, establishes a framework for measuring fair value undergenerally accepted accounting principles (GAAP), and expands disclosures aboutfair value measurements.  This statementis effective for financial statements issued for fiscal years beginning afterNovember 15, 2007, and interim periods within those fiscal years.  We are currently evaluating this statement todetermine any potential impact that it may have on its financial results.

In September 2006, the FASBissued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension andOther Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and 132(R)” (“SFAS 158”), which requires recognition of the fundedstatus of pension and other postretirement benefit plans on the balance sheet.This statement amends and clarifies the financial accounting and reportingguidance for defined benefit pension and other postretirement plans.  Under SFAS 158, gains and losses, prior service costs and credits, and anyremaining transition amounts under SFAS 87 and SFAS 106 that have not yet beenrecognized through net periodic benefit cost will be recognized in accumulatedother comprehensive income (AOCI), a component of shareholders’ equity, net oftax effects. The measurement date, the date at which the benefit obligation andplan assets are measured, is required to be our fiscal year end.  SFAS 158 is effective for publicly-heldcompanies for fiscal years ending after December 15, 2006, except for themeasurement date provisions, which are effective for fiscal years ending afterDecember 15, 2008. Since we already utilize a fiscal year end measurement date,this particular provision does not affect the financial statements. Based onour financial statements as of December 31, 2005, the adoption of SFAS 158would have reduced Shareholders’ Equity (within AOCI) by approximately $34,000,increased the Postretirement and Postemployment benefit liability byapproximately $50,000, decreased the intangible asset (within Other Assets) byapproximately $1,000 and increased the long-term deferred tax asset (withinOther Assets) by approximately $17,000. SFAS 158 does not affect the results of operations.

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At this time, we are unableto estimate the effect of SFAS 158 on its financial position upon adoption atDecember 31, 2006. This will be determined once the actuarial and plan assetcalculations are performed which are dependent on, among other things, theyear-end discount rate and fair value of plan assets, which are not known until after December 31, 2006.

***Forward-LookingStatements***

This Quarterly Report on Form 10-Q, as well asinformation included in oral statements or other written statements made or tobe made by us, contain statements that, in our opinion, may constitute “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Act of 1995.  The words such as “believe,” “expect,” “anticipate,”“intend,” “plan,” “foresee,” “likely,” “project,” “estimate,” “will,” “may,” “should,”“future,” “predicts,” “potential,” “continue” and similar expressions identifythese forward-looking statements, which appear in a number of places in thisQuarterly Report and include, but are not limited to, all statements relatingto plans for future growth and other business development activities as well ascapital expenditures, financing sources, dividends and the effects ofregulation and competition, foreign currency conversion and all otherstatements regarding our intent, plans, beliefs or expectations or those of ourdirectors or officers.  Investors arecautioned that such forward-looking statements are not assurances for futureperformance or events and involve risks and uncertainties that could causeactual results and developments to differ materially from those covered in suchforward-looking statements.  These risksand uncertainties include, but are not limited to:

·                  risksassociated with operating on a global basis, including fluctuations in thevalue of foreign currencies relative to the U.S. dollar, and the ability tosuccessfully hedge such risks — we derived approximately 64% of our operatingrevenue in 2005 from non-U.S. operations;

·                  regulatory,legislative and enforcement initiatives to which we are, or may become, subjectrelating to access to medical data and to the collection and dissemination ofdata, e.g. prescriber-identifiable data and anonymized patient-specificinformation, which information we anticipate to be an increasingly importanttool in the design, development and marketing of pharmaceuticals;

·                  tothe extent we seek growth through acquisitions, alliances or joint ventures,the ability to identify, consummate and integrate acquisitions, alliances andjoint ventures on satisfactory terms;

·                  ourability to develop new or advanced technologies, including sophisticatedinformation systems, software and other technology used to deliver our productsand services and to do so on a timely and cost-effective basis, and theexposure to the risk of obsolescence or incompatibility of these technologieswith those of our customers or suppliers;

