**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

| **(Mark One)** |
|----------------|
| ** **     |
| **x**          | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **     | ** ** |
| ** **     | **For the quarterly period ended September 30,  2007** |
| ** **     | ** ** |
| **OR**         |
| ** **     | ** ** |
| **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**

 

 

**IMSHealth Incorporated**

(Exact Name of Registrantas Specified in its Charter)

 

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

 

**901 Main Avenue, Norwalk, CT06851**

(Address of principalexecutive offices)(Zip Code)

 

**(203) 845-5200**

(Registrant’s telephonenumber, including area code)

 

**N/A**

(Former name, formeraddress and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to the filing requirements for the past 90 days.

xYes   oNo

 

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 | Accelerated Filer o | Non-Accelerated Filer o |
|---------------------------|---------------------|-------------------------|

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).  oYes   xNo

 

Indicate the number of shares outstanding of each ofthe issuer’s classes of common stock, as of the latest practicable date.  At September 30, 2007, there were 193,991,579shares of IMS Health Incorporated Common Stock, $0.01 par value, outstanding.

 

 

----

 

**IMSHEALTH INCORPORATED**

 

**INDEX TOFORM 10-Q**

 
| **PART  I. FINANCIAL INFORMATION**                                                                       | **3**      |
|----------------------------------------------------------------------------------------------------------|------------|
|                                                                                                     |       |
| **Item  1. Financial Statements (Unaudited)**                                                            | **3**      |
| Condensed  Consolidated Statements of Financial Position                                                 | 3          |
| As of September 30, 2007 and  December 31, 2006                                                          |       |
|                                                                                                     |       |
| Condensed  Consolidated Statements of Income                                                             | 4          |
| Three Months Ended September  30, 2007 and 2006                                                          |       |
|                                                                                                     |       |
| Condensed  Consolidated Statements of Income                                                             | 5          |
| Nine Months Ended September  30, 2007 and 2006                                                           |       |
|                                                                                                     |       |
| Condensed  Consolidated Statements of Cash Flows                                                         | 6          |
| Nine Months Ended September  30, 2007 and 2006                                                           |       |
|                                                                                                     |       |
| Notes to  Condensed Consolidated Financial Statements                                                    | 7          |
|                                                                                                     |       |
| **Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations** | **29**     |
| ** **                                                                                               | ** ** |
| **Item 3.  Quantitative and Qualitative Disclosures About Market Risk**                                  | **49**     |
| ** **                                                                                               | ** ** |
| **Item 4.  Controls and Procedures**                                                                     | **49**     |
| ** **                                                                                               | ** ** |
| **PART II.  OTHER INFORMATION**                                                                     | **50**     |
|                                                                                                     |       |
| **Item 1. Legal  Proceedings**                                                                           | **50**     |
| ** **                                                                                               | ** ** |
| **Item 1A. Risk Factors**                                                                                | **50**     |
|                                                                                                     |       |
| **Item 2. Unregistered Sales of Equity  Securities and Use of Proceeds**                                 | **56**     |
|                                                                                                     |       |
| ****Item 6.  Exhibits****                                                                                | ****57**** |
|                                                                                                     |       |
| **SIGNATURES**                                                                                           | **58**     |
|                                                                                                     |       |
| **EXHIBITS**                                                                                             | **59**     |

 

2

----

 

**PART I. FINANCIAL INFORMATION**

**Item 1. FINANCIAL STATEMENTS**

 

**IMS HEALTH INCORPORATED**

**CONDENSEDCONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Unaudited)**

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

 
| ** **                                                                                                               | ** ** | **As of**

**September 30,**

**2007** | ** **    | **As of**

**December 31,**

**2006** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|---------------|-------------------------------------------------|------------|
| **Assets:**                                                                                                              |       |                                             |          |                                            |       |
| **Current  Assets:**                                                                                                     |       |                                             |          |                                            |       |
| Cash and cash  equivalents                                                                                               | ** ** | **$**                                            | **195,985**   |                                            | $          | 157,346 |   |
| Accounts  receivable, net of allowances of $7,717 and $7,860 in 2007 and 2006, respectively                              | ** ** | **423,055**                                      |          | 367,413                                         |       |
| Other current  assets                                                                                                    | ** ** | **194,330**                                      |          | 168,534                                         |       |
| **Total  Current Assets**                                                                                                | ** ** | **813,370**                                      |          | 693,293                                         |       |
| Securities and  other investments                                                                                        | ** ** | **5,015**                                        |          | 6,401                                           |       |
| Property, plant  and equipment, net of accumulated depreciation of $197,241 and $181,543 in 2007 and 2006,  respectively | ** ** | **173,619**                                      |          | 148,190                                         |       |
| Computer  software                                                                                                       | ** ** | **272,187**                                      |          | 255,285                                         |       |
| Goodwill                                                                                                                 | ** ** | **579,381**                                      |          | 531,610                                         |       |
| Other assets                                                                                                             | ** ** | **286,137**                                      |          | 271,815                                         |       |
| **Total  Assets**                                                                                                        | ** ** | **$**                                            | **2,129,709** |                                            | $          | 1,906,594 |   |
| ** **                                                                                                               | ** ** | ** **                                       |          |                                            |       |
| **Liabilities,  Minority Interests and Shareholders’ (Deficit) Equity:**                                            |       |                                             |          |                                            |       |
| **Current  Liabilities:**                                                                                                |       |                                             |          |                                            |       |
| Accounts payable                                                                                                         | ** ** | **$**                                            | **73,270**    |                                            | $          | 82,013 |   |
| Accrued and  other current liabilities                                                                                   | ** ** | **232,386**                                      |          | 256,672                                         |       |
| Accrued income  taxes                                                                                                    | ** ** | **72,474**                                       |          | 74,485                                          |       |
| Short-term  deferred tax liability                                                                                       | ** ** | **9,666**                                        |          | 7,238                                           |       |
| Deferred  revenues                                                                                                       | ** ** | **111,752**                                      |          | 122,466                                         |       |
| **Total  Current Liabilities**                                                                                           | ** ** | **499,548**                                      |          | 542,874                                         |       |
| Postretirement  and postemployment benefits                                                                              | ** ** | **89,341**                                       |          | 85,846                                          |       |
| Long-term debt  (Note 9)                                                                                                 | ** ** | **1,197,642**                                    |          | 975,406                                         |       |
| Other  liabilities                                                                                                       | ** ** | **248,408**                                      |          | 168,149                                         |       |
| **Total  Liabilities**                                                                                                   | ** ** | **$**                                            | **2,034,939** |                                            | $          | 1,772,275 |   |
| ** **                                                                                                               | ** ** | ** **                                       |          |                                            |       |
| **Commitments  and Contingencies (Note 7)**                                                                              |       |                                             |          |                                            |       |
| **Minority  Interests**                                                                                                  | ** ** | **$**                                            | **101,169**   |                                            | $          | 100,410 |   |
|                                                                                                                     |       |                                             |          |                                            |       |
| **Shareholders’  (Deficit) Equity:**                                                                                |       |                                             |          |                                            |       |
| Common Stock,  par value $.01, authorized 800,000 shares; issued 335,045 shares in 2007 and  2006, respectively          | ** ** | **$**                                            | **3,350**     |                                            | $          | 3,350 |   |
| Capital in  excess of par                                                                                                | ** ** | **529,352**                                      |          | 497,955                                         |       |
| Retained  earnings                                                                                                       | ** ** | **2,759,256**                                    |          | 2,612,939                                       |       |
| Treasury stock,  at cost, 141,054 and 134,367 shares in 2007 and 2006, respectively                                      | ** ** | **(3,287,969**                                   | )             | (3,044,996                                      | )          |
| Cumulative  translation adjustment                                                                                       | ** ** | **49,770**                                       |          | 28,786                                          |       |
| Unamortized  postretirement and postemployment balances (SFAS No. 158)                                                   | ** ** | **(60,164**                                      | )             | (64,264                                         | )          |
| Unrealized gain  on changes in fair value of cash flow hedges, net of tax                                                | ** ** | **6**                                            |          | 6                                               |       |
| Unrealized gain  on investments, net of tax                                                                              | ** ** | **—**                                       |          | 133                                             |       |
| **Total  Shareholders’ (Deficit) Equity**                                                                           | ** ** | **$**                                            | **(6,399**    | )                                               | $          | 33,909 |   |
| **Total  Liabilities, Minority Interests and Shareholders’ (Deficit) Equity**                                       | ** ** | **$**                                            | **2,129,709** |                                            | $          | 1,906,594 |   |

 

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

 

3

----

 

**IMS HEALTH INCORPORATED**

**CONDENSEDCONSOLIDATED STATEMENTS OF INCOME (Unaudited)**

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

* *
| ** **                                                                                               | ** ** | **Three Months Ended**

**September 30,** | ** **  |
|----------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|-------------|
| ** **                                                                                               | ** ** | **2007**                                                 | ** **  | **2006** | ** ** |
|                                                                                                     |       |                                                     |        |   |   |
| Information and  analytics revenue                                                                       | ** ** | **421,589**                                              |        | 396,522 |   |
| Consulting and  services revenue                                                                         | ** ** | **117,221**                                              |        | 86,184 |   |
| **Operating  Revenue**                                                                                   | ** ** | **$**                                                    | **538,810** |   | $ | 482,706 |   |
|                                                                                                     |       |                                                     |        |   |   |
| Operating costs  of information and analytics                                                            | ** ** | **179,037**                                              |        | 165,035 |   |
| Direct and  incremental costs of consulting and services                                                 | ** ** | **53,968**                                               |        | 43,617 |   |
| External-use  software amortization                                                                      | ** ** | **12,209**                                               |        | 10,952 |   |
| Selling and  administrative expenses                                                                     | ** ** | **157,019**                                              |        | 129,670 |   |
| Depreciation and  other amortization                                                                     | ** ** | **19,475**                                               |        | 18,043 |   |
| **Operating  Income**                                                                                    | ** ** | **117,102**                                              |        | 115,389 |   |
| Interest income                                                                                          | ** ** | **1,909**                                                |        | 1,322 |   |
| Interest expense                                                                                         | ** ** | **(9,903**                                               | **)**       | (10,623 | ) |
| Gains (losses)  from investments, net                                                                    | ** ** | **353**                                                  | ** **  | (305 | ) |
| Other expense,  net                                                                                      | ** ** | **(9,569**                                               | **)**       | (425 | ) |
| **Non-Operating  Loss, Net**                                                                             | ** ** | **(17,210**                                              | **)**       | (10,031 | ) |
| Income before  provision for income taxes                                                                | ** ** | **99,892**                                               | ** **  | 105,358 |   |
| Provision for  income taxes (Note 12)                                                                    | ** ** | **(42,767**                                              | **)**       | (36,094 | ) |
| **Net  Income**                                                                                          | ** ** | **$**                                                    | **57,125**  |   | $ | 69,264 |   |
|                                                                                                     |       |                                                     |        |   |   |
| **Basic  Earnings Per Share of Common Stock**                                                            | ** ** | **$**                                                    | **0.29**    |   | $ | 0.34 |   |
| **Diluted  Earnings Per Share of Common Stock**                                                          | ** ** | **$**                                                    | **0.29**    |   | $ | 0.34 |   |
|                                                                                                     |       |                                                     |        |   |   |
| Weighted average  number of shares outstanding – Basic                                              | ** ** | **194,870**                                              |        | 200,900 |   |
| Dilutive effect  of shares issuable as of period-end under Stock-based compensation plans and  other     | ** ** | **3,328**                                                |        | 3,702 |   |
| Adjustment of  shares outstanding applicable to exercised and cancelled stock options during  the period | ** ** | **158**                                                  |        | 340 |   |
| **Weighted  Average Number of Shares Outstanding – Diluted**                                        | ** ** | **198,356**                                              |        | 204,942 |   |

 

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

 

4

----

 

**IMS HEALTH INCORPORATED**

**CONDENSEDCONSOLIDATED STATEMENTS OF INCOME (Unaudited)**

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

 
| ** **                                                                                               | ** ** | **Nine Months Ended**

**September 30,** | ** **    |
|----------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|---------------|
| ** **                                                                                               | ** ** | **2007**                                                | ** **    | **2006** | ** ** |
|                                                                                                     |       |                                                    |          |   |   |
| Information and  analytics revenue                                                                       | ** ** | **1,255,640**                                           |          | 1,167,356 |   |
| Consulting and  services revenue                                                                         | ** ** | **330,991**                                             |          | 247,724 |   |
| **Operating  Revenue**                                                                                   | ** ** | **$**                                                   | **1,586,631** | ** ** | $ | 1,415,080 | ** ** |
|                                                                                                     |       |                                                    |          |   |   |
| Operating costs  of information and analytics                                                            | ** ** | **531,496**                                             |          | 489,525 |   |
| Direct and  incremental costs of consulting and services                                                 | ** ** | **164,628**                                             |          | 129,012 |   |
| External-use  software amortization                                                                      | ** ** | **35,830**                                              |          | 32,225 |   |
| Selling and  administrative expenses                                                                     | ** ** | **450,827**                                             |          | 386,967 |   |
| Depreciation and  other amortization                                                                     | ** ** | **57,548**                                              |          | 52,884 |   |
| Merger costs  (Note 16)                                                                                  | ** ** | **—**                                              |          | 6,016 |   |
| **Operating  Income**                                                                                    | ** ** | **346,302**                                             |          | 318,451 |   |
| Interest income                                                                                          | ** ** | **5,436**                                               |          | 4,077 |   |
| Interest expense                                                                                         | ** ** | **(27,875**                                             | **)**         | (29,270 | ) |
| Gains from  investments, net                                                                             | ** ** | **2,317**                                               | ** **    | 2,443 |   |
| Other income  (expense), net                                                                             | ** ** | **(12,367**                                             | **)**         | 38,207 |   |
| **Non-Operating  Income (Loss), Net**                                                                    | ** ** | **(32,489**                                             | **)**         | 15,457 |   |
| Income before  provision for income taxes                                                                | ** ** | **313,813**                                             | ** **    | 333,908 |   |
| Provision for  income taxes (Note 12)                                                                    | ** ** | **(97,725**                                             | **)**         | (83,864 | ) |
| **Net  Income**                                                                                          | ** ** | **$**                                                   | **216,088**   |   | $ | 250,044 |   |
|                                                                                                     |       |                                                    |          |   |   |
| **Basic  Earnings Per Share of Common Stock**                                                            | ** ** | **$**                                                   | **1.10**      |   | $ | 1.23 |   |
| **Diluted  Earnings Per Share of Common Stock**                                                          | ** ** | **$**                                                   | **1.08**      |   | $ | 1.20 |   |
| ** **                                                                                               | ** ** | ** **                                              | ** **    |   |   |   |   |
| Weighted average  number of shares outstanding – Basic                                              | ** ** | **195,997**                                             |          | 203,610 |   |
| Dilutive effect  of shares issuable as of period-end under stock-based compensation plans and  other     | ** ** | **3,118**                                               |          | 3,100 |   |
| Adjustment of  shares outstanding applicable to exercised and cancelled stock options during  the period | ** ** | **936**                                                 |          | 807 |   |
| **Weighted  Average Number of Shares Outstanding – Diluted**                                        | ** ** | **200,051**                                             |          | 207,517 |   |

 

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

 

5

----

 

**IMS HEALTH INCORPORATED**

**CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS (Unaudited)**

*(Dollars and shares in thousands, except per sharedata)*

 
| ** **                                                                               | ** ** | **Nine Months Ended September 30,** | ** **  |
|------------------------------------------------------------------------------------------|------------|----------------------------------------------------|-------------|
| ** **                                                                               | ** ** | **2007**                                           | ** **  | **2006** | ** ** |
| **Cash  Flows from Operating Activities:**                                               |       |                                               |        |   |   |
| Net income                                                                               | ** ** | **$**                                              | **216,088** |   | $ | 250,044 |   |
| **Adjustments  to reconcile net income to net cash provided by operating activities:**   |       |                                               |        |   |   |
| Depreciation and  amortization                                                           | ** ** | **93,378**                                         |        | 85,109 |   |
| Bad debt expense                                                                         | ** ** | **1,701**                                          |        | 444 |   |
| Deferred income  taxes                                                                   | ** ** | **(9,760**                                         | **)**       | (8,375 | ) |
| Gains from  investments, net                                                             | ** ** | **(2,317**                                         | **)**       | (2,443 | ) |
| Minority  interests in net income of consolidated companies                              | ** ** | **5,829**                                          | ** **  | 2,645 |   |
| Non-cash  stock-based compensation charges                                               | ** ** | **28,598**                                         | ** **  | 32,987 |   |
| Excess tax  benefits from stock-based compensation                                       | ** ** | **(4,984**                                         | **)**       | (4,262 | ) |
| Change in assets  and liabilities, excluding effects from acquisitions and dispositions: |       |                                               | ** **  |   |   |
| Net increase in  accounts receivable                                                     | ** ** | **(58,190**                                        | **)**       | (25,577 | ) |
| Net increase in  work-in-process inventory                                               | ** ** | **(3,031**                                         | **)**       | (3,898 | ) |
| Net increase in  prepaid expenses and other current assets                               | ** ** | **(18,441**                                        | **)**       | (4,433 | ) |
| Net decrease in  accounts payable                                                        | ** ** | **(11,360**                                        | **)**       | (19,945 | ) |
| Net decrease in  accrued and other current liabilities                                   | ** ** | **(15,016**                                        | **)**       | (1,341 | ) |
| Net decrease in  accrued severance, impairment and other charges                         | ** ** | **(1,860**                                         | **)**       | (13,907 | ) |
| Net decrease in  deferred revenues                                                       | ** ** | **(11,929**                                        | **)**       | (8,144 | ) |
| Net increase  (decrease) in accrued income taxes                                         | ** ** | **26,079**                                         |        | (68,643 | ) |
| Net decrease  (increase) in pension assets (net of liabilities)                          | ** ** | **5,269**                                          |        | (13,296 | ) |
| Net decrease  (increase) in other long-term assets (net of other long-term liabilities)  | ** ** | **534**                                            |        | (366 | ) |
| Net tax benefit  on stock-based compensation                                             | ** ** | **11,704**                                         |        | 10,182 |   |
| **Net  Cash Provided by Operating Activities**                                           | ** ** | **252,292**                                        |        | 206,781 |   |
| **Cash  Flows Used in Investing Activities:**                                            |       |                                               |        |   |   |
| Capital  expenditures                                                                    | ** ** | **(41,222**                                        | **)**       | (18,472 | ) |
| Additions to  computer software                                                          | ** ** | **(73,692**                                        | **)**       | (58,254 | ) |
| Payments for  acquisitions of businesses, net of cash acquired                           | ** ** | **(30,731**                                        | **)**       | (42,113 | ) |
| Funding of  venture capital investments                                                  | ** ** | **(1,200**                                         | **)**       | (1,400 | ) |
| Other investing  activities, net                                                         | ** ** | **260**                                            | ** **  | (642 | ) |
| **Net  Cash Used in Investing Activities**                                               | ** ** | **(146,585**                                       | **)**       | (120,881 | ) |
| **Cash  Flows Used in Financing Activities:**                                            |       |                                               |        |   |   |
| Net increase in  revolving credit facility and other                                     | ** ** | **191,332**                                        |        | 125 |   |
| 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                                                 | ** ** | **(386,771**                                       | **)**       | (880,407 | ) |
| Proceeds from  exercise of stock options                                                 | ** ** | **134,949**                                        | ** **  | 77,364 |   |
| Excess tax  benefits from stock-based compensation                                       | ** ** | **4,984**                                          | ** **  | 4,262 |   |
| Dividends paid                                                                           | ** ** | **(17,955**                                        | **)**       | (18,292 | ) |
| Proceeds from  employee stock purchase plan                                              | ** ** | **3,334**                                          | ** **  | 2,942 |   |
| (Decrease)  increase in cash overdrafts                                                  | ** ** | **(4,449**                                         | **)**       | 14,235 |   |
| Payments to  minority interests and other financing activities                           | ** ** | **(5,071**                                         | **)**       | (2,281 | ) |
| **Net  Cash Used in Financing Activities**                                               | ** ** | **(79,647**                                        | **)**       | (302,052 | ) |
| Effect of  Exchange Rate Changes on Cash and Cash Equivalents                            | ** ** | **12,579**                                         | ** **  | 921 |   |
| **Increase  (Decrease) in Cash and Cash Equivalents**                                    | ** ** | **38,639**                                         | ** **  | (215,231 | ) |
| **Cash  and Cash Equivalents, Beginning of Period**                                      | ** ** | **157,346**                                        | ** **  | 362,943 |   |
| **Cash  and Cash Equivalents, End of Period**                                            | ** ** | **$**                                              | **195,985** |   | $ | 147,712 |   |

 

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

 

6

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**IMS HEALTH INCORPORATED**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS (Unaudited)**

**(Dollars and shares in thousands, except per sharedata)**

 

**Note 1.   Interim CondensedConsolidated 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. The Condensed Consolidated FinancialStatements (Unaudited) do not include all the information and notes required byaccounting principles generally accepted in the United States of America forcomplete financial statements. In the opinion of management, all adjustments,all of which are of a normal recurring nature (except for those adjustmentsrelated to the Company’s adoption of Financial Accounting Standards Board (“FASB”)Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”)(see Note 11)), considered necessary for a fair presentation of the statementsof financial position, income and cash flows for the periods presented havebeen included. The results of operations for interim periods are notnecessarily indicative of the results expected for the full year. The December31, 2006 balance sheet data was derived from audited financial statements, butdoes not include all disclosures required by accounting principles generallyaccepted in the United States of America. The Condensed Consolidated FinancialStatements (Unaudited) and related notes should be read in conjunction with theConsolidated Financial Statements and related notes of IMS Health Incorporated(the “Company” or “IMS”) included in its 2006 Annual Report on Form 10-K. Certainprior year amounts have been reclassified to conform to the 2007 presentation. Amountspresented in the Condensed Consolidated Financial Statements (Unaudited) maynot add due to rounding.

