**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**WASHINGTON, D.C. 20549

**FORM10-Q**
| (Mark One) | ** **                                                                                                                                                                    |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| x          | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the Quarterly Period Ended June 30, 2006**                                |   |
| o          | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the Transition period from**       to |   |

 

**Commission file number: 001-14049**

**IMS Health Incorporated**

(Exact name of registrantas specified in its charter)

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

**1499 Post Road, Fairfield, CT06824**

(Address of principalexecutive offices)(Zip Code)

**(203) 319-4700**

(Registrant’s telephonenumber, including area code)

 

(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 been subjectto the filing requirements for the past 90 days.

x  Yes      o  No

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

| Large accelerated  filer   x |   | Accelerated  filer   o |   | Non-accelerated  filer   o |
|---------------------------------------------|--------|---------------------------------------|--------|-------------------------------------------|

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).

o  Yes      x  No

Indicate the number of shares outstanding of each ofthe issuer’s classes of Common Stock, as of the latest practicable date.  At June 30, 2006, there were 201,497,952shares of IMS Health Incorporated Common Stock, $0.01 par value, outstanding.

 

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**IMS HEALTH INCORPORATED**

**INDEX TO FORM 10-Q**

 
|                                                                                                          | ** ** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|------------|
| **PART  I. FINANCIAL INFORMATION**                                                                       |       | 3          |
| **Item  1. Financial Statements (Unaudited)**                                                            |       | 3          |
| Condensed Consolidated Statements of Financial  Position  As of June 30, 2006 and December 31, 2005      |       | 3          |
| Condensed Consolidated Statements of Income  Three Months Ended June 30, 2006 and 2005                   |       | 4          |
| Condensed Consolidated Statements of Income  Six Months Ended June 30, 2006 and 2005                     |       | 5          |
| Condensed Consolidated Statements of Cash Flows  Six Months Ended June 30, 2006 and 2005                 |       | 6          |
| Notes to Condensed Consolidated Financial Statements                                                     |       | 7          |
| **Item 2. Management’s Discussion and Analysis of  Financial  Condition and Results of Operations** |       | 33         |
| **Item 3. Quantitative and Qualitative Disclosures About  Market Risk**                                  |       | 52         |
| **Item 4. Controls and Procedures**                                                                      |       | 52         |
| **PART  II. OTHER INFORMATION**                                                                          |       | 53         |
| **Item  1. Legal Proceedings**                                                                           |       | 53         |
| **Item 2. Changes in Securities, Use of Proceeds and  Issuer Purchases of Equity Securities**            |       | 53         |
| **Item 4. Submission of Matters to a Vote of Security  Holders**                                         |       | 53         |
| **Item 6.  Exhibits**                                                                                    |       | 55         |
| **SIGNATURES**                                                                                           | ** ** |            |   | 56 |
| **EXHIBITS**                                                                                             | ** ** |            |   |   |

 

2

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**PART I. FINANCIALINFORMATIONItem 1. FINANCIAL STATEMENTS**

**IMS HEALTH INCORPORATEDCONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Unaudited)**

*(Dollarsand shares in thousands, except per share data)*
| ** **                                                                                                               | ** ** | **As of June 30,  2006** | ** **    | **As of December 31,   2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|---------------|---------------------------------------------------|------------|
| **Assets:**                                                                                                              |       |                                    |          |                                              |       |
| **Current  Assets:**                                                                                                     |       |                                    |          |                                              |       |
| Cash and cash  equivalents                                                                                               | ** ** | **$**                                   | **150,364**   |                                              | $          | 362,943 |   |
| Accounts receivable,  net of allowances of  $5,903 and  $7,629 in 2006 and 2005, respectively                  | ** ** | **332,338**                             |          | 297,302                                           |       |
| Other current assets                                                                                                     | ** ** | **169,439**                             |          | 160,765                                           |       |
| **Total Current Assets**                                                                                                 | ** ** | **652,141**                             |          | 821,010                                           |       |
| Securities and other  investments                                                                                        | ** ** | **5,025**                               |          | 6,037                                             |       |
| Property, plant and  equipment, net of accumulated depreciation of $192,014 and $180,576 in 2006  and 2005, respectively | ** ** | **151,526**                             |          | 148,586                                           |       |
| Computer software                                                                                                        | ** ** | **252,816**                             |          | 241,298                                           |       |
| Goodwill                                                                                                                 | ** ** | **482,678**                             |          | 457,006                                           |       |
| Other assets                                                                                                             | ** ** | **320,665**                             |          | 299,083                                           |       |
| **Total Assets**                                                                                                         | ** ** | **$**                                   | **1,864,851** |                                              | $          | 1,973,020 |   |
| **Liabilities,  Minority Interests and Shareholders’ (Deficit) Equity:**                                            |       |                                    |          |                                              |       |
| **Current Liabilities:**                                                                                                 |       |                                    |          |                                              |       |
| Accounts payable                                                                                                         | ** ** | **$**                                   | **57,146**    |                                              | $          | 71,737 |   |
| Accrued and other  current liabilities                                                                                   | ** ** | **212,781**                             |          | 231,475                                           |       |
| Accrued income taxes                                                                                                     | ** ** | **97,346**                              |          | 114,325                                           |       |
| Short-term deferred tax  liability                                                                                       | ** ** | **9,513**                               |          | 8,627                                             |       |
| Deferred revenues                                                                                                        | ** ** | **127,868**                             |          | 122,884                                           |       |
| **Total Current Liabilities**                                                                                            | ** ** | **504,654**                             |          | 549,048                                           |       |
| Postretirement and  postemployment benefits                                                                              | ** ** | **112,270**                             |          | 110,782                                           |       |
| Long-term debt (Note  10)                                                                                                | ** ** | **1,050,533**                           |          | 611,431                                           |       |
| Other liabilities                                                                                                        | ** ** | **151,235**                             |          | 186,839                                           |       |
| **Total Liabilities**                                                                                                    | ** ** | **$**                                   | **1,818,692** |                                              | $          | 1,458,100 |   |
| **Commitments  and Contingencies (Note 8)**                                                                              |       |                                    |          |                                              |       |
| **Minority Interests**                                                                                                   | ** ** | **$**                                   | **100,018**   |                                              | $          | 99,865 |   |
| **Shareholders’  (Deficit) Equity:**                                                                                |       |                                    |          |                                              |       |
| Common Stock, par value  $.01, authorized 800,000 shares; issued 335,045 shares in 2006 and 2005,  respectively          | ** ** | **$**                                   | **3,350**     |                                              | $          | 3,350 |   |
| Capital in excess of  par                                                                                                | ** ** | **483,702**                             |          | 468,299                                           |       |
| Retained earnings                                                                                                        | ** ** | **2,490,403**                           |          | 2,321,765                                         |       |
| Treasury stock, at  cost, 133,547 and 107,075 shares in 2006 and 2005, respectively                                      | ** ** | **(2,986,805**                          | **)**         | (2,315,404                                        | )          |
| Cumulative translation  adjustment                                                                                       | ** ** | **(13,063**                             | **)**         | (31,521                                           | )          |
| Minimum pension  liability adjustment, net of taxes of $14,484 in 2006 and 2005, respectively                            | ** ** | **(31,408**                             | **)**         | (31,408                                           | )          |
| Unrealized gain (loss)  on changes in fair value of cash flow hedges, net of tax                                         | ** ** | **6**                                   |          | (59                                               | )          |
| Unrealized (loss) gain  on investments, net of tax                                                                       | ** ** | **(44**                                 | **)**         | 33                                                |       |
| **Total Shareholders’ (Deficit)  Equity**                                                                           | ** ** | **$**                                   | **(53,859**   | **)**                                             | $          | 415,055 |   |
| **Total Liabilities, Minority Interests and  Shareholders’ (Deficit) Equity**                                       | ** ** | **$**                                   | **1,864,851** |                                              | $          | 1,973,020 |   |

##  

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

3

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##  

**IMS HEALTH INCORPORATED**

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

*(Dollars and sharesin thousands, except per share data)*
| ** **                                                                                               | ** ** | **Three Months Ended  June 30,** | ** **  |
|----------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|-------------|
| ** **                                                                                               | ** ** | **2006**                                        | ** **  | **2005** | ** ** |
| ** **                                                                                               | ** ** | ** **                                      |        |   |   |
| **Operating  Revenue**                                                                                   | ** ** | **$**                                           | **486,220** |   | $ | 433,282 |   |
|                                                                                                     | ** ** | ** **                                      |        |   |   |
| Operating costs                                                                                          | ** ** | **211,872**                                     |        | 185,311 |   |
| Selling and  administrative expenses                                                                     | ** ** | **133,241**                                     |        | 111,632 |   |
| Depreciation and  amortization                                                                           | ** ** | **28,765**                                      |        | 25,642 |   |
| Merger Costs                                                                                             | ** ** | **6,016**                                       |        | 7,400 |   |
| **Operating  Income**                                                                                    | ** ** | **106,326**                                     |        | 103,297 |   |
| Interest income                                                                                          | ** ** | **1,212**                                       |        | 2,392 |   |
| Interest expense                                                                                         | ** ** | **(10,188**                                     | **)**       | (6,999 | ) |
| Gains (losses)  from investments, net                                                                    | ** ** | **75**                                          |        | (299 | ) |
| Other income,  net                                                                                       | ** ** | **36,860**                                      |        | 8,639 |   |
| **Non-Operating  Income, Net**                                                                           | ** ** | **27,959**                                      |        | 3,733 |   |
| Income before  provision for income taxes                                                                | ** ** | **134,285**                                     |        | 107,030 |   |
| Provision for  income taxes (Note 12)                                                                    | ** ** | **(71,602**                                     | **)**       | (13,851 | ) |
| **Net  Income**                                                                                          | ** ** | **$**                                           | **62,683**  |   | $ | 93,179 |   |
|                                                                                                     | ** ** | ** **                                      |        |   |   |
| **Basic  Earnings Per Share of Common Stock**                                                            | ** ** | **$**                                           | **0.31**    |   | $ | 0.41 |   |
| **Diluted  Earnings Per Share of Common Stock**                                                          | ** ** | **$**                                           | **0.30**    |   | $ | 0.41 |   |
| Weighted average number of shares outstanding —  Basic                                              | ** ** | **200,761**                                     |        | 225,863 |   |
| Dilutive effect  of shares issuable as of period-end under Stock-based compensation plans and  other     | ** ** | **4,787**                                       |        | 3,429 |   |
| Adjustment of  shares outstanding applicable to exercised and cancelled stock options during  the period | ** ** | **286**                                         |        | 186 |   |
| **Weighted Average Number of  Shares Outstanding — Diluted**                                        | ** ** | **205,834**                                     |        | 229,478 |   |

* *

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

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**IMS HEALTH INCORPORATED**

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

*(Dollars andshares in thousands, except per share data)*
| ** **                                                                                               | ** ** | **Six Months Ended  June 30,** | ** **  |
|----------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|-------------|
| ** **                                                                                               | ** ** | **2006**                                      | ** **  | **2005** | ** ** |
| ** **                                                                                               | ** ** | ** **                                    |        |   |   |
| **Operating  Revenue**                                                                                   | ** ** | **$**                                         | **932,374** |   | $ | 844,266 |   |
|                                                                                                     | ** ** | ** **                                    |        |   |   |
| Operating costs                                                                                          | ** ** | **409,789**                                   |        | 365,317 |   |
| Selling and  administrative expenses                                                                     | ** ** | **257,393**                                   |        | 221,061 |   |
| Depreciation and  amortization                                                                           | ** ** | **56,114**                                    |        | 50,319 |   |
| Merger Costs                                                                                             | ** ** | **6,016**                                     |        | 7,400 |   |
| **Operating  Income**                                                                                    | ** ** | **203,062**                                   |        | 200,169 |   |
| Interest income                                                                                          | ** ** | **2,755**                                     |        | 4,747 |   |
| Interest expense                                                                                         | ** ** | **(18,647**                                   | **)**       | (13,152 | ) |
| Gains from  investments, net                                                                             | ** ** | **2,748**                                     |        | 2,372 |   |
| Other income,  net                                                                                       | ** ** | **38,632**                                    |        | 17,900 |   |
| **Non-Operating  Income, Net**                                                                           | ** ** | **25,488**                                    |        | 11,867 |   |
| Income before  provision for income taxes                                                                | ** ** | **228,550**                                   |        | 212,036 |   |
| Provision for  income taxes (Note 12)                                                                    | ** ** | **(47,770**                                   | **)**       | (88,514 | ) |
| **Net  Income**                                                                                          | ** ** | **$**                                         | **180,780** |   | $ | 123,522 |   |
|                                                                                                     | ** ** | ** **                                    |        |   |   |
| **Basic  Earnings Per Share of Common Stock**                                                            | ** ** | **$**                                         | **0.88**    |   | $ | 0.54 |   |
| **Diluted  Earnings Per Share of Common Stock**                                                          | ** ** | **$**                                         | **0.86**    |   | $ | 0.54 |   |
| Weighted average number of shares outstanding —  Basic                                              | ** ** | **204,988**                                   |        | 226,863 |   |
| Dilutive effect  of shares issuable as of period-end under stock-based compensation plans and  other     | ** ** | **4,175**                                     |        | 3,303 |   |
| Adjustment of  shares outstanding applicable to exercised and cancelled stock options during  the period | ** ** | **448**                                       |        | 319 |   |
| **Weighted Average Number of  Shares Outstanding — Diluted**                                        | ** ** | **209,611**                                   |        | 230,485 |   |

 

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

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**IMS HEALTH INCORPORATED**

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

*(Dollars andshares in thousands, except per share data)*
| ** **                                                                               | ** ** | **Six Months Ended June 30,** | ** **  |
|------------------------------------------------------------------------------------------|------------|---------------------------------------------------|-------------|
| ** **                                                                               | ** ** | **2006**                                          | ** **  | **2005** | ** ** |
| **Cash  Flows from Operating Activities:**                                               |       |                                              |        |   |   |
| Net income                                                                               | ** ** | **$**                                             | **180,780** |   | $ | 123,522 |   |
| **Adjustments  to reconcile net income to net cash provided by operating activities:**   | ** ** | ** **                                        |        |   |   |
| Depreciation and amortization                                                            | ** ** | **56,114**                                        |        | 50,319 |   |
| Bad debt expense                                                                         | ** ** | **190**                                           |        | 1,707 |   |
| Deferred income taxes                                                                    | ** ** | **(6,367**                                        | **)**       | 6,208 |   |
| Gains from investments, net                                                              | ** ** | **(2,748**                                        | **)**       | (2,372 | ) |
| Minority interests in net income of consolidated  companies                              | ** ** | **1,766**                                         |        | 1,596 |   |
| Non-cash stock-based compensation charges                                                | ** ** | **24,354**                                        |        | 2,117 |   |
| Excess tax benefits from stock-based compensation                                        | ** ** | **(2,284**                                        | **)**       | — |   |
| Change in assets  and liabilities, excluding effects from acquisitions and dispositions: | ** ** | ** **                                        |        |   |   |
| Net increase in accounts receivable                                                      | ** ** | **(36,109**                                       | **)**       | (30,302 | ) |
| Net (increase) decrease in inventory                                                     | ** ** | **(4,708**                                        | **)**       | 4,136 |   |
| Net increase in prepaid expenses and other current  assets                               | ** ** | **(1,374**                                        | **)**       | (37,736 | ) |
| Net decrease in accounts payable                                                         | ** ** | **(16,317**                                       | **)**       | (16,239 | ) |
| Net decrease in accrued and other current  liabilities                                   | ** ** | **(16,058**                                       | **)**       | (30,604 | ) |
| Net decrease in accrued severance, impairment and  other charges                         | ** ** | **(12,755**                                       | **)**       | (16,955 | ) |
| Net increase in deferred revenues                                                        | ** ** | **3,018**                                         |        | 130 |   |
| Net (decrease) increase in accrued income taxes                                          | ** ** | **(51,587**                                       | **)**       | 8,308 |   |
| Net increase in pension assets (net of liabilities)                                      | ** ** | **(12,926**                                       | **)**       | (2,773 | ) |
| Net (increase) decrease in other long-term assets  (net of other long-term liabilities)  | ** ** | **(141**                                          | **)**       | 598 |   |
| Net tax benefit on stock-based compensation                                              | ** ** | **5,235**                                         |        | 4,253 |   |
| **Net  Cash Provided by Operating Activities**                                           | ** ** | **108,083**                                       |        | 65,913 |   |
| **Cash  Flows Used in Investing Activities:**                                            | ** ** | ** **                                        |        |   |   |
| Capital expenditures                                                                     | ** ** | **(11,264**                                       | **)**       | (8,195 | ) |
| Additions to computer software                                                           | ** ** | **(44,296**                                       | **)**       | (39,139 | ) |
| Proceeds from sale of TriZetto                                                           | ** ** | **—**                                        |        | 37,414 |   |
| Investments in short-term marketable securities                                          | ** ** | **—**                                        |        | 15,053 |   |
| Payments for acquisitions of businesses, net of cash  acquired                           | ** ** | **(21,515**                                       | **)**       | (91,507 | ) |
| Proceeds from sales of investments, net                                                  | ** ** | **5,026**                                         |        | 3,023 |   |
| Funding of venture capital investments                                                   | ** ** | **(400**                                          | **)**       | (1,000 | ) |
| Other investing activities, net                                                          | ** ** | **(2,897**                                        | **)**       | (2,620 | ) |
| **Net  Cash Used in Investing Activities**                                               | ** ** | **(75,346**                                       | **)**       | (86,971 | ) |
| **Cash  Flows Used in Financing Activities:**                                            | ** ** | ** **                                        |        |   |   |
| Net (decrease) increase in revolving credit facility  and other                          | ** ** | **(60,391**                                       | **)**       | 84,899 |   |
| 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                                                  | ** ** | **(728,564**                                      | **)**       | (147,945 | ) |
| Proceeds from exercise of stock options                                                  | ** ** | **41,348**                                        |        | 47,502 |   |
| Excess tax benefits from stock-based compensation                                        | ** ** | **2,284**                                         |        | — |   |
| Dividends paid                                                                           | ** ** | **(12,142**                                       | **)**       | (9,119 | ) |
| Proceeds from employee stock purchase plan                                               | ** ** | **2,913**                                         |        | 2,389 |   |
| Increase in cash overdrafts                                                              | ** ** | **10,485**                                        |        | 9,134 |   |
| Payments to minority interests and other financing  activities                           | ** ** | **(1,612**                                        | **)**       | (1,612 | ) |
| **Net  Cash Used in Financing Activities**                                               | ** ** | **(245,679**                                      | **)**       | (14,752 | ) |
| Effect of  Exchange Rate Changes on Cash and Cash Equivalents                            | ** ** | **363**                                           |        | (9,284 | ) |
| **Decrease  in Cash and Cash Equivalents**                                               | ** ** | **(212,579**                                      | **)**       | (45,094 | ) |
| **Cash  and Cash Equivalents, Beginning of Period**                                      | ** ** | **362,943**                                       |        | 444,903 |   |
| **Cash and Cash Equivalents, End  of Period**                                            | ** ** | **$**                                             | **150,364** |   | $ | 399,809 |   |