·                  regulatory,legislative and enforcement initiatives to which our customers in thepharmaceutical industry are or may become subject restricting the prices thatmay be charged for prescription or other pharmaceutical products, the manner inwhich such products may be marketed or sold or the data that may be used in suchmarketing efforts;

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·                  our ability to maintain and defendour intellectual property rights in jurisdictions around the world;

·                  our ability to successfully maintainhistoric effective tax rates;

·                  to the extent unforeseen cash needsarise, the ability to obtain financing on favorable terms;

·                  competition, particularly in themarkets for pharmaceutical information;

·                  deterioration in economic conditions,particularly in the pharmaceutical, healthcare, or other industries in whichour customers operate;

·                  consolidation in the pharmaceuticalindustry and the other industries in which our customers operate;

·                  the imposition of additionalrestrictions on our use of or access to data, or the refusal by data suppliersto provide data to us;

·                  conditions in the securities marketsthat may affect the value or liquidity of portfolio investments; and management’sestimates of lives of assets, recoverability of assets, fair market value,estimates and liabilities and accrued income tax benefits and liabilities;

·                  regulatory, legislative and enforcementinitiatives to which we are or may become subject, relating to tax; and

·                  terroristactivity, the threat of such activity, and responses to and results of suchactivity and threats, including but not limited to effects, domestically and/orinternationally, on us, our personnel and facilities, our customers andsuppliers, financial markets and general economic conditions.

Consequently, all of the forward-looking statements wemake in this document are qualified by the information contained herein, including, but not limited to, theinformation contained under this heading and our Condensed ConsolidatedFinancial Statements (Unaudited) and notes thereto for the three and ninemonths ended September 30, 2006 and by the material set forth under the headings“Business” and “Risk Factors” in our Annual Report on Form 10-K for the yearended December 31, 2005.  We are under noobligation to publicly release any revision to any forward-looking statementcontained or incorporated herein to reflect any future events or occurrences.

**Item 3. Quantitative and Qualitative Disclosures About Market Risk**

Information in response to this Item is set forth in “Note10. Financial Instruments” in the Notes to the Condensed Consolidated FinancialStatements (Unaudited).

**Item 4.  Controls and Procedures**

(a)          Evaluation of Disclosure Controls and Procedures

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The Company maintains disclosure controls andprocedures that are designed to ensure that information required to bedisclosed in the reports that the Company files or submits to the SEC under theSecurities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms, and that such information is accumulated and communicated tothe Company’s management, including its principal executive and principalfinancial officers, or persons performing similar functions, as appropriate, toallow timely decisions regarding required disclosure.  In designing and evaluating the disclosurecontrols and procedures, management recognized that any controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives, as theCompany’s disclosure controls and procedures are designed to do.  Thus, management necessarily was required toapply its judgment in evaluating the cost-benefit relationship of possiblecontrols and procedures.

The Company’s ChiefExecutive Officer and****actingprincipal financial officer have evaluated the effectiveness of the Company’sdisclosure controls and procedures (as such term is defined in Rules 13a-14c and 15d-14cunder the Exchange Act) as of September 30, 2006 (the “Evaluation Date”).  Based on such evaluation, such officers haveconcluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures areeffective to ensure that information required to be disclosed by theCompany in the reports that the Company files or submits under the Exchange Actis recorded, processed, summarized and reported within the time periodsspecified in the SEC’s rules and forms and to ensure that information requiredto be disclosed by the Company in the reports that the Company files or submitsunder the Exchange Act is accumulated and communicated to the Company’smanagement, including its principal executive and principal financial officers,or persons performing similar functions, as appropriate to allow timelydecisions regarding required disclosure.

(b)         Changes in Internal Control over Financial Reporting

There have been no changes in the Company’s internalcontrol over financial reporting that occurred during the period covered bythis report that have materially affected, or are reasonably likely tomaterially affect, the Company’s internal control over financial reporting.