 

**Note 2.   Basis of Presentation**

 

IMS is the leading global provider of marketintelligence to the pharmaceutical and healthcare industries. We offer leading-edgemarket intelligence products and services that are integral to our clients’day-to-day operations, including portfolio optimization capabilities; launchand brand management solutions; sales force effectiveness innovations; managedcare and consumer health offerings; and consulting and services solutions thatimprove ROI and the delivery of quality healthcare worldwide. Our informationproducts are developed to meet our clients’ needs by using data secured from aworldwide network of suppliers in more than 100 countries. Our key informationproducts include:

 

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

 

•                  PortfolioOptimization to provide clients with insights into market opportunity andbusiness development assessment; and

 

•                  Launch, BrandManagement and Other to support client needs relative to market segmentationand positioning, life cycle management for prescription and consumer healthpharmaceutical products and health economics and outcomes research offerings.

 

Withinthese key information products, we provide consulting and services that usein-house capabilities and methodologies to assist pharmaceutical clients inanalyzing and evaluating market trends, strategies and tactics, and to help inthe development and implementation of customized software applications and datawarehouse tools.

 

TheCompany operates in more than 100 countries.

 

7

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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 15).

 

**Note 3.   Summary of RecentAccounting Pronouncements**

 

In September 2006, the FASB issued Statement ofFinancial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements.” Thisstatement defines fair value, establishes a framework for measuring fair valueunder generally accepted accounting principles, and expands disclosures aboutfair value measurements. This statement is effective for financialstatements issued for fiscal years beginning after November 15, 2007, andinterim periods within those fiscal years. The Company is currently evaluatingthis statement to determine any potential impact that it may have on itsfinancial results.

 

In February 2007, the FASB issued SFAS No. 159, “TheFair Value Option for Financial Assets and Financial Liabilities–Including anamendment of FASB Statement No. 115.” This statement permits entities to chooseto measure many financial instruments and certain other items at fair value. Entitiesshall report unrealized gains and losses on items for which the fair valueoption has been elected in earnings at each subsequent reporting date. Thisstatement is effective as of the beginning of an entity’s first fiscal yearthat begins after November 15, 2007. The Company is currently evaluating thisstatement to determine any potential impact that it may have on its financialresults.

 

**Note 4.   Summary of SignificantAccounting Policies**

 

*OperatingCosts of Information and Analytics*

 

Operatingcosts of information and analytics (“I&A”) include costs of data, dataprocessing and collection and costs attributable to personnel involved inproduction, data management and delivery of the Company’s I&A offerings.

 

One of the Company’s major expenditures isthe cost for the data it receives from suppliers.  After receipt ofthe raw data and prior to the data being available for use in any part ofits business, the Company is required to transform the raw data into usefulinformation through a series of comprehensive processes. These processesinvolve significant employee costs and data processing costs.

 

Costs associated with the Company’s data purchases aredeferred within work-in-process inventory and recognized as expense as thecorresponding data product revenue is recognized by the Company, generally overa thirty to sixty day period.

 

*Direct and Incremental Costs of Consulting andServices*

 

Direct and incremental costs of consulting andservices (“C&S”) include the costs of the Company’s consulting staffdirectly involved with delivering revenue generating engagements, relatedaccommodations and the costs of primary market research data purchasedspecifically for certain individual C&S engagements. Although the Company’sdata is used in multiple customer solutions across different offeringswithin both I&A and C&S, the Company does not have a meaningfulway to allocate the direct cost of the data between I&A and C&Srevenues.  As such, the direct and incremental costs of C&S do notreflect the total costs incurred to deliver its C&S revenues.

 

Costs associated with the Company’s time andmaterial and fixed-price C&S contracts are 

 

8

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recognized as incurred.

 

*Stock-Based Compensation 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 non-employee directorsincluding employee stock options, restricted stock, restricted stock units andemployee stock purchases related to the Employee Stock Purchase Plan based onestimated fair values. SFAS 123R supersedes the Company’s previous accountingunder Accounting Principles Board (“APB”) Opinion No. 25, “Accounting forStock Issued to Employees” (“APB 25”) for periods beginning in  2006. In March 2005, the Securities andExchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”)No. 107 (“SAB 107”) relating to SFAS 123R. The Company has applied theprovisions of SAB 107 in its adoption of SFAS 123R. The Company adopted SFAS123R using the modified prospective transition method, which requires theapplication of the accounting standard as of January 1, 2006, the first day of theCompany’s fiscal year 2006. See Note 8 for additional information.

 

SFAS 123R requires companies to estimate the fairvalue of stock option awards on the date of grant using an option-pricingmodel. The value of the portion of the award that is ultimately expected tovest is recognized as expense over the requisite service period of the award inthe Company’s Consolidated Statements of Income. Prior to the adoption of SFAS123R, the Company accounted for stock-based awards to employees and directorsusing the intrinsic value method in accordance with APB 25 as allowed underSFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”).Under the intrinsic value method, stock-based compensation expense had beenrecognized in the Company’s Consolidated Statements of Income only for stockoption modifications and restricted stock units because the exercise price ofthe Company’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 duringthe period is based on the value of the portion of share-based payment awardsthat is ultimately expected to vest during the period. Stock-based compensationexpense recognized in the Company’s Consolidated Statements of Income for 2006 and 2007 includedcompensation expense for share-based payment awards granted prior to, but notyet vested as of January 1, 2006, based on the grant date fair value estimatedin accordance with the 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 SFAS 123R.Prior to the adoption of SFAS 123R, the Company used the straight-line methodof attributing the value of stock-based compensation and continued to use thatmethod after the adoption. As stock-based compensation expense recognized inthe Consolidated Statements of Income for 2006 and 2007 is based on awardsultimately expected to vest, it has been reduced for estimated forfeitures.SFAS 123R requires forfeitures to be estimated at the time of grant andrevised, if necessary, in subsequent periods if actual forfeitures differ fromthose estimates. In the Company’s pro forma information required under SFAS 123for the periods prior to 2006, the Company accounted for stock options byestimating forfeitures in the first three quarters of the year and applying thefull year actual forfeitures in the fourth quarter of the year, as well as anestimate of future forfeitures, and recognized forfeitures as they occurred forrestricted stock grants. The Company’s method of valuation for stock optionawards granted after January 1, 2006 is the Black-Scholes option-pricing modelwhich was also previously used for the Company’s pro forma information requiredunder SFAS 123. See Note 8 for additional information.

 

9

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*Computation of Net Income 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,” requiresthat employee equity share options, restricted stock units and similar equityinstruments granted by the Company be treated as potential common sharesoutstanding in computing diluted earnings per share. Diluted shares outstandinginclude restricted stock units and the dilutive effect of in-the-money optionswhich is calculated based on the average share price for each fiscal periodusing the treasury stock method. Under the treasury stock method, the amountthe employee must pay for exercising stock options, the amount of compensationcost for future service that the Company has not yet recognized, and the amountof benefits that would be recorded in additional paid-in capital when the awardbecomes deductible for tax purposes are assumed to be used to repurchaseshares.

 

**Note 5.   Acquisitions**

 

TheCompany makes acquisitions in order to expand its products, services and geographicreach. During the nine months ended September 30, 2007, the Company completedfive acquisitions of ValueMedics Research, LLC (U.S.), MERG ForschungsgruppeMedizinische Okonomie, GmbH (Germany), Datasurf Co. (Japan), Aremis ConsultantsHolding SA (France) and Brynlake Limited (U.K.) at a cost of approximately$18,000. These acquisitions were accounted for under the purchase method ofaccounting. As such, the aggregate purchase price has been allocated on apreliminary basis to the assets acquired based on estimated fair values as ofthe closing date. The purchase price allocations will be finalized after thecompletion of the valuation of certain assets and liabilities. Any adjustmentsresulting from the finalization of the purchase price allocations are notexpected to have a material impact on the Company’s results of operations. TheCondensed Consolidated Financial Statements (Unaudited) include the results ofthese acquired companies subsequent to the closing of the acquisition. Hadthese acquisitions occurred as of January 1, 2007 or 2006, the impact on theCompany’s results of operations would not have been significant. Goodwill ofapproximately $12,385 was recorded in connection with these acquisitions, ofwhich $6,000 is deductible for tax purposes.

 

Duringthe nine months ended September 30, 2006, the Company completed threeacquisitions 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 accountedfor under the purchase method of accounting. As such, the aggregate purchaseprice was allocated on a preliminary basis to the assets acquired based onestimated fair values as of the closing date. The Company finalized thepurchase price allocation for these acquisitions during 2006 which did not havea material impact on the Company’s results of operations. The CondensedConsolidated Financial Statements (Unaudited) include the results of theseacquired companies subsequent to the closing of these acquisitions. Had theseacquisitions occurred as of January 1, 2006, the impact on the Company’sresults of operations would not have been significant. Goodwill ofapproximately $21,447 was recorded in connection with these acquisitions, noneof which is deductible for tax purposes.

 

10

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**Note 6.   Goodwill and IntangibleAssets**

 

Duringthe nine months ended September 30, 2007, the Company recorded additionalgoodwill of approximately $20,532 related to the preliminary allocation ofpurchase price for the acquisitions completed during the first nine months of2007 and the completion of purchase price allocations for 2006 acquisitions.During the nine months ended September 30, 2006, the Company recordedadditional goodwill of approximately $24,972 related primarily to thepreliminary allocation of purchase price for the acquisitions completed duringthe first nine months of 2006 and to earn-out agreements for acquisitionscompleted prior to 2006. The remaining movements in goodwill for the ninemonths ended September 30, 2007 and 2006 relate to foreign currency translationadjustments.

 

All ofthe Company’s other acquired intangibles are subject to amortization.  Intangibleasset amortization expense was $4,161 and $13,018 during the three and ninemonths ended September 30, 2007, respectively, and $4,286 and $12,870 duringthe three and nine months ended September 30, 2006, respectively.  At September30, 2007, intangible assets were primarily composed of customer relationships,databases and trade names (included in Other assets) and computer software. Thegross carrying amounts and related accumulated amortization of theseintangibles were $151,748 and $74,866, respectively, at September 30, 2007 and$136,231 and $61,850, respectively, at December 31, 2006. These intangibles areamortized over periods ranging from two to fifteen years. As of September 30,2007, the weighted average amortization periods of the acquired intangibles byasset class are listed 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                         |       | 4.3                                                              |       |
| Other                               |       | 3.6                                                              |       |
| Weighted Average                    |       | 8.9                                                              |       |

 

Based on current estimated useful lives, amortizationexpense associated with intangible assets at September 30, 2007 is estimated tobe approximately $4,100 for the remaining quarter in 2007. Thereafter, annualamortization expense associated with intangible assets is estimated to be asfollows:

 
| **Year Ended  December 31,** | ** ** | **Amortization  Expense** | ** ** |
|----------------------------------------|------------|---------------------------|------------|
| 2008                                   |       | $                         | 14,786     |   |
| 2009                                   |       | 12,721                    |       |
| 2010                                   |       | 9,227                     |       |
| 2011                                   |       | 7,993                     |       |
| 2012                                   |       | 6,219                     |       |
| Thereafter                             |       | $                         | 21,895     |   |

 

11

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**Note 7.   Contingencies**

 

The Company and its subsidiaries are involved in legaland tax proceedings, claims and litigation arising in the ordinary course ofbusiness. Management periodically assesses the Company’s liabilities andcontingencies in connection with these matters based upon the latestinformation available. For those matters where management currently believes itis probable that the Company will incur a loss and that the probable loss orrange of loss can be reasonably estimated, the Company has recorded reserves inthe Condensed Consolidated Financial Statements (Unaudited) based on its bestestimates of such loss. In other instances, because of the uncertaintiesrelated to either the probable outcome or the amount or range of loss,management is unable to make a reasonable estimate of a liability, if any. However,even in many instances where the Company has recorded a reserve, the Company isunable to predict with certainty the final outcome of the matter or whetherresolution of the matter will materially affect the Company’s results of operations,financial position or cash flows. As additional information becomes available,the Company adjusts its assessment and estimates of such liabilitiesaccordingly.

 

The Company routinely enters into agreements with itssuppliers to acquire data and with its customers to sell data, all in thenormal course of business. In these agreements, the Company sometimes agrees toindemnify and hold harmless the other party for any damages such other partymay suffer as a result of potential intellectual property infringement andother claims related to the use of the data. These indemnities typically haveterms of approximately two years. The Company has not accrued a liability withrespect to these matters, as the exposure is considered remote.

 

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 ofthis guaranty agreement, the Company guarantees in favor of the third-party investorsthe performance of the Company’s subsidiaries under the LLC Agreements andagrees to indemnify and hold harmless the third-party investors againstdamages, including specified delay damages, the third-party investors maysuffer as a result of failures to perform under the LLC Agreements by theCompany 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 matters describedbelow.

 

*D&B Legacy and Related Tax Matters*

 

*Sharing Disputes.*In1996 the company then known as The Dun & Bradstreet Corporation (“D&B”)and now known as R.H. Donnelley Corporation (“Donnelley”) separated into threepublic companies by spinning off ACNielsen Corporation (“ACNielsen”) and thecompany then known as Cognizant Corporation (“Cognizant”) (the “1996 Spin-Off”).Cognizant is now known as Nielsen Media Research, Inc., a subsidiary of TheNielsen Company, formerly known as VNU N.V. (“NMR”). The agreements effectingthe 1996 Spin-Off allocated tax-related liability with respect to certain priorbusiness transactions (the “Legacy Tax Controversies”) between D&B andCognizant. The D&B portion of such liability is now shared among Donnelleyand certain of its former affiliates (the “Donnelley Parties”), and theCognizant portion of such liability is shared between NMR and the Companypursuant to the agreements effecting Cognizant’s spin-off of the Company in1998 (the “1998 Spin-Off”).

 

12

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The underlying tax controversies with the InternalRevenue Service (the “IRS”) have substantially all been resolved and theCompany paid to the IRS the amounts that it believed 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 Donnelley Parties on the one hand, and NMR and theCompany, on the other hand, have attempted to resolve these disputes throughnegotiation. The 1996 Spin-Off agreements provide that if the parties cannotreach agreement through negotiation they must arbitrate the disputes. TheCompany intends to vigorously defend itself with respect to such disputes. Asof September 30, 2007, the Company had a reserve of approximately $20,900 forthese matters.

 

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 DonnelleyStatement, the Donnelley Parties claim that the Company and NMR collectivelyowe approximately an additional $10,800 with respect to the Dutch PartnershipDispute; (if determined liable, the Company’s share of this amount would beapproximately $5,400). On October 16, 2006, the Company and NMR filed aStatement of Defense denying all claims made by the Donnelley Parties in theDonnelley Statement. In October 2007, a hearing on the merits of the parties’claims took place before an AAA arbitration panel and the parties are currentlyawaiting a final decision of that panel.

 

*ThePartnership (Tax Year 1997)*. The IRS is seeking to reallocate certain items of partnership incomeand expense as well as disallow certain items of partnership expense withrespect to a partnership now substantially owned by the Company (the “Partnership”)on the Partnership’s 1997 tax return. During 1997, the Partnership wassubstantially owned by Cognizant, but liability for this matter was allocatedto the Company pursuant to the agreements effecting the 1998 Spin-Off. TheCompany has filed a formal protest relating to the proposed assessment for 1997with the IRS Office of Appeals. The Company is attempting to resolve thismatter in the administrative appeals process before proceeding to litigation ifnecessary. If the IRS were to ultimately prevail in its position, the Company’sliability (tax and interest, net of tax benefit) with respect to tax year 1997would be approximately $21,200, whichamount the Company had reserved in current accrued income taxes payable atSeptember 30, 2007 (See Note 11).

 

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 activitiesare subject to review by applicable tax authorities. As a result of the reviewprocess, uncertainties exist and it is possible that some of these matterscould be resolved adversely to the Company.

 

*Matters Before the Belgian Competition Service*

 

Complaints were filed in 1998 and 1999 against theCompany with the Belgian Competition Service (“BCS”) alleging abuse of adominant position on the Belgian market. In October 1999 and 2000, the Chairmanof the Belgian Competition Council (“BCC”) adopted interim measures against theCompany, with which the Company complied. In December 2004, the Company receiveda formal statement of objections alleging that the Company had abused itsdominant position on the Belgian market in violation of Article 82 of the ECTreaty and corresponding Belgian law. The Company submitted its comments to thestatement of objections in writing to the BCC in February 2005.