 

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

6

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**IMSHEALTH INCORPORATEDNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Dollars and shares in thousands, except per share data)**

**Note 1.  Interim Condensed Consolidated FinancialStatements (Unaudited)**

The accompanying CondensedConsolidated Financial Statements (Unaudited) have been prepared in accordancewith accounting principles generally accepted in the United States of Americafor interim financial information and Article 10 of Regulation S-X under theSecurities and Exchange Act of 1934, as amended. The Condensed ConsolidatedFinancial Statements (Unaudited) do not include all the information and notesrequired by accounting principles generally accepted in the United States ofAmerica for complete financial statements. In the opinion of management, alladjustments, all of which are of a normal recurring nature, considerednecessary for a fair presentation of financial position, results of operationsand cash flows for the periods presented have been included. The results ofoperations for interim periods are not necessarily indicative of the resultsexpected for the full year. The December 31, 2005 balance sheet data wasderived from audited financial statements, but does not include all disclosuresrequired by accounting principles generally accepted in the United States ofAmerica. The Condensed Consolidated Financial Statements (Unaudited) andrelated notes should be read in conjunction with the Consolidated FinancialStatements and related notes of IMS Health Incorporated (the “Company” or “IMS”)included in its 2005 Annual Report on Form 10-K. Certain prior year amounts have been reclassified to conform to the 2006presentation. Amounts presented in the Condensed Consolidated FinancialStatements (Unaudited) may not add due to rounding.

**Note 2.  Basis of Presentation**

IMS Health Incorporated (“IMS” or the “Company”) is the leadingglobal provider of market intelligence to the pharmaceutical and healthcareindustries. The Company offers leading-edge business intelligence products andservices that are integral to our clients’ day-to-day operations, includingportfolio optimization capabilities; launch and brand management solutions; salesforce effectiveness innovations; managed care and over-the-counter offerings;and consulting and services solutions that improve ROI and the delivery ofquality healthcare worldwide. The Company’sinformation products are developed to meet client needs by using data securedfrom a worldwide network of suppliers in the markets where operations exist. Keyinformation products include:

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

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

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

Within these keyinformation products, the Company provides 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.

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

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** **

The Company ismanaged on a global business model with global leaders for the majority of itscritical business processes and accordingly has one reportable segment (SeeNote 16).

**Note 3. Summary ofRecent Accounting Pronouncements**

In February 2006, the Financial Accounting Standards Board (“FASB”)issued Statement of Financial Accounting Standards (“SFAS”) No. 155, “Accountingfor Certain Hybrid Financial Instruments — an amendment of FASB Statements No.133 and 140.” This statement clarifies the application of SFAS No. 133, “Accountingfor Derivative Instruments and Hedging Activities,” to beneficial interests insecuritized financial assets and improves the consistency of accounting forsimilar financial instruments. This statement also amends SFAS No. 140, “Accountingfor Transfers and Servicing of Financial Assets and Extinguishments ofLiabilities — a replacement of FASB Statement No. 125,” to eliminate theprohibition on a qualifying special-purpose entity from holding a derivativefinancial instrument that pertains to a beneficial interest other than anotherderivative financial instrument. This statement is effective for all financialinstruments acquired or issued after the beginning of an entity’s first fiscalyear that begins after September 15, 2006. The Company is currently evaluatingthis statement to determine any potential impact that it may have on itsfinancial results.

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicingof Financial Assets — an amendment of FASB Statement No. 140.” This statementamends SFAS 140 and clarifies the accounting for, measurement of, anddisclosure of servicing assets and servicing liabilities. This statement shouldbe adopted as of the beginning of an entity’s first fiscal year that beginsafter September 15, 2006, but earlier adoption is permitted. The Company iscurrently evaluating this statement to determine any potential impact that itmay have on its financial results.

InJune 2006, the FASB issued FASB Interpretation No. 48, “Accounting forUncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN48”). This interpretation prescribes a recognition threshold and measurementattribute for the financial statement recognition and measurement of a taxposition taken or expected to be taken in a tax return. It also providesguidance on derecognition, classification, interest and penalties, accountingin interim periods, disclosure, and transition. This interpretation iseffective for fiscal years beginning after December 15, 2006, but earlieradoption is permitted. The Company is currently evaluating this interpretationto determine any potential impact that it may have on its financial results.

**Note 4.  Summary of Significant Accounting Policies**

*Stock-BasedCompensation Expense*

On January 1, 2006, the Company adopted SFAS No. 123(revised 2004), “Share-Based Payment,” (“SFAS 123R”) which requires themeasurement and recognition of compensation expense for all share-based paymentawards made to employees and directors including employee stock options,restricted stock and employee stock purchases related to the Employee StockPurchase Plan based on estimated fair values. SFAS 123R supersedes the Company’sprevious accounting under Accounting Principles Board (“APB”) OpinionNo. 25, “Accounting for Stock Issued to Employees” (“APB 25”)

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** **

for periodsbeginning in fiscal 2006. In March 2005, the Securities and Exchange Commission(“SEC”) issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating toSFAS 123R. The Company has applied the provisions of SAB 107 in its adoption ofSFAS 123R.

The Company adopted SFAS 123R using the modifiedprospective transition method, which requires the application of the accountingstandard as of January 1, 2006, the first day of the Company’s fiscal year2006. The Company’s Condensed Consolidated Financial Statements (Unaudited) asof and for the three and six months ended June 30, 2006, respectively, reflectthe impact of SFAS 123R. In accordance with the modified prospective transitionmethod, the Company’s Condensed Consolidated Financial Statements (Unaudited)for prior periods have not been retrospectively adjusted to reflect, and do notinclude, the impact of SFAS 123R. See Note 9 for additional information.

SFAS 123R requires companies to estimate the fairvalue of share-based payment awards on the date of grant using anoption-pricing model. The value of the portion of the award that is ultimately expectedto vest is recognized as expense over the requisite service period of the awardin the Company’s Condensed Consolidated Statements of Income (Unaudited). Priorto the adoption of SFAS 123R, the Company accounted for stock-based awards toemployees and directors using the intrinsic value method in accordance with APB25 as allowed under SFAS No. 123, “Accounting for Stock-Based Compensation”(“SFAS 123”). Under the intrinsic value method, stock-based compensationexpense had been recognized in the Company’s Condensed Consolidated Statementsof Income (Unaudited) only for stock option modifications and restricted stockunits because the exercise price of the Company’s stock options granted toemployees and directors equaled the fair market value of the underlying stockat the date of grant.

Stock-based compensation expense recognized during theperiod is based on the value of the portion of share-based payment awards thatis ultimately expected to vest during the period. Stock-based compensationexpense recognized in the Company’s Condensed Consolidated Statements of Income(Unaudited) for the first and second quarters of fiscal 2006 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 pro forma provisions of SFAS 123 and compensationexpense for the share-based payment awards granted subsequent to January 1,2006 based on the grant date fair value estimated in accordance with theprovisions of SFAS 123R. Prior to the adoption of SFAS 123R, the Company usedthe straight-line method of attributing the value of stock-based compensationand continued to use that method after the adoption. As stock-basedcompensation expense recognized in the Condensed Consolidated Statements ofIncome (Unaudited) for the first and second quarters of fiscal 2006 is based onawards ultimately expected to vest, it has been reduced for estimatedforfeitures. SFAS 123R requires forfeitures to be estimated at the time ofgrant and revised, if necessary, in subsequent periods if actual forfeituresdiffer from those estimates. In the Company’s pro forma information requiredunder SFAS 123 for the periods prior to fiscal 2006, the Company accounted for estimatedforfeitures for stock option grants and for forfeitures as they occurred forrestricted stock grants. The Company’s method of valuation for share-basedawards 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 9 for additional information.

9

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** **

*Computation of NetIncome per Share*

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

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

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

**Note 5.  Acquisitions**

The Company makesacquisitions in order to expand its products, services and geographic reach. Duringthe six months ended June 30, 2006, the Company completed one acquisition ofLäkemedelsstatistik AB (Sweden) at a cost of approximately $12,000. Thisacquisition was accounted for under the purchase method of accounting. As such,the aggregate purchase price has been allocated on a preliminary basis to theassets acquired based on estimated fair values as of the closing date. Thepurchase price allocations will be finalized after the completion of thevaluation of certain assets and liabilities. Any adjustments resulting from thefinalization of the purchase price allocations are not expected to have amaterial impact on the Company’s results of operations. The CondensedConsolidated Financial Statements (Unaudited) include the results of thisacquired company subsequent to the closing of the acquisition. Had thisacquisition occurred as of January 1, 2006 or 2005, the impact on the Company’sresults of operations would not have been significant. Goodwill ofapproximately $8,861 was recorded in connection with this acquisition, of whichnone is deductible for tax purposes.

During the six monthsended June 30, 2005, the Company completed six acquisitions for an aggregatecost of approximately $51,000. These acquisitions were Taskarena SoftwareEngineering GmbH (Germany), SAI Healthcare (U.S.), Synchronous Knowledge, Inc.(U.S.), M-Tag (Australia and UK), Fricke & Pirk (Germany) and BASS (Korea)and were accounted for under the purchase method of accounting. As such, theaggregate purchase price had been allocated on a preliminary basis to theassets acquired based on estimated fair values as of the closing date. TheCompany finalized the purchase price allocations for these acquisitions priorto the end of the second quarter of 2006, which did not have a material impacton the Company’s results of operations. The Condensed Consolidated FinancialStatements (Unaudited) include the results of these acquired companiessubsequent to the 

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** **

closing of the acquisitions. Had each of theseacquisitions occurred as of January 1, 2005 or 2004, the impact on the Company’sresults of operations would not have been significant. Goodwill ofapproximately $34,214 was recorded in connection with these acquisitions. Fortax purposes, approximately $21,200 of goodwill is deductible in connectionwith these acquisitions.

Additionally, duringJanuary 2005, the Company paid approximately $36,000 to acquire the 50%interest in IMS Health GmbH (“IHA”) not owned by IMS. The Company accounted forthis purchase as a step transaction and allocated the purchase price toacquired intangible assets and goodwill. Prior to 2005, the Companyconsolidated the results of IHA and recorded minority interest expense for the50% not owned by the Company.

**Note 6.  Goodwill and Intangible Assets**

During the first half of 2006, the Company recordedadditional goodwill of approximately $11,171 related primarily to the preliminaryallocation of purchase price for the acquisition completed during the firstquarter of 2006 and also to earn-out agreements for acquisitions completedprior to 2006 (see Note 8). During the six months ended June 30, 2005, theCompany recorded additional goodwill of approximately $80,359 related primarilyto the acquisition of the remaining 50% of IHA in January 2005, the preliminaryallocation of purchase price for the acquisitions completed in the first halfof 2005 (see Note 5) and payments on earn-out agreements for acquisitionscompleted prior to 2005.

Allof the Company’s other acquired intangibles are subject to amortization.  Intangibleasset amortization expense was $4,185 and $8,584 during the three and sixmonths ended June 30, 2006, respectively and $3,953 and $8,295 during the threeand six months ended June 30, 2005, respectively. At June 30, 2006, intangibleassets were primarily composed of customer relationships, databases and tradenames (included in Other assets) and computer software. The gross carryingamounts and related accumulated amortization of these intangibles were $134,404and $52,313, respectively, at June 30, 2006 and $131,338 and $41,978,respectively, at December 31, 2005. These intangibles are amortized overperiods ranging from two to twenty years. As of June 30, 2006, the weightedaverage amortization periods of the acquired intangibles by asset class arelisted in the following table:

| Intangible Asset Type   | ** ** | **Weighted Average  Amortization (Years) Period** | ** ** |
|-----------------------------------|------------|------------------------------------------------------------------|------------|
| Customer  Relationships           |       |                                                             | 10.1       |   |   |
| Computer  Software and Algorithms |       |                                                             | 7.0        |   |   |
| Databases                         |       |                                                             | 4.7        |   |   |
| Trade Names                       |       |                                                             | 4.4        |   |   |
| Other                             |       |                                                             | 3.8        |   |   |
| Weighted average                  |       |                                                             | 8.8        |   |   |

 

Based on currentestimated useful lives, amortization expense associated with intangible assetsat June 30, 2006 is estimated to be approximately $4,200 for each of theremaining two quarters in 2006. Thereafter, annual amortization expenseassociated with intangible assets is estimated to be as follows:

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| Year Ended  December 31, | ** ** | ** ** | ** ** | **Amortization  Expense** | ** ** |
|------------------------------------|------------|------------|------------|---------------------------|------------|
| 2007                               |       | $          | 14,401     |                      |
| 2008                               |       | 12,877     |       |
| 2009                               |       | 10,878     |       |
| 2010                               |       | 7,760      |       |
| 2011                               |       | 6,515      |       |
| Thereafter                         |       | $          | 21,209     |                      |

 

***Note 7.  Investmentsin Equity Investees***

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

**Note 8.**  **Contingencies**

The Company and its subsidiaries are involved inlegal and tax proceedings, claims and litigation arising in the ordinary courseof business.  Management periodicallyassesses the Company’s liabilities and contingencies in connection with thesematters based upon the latest information available.  For those matters where management currentlybelieves it is probable that the Company will incur a loss and that theprobable loss or range of loss can be reasonably estimated, the Company hasrecorded reserves in the Condensed Consolidated Financial Statements(Unaudited) based on its best estimates of such loss.  In other instances, because of 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 theCompany has recorded a reserve, the Company is unable to predict with certaintythe final outcome of the matter or whether resolution of the matter willmaterially affect the Company’s results of operations, financial position orcash flows.  As additional informationbecomes available, the Company adjusts its assessment and estimates of suchliabilities accordingly.

The Company routinely enters into agreements withits suppliers to acquire data and with its customers to sell data, all in thenormal course of business.  In theseagreements, the Company sometimes agrees to indemnify and hold harmless theother party for any damages such other party may suffer as a result ofpotential intellectual property infringement and other claims related to theuse of the data.  These indemnitiestypically have terms of approximately two years.  The Company has not accrued a liability withrespect to these matters, as the exposure is considered remote.

Inconnection with the agreements (the “LLC Agreements”) governing therelationship among the Company and two of its subsidiaries and two third-partyinvestors with respect to IMS Health Licensing Associates, L.L.C. (see Note18), the Company also entered into a guaranty agreement.  Under the terms of this guaranty agreement,the Company guarantees in favor of the third-party investors the performance ofthe Company’s subsidiaries under the LLC Agreements and agrees to indemnify andhold harmless the third-party investors against damages, including specifieddelay

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damages, thethird-party investors may suffer as a result of failures to perform under theLLC Agreements by the Company and its subsidiaries.

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

*D&B Legacy 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 (“Donnelley”) separated into three publiccompanies by spinning-off ACNielsen Corporation (“ACNielsen”) and the companythen known as Cognizant Corporation (“Cognizant”) and now known as NielsenMedia Research, Inc. (“NMR”) (the “1996 Spin-Off”).  The agreements effecting the 1996 Spin-Offallocated tax-related liability with respect to certain prior businesstransactions (the “Legacy Tax Controversies”) between D&B and Cognizant.  The D&B portion of such liability is nowshared among Donnelley and certain of its former affiliates, and the Cognizantportion of such liability is shared between NMR and the Company pursuant to theagreements effecting Cognizant’s spin-off of the Company in 1998 (the “1998Spin-Off”).  The underlying taxcontroversies with the Internal Revenue Service (the “IRS”) have substantiallyall been resolved and the Company paid to the IRS the amounts that itbelieved were due and owing.  In thefirst quarter of 2006, Donnelley indicated that it disputed the amountscontributed by the Company toward the resolution of these matters based onDonnelley’s interpretation of the allocation of liability under the 1996Spin-Off agreements.  Donnelly and itsformer affiliates, on the one hand, and NMR and the Company, on the other hand,have attempted to resolve thesedisputes through negotiation.  If noresolution is reached through negotiation, the 1996 Spin-Off agreements providethat the parties arbitrate the disputes. In June 2006, the Company made payments with regard to these matters ofapproximately $5,800 (tax and interest, net of federal income tax benefit)related to certain 1995 and 1996 shared state and local legacy taxliabilities.  Although the Companyintends to vigorously defend itself with respect to the remaining disputes, asof June 30, 2006 the Company has a reserve of approximately $20,200 for thesematters, of which $24,800 was accrued during the first half of 2006.