 

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**PARTII.  OTHER INFORMATION**

**Item 1. Legal Proceedings**

Information in response to this Item is incorporatedby reference to the information set forth in “Note 8. Contingencies” in theNotes to the Condensed Consolidated Financial Statements (Unaudited).

**Item 1A. Risk Factors**

In addition to the other information included orincorporated by reference into this Quarterly Report on Form 10-Q, includingthe matters addressed under the caption “Forward-Looking Statements,” set forthbelow are some of the risks and uncertainties that, if they were to occur,could materially adversely affect our business or that could cause our actualresults to differ materially from the results contemplated by theforward-looking statements contained in this report and other public statementswe make.

**Our datasuppliers might restrict our use of or refuse to license data, which could leadto our inability to provide certain products or services.**

Our products and servicesincorporate data that we collect from third parties.  These suppliers of data may increaserestrictions on our use of such data, fail to adhere to our quality controlstandards or refuse altogether to license the data to us. For example, in 2002certain of our data suppliers in Japan began withholding certain data fromus.  This interruption in data supply ledus to discontinue one of our Japanese products and adversely affected ouroperating results.  If the suppliers of asignificant amount of data that we use for one or more of our products orservices were to impose additional contractual restrictions on our use oraccess to data, fail to adhere to our quality control standards, or refuse toprovide data, now or in the future, our ability to provide products andservices to our clients could be materially adversely impacted, which couldresult in decreased revenue, net income and earnings per share.

**Dataprotection laws may restrict our activities.**

Data protection laws affect our collection, use,storage and transfer of personally identifiable information both abroad and inthe United States.  Compliance with suchlaws may require investment or may dictate that we not offer certain types ofproducts and services.  Failure to complywith such laws may result in, among other things, civil and criminal liability,negative publicity, data being blocked from use and liability under contractualwarranties.

In addition, there is an increasing public concernregarding data protection issues and the number of jurisdictions with dataprotection laws has been slowly increasing. For example, there have been a number of legislative and regulatoryinitiatives in the U.S. and abroad in the area of access to medical data.  These initiatives tend to seek to placerestrictions on the use and disclosure of patient-identifiable informationwithout consent and, in some cases, seek to extend restrictions to non-patientidentifiable information, e.g. prescriber identifiable information, or to theprocess of anonymizing data.  There arealso some initiatives that seek to restrict access to this information tonon-commercial uses.  While most of thecurrent initiatives should not impact our business, there can be no assurancethat these initiatives or future initiatives will not adversely affect IMS’ability to generate or assemble data or to develop or market current or futureproducts or services.

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**Ourbusiness is subject to exchange rate fluctuations and our revenue and netincome may suffer due to currency translations.**

We operate globally, derivingapproximately 64% of our 2005 revenue from non-United States operations.  As a result, fluctuations in the value offoreign currencies relative to the U.S. dollar increase the volatility of U.S.dollar-denominated operating results. Emerging markets currencies tend tobe considerably less stable than those in established markets, which mayfurther contribute to volatility in our U.S. dollar-denominated operatingresults.

As a result of devaluations andfluctuations in currency exchange rates or the imposition of limitations onconversion of foreign currencies into dollars, we are subject to currencytranslation exposure on the profits of our operations, in addition to economicexposure.

**Ourinternational operations present risks to our current businesses that couldimpede growth in the future.**

International operations are subject to various risksthat could adversely affect our business, including:

·                  costs ofcustomizing services for foreign clients;

·                  reducedprotection for intellectual property rights in some countries;

·                  the burdens ofcomplying with a wide variety of foreign laws;

·                  exposure tolocal economic conditions; and

·                  exposure tolocal political conditions, including the risks of an outbreak of war, theescalation of hostilities, acts of terrorism and nationalization, expropriation, price controls or other restrictivegovernment actions.