 

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In a separate matter, in October 2004, the BCSnotified IMS of a request for information in connection with IMS’s acquisitionin April 2004 of a competitor in the Belgian market, Source Informatics BelgiumS.A. The BCS is investigating whether such acquisition may have violatedArticle 82 of the EC Treaty and corresponding Belgian law. The Companyresponded to the request for information in December 2004.

 

The Company intends to continue to vigorously defenditself in these matters before the Belgian competition authorities. Managementof the Company is unable to predict at this time the final outcome of thesematters or whether adverse resolutions thereof could materially affect theCompany’s results of operations, cash flows or financial position in the periodin which such adverse resolution occurs.

 

*Contingent Consideration*

 

Under the terms of certain purchase agreements relatedto acquisitions made since 2002, the Company may be required to pay additionalamounts as contingent consideration based on the achievement of certainperformance related targets during 2007 through 2009. Substantially all ofthese additional payments will be recorded as goodwill in accordance with EmergingIssues Task Force (“EITF”) No. 95-8, “Accounting for Contingent ConsiderationPaid to the Shareholders of an Acquired Enterprise in a Purchase BusinessCombination.”  As of September 30, 2007,approximately $47,000 had been earned under these contingencies, of which$9,400 was paid during 2007. Based on current estimates, the Company expectsthat additional contingent consideration under these agreements may totalapproximately $15,000. It is expected that these contingencies will be resolvedwithin a specified time period after the end of each respective calendar yearfrom 2007 through 2009.

 

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**Note 8.   Stock-Based Compensation**

 

Thefollowing table summarizes stock option activity for the periods indicated.

 
| ** **                                                  | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price Per  Share** | ** ** |
|-------------------------------------------------------------|------------|------------|------------|---------------------------------------------------|------------|
| 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                                                   |       | (6,161     | )          | $                                                 | 19.36      |   |
| Forfeited                                                   |       | (699       | )          | $                                                 | 23.58      |   |
| Cancelled                                                   |       | (1,739     | )          | $                                                 | 28.93      |   |
| **Options  Outstanding, December 31, 2006**                 | ** ** | **21,396** | ** ** | **$**                                             | **23.43**  | ** ** |
| **Exercised**                                               | ** ** | **(5,918** | **)**      | **$**                                             | **22.80**  | ** ** |
| **Forfeited**                                               | ** ** | **(169**   | **)**      | **$**                                             | **24.16**  | ** ** |
| **Cancelled**                                               | ** ** | **(201**   | **)**      | **$**                                             | **29.29**  | ** ** |
| **Options  Outstanding, September 30, 2007**                | ** ** | **15,108** | ** ** | **$**                                             | **23.59**  | ** ** |
| **Options  Vested or Expected to Vest, September 30, 2007** | ** ** | **15,060** | ** ** | **$**                                             | **23.58**  | ** ** |
| **Exercisable,  September 30, 2007**                        | ** ** | **13,715** | ** ** | **$**                                             | **23.53**  | ** ** |

 

15

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The following table summarizes activity ofrestricted stock units with service conditions.

 
| ** **                                          | ** ** | **Shares** | ** ** | **Weighted  Average  Grant Date  Fair Value** | ** ** |
|-----------------------------------------------------|------------|------------|------------|---------------------------------------------------------|------------|
| Unvested,  December 31, 2004                        |       | 410        |       | $                                                       | 20.01      |   |
| Granted                                             |       | 153        |       | $                                                       | 24.46      |   |
| Vested                                              |       | (119       | )          | $                                                       | 24.41      |   |
| Unvested,  December 31, 2005                        |       | 444        |       | $                                                       | 20.30      |   |
| Granted                                             |       | 1,386      |       | $                                                       | 26.12      |   |
| Vested                                              |       | (217       | )          | $                                                       | 22.03      |   |
| Forfeited                                           |       | (55        | )          | $                                                       | 25.79      |   |
| **Unvested,  December 31, 2006**                    | ** ** | **1,558**  | ** ** | **$**                                                   | **25.04**  | ** ** |
| **Granted**                                         | ** ** | **1,163**  | ** ** | **$**                                                   | **29.81**  | ** ** |
| **Vested**                                          | ** ** | **(277**   | **)**      | **$**                                                   | **26.08**  | ** ** |
| **Forfeited**                                       | ** ** | **(103**   | **)**      | **$**                                                   | **27.18**  | ** ** |
| **Unvested,  September 30, 2007**                   | ** ** | **2,341**  | ** ** | **$**                                                   | **27.19**  | ** ** |
| **Vested  or Expected to Vest, September 30, 2007** | ** ** | **2,108**  | ** ** | **$**                                                   | **27.01**  | ** ** |

 

The following table summarizes activity ofrestricted stock units with performance conditions.

 
| ** **                                          | ** ** | **Shares** | ** ** | **Weighted  Average  Grant  Date Fair  Value** | ** ** |
|-----------------------------------------------------|------------|------------|------------|------------------------------------------------|------------|
| 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                                              |       | (181       | )          | $                                              | 21.76      |   |
| Forfeited                                           |       | (28        | )          | $                                              | 24.08      |   |
| **Unvested,  December 31, 2006**                    | ** ** | **320**    | ** ** | **$**                                          | **22.14**  | ** ** |
| **Granted**                                         | ** ** | **123**    | ** ** | **$**                                          | **29.16**  | ** ** |
| **Vested**                                          | ** ** | **(84**    | **)**      | **$**                                          | **18.65**  | ** ** |
| **Forfeited**                                       | ** ** | **(2**     | **)**      | **$**                                          | **26.03**  | ** ** |
| **Unvested,  September 30, 2007**                   | ** ** | **357**    | ** ** | **$**                                          | **25.36**  | ** ** |
| **Vested  or Expected to Vest, September 30, 2007** | ** ** | **339**    | ** ** | **$**                                          | **25.27**  | ** ** |

 

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The following table summarizes activity ofnon-employee director deferred stock granted in lieu of board meeting fees:

 
| ** **                           | ** ** | **Shares** | ** ** | **Weighted  Average  Grant  Date Fair  Value** | ** ** |
|--------------------------------------|------------|------------|------------|------------------------------------------------|------------|
| Outstanding,  December 31, 2004      |       | 24         |       | $                                              | 21.47      |   |
| Granted                              |       | 6          |       | $                                              | 24.87      |   |
| Outstanding,  December 31, 2005      |       | 30         |       | $                                              | 22.12      |   |
| Granted                              |       | 3          |       | $                                              | 26.13      |   |
| **Outstanding,  December 31, 2006**  | ** ** | **33**     | ** ** | **$**                                          | **22.49**  | ** ** |
| **Granted**                          | ** ** | **3**      | ** ** | **$**                                          | **30.07**  | ** ** |
| **Outstanding,  September 30, 2007** | ** ** | **36**     | ** ** | **$**                                          | **23.20**  | ** ** |

 

The following table summarizes the components andclassification of stock-based compensation expense in the third quarter of 2007and 2006.

 
| ** **                                       | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                       | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| Stock Options                                    | ** ** | **$**                                                | **2,546**  |                                                | $          | 5,693 | ** ** | **$** | **11,625** |   | $ | 24,316 |   |
| Restricted Stock  Units                          | ** ** | **5,856**                                            |       | 2,774                                               | ** ** | **16,415** |   | 7,991 |   |
| Employee Stock  Purchase Plan                    | ** ** | **183**                                              |       | 166                                                 | ** ** | **558** |   | 680 |   |
| Total  Stock-Based Compensation Expense          | ** ** | **$**                                                | **8,585**  |                                                | $          | 8,633 | ** ** | **$** | **28,598** |   | $ | 32,987 |   |
|                                             |       |                                                 |       |                                                |       |   |   |   |   |
| Operating Costs  of I&A                      | ** ** | **$**                                                | **849**    |                                                | $          | 499 | ** ** | **$** | **2,810** |   | $ | 3,449 |   |
| Direct and  Incremental Costs of C&S         | ** ** | **982**                                              |       | 950                                                 | ** ** | **2,879** |   | 1,624 |   |
| Selling, &  Administrative Expenses          | ** ** | **6,754**                                            |       | 7,184                                               | ** ** | **22,909** |   | 27,914 |   |
| Total  Stock-Based Compensation Expense          | ** ** | **$**                                                | **8,585**  |                                                | $          | 8,633 | ** ** | **$** | **28,598** |   | $ | 32,987 |   |
|                                             |       |                                                 |       |                                                |       |   |   |   |   |
| Tax Benefit on  Stock-Based Compensation Expense | ** ** | **$**                                                | **2,579**  |                                                | $          | 2,583 | ** ** | **$** | **8,695** |   | $ | 10,054 |   |
|                                             |       |                                                 |       |                                                |       |   |   |   |   |
| Capitalized  Stock-Based Compensation Expense    | ** ** | **$**                                                | **73**     |                                                | $          | — | ** ** | **$** | **250** |   | $ | — |   |

 

OnApril 17, 2007, the Company awarded its annual grant in the form of restrictedstock units (“RSUs”) whose vesting and delivery are contingent upon completionof a specified period of future service. The awards have a zero exercise priceto the employee and vest ratably over three to four years. The Company’samortization of the award is based upon the fair market value of a share ofCommon Stock on April 17, 2007.

 

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**Note 9.   Financial Instruments**

 

*Foreign Exchange 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 to reduce earnings and cash flow volatilityassociated with foreign exchange rate changes. Accordingly, the Company entersinto foreign currency forward contracts to minimize the impact of foreignexchange movements on net income, non-U.S. dollar anticipated royalties, and onthe 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 enter into foreign currency transactions forinvestment or speculative purposes. The principal currencies hedged are theEuro, the Japanese Yen, the British Pound, the Swiss Franc and the CanadianDollar.

 

Theimpact of foreign exchange risk management activities on pre-tax income in thethree and nine months ended September 30, 2007 was a net loss of $7,603 and$6,418, respectively and a net gain of $502 and a net loss of $4,030 in thethree and nine months ended September 30, 2006, respectively. In addition, atSeptember 30, 2007, the Company had approximately $545,179 in foreign exchangeforward contracts outstanding with various expiration dates through August 2008relating to non-U.S. Dollar Operating Income, non-U.S. Dollar anticipatedroyalties and non-functional currency assets and liabilities. Foreign exchangeforward contracts are recorded at estimated fair value. The estimated fairvalues of the forward contracts are based on quoted market prices.

 

Unrealized and realized gains and losses on thecontracts hedging non-U.S. Dollar Operating Income and non-functional currencyassets and liabilities do not qualify for hedge accounting in accordance withSFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” asamended by SFAS No. 138, “Accounting for Certain Derivative Instruments andCertain Hedging Activities,” and SFAS No. 149, “Amendment of Statement 133 onDerivative Instruments and Hedging Activities,” (collectively, “SFAS No. 133”),  and therefore are not deferred and areincluded in the Condensed Consolidated Statements of Income (Unaudited) inOther (expense) income, net.

 

*Fair Value of Financial Instruments*

 

At September 30, 2007, the Company’s financialinstruments included cash, cash equivalents, receivables, accounts payable andlong-term debt. At September 30, 2007, the fair values of cash, cashequivalents, receivables and accounts payable approximated carrying values dueto the short-term nature of these instruments. At September 30, 2007, the fairvalue of long-term debt approximated carrying value.

 

*Credit Concentrations*

 

The Company continually monitors its positions with,and the credit quality of, the financial institutions which are counterpartiesto its financial instruments and does not anticipate non-performance by thecounterparties. The Company would not realize a material loss as of September30, 2007 in the event of non-performance by any one counterparty. The Companyenters into transactions only with financial institution counterparties thathave a credit rating of A or better. In addition, the Company limits the amountof credit exposure with any one institution.

 

18

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The Company maintains accounts receivable balances($423,055 and $367,413, net of allowances, at September 30, 2007 and December31, 2006, respectively), principally from customers in the pharmaceuticalindustry. The Company’s trade receivables do not represent significantconcentrations of credit risk at September 30, 2007 due to the high quality ofits customers and their dispersion across many geographic areas.

 

*Borrowings*

 

The following table summarizes the Company’s long-termdebt at September 30, 2007 and December 31, 2006:

 
| ** **                                                                                                                                                        | ** ** | **September 30,  2007** | ** **    | **December 31,  2006** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|---------------|------------------------|------------|
| 4.6% Private Placement  Notes, principal payment of $ 150,000 due January 2008, net of interest rate swaps  of $ (968) and $ (2,819), respectively | ** ** | **$**                   | **149,033**   | ** **             | $          | 147,181 | ** ** |
|                                                                                                                                                              | ** ** | ** **              | ** **    |                   | ** ** |
| 5.55% Private  Placement Notes, principal payment of $150,000 due April 2016                                                                                      | ** ** | **150,000**             |          | 150,000                |       |
|                                                                                                                                                              | ** ** | ** **              |          |                   |       |
| 1.70% Private  Placement Notes, principal payment of 34,395,000 Japanese Yen due January  2013                                                                    | ** ** | **299,791**             |          | 288,670                |       |
|                                                                                                                                                              | ** ** | ** **              |          |                   |       |
| Revolving Credit  Facility:                                                                                                                                       |       |                    |          |                   |       |
| Japanese Yen  denominated borrowings at average floating rates of approximately 1.19%                                                                             | ** ** | **395,877**             |          | 249,097                |       |
| Swiss Franc  denominated borrowings at average floating rates of approximately 2.83%                                                                              | ** ** | **69,041**              |          | 59,258                 |       |
| U.S. Dollar  denominated borrowings at average floating rates of approximately 6.05%                                                                              | ** ** | **83,900**              |          | 31,200                 |       |
|                                                                                                                                                              | ** ** | ** **              |          |                   |       |
| Bank Term Loan,  principal payment of $50,000 due June, 2009 at average floating rate of  approximately 5.45%                                                     | ** ** | **50,000**              |          | 50,000                 |       |
|                                                                                                                                                              | ** ** | ** **              |          |                   |       |
| Total Long-Term  Debt                                                                                                                                             | ** ** | **$**                   | **1,197,642** |                   | $          | 975,406 |   |

 

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 Revolving Credit Facility extended the maturity of thefacility in its entirety to a term of five years, maturing July 2011, reducedthe borrowing margins, and increased subsidiary borrowing limits. Totalborrowings under the Revolving Credit Facility were $548,819 and $339,555 atSeptember 30, 2007 and December 31, 2006, respectively, all of which wereclassified as long-term. In April 2004, the Company entered into a $700,000revolving credit facility with a syndicate of 12 banks (the “Unsecured Facility”).The Unsecured Facility replaced the Company’s lines of credit with severaldomestic and international banks. On March 9, 2005, the Company renegotiatedwith the syndicate of 12 banks to amend and restate 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

 

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years, maturing March 2010, reduced the borrowing margins and increasedsubsidiary borrowing limits.

 

The Company defines long-term lines as those where thelines are non-cancellable for more than 365 days from the balance sheet date bythe financial institutions except for specified, objectively measurableviolations of the provisions of the agreement. Although the 4.6% PrivatePlacement Notes principal payment of $150,000 is due within 365 days, theCompany has the ability and intent to refinance the notes with anotherlong-term debt arrangement and continues to classify them as long-term incompliance with SFAS No. 6, “Classification of Short-Term Obligations Expectedto be Refinanced.”

 

In general, rates for borrowing under the RevolvingCredit Facility are LIBOR plus 30 basis points and can vary based on theCompany’s Debt to EBITDA ratio. The weighted average interest rates for theCompany’s lines were 2.14% and 1.61% at September 30, 2007 and December 31,2006, respectively. In addition, the Company is required to pay a commitmentfee on any unused portion of the facilities of 0.075%. At September 30, 2007,the Company had approximately $451,181 available under its existing bank creditfacilities.

 

In June 2006, the Company closed a $50,000 three yearterm loan with a bank. The term loan allows the Company to borrow at a floatingrate with a lower borrowing margin than the Company’s revolving creditfacility, and provides the Company with an option to extend the term up to anadditional two years. The Company used the proceeds to refinance existing debtborrowed under the revolving credit facility.

 

In April 2006, the Company closed a private placementtransaction pursuant to which it issued $150,000 of ten-year notes to twohighly rated insurance companies at a fixed rate of 5.55%.  The Companyused the proceeds to refinance existing debt of $150,000 drawn under a shortterm credit 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 privateplacement transaction pursuant to which it issued $150,000 of five-year debt toseveral highly rated insurance companies at a fixed rate of 4.60%. The Company usedthe proceeds to pay down short-term debt. The Company also swapped $100,000 ofits fixed rate debt to floating rate based on six-month LIBOR plus a margin ofapproximately 107 basis points. The Company accounted for these swaps as fairvalue hedges under the provisions of SFAS No. 133, “Accounting for DerivativeInstruments and Hedging Activities.”  TheCompany determined the fair values based on estimated prices quoted byfinancial institutions. The fair values of these swaps were $(968) and $(2,819)as of September 30, 2007 and December 31, 2006, respectively.

 

The Company’s financing arrangements provide forcertain covenants and events of default customary for similar instruments,including in the case of its main bank arrangements, the  private placement transactions, and the termloan, covenants to maintain specific ratios of consolidated total indebtednessto EBITDA and of EBITDA to certain fixed charges. At September 30, 2007, theCompany was in compliance with these financial debt covenants.

 

20

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**Note 10.   Pension andPostretirement Benefits**

 

Thefollowing tables provide 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 11 of the Company’s 2006Annual 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,**                               | ** ** | **2007**                  | ** ** | **2006**                | ** ** | **2007** | ** ** | **2006** | ** ** |
| Service cost                                                                           | ** ** | **$**                     | **3,833**  | ** **              | $          | 3,527 |   | **$** | **(7** | **)** | $ | (3 | ) |
| Interest cost                                                                          | ** ** | **4,609**                 | ** ** | 4,027                   |       | **186** | ** ** | 114 |   |
| Expected return  on plan assets                                                        | ** ** | **(7,374**                | **)**      | (6,513                  | )          | **—** | ** ** | — |   |
| Amortization of  prior service cost (credit)                                           | ** ** | **7**                     | ** ** | (45                     | )          | **(9** | **)** | (9 | ) |
| Amortization of  transition obligation                                                 | ** ** | **(1**                    | **)**      | (1                      | )          | **—** | ** ** | — |   |
| Amortization of  net loss                                                              | ** ** | **1,176**                 | ** ** | 1,197                   |       | **138** | ** ** | (73 | ) |
| Net periodic  benefit cost                                                             | ** ** | **$**                     | **2,250**  | ** **              | $          | 2,192 |   | **$** | **308** | ** ** | $ | 29 |   |

** **
| **Components of Net Periodic Benefit Cost for the** | ** ** | **Pension Benefits** | ** ** | **Other Benefits** | ** ** |
|----------------------------------------------------------------------------------------|------------|---------------------------|------------|-------------------------|------------|
| **Nine Months Ended September 30,**                                | ** ** | **2007**                  | ** ** | **2006**                | ** ** | **2007** | ** ** | **2006** | ** ** |
| Service cost                                                                           | ** ** | **$**                     | **12,072** | ** **              | $          | 10,590 |   | **$** | **5** | ** ** | $ | 17 |   |
| Interest cost                                                                          | ** ** | **13,802**                | ** ** | 11,916                  |       | **540** | ** ** | 500 |   |
| Expected return  on plan assets                                                        | ** ** | **(21,972**               | **)**      | (19,304                 | )          | **—** | ** ** | — |   |
| Amortization of  prior service cost (credit)                                           | ** ** | **16**                    | ** ** | (134                    | )          | **(27** | **)** | (159 | ) |
| Amortization of  transition obligation                                                 | ** ** | **(3**                    | **)**      | (3                      | )          | **—** | ** ** | — |   |
| Amortization of  net loss                                                              | ** ** | **3,378**                 | ** ** | 3,484                   |       | **354** | ** ** | 231 |   |
| Net periodic  benefit cost                                                             | ** ** | **$**                     | **7,293**  | ** **              | $          | 6,549 |   | **$** | **872** | ** ** | $ | 589 |   |

 

**Note 11.  Income Taxes**

 

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

 

The Company adopted the provisions of FIN 48 onJanuary 1, 2007. As a result of this adoption, the Company recognized anincrease in liabilities for uncertain tax positions of approximately $51,800and a corresponding reduction to the January 1, 2007 retained earnings balance.As of the adoption date, the Company had approximately $117,200 of grossunrecognized tax benefits, of which $107,600, if recognized, would favorablyaffect the effective tax rate. The Company recognizes interest expense andpenalties related to unrecognized tax benefits in income tax expense. As of theadoption date, the Company had accrued interest and penalties of approximately$13,500.