*The Partnership (Tax Year 1997)*.  TheIRS is seeking to reallocate certain items of partnership income and expense aswell as disallow certain items of partnership expense with respect to apartnership now substantially owned by the Company (the “Partnership”) on thePartnership’s 1997 tax return.  During1997, the Partnership was substantially owned by Cognizant, but liability forthis matter was allocated to the Company pursuant to the agreements effectingthe 1998 Spin-Off.  The Company has fileda formal protest relating to the proposed assessment for 1997 with the IRSOffice of Appeals.  The Company isattempting to resolve this matter in the administrative appeals process beforeproceeding to litigation if necessary. If the IRS were to ultimately prevail inits position, the Company’s liability (tax and interest, net of tax benefit)with respect to tax year 1997 would be approximately $19,600, which amount theCompany had reserved in current accrued income taxes payable at June 30, 2006.

In addition to thesematters, the Company and its predecessors have entered, and the Company

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continues to enter, intoglobal tax planning initiatives in the normal course of their businesses.  These activities are subject to review byapplicable tax authorities.  As a resultof the review process, uncertainties exist and it is possible that some ofthese matters could be resolved adversely to the Company.

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

In a separate matter, in October 2004, 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 whethersuch acquisition may have violated Article 82 of the EC Treaty andcorresponding Belgian law.  The Companyresponded to the request for information in December 2004.

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

*OtherContingencies*

*CTS Split-Off.*  On February 6, 2003, theCompany completed an exchange offer to distribute its majority interest inCognizant Technology Solutions (“CTS”) in a transaction qualifying as tax freeunder Section 355 of the IRC.  If,contrary to expectations, the CTS distribution were not to qualify as tax freeunder Section 355, then the Company would generally be liable for theresulting corporate tax.  However,pursuant to the distribution agreement entered into between the Company and CTS in connection with thedistribution, CTS agreed to indemnify theCompany in the event the transaction is taxable as a result of a breach ofcertain representations made by CTS, subject to certain exceptions.  In the opinion of management and based on theopinion of tax counsel, McDermott, Will & Emery, it is not probable, butmay be reasonably possible, that the Companywill incur liability for this matter; therefore, the Company has notrecorded reserves for this matter.  The Company estimates that the aggregate taxliability in this regard would not exceed $215,725.

*ContingentConsideration.*  Underthe terms of the purchase agreements related to acquisitions made from 2001through 2006, the Company may be required to pay additional amounts ascontingent consideration based on the achievement of certain targets during2003 through 2008.  Substantially all ofthese additional payments will be recorded as goodwill in accordance withEmerging Issues Task Force Issue (“EITF”) No. 95-8, “Accounting for ContingentConsideration Paid to the Shareholders of

14

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an Acquired Enterprise ina Purchase Business Combination.”  As ofJune 30, 2006, approximately $29,000 had been earned under thesecontingencies.  Based on currentestimates, management expects that additional contingent payments under theseagreements may total approximately $37,000. It is expected that these contingent payments will be resolved within aspecified time period after the end of each respective calendar year from 2006through 2008.

*Other TaxContingencies.*In additionto the tax items discussed above, the Company has net tax reserves ofapproximately $22,000 that relate to various positions it has taken on taxreturns filed in numerous countries over the last several years.  These reserves represent the Company’s bestestimate of the probable liability should the tax return positions bechallenged by the relevant tax authorities. While the amount is material in the aggregate, no individual item ismaterial and no single event will have a material impact related to thesereserves.  See Note 12 for additional taxrelated matters.

***Note 9. *****                     ****Stock-BasedCompensation**

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

SFAS 123R requires all share-based payments toemployees, including grants of employee stock options, to be recognized ascompensation expense over the requisite service period (generally the vestingperiod) in the consolidated financial statements based on their fair values.For options with graded vesting, the Company values the stock option grants andrecognizes compensation expense as if each vesting portion of the award waspart of the total award and not a separate award. Under the modifiedprospective method, awards that were granted, modified, or settled on or afterJanuary 1, 2006 are measured and accounted for in accordance with SFAS 123R.Unvested equity-classified awards that were granted prior to January 1, 2006will continue to be accounted for in accordance with the pro forma provisionsof SFAS 123, except that all awards are recognized in the results of operationsover the remaining vesting periods. SFAS 123R requires the recognition ofstock-based compensation for the number of awards that are ultimately expectedto vest. As a result, for most awards, recognized stock compensation wasreduced for estimated forfeitures prior to vesting primarily based onhistorical annual forfeiture rates. Estimated forfeitures will be reassessed insubsequent periods and may change based on new facts and circumstances. Priorto January 1, 2006, forfeitures were estimated for stock option grants forpurposes of required pro forma stock compensation disclosures and wererecognized as they occurred for restricted stock grants. In addition, therealization of tax benefits in excess of amounts recognized for financialreporting purposes is recognized as a financing activity rather than anoperating activity as it was prior to SFAS 123R adoption for purposes of thecash flow statement.

The Companymaintains four Stock Incentive Plans, which provide for the grant of stockoptions, restricted stock and restricted stock units to eligible employees andNon-Employee Directors.  At June 30,2006, there were 59,279 shares of Common Stock reserved for issuance under allof the Company’s

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stock plans, of which 12,913 shares arestill available for future grants. Common Stock reserved for issuance includes 18,448 shares from the 2000Stock Incentive Plan, which the Board of Directors approved during 2000, 36,484shares from the 1998 Employees’ Stock Incentive Plan, 29,784 of which wasapproved by the shareholders during 1998 and 6,700 of which were approved bythe shareholders in May 2006, 3,437 shares from the 1998 Employees’ StockPurchase Plan, which was approved by the shareholders during 1998, and 910shares from the 1998 Non-Employee Directors’ Stock Incentive Plan, 410 shares ofwhich were approved by the shareholders during 1998 and an additional 500shares of which were approved by the shareholders in May 2003.  Historically, stock options have beengranted to broad groups of employees on a discretionary basis. Beginning in fiscal2006, employees are generally eligible to receive restricted stock units with aservice condition of four years instead of stock options with a servicecondition of three years.  Certain senioremployees will continue to be eligible to receive restricted stock unit awardswhich contain both performance and service conditions.

The EmployeeStock Purchase Plan (“ESPP”) wasoriginally adopted in 1998 with a quarterly purchase period and a price equalto the lesser of 90% of the fair market value on the first trading day or thelast trading day of the period.  TheCompany amended its Employee Stock Purchase Plan in 2001 to allow employees topurchase a limited amount of Common Stock at the end of each six-month periodat a price equal to the lesser of 85% of fair market value on (a) the firsttrading day of the period, or (b) the last trading day of the period.  Beginning with the first purchase of 2006,the plan has been amended to allow employees to purchase a limited amount ofCommon Stock at the end of each six-month period at a price equal to 85% of thefair market value on the last trading day of the period.  Fair market value is defined as the averageof the high and low prices of the shares on the relevant day.  The 15% discount makes the plan compensatoryunder SFAS 123R.

Stock options are granted with an exercise price equalto the market value of a share of Common Stock on the date of grant.  Stock options expire within five, seven, orten years and generallyvest ratably over three years for employees and one to three years fornon-employee directors.  The vesting period and option termfor grants to employees is at the discretion of the Compensation and BenefitsCommittee of the Board of Directors.

Restricted stock units are granted at a price equal tothe market value of a share of Common Stock on the date of grant.  Restricted stock unit awards with servicevesting generally vest ratably over three to four years. The vesting period for grants toemployees is at the discretion of the Compensation and Benefits Committee ofthe Board of Directors.

Participation in the Performance Restricted StockUnits program (“PERS”), under which performance restricted stock awards aregranted, is limited to key senior executives. The target award is denominated in cash and is equal to each eligibleexecutive’s annual incentive target. These awards are subject to fair value adjustments for any changes inthe underlying market value of our Common Stock until the end of theperformance period.  The performanceperiod is one year during which performance against the established financialcriterion is measured.  The actual awardis quantified and granted to eligible employees in restricted stock units atthe February Compensationand Benefits Committee of the Board of Directors meeting in the yearfollowing the one year performance period. Upon grant, there is an additional two year cliff vest servicerequirement which begins on the first business day of the year following theperformance period.  If performancecriterion is not met, the

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awardis forfeited and no restricted stock units are granted.  The final value of the restricted stock unitsgranted are at fair market value based on the average high/low stock price forthe last 20 business days of the performance period in accordance with the PERSplan document.

Participation inthe Long Term Incentive program (“LTI”), under which performance restrictedstock awards are granted, is at the CEO’s discretion with participants varyingfrom year to year.  The target awards, byperson, are approved by the Compensation and Benefits Committee of the Company’sBoard of Directors prior to the end of the first quarter of the performancecycle.  The target award is denominated50% in cash, or in non-restricted shares of stock at the fair value of IMSCommon Stock on the day of grant, which are payable after the two yearperformance period.  The remaining 50% ispayable in restricted stock units, which are granted after the two yearperformance period with an additional two year cliff vest servicerequirement.  A restricted stock unit, ifearned, may only be settled by issuance or delivery of a share.  These awards are subject to fair valueadjustments for any changes in the underlying market value of our Common Stockuntil the end of the two year performance period.  At the end of the performance period,achievement against the established financial criterion is measured and theactual payout percentage is quantified and approved by the Compensation andBenefits Committee of the Board of Directors following approval of year endresults by the Board of Directors.  Ifperformance criterion is not met, the award is forfeited and no restrictedstock units are granted, or cash paid. The final value of the restricted stock units granted are at fair marketvalue based on the average high/low stock price for the last 20 business daysof the performance period in accordance with the LTI plan document.

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The following tablesummarizes stock option activity for the periods indicated:

 
| ** **                                         | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price Per  Share** | ** ** | **Weighted  Average  Remaining  Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|----------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|----------------------------------------|------------|---------------------------------|------------|
| Options Outstanding,  December 31, 2003            |       | 37,021     |       | $                                                      | 20.89      |                                   |       |                            |       |   |
| Granted                                            |       | 6,003      |       | $                                                      | 23.90      |                                   |       |                            |       |   |
| Exercised                                          |       | (5,598     | )          | $                                                      | 17.25      |                                   |       |                            |       |   |
| Forfeited                                          |       | (1,020     | )          | $                                                      | 18.89      |                                   |       |                            |       |   |
| Cancelled                                          |       | (906       | )          | $                                                      | 27.50      |                                   |       |                            |       |   |
| Options Outstanding,  December 31, 2004            |       | 35,500     |       | $                                                      | 21.86      |                                   |       |                            |       |   |
| Granted                                            |       | 4,813      |       | $                                                      | 24.12      |                                   |       |                            |       |   |
| Exercised                                          |       | (8,726     | )          | $                                                      | 18.97      |                                   |       |                            |       |   |
| Forfeited                                          |       | (575       | )          | $                                                      | 20.63      |                                   |       |                            |       |   |
| Cancelled                                          |       | (1,028     | )          | $                                                      | 26.93      |                                   |       |                            |       |   |
| Options Outstanding,  December 31, 2005            |       | 29,984     |       | $                                                      | 22.91      |                                   |       |                            |       |   |
| Granted                                            |       | 8          |       | $                                                      | 24.54      |                                   |       |                            |       |   |
| Exercised                                          |       | (2,182     | )          | $                                                      | 18.96      |                                   |       |                            |       |   |
| Forfeited                                          |       | (463       | )          | $                                                      | 23.12      |                                   |       |                            |       |   |
| Cancelled                                          |       | (705       | )          | $                                                      | 28.52      |                                   |       |                            |       |   |
| Options Outstanding,  June 30, 2006                |       | 26,642     |       | $                                                      | 23.09      |                                   | 3.76       |                            | $          | 117,617 |   |
| Options Vested or Expected  to Vest, June 30, 2006 |       | 26,229     |       | $                                                      | 23.07      |                                   | 3.73       |                            | $          | 116,437 |   |
| Exercisable, June 30,  2006                        |       | 21,825     |       | $                                                      | 22.88      |                                   | 3.39       |                            | $          | 103,397 |   |

 

The intrinsic value for stock options is calculatedbased on the exercise price of the underlying awards and the market price of ourCommon Stock as of the end of the period. As of June 30, 2006, approximately$27,440 of unrecognized stock compensation related to unvested stock options(net of estimated forfeitures) is expected to be recognized over aweighted-average period of 1.43 years. As of June 30, 2005, approximately $58,293 of unrecognized stockcompensation related to unvested stock options (net of estimated forfeitures)was expected to be recognized over a weighted-average period of 1.70years.  Proceeds received from the exerciseof stock options were $31,556 and $41,348 for the three and six months endedJune 30, 2006, respectively, and $23,646 and $47,502 for the three and sixmonths ended June 30, 2005, respectively. The intrinsic value of stock optionsthat were exercised was $13,439 and $16,764 for the three and six months endedJune 30, 2006, respectively, the majority of which is currently deductible fortax purposes, and $8,797 and $16,096 for the three and six months ended June30, 2005, respectively.

The fair value of stock options was estimated usingthe Black-Scholes option-pricing model. This model requires the input ofsubjective assumptions that will usually have a significant impact on the fairvalue estimate. The assumptions for the current period grants were developedbased on SFAS 123R and SEC guidance contained in SAB 107. The following tablesummarizes the assumptions used to compute the weighted average fair value ofstock option grants:

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| ** **                                      | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                      | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| Dividend Yield                                  |       | 0.5                                             | %          | 0.3                                           | %          | 0.5 | % | 0.3 | % |
| Weighted Average  Volatility                    |       | 29.4                                            | %          | 29.4                                          | %          | 29.4 | % | 29.6 | % |
| Risk Free Interest Rate                         |       | 4.49                                            | %          | 3.88                                          | %          | 4.49 | % | 3.87 | % |
| Expected Term                                   |       | 4.39 years                                      |       | 4.39 years                                    |       | 4.39 years |   | 4.39 years |   |
| Weighted Average Fair  Value of Options Granted |       | $                                               | 7.82       |                                          | $          | 7.41 |   | $ | 7.82 |   | $ | 7.42 |   |
| Weighted Average Grant Price                    |       | $                                               | 24.54      |                                          | $          | 24.07 |   | $ | 24.54 |   | $ | 24.02 |   |

 

·                  Thedividend yield is equal to the annualized dividend divided by the closing stockprice on the date of payment.  The increasein the dividend yield from 2005 to 2006 was due to a $0.01 per share increasein the quarterly dividend payment.  Anincrease in the dividend yield will decrease stock compensation expense.

·                  Theweighted average volatility for the current periods was developed usinghistorical volatility for periods equal to the expected life of the options. Anincrease in the weighted average volatility assumption will increase stockcompensation expense.

·                  Therisk-free interest rate was developed using the U.S. Treasury yield curve forperiods equal to the expected life of the options on the grant date. Anincrease in the risk-free interest rate will increase stock compensationexpense.

·                  Theexpected term for the current period and prior period grants was estimated byreviewing the historical exercise experience of a fully vested material grantthat was close to maturity.  An increasein the expected holding period will increase stock compensation expense.

The following tablesummarizes restricted stock unit activity with a service condition:

 
| ** **                   | ** ** | **Shares** | ** ** | **Weighted  Average  Grant Date  Fair Value** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|------------------------------|------------|------------|------------|---------------------------------------------------------|------------|---------------------------------|------------|
| Unvested, December 31,  2003 |       | 411        |       | $                                                       | 19.65      |                            |       |   |
| Granted                      |       | 38         |       | $                                                       | 24.39      |                            |       |   |
| Vested                       |       | (29        | )          | $                                                       | 20.79      |                            |       |   |
| Forfeited                    |       | (10        | )          | $                                                       | 19.37      |                            |       |   |
| Unvested, December 31, 2004  |       | 410        |       | $                                                       | 20.01      |                            |       |   |
| Granted                      |       | 153        |       | $                                                       | 24.26      |                            |       |   |
| Vested                       |       | (119       | )          | $                                                       | 24.41      |                            |       |   |
| Forfeited                    |       | —     |       | —                                                  |       |                            |       |
| Unvested, December 31,  2005 |       | 444        |       | $                                                       | 20.30      |                            |       |   |
| Granted                      |       | 1,277      |       | $                                                       | 26.03      |                            |       |   |
| Vested                       |       | (200       | )          | $                                                       | 21.71      |                            |       |   |
| Forfeited                    |       | (8         | )          | $                                                       | 26.20      |                            |       |   |
| Unvested, June 30, 2006      |       | 1,513      |       | $                                                       | 24.91      |                            | $          | 40,800 |   |
|                              |            |            |            |                                                         |            |                                 |            |  |  |

 

The intrinsic value forrestricted stock is calculated based on the market price of our Common Stock asof the end of the period.  As of June 30,2006, approximately $25,262 of unrecognized stock compensation expense relatedto unvested restricted stock awards (net of estimated forfeitures) is expectedto be recognized over a weighted-average period of 3.43 years. As of June 30,2005,

19

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approximately$2,117 of unrecognized stock compensation related to unvested restricted stockawards was expected to be recognized over a weighted-average period of 2.26years.  The total fair value ofrestricted stock units with service conditions which vested during the periodsended June 30, 2006 and 2005 was $3,998 and $2,802, respectively.