**We areinvolved in tax related matters that could have a material effect on us.**

We (and our predecessors) haveentered, and we continue to enter, into global tax planning initiatives in thenormal course of business. These activities are subject to review by applicabletax authorities and courts. As a result of the review process, uncertaintiesexist and it is possible that some of these matters could be resolved adverselyto us, including those tax related matters described in Part I, Item 3 of thisQuarterly Report on Form 10-Q. Moreover, there can be no assurance that we willbe able to maintain our effective tax rate.

**We are, andmay become, involved in litigation that could harm the value of our business**.

In the normal course of our business, we are involvedin lawsuits, claims, audits and investigations, such as those described in PartI, Item 3 of this Quarterly Report on Form 10-Q.  The outcome of these matters could have amaterial adverse effect on our business, results of operation or financialcondition.  In addition, we may becomesubject to future lawsuits, claims, audits and investigations that could resultin substantial costs and divert our attention and resources.

**Significanttechnological changes could render our products and services obsolete.  We may not be able to develop the technologynecessary for our business, or to do so efficiently.**

We operate in businesses that require sophisticateddata collection and processing systems and software and other technology.  Some of the technologies supporting theindustries we serve are changing rapidly and we must continue to developcost-effective technologies for data collection and processing to 

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accommodate suchchanges.  We also must continue todeliver data to our clients in forms that are easy to use while simultaneouslyproviding clear answers to complex questions. There can be no guarantee that we will be able to develop newtechnologies for data collection, processing and delivery or that we will beable to do so as quickly or cost-effectively as our competition.  Significant technological change could renderour products and services obsolete.

Moreover, the introduction of new products andservices embodying new technologies and the emergence of new industry standardscould render existing products and services obsolete.  Our continued success will depend on ourability to adapt to changing technologies, manage and process ever-increasingamounts of data and information and improve the performance, features andreliability of our products and services in response to changing client and industrydemands.  We may experience difficultiesthat could delay or prevent the successful design, development, testing,introduction or marketing of our products and services.  New products and services, or enhancements toexisting products and services, may not adequately meet the requirements ofcurrent and prospective clients or achieve any degree of significant marketacceptance.

**Government imposed price restrictions on pharmaceutical companies couldreduce demand for our products and services.**

A number of countries in which weoperate have enacted regulations limiting the prices pharmaceutical companiesmay charge for drugs. We believe that such cost containment measures will causepharmaceutical companies to seek more effective means of marketing theirproducts (which will benefit us in the medium and long-term). However, suchgovernmental regulation may cause pharmaceutical companies to revise or reducetheir marketing programs in the near term, which may in turn reduce the demandfor certain of our products and services. This could result in decreased revenue, net income and earnings pershare.

**Our success will depend on ourability to protect our intellectual property rights.**

The success of our businesses will continue to depend,in part, on:

·                  obtaining patentprotection for our technology, products and services;

·                  defending ourpatents, copyrights and other intellectual property;

·                  preserving ourtrade secrets and maintaining the security of our know-how; and

·                  operatingwithout infringing upon patents and proprietary rights held by third parties.

We rely on a combination of contractual provisions,confidentiality procedures and patent, copyright, trademark, service mark andtrade secret laws to protect the proprietary aspects of our products, services,databases and technologies.  There can be no assurance that these protectionswill be adequate, or that we will adequately employ each and every one of theseprotections at all times, to provide sufficient protection in the futureto prevent the use or misappropriation of our data, technology and otherproducts and services.  Further, our competitors may develop products, services,databases or technologies that are substantially equivalent or superior to ourproducts, services, databases or technologies. Although we believe that our products, services, databases, technologiesand related proprietary rights do not infringe upon the proprietary rights ofthird parties, there can be no assurance that third parties will not assertinfringement claims against us in the future.  Litigation may be necessary to enforce ourintellectual property rights, to protect our trade secrets and to determine thevalidity and scope of our proprietary rights. For example, we have been involved in litigation with Insight HealthGmbH & Co. KG in Germany in order to protect our proprietary mappingsoftware. In addition, the growing need for global data, along with increasedcompetition and 

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technologicaladvances, puts increasing pressure on us to share our intellectual property forclient applications.  Any futurelitigation, regardless of outcome, could result in substantial expense anddiversion of resources with no assurance of success and could seriously harmour business, financial condition and operating results.