 

Forthe nine months ended September 30, 2007, the Company had recordedapproximately $11,900 of tax expense related to uncertain tax positions that ifrecognized, would favorably affect the effective tax rate. Included in thisamount is approximately $6,700 of interest and penalties.

 

21

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The Company files numerous consolidated and separateincome tax returns in the U.S. federal and state and non-U.S. jurisdictions. Withfew exceptions, the Company is no longer subject to U.S. federal income taxexaminations for the years before 2003 and is no longer subject to state andlocal income tax examination by tax authorities for years before 1997. As well,with few exceptions, the Company is no longer subject to examination by taxauthorities in its material non-U.S. jurisdictions prior to 2003. It isreasonably possible that within the next twelve months the Company couldrecognize approximately $2,500 of unrecognized benefits as a result of theexpiration of certain statutes of limitation.

 

TheInternal Revenue Service (“IRS”) is currently auditing the 2004 and 2005federal income tax returns of the Company. It is reasonably possible that thisaudit may conclude within the next twelve months. To date, no materialadjustments have been proposed as a result of this audit. At this time, it isnot reasonably possible to estimate the impact of the resolution of this auditon the financial statements of the Company.

 

TheCompany had considered making a deposit of tax to stop the running of interest for the tax year 1997 related to adispute over the allocation of certain items of partnership income and expense(see Note 7), but is currently in discussions with the IRS regarding thismatter. The Company had approximately $21,200 (tax and interest, net of taxbenefit) reserved in current accrued income taxes payable at September 30,2007.

 

For the three monthsended September 30, 2007, the Company recognized a tax charge of approximately$7,500 to revalue net deferred tax assets related to Germany as a result of theenactment, during the third quarter, of the German 2008 Business Tax Reform Actwhich reduced the German federal tax rate from 25% to 15%. For the nine monthsended September 30, 2007, the Company’s effective tax rate was reducedprimarily due to a favorable non-U.S. audit settlement for tax years 1998through 2002 of approximately $16,500 and a reorganization of certain non-U.S.subsidiaries yielding a tax benefit of approximately $4,400, partially offsetby a tax charge of approximately $7,500 to revalue net deferred tax assetsrelated to Germany as discussed above. 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 endedSeptember 30, 2006, the Company’s effective tax rate was reduced due to afavorable U.S. partnership audit settlement of approximately $69,200 for thetax years 1998 through 2003 and a favorable U.S. corporate audit settlement of approximately $17,600 for the tax years 2000through 2003. Also in the first nine months of 2006, approximately$21,400 of tax expense was recorded related to a reorganization of several ofthe Company’s subsidiaries. Further, approximately $24,800 of tax expense wasrecorded in the first quarter of 2006 related to disputes between the Companyand NMR, on the one hand, and Donnelley and certain of its former affiliates onthe other hand, as to proper interpretation of, and allocation of taxliabilities under, the 1996 Spin-Off agreements (see Note 7).

 

While the Company intends to continue to seek globaltax planning initiatives, there can be no assurance that the Company will beable to successfully identify and implement such initiatives to reduce ormaintain its overall tax rate.

 

**Note 12.   IMS Health Capital Stock**

 

The Company’s share repurchase program has beendeveloped to buy opportunistically, when the Company believes that its shareprice provides it with an attractive use of its cash flow and debt capacity.

 

On December 19, 2006, the Board of Directorsauthorized a stock repurchase program to buy up to

 

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10,000 shares. As of September 30, 2007, 3,275 shares remainedavailable for repurchase under the December 2006 program.

 

On January 25, 2006, the Board of Directors authorizeda stock repurchase program to buy up to 30,000 shares. This program wascompleted in May 2007 at a total cost of $799,906.

 

On November 16, 2005, the Board of Directorsauthorized a stock repurchase program to buy up to 10,000 shares. This programwas completed in February 2006 at a total cost of $256,521.

 

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

 

Duringthe first nine months of 2007, the Company repurchased approximately 13,168shares of outstanding Common Stock under these programs at a total cost of$392,782, including the repurchase of 6,135 shares pursuant to an acceleratedshare repurchase program (“ASR”). As part of the ASR, the Companysimultaneously entered into a forward contract for the final settlement of theASR transaction which was indexed to the price of the Company’s Common Stock. TheASR agreement provided for the final settlement amount to be in the Company’sCommon Stock if the Company were to owe an amount to the bank, or in eithercash or additional shares of the Company’s Common Stock, at the Company’s solediscretion, if the bank were to owe an amount to the Company. As the agreementrequired the Company to deliver shares to the bank for final settlement, theforward contract element qualified for permanent equity classification and thefair value of the forward contract, which was zero at the contract’s inception,was recorded in equity in accordance with the provisions of EITF 00-19, “Accountingfor Derivative Financial Instruments Indexed to, and Potentially Settled In, aCompany’s Own Stock.”  Subsequent changesin the fair value of the forward contract were not recorded as the Companycontinued to classify the forward contract as equity. Upon completion of theASR in April 2007, the Company was required to pay approximately $6,000in shares, and therefore issued 203 treasury shares, as fullsettlement of its obligation under the ASR. The total cost of the ASR wasapproximately $176,000 or $28.68 per share. The Company funded the ASR throughits existing bank credit facilities (see Note 9).

 

Duringthe first nine months of 2006, the Company repurchased approximately 33,900shares of outstanding Common Stock under these programs at a total cost of$880,407. The 2006 repurchases include the repurchase of 25,000 shares at atotal cost of approximately $645,000 or $25.82 per share in January 2006pursuant to an ASR. As the 2006 ASR provided for the final settlement of thecontract in either cash or additional shares of the Company’s Common Stock atits sole discretion, the forward contract element of the 2006 ASR, which wasindexed to the price of the Company’s Common Stock, was treated as permanent equityand subsequent changes in fair value were not recorded in accordance with theprovisions of EITF 00-19.

 

Totalshare repurchases during the three months ended September 30, 2007 had noeffect on diluted earnings per share (“EPS”). Total share repurchases for thenine months ended September 30, 2007 benefited diluted earnings per share (“EPS”)by approximately $0.01 per share. Total share repurchases during the three andnine months ended September 30, 2006 benefited EPS by approximately $0.01 pershare and $0.06 per share, respectively.

 

Shares acquired through the Company’s repurchaseprograms described above are open-market purchases or privately negotiatedtransactions in compliance with SEC Rule 10b-18, with the exception

 

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of purchases pursuant to the 2006 and 2007 ASR transactions.

 

Under the Company’s Restated Certificate ofIncorporation as amended, the Company has authority to issue 820,000 shareswith a par value of $.01 per share of which 800,000 represent shares of CommonStock, 10,000 represent shares of Preferred Stock and 10,000 represent sharesof Series Common Stock. The Preferred and Series Common Stock can be issuedwith varying terms, as determined by the Board of Directors.

 

**Note 13.   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,** | ** ** |
|-----------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                          | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Net  Income**                                     | ** ** | **$**                                                | **57,125** | ** **                                          | $          | 69,264 |   | **$** | **216,088** | ** ** | $ | 250,044 |   |
| Other  comprehensive income, net of taxes:          |       |                                                 | ** ** |                                                |       |   | ** ** |   |   |
| Unrealized  (losses) gains on:                      |       |                                                 | ** ** |                                                |       |   | ** ** |   |   |
| Available-for-sale  equity securities               | ** ** | **(187**                                             | **)**      | 168                                                 |       | **(204** | **)** | 50 |   |
| Tax benefit  (provision) on above                   | ** ** | **65**                                               | ** ** | (59                                                 | )          | **71** | ** ** | (18 | ) |
| Change in  unrealized (losses) gains on investments | ** ** | **(122**                                             | **)**      | 109                                                 |       | **(133** | **)** | 32 |   |
| Foreign currency  translation (losses) gains        | ** ** | **(17,492**                                          | **)**      | 14,517                                              |       | **20,984** | ** ** | 32,975 |   |
| Changes in fair  value of cash flow hedges          | ** ** | **—**                                           | ** ** | —                                              |       | **—** | ** ** | 65 |   |
| Amortization of  SFAS 158 service cost and other    | ** ** | **1,771**                                            | ** ** | —                                              |       | **4,100** | ** ** | — |   |
| Total other  comprehensive (loss) income            | ** ** | **(15,843**                                          | **)**      | 14,626                                              |       | **24,951** | ** ** | 33,072 |   |
| **Comprehensive  Income**                           | ** ** | **$**                                                | **41,282** | ** **                                          | $          | 83,890 |   | **$** | **241,039** | ** ** | $ | 283,116 |   |

 

**Note 14.   Severance, Impairmentand Other Charges**

 

During the fourth quarter of 2004, the Companyrecorded $36,890 of Severance, impairment and other charges as a component ofoperating income. As a result of leveraging prior investments in technology andprocess improvements, the Company committed to a plan to eliminate selectedpositions involved primarily in production and development. The plan resultedin a charge for one-time termination benefits relating to a headcount reductionof approximately 600 employees located primarily in EMEA and the U.S. Theseseverance benefits were calculated pursuant to the terms of establishedemployee protection plans, in accordance with local statutory minimumrequirements or individual employee contracts, as applicable.

 

All of the charge was settled in cash. The Companypaid $166 during the first quarter of 2007 and there was no remaining accrualbalance at September 30, 2007. All termination actions under this plan werecompleted by the end of 2006.

 

24

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| ** **                     | ** ** | **Severance** | ** ** |
|--------------------------------|------------|---------------|------------|
| ** **                     | ** ** | **related**   | ** ** |
| ** **                     | ** ** | **reserves**  | ** ** |
| Charge at  December 31, 2004   |       | $             | 36,890     |   |
| 2004 utilization               |       | (452          | )          |
| 2005 utilization               |       | (24,052       | )          |
| 2006 utilization               |       | (12,220       | )          |
| 2007 utilization               |       | (166          | )          |
| Balance at  September 30, 2007 |       | $             | —     |   |

 

During the three months ended March 31, 2003, theCompany recorded $37,220 of Severance, impairment and other charges as acomponent 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. The contract-related charges were for impaired datasupply and data processing contacts primarily in the Company’s U.S. andJapanese operations. The asset write-downs portion of the 2003 charge relatedto the Company’s decision to abandon certain products and as such, certaincomputer software primarily in the U.S., Japan and EMEA was written-down to itsnet 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               |       | —                           |       | (2,262                          | )          | —                   |       | (2,262    | )          |
| 2007 utilization               |       | —                           |       | (289                            | )          | —                   |       | (289      | )          |
| 2007 reversals                 |       | —                           |       | (2,249                          | )          | —                   |       | (2,249    | )          |
| Adjustments                    |       | (1,746                           | )          | 67                              |       | 1,679                    |       | —    |       |
| Balance at  September 30, 2007 |       | $                                | —     |                            | $          | 166                      |       | $         | —     |   | $ | 166 |   |

 

Approximately $9,958 of the 2003 charge related to aworldwide reduction in headcount of approximately 80 employees. These severancebenefits were calculated pursuant to the terms of established employeeprotection plans, in accordance with local statutory minimum requirements orindividual employee contracts, as applicable.

 

The cash portion of the 2003 charge amounted to $30,586,of which the Company paid approximately $289, $2,262 and $7,125 during 2007,2006 and 2005, respectively, related primarily to employee termination benefitsand contract-related charges. The remaining accrual of $166 at September 30,2007 relates to a remaining lease obligation and will be utilized during 2007.

 

During the fourth quarter of 2001, the Companycompleted the assessment of its Competitive Fitness Program. This program wasdesigned to streamline operations, increase productivity and improve clientservice. In connection with this program, the Company recorded $94,616 ofSeverance, impairment and other charges during the fourth quarter of 2001 as acomponent of operating income. As of September 30, 2007, approximately $1,433remains to be utilized from 2007 to 2013 related to severance

 

25

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payments.

 

In the first quarter of 2007, the Company reversed$2,889 of contract-related reserves from the 2001 and 2003 charges dueprimarily to the termination and settlement of exit related costs for animpaired lease. These amounts were reversed against Selling and administrativeexpenses in the Condensed Consolidated Statements of Income (Unaudited).

 
| ** **                     | ** ** | **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               |       | (264                             | )          | (1,887                          | )          | —                   |       | (2,151    | )          |
| 2007 utilization               |       | (197                             | )          | (1,208                          | )          | —                   |       | (1,405    | )          |
| 2007 reversals                 |       | —                           |       | (640                            | )          | —                   |       | (640      | )          |
| Adjustments                    |       | (688                             | )          | (274                            | )          | 962                      |       | —    |       |
| Balance at  September 30, 2007 |       | $                                | 1,433      |                            | $          | —                   |       | $         | —     |   | $ | 1,433 |   |

 

The Company currently expects that the $1,433 balanceremaining in the 2001 fourth quarter charge will be utilized as follows:

 
| **Year Ended December 31,** | ** ** | **Outlays** | ** ** |
|--------------------------------------------|------------|-------------|------------|
| 2007                                       |       | $           | 65         |   |
| 2008                                       |       | 262         |       |
| 2009                                       |       | 262         |       |
| 2010                                       |       | 262         |       |
| 2011                                       |       | 262         |       |
| Thereafter                                 |       | 320         |       |
| Total                                      |       | $           | 1,433      |   |

 

**Note 15.   Operations by BusinessSegment**

 

Operating segments are defined as components of anenterprise about which financial information is available that is evaluated ona regular basis by the chief operating decision-maker, or decision-makinggroups, in deciding how to allocate resources to an individual segment and inassessing performance of the segment. 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 maintains regional geographic managementto facilitate local execution of its global strategies. However, the Companymaintains global leaders for the majority of its critical business processes;and the most significant performance evaluations and resource allocations madeby the Company’s chief operating decision makers are made on a global basis. Assuch, the Company has

 

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concluded that it maintains one operating and reportable segment.

 

**Geographic Financial Information:**

 

The following represents selected geographicinformation for the regions in which we operate for the three and nine monthsended September 30, 2007 and 2006:

 
| ** **                                  | ** ** | **Americas  (1)** | ** ** | **EMEA  (2)** | ** ** | **Asia Pacific  (3)** | ** ** | **Corporate &  Other** | ** ** | **Total  IMS** | ** ** |
|---------------------------------------------|------------|-------------------|------------|---------------|------------|-----------------------|------------|----------------------------|------------|----------------|------------|
| **Three  months ended September 30, 2007:** |       |              |       |          |       |                  |       |                       |       |           |       |
| Operating Revenue (4)                       |       | $                 | 246,893    |          | $          | 219,781               |       | $                          | 72,136     |           | —     |   | $ | 538,810 |   |
| Operating Income  (Loss) (5)                |       | $                 | 85,679     |          | $          | 20,348                |       | $                          | 26,965     |           | $          | (15,890 | ) | $ | 117,102 |   |
| **Nine  months ended September 30, 2007:**  | ** ** | ** **        | ** ** | ** **    | ** ** | ** **            | ** ** | ** **                 | ** ** | ** **     | ** ** |
| Operating  Revenue (4)                      |       | $                 | 718,941    |          | $          | 654,631               |       | $                          | 213,059    |           | —     |   | $ | 1,586,631 |   |
| Operating Income  (Loss) (5)                |       | $                 | 239,350    |          | $          | 69,827                |       | $                          | 81,744     |           | $          | (44,619 | ) | $ | 346,302 |   |
| **Three  months ended September 30, 2006:** |       |              |       |          |       |                  |       |                       |       |           |       |
| Operating Revenue (4)                       |       | $                 | 215,846    |          | $          | 199,631               |       | $                          | 67,229     |           | —     |   | $ | 482,706 |   |
| Operating Income  (Loss) (5)                |       | $                 | 73,651     |          | $          | 27,848                |       | $                          | 26,795     |           | $          | (12,905 | ) | $ | 115,389 |   |
| **Nine  months ended September 30, 2006:**  | ** ** | ** **        | ** ** | ** **    | ** ** | ** **            | ** ** | ** **                 | ** ** | ** **     | ** ** |
| Operating  Revenue (4)                      |       | $                 | 641,797    |          | $          | 577,120               |       | $                          | 196,163    |           | —     |   | $ | 1,415,080 |   |
| Operating Income  (Loss) (5)                |       | $                 | 214,975    |          | $          | 75,032                |       | $                          | 79,919     |           | $          | (51,475 | ) | $ | 318,451 |   |

 

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**Notes to Geographic Financial Information:**

 

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

 

*(2)**                               EMEAincludes 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 for the geographic regions includes theimpact of foreign exchange in converting results into 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, it isnot a true measure of the respective regions’ profitability. The OperatingIncome for the geographic segments includes the impact of foreign exchange inconverting results into U.S. dollars. $6,340 of Corporate and Other OperatingIncome (Loss) for the three months ended September 30, 2006 has beenreclassified into the regions ($2,225, $3,084 and $1,031 in the Americas, EMEAand Asia Pacific, respectively)  to conformto the current year presentation. $18,096 of Corporate and Other OperatingIncome (Loss) for the nine months ended September 30, 2006 has beenreclassified into the regions ($6,696, $8,540 and $2,860 in the Americas, EMEAand Asia Pacific, respectively) to conform to the current year presentation.*

 

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A summary of the Company’s operating revenue byproduct line for the three and nine months ended September 30, 2007 and 2006 ispresented below:

 
| ** **                 | ** ** | **Three Months  Ended September 30,** | ** **  | **Nine Months  Ended September 30,** | ** ** |
|----------------------------|------------|------------------------------------------------------|-------------|-----------------------------------------------------|------------|
| ** **                 | ** ** | **2007**                                             | ** **  | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| Sales Force  Effectiveness | ** ** | **$**                                                | **252,800** |                                                | $          | 226,069 | ** ** | **$** | **732,054** |   | $ | 670,198 |   |
| Portfolio  Optimization    | ** ** | **148,600**                                          |        | 134,676                                             | ** ** | **460,098** |   | 403,042 |   |
| Launch, brand  and other   | ** ** | **137,410**                                          |        | 121,961                                             | ** ** | **394,479** |   | 341,840 |   |
| Total Operating  Revenue   | ** ** | **$**                                                | **538,810** |                                                | $          | 482,706 | ** ** | **$** | **1,586,631** |   | $ | 1,415,080 |   |

 

**Note 16.   MergerCosts**

 

On July 11, 2005, the Company announced a definitiveagreement to merge with The Nielsen Company (formerly VNU, N.V.) (“Nielsen”), aglobal information and media company based in Haarlem, The Netherlands. OnNovember 17, 2005, the Company announced the termination of the proposed mergerwith Nielsen.