The following tablesummarizes restricted stock unit activity with performance conditions:

 

|                              | ** ** | **Shares** | ** ** | **Weighted  Average  Grant Date  Fair Value** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|------------------------------|------------|------------|------------|---------------------------------------------------------|------------|---------------------------------|------------|
| Unvested, December 31,  2003 |       | 105        |       | $                                                       | 17.82      |                            |       |   |
| Granted                      |       | 156        |       | $                                                       | 23.19      |                            |       |   |
| Vested                       |       | -          |       | -                                                       |       |                            |       |
| Forfeited                    |       | (20        | )          | $                                                       | 21.63      |                            |       |   |
| Unvested, December 31,  2004 |       | 241        |       | $                                                       | 20.96      |                            |       |   |
| Granted                      |       | 194        |       | $                                                       | 20.62      |                            |       |   |
| Vested                       |       | (53        | )          | $                                                       | 18.97      |                            |       |   |
| Forfeited                    |       | (7         | )          | $                                                       | 17.72      |                            |       |   |
| Unvested, December 31,  2005 |       | 375        |       | $                                                       | 21.12      |                            |       |   |
| Granted                      |       | 153        |       | $                                                       | 24.53      |                            |       |   |
| Vested                       |       | (145       | )          | $                                                       | 23.18      |                            |       |   |
| Forfeited                    |       | (5         | )          | $                                                       | 24.21      |                            |       |   |
| Unvested, June 30, 2006      |       | 378        |       | $                                                       | 21.66      |                            | $          | 10,190 |   |
|                              |            |            |            |                                                         |            |                                 |            |  |  |

 

The intrinsic value for restricted stock is calculatedbased on the market price of our Common Stock as of the end of the period.  As of June 30, 2006, approximately $2,481 ofunrecognized stock compensation expense related to unvested restricted stockawards (net of estimated forfeitures) is expected to be recognized over aweighted-average period of 1.01 years. As of June 30, 2005, approximately$3,665 of unrecognized stock compensation related to unvested restricted stockawards was expected to be recognized over a weighted-average period of 1.08years.  The total fair value ofrestricted stock units with a performance condition which vested during theperiods ended June 30, 2006 and 2005 was $4,630 and $1,231, respectively.

The following table summarizes the pro forma effect ofstock-based compensation as if the fair value method of accounting for stockcompensation had been applied:

20

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| ** **           | ** ** | ** **                                                                                                   | ** ** | **Three Months  Ended  June 30, 2005** | ** ** | **Six Months  Ended  June 30, 2005** | ** ** |
|----------------------|------------|--------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| Net  Income:         |       | As reported                                                                                                  | ** ** | **$**                                                 | **93,179** |                                                | $          | 123,522 |   |
|                 |       | Add: Stock-based  employee compensation expense included in reported net income, net of tax                  | ** ** | **1,014**                                             |       | 1,932                                               |       |
|                 |       | Deduct: Total  stock-based employee compensation expense under fair value method for all  awards, net of tax | ** ** | **(8,016**                                            | **)**      | (14,369                                             | )          |
|                 |       | Pro forma                                                                                                    | ** ** | **$**                                                 | **86,177** |                                                | $          | 111,085 |   |
| Earnings  Per Share: |       |                                                                                                         |       |                                                  |       |                                                |       |
| Basic                |       | As reported                                                                                                  | ** ** | **$**                                                 | **0.41**   |                                                | $          | 0.54 |   |
|                 |       | Pro forma                                                                                                    | ** ** | **$**                                                 | **0.38**   |                                                | $          | 0.49 |   |
| Diluted              |       |                                                                                                         |       |                                                  |       |                                                |       |
|                 |       | As reported                                                                                                  | ** ** | **$**                                                 | **0.41**   |                                                | $          | 0.54 |   |
|                 |       | Pro forma                                                                                                    | ** ** | **$**                                                 | **0.38**   |                                                | $          | 0.48 |   |

 

The following table summarizes the components andclassification of stock-based compensation expense:

 
| ** **                                      | ** ** | **Three Months  Ended June 30,  2006** | ** ** | **Six Months  Ended June 30,  2006** | ** ** |
|-------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| Stock Options                                   |       | $                                                     | 9,482      |                                                | $          | 18,624 |   |
| Restricted Stock Units                          |       | $                                                     | 3,445      |                                                | $          | 5,216 |   |
| Employee Stock Purchase  Plan                   |       | $                                                     | 272        |                                                | $          | 514 |   |
| Total Stock Based  Compensation Expense         | ** ** | **$**                                                 | **13,199** | ** **                                          | **$**      | **24,354** | ** ** |
|                                            |       |                                                  |       |                                                |       |
| Operating Costs                                 |       | $                                                     | 2,084      |                                                | $          | 3,623 |   |
| Selling, General, &  Administrative         |       | $                                                     | 11,115     |                                                | $          | 20,731 |   |
| Total Stock Based  Compensation Expense         | ** ** | **$**                                                 | **13,199** | ** **                                          | **$**      | **24,354** | ** ** |
|                                            | ** ** | ** **                                            | ** ** | ** **                                          | ** ** |
| Tax Benefit on Stock Based Compensation Expense | ** ** | **$**                                                 | **4,145**  | ** **                                          | **$**      | **7,471** | ** ** |

 

The Company satisfiesstock option exercises, vested restricted stock units and ESPP shares withrepurchased treasury stock on hand.  Forfurther information regarding the Company’s share repurchase programs andshares available for repurchase under such programs, see Note 13.

***Note 10. *****              ****FinancialInstruments**

*ForeignExchange Risk Management*

The Company transactsbusiness in more than 100 countries and is subject to risks associated withchanging foreign exchange rates.  TheCompany’s objective is to reduce earnings and cash flow volatility associatedwith foreign exchange rate changes. Accordingly, the Company enters into foreign currency forward contractsto minimize the impact of foreign exchange movements on net income and on thevalue of non-functional currency assets and liabilities.

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It is the Company’spolicy to enter into foreign currency transactions only to the extent necessaryto meet its objectives as stated above. The Company does not enter into foreign currency transactions forinvestment or speculative purposes.  Theprincipal currencies hedged are the Euro, the Japanese Yen, the British Pound,the Swiss Franc and the Canadian Dollar.

The impact of foreignexchange risk management activities on pre-tax income in the three and sixmonths ended June 30, 2006 was a net loss of $7,223 and $4,532, respectivelyand net gains in the three and six months ended June 30, 2005 of $9,596 and$20,832, respectively.  In addition, atJune 30, 2006, the Company had approximately $569,172 in foreign exchangeforward contracts outstanding with various expiration dates through May 2007relating to non-US Dollar Anticipated Royalties and non-functional currencyassets and liabilities.  Foreign exchangeforward contracts are recorded at estimated fair value.  The estimated fair values of the forwardcontracts are based on quoted market prices.

Unrealized and realizedgains and losses on the contracts hedging non-functional currency assets andliabilities do not qualify for hedge accounting in accordance with SFAS 133 “Accountingfor Derivative Instruments and Hedging Activities,” as amended by SFAS No. 138,“Accounting for Certain Derivative Instruments and Certain Hedging Activities,”and SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments andHedging Activities,” (collectively, “SFAS No. 133”),  and therefore are not deferred and areincluded in the Condensed Consolidated Statements of Income (Unaudited) inOther income, net.

Unrealized gains andlosses on the contracts hedging non-US Dollar Anticipated Royalties qualify forhedge accounting under SFAS No. 133 and are therefore deferred and included inOCI “Other Comprehensive Income.”

*FairValue of Financial Instruments*

At June 30, 2006, theCompany’s financial instruments included cash, cash equivalents, receivables,accounts payable and long-term debt.  AtJune 30, 2006, the fair values of cash, cash equivalents, receivables andaccounts payable approximated carrying values due to the short-term nature ofthese instruments.  At June 30, 2006, thefair value of long-term debt approximated carrying value.

*Credit Concentrations*

TheCompany continually monitors its positions with, and the credit quality of, thefinancial institutions that are counterparties to its financial instruments anddoes not anticipate non-performance by the counterparties.  The Company would not realize a material lossas of June 30, 2006 in the event of non-performance by any onecounterparty.  The Company enters intotransactions only with financial institution counterparties that have a creditrating of A or better.  In addition, theCompany limits the amount of credit exposure with any one institution.

The Company maintainsaccounts receivable balances ($332,338 and $297,302, net of allowances, at June30, 2006 and December 31, 2005, respectively), principally from customers inthe pharmaceutical industry.  The Company’strade receivables do not represent significant concentrations

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of credit risk at June 30, 2006 due to the highquality of its customers and their dispersion across many geographic areas.

*Linesof Credit*

The following table summarizes the Company’s long-termdebt at June 30, 2006 and December 31, 2005:
| ** **                                                                                                                                       | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| 4.6% Private  Placement Note, principal payment of $150,000 due January 2008, net of  interest rate swaps of $(3,630) and $(2,710), respectively |       | $                       | 146,370    |                        | $          | 147,290 |   |
| 5.55% Private  Placement Notes, principal payment of $150,000 due April 2016                                                                     |       | $                       | 150,000    |                        | —     |   |
| 1.70% Private  Placement Note, principal payment of 34,395,000 Japanese Yen due January 2013                                                     |       | $                       | 295,795    |                        | —     |   |
| Revolving Credit  Facility:                                                                                                                      |       |                    |       |                        |       |
| Japanese Yen denominated borrowings at average  floating rates of approximately 0.50%                                                            |       | $                       | 79,807     |                        | 371,924    |   |
| Swiss Franc denominated borrowings at average  floating rates of approximately 1.76%                                                             |       | $                       | 99,361     |                        | 92,217     |   |
| U.S. Dollar denominated borrowings at average  floating rates of approximately 5.53%                                                             |       | $                       | 229,200    |                        | —     |   |
| Bank Term Loan,  principal payment of $50,000 due June, 2009 at average floating rate of  approximately 5.70%                                    |       | $                       | 50,000     |                        | —     |   |
|                                                                                                                                             |       |                    |       |                        |       |
| Total Long-Term  Debt                                                                                                                            |       | $                       | 1,050,533  |                        | $          | 611,431 |   |

 

InJune 2006, the Company closed a $50,000 three year term loan with a bank.  The term loan allows the Company to borrow ata floating rate with a lower borrowing margin than the Company’s revolvingcredit facility, and provides the Company with an option to extend the term upto an additional two years.  The Companyused the proceeds to refinance existing debt borrowed under the revolvingcredit facility.

InApril 2006, the Company closed a private placement transaction pursuant towhich it issued $150,000 of ten-year notes to two highly rated insurancecompanies at a fixed rate of 5.55%.  The Company used the proceeds torefinance existing debt of $150,000 drawn under a short term creditagreement with a bank in January 2006.

InJanuary 2006, the Company closed a private placement transaction pursuant towhich its Japanese subsidiary issued 34,395,000 Japanese Yen seven-year debt(equal to $300,000 at date of issuance) to several highly rated insurancecompanies at a fixed rate of 1.70%.  The Company used the proceeds torefinance existing debt in Japan.

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In April 2004, theCompany entered into a $700,000 revolving credit facility with a syndicate of12 banks (the “Unsecured Facility”).  TheUnsecured Facility replaced the Company’s lines of credit with several domesticand international banks.  On March 9,2005, the Company renegotiated with the syndicate of 12 banks to amend andrestate the Unsecured Facility (the “Amended and Restated Facility”).  The terms of the Amended and RestatedFacility extended the maturity of the facility in its entirety to a term offive years, maturing March 2010, reduced the borrowing margins and increasedsubsidiary borrowing limits.  Totalborrowings under these existing lines were $408,368 and $464,141 at June 30, 2006and December 31, 2005, respectively, all of which were classified aslong-term.  The Company defines long-termlines as those where the lines are non-cancellable for more than 365 days fromthe balance sheet date by the financial institutions except for specified,objectively measurable violations of the provisions of the agreement.  In general, rates for borrowing under theAmended and Restated Facility are LIBOR plus 40 basis points and can vary basedon the Company’s Debt to EBITDA ratio. The weighted average interest rates for the Company’s lines were 3.66%and 0.62% at June 30, 2006 and December 31, 2005, respectively.  In addition, the Company is required to pay acommitment fee on any unused portion of the facilities of 0.1%.  At June 30, 2006, the Company hadapproximately $291,632 available under its existing bank creditfacilities.  In July 2006, the Companyentered into a $1,000,000 revolving credit facility with a syndicate of 12banks replacing its existing $700,000 revolving credit facility (see Note 18).

In January 2003, theCompany closed a private placement transaction pursuant to which it issued$150,000 of five-year debt to several highly rated insurance companies at afixed rate of 4.60%.  The Company usedthe proceeds to pay down short-term debt. The Company also swapped $100,000 of its fixed rate debt to floatingrate based on six-month LIBOR plus a margin of approximately 107 basispoints.  The Company accounted for theseswaps as fair value hedges under the provisions of SFAS No. 133, “Accountingfor Derivative Instruments and Hedging Activities.”  The Company determined the fair values basedon estimated prices quoted by financial institutions.  The fair values of these swaps were $(3,630)and $(2,710) as of June 30, 2006 and December 31, 2005, respectively.

In March and April 2002,the Company entered into interest rate swaps on a portion of its variable ratedebt portfolio.  These swaps matured inMarch 2005 and April 2006.  The Companyaccounted for the interest rate swaps as cash flow hedges and recorded anychanges in fair value in Other Comprehensive Income.  The Company determined the fair values basedon estimated prices quoted by financial institutions.  The fair values of these swaps were $(100) asof December 31, 2005.

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

***Note 11.       Pension and Postretirement Benefits***

*The following table provides the Company’s expenseassociated with pension benefits that are accounted for under SFAS No. 87, “Employers’Accounting for Pensions,” and postretirement benefits that are accounted forunder SFAS No. 106, “Employers’ Accounting for Postretirement Benefits*

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*Other Than Pensions.” For a complete description of the Company’s pension and postretirementbenefits, refer to Note 12 of the Company’s 2005 Annual Report on Form 10-K asfiled with the SEC.*
| **Components of Net Periodic Benefit Cost for the** | ** ** | ** ** | **Pension Benefits** | ** ** | **Other Benefits** | ** ** |
|----------------------------------------------------------------------------------------|------------|------------|---------------------------|------------|-------------------------|------------|
| **Three Months Ended June 30,**                                    | ** ** | ** ** | **2006**                  | ** ** | **2005**                | ** ** | **2006** | ** ** | **2005** | ** ** |
| Service cost                                                                           |       | $          | 3,599                     |       | $                       | 2,302      |   | $ | 10 |   | $ | 18 |   |
| Interest cost                                                                          |       | 3,978      |                      | 3,624      |                    | 193        |   | 167 |   |
| Expected return  on plan assets                                                        |       | (6,437     | )                         | (5,563     | )                       | —     |   | — |   |
| Amortization of  prior service cost (credit)                                           |       | (44        | )                         | (56        | )                       | (9         | ) | (247 | ) |
| Amortization of  transition obligation                                                 |       | (1         | )                         | (1         | )                       | —     |   | — |   |
| Amortization of  net loss                                                              |       | 1,159      |                      | 723        |                    | 152        |   | 63 |   |
| Net periodic benefit  cost                                                             |       | $          | 2,254                     |       | $                       | 1,029      |   | $ | 346 |   | $ | 1 |   |

 
| **Components of Net Periodic Benefit Cost for the** | ** ** | ** ** | **Pension Benefits** | ** ** | **Other Benefits** | ** ** |
|----------------------------------------------------------------------------------------|------------|------------|---------------------------|------------|-------------------------|------------|
| **Six Months Ended June 30,**                                      | ** ** | ** ** | **2006**                  | ** ** | **2005**                | ** ** | **2006** | ** ** | **2005** | ** ** |
| Service cost                                                                           |       | $          | 7,063                     |       | $                       | 4,617      |   | $ | 20 |   | $ | 36 |   |
| Interest cost                                                                          |       | 7,889      |                      | 7,266      |                    | 386        |   | 334 |   |
| Expected return  on plan assets                                                        |       | (12,791    | )                         | (11,149    | )                       | —     |   | — |   |
| Amortization of  prior service cost (credit)                                           |       | (89        | )                         | (111       | )                       | (150       | ) | (494 | ) |
| Amortization of  transition obligation                                                 |       | (2         | )                         | (2         | )                       | —     |   | — |   |
| Amortization of  net loss                                                              |       | 2,287      |                      | 1,451      |                    | 304        |   | 126 |   |
| Net periodic benefit  cost                                                             |       | $          | 4,357                     |       | $                       | 2,072      |   | $ | 560 |   | $ | 2 |   |

 

***Note 12.       Income Taxes***

The Company operates inmore than 100 countries around the world and its earnings are taxed at theapplicable income tax rate in each of these countries.

For the three monthsended June 30, 2006, the Company’s effective tax rate was primarily impacted byapproximately $21,400 of tax expense related to a reorganization of several ofthe Company’s subsidiaries.  For the sixmonths ended June 30, 2006, the Company’s effective tax rate was reducedprimarily due to a favorable U.S. partnership audit settlement of approximately$69,200 for the tax years 1998 through 2003 and a favorable U.S. auditsettlement of approximately $17,600 for the tax years 2000 through 2003.  Also in the first half 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 was recorded primarily in the firstquarter of 2006 related to disputes between the Company and NMR, on the onehand, and Donnelley and certain of its former affiliates on the other hand, asto proper interpretation of, and allocation of tax liabilities under, the 1996Spin-Off agreements (see Note 8).