**If we are unable to attract, retain and motivateemployees, we will not be able to compete effectively and will not be able toexpand our business.**

Our success and ability to grow are dependent, inpart, on our ability to hire, retain and motivate sufficient numbers oftalented people, with the increasingly diverse skills needed to serve clientsand expand our business, in many locations around the world. Competition forhighly qualified technical and managerial, and particularly consultingpersonnel, is intense. Recruiting, training and retention costs and benefitsplace significant demands on our resources. The inability to attract qualifiedemployees in sufficient numbers to meet particular demands or the loss of asignificant number of our employees could have a serious negative effect on us,including our ability to obtain and successfully complete important clientengagements and thus maintain or increase our revenues.

**We may be unsuccessful in identifying acquisition candidates orevaluating the material risks involved in any acquisition**.

An important aspect of theCompany’s business strategy in the past has been growth through acquisitions orjoint ventures and we may continue to acquire or make investments incomplementary businesses, technologies, services or products.  There can be no assurance that we will beable to continue to identify and consummate acquisitions or joint ventures onsatisfactory terms. Moreover, every acquisition and joint venture entails somedegree of uncertainty and risk.  Forexample, we may be unsuccessful in identifying and evaluating business, legalor financial risks as part of the due diligence process associated with atransaction. In addition, some acquisitions will have contingent considerationcomponents that may require the Company to pay additional amounts in the futurein relation to future performance results of the acquired business.  If we do not properly assess these risks, orif we fail to realize the benefits from one or more acquisitions, our business,results of operations and financial condition could be adversely affected.

**We may be unsuccessful inintegrating any acquired operations with our existing business.**

We may experience difficulties in integratingoperations acquired from other companies. These difficulties include the diversion of management’s attention fromother business concerns and the potential loss of key employees of the acquiredoperations.  Acquisitions also frequentlyinvolve significant costs, often related to integrating information technology,accounting and management services and rationalizing personnel levels.  If we experience difficulties in integratingone or more acquisitions, our business, results of operations and financialcondition could be adversely affected.

**Consolidationin the industries in which our clients operate may put pressure on the pricingof our products and services, and could increase the cost of acquiring data,leading to decreased earnings.**

Consolidation in the pharmaceutical industry could putpressure on the pricing of our information products and services, as theconsolidated client seeks pricing concessions from us, and could limitavailable dollars for our products and services.  In addition, when companies merge, theproducts and services they previously purchased separately are now purchasedonly once by the combined entity, leading to contract compression and loss ofrevenue.  While we have experiencedsuccess in mitigating the revenue 

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impact of anypricing pressure through effective negotiations and by providing services toindividual businesses within a particular group, there can be no assurance asto the degree to which we will be able to continue to do so as consolidationcontinues.

**Hardwareand software failures, delays in the operation of our computer andcommunications systems or the failure to implement system enhancements may harmour business.**

Our success depends on the efficient and uninterruptedoperation of our computer and communications systems.  A failure of our network or data gatheringprocedures could impede the processing of data, delivery of databases andservices, client orders and day-to-day management of our business and couldresult in the corruption or loss of data. While many of our operations have appropriate disaster recovery plans inplace, we currently do not have full backup facilities everywhere in the worldto provide redundant network capacity in the event of a system failure.  Despite any precautions we may take, damagefrom fire, floods, hurricanes, power loss, telecommunications failures,computer viruses, break-ins and similar events at our various computerfacilities could result in interruptions in the flow of data to our servers andfrom our servers to our clients.  In addition,any failure by our computer environment to provide our required datacommunications capacity could result in interruptions in our service.  In the event of a delay in the delivery ofdata, we could be required to transfer our data collection operations to analternative provider of server hosting services.  Such a transfer could result in significantdelays in our ability to deliver our products and services to our clients.  Additionally, significant delays in theplanned delivery of system enhancements, improvements and inadequate performanceof the systems once they are completed could damage our reputation and harm ourbusiness.  Finally, long-term disruptionsin the infrastructure caused by events such as natural disasters, the outbreakof war, the escalation of hostilities, and acts of terrorism (particularlyinvolving cities in which we have offices) could adversely affect ourbusinesses.  Although we carry propertyand business interruption insurance, our coverage may not be adequate tocompensate us for all losses that may occur.