 

Inaccordance with the terms of the merger termination agreement, Nielsen was requiredto pay the Company $45,000 as a result of the acquisition of Nielsen by aprivate equity group in June 2006. This $45,000 payment was received during thesecond quarter of 2006 and was reflected in Other (expense) income, net in theCondensed Consolidated Statements of Income (Unaudited) for the nine monthsended September 30, 2006. Additionally, the Company was required to pay $6,016of investment banker fees and expenses related to the $45,000 payment receivedwhich were included in Merger costs in the Condensed Consolidated Statements ofIncome (Unaudited) for the nine months ended September 30, 2006.

 

**Note 17.   SubsequentEvents**

 

On October 18, 2007, the Company signed anagreement to acquire MIHS Holdings, Inc. (U.S.) for a purchase price of$68,000, with up to an additional $12,000 of potentialcontingent consideration payments based on the achievement of certainperformance targets for 2007.  The Company has submitted a premergernotification form under the Hart-Scott-Rodino Antitrust Improvements Act of1976 as the transaction is subject to approval by the Federal Trade Commissionor the U.S. Department of Justice.  If approved, this acquisition will beaccounted for under the purchase method of accounting and the purchaseprice will be allocated to the assets acquired and liabilities assumed based onestimated fair values as of the closing date. Had this acquisition occurred asof the January 1, 2007 or 2006, the impact on the Company’s results ofoperations would not have been significant.

 

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**Item 2. Management’s Discussionand Analysis of Financial Condition and Results of Operations**

 

**(Dollars and shares in thousands, except per sharedata)**

 

*This discussion and analysisshould be read in conjunction with the accompanying Condensed ConsolidatedFinancial 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 market intelligence products andservices that are integral to our clients’ day-to-day operations, includingportfolio optimization capabilities; launch and brand management solutions;sales force effectiveness innovations; managed care and consumer healthofferings; and consulting and services solutions that improve ROI and thedelivery of quality healthcare worldwide. Our information products aredeveloped to meet our clients’ needs by using data secured from a worldwidenetwork of suppliers in more than 100 countries. Our key information productsinclude:

 

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

 

•       PortfolioOptimization to provide clients with insights into market opportunity andbusiness development assessment; and

 

•       Launch, BrandManagement and Other to support client needs relative to market segmentationand positioning, life cycle management for prescription and consumer healthpharmaceutical products and health economics and outcomes research offerings.

 

Within these key information products, we provideconsulting and services that use in-house capabilities and methodologies toassist pharmaceutical clients in analyzing and evaluating market trends,strategies and tactics, and to help in the development and implementation ofcustomized software applications and data warehouse tools.

 

We operate in more than 100 countries.

 

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.

 

**Performance Overview**

 

Our operating revenue grew 11.6% to $538,810 in thethird quarter of 2007 as compared to $482,706 in the third quarter of 2006. Ouroperating revenue grew 12.1% to $1,586,631 in the nine months ended September30, 2007 as compared to $1,415,080 in the nine months ended September 30, 2006.The three and nine month operating revenue increases were a result of growth inall three of our business lines. Our operating income grew 1.5% to $117,102 inthe third quarter of 2007 as compared to $115,389 in the third quarter of 2006.Our operating income grew 8.7% to $346,302 in the nine months September 30,2007 as compared to $318,451 in the nine months ended September 30, 2006. Boththe three and nine month

 

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operating income growth were a result of increased operating revenuesoffset by increases in operating costs, selling and administrative expenses anddepreciation and amortization, as discussed below. Our net income was $57,125for the third quarter of 2007 as compared to $69,264 for the third quarter of2006 and $216,088 for the nine months ended September 30, 2007 as compared to$250,044 for the nine months ended September 30, 2006, due to the Non-OperatingIncome (Loss), net items discussed below and certain tax items as discussed inNote 11 of the Condensed Consolidated Financial Statements (Unaudited). Ourdiluted earnings per share of Common Stock decreased to $0.29 for the thirdquarter of 2007 as compared to $0.34 for the third quarter of 2006 anddecreased to $1.08 for the nine months ended September 30, 2007 as compared to$1.20 for the nine months ended September 30, 2006.

 

**Results of Operations**

 

*Reclassifications.*Certainprior-year amounts have been reclassified to conform to the 2007 presentation.

 

*References to constant dollarresults and results excluding the effect of foreign currency translations.*Wereport results in U.S. dollars, but we do business on a global basis. Exchangerate fluctuations affect the rate at which we translate foreign revenues andexpenses into U.S. dollars and may have significant effects on our results. Inorder to illustrate these effects, the discussion of our business in thisreport sometimes describes the magnitude of changes in constant dollar terms orresults excluding the effect of foreign currency translations. We believe thisinformation facilitates a comparative view of our business. In the first ninemonths of 2007, the U.S. dollar was generally weaker against other currenciesas compared to the first nine months of 2006. As a result, revenue growth atconstant dollar exchange rates was lower than growth at actual currencyexchange rates, while operating income growth at constant dollar exchange rateswas slightly higher than growth at actual currency exchange rates due to themix of actual currency revenue and expense. See “How Exchange Rates Affect OurResults” below and the discussion of “Market Risk” in the Management Discussionand Analysis section of our annual report on Form 10-K for the year endedDecember 31, 2006 for a more complete discussion regarding the impact offoreign currency translation on our business.

 

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**Summary of Operating Results**

 
| ** **                                   | ** ** | **Three Months Ended September 30,** | ** **  | **% Variance** | ** ** |
|----------------------------------------------|------------|----------------------------------------------------------|-------------|---------------------|------------|
| ** **                                   | ** ** | ** **                                               | ** **  | ** **          | ** ** | **2007** | ** ** |
| ** **                                   | ** ** | **2007**                                                 | ** **  | **2006**            | ** ** | **vs 2006** | ** ** |
| Information and  analytics revenue (I&A) | ** ** | **$**                                                    | **421,589** |                | $          | 396,522 |   | 6.3 | % |
| Consulting and  services revenue (C&S)   | ** ** | **117,221**                                              |        | 86,184              |       | 36.0 | % |
| Operating costs  of I&A                  | ** ** | **179,037**                                              |        | 165,035             |       | 8.5 | % |
| Direct and  incremental costs of C&S     | ** ** | **53,968**                                               |        | 43,617              |       | 23.7 | % |
| External use  software amortization          | ** ** | **12,209**                                               |        | 10,952              |       | 11.5 | % |
| Selling and  administrative expenses         | ** ** | **157,019**                                              |        | 129,670             |       | 21.1 | % |
| Depreciation and  amortization               | ** ** | **19,475**                                               |        | 18,043              |       | 7.9 | % |
| Operating income                             | ** ** | **$**                                                    | **117,102** |                | $          | 115,389 |   | 1.5 | % |

 
| ** **                                   | ** ** | **Nine Months Ended September 30,** | ** **    | **% Variance** | ** ** |
|----------------------------------------------|------------|---------------------------------------------------------|---------------|---------------------|------------|
| ** **                                   | ** ** | ** **                                              | ** **    | ** **          | ** ** | **2007** | ** ** |
| ** **                                   | ** ** | **2007**                                                | ** **    | **2006**            | ** ** | **vs 2006** | ** ** |
| Information and  analytics revenue (I&A) | ** ** | **$**                                                   | **1,255,640** |                | $          | 1,167,356 |   | 7.6 | % |
| Consulting and  services revenue (C&S)   | ** ** | **330,991**                                             |          | 247,724             |       | 33.6 | % |
| Operating costs  of I&A                  | ** ** | **531,496**                                             |          | 489,525             |       | 8.6 | % |
| Direct and  incremental costs of C&S     | ** ** | **164,628**                                             |          | 129,012             |       | 27.6 | % |
| External use  software amortization          | ** ** | **35,830**                                              |          | 32,225              |       | 11.2 | % |
| Selling and administrative  expenses         | ** ** | **450,827**                                             |          | 386,967             |       | 16.5 | % |
| Depreciation and  amortization               | ** ** | **57,548**                                              |          | 52,884              |       | 8.8 | % |
| Merger costs                                 | ** ** | **—**                                              |          | 6,016               |       | (100.0 | )% |
| Operating income                             | ** ** | **$**                                                   | **346,302**   |                | $          | 318,451 |   | 8.7 | % |

 

***Operating Income***

 

Our operating income forthe third quarter of 2007 grew 1.5% to $117,102 from $115,389 in the thirdquarter of 2006. This was due to the increase in our operating revenue, offsetby increases in our operating costs and selling and administrative expensesdriven by acquisitions, increased cost of data, increased sales, marketing andadministrative expenses and investments in consulting and services capabilities.Our operating income increased 0.6% in constant dollar terms. Our operatingincome for the first nine months of 2007 grew 8.7% to $346,302 from $318,451 inthe first nine months of 2006. This was due to the increase in our operatingrevenue and the absence of merger costs during the first nine months of 2007,offset by increases in our operating costs and selling and administrativeexpenses driven by acquisitions, increased cost of data, and investments inconsulting and services capabilities. Our operating income increased 9.0% inconstant dollar terms.

 

***OperatingRevenue***

 

Our operating revenue forthe third quarter of 2007 grew 11.6% to $538,810 from $482,706 in the thirdquarter of 2006. On a constant dollar basis, operating revenue growth was 8.2%.Operating revenue for the first nine months of 2007 grew 12.1% to $1,586,631from $1,415,080 in the first nine months of 2006. On a constant dollar basisour operating revenue growth was 9.0%. On a constant dollar basis, acquisitionscompleted within the prior twelve months contributed approximately 1.9percentage points to our operating revenue growth for the third quarter andfirst nine months of 2007. The increase in our

 

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operating revenueresulted from growth in revenue in all three of our business lines, togetherwith the effect of approximately $16,000 and $44,000 of currency translationfor the third quarter and first nine months of 2007, respectively. On aconstant dollar basis, all business lines grew.

 

**Summaryof Operating Revenue**

 
| ** **                          | ** ** | ** **                                               | ** **  | ** **                 | ** ** | ** **          | ** ** | **% Variance**  | ** ** |
|-------------------------------------|------------|----------------------------------------------------------|-------------|----------------------------|------------|---------------------|------------|----------------------|------------|
| ** **                          | ** ** | **Three Months Ended September 30,** | ** **  | **2007 vs 2006** | ** ** |
| ** **                          | ** ** | **2007**                                                 | ** **  | **2006**                   | ** ** | **Reported  Rates** | ** ** | **Constant  Dollar** | ** ** |
| Sales Force Effectiveness | ** ** | **$**                                                    | **252,800** | ** **                 | $          | 226,069             |       | 11.8                 | %          | 8.6 | % |
| Portfolio  Optimization             | ** ** | **148,600**                                              |        | 134,676                    |       | 10.3                | %          | 7.0                  | %          |
| Launch, Brand  and Other            | ** ** | **137,410**                                              |        | 121,961                    |       | 12.7                | %          | 8.9                  | %          |
| Operating  Revenue                  | ** ** | **$**                                                    | **538,810** |                       | $          | 482,706             |       | 11.6                 | %          | 8.2 | % |

 
| ** **                 | ** ** | ** **                                              | ** **    | ** **                 | ** ** | ** **          | ** ** | **% Variance**  | ** ** |
|----------------------------|------------|---------------------------------------------------------|---------------|----------------------------|------------|---------------------|------------|----------------------|------------|
| ** **                 | ** ** | **Nine Months Ended September 30,** | ** **    | **2007 vs 2006** | ** ** |
| ** **                 | ** ** | **2007**                                                | ** **    | **2006**                   | ** ** | **Reported  Rates** | ** ** | **Constant  Dollar** | ** ** |
| Sales Force  Effectiveness | ** ** | **$**                                                   | **732,054**   |                       | $          | 670,198             |       | 9.2                  | %          | 6.6 | % |
| Portfolio  Optimization    | ** ** | **460,098**                                             |          | 403,042                    |       | 14.2                | %          | 11.0                 | %          |
| Launch, Brand  and Other   | ** ** | **394,479**                                             |          | 341,840                    |       | 15.4                | %          | 11.4                 | %          |
| Operating  Revenue         | ** ** | **$**                                                   | **1,586,631** |                       | $          | 1,415,080           |       | 12.1                 | %          | 9.0 | % |

 

•                  *Sales Force Effectiveness:*The Americas contributed approximately two-thirds and EMEA contributedapproximately one-quarter to the revenue growth for the third quarter of 2007. TheAmericas contributed approximately two-thirds to the revenue growth for thefirst nine months of 2007.

 

•                  *Portfolio Optimization:*The Americas contributed more than three-quarters to the revenue growth for thethird quarter of 2007. Both the Americas and EMEA contributed approximatelyone-half to the growth during the first nine months of 2007.

 

•                  *Launch, Brand Managementand Other:* The Americas contributed more than three-quarters andEMEA contributed approximately one-quarter to the revenue growth for the thirdquarter of 2007. The Americas contributed approximately two-thirds and EMEAcontributed more than one-quarter to the growth in the first nine months of2007.

 

Consulting and services (“C&S”)revenue, as included in the business lines above, was $117,221 in the thirdquarter of 2007, up 36.0% from $86,184 in the third quarter of 2006 (up 31.4%on a constant dollar basis). Approximately one-third of the C&S revenuegrowth for the third quarter of 2007 was attributable to acquisitions completedduring the prior twelve months. C&S revenue, as included in the businesslines above, was $330,991 in the first nine months of 2007, up 33.6% from$247,724 in the first nine months of 2006 (up 29.4% on a constant dollar basis).More than one-third of the C&S revenue growth for the first nine months of2007 was attributable to acquisitions completed during the prior twelve months.

 

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***OperatingCosts of Information and Analytics***

 

Operating costs ofinformation and analytics (“I&A”) include costs of data, data processingand collection and costs attributable to personnel involved in production, datamanagement and delivery of the Company’s I&A offerings.

 

Our operating costs ofI&A grew 8.5% to $179,037 in the third quarter of 2007 from $165,035 in thethird quarter of 2006. Our operating costs of I&A grew 8.6% to $531,496 inthe first nine months of 2007 from $489,525 in the first nine months of 2006.

 

•                  *Foreign CurrencyTranslation*: The effect of foreign currency translation increasedour operating costs of I&A by approximately $7,000 and $19,000 for thethird quarter and first nine months of 2007 as compared to 2006, respectively.

 

Excluding the effect offoreign currency translation, our operating costs of I&A grew 4.5% and 4.7%in the third quarter and first nine months of 2007, respectively, as comparedto the third quarter and first nine months of 2006.

 

•                  *Data*: Datacosts increased by approximately $9,000 and $22,000 in the third quarter andfirst nine months of 2007, compared to 2006, respectively.

 

•                  *Production, ClientServices and Other*: Production, client services and other costsdecreased by approximately $2,000 in the third quarter of 2007 as compared tothe third quarter of 2006 and increased approximately $1,000 in the first ninemonths of 2007 as compared to the first nine months of 2006.

 

***Directand Incremental Costs of Consulting and Services***

 

Direct and incrementalcosts of C&S include the costs of consulting staff directly involved withdelivering revenue-generating engagements, related accommodations and the costsof primary market research data purchased specifically for certain individualC&S engagements. Direct and incremental costs of C&S do not include anallocation of direct costs of data that are included within I&A. Our directand incremental costs of C&S grew 23.7% to $53,968 in the third quarter of2007 from $43,617 in the third quarter of 2006. Our direct and incrementalcosts of C&S grew 27.6% to $164,628 in the first nine months of 2007 from$129,012 in the first nine months of 2006.

 

•                  *Foreign CurrencyTranslation*: The effect of foreign currency translation increasedour direct and incremental costs of C&S by approximately $2,000 and $7,000for the third quarter and first nine months of 2007 as compared to 2006,respectively.

 

Excluding the effect offoreign currency translation, our direct and incremental costs of C&S grew18.7% and 22.3% in the third quarter and first nine months of 2007,respectively, as compared to the third quarter and first nine months of 2006.

 

•                  C&S costs increased byapproximately $8,000 and $29,000 in the third quarter and first nine months of2007 as compared to 2006, respectively, due to increased labor, accommodationsand primary market research data expense, all directly related  to C&S revenue growth.

 

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***External-UseSoftware Amortization***

 

Our external-use software amortization charges represent theamortization associated with software we capitalized under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 86, “Accounting for the Costs ofComputer Software to be Sold, Leased, or Otherwise Marketed.” Our external-usesoftware amortization charges grew 11.5% to $12,209 in the third quarter of2007 from $10,952 in the third quarter of 2006. Our external-use softwareamortization charges grew 11.2% to $35,830 in the first nine months of 2007from $32,225 in the first nine months of 2006.

 

***Sellingand Administrative Expenses***

 

Our selling andadministrative expenses consist primarily of the expenses attributable tosales, marketing, and administration, including human resources, legal,management and finance. Our selling and administrative expenses grew 21.1% inthe third quarter of 2007, to $157,019 from $129,670 in the third quarter of2006. Our selling and administrative expenses grew 16.5% to $450,827 in thefirst nine months of 2007 as compared to $386,967 in the first nine months of2006:

 

•                  *Foreign Currency Translation*:The effect of foreign currency translation increased our selling andadministrative expenses by approximately $6,000 and $17,000 for the thirdquarter and first nine months of 2007 as compared to 2006, respectively.

 

Excluding the effect offoreign currency translation, our selling and administrative expenses grew16.7% and 10.4% in the third quarter and first nine months of 2007,respectively, as compared to the third quarter and first nine months of 2006 tosupport revenue growth.

 

•                  *Sales and Marketing*:Sales and marketing expense increased by approximately $6,000 and $13,000 inthe third quarter and first nine months of 2007 compared to 2006, respectively.

 

•                  *Consulting*:  Consulting and services expenses increased byapproximately $10,000 and $27,000 in the third quarter and first nine months of2007 compared to 2006, respectively.

 

•                  *Administrative and Other*:  Other expenses increased by approximately$5,000 and $7,000 in the third quarter and first nine months of 2007 comparedto 2006, respectively.