For the six months endedJune 30, 2005, the Company’s effective tax rate was reduced primarily due to afavorable non-U.S. audit settlement of approximately $29,300.  For the six months ended June 30, 2005, theeffective tax rate was also impacted by $42,800 of tax expense related to thedecision  to repatriate approximately$647,000 of foreign earnings back to the U.S. during 2005 under the AmericanJobs Creation Act of 2004 (“AJCA”).  Inthe first quarter of 2005, $67,100 of tax expense was recorded related to theAJCA, of which $24,300 was reversed in the second quarter of 2005 primarily asa result of a technical correction passed by Congress to the AJCA.

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The Company accrues fortax loss contingencies in the period in which they are probable and estimablein accordance with SFAS No. 5, “Accounting for Contingencies.”  These reserves are included in current incometaxes payable to the extent the related amounts are expected to be paid withinthe next twelve-month period.  If theCompany expects the liability to be settled beyond one year, these amounts areclassified as a long-term liability.

***Note 13.       IMS Health Capital Stock***

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

On January 25, 2006, theBoard of Directors authorized a stock repurchase program to buy up to 30,000shares.  As of June 30, 2006, 11,374shares remained available for repurchase under the January 2006 program.

On November 16, 2005, the Board of Directorsauthorized a stock repurchase program to buy up to 10,000 shares.  This program was completed in February 2006at a total cost to date of $251,620.  Thefinal total cost will be determined upon completion of the accelerated share repurchaseprogram (“ASR”) settlement period as described below.

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

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

During the first half of2006, the Company repurchased 29,000 shares of outstanding Common Stock underthese programs at a total cost of $728,564, including the repurchase of 25,000shares on January 30, 2006 pursuant to an ASR. The ASR agreement provides for the final settlement of the contract ineither cash or additional shares of the Company’s Common Stock at the Company’ssole discretion.  The Company’s finalsettlement amount will increase (decrease) based on an increase (decrease) inthe Company’s share price over the settlement period, and will occur no laterthan August 7, 2006.  The Companycurrently estimates a payment of approximately $18,000 as final settlement,which will be recorded as an additional cost to purchase treasury stock.

During 2005, the Companyrepurchased approximately 10,213 shares of outstanding Common Stock under theseprograms at a total cost of $246,507.

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

Under the Company’sRestated Certificate of Incorporation as amended, the Company has authority toissue 820,000 shares with a par value of $.01 per share of which 800,000represent shares of Common Stock, 10,000 represent shares of preferred stockand 10,000 represent shares of Series

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Common Stock.  The preferred and series Common Stock can beissued with varying terms, as determined by the Board of Directors.

The Company paid cash dividends of $0.03 and $0.02 pershare which amounted to $6,107 and $4,549 during the three months ended June30, 2006 and 2005, respectively.  TheCompany paid cash dividends of $0.06 and $0.04 per share which amounted to$12,142 and $9,119 during the six months ended June 30, 2006 and 2005,respectively.  The payments and level ofcash dividends made by the Company are subject to the discretion of the Boardof Directors.

***Note 14.       Comprehensive Income***

The following table sets forth the components ofcomprehensive income, net of income tax expense:
| ** **                                         | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                         | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Net  Income**                                    | ** ** | **$**                                           | **62,683** |                                          | $          | 93,179 | ** ** | **$** | **180,780** |   | $ | 123,522 |   |
| Other  comprehensive income, net of taxes:         | ** ** | ** **                                      |       |                                          | ** ** | ** ** |   |   |   |
| Unrealized (losses) gains on:                      | ** ** | ** **                                      |       |                                          | ** ** | ** ** |   |   |   |
| Available-for-sale equity securities               | ** ** | **(162**                                        | **)**      | 28                                            | ** ** | **(118** | **)** | (77 | ) |
| Tax benefit (provision) on above                   | ** ** | **57**                                          |       | (10                                           | )          | **41** |   | 27 |   |
| Change in unrealized (losses) gains on investments | ** ** | **(105**                                        | **)**      | 18                                            | ** ** | **(77** | **)** | (50 | ) |
| Foreign currency translation gains (losses)        | ** ** | **9,337**                                       |       | (21,592                                       | )          | **18,458** |   | (47,890 | ) |
| Changes in fair value of cash flow hedges          | ** ** | **22**                                          |       | 77                                            | ** ** | **65** |   | 430 |   |
| Total other  comprehensive income (loss)           | ** ** | **9,254**                                       |       | (21,497                                       | )          | **18,446** |   | (47,510 | ) |
| **Comprehensive Income**                           | ** ** | **$**                                           | **71,937** |                                          | $          | 71,682 | ** ** | **$** | **199,226** |   | $ | 76,012 |   |

 

***Note 15.       Severance, Impairment and Other Charges***

Duringthe fourth quarter of 2004, the Company recorded $36,890 of Severance,impairment and other charges as a component of operating income.  As a result of leveraging prior investmentsin technology and process improvements, the Company committed to a plan toeliminate selected positions involved primarily in production anddevelopment.  The plan resulted in acharge for one-time termination benefits relating to a headcount reduction ofapproximately 490 employees located primarily in Europe and the U.S.  These severance benefits werecalculated pursuant to the terms of established employee protection plans, inaccordance with local statutory minimum requirements or individual employeecontracts, as applicable.

All of the 2004 fourthquarter charge will be settled in cash. Substantially all termination actions under this plan were completed byJune 30, 2006.

27

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|                              | ** ** | **Severance Related  Reserves** | ** ** |
|------------------------------|------------|--------------------------------------|------------|
| Charge at  December 31, 2004 |       | $                                    | 36,890     |   |
| 2004 utilization             |       | (452                                 | )          |
| 2005 utilization             |       | (24,052                              | )          |
| 2006 utilization             |       | (9,673                               | )          |
| Balance at June  30, 2006    |       | $                                    | 2,713      |   |

 

TheCompany currently expects that a substantial portion of the cash outlaysrelating to the 2004 fourth quarter charge will be applied against theremaining June 30, 2006 balance during the remainder of 2006.

Duringthe three months ended March 31, 2003, the Company recorded $37,220 ofSeverance, impairment and other charges as a component of operatingincome.  These charges were designed tofurther streamline operations and increase productivity through a worldwidereduction in headcount of approximately 80 employees and charges related toimpaired contracts and assets.   Thecontract-related charges were for impaired data supply and data processingcontacts primarily in the Company’s U.S. and Japanese operations.  The asset write-downs portion of the 2003charge related to the Company’s decision to abandon certain products and assuch, certain computer software primarily in the U.S., Japan and Europe waswritten-down to its net realizable value.
| ** **                | ** ** | **Severance  Related  Reserves** | ** ** | **Contract  Related  Reserves** | ** ** | **Asset  Write-  Downs** | ** ** | **Total** | ** ** |
|---------------------------|------------|----------------------------------|------------|---------------------------------|------------|--------------------------|------------|-----------|------------|
| Charge at March  31, 2003 |       | $                                | 9,958      |                            | $          | 22,307                   |       | $         | 4,955      |   | $ | 37,220 |   |
| 2003 utilization          |       | (6,197                           | )          | (7,047                          | )          | (6,634                   | )          | (19,878   | )          |
| 2004 utilization          |       | (1,637                           | )          | (3,614                          | )          | —                   |       | (5,251    | )          |
| 2005 utilization          |       | (378                             | )          | (6,747                          | )          | —                   |       | (7,125    | )          |
| 2006 utilization          |       | —                           |       | (2,036                          | )          | —                   |       | (2,036    | )          |
| Adjustments               |       | (1,746                           | )          | 67                              |       | 1,679                    |       | —    |       |
| Balance at June 30,  2006 |       | $                                | —     |                            | $          | 2,930                    |       | $         | —     |   | $ | 2,930 |   |

 

Approximately$9,958 of the 2003 charge related to a worldwide reduction in headcount ofapproximately 80 employees.  Theseseverance benefits were calculated pursuant to the terms of establishedemployee protection plans, in accordance with local statutory minimumrequirements or individual employee contracts, as applicable.

Thecash portion of the first quarter 2003 charge amounted to $30,586, of which theCompany paid approximately $2,036 during the first six months of 2006 forcontract related charges.  The remainingaccrual of $2,930 at June 30, 2006 relates to lease obligations.

The Company expects thatcash outlays will be applied against the $2,930 balance remaining of the firstquarter 2003 charge at June 30, 2006 as follows:

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| Year Ended  December 31, | ** ** | ** ** | ** ** | **Cash Outlays** | ** ** |
|------------------------------------|------------|------------|------------|-----------------------|------------|
| 2006                               |       | $          | 248        |                  |
| 2007                               |       | 2,682      |       |
| Total                              |       | $          | 2,930      |                  |

 

During2003, the Company reversed approximately $1,750 of severance related chargesoriginally included in the first quarter 2003 charge due to the Company’srefinement of estimates.  The Companyalso recorded additional charges during 2003 of approximately $1,700 relatedprimarily to a software impairment.

During the fourth quarterof 2001, the Company completed the assessment of its Competitive FitnessProgram.  This program was designed tostreamline operations, increase productivity, and improve client service.  In connection with this program, the Companyrecorded $94,616 of Severance, impairment and other charges during the fourthquarter of 2001 as a component of operating income.
| ** **                   | ** ** | **Severance  Related  Reserves** | ** ** | **Contract  Related  Reserves** | ** ** | **Asset  Write-  Downs** | ** ** | **Total** | ** ** |
|------------------------------|------------|----------------------------------|------------|---------------------------------|------------|--------------------------|------------|-----------|------------|
| Charge at  December 31, 2001 |       | $                                | 39,652     |                            | $          | 26,324                   |       | $         | 28,640     |   | $ | 94,616 |   |
| 2001 utilization             |       | (3,692                           | )          | (6,663                          | )          | (27,887                  | )          | (38,242   | )          |
| 2002 utilization             |       | (26,277                          | )          | (9,819                          | )          | (1,474                   | )          | (37,570   | )          |
| 2003 utilization             |       | (6,384                           | )          | (2,720                          | )          | (241                     | )          | (9,345    | )          |
| 2004 utilization             |       | (455                             | )          | (1,232                          | )          | —                   |       | (1,687    | )          |
| 2005 utilization             |       | (262                             | )          | (1,881                          | )          | —                   |       | (2,143    | )          |
| 2006 utilization             |       | (132                             | )          | (914                            | )          | —                   |       | (1,046    | )          |
| Adjustments                  |       | (688                             | )          | (274                            | )          | 962                      |       | —    |       |
| Balance at June 30,  2006    |       | $                                | 1,762      |                            | $          | 2,821                    |       | $         | —     |   | $ | 4,583 |   |

 

The Companyexpects that cash outlays will be applied against the $4,583 balance remainingin the program at June 30, 2006 as follows:

| Year Ended December 31, | ** ** | ** ** | ** ** | **Cash Outlays** | ** ** |
|----------------------------------------|------------|------------|------------|-----------------------|------------|
| 2006                                   |       | $          | 1,175      |                  |
| 2007                                   |       | 1,903      |       |
| 2008                                   |       | 262        |       |
| 2009                                   |       | 262        |       |
| 2010                                   |       | 262        |       |
| Thereafter                             |       | 719        |       |
| Total                                  |       | $          | 4,583      |                  |

 

***Note 16.       Operations by Business Segment***

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

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pharmaceutical business information, software andrelated services to its customers in more than 100 countries.  See Note 2.

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

**GeographicFinancial Information:**

The following representsselected geographic information for the regions in which we operate for thethree and six months ended June 30, 2006 and 2005:

 
| ** **                             | ** ** | **Americas  (1)** | ** ** | **Europe  (2)** | ** ** | **Asia Pacific  (3)** | ** ** | **Corporate &  Other** | ** ** | **Total  IMS** | ** ** |
|----------------------------------------|------------|-------------------|------------|-----------------|------------|----------------------------|------------|---------------------------------|------------|----------------|------------|
| **Three  months ended June 30, 2006:** |       |              |       |            |       |                       |       |                            |       |           |       |
| Operating Revenue (4)                  |       | $                 | 218,566    |            | $          | 202,944                    |       | $                               | 64,710     |           | —     |   | $ | 486,220 |   |
| Operating Income (Loss) (5)            |       | $                 | 72,523     |            | $          | 34,631                     |       | $                               | 27,354     |           | $          | (28,182 | ) | $ | 106,326 |   |
| **Six  months ended June 30, 2006:**   | ** ** | ** **        | ** ** | ** **      | ** ** | ** **                 | ** ** | ** **                      | ** ** | ** **     | ** ** |
| Operating Revenue (4)                  |       | $                 | 425,645    |            | $          | 377,796                    |       | $                               | 128,933    |           | —     |   | $ | 932,374 |   |
| Operating Income (Loss) (5)            |       | $                 | 145,797    |            | $          | 52,640                     |       | $                               | 54,953     |           | $          | (50,328 | ) | $ | 203,062 |   |
| **Three  months ended June 30, 2005:** |       |              |       |            |       |                       |       |                            |       |           |       |
| Operating Revenue (4)                  |       | $                 | 189,027    |            | $          | 186,734                    |       | $                               | 57,521     |           | —     |   | $ | 433,282 |   |
| Operating Income (Loss) (5)            |       | $                 | 70,880     |            | $          | 30,747                     |       | $                               | 25,671     |           | $          | (24,001 | ) | $ | 103,297 |   |
| **Six  months ended June 30, 2005:**   | ** ** | ** **        | ** ** | ** **      | ** ** | ** **                 | ** ** | ** **                      | ** ** | ** **     | ** ** |
| Operating Revenue (4)                  |       | $                 | 365,577    |            | $          | 362,340                    |       | $                               | 116,349    |           | —     |   | $ | 844,266 |   |
| Operating Income  (Loss) (5)           |       | $                 | 136,283    |            | $          | 48,819                     |       | $                               | 53,946     |           | $          | (38,879 | ) | $ | 200,169 |   |

 

**Notes to Geographic FinancialInformation:**

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

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

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

*(4)**             Operatingrevenue relates to external customers and is primarily based on the location ofthe customer.  The operating revenue forthe geographic regions includes the impact of foreign exchange in convertingresults 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, is nota true measure of the respective regions’ profitability.   The operating income for the geographicsegments includes the impact of foreign exchange in converting results intoU.S. dollars.*

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A summary of the Company’s operating revenue byproduct line for the three and six months ended June 30, 2006 and 2005 ispresented below:
| ** **                 | ** ** | **Three Months Ended June 30,** | ** **  | **Six Months Ended June 30,** | ** ** |
|----------------------------|------------|-----------------------------------------------------|-------------|---------------------------------------------------|------------|
| ** **                 | ** ** | **2006**                                            | ** **  | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Sales Force  Effectiveness | ** ** | **$**                                               | **229,996** |                                              | $          | 207,082 | ** ** | **$** | **444,133** |   | $ | 407,055 |   |
| Portfolio  Optimization    | ** ** | **138,552**                                         |        | 124,584                                           | ** ** | **268,363** |   | 251,332 |   |
| Launch, brand  and other   | ** ** | **117,672**                                         |        | 101,616                                           | ** ** | **219,878** |   | 185,879 |   |
| Total Operating Revenue    | ** ** | **$**                                               | **486,220** |                                              | $          | 433,282 | ** ** | **$** | **932,374** |   | $ | 844,266 |   |

 

**Note17.  Merger Costs**

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

Inaccordance with the terms of the merger termination agreement, VNU was requiredto pay the Company $45,000 as a result of the acquisition of VNU by a privateequity group in June 2006.  This $45,000payment was received during the second quarter of 2006 and has been reflectedin Other income, net in the Condensed Consolidated Statements of Income(Unaudited) for the three and six months ended June 30, 2006.  Additionally, the Company was required to pay$6,016 of investment banker fees and expenses related to the $45,000 paymentreceived which are included in Merger costs in the Condensed Consolidated Statementsof Income (Unaudited) for the three and six months ended June 30, 2006.  The Company had incurred merger costs of$7,400 through June 30, 2005, primarily for professional fees.

**Note18.  Subsequent Events**

InJuly 2006, the Company entered into a $1,000,000 revolving credit facility witha syndicate of 12 banks replacing its existing $700,000 revolving creditfacility (see Note 10).  The terms of thenew facility extended the maturity date to July 2011, reduced borrowingmargins, increased subsidiary borrowing limits and changed certain covenants.  The Company used the proceeds to refinanceexisting debt.

In July 2006, the Company, together with two of itswholly-owned subsidiaries, entered into an Amended and Restated Agreement ofLimited Liability Company of IMS Health Licensing Associates, L.L.C. (the “AmendedLLC Agreement”). The Amended LLC Agreement governs the relationship between theCompany, its subsidiaries and two third-party investors with respect to theirinterests in IMS Health Licensing Associates, L.L.C. (the “LLC”).  The Company is the sole managing member ofthe LLC. Since 1997, the Company and/or its subsidiaries, or theirpredecessors, have contributed assets to, and have held a controlling(currently approximately 93%) interest in, the LLC, and the third-partyinvestors have contributed $100,000 to, and have held a minority (currentlyapproximately 7%) interest in, the LLC. The third-party investor contributions are reflected in MinorityInterests in the Condensed Consolidated Statements of Financial Position(Unaudited).  The LLC is a separate and

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distinctlegal entity that is in the business of licensing database assets and computersoftware.  Under the terms of the AmendedLLC Agreement, the third-party investors have the right to take steps thatwould result in the liquidation of their membership interest in the LLC onJune 30, 2009.  This right may beaccelerated if certain events occur as set forth in the Amended LLC Agreement.