**Changesin tax laws or their application may adversely affect our reported results.**

We operate in approximately 100 countries worldwideand our earnings are subject to taxation in many differing jurisdictions and atdiffering rates.  We seek to organize ouraffairs in a tax efficient manner, taking account of the jurisdictions in whichwe operate.  Tax laws that apply to ourbusiness may be amended by the relevant authorities, for example as a result ofchanges in fiscal circumstances or priorities. Such amendments, or their application to our business, may adverselyaffect our reported results.

**Ourbusinesses are subject to significant or potential competition that is likelyto intensify in the future.**

Our future growth and success will be dependent on ourability to successfully compete with other companies that provide similarservices in the same markets, some of which may have financial, marketing,technical and other advantages.

**The success of our business will largely depend on the performance ofthe pharmaceutical and healthcare industries.**

The vast majority of our revenues are generated fromsales to the pharmaceutical and healthcare industries. To the extent thebusinesses we serve, especially our clients in the pharmaceutical andhealthcare industries, are subject to financial pressures of, for example,price controls, increased costs or reduced 

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demand for their products, the demand for our productsand services, or the price our clients are willing to pay for those productsand services, may decline.

**Item2.  Unregistered Sales of EquitySecurities and Use of Proceeds.**
| **Period**            | ** ** | **Total Number  of Shares  Purchased** | ** ** | **Average  Price Paid  per Share** | ** ** | **Total Number of Shares  Purchased Under  Publicly Announced  Programs** | ** ** | **Maximum Number of  Shares that May Yet Be  Purchased Under the  Programs(1)** | ** ** |
|-----------------------|------------|--------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------|------------|
|                  |       |                                             |       |                                         |       |                                                                                               |       |                                                                                                                    |       |
| July 1-31, 2006       |       | 10,000                                           |       | $                                            | 26.92      |                                                                                               | 10,000     |                                                                                                                    | 11,364,200 |   |
| August 1-31,  2006    |       | 2,763,600                                        |       | $                                            | 27.09      |                                                                                               | 2,763,600  |                                                                                                                    | 8,600,600  |   |
| September 1-30,  2006 |       | 2,156,900                                        |       | $                                            | 27.04      |                                                                                               | 2,156,900  |                                                                                                                    | 6,443,700  |   |
| **Total**             |       | 4,930,500                                        |       | $                                            | 27.07      |                                                                                               | 4,930,500  |                                                                                                                    | 6,443,700  |   |

 

(1)    In January2006, the Board of Directors authorized a stock repurchase program to buy up to30,000,000 shares.  As of September 30,2006, 6,443,700 shares remained available for repurchase under the January 2006program.  Unless terminated earlier byresolution of the Company’s Board of Directors, this program will expire whenthe Company has repurchased all shares authorized for repurchasethereunder.  See Note 13 of our Notes toCondensed Consolidated Financial Statements (Unaudited) for further details.