 

***Depreciationand Other Amortization***

 

Our depreciation andother amortization charges increased 7.9% to $19,475 in the third quarter of2007 from $18,043 in the third quarter of 2006, and 8.8% to $57,548 in thefirst nine months of 2007 from $52,884 in the first nine months of 2006,resulting from higher amortization of intangible assets recorded fromacquisitions made during 2006 and 2007 and increased internal-use softwareamortization.

 

***MergerCosts***

 

During the second quarterof 2006, we incurred $6,016 of investment banker fees and expenses related to apayment received from TheNielsen Company (formerly VNU, N.V.) (“Nielsen”) in accordance with theterms of the merger termination agreement (see Other (Expense) Income, netbelow). See Note 16 to our Condensed Consolidated Financial Statements(Unaudited).

 

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***Trendsin our Operating Margins***

 

Our operating margin forthe third quarter of 2007 was 21.7%, as compared to 23.9% in the third quarterof 2006. Our operating margin for the first nine months of 2007 was 21.8%, ascompared to 22.5% in the first nine months of 2006. Excluding the expenseimpact of costs related to the terminated merger with Nielsen in the secondquarter of 2006, our year to date operating margin declined 1.10%.

 

A decrease ofapproximately 0.5 and 0.7 percentage points in operating margin for the thirdquarter and first nine months of 2007, respectively, was due to foreignexchange fluctuations. In addition, margins were negatively impacted byincreased cost of data and our continuing investments in new products andconsulting and services capabilities.

 

Recent acquisitions havealso had an adverse effect on our operating margins due to the fact that someof the small businesses we have acquired have historically experienced loweroperating margins than ours, and the revenue and cost synergies that weincorporate into our business plans are not all immediately realized. We alsoexperience higher intangible amortization in the first years after completingan acquisition and may incur additional costs in integrating the acquiredoperations into ours, both of which tend to increase our costs and thusdecrease our operating margins in the initial years of each completedacquisition.

 

***Non-OperatingIncome (Loss), net***

 

Our non-operating loss,net increased to a loss of $17,210 in the third quarter of 2007 from a loss of$10,031 in the third quarter of 2006. Our non-operating income (loss), netincreased to a loss of $32,489 in the first nine months of 2007 from income of$15,457 in the first nine months of 2006. This was due to the followingfactors:

 

•                  *Interest Expense, net*: Net interest expense was $7,994 and$22,439 for the third quarter and first nine months of 2007, respectively,compared with $9,301 and $25,193 for the third quarter and first nine months of2006, due to lower borrowing costs in the third quarter and first nine monthsof 2007 compared with the third quarter and first nine months of 2006.

 

•                  *Gains (Losses) fromInvestments, net*: Gains from investments of $353 during the thirdquarter of 2007 were a result of the sale of marketable securities and the gainon the sale of our venture capital investments. We had net losses frominvestments of $305 during the third quarter of 2006 which were a result ofmanagement fees related to our Enterprise Portfolio and write-downs related toother-than-temporary declines in the value of our venture capital investments. Netgains from investments of $2,317 during the first nine months of 2007 wereprimarily a result of the sale of our Enterprise portfolio offset by relatedmanagement fees. We had net gains from investments of $2,443 during the firstnine months of 2006, as a result of the sale of our investment in AllscriptsHealthcare Solutions, Inc., partially offset by management fees related to ourEnterprise portfolio and write-downs related to other-than-temporary declinesin the value of our venture capital investments.

 

•                  *Other Income (Expense),net*: Other expense, net, grew by $9,144 in the third quarter of2007, as compared to the third quarter of 2006. Other income (expense), net,was a net expense of $12,367 in the first nine months of 2007 as compared tonet income of $38,207 in the first nine months of 2006, principally due to the receiptof $45,000 in the second quarter of 2006 from Nielsen as a result of theagreement to terminate the proposed merger (see Note 16 to our CondensedConsolidated Financial Statements (Unaudited)). In addition, this expense is aresult of net

 

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foreign exchange losses of $7,602 and $6,417 in thethird quarter and first nine months of 2007, respectively, and minorityinterest expense of $1,691 and $5,071 in the third quarter and first ninemonths of 2007, respectively, compared with a net foreign exchange gain of $502and a net foreign exchange loss of $4,030 in the third quarter and first ninemonths of 2006, respectively, and minority interest expense of $669 and $2,281in the third quarter and first nine months of 2006, respectively.

 

***Taxes***

 

We adopted the provisionsof Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes” (“FIN 48”) on January 1, 2007. As a result ofthis adoption, we recognized an increase in liabilities for uncertain taxpositions of approximately $51,800 and a corresponding reduction to the January1, 2007 retained earnings balance. As of the adoption date, we hadapproximately $117,200 of gross unrecognized tax benefits, of which $107,600,if recognized, would favorably affect the effective tax rate. We recognizeinterest expense and penalties related to unrecognized tax benefits in incometax expense. As of the adoption date, we had accrued interest and penalties ofapproximately $13,500.

 

For the nine months ended September 30, 2007, we haverecorded approximately $11,900 of tax expense related to uncertain taxpositions that if recognized, would favorably affect the effective tax rate.Included in this amount is approximately $6,700 of interest and penalties.

 

We file numerous consolidated and separate income taxreturns in the U.S. federal and state and non-U.S. jurisdictions. With fewexceptions, we are no longer subject to U.S. federal income tax examinationsfor the years before 2003 and are no longer subject to state and local incometax examination by tax authorities for years before 1997. As well, with fewexceptions, we are no longer subject to examination by tax authorities in itsmaterial non-U.S. jurisdictions prior to 2003. It is reasonably possible thatwithin the next twelve months we could recognize approximately $2,500 ofunrecognized benefits as a result of the expiration of certain statutes oflimitation.

 

The Internal Revenue Service(“IRS”) is currently auditing our 2004 and 2005 federal income tax returns. Itis reasonably possible that this audit may conclude within the next twelvemonths. To date, no material adjustments have been proposed as a result of thisaudit. At this time, it is not reasonably possible to estimate the impact ofthe resolution of this audit on our financial statements.

 

We had considered making adeposit of  tax to stop the running ofinterest for the tax year 1997 related to a dispute over the allocation ofcertain items of partnership income and expense (see Note 7 to our CondensedConsolidated Financial Statements (Unaudited)), but are currently indiscussions with the IRS regarding this matter. We have approximately $21,200(tax and interest, net of tax benefit) reserved in current accrued income taxespayable at September 30, 2007.

 

For the three monthsended September 30, 2007, the Company recognized a tax charge of approximately$7,500 to revalue net deferred tax assets related to Germany as a result of theenactment, during the third quarter, of the German 2008 Business Tax Reform Actwhich reduced the German federal tax rate from 25% to 15%. For the nine monthsended September 30, 2007, our effective tax rate was reduced primarily due to afavorable non-U.S. audit settlement for tax years 1998 through 2002 ofapproximately $16,500 and a reorganization of certain non-U.S. subsidiariesyielding a tax benefit of approximately $4,400, partially offset by a taxcharge of approximately $7,500 to revalue net deferred tax assets related toGermany as discussed above. Forthe three months ended September 30, 2006, our

 

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effective tax rate wasprimarily impacted by approximately $21,400 of tax expense related to areorganization of several of our subsidiaries. For the three months ended September 30, 2006, our effective tax ratewas reduced by approximately $4,500 related to a non-U.S. auditsettlement. For the nine months endedSeptember 30, 2006, our effective tax rate was reduced due to afavorable U.S. partnership audit settlement of approximately $69,200 for thetax years 1998 through 2003 and a favorable U.S. corporate audit settlement of approximately $17,600 for the tax years 2000through 2003. Also in the first nine months of 2006, approximately$21,400 of tax expense was recorded related to a reorganization of several ofour subsidiaries. Further, approximately $24,800 of tax expense was recorded inthe first quarter of 2006 related to disputes between us 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 7 to our Condensed Consolidated FinancialStatements (Unaudited)).

 

 For all periods presented, our effective taxrate was reduced as a result of global tax planning initiatives. While weintend to continue to seek global tax planning initiatives, there can be noassurance that we will be able to successfully identify and implement suchinitiatives to reduce or maintain our overall tax rate.

 

## **OperatingResults by Geographic Region**

## ** **

The following represents selected geographicinformation for the regions in which we operate for the three and nine monthsended September 30, 2007 and 2006:

 
| ** **                                  | ** ** | **Americas  (1)** | ** ** | **EMEA  (2)** | ** ** | **Asia Pacific  (3)** | ** ** | **Corporate &  Other** | ** ** | **Total  IMS** | ** ** |
|---------------------------------------------|------------|-------------------|------------|---------------|------------|----------------------------|------------|---------------------------------|------------|----------------|------------|
| **Three  months ended September 30, 2007:** |       |              |       |          |       |                       |       |                            |       |           |       |
| Operating  Revenue (4)                      |       | $                 | 246,893    |          | $          | 219,781                    |       | $                               | 72,136     |           | —     |   | $ | 538,810 |   |
| Operating Income  (Loss) (5)                |       | $                 | 85,679     |          | $          | 20,348                     |       | $                               | 26,965     |           | $          | (15,890 | ) | $ | 117,102 |   |
| **Nine  months ended September 30, 2007:**  | ** ** | ** **        | ** ** | ** **    | ** ** | ** **                 | ** ** | ** **                      | ** ** | ** **     | ** ** |
| Operating  Revenue (4)                      |       | $                 | 718,941    |          | $          | 654,631                    |       | $                               | 213,059    |           | —     |   | $ | 1,586,631 |   |
| Operating Income  (Loss) (5)                |       | $                 | 239,350    |          | $          | 69,827                     |       | $                               | 81,744     |           | $          | (44,619 | ) | $ | 346,302 |   |
| **Three  months ended September 30, 2006:** |       |              |       |          |       |                       |       |                            |       |           |       |
| Operating  Revenue (4)                      |       | $                 | 215,846    |          | $          | 199,631                    |       | $                               | 67,229     |           | —     |   | $ | 482,706 |   |
| Operating Income  (Loss) (5)                |       | $                 | 73,651     |          | $          | 27,848                     |       | $                               | 26,795     |           | $          | (12,905 | ) | $ | 115,389 |   |
| **Nine  months ended September 30, 2006:**  | ** ** | ** **        | ** ** | ** **    | ** ** | ** **                 | ** ** | ** **                      | ** ** | ** **     | ** ** |
| Operating  Revenue (4)                      |       | $                 | 641,797    |          | $          | 577,120                    |       | $                               | 196,163    |           | —     |   | $ | 1,415,080 |   |
| Operating Income  (Loss) (5)                |       | $                 | 214,975    |          | $          | 75,032                     |       | $                               | 79,919     |           | $          | (51,475 | ) | $ | 318,451 |   |

 

**Notes to Geographic FinancialInformation:**

 

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

 

*(2)**                               EMEAincludes 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 for the geographic regions includes theimpact of foreign exchange in converting results into 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, it isnot a true measure of the respective regions’ profitability. The OperatingIncome for the geographic segments includes the impact of foreign exchange inconverting results into U.S. dollars. $6,340 of Corporate and Other OperatingIncome (Loss) for the three months ended September 30, 2006 has beenreclassified into the regions ($2,225, $3,084 and $1,031 in the Americas, EMEAand Asia Pacific,*

 

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*respectively) to conform to the current year presentation. $18,096 of Corporate andOther Operating Income (Loss) for the nine months ended September 30, 2006 hasbeen reclassified into the regions ($6,696, $8,540 and $2,860 in the Americas,EMEA and Asia Pacific, respectively)  toconform to the current year presentation.*

 

***Americas Region***

 

Operating revenue growthin the Americas region was 14.4% and 12.0% in the third quarter and first ninemonths of 2007 compared to the third quarter and first nine months of 2006. Excludingthe effect of foreign currency translations, operating revenue grew 13.5% and11.6% in the third quarter and first nine months of 2007, respectively. Thiswas driven more than one-third by Sales Force Effectiveness, approximatelyone-third by Launch, Brand and Other business lines and more than one-quarterby Portfolio Optimization for the third quarter and first nine months of 2007.

 

Operating income in theAmericas region grew 16.3% and 11.3% in the third quarter and first nine monthsof 2007 as compared to the third quarter and first nine months of 2006,respectively. The operating income growth reflected revenue growth in theregion offset by increases in operating expenses of $19,000 and $53,000 in thethird quarter and first nine months of 2007, respectively. Excluding the effectof foreign currency translations, operating income grew by 15.6% and 11.1% inthe third quarter and first nine months of 2007, respectively.

 

***EMEARegion***

 

Operating revenueincreased in the EMEA region by 10.1% and 13.4% in the third quarter and firstnine months of 2007 as compared to the third quarter and first nine months of2006, respectively. Excluding the effect of foreign currency translations,operating revenue grew 3.7% and 6.6% in the third quarter and first nine monthsof 2007, respectively. The revenue growth in the third quarter of 2007 wasdriven approximately two-thirds by Sales Force Effectiveness and more thanone-quarter by Launch, Brand and Other business lines. The growth in the firstnine months of 2007 was driven more than one-half by Portfolio Optimization andmore than one-quarter by Launch, Brand and Other business lines.

 

Operating income in theEMEA region declined by 26.9% and 6.9% in the third quarter and first ninemonths of 2007 as compared to the third quarter and first nine months of 2006,respectively. The operating income decline reflected revenue growth at lowerthan expected levels in the region which was more than offset by increases inoperating expenses of $28,000 and $83,000 in the third quarter and first ninemonths of 2007, respectively. Growth in data, marketing and C&S expensedrove the increase in operating expenses. Excluding the effect of foreigncurrency translations, operating income declined by 27.6% and 6.4% in the thirdquarter and first nine months of 2007, respectively.

 

***Asia Pacific Region***

 

Operatingrevenue in the Asia Pacific region increased 7.3% and 8.6% in the third quarterand first nine months of 2007 as compared to the third quarter and first ninemonths of 2006, respectively. Excluding the effect of foreign currencytranslations, operating revenue grew 4.8% and 7.7% in the third quarter andfirst nine months of 2007, respectively. The revenue growth in the thirdquarter of 2007 was driven more than one-half by Sales Force Effectiveness andmore than one-third by Portfolio Optimization. The growth in the first ninemonths of 2007 was driven more than one-half by Sales Force Effectiveness andapproximately one-quarter by both the Portfolio Optimization and Launch, Brandand Other business lines.

 

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Operatingincome in the Asia Pacific region increased by 0.6% and 2.3% in the thirdquarter and first nine months of 2007 as compared to the third quarter andfirst nine months of 2006, respectively. The operating income growthreflected revenue growth in the region offset by increases in operatingexpenses of $5,000 and $15,000 in the third quarter and first nine months of2007, respectively. Excluding the effect of foreign currency translations,operating income decreased by 1.5% in the third quarter of 2007 and increasedby 2.1% in the first nine months of 2007.

 

### **HowExchange Rates Affect Our Results**

### ** **

Weoperate globally, deriving a significant portion of our operating income fromnon-U.S. operations. As a result, fluctuations in the value of foreigncurrencies relative to the U.S. dollar may increase the volatility of U.S.dollar operating results. We enter into foreign currency forward contracts topartially offset the effect of currency fluctuations. In 2007, foreigncurrency translation increased U.S. dollar revenue growth by approximately 3.4and 3.1 percentage points in the third quarter and first nine months of 2007,respectively, while the impact on operating income growth was an approximateincrease of 0.9 percentage points in the third quarter of 2007 and anapproximate decrease of 0.3 percentage points in the first nine months of 2007.

 

Non-U.S. monetary assetsare maintained in currencies other than the U.S. dollar, principally the Euro,the Japanese Yen and the Swiss Franc. Where monetary assets are held in thefunctional currency of the local entity, changes in the value of thesecurrencies relative to the U.S. dollar are reflected in Cumulative translationadjustment in the Condensed Consolidated Statements of Financial Position(Unaudited). The effect of exchange rate changes during the first nine monthsof 2007 increased the U.S. dollar amount of Cash and cash equivalents by$12,579.

 

### **Liquidityand Capital Resources**

 

Our Cash and cashequivalents increased $38,639 during the first nine months of 2007 to $195,985at September 30, 2007 compared to $157,346 at December 31, 2006. The increasereflects cash provided by operating activities of $252,292, an increase of$12,579 due to the effect of exchange rate changes on cash during the firstnine months of 2007, offset by cashused in investing activities of $146,585 and cash used in financingactivities of $79,647.

 

We currently expect that we willuse our Cash and cash equivalents 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 $140,000 to $150,000 during full-year 2007 for softwaredevelopment and capital expenditures);

 

•                  acquisitions(see Note 5 of Notes to Condensed Consolidated Financial Statements(Unaudited));

 

•                  sharerepurchases (see Note 12 of Notes to Condensed Consolidated FinancialStatements (Unaudited));

 

•                  dividendsto our shareholders (we expect 2007 dividends will be $0.12 per share orapproximately $24,000);

 

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•                  payments for tax-related matters,including the D&B Legacy Tax Matters discussed further in Note 7 to ourCondensed Consolidated Financial Statements (Unaudited). Payments for certainof the D&B Legacy Tax Matters could be up to approximately $33,400 in 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 $8,000 in 2007).

 

Net cash provided byoperating activities amounted to $252,292 for the nine months ended September30, 2007, an increase of cash provided of $45,511 over the comparable period in2006. The increase relates to lower funding of accounts payable and accrued taxesand lower payments for accrued severance, impairment and other charges,partially offset by slower collections of accounts receivable, lower net incomeand the higher funding of prepaid expenses and other current assets and accruedand other liabilities during the nine months ended September 30, 2007. Theincrease in accounts receivable was driven by the increase in revenues and DSO(days sales outstanding) in the first nine months of 2007. DSO wasapproximately 10 days higher in the first nine months of 2007 as compared tothe first nine months of 2006. As a result of the deterioration in DSO, we haveput plans in place to improve our DSO performance over the coming quarters tobe more in-line with historical levels.

 

Net cash used ininvesting activities amounted to $146,585 for the nine months ended September30, 2007, an increase in cash used of $25,704 over the comparable period in2006. The increase relates to higher capital expenditures during the first ninemonths of 2007 related to new facilities and technology to upgrade our systemsand higher costs for the development of software to be used in new products,partially offset by lower payments for acquisitions of businesses.

 

Net cash used infinancing activities amounted to $79,647 for the nine months ended September30, 2007, a decrease of $222,405 over the comparable period in 2006. Thisdecrease in cash used was due to reduced purchases of treasury stock and higherproceeds from the exercise of employee stock options during the first nine monthsof 2007 compared to the first nine months of 2006, partially offset by lowerdebt incurred during the first nine months of 2007 compared to the first ninemonths of 2006. Refer to the Stock Repurchase Programs and Borrowings sectionsbelow for further information on our financing activities.

 

Our financing activitiesinclude quarterly cash dividends we paid of $0.03 per share in 2007 and 2006,which amounted to $17,955 and $18,292 during the first nine months of 2007 and2006, respectively. The payments and level of cash dividends made by us aresubject to the discretion of our Board of Directors. Any future dividends,other than the $0.03 per share dividend for the fourth quarter of 2007, whichwas declared by our Board of Directors in October 2007, will be based on, andaffected by, a number of factors, including our operating results and financialrequirements.