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**Item2.  Management’s Discussion and Analysisof Financial Condition and Results ofOperations**

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

*Thisdiscussion and analysis should be read in conjunction with the accompanyingCondensed Consolidated Financial Statements (Unaudited) and related notes.*

***Executive Summary***

***Our Business***

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

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

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

·                  Launch,Brand Management and Other to support client needs relative to marketsegmentation and positioning and life cycle management for prescription andover-the-counter pharmaceutical products.

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

Weoperate in more than 100 countries. Until December 21, 2004, we also owned approximately a 25% equityinterest in the TriZetto Group, Inc. (“TriZetto”) (see Note 7 to the CondensedConsolidated Financial Statements (Unaudited).

Wemanage on a global business model with global leaders for the majority of ourcritical business processes and accordingly have 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 12.2% to $486,220 in thesecond quarter of 2006 as compared to $433,282 in the second quarter of2005.  Our operating revenue grew 10.4%to $932,374 in the six months ended June 30, 2006 as compared to $844,266 inthe six months ended June 30, 2005. The

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quarterly and sixmonth operating revenue increases were a result of growth in all three of ourbusiness lines.  Our operating incomegrew 2.9% to $106,326 in the second quarter of 2006 as compared to $103,297 inthe second quarter of 2005.  Our operatingincome grew 1.4% to $203,062 in the six months ended June 30, 2006 as comparedto $200,169 in the six months ended June 30, 2005.  Both the quarterly and six month operatingincome growth was a result of increased operating revenues offset by increasesin operating costs, selling and administrative expenses and depreciation andamortization. The increases in costs and expenses were primarily driven by ouradoption of Statement ofFinancial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-BasedPayment,” (“SFAS 123R”), acquisitions, increased costs of data, and additionalinvestments in consulting and services capabilities.  Our net income was $62,683 for the secondquarter of 2006 as compared to $93,179 for the second quarter of 2005 and$180,780 for the six months ended June 30, 2006 compared to $123,522 for the sixmonths ended June 30, 2005 due to the Non-Operating Income, net items discussedbelow and certain tax items as discussed in Note 12 of the CondensedConsolidated Financial Statements (Unaudited). Our diluted earnings per share of Common Stock decreased to $0.30 forthe second quarter of 2006 as compared to $0.41 for the second quarter of 2005and increased to $0.86 for the six months ended June 30, 2006 as compared to$0.54 for the six months ended June 30, 2005.

**Resultsof Operations**

*Reclassifications. *Certain prior-year amounts have been reclassified to conform to the2006 presentation.

*References to constant dollarresults. *We reportresults in U.S. dollars, but we do business on a global basis.  Exchange rate fluctuations affect the rate atwhich we translate foreign revenues and expenses into U.S. dollars and haveimportant effects on our results.  Inorder to illustrate these effects, the discussion of our business in thisreport sometimes describes the magnitude of changes in constant dollar terms.  We believe this information facilitates acomparative view of business growth.  Inthe first six months of 2006, the U.S. dollar was generally stronger againstother currencies as compared to the first six months of 2005, so growth atconstant dollar exchange rates was generally higher than growth at actualcurrency exchange rates.  See “HowExchange Rates Affect Our Results” below and the discussion of “Market Risk” inthe Management Discussion and Analysis section of our annual report on Form10-K for the year ended December 31, 2005 for a more complete discussionregarding the impact of foreign currency translation on our business.

***Stock-BasedCompensation Expense***

SFAS123R was adopted on January 1, 2006, which now requires among otheritems, the recognition of stock option expense in the results of operations.The modified prospective transition method was elected; therefore, prior periodresults were not retrospectively adjusted. Prior to the adoption of SFAS 123R, stock-based compensation expense relatedto stock options was not recognized in the results of operations if theexercise price was at least equal to the market value of the Common Stock onthe grant date, in accordance with Accounting Principles Board (“APB”) OpinionNo. 25, “Accounting for Stock Issued to Employees,” (“APB 25”). As a result,the recognition of stock-based compensation expense was generally limited tothe expense attributed to restricted stock unit awards and stock optionmodifications.  Historically, stockoptions have been granted to broad groups of employees on a discretionarybasis. Beginning in fiscal 2006, employees

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are eligible to receive restricted stock units with aservice condition of four years instead of stock options with a servicecondition of three years. Employees in more advanced leadership positions willcontinue to be eligible to receive restricted stock units which containperformance and service conditions.

As a result of adoptingSFAS 123R on January 1, 2006, our income before income taxes and net income forthe three months ended June 30, 2006 are $12,069 lower and $8,450 lower,respectively, and for the six months ended June 30, 2006 are $21,691 lower and$15,240 lower, respectively, than if the company had continued to account forshare-based compensation under APB 25. Basic and diluted earnings per share for the three months ended June 30,2006 were $0.31 and $0.30, respectively, but would have been $0.35 and $0.35,respectively, if we had not adopted SFAS 123R. Basic and diluted earnings per share for the six months ended June 30,2006 were $0.88 and $0.86, respectively, but would have been $0.96 and $0.94,respectively, if we had not adopted SFAS 123R. Stock-based compensation expense was $13,199 and $24,354 before taxesduring the three and six months ended June 30, 2006, respectively, and $10,890and $19,520 before taxes during the three and six months ended June 30, 2005,respectively.  Stock-based compensationexpense recognized in the results of operations for the three and six monthsended June 30, 2006 was $2,309 and $4,834 higher than the proforma amountdetermined under the fair value-based method and disclosed in accordance withSFAS No. 123, “Accounting for Stock-Based Compensation,” for the comparableprior year period, respectively.  This increase was primarily due to higher fairvalue amounts attributed to the more recent awards and acceleration of thevesting of restricted stock units and stock options of one employee in anadvanced leadership position due to retirement. As of June 30, 2006, approximately $25,262 of unrecognized stockcompensation related to unvested restricted stock awards with a servicecondition (net of estimated forfeitures) is expected to be recognized over aweighted-average period of 3.43 years. As of June 30, 2006, approximately $2,481 of unrecognized stockcompensation related to unvested restricted stock awards with performanceconditions (net of estimated forfeitures) is expected to be recognized over aweighted-average period of 1.01 years. As of June 30, 2006, approximately $27,440 of unrecognized stockcompensation related to unvested stock options (net of estimated forfeitures)is expected to be recognized over a weighted-average period of 1.43 years.

**Summary of Operating Results**
| ** **                           | ** ** | **Three Months Ended June 30,** | ** **  | **% Variance** | ** ** |
|--------------------------------------|------------|-----------------------------------------------------|-------------|---------------------|------------|
| ** **                           | ** ** | ** **                                          | ** **  | ** **          | ** ** | **2006** | ** ** |
| ** **                           | ** ** | **2006**                                            | ** **  | **2005**            | ** ** | **vs 2005** | ** ** |
| Operating  revenue                   | ** ** | **$**                                               | **486,220** |                | $          | 433,282 |   | 12.2 | % |
| Operating costs                      | ** ** | **211,872**                                         |        | 185,311             |       | 14.3 | % |
| Selling and  administrative expenses | ** ** | **133,241**                                         |        | 111,632             |       | 19.4 | % |
| Depreciation and  amortization       | ** ** | **28,765**                                          |        | 25,642              |       | 12.2 | % |
| Merger costs                         | ** ** | **6,016**                                           |        | 7,400               |       | (18.7 | )% |
| Operating income                     | ** ** | **$**                                               | **106,326** |                | $          | 103,297 |   | 2.9 | % |

* *

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* *
| ** **                           | ** ** | **Six Months Ended June 30,** | ** **  | **% Variance** | ** ** |
|--------------------------------------|------------|---------------------------------------------------|-------------|---------------------|------------|
| ** **                           | ** ** | ** **                                        | ** **  | ** **          | ** ** | **2006** | ** ** |
| ** **                           | ** ** | **2006**                                          | ** **  | **2005**            | ** ** | **vs 2005** | ** ** |
| Operating  revenue                   | ** ** | **$**                                             | **932,374** |                | $          | 844,266 |   | 10.4 | % |
| Operating costs                      | ** ** | **409,789**                                       |        | 365,317             |       | 12.2 | % |
| Selling and  administrative expenses | ** ** | **257,393**                                       |        | 221,061             |       | 16.4 | % |
| Depreciation and  amortization       | ** ** | **56,114**                                        |        | 50,319              |       | 11.5 | % |
| Merger costs                         | ** ** | **6,016**                                         |        | 7,400               |       | (18.7 | )% |
| Operating income                     | ** ** | **$**                                             | **203,062** |                | $          | 200,169 |   | 1.4 | % |

 

***Operating Income***

Our operating income forthe second quarter of 2006 grew 2.9% to $106,326 from $103,297 in the secondquarter of 2005.  This was primarily dueto the increase in our operating revenue, offset by increases in our operatingcosts and selling and administrative expenses driven primarily by acquisitions,increased cost of data, investments in consulting and services capabilities,and the adoption of SFAS 123R.  Ouroperating income increased 1.8% in constant dollar terms.  Excluding the effect of our adoption of SFAS123R and merger costs, our operating income increased 12.4% on a reported basisand 11.4% in constant dollar terms.  Ouroperating income for the first six months of 2006 grew 1.4% to $203,062 from$200,169 in the first six months of 2005. This was primarily due to the increase in our operating revenue, offsetby increases in our operating costs and selling and administrative expensesdriven primarily by acquisitions, increased cost of data, investments inconsulting and services capabilities, and the adoption of SFAS 123R.  Our operating income increased 2.3% in constantdollar terms.  Excluding the effect ofour adoption of SFAS 123R and merger costs, our operating income increased11.2% on a reported basis and 12.0% in constant dollar terms.

***Operating Revenue***

Revenuein 2005 reflects a reclassification between our three business lines to conformto the 2006 presentation.

Our operating revenue forthe second quarter of 2006 grew 12.2% to $486,220 from $433,282 in the secondquarter of 2005. On a constant dollar basis our operating revenue growth was12.0%.  Our operating revenue for thefirst six months of 2006 grew 10.4% to $932,374 from $844,266 in the first sixmonths of 2005. On a constant dollar basis our operating revenue growth was12.5%.  Acquisitions made during 2005 and2006 contributed approximately 3.5 percentage points for the second quarter and3.7 percentage points for the first six months of 2006 to both reported andconstant dollar operating revenue growth. The increase in our operating revenue resulted from growth in revenue inall three of our business lines, together with the effect of currencytranslation.  On a constant dollar basis,all business lines grew.

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**Summary of OperatingRevenue**
| ** **                 | ** ** | ** **                                          | ** **  | ** **                 | ** ** | **% Variance** | ** ** |
|----------------------------|------------|-----------------------------------------------------|-------------|----------------------------|------------|---------------------|------------|
| ** **                 | ** ** | **Three Months Ended June 30,** | ** **  | **2006 vs 2005** | ** ** |
| ** **                 | ** ** | **2006**                                            | ** **  | **2005**                   | ** ** | **Reported  Rates** | ** ** | **Constant  Dollar** | ** ** |
| Sales force  effectiveness | ** ** | **$**                                               | **229,996** |                       | $          | 207,082             |       | 11.1 | % | 10.8 | % |
| Portfolio  optimization    | ** ** | **138,552**                                         |        | 124,584                    |       | 11.2                | %          | 11.2 | % |
| Launch, brand  and other   | ** ** | **117,672**                                         |        | 101,616                    |       | 15.8                | %          | 15.5 | % |
| Operating revenue          | ** ** | **$**                                               | **486,220** |                       | $          | 433,282             |       | 12.2 | % | 12.0 | % |

 

 
| ** **                 | ** ** | ** **                                        | ** **  | ** **                 | ** ** | **% Variance** | ** ** |
|----------------------------|------------|---------------------------------------------------|-------------|----------------------------|------------|---------------------|------------|
| ** **                 | ** ** | **Six Months Ended June 30,** | ** **  | **2006 vs 2005** | ** ** |
| ** **                 | ** ** | **2006**                                          | ** **  | **2005**                   | ** ** | **Reported  Rates** | ** ** | **Constant  Dollar** | ** ** |
| Sales force  effectiveness | ** ** | **$**                                             | **444,133** |                       | $          | 407,055             |       | 9.1 | % | 11.0 | % |
| Portfolio  optimization    | ** ** | **268,363**                                       |        | 251,332                    |       | 6.8                 | %          | 9.0 | % |
| Launch, brand  and other   | ** ** | **219,878**                                       |        | 185,879                    |       | 18.3                | %          | 20.5 | % |
| Operating revenue          | ** ** | **$**                                             | **932,374** |                       | $          | 844,266             |       | 10.4 | % | 12.5 | % |

 

·                  *Sales Force Effectiveness* revenue grew primarily due to ourcore information assets in the US and continued growth of our DDD offering inJapan.

·                  *Portfolio Optimization* revenue grew primarily due to strongdemand for certain of our core products including MIDAS Quantum.

·                  *Launch, Brand Management and Other product lines* revenuegrew primarily due to our Launch and Brand management offerings and strongacceptance of our Managed Care offerings in the Americas.

·                  Consultingand services revenue, as included in the business lines above, was $92,521 inthe second quarter of 2006, up 46.5% from $63,161 in the second quarter of 2005(up 45.7% on a constant-dollar basis). Consulting and services revenue was $161,540 in the first six months of2006, up 36.9% from $117,979 in the first six months of 2005 (up 38.8% on aconstant-dollar basis).  Approximatelyone-third of the consulting and services revenue growth for the second quarterof 2006 and one-half of the consulting and services revenue growth for thefirst six months of 2006 was attributable to acquisitions completed during 2006and 2005.

***OperatingCosts***

Our operating costsinclude data processing costs, the costs of data collection and production, andcosts attributable to personnel involved in production, data management and theprocessing and delivery of our consulting and services offerings.  Our operating costs grew 14.3% to $211,872 inthe second quarter of 2006, from $185,311 in the second quarter of 2005.  The increase in our operating costs wasprimarily due to operating costs of acquired businesses, increases in costsrelated to

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consulting and services, increased cost of data, andthe adoption of SFAS 123R.  SFAS 123Rincreased our operating costs by $1,877 and foreign currency translationdecreased our operating costs by approximately $300 for the second quarter of2006.  Excluding the effect of these twoitems, our operating costs grew 13.5% in the second quarter of 2006 as comparedto the second quarter of 2005.  Ouroperating costs grew 12.2% to $409,789 in the first six months of 2006, from$365,317 in the first six months of 2005. The increase in our operating costs was primarily due to operating costsof acquired businesses, increased cost of data, increases in costs related toconsulting and services, and the adoption of SFAS 123R partially offset by theeffect of foreign currency translations. SFAS 123R increased our operating costs by $3,283 and foreign currencytranslation decreased our operating costs by approximately $9,500 for thesecond quarter of 2006.  Excluding theeffect of these two items, our operating costs grew 13.9% in the first sixmonths of 2006 as compared to the first six months of 2005.

Our operating costsgenerally have increased at a rate greater than operating revenues in each ofthe last three full fiscal years.  Thisincrease has been due primarily to higher data costs to support revenue growthand acquisitions**.**

***Selling and Administrative Expenses***

Ourselling and administrative expenses consist primarily of the expensesattributable to sales, marketing, and administration, including humanresources, legal, management and finance. Our selling and administrative expenses grew 19.4% in the second quarterof 2006 to $133,241 from $111,632 in the second quarter of 2005.  Our selling and administrative expenses grew16.4% in the first six months of 2006 to $257,393 from $221,061 in the firstsix months of 2005:

·                  *SFAS 123R*: The effect of the adoption of SFAS 123R increasedour selling and administrative expenses by $10,192 and $18,408 for the secondquarter and first six months of 2006 as compared to 2005, respectively (SeeNote 9 to our Condensed Consolidated Financial Statements (Unaudited)).

·                  *Foreign Currency Translation*: There was virtually no effectof foreign currency translation on our selling and administrative expenses forthe second quarter of 2006 as compared to the second quarter of 2005.  The effect of foreign currency decreased ourselling and administrative expenses by approximately $5,000 for the first sixmonths of 2006 as compared to the first six months of 2005.

Excludingthe effect of SFAS 123R and the change due to foreign currency translation, ourselling and administrative expenses grew 10.2% and 10.4% in the second quarterand first six months of 2006, respectively, as compared to the second quarterand first six months of 2005.

·                  *Sales and Marketing*: Sales and marketing expense increasedby approximately $4,000 and $8,000 in the second quarter and first six monthsof 2006, compared to the second quarter of 2005, respectively, to supportrevenue growth.

·                  *Consulting*: Consulting and services expenses increased by approximately $8,500 and$17,500 in the second quarter and first six months of 2006 compared to thesecond quarter of 2005, respectively, to support the growth in this revenuestream.

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***Depreciationand Amortization***

Ourdepreciation and amortization charges increased 12.2% to $28,765 in the second quarter of 2006, from $25,642 in the second quarter of2005, and 11.5% to $56,114 in the first sixmonths of 2006, from $50,319 in the first six months of 2005, primarilydue to computer software amortization associated with new products whichincreased by approximately $2,500 and $5,000,and amortization of intangibles related to recent acquisitions, which increasedby approximately $500 and $1,500  in thesecond quarter and first six months of 2006 as compared to the second quarterof 2005, respectively.

***MergerCosts***

Duringthe second quarter of 2006, we incurred $6,016 of investment banker fees andexpenses related to a payment received from VNU in accordance with the terms ofthe merger termination agreement (see Other Income, net below). During thesecond quarter of 2005, we incurred $7,400 of costs in connection with theterminated merger with VNU primarily for professional fees.  See Note 17 to our CondensedConsolidated Financial Statements (Unaudited).