 

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**Item 6.  Exhibits**

(a)                           Exhibits:

 
| Exhibit  Number | ** ** | **Description of Exhibits**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|-----------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1            |       | Amended and Restated Agreement of Limited Liability  Company of IMS Health Licensing Associates, L.L. C. by and among IMS Health  Incorporated, Coordinated Management Systems, Inc., IMS AG, Utrecht-America  Finance Co. and Edam, L.L.C., dated as of July 1, 2006 (incorporated by  reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K, filed  on July 6, 2006).                                                                                                                                                                                                                   |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.2            |       | Fourth Amended and Restated IMS Health Guaranty made  by IMS Health Incorporated in favor of Utrecht-America Finance Co. and Edam,  L.L.C., dated as of July 1, 2006 (incorporated by reference to Exhibit 99.2 to the Company’s Current  Report on Form 8-K, filed on July 6, 2006).                                                                                                                                                                                                                                                                                                                     |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.3            |       | $1,000,000,000 Credit Agreement, dated as of July  27, 2006, by and among IMS Health Incorporated, as a borrower, IMS AG, as a  borrower, IMS Japan K.K, as a borrower, the lenders party thereto, Wachovia  Bank, National Association, as administrative agent, Barclays Bank PLC and  ABN Amro Bank N.V., as co-syndication agents, Suntrust Bank and Bank of  America, N,A., as co-documentation agents, and Wachovia Capital Markets, LLC,  as lead arranger and sole book runner (incorporated by reference to Exhibit  99.1 to the Company’s Current Report on Form 8-K, filed on August 1, 2006). |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 31.1            |       | CEO 302 Certification pursuant to Rule  13a-14(a)/15d-14(a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 31.2            |       | CFO 302 Certification pursuant to Rule  13a-14(a)/15d-14(a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 32.1            |       | Joint CEO/CFO Certification Required Under Section  906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |

 

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**SIGNATURES**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

|                        |   |   | IMS Health Incorporated                                        |
|------------------------|--------|--------|----------------------------------------------------------------|
|                   |   |   |                                                           |
|                   |   |   |                                                           |
|                   | By:    |   | /s/ Leslye G. Katz                                             |
| Date: November 3, 2006 |   |   | Leslye G. Katz                                                 |
|                   |   |   | Vice President and Controller                                  |
|                   |   |   | (principal accounting and acting principal financial  officer) |
|                   |   |   |                                                           |

 

 

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# **EXHIBITINDEX**

| Exhibit Number | ** ** | **Description of Exhibits**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | ** ** | ** ** |
|----------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| 10.1           |       | Amended and Restated  Agreement of Limited Liability Company of IMS Health Licensing Associates,  L.L. C. by and among IMS Health Incorporated, Coordinated Management Systems,  Inc., IMS AG, Utrecht-America Finance Co. and Edam, L.L.C., dated as of July  1, 2006 (incorporated by reference to Exhibit 99.1 to the Company’s Current  Report on Form 8-K, filed on July 6, 2006).                                                                                                                                                                                                                    |
|           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.2           |       | Fourth Amended and  Restated IMS Health Guaranty made by IMS Health Incorporated in favor of  Utrecht-America Finance Co. and Edam, L.L.C., dated as of July 1, 2006 (incorporated by reference to Exhibit 99.2  to the Company’s Current Report on Form 8-K, filed on July 6, 2006).                                                                                                                                                                                                                                                                                                                      |
|           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.3           |       | $1,000,000,000 Credit  Agreement, dated as of July 27, 2006, by and among IMS Health Incorporated,  as a borrower, IMS AG, as a borrower, IMS Japan K.K, as a borrower, the  lenders party thereto, Wachovia Bank, National Association, as administrative  agent, Barclays Bank PLC and ABN Amro Bank N.V., as co-syndication agents,  Suntrust Bank and Bank of America, N,A., as co-documentation agents, and  Wachovia Capital Markets, LLC, as lead arranger and sole book runner  (incorporated by reference to Exhibit 99.1 to the Company’s Current Report on  Form 8-K, filed on August 1, 2006). |
|           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 31.1           |       | CEO 302 Certification  pursuant to Rule 13a-14(a)/15d-14(a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 31.2           |       | CFO 302 Certification  pursuant to Rule 13a-14(a)/15d-14(a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 32.1           |       | Joint CEO/CFO  Certification Required Under Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |

 

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