 

**Tax andOther Contingencies**

 

Weare exposed to certain known tax and other contingencies that are material toour investors.  The facts and circumstances surrounding thesecontingencies and a discussion of their effect on us are included in Notes 7and 11 to our Condensed Consolidated Financial Statements (Unaudited) for theperiod ended September 30, 2007. We do not know of any material tax or othercontingencies, other

 

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than those described in Notes 7 and 11 to ourCondensed Consolidated Financial Statements (Unaudited).

 

Thesecontingencies may have a material effect on our liquidity, capital resourcesor results of operations.  Although we have established reserves forD&B Legacy Tax Matters in accordance with SFAS No. 5, “Accounting forContingencies,” the actual liability may exceed the amount of the reserve. Wehave not established any reserves in respect of the other contingencies otherthan those discussed in Notes 7 and 11 to our Notes to Condensed ConsolidatedFinancial Statements (Unaudited).  In addition, even where our reservesare adequate, the incurrence of any of these liabilities may have a materialeffect on our liquidity and the amount of cash available to us for otherpurposes.

 

Managementbelieves that we have made appropriate arrangements in respect of the futureeffect on us of these known tax and other contingencies.  Managementalso believes that the amount of cash available to us from our operations,together with cash from financing, will be sufficient for us to pay any knowntax and other contingencies as they become due without materially affecting ourability to conduct our operations and invest in the growth of ourbusiness.

 

**Stock Repurchase 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 December 19, 2006, the Board of Directors authorized a stockrepurchase program to buy up to 10,000 shares. As of September 30, 2007, 3,275shares remained available for repurchase under the December 2006 program.

 

On January 25, 2006, the Board of Directors authorized a stockrepurchase program to buy up to 30,000 shares. This program was completed inMay 2007 at a total cost of $799,906.

 

On November 16, 2005, the Board of Directors authorized a stockrepurchase program to buy up to 10,000 shares. This program was completed inFebruary 2006 at a total cost of $256,521.

 

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

 

During the first ninemonths of 2007, we repurchased approximately 13,168 shares of outstandingCommon Stock under these programs at a total cost of $392,782, including therepurchase of 6,135 shares pursuant to an accelerated share repurchase program(“ASR”). As part of the ASR, we simultaneously entered into a forward contractfor the final settlement of the ASR transaction which was indexed to the priceof our Common Stock. The ASR agreement provided for the final settlement amountto be in our Common Stock if we were to owe an amount to the bank, or in eithercash or additional shares of our Common Stock, at our sole discretion, if thebank were to owe an amount to us. As the agreement required us to delivershares to the bank for final settlement, the forward contract element qualifiedfor permanent equity classification and the fair value of the forward contract,which was zero at the contract’s inception, was recorded in equity inaccordance with the provisions of EITF 00-19, “Accounting for DerivativeFinancial Instruments Indexed to, and Potentially Settled In, a Company’s OwnStock.”  Subsequent changes in the fairvalue of the forward contract were not recorded as we continued to classify theforward contract as equity. Upon completion of the ASR in April 2007, we wererequired to pay approximately

 

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$6,000 in shares, and therefore issued 203 treasury shares,as full settlement of our obligation under the ASR. The total cost of the ASRwas approximately $176,000 or $28.68 per share. We funded the ASR through ourexisting bank credit facilities (see Note 9 to our Condensed Consolidated FinancialStatements (Unaudited)).

 

Duringthe first nine months of 2006, we repurchased approximately 33,900 shares ofoutstanding Common Stock under these programs at a total cost of $880,407. The2006 repurchases include the repurchase of 25,000 shares at a total cost ofapproximately $645,000 or $25.82 per share in January 2006 pursuant to an ASR. Asthe 2006 ASR provided for the final settlement of the contract in either cashor additional shares of our Common Stock at our sole discretion, the forwardcontract element of the 2006 ASR, which was indexed to the price of our CommonStock, was treated as permanent equity and subsequent changes in fair valuewere not recorded in accordance with the provisions of EITF 00-19.

 

Total share repurchasesduring the three months ended September 30, 2007 had no effect on dilutedearnings per share (“EPS”). Total share repurchases for the nine months endedSeptember 30, 2007 benefited diluted earnings per share (“EPS”) byapproximately $0.01 per share. Total share repurchases during the three andnine months ended September 30, 2006 benefited EPS by approximately $0.01 pershare and $0.06 per share, respectively.

 

Shares acquired through our repurchase programs described above areopen-market purchases or privately negotiated transactions in compliance withSEC Rule 10b-18, with the exception of purchases pursuant to the 2006 and 2007ASR transactions.

 

Under our Restated Certificate of Incorporation as amended, we haveauthority to issue 820,000 shares with a par value of $.01 per share of which800,000 represent shares of Common Stock, 10,000 represent shares of Preferred Stockand 10,000 represent shares of Series Common Stock. The Preferred and Series CommonStock can be issued with varying terms, as determined by the Board ofDirectors.

 

**Borrowings**

** **

In recent years, we haveincreased debt levels to balance appropriately the objective of generating anattractive cost of capital with providing us a reasonable amount of financialflexibility. At September 30, 2007, our debt totaled $1,197,642, and managementdoes 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, 2007, we had $195,985 in worldwide cash and cash equivalents;

 

•                  atSeptember 30, 2007, we had $451,181 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 tablesummarizes our long-term debt at September 30, 2007 and December 31, 2006:

 
| ** **                                                                                                                                      | ** ** | **September 30,  2007** | ** **    | **December 31,  2006** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|---------------|-----------------------------|------------|
| 4.6% Private  Placement Notes, principal payment of $150,000 due January 2008, net of  interest rate swaps of $(968) and $(2,819), respectively | ** ** | **$**                        | **149,033**   |                        | $          | 147,181 |   |
|                                                                                                                                            | ** ** | ** **                   |          |                        |       |
| 5.55% Private  Placement Notes, principal payment of $150,000 due April 2016                                                                    | ** ** | **150,000**                  |          | 150,000                     |       |
|                                                                                                                                            | ** ** | ** **                   |          |                        |       |
| 1.70% Private  Placement Notes, principal payment of 34,395,000 Japanese Yen due January  2013                                                  | ** ** | **299,791**                  |          | 288,670                     |       |
|                                                                                                                                            | ** ** | ** **                   |          |                        |       |
| Revolving Credit  Facility:                                                                                                                     |       |                         |          |                        |       |
| Japanese Yen  denominated borrowings at average floating rates of approximately 1.19%                                                           | ** ** | **395,877**                  |          | 249,097                     |       |
|                                                                                                                                            | ** ** | ** **                   |          |                        |       |
| Swiss Franc  denominated borrowings at average floating rates of approximately 2.83%                                                            | ** ** | **69,041**                   |          | 59,258                      |       |
|                                                                                                                                            | ** ** | ** **                   |          |                        |       |
| U.S. Dollar  denominated borrowings at average floating rates of approximately 6.05%                                                            | ** ** | **83,900**                   |          | 31,200                      |       |
|                                                                                                                                            | ** ** | ** **                   |          |                        |       |
| Bank Term Loan,  principal payment of $50,000 due June, 2009 at average floating rate of  approximately 5.45%                                   | ** ** | **50,000**                   |          | 50,000                      |       |
| Total Long-Term  Debt                                                                                                                           | ** ** | **$**                        | **1,197,642** |                        | $          | 975,406 |   |

 

InJuly 2006, we entered into a $1,000,000 revolving credit facility with asyndicate of 12 banks (“Revolving Credit Facility”) replacing our existing$700,000 Amended and Restated Facility (see below). 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. Total borrowings under the Revolving CreditFacility were $548,819 and $339,555 at September 30, 2007 and December 31,2006, respectively, all of which were classified as long-term. In April 2004,we entered into a $700,000 revolving credit facility with a syndicate of 12 banks(the “Unsecured Facility”). The Unsecured Facility replaced our lines of creditwith several domestic and international banks. On March 9, 2005, werenegotiated with the syndicate of 12 banks to amend and restate the UnsecuredFacility (the “Amended and Restated Facility”). The terms of the Amended andRestated Facility extended the maturity of the facility in its entirety to aterm of five years, maturing March 2010, reduced the borrowing margins andincreased subsidiary borrowing limits.

 

Wedefine long-term lines as those where the lines are non-cancellable for morethan 365 days from the balance sheet date by the financial institutions exceptfor specified, objectively measurable violations of the provisions of theagreement. Although the 4.6% Private Placement Notes principal payment of$150,000 is due within 365 days, we have the ability and intent to refinancethe notes with another long-term debt arrangement and continue to classify themas long-term in compliance with SFAS No. 6, “Classification of Short-TermObligations Expected to be Refinanced.”

 

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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 weightedaverage interest rates for our lines were 2.14% and 1.61% at September 30, 2007and December 31, 2006, respectively. In addition, we are required to pay acommitment fee on any unused portion of the facilities of 0.075%. At September30, 2007, we had approximately $451,181 available under our existing bankcredit facilities.

 

InJune 2006, we closed a $50,000 three year term loan with a bank. The term loanallows us to borrow at a floating rate with a lower borrowing margin than ourrevolving credit facility, and provides us with an option to extend the term upto an additional two years. We used the proceeds to refinance existing debtborrowed under the revolving credit facility.

 

InApril 2006, we closed a private placement transaction pursuant to which weissued $150,000 of ten-year notes to two highly rated insurance companies at afixed rate of 5.55%. We used the proceeds to refinance existing debt of$150,000 drawn under a short term credit agreement with a bank in January 2006.

 

InJanuary 2006, we closed a private placement transaction pursuant to which ourJapanese subsidiary issued 34,395,000 Japanese Yen seven-year debt (equal to$300,000 at date of issuance) to several highly rated insurance companies at afixed rate of 1.70%. We used the proceeds to refinance existing debt in Japanborrowed under our Amended and Restated Facility.

 

InJanuary 2003, we closed a private placement transaction pursuant to which weissued $150,000 of five-year debt to several highly rated insurance companiesat a fixed rate of 4.60%. We used the proceeds to pay down short-term debt. Wealso swapped $100,000 of our fixed rate debt to floating rate based onsix-month LIBOR plus a margin of approximately 107 basis points. We accountedfor these swaps as fair value hedges under the provisions of SFAS No. 133, “Accountingfor Derivative Instruments and Hedging Activities.” We determined the fairvalues based on estimated prices quoted by financial institutions. The fairvalues of these swaps were $(968) and $(2,819) as of September 30, 2007 andDecember 31, 2006, respectively.

 

Ourfinancing arrangements provide for certain covenants and events of defaultcustomary for similar instruments, including in the case of our main bankarrangements, the  private placement transactions,and the term loan, covenants to maintain specific ratios of consolidated totalindebtedness to EBITDA and of EBITDA to certain fixed charges. At September 30,2007, we were in compliance with these financial debt covenants.

 

**Severance,Impairment and Other Charges**

 

Duringthe fourth quarter of 2004, we recorded $36,890 of Severance, impairment andother charges as a component of operating income. As a result of leveragingprior investments in technology and process improvements, we committed to aplan to eliminate selected positions involved primarily in production anddevelopment. The plan resulted in a charge for one-time termination benefitsrelating to a headcount reduction of approximately 600 employees locatedprimarily in EMEA and the U.S. These severance benefits were calculatedpursuant to the terms of established employee protection plans, in accordancewith local statutory minimum requirements or individual employee contracts, asapplicable.

 

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All of the charge was settled in cash. We paid $166 during the firstquarter of 2007 and there was no remaining accrual balance at September 30,2007. All termination actions under this plan were completed by the end of2006.

 
| ** **                     | ** ** | **Severance** | ** ** |
|--------------------------------|------------|---------------|------------|
| ** **                     | ** ** | **related**   | ** ** |
| ** **                     | ** ** | **reserves**  | ** ** |
| Charge at  December 31, 2004   |       | $             | 36,890     |   |
| 2004 utilization               |       | (452          | )          |
| 2005 utilization               |       | (24,052       | )          |
| 2006 utilization               |       | (12,220       | )          |
| 2007 utilization               |       | (166          | )          |
| Balance at  September 30, 2007 |       | $             | —     |   |

 

During the three months ended March 31, 2003, we recorded $37,220 ofSeverance, impairment and other charges as a component of operating income.These charges were designed to further streamline operations and increaseproductivity through a worldwide reduction in headcount of approximately 80employees and charges related to impaired contracts and assets. Thecontract-related charges were for impaired data supply and data processingcontacts primarily in our U.S. and Japanese operations. The asset write-downsportion of the 2003 charge related to our decision to abandon certain productsand as such, certain computer software primarily in the U.S., Japan and EMEAwas written-down to its net realizable value.

 
| ** **                     | ** ** | **Severance** | ** ** | **Contract** | ** ** | **Asset**  | ** ** | ** ** | ** ** |
|--------------------------------|------------|---------------|------------|--------------|------------|------------|------------|------------|------------|
| ** **                     | ** ** | **related**   | ** ** | **related**  | ** ** | **write-** | ** ** | ** ** | ** ** |
| ** **                     | ** ** | **reserves**  | ** ** | **reserves** | ** ** | **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               |       | —        |       | (2,262       | )          | —     |       | (2,262     | )          |
| 2007 utilization               |       | —        |       | (289         | )          | —     |       | (289       | )          |
| 2007 reversals                 |       | —        |       | (2,249       | )          | —     |       | (2,249     | )          |
| Adjustments                    |       | (1,746        | )          | 67           |       | 1,679      |       | —     |       |
| Balance at  September 30, 2007 |       | $             | —     |         | $          | 166        |       | $          | —     |   | $ | 166 |   |

 

Approximately $9,958 of the 2003 charge related to a worldwidereduction in headcount of approximately 80 employees. These severance benefitswere calculated pursuant to the terms of established employee protection plans,in accordance with local statutory minimum requirements or individual employeecontracts, as applicable.

 

The cash portion of the 2003 charge amounted to $30,586, of which wepaid approximately $289, $2,262 and $7,125 during 2007, 2006 and 2005,respectively, related primarily to employee termination benefits andcontract-related charges. The remaining accrual of $166 at September 30, 2007relates to a remaining lease obligation and will be utilized during 2007.

 

During the fourth quarter of 2001, we completed the assessment of ourCompetitive Fitness Program. This program was designed to streamline operations,increase productivity and improve client

 

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service. In connection with this program, we recorded $94,616 ofSeverance, impairment and other charges during the fourth quarter of 2001 as acomponent of operating income. As of September 30, 2007, approximately $1,433remains to be utilized from 2007 to 2013 related to severance payments.

 

In the first quarter of 2007, we reversed $2,889 of contract-relatedreserves from the 2001 and 2003 charges due primarily to the termination andsettlement of exit related costs for an impaired lease. These amounts werereversed against Selling and administrative expenses in the CondensedConsolidated Statements of Income (Unaudited).

 
| ** **                     | ** ** | **Severance** | ** ** | **Contract** | ** ** | **Asset**  | ** ** | ** ** | ** ** |
|--------------------------------|------------|---------------|------------|--------------|------------|------------|------------|------------|------------|
| ** **                     | ** ** | **related**   | ** ** | **related**  | ** ** | **write-** | ** ** | ** ** | ** ** |
| ** **                     | ** ** | **reserves**  | ** ** | **reserves** | ** ** | **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               |       | (264          | )          | (1,887       | )          | —     |       | (2,151     | )          |
| 2007 utilization               |       | (197          | )          | (1,208       | )          | —     |       | (1,405     | )          |
| 2007 reversals                 |       | —        |       | (640         | )          | —     |       | (640       | )          |
| Adjustments                    |       | (688          | )          | (274         | )          | 962        |       | —     |       |
| Balance at  September 30, 2007 |       | $             | 1,433      |         | $          | —     |       | $          | —     |   | $ | 1,433 |   |

 

We currently expect that the $1,433 balance remaining in the 2001fourth quarter charge will be utilized as follows:

 
| **Year Ended December 31,** | ** ** | **Outlays** | ** ** |
|--------------------------------------------|------------|-------------|------------|
| 2007                                       |       | $           | 65         |   |
| 2008                                       |       | 262         |       |
| 2009                                       |       | 262         |       |
| 2010                                       |       | 262         |       |
| 2011                                       |       | 262         |       |
| Thereafter                                 |       | 320         |       |
| Total                                      |       | $           | 1,433      |   |

 

**Recently Issued AccountingStandards**

 

In September 2006, the FASB issued SFAS No. 157, “Fair ValueMeasurements.” This statement defines fair value, establishes a frameworkfor measuring fair value under generally accepted accounting principles, andexpands disclosures about fair value measurements. This statement iseffective for financial statements issued for fiscal years beginning afterNovember 15, 2007, and interim periods within those fiscal years. We arecurrently evaluating this statement to determine any potential impact that itmay have on our financial results.

 

InFebruary 2007, the FASB issued SFAS No. 159, “The Fair Value Option forFinancial Assets and Financial Liabilities–Including an amendment of FASBStatement No. 115.” This statement permits

 

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entities to choose to measure many financialinstruments and certain other items at fair value. Entities shall reportunrealized gains and losses on items for which the fair value option has beenelected in earnings at each subsequent reporting date. This statement iseffective as of the beginning of an entity’s first fiscal year that beginsafter November 15, 2007. We are currently evaluating this statement todetermine any potential impact that it may have on our financial results.

 

***Forward-Looking Statements and Risk Factors***

 

ThisQuarterly Report on Form 10-Q, as well as information included in oralstatements or other written statements made or to be made by us, containstatements that, in our opinion, may constitute “forward-looking statements”within the meaning of the Private Securities Litigation Reform Act of 1995. Thewords such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “foresee,” “likely,”“project,” “estimate,” “will,” “may,” “should,” “future,” “predicts,” “potential,”“continue” and similar expressions identify these forward-looking statements,which appear in a number of places in this Quarterly Report and include, butare not limited to, all statements relating to plans for future growth andother business development activities as well as capital expenditures,financing sources, dividends and the effects of regulation and competition,foreign currency conversion and all other statements regarding our intent,plans, beliefs or expectations or those of our directors or officers. Investorsare cautioned that such forward-looking statements are not assurances forfuture performance or events and involve risks and uncertainties that couldcause actual results and developments to differ materially from those coveredin such forward-looking statements. These risks and uncertainties include, butare 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 63% of our operatingrevenue in 2006 from non-U.S. operations;

 

•                  regulatory,legislative and enforcement initiatives to which we are or may become subjectrelating particularly to tax and to medical privacy and the collection anddissemination of data and, specifically, non-patient identifiable information,e.g., prescriber identifiable information, or to the process of anonymizingdata;

 

•                  theimposition of additional restrictions on our use of or access to data, or therefusal by data suppliers to provide data to us;

 

•                  to theextent we seek growth through acquisitions, alliances or joint ventures, theability to identify, consummate and integrate acquisitions, alliances and jointventures 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; our ability to maintain effectivesecurity measures for our computer and communications systems; and failures ordelays in the operation of our computer or communications systems;

 

•                  ourability to successfully maintain historic effective tax rates;

 

•                  ourability to maintain and defend our intellectual property rights injurisdictions around the world;

 

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•                  competition,particularly in the markets for pharmaceutical information;

 

•                  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 or the mannerin which such products may be marketed or sold;

 

•                  deteriorationin economic conditions, particularly in the pharmaceutical, healthcare or otherindustries in which our customers operate;

 

•                  consolidationin the pharmaceutical industry and the other industries in which our customersoperate;

 

•                  conditionsin the securities markets that may affect the value or liquidity of portfolioinvestments; and management’s estimates of lives of assets, recoverability ofassets, fair market value, estimates and liabilities and accrued income taxbenefits and liabilities;

 

•                  to theextent unforeseen cash needs arise, the ability to obtain financing onfavorable terms; and

 

•                  terroristactivity, epidemics or other conditions that could disrupt commerce, the threatof any such conditions, and responses to and results of such conditions andthreats, 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 theforward-looking statements we make in this document are qualified by theinformation contained herein, including, but not limited to, the informationcontained under this heading, “Risk Factors” and our Condensed Consolidated FinancialStatements (Unaudited) and notes thereto for the three and nine months endedSeptember 30, 2007 and by the material set forth under the headings “Business”and “Risk Factors” in our Annual Report on Form 10-K for the year endedDecember 31, 2006. We are under no obligation to publicly release any revisionto any forward-looking statement contained or incorporated herein to reflectany future events or occurrences.