***Trendsin our Operating Margins***

Ouroperating margin for the second quarter of 2006 was 21.9%, as compared to 23.8% in the second quarter of 2005.  Thedecrease in our operating margins for the second quarter of 2006 is primarilydue to the adoption of SFAS 123R and costs related to the terminated mergerwith VNU.  Excluding the effect of SFAS123R and merger costs, our operating margin would have been relatively flat at25.6% in the second quarter of 2006 compared to 25.5% in the second quarter of2005.  Our operating margin for thefirst six months of 2006 was 21.8%, ascompared to 23.7% in the first six months of 2005.  The decrease in ouroperating margins for the first six months of 2006 is primarily due to theadoption of SFAS 123R and costs related to the terminated merger with VNU.  Excluding the effect of SFAS 123R and mergercosts, our operating margin would have been relatively flat at 24.8% in thefirst six months of 2006 compared to 24.6% in the first six months of 2005.

Recentacquisitions have had an adverse effect on our operating margins due to thefact that some of our small business acquisitions have historically experiencedlower operating margins than ours, and the revenue and cost synergies that weincorporate into our business plans are not all immediately realized.  We also experience higher intangibleamortization in the first years after completing an acquisition and may incuradditional costs in integrating the acquired operations into ours, both ofwhich tend to increase our costs and thus decrease our operating margins in theinitial years of each completed acquisition.

Excludingthe effect of SFAS 123R, our operating margin stabilized during the secondquarter and first six months of 2006. Operating margins are likely to decline throughout 2006 as a result ofour adoption of SFAS 123R.

***Non-OperatingIncome, net***

Our non-operatingincome, net increased to $27,959 in the second quarter of 2006 from income of$3,733 in the second quarter of 2005. Our non-operating income, net increased to $25,488 in the first

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six months of 2006from income of $11,867 in the first six months of 2005.  The increase in our non-operating income, netwas primarily due to the following factors:

·                  *Interest Expense, net*: Net interest expense was $8,976 and$15,892 for the second quarter and first six months of 2006, respectively,compared with $4,607 and $8,405 for the second quarter and first six months of2005, respectively, primarily due to both higher debt levels and interestrates.

·                  *Gains (Losses) from Investments, net*: We had gains frominvestments of $75 during the second quarter of 2006, primarily as a result ofgains within the Enterprise portfolio partially offset by fees.  We had losses from investments of $299 duringthe second quarter of 2005, primarily as a result of fees within the Enterpriseportfolio.  We had gains from investmentsof $2,748 during the first six months of 2006, primarily as a result of thesale of our investment in Allscripts Healthcare Solutions, Inc., offset bymanagement fees related to our Enterprise portfolio and write-downs related toother-than-temporary declines in the value of our venture capitalinvestments.  Gains from investments of$2,372 in the first six months of 2005 were primarily as a result of adivestiture of an interest we had in a German company.

·                  *Other Income, net*: Other income, net, increased by $28,221and $20,732 for the second quarter and first six months of 2006, respectively,primarily due to the receipt of $45,000 in the second quarter from VNU as aresult of the agreement to terminate the proposed merger (See Note 17 to ourCondensed Consolidated Financial Statements (Unaudited)).  This income was offset by net foreignexchange losses of $7,223 and $4,532 in the second quarter and first six monthsof 2006, respectively, compared with net foreign exchange gains of $9,596 and$20,832 in the second quarter and first six months of 2005, respectively.

***Taxes***

For the three monthsended June 30, 2006, our effective tax rate was primarily impacted byapproximately $21,400 of tax expense related to a reorganization of several ofour subsidiaries.  For the six monthsended June 30, 2006, our effective tax rate was reduced primarily due to afavorable U.S. partnership audit settlement of approximately $69,200 for thetax years 1998 through 2003 and a favorable U.S. audit settlement ofapproximately $17,600 for the tax years 2000 through 2003.  Also in the first half 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 primarily in the first quarter of 2006 relatedto disputes between the Company and NMR, on the one hand, and Donnelley andcertain of its former affiliates on the other hand, as to proper interpretationof, and allocation of tax liabilities under, the 1996 Spin-Off agreements (SeeNote 8 to our Condensed Consolidated Financial Statements (Unaudited)).

For the six months endedJune 30, 2005, our effective tax rate was reduced primarily due to a favorablenon-U.S. audit settlement of approximately $29,300.  For the six months ended June 30, 2005, theeffective tax rate was also impacted by $42,800 of tax expense related to thedecision  to repatriate approximately$647,000 of foreign earnings back to the U.S. during 2005 under the AmericanJobs Creation Act of 2004 (“AJCA”).  Inthe first quarter of 2005, $67,100 of tax expense

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was recorded related to the AJCA, of which $24,300 wasreversed in the second quarter of 2005 primarily as a result of a technicalcorrection passed by Congress to the AJCA.

## For all periods presented, our effective tax rate was reduced as aresult of global tax planning initiatives. While we intend to continue to seek global tax planning initiatives,there can be no assurance that we will be able to successfully identify andimplement such initiatives to reduce or maintain our overall tax rate.

## **OperatingResults by Geographic Region**

The following representsselected geographic information for the regions in which we operate for thethree and six months ended June 30, 2006 and 2005:

 
| ** **                             | ** ** | **Americas  (1)** | ** ** | **Europe  (2)** | ** ** | **Asia Pacific  (3)** | ** ** | **Corporate &  Other** | ** ** | **Total  IMS** | ** ** |
|----------------------------------------|------------|-------------------|------------|-----------------|------------|----------------------------|------------|---------------------------------|------------|----------------|------------|
| **Three  months ended June 30, 2006:** |       |              |       |            |       |                       |       |                            |       |           |       |
| Operating Revenue (4)                  |       | $                 | 218,566    |            | $          | 202,944                    |       | $                               | 64,710     |           | —     |   | $ | 486,220 |   |
| Operating Income (Loss) (5)            |       | $                 | 72,523     |            | $          | 34,631                     |       | $                               | 27,354     |           | $          | (28,182 | ) | $ | 106,326 |   |
| **Six  months ended June 30, 2006:**   | ** ** | ** **        | ** ** | ** **      | ** ** | ** **                 | ** ** | ** **                      | ** ** | ** **     | ** ** |
| Operating Revenue (4)                  |       | $                 | 425,645    |            | $          | 377,796                    |       | $                               | 128,933    |           | —     |   | $ | 932,374 |   |
| Operating Income (Loss) (5)            |       | $                 | 145,797    |            | $          | 52,640                     |       | $                               | 54,953     |           | $          | (50,328 | ) | $ | 203,062 |   |
| **Three  months ended June 30, 2005:** |       |              |       |            |       |                       |       |                            |       |           |       |
| Operating Revenue (4)                  |       | $                 | 189,027    |            | $          | 186,734                    |       | $                               | 57,521     |           | —     |   | $ | 433,282 |   |
| Operating Income (Loss) (5)            |       | $                 | 70,880     |            | $          | 30,747                     |       | $                               | 25,671     |           | $          | (24,001 | ) | $ | 103,297 |   |
| **Six  months ended June 30, 2005:**   | ** ** | ** **        | ** ** | ** **      | ** ** | ** **                 | ** ** | ** **                      | ** ** | ** **     | ** ** |
| Operating Revenue (4)                  |       | $                 | 365,577    |            | $          | 362,340                    |       | $                               | 116,349    |           | —     |   | $ | 844,266 |   |
| Operating Income  (Loss) (5)           |       | $                 | 136,283    |            | $          | 48,819                     |       | $                               | 53,946     |           | $          | (38,879 | ) | $ | 200,169 |   |

 

**Notes to Geographic Financial Information:**

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

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

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

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

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

***Americas Region***

Operatingrevenue growth in the Americas region was 15.6% and 16.4% in the second quarterand first six months of 2006, respectively, compared to the second quarter andfirst six months of 2005.  Excluding theeffect of foreign currency translations, operating revenue grew 14.4% and15.3%,

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respectively,primarily due to strong performance in consulting and services within thelaunch and brand management, managed care and other business lines andcontinued overall strength of the sales force effectiveness business line, aswell as acquisitions.

Operatingincome in the Americas region grew 2.3% and 7.0% in the second quarter andfirst six months of 2006, respectively, compared to the second quarter andfirst six months of 2005.  The operatingincome growth reflects revenue growth in the region and foreign currencytranslations, partially offset by the adoption of SFAS 123R, increased cost ofdata, investment in consulting capabilities, and costs associated withacquisitions.  Excluding the effect offoreign currency translations, operating income grew by 1.1% and 5.9%, respectively.  Excluding the effect of SFAS 123R, afteradjusting for currency, operating income grew 6.2% and 8.5%, respectively, inthe Americas region.

***Europe Region***

Operating revenue increased in the Europe region by8.7% and 4.3% in the second quarter and first six months of 2006, compared tothe second quarter and first six months of 2005.  Excluding the effect of foreign currencytranslations, operating revenue grew 8.2% and 8.1%, respectively, primarily dueto the strong performance of our SFE and Launch and Brand Management offeringsand growth in of our portfolio optimization information sales.

Operatingincome in the Europe region increased by 12.6% and 7.8% in the second quarterand first six months of 2006, respectively, compared to the second quarter andfirst six months of 2005.  Excluding theeffect of foreign currency translations, operating income grew by 8.2% and7.9%, respectively.  Excluding the effectof SFAS 123R, after adjusting for currency, operating income grew 20.4% and15.6%, respectively, in the Europe region, primarily due to increased revenueand a decrease in our production costs as a result of the fourth quarter 2004severance actions.

***Asia Pacific Region***

Operating revenue in the Asia Pacific region increased12.5% and 10.8%, respectively, in the second quarter and first six months of2006, compared to the second quarter and first six months of 2005, primarilydue to our sales force effectiveness offering in Japan and consulting andservices in the rest of the region, partially offset by foreign currencytranslations.  Excluding the effect offoreign currency translations, operating revenue grew 16.6% and 16.9%,respectively.

Operating income in the Asia Pacific region increased by6.6% and 1.9% in the second quarter and first six months of 2006, respectively,compared to the second quarter and first six months of 2005, primarily due toforeign currency translations and the adoption of SFAS 123R.  Excluding the effect of foreigncurrency translations, operating income grew by 11.0% and 8.2%,respectively.  Excluding the effect ofSFAS 123R, after adjusting for currency, operating income grew by 13.8% and9.6% in the Asia Pacific region, primarily due to increased revenue offset byincreased costs related to data and production support and investments inconsulting capabilities.

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

We operate globally,deriving a significant portion of our operating income from non-U.S.operations.  As a result, fluctuations inthe value of foreign currencies relative to the U.S. dollar may increase thevolatility of U.S. dollar operating results. We enter into foreign currency forward contracts to partially offset theeffect of currency fluctuations.  In2006, foreign currency translation increased U.S. dollar revenue growth byapproximately 0.2 percentage points in the second quarter of 2006 and decreasedU.S. dollar revenue growth by approximately 2.0 percentage points in the firstsix months of 2006, while the impact on operating income growth was anapproximate increase of 1.1 percentage points in the second quarter of 2006 andan approximate decrease of 0.8 percentage points in the first six months of2006.

Non-U.S.monetary assets are 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 charged or credited to Cumulativetranslation adjustment in the Condensed Consolidated Statements of Financial Position(Unaudited).  The effect of exchange ratechanges during the first six months of 2006 increased the U.S. dollar amount ofCash and cash equivalents by $363.

***Liquidityand Capital Resources***

Our cash and cashequivalents decreased $212,579 during the first six months of 2006 to $150,364at June 30, 2006 compared to $362,943 at December 31, 2005.  The decrease reflects cash provided byoperating activities of $108,083, offset by cash used in investing activities of $75,346 andfinancingactivities of $245,679.

We currentlyexpect that we will use 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 $99,000 to $106,000 during 2006 for software development andcapital expenditures);

·                  acquisitions;

·                  sharerepurchases, including an estimated payment of approximately $18,000 as finalsettlement of our current accelerated share repurchase program (“ASR”) (seeNote 13 to our Condensed Consolidated Financial Statements (Unaudited));

·                  dividendsto our shareholders (we expect 2006 dividends will be $0.12 per share or approximately$24,000);

·                  paymentsfor tax-related matters, including the D&B Legacy Tax Matters discussedfurther in Note 8 to our Condensed Consolidated Financial Statements(Unaudited).  Payments for certain of theD&B Legacy Tax Matters could be up to approximately $43,500 prior to June30, 2007; and

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·                  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$7,300 in 2006, in addition to approximately $10,500 paid in January 2006).

Net cash provided byoperating activities amounted to $108,083 for the six months ended June 30,2006, an increase of cash provided of $42,170 over the comparable period in2005.  The increase relates primarily tohigher net income and lower funding of prepaid expenses and accrued and othercurrent liabilities during the six months ended June 30, 2006.

Netcash used in investing activities amounted to $75,346 for the six months endedJune 30, 2006, a decrease in cash used of $11,625 over the comparable period in2005.  The decrease relates primarily tolower payments for acquisitions during the first six months of 2006 as comparedto the first six months of 2005, partially offset by proceeds from the sale ofour investment in TriZetto during the first quarter of 2005 (see Note 7 of theCondensed Consolidated Financial Statements (Unaudited)), higher capitalexpenditures and computer software additions, and a reduction in short-termmarketable security investments.

Netcash used in financing activities amounted to $245,679 for the six months endedJune 30, 2006, an increase of $230,927 over the comparable period in 2005.  This increase in cash used was primarily dueto an increase of $580,619 in purchases of our stock during the first sixmonths of 2006 compared to the first six months of 2005, partially offset by anincrease of $354,710 in related debt during the first six months of 2006compared to the first six months of 2005. Refer to the Stock Repurchase Programs and Debt sections for furtherinformation on our variance between the first six months of 2006 and 2005.

Our financing activitiesinclude cash dividends we paid of $0.03 and $0.02 per share quarterly for 2006and 2005, respectively, which amounted to $12,142 and $9,119 during the firstsix months of 2006 and 2005, respectively. The payments and level of cash dividends made by us are subject to thediscretion of our Board of Directors. Any future dividends, other than the $0.03 per share dividend for thethird quarter of 2006, which was declared by our Board of Directors in July2006, will be based on, and affected by, a number of factors, including ouroperating results and financial requirements.

Prior to the adoption ofSFAS 123R, we presented all tax benefits of deductions resulting from theexercise of stock options as operating cash flows in the Statement of CashFlows.  Beginning on January 1, 2006, wechanged our cash flow presentation in accordance with SFAS 123R which requiresthe cash flows resulting from the tax benefits resulting from tax deductions inexcess of the compensation cost recognized for those options (excess taxbenefits) to be classified as financing cash flows.

**Taxand Other Contingencies**

We are exposed to certain known tax and othercontingencies that are material to our investors.  The facts andcircumstances surrounding these contingencies and a discussion of their effecton us are included in Note 8 to our Condensed Consolidated Financial Statements(Unaudited) for the period

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endedJune 30, 2006.  We do not know of anymaterial tax or other contingencies, other than those described in Note 8 toour Condensed Consolidated Financial Statements (Unaudited).

These contingencies may have a material effect onour liquidity, capital resources or results of operations.  Althoughwe have established reserves for D&B Legacy Tax Matters in accordance withSFAS No. 5, “Accounting for Contingencies,” the actual liability may exceed theamount of the reserve.  We have notestablished any reserves in respect of the other contingencies other than thosediscussed in Note 8 of our Notes to Condensed Consolidated Financial Statements(Unaudited).  In addition, even where our reserves are adequate, theincurrence of any of these liabilities may have a material effect on ourliquidity and the amount of cash available to us for other purposes.

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.

**StockRepurchase Programs**

Our share repurchaseprogram has been developed to buy opportunistically, when we believe that ourshare price provides us with an attractive use of our cash flow and debtcapacity.

On January 25, 2006, theBoard of Directors authorized a stock repurchase program to buy up to 30,000shares.  As of June 30, 2006, 11,374shares remained available for repurchase under the January 2006 program.

On November 16, 2005, the Board of Directorsauthorized a stock repurchase program to buy up to 10,000 shares.  This program was completed in February 2006at a total cost to date of $251,620.  Thefinal total cost will be determined upon completion of the ASR settlementperiod as described below.

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

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

During the first half of2006, we repurchased 29,000 shares of outstanding Common Stock under theseprograms at a total cost of $728,564, including the repurchase of 25,000 shareson January 30, 2006 pursuant to an ASR. The ASR agreement provides for the final settlement of the contract ineither cash or additional shares of our Common Stock at our solediscretion.  Our final settlement amountwill increase (decrease) based on an increase (decrease) in our share priceover the settlement period, and will occur no later than August 7, 2006.  We currently estimate a payment ofapproximately $18,000 as final settlement, which will be recorded as anadditional cost to purchase treasury stock.

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During 2005, werepurchased approximately 10,213 shares of outstanding Common Stock under theseprograms at a total cost of $246,507.

Shares acquired throughour repurchase programs described above are open-market purchases or privatelynegotiated transactions in compliance with Securities and Exchange CommissionRule 10b-18, with the exception of purchases pursuant to the ASR.

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

**Debt     **

In recent years, we haveincreased debt levels to balance appropriately the objective of generating anattractive cost of capital with providing us a reasonable amount of financialflexibility.  At June 30, 2006, our debttotaled $1,050,533, and management does not believe that this level of debtposes a material risk to us due to the following factors:

·                  in each of thelast three years, we have generated strong net cash provided by operatingactivities in excess of $300,000;

·                  at June 30,2006, we had $150,364 in worldwide cash and cash equivalents;

·                  at June 30,2006, we had $291,632 of unused debt capacity under our existing bank creditfacilities; and

·                  we believe thatwe have the ability to obtain additional debt capacity outside of our existingdebt arrangements.