 

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**Item 3. Quantitativeand Qualitative Disclosures About Market Risk**

 

Information in responseto this Item is set forth in “Note 9. Financial Instruments” in the Notes tothe Condensed Consolidated Financial Statements (Unaudited).

 

**Item 4.Controls and Procedures**

 

(a)          Evaluationof Disclosure Controls and Procedures

 

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 andprincipal financial officers, or persons performing similar functions, as appropriate, to allow timely decisionsregarding 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 to apply its judgment in evaluating thecost-benefit relationship of possible controls and procedures.

 

TheCompany’s Chief Executive Officer and****ChiefFinancial Officer have evaluated the effectiveness of the Company’s disclosurecontrols and procedures (as such term is defined in Rules 13a-14c and 15d-14cunder the Exchange Act) as of September 30, 2007 (the “Evaluation Date”). Basedon such evaluation, such officers have concluded that, as of the EvaluationDate, the Company’s disclosure controls and procedures are effective toensure that information required to be disclosed by the Company in the reportsthat the Company files or submits under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms and to ensure that information required to be disclosed by theCompany in the reports that the Company files or submits under the Exchange Actis accumulated and communicated to the Company’s management, including itsprincipal executive and principal financial officers, or persons performingsimilar functions, as appropriate to allow timely decisions regarding requireddisclosure.

 

(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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**PART II. OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

Information in response to this Item is incorporated by reference tothe information set forth in “Note 7. Contingencies” in the Notes to theCondensed Consolidated Financial Statements (Unaudited).

 

**Item 1A. Risk Factors**

 

In addition to the other information included or incorporated byreference into this Quarterly Report on Form 10-Q, including the mattersaddressed under the caption “Forward-Looking Statements,” set forth below aresome of the risks and uncertainties that, if they were to occur, couldmaterially adversely affect our business or could cause our actual results todiffer materially from the results contemplated by the forward-lookingstatements contained in this report and other public statements we make.

 

**Our data suppliers might restrict our useof or refuse to license data, which could lead to our inability to providecertain products or services.**

 

Our products and services incorporate data that we collect from thirdparties. These suppliers of data may increase restrictions on our use of suchdata, fail to adhere to our quality control standards or refuse altogether tolicense the data to us. For example, in 2002 certain of our data suppliers inJapan began withholding certain data from us. This interruption in data supplyled us to discontinue one of our Japanese products and adversely affected ouroperating results. If the suppliers of a significant amount of data that we usefor one or more of our products or services were to impose additionalcontractual restrictions on our use of or access to data, fail to adhere to ourquality control standards, or refuse to provide data, now or in the future, ourability to provide products and services to our clients could be materiallyadversely impacted, which could result in decreased revenue, net income andearnings per share.

 

**Data protection laws may restrict ouractivities.**

 

Data protection laws affect our collection, use, storage and transferof personally identifiable information both abroad and in the United States.Compliance with such laws may require investment or may dictate that we notoffer certain types of products and services. Failure to comply with such lawsmay result in, among other things, civil and criminal liability, negativepublicity, data being blocked from use and liability under contractualwarranties.

 

In addition, there is an increasing public concern regarding dataprotection issues and the number of jurisdictions with data protection laws hasbeen slowly increasing. For example, there have been a number of legislativeand regulatory initiatives in the U.S. and abroad in the area of access tomedical data. These initiatives tend to seek to place restrictions on the useand disclosure of patient-identifiable information without consent and, in somecases, seek to extend restrictions to non-patient-identifiable information,e.g., prescriber identifiable information, or to the process of anonymizingdata. There are also some initiatives that seek to restrict access to thisinformation to non-commercial uses. While most of the current initiativesshould not impact our business, there can be no assurance that theseinitiatives or future initiatives will not adversely affect IMS’s ability togenerate or assemble data or to develop or market current or future products orservices.

 

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**Hardware and software failures, delays inthe operation of our computer and communications systems or the failure toimplement system enhancements may harm our business.**

** **

Our success depends on the efficient and uninterrupted operation of ourcomputer 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 haveappropriate disaster recovery plans in place, we currently do not have fullbackup facilities everywhere in the world to provide redundant network capacityin the event of a system failure. Despite any precautions we may take, damagefrom fire, floods, hurricanes, power loss, telecommunications failures,computer viruses, break-ins, sabotage, breaches of security, epidemics andsimilar events at our various computer facilities could result in interruptionsin the flow of data to our servers and from our servers to our clients. Inaddition, any failure by our computer environment to provide our required datacommunications capacity could result in interruptions in our service. In theevent of a delay in the delivery of data, we could be required to transfer ourdata collection operations to an alternative provider of server hosting services.Such a transfer could result in significant delays in our ability to deliverour products and services to our clients. Additionally, significant delays inthe planned delivery of system enhancements, improvements and inadequateperformance of the systems once they are completed could damage our reputationand harm our business. Finally, long-term disruptions in the infrastructurecaused by events such as natural disasters, the outbreak of war, the escalationof hostilities, epidemics and acts of terrorism (particularly involving citiesin which we have offices) could adversely affect our businesses. Although wecarry property and business interruption insurance, our coverage may not beadequate to compensate us for all losses that may occur.

 

**Our business is subject to exchange ratefluctuations and our revenue and net income may suffer due to currencytranslations.**

 

We operate globally, deriving approximately 63% of our 2006 revenuefrom 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 to beconsiderably less stable than those in established markets, which may furthercontribute to volatility in our U.S. dollar-denominated operating results.

 

As a result of devaluations and fluctuations in currency exchange ratesor the imposition of limitations on conversion of foreign currencies intodollars, we are subject to currency translation exposure on the profits of ouroperations, in addition to economic exposure.

 

**Our international operations presentrisks to our current businesses that could impede growth in the future.**

 

International operations are subject to various risks that could adverselyaffect our business, including:

 

•  costs of customizing services for foreign clients;

 

•  reduced protection for intellectual property rights in somecountries;

 

•  the burdens of complying with a wide variety of foreign laws;

 

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•  exposure to local economic conditions; and

 

•     exposure to local politicalconditions, including the risks of an outbreak of war, the escalation ofhostilities, acts of terrorism and nationalization, expropriation, price controlsor other restrictive government actions.

 

**We may be unsuccessful in identifyingacquisition candidates or evaluating the material risks involved in anyacquisition.**

 

An important aspect of our business strategy in the past has beengrowth through acquisitions or joint ventures and we may continue to acquire ormake investments in complementary businesses, technologies, services orproducts. There can be no assurance that we will be able to continue toidentify and consummate acquisitions or joint ventures on satisfactory terms.Moreover, every acquisition and joint venture entails some degree ofuncertainty and risk. For example, we may be unsuccessful in identifying andevaluating business, legal or financial risks as part of the due diligence processassociated with a transaction. In addition, some acquisitions will havecontingent consideration components that may require us to pay additionalamounts in the future in relation to future performance results of the acquiredbusiness. If we do not properly assess these risks, or if we fail to realizethe benefits from one or more acquisitions, our business, results of operationsand financial condition could be adversely affected.

 

**We may be unsuccessful in integrating anyacquired operations with our existing business.**

 

We may experience difficulties in integrating operations acquired fromother companies. These difficulties include the diversion of management’sattention from other business concerns and the potential loss of key employeesof the acquired operations. Acquisitions also frequently involve significantcosts, often related to integrating information technology, accounting andmanagement services and rationalizing personnel levels. If we experiencedifficulties in integrating one or more acquisitions, our business, results ofoperations and financial condition could be adversely affected.

 

**Changes in tax laws or their applicationmay adversely affect our reported results.**

 

We operate in approximately 100 countries worldwide and our earningsare subject to taxation in many differing jurisdictions and at differing rates.We seek to organize our affairs in a tax efficient manner, taking account ofthe jurisdictions in which we operate. Tax laws that apply to our business maybe amended by the relevant authorities, for example as a result of changes infiscal circumstances or priorities. Such amendments, or their application toour business, may adversely affect our reported results.

 

**We are involved in tax related mattersthat could have a material effect on us.**

 

We (and our predecessors) have entered, and we continue to enter, intoglobal tax planning initiatives in the normal course of business. Theseactivities are subject to review by applicable tax authorities and courts. As aresult of the review process, uncertainties exist and it is possible that someof these matters could be resolved adversely to us, including those tax relatedmatters described in Part I, Item 1 of this Quarterly Report on Form 10-Q.Moreover, there can be no assurance that we will be able to maintain oureffective tax rate.

 

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**We are, and may become, involved inlitigation that could harm the value of our business.**

** **

In the normal course of our business, we are involved in lawsuits,claims, audits and investigations, such as those described in Part I, Item 1 ofthis 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 become subject to future lawsuits, claims,audits and investigations that could result in substantial costs and divert ourattention and resources.

 

**Significant technological changes couldrender our products and services obsolete. We may not be able to develop thetechnology necessary for our business, or to do so efficiently.**

 

We operate in businesses that require sophisticated data collection andprocessing systems and software and other technology. Some of the technologiessupporting the industries we serve are changing rapidly and we must continue todevelop cost-effective technologies for data collection and processing toaccommodate such changes. We also must continue to deliver data to our clientsin forms that are easy to use while simultaneously providing clear answers tocomplex questions. There can be no guarantee that we will be able to developnew technologies for data collection, processing and delivery or that we willbe able to do so as quickly or cost-effectively as our competition. Significanttechnological change could render our products and services obsolete.

 

Moreover, the introduction of new products and services embodying newtechnologies and the emergence of new industry standards could render existingproducts 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 andindustry demands. We may experience difficulties that could delay or preventthe successful design, development, testing, introduction or marketing of ourproducts and services. New products and services, or enhancements to existingproducts and services, may not adequately meet the requirements of current andprospective clients or achieve any degree of significant market acceptance.

 

**Government imposed price restrictions onpharmaceutical companies could reduce demand for our products and services.**

 

A number of countries in which we operate have enacted regulationslimiting the prices pharmaceutical companies may charge for drugs. We believethat such cost containment measures will cause pharmaceutical companies to seekmore effective means of marketing their products (which will benefit us in themedium and long-term). However, such governmental regulation may causepharmaceutical companies to revise or reduce their marketing programs in thenear term, which may in turn reduce the demand for certain of our products andservices. This could result in decreased revenue, net income and earnings pershare.

 

**Our success will depend on our ability toprotect our intellectual property rights.**

 

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

 

•  obtaining patent protection for our technology, products andservices;

 

•  defending our patents, copyrights and other intellectual property;

 

•  preserving our trade secrets and maintaining the security of ourknow-how; and

 

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•  operating without infringing upon patents and proprietary rightsheld by third parties.

 

We rely on a combination of contractual provisions, confidentialityprocedures and patent, copyright, trademark, service mark and trade secret lawsto protect the proprietary aspects of our products, services, databases andtechnologies. There can be no assurance that these protections will beadequate, or that we will adequately employ each and every one of these protectionsat all times, to provide sufficient protection in the future to prevent the useor misappropriation of our data, technology and other products and services.Further, our competitors may develop products, services, databases ortechnologies that are substantially equivalent or superior to our products,services, databases or technologies. Although we believe that our products,services, databases, technologies and related proprietary rights do notinfringe upon the proprietary rights of third parties, there can be noassurance that third parties will not assert infringement claims against us inthe future. Litigation may be necessary to enforce our intellectual propertyrights, to protect our trade secrets and to determine the validity and scope ofour proprietary rights. For example, we have been involved in litigation withInsight Health GmbH & Co. KG in Germany in order to protect our proprietarymapping software. In addition, the growing need for global data, along withincreased competition and technological advances, puts increasing pressure onus to share our intellectual property for client 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 andmotivate employees, we will not be able to compete effectively and will not beable to expand our business.**

 

Our success and ability to grow are dependent, in part, on our abilityto hire, retain and motivate sufficient numbers of talented people, with theincreasingly diverse skills needed to serve clients and expand our business, inmany locations around the world. Competition for highly qualified technical andmanagerial, and particularly consulting personnel is intense. Recruiting,training and retention costs and benefits place significant demands on ourresources. The inability to attract qualified employees in sufficient numbers tomeet particular demands or the loss of a significant number of our employeescould have a serious negative effect on us, including our ability to obtain andsuccessfully complete important client engagements and thus maintain orincrease our revenues.

 

**Consolidation in the industries in whichour clients operate may put pressure on the pricing of our products andservices, and could increase the cost of acquiring data, leading to decreasedearnings.**

 

Consolidation in the pharmaceutical industry could put pressure on thepricing of our information products and services, as the consolidated clientseeks pricing concessions from us, and could limit available dollars for ourproducts and services. In addition, when companies merge, the products andservices they previously purchased separately are now purchased only once bythe combined entity, leading to contract compression and loss of revenue. Whilewe have experienced success in mitigating the revenue impact of any pricingpressure through effective negotiations and by providing services to individualbusinesses within a particular group, there can be no assurance as to thedegree to which we will be able to continue to do so as consolidationcontinues.

 

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**Our businesses are subject to significantor potential competition that is likely to intensify in the future.**

 

Our future growth and success will be dependent on our ability tosuccessfully compete with other companies that provide similar services in the samemarkets, some of which may have financial, marketing, technical and otheradvantages.

 

**Disruptions in commerce could adverselyaffect our business.**

 

Commerce could be disrupted by various political, economic, worldhealth or other conditions. Examples of such disruptions that could adverselyaffect our business include:

 

•      terrorist activity, thethreat of such activity, and responses to and results of such activity andthreats, including but not limited to effects, domestically and/orinternationally, on us, our personnel and facilities, our customers andsuppliers, financial markets and general economic conditions; and

 

•      an outbreak of SARS, avianinfluenza (Bird Flu) or other epidemic, the fear of such an epidemic, andresponses to and results of such an epidemic or fear thereof, including but notlimited to effects, domestically and/or internationally, on us, our personneland facilities, our customers and suppliers, financial markets and generaleconomic conditions.

 

If such disruptions result in cancellations of or reductions incustomer orders or contribute to a general decrease in economic activity, ordirectly impact our marketing, collection, production, delivery, financial andlogistics functions, our results of operations and financial condition could bematerially adversely affected.

 

**The success of our business will largelydepend on the performance of the pharmaceutical and healthcare industries.**

 

Thevast majority of our revenues are generated from sales to the pharmaceuticaland healthcare industries. To the extent the businesses we serve, especiallyour clients in the pharmaceutical and healthcare industries, are subject tofinancial pressures of, for example, price controls, increased costs or reduceddemand for their products, the demand for our products and services, or theprice our clients are willing to pay for those products and services, maydecline.

 

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**Item 2. UnregisteredSales of Equity Securitiesand Use of Proceeds**

 
| **Period**              | ** ** | **Total Number  of Shares  Purchased(1)** | ** ** | **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(2)** | ** ** |
|-------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------|------------|
|                    |       |                                                |       |                                         |       |                                                                                               |       |                                                                                                                    |       |
| July 1-31, 2007         |       | —                                              |       |                                         |       |                                                                                               |       | 5,308,730                                                                                                               |       |
| August 1–31,  2007 |       | 1,873,500                                           |       | $                                            | 29.17      |                                                                                               | 1,873,500  |                                                                                                                    | 3,435,230  |   |
| September 1-30,  2007   |       | 160,000                                             |       | $                                            | 28.23      |                                                                                               | 160,000    |                                                                                                                    | 3,275,230  |   |
| **Total**               |       | 2,033,500                                           |       |                                         |       | 2,033,500                                                                                          |       | 3,275,230                                                                                                               |       |

 

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(1)          All shares were repurchased through the Company’s publicly announcedstock repurchase programs.

 

(2)          In January 2006, the Board of Directorsauthorized a stock repurchase program to buy up to 30,000,000 shares. As ofSeptember 30, 2007, no shares remained available for repurchase under theJanuary 2006 program. In December 2006, the Board of Directors authorized astock repurchase program to buy up to 10,000,000 shares. As of September 30,2007, 3,275,230 shares remained available for repurchase under the December2006 program. Unless terminated earlier by resolution of the Company’s Board ofDirectors, this program will expire when the Company has repurchased all sharesauthorized for repurchase thereunder. See Note 12 of our Notes to CondensedConsolidated Financial Statements (Unaudited) for further details.

 

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**Item 6. Exhibits**

 
|   | (a) | Exhibits |
|--------|-----|----------|

 
| **Exhibit  Number** | ** ** | **Description of Exhibits**                                                                                                                                                                                                                          |
|---------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1                |       | Purchase and Sale Agreement between Ullman Family  Partnership, L.P. and IMS Health Incorporated dated as of June 1, 2007  (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report  on Form 8-K, filed on July 27, 2007). |
|                |       |                                                                                                                                                                                                                                                 |
| 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                                                                                                                                                            |
|                |       |                                                                                                                                                                                                                                                 |

 

57

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|                        |   | IMS Health Incorporated         |
|------------------------|--------|---------------------------------|
|                   |   |                            |
|                   |   |                            |
|                   | By:    | /s/ Leslye G.  Katz             |   |
| Date: November 2, 2007 |   | Leslye G. Katz                  |
|                   |   | Senior Vice  President and      |
|                   |   | Chief Financial  Officer        |
|                   |   | (principal  financial officer)  |
|                   |   |                            |
|                   |   |                            |
|                   |   | /s/ Harshan  Bhangdia           |   |
| Date: November 2, 2007 |   | Harshan Bhangdia                |
|                   |   | Vice President  and Controller  |
|                   |   | (principal  accounting officer) |
|                        |        |                                 |  |  |

 

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# **EXHIBIT INDEX**

 
| **Exhibit  Number** | ** ** | **Description of Exhibits**                                                                                                                                                                                                                          |
|---------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1                |       | Purchase  and Sale Agreement between Ullman Family Partnership, L.P. and IMS Health  Incorporated dated as of June 1, 2007 (incorporated by reference to Exhibit  10.1 to the Registrant’s Current Report on Form 8-K, filed on July 27, 2007). |
|                |       |                                                                                                                                                                                                                                                 |
| 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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