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The following table summarizes our long-term debt atJune 30, 2006 and December 31, 2005:
| ** **                                                                                                                                       | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| 4.6% Private  Placement Note, principal payment of $150,000 due January 2008, net of  interest rate swaps of $(3,630) and $(2,710), respectively |       | $                       | 146,370    |                        | $          | 147,290 |   |
|                                                                                                                                             |       |                    |       |                        |       |
| 5.55% Private  Placement Notes, principal payment of $150,000 due April 2016                                                                     |       | $                       | 150,000    |                        | —     |   |
|                                                                                                                                             |       |                    |       |                        |       |
| 1.70% Private  Placement Note, principal payment of 34,395,000 Japanese Yen due January 2013                                                     |       | $                       | 295,795    |                        | —     |   |
|                                                                                                                                             |       |                    |       |                        |       |
| Revolving Credit  Facility:                                                                                                                      |       |                    |       |                        |       |
| Japanese Yen denominated borrowings at average  floating rates of approximately 0.50%                                                            |       | $                       | 79,807     |                        | 371,924    |   |
| Swiss Franc denominated borrowings at average  floating rates of approximately 1.76%                                                             |       | $                       | 99,361     |                        | 92,217     |   |
| U.S. Dollar denominated borrowings at average  floating rates of approximately 5.53%                                                             |       | $                       | 229,200    |                        | —     |   |
|                                                                                                                                             |       |                    |       |                        |       |
| Bank Term Loan,  principal payment of $50,000 due June, 2009 at average floating rate of  approximately 5.70%                                    |       | $                       | 50,000     |                        | —     |   |
|                                                                                                                                             |       |                    |       |                        |       |
| Total Long-Term Debt                                                                                                                             |       | $                       | 1,050,533  |                        | $          | 611,431 |   |

 

InJune 2006, we closed a $50,000 three year term loan with a bank.  The term loan allows us to borrow at afloating rate with a lower borrowing margin than our revolving credit facility,and provides us with an option to extend the term up to an additional twoyears.  We used the proceeds to refinanceexisting debt borrowed 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 January2006.

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 inJapan.

In April 2004, we enteredinto a $700,000 revolving credit facility with a syndicate of 12 banks (the “UnsecuredFacility”).  The Unsecured Facilityreplaced our lines of credit with several domestic and internationalbanks.  On March 9, 2005, we renegotiatedwith the syndicate of 12 banks to amend and restate the Unsecured Facility (the“Amended and Restated Facility”).  Theterms of the Amended and Restated Facility extended the maturity of thefacility in its entirety to a term of five years, maturing March 2010, reducedthe borrowing margins and increased subsidiary borrowing limits.

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Total borrowings underthese existing lines were $408,368 and $464,141 at June 30, 2006 and December31, 2005, respectively, all of which were classified as long-term.  We define long-term lines as those where thelines are non-cancelable for more than 365 days from the balance sheet date bythe financial institutions except for specified, objectively measurableviolations of the provisions of the agreement. In general, rates for borrowing under the Amended and Restated Facilityare LIBOR plus 40 basis points and can vary based on our Debt to EBITDA ratio.  The weighted average interest rates for our lineswere 3.66% and 0.62% at June 30, 2006 and December 31, 2005, respectively.  In addition, we are required to pay acommitment fee on any unused portion of the facilities of 0.1%.  At June 30, 2006, we had approximately$291,632 available under our existing bank credit facilities. In July 2006, weentered into a $1,000,000 revolving credit facility with a syndicate of 12banks replacing our existing $700,000 revolving credit facility.  The terms of the new facility extended thematurity date to July 2011, reduced borrowing margins, increased subsidiaryborrowing limits and changed certain covenants. We used the proceeds to refinance existing debt.

In January 2003, weclosed a private placement transaction pursuant to which we issued $150,000 offive-year debt to several highly rated insurance companies at a fixed rate of4.60%.  We used the proceeds to pay downshort-term debt.  We also swapped$100,000 of our fixed rate debt to floating rate based on six-month LIBOR plusa margin of approximately 107 basis points. We accounted for these swaps as fair value hedges under the provisionsof SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.”  We determined the fair values based onestimated prices quoted by financial institutions.  The fair values of these swaps were $(3,630)and $(2,710) as of June 30, 2006 and December 31, 2005, respectively.

In March and April 2002,we entered into interest rate swaps on a portion of our variable rate debtportfolio.  These swaps matured in March2005 and April 2006.  We accounted forthe interest rate swaps as cash flow hedges and recorded any changes in fairvalue in Other Comprehensive Income.  Wedetermined the fair values based on estimated prices quoted by financialinstitutions.  The fair values of theseswaps were $(100) as of December 31, 2005.

Our financingarrangements provide for certain covenants and events of default customary forsimilar instruments, including in the case of our main bank arrangements,the  private placement transactions, andthe term loan, covenants to maintain specific ratios of consolidated totalindebtedness to EBITDA and of EBITDA to certain fixed charges.  At June 30, 2006, we were in compliance with these financial debtcovenants.

**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 leveraging prior investmentsin technology and process improvements, we committed to a plan to eliminateselected positions involved primarily in production and development.  The plan resulted in a charge for one-timetermination benefits relating to a headcount reduction of approximately 490employees located primarily in Europe and the U.S.  These severance benefits werecalculated pursuant to the terms of established employee protection plans, inaccordance with local statutory minimum requirements or individual employeecontracts, as applicable.

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All of the 2004 fourthquarter charge will be settled in cash. Substantially all termination actions under this plan were completed byJune 30, 2006.

|                              | ** ** | **Severance Related  Reserves** | ** ** |
|------------------------------|------------|--------------------------------------|------------|
| Charge at  December 31, 2004 |       | $                                    | 36,890     |   |
| 2004 utilization             |       | (452                                 | )          |
| 2005 utilization             |       | (24,052                              | )          |
| 2006 utilization             |       | (9,673                               | )          |
| Balance at June  30, 2006    |       | $                                    | 2,713      |   |

 

Wecurrently expect that a substantial portion of the cash outlays relating to the2004 fourth quarter charge will be applied against the remaining June 30, 2006balance during the remainder of 2006.

SeeNote 15 of our Condensed Consolidated Financial Statements (Unaudited) for adescription of our 2001 and 2003 restructuring programs.

Weexpect that future results will benefit from the 2001 and 2003 restructuringcharges to the extent of the contract-related charges and asset write-downsprimarily through 2007.  Our severanceactions in the 2001 and 2003 programs related to a shifting of resources aroundthe Company.  The benefits from the 2004severance actions will be partially offset by headcount additions in selectedlocations.  The benefits will be realizedprimarily in Operating costs and Selling and administrative expense, with apartial year of benefit realized in 2005 and a full year of benefit expected tobe realized in 2006.  For the 2001 and2003 charges the income statement lines that will be impacted in future periodsare Operating costs for the contract-related charges and Depreciation andamortization related to the asset write-downs. However, we do not expect a material impact on future cash flows due tothe fact that we are still contractually obligated to continue to make paymentsunder impaired contracts.

**Recently Issued AccountingStandards**

In February 2006, the Financial Accounting Standards Board (“FASB”)issued Statement of Financial Accounting Standards (“SFAS”) No. 155, “Accountingfor Certain Hybrid Financial Instruments — an amendment of FASB Statements No.133 and 140.”  This statement clarifiesthe application of SFAS No. 133, “Accounting for Derivative Instruments and HedgingActivities,” to beneficial interests in securitized financial assets andimproves the consistency of accounting for similar financial instruments. Thisstatement also amends SFAS No. 140, “Accounting for Transfers and Servicing ofFinancial Assets and Extinguishments of Liabilities — a replacement of FASBStatement No. 125,” to eliminate the prohibition on a qualifyingspecial-purpose entity from holding a derivative financial instrument thatpertains to a beneficial interest other than another derivative financialinstrument.  This statement is effectivefor all financial instruments acquired or issued after the beginning of anentity’s first fiscal year that begins after September 15, 2006.  We are currently evaluating this statement todetermine any potential impact that it may have on our financial results.

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicingof Financial Assets — an amendment of FASB Statement No. 140.” This statementamends SFAS 140 and clarifies the

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accounting for, measurement of, anddisclosure of servicing assets and servicing liabilities.  This statement should be adopted as of thebeginning of an entity’s first fiscal year that begins after September 15,2006, but earlier adoption is permitted. We are currently evaluating this statement to determine any potentialimpact that it may have on our financial results.

InJune 2006, the FASB issued FASB Interpretation No. 48, “Accounting forUncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN48”).  This interpretation prescribes arecognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return. It also provides guidance on derecognition, classification,interest and penalties, accounting in interim periods, disclosure, andtransition.  This interpretation iseffective for fiscal years beginning after December 15, 2006, but earlieradoption is permitted.  We are currentlyevaluating this interpretation to determine any potential impact that it mayhave on our financial results.

***Forward-LookingStatements and Risk Factors***

This Quarterly Report onForm 10-Q, as well as information included in oral statements or other writtenstatements made or to be made by us, contain statements that, in our opinion,may constitute “forward-looking statements” within the meaning of the PrivateSecurities Litigation Reform Act of 1995. The words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “foresee,”“likely,” “project,” “estimate,” “will,” “may,” “should,” “future,” “predicts,”“potential,” “continue” and similar expressions identify these forward-lookingstatements, which appear in a number of places in this Quarterly Report andinclude, but are not limited to, all statements relating to plans for futuregrowth and other business development activities as well as capitalexpenditures, financing sources, dividends and the effects of regulation andcompetition, foreign currency conversion and all other statements regarding ourintent, plans, beliefs or expectations or those of our directors orofficers.  Investors are cautioned thatsuch forward-looking statements are not assurances for future performance orevents and involve risks and uncertainties that could cause actual results anddevelopments to differ materially from those covered in such forward-lookingstatements.  These risks anduncertainties include, but are not limited to:

·                  risks associated with operating on aglobal basis, including fluctuations in the value of foreign currenciesrelative to the U.S. dollar, and the ability to successfully hedge such risks —we derived approximately 64% of our operating revenue in 2005 from non-U.S.operations;

·                  to the extent we seek growth throughacquisitions, alliances or joint ventures, the ability to identify, consummateand integrate acquisitions, alliances and joint ventures on satisfactory terms;

·                  our ability to develop new oradvanced technologies, including sophisticated information systems, softwareand other technology used to deliver our products and services and to do so ona timely and cost-effective basis, and the exposure to the risk of obsolescenceor incompatibility of these technologies with those of our customers or suppliers;

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

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·                  our ability to successfully maintainhistoric effective tax rates;

·                  competition, particularly in themarkets for pharmaceutical information;

·                  regulatory, legislative andenforcement initiatives to which we are or may become subject, relatingparticularly to tax and to patient privacy and the collection and disseminationof data and specifically, the use of anonymized patient-specific information andprescriber information, which we anticipate to be an increasingly importanttool in the design, development and marketing of pharmaceuticals;

·                  regulatory, legislative andenforcement initiatives to which our customers in the pharmaceutical industryare or may become subject restricting the prices that may be charged forsubscription or other pharmaceutical products or the manner in which suchproducts may be marketed or sold;

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

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

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

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

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

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

Consequently, all of theforward-looking statements we make in this document are qualified by theinformation contained herein, including, but not limited to, the informationcontained under this heading and our Condensed Consolidated FinancialStatements (Unaudited) and notes thereto for the three and six months endedJune 30, 2006 and by the material set forth under the headings “Business” and “RiskFactors” in our Annual Report on Form 10-K for the year ended December 31,2005.  We are under no obligation topublicly release any revision to any forward-looking statement contained orincorporated herein to reflect any future events or occurrences.

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

Informationin response to this Item is set forth in “Note 10. Financial Instruments” inthe Notes to the Condensed Consolidated Financial Statements (Unaudited).

**Item 4.Controls and Procedures**

(a)          Evaluation of Disclosure Controls and Procedures

The Company maintainsdisclosure controls and procedures that are designed to ensure that informationrequired to be disclosed in the reports that the Company files or submits tothe SEC under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”), is recorded, processed, summarized and reported within the time periodsspecified in the SEC’s rules and forms, and that such information isaccumulated and communicated to the Company’s management, including its ChiefExecutive Officer and Chief Financial Officer, as appropriate, to allow timelydecisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures,management recognized that any controls and procedures, no matter how welldesigned and operated, can provide only reasonable assurance of achieving thedesired control objectives, as the Company’s disclosure controls and proceduresare designed to do.  Thus, managementnecessarily was required to apply its judgment in evaluating the cost-benefitrelationship of possible controls and procedures.

The Company’s Chief Executive Officer and****Chief Financial Officer have evaluated theeffectiveness of the Company’s disclosure controls and procedures (as such termis defined in Rules 13a-14c and 15d-14c under the Exchange Act) as of June 30,2006 (the “Evaluation Date”).  Based onsuch evaluation, such officers have concluded that, as of the Evaluation Date,the Company’s disclosure controls and procedures are effective in alerting themon a timely basis to material information relating to the Company (includingits consolidated subsidiaries) required to be included in the Company’speriodic filings under the Exchange Act.

(b)         Changes in Internal Control over Financial Reporting

There have been nochanges in the Company’s internal control over financial reporting thatoccurred during the period covered by this report that have materiallyaffected, or are reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

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**PART II.  OTHER INFORMATION**

**Item 1. LegalProceedings**

Information in responseto this Item is incorporated by reference to the information set forth in “Note8. Contingencies” in the Notes to the Condensed Consolidated FinancialStatements (Unaudited).

**Item 2.  Changes in Securities, Use of Proceeds andIssuer Purchases of Equity Securities**
| ** **       | **Period** | ** ** | ** ** | **Total Number  of Shares  Purchased** | ** ** | **Average  Price Paid  per Share** | ** ** | **Total Number of Shares  Purchased Under  Publicly Announced  Programs** | ** ** | **Maximum Number of   Shares that May Yet Be  Purchased Under the  Programs**(1) | ** ** |
|------------------|------------|------------|------------|--------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------|------------|
|             |       |       |       |                                             |       |                                         |       |                                                                                               |       |
| April 1-30, 2006 |       | —     |       | —                                           |       | —                                       |       | 11,374,200                                                                                         |       |
| May 1-31, 2006   |       | —     |       | —                                           |       | —                                       |       | 11,374,200                                                                                         |       |
| June 1-30, 2006  |       | —     |       | —                                           |       | —                                       |       | 11,374,200                                                                                         |       |
| **Total**        |       |       |       |                                             |       |                                         |       | 11,374,200                                                                                         |       |

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(1)                In January 2006, the Board of Directorsauthorized a stock repurchase program to buy up to 30,000,000 shares.  As of June 30, 2006, 11,374,200 sharesremained available for repurchase under the January 2006 program.  Unless terminated earlier by resolution ofthe Company’s Board of Directors, this program will expire when the Company hasrepurchased all shares authorized for repurchase thereunder.  See Note 13 of our Notes to CondensedConsolidated Financial Statements (Unaudited) for further details.

**Item 4. Submissionof Matters to a Vote of Security Holders**

The Annual Meeting ofShareholders of IMS Health Incorporated was held on May 5, 2006.

The following nomineesfor director named in the Proxy Statement dated March 24, 2006 were elected atthe Meeting for a three-year term expiring in 2009 by the votes indicated:

|                      | ** ** | **For**     | ** ** | **Withheld** | ** ** |
|----------------------|------------|-------------|------------|--------------|------------|
| John P. Imlay, Jr.   |       | 167,742,091 |       | 3,819,873    |       |
| Robert J. Kamerschen |       | 157,641,659 |       | 13,920,394   |       |
| H. Eugene Lockhart   |       | 161,908,315 |       | 9,653,738    |       |

 

The followingdirectors continue to serve terms expiring in 2007: James D. Edwards andWilliam C. Van Faasen.  The followingdirectors continue to serve terms expiring in 2008: David R. Carlucci,Constantine L. Clemente, Kathryn E. Giusti and M. Bernard Puckett.

The appointment of PricewaterhouseCoopers LLP as Independent RegisteredPublic Accounting Firm was approved by the following vote:

|                  | ** ** | **For**     | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| Number of Shares |       | 168,705,091 |       | 1,486,639   |       | 1,370,322   |       |

 

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The Shareholder Proposal regarding the approval of theamendment and restatement of the 1998 IMS Health Incorporated Employees’ StockIncentive Plan was approved by the following vote:

|                  | ** ** | **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker Non-Votes** | ** ** |
|------------------|------------|------------|------------|-------------|------------|-------------|------------|---------------------------|------------|
| Number of Shares |       | 92,510,987 |       | 44,673,431  |       | 1,678,529   |       | 32,699,106                |       |

 

The Shareholder Proposal regarding the Shareholder Rights Plan was notapproved by the following vote:

 

|                  | ** ** | **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker Non-Votes** | ** ** |
|------------------|------------|------------|------------|-------------|------------|-------------|------------|---------------------------|------------|
| Number of Shares |       | 25,867,257 |       | 110,988,537 |       | 1,934,109   |       | 32,772,110                |       |

 

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**PARTII.  OTHER INFORMATION (continued)**

**Item 6.  Exhibits**

(a)                           Exhibits:

 
| Exhibit  Number | ** ** | **Description  of Exhibits**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|-----------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1            |       | Summary Sheet for Non-Employee Director Remuneration  as in effect at April 18, 2006 (incorporated by reference to Exhibit 10.3 to  the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31,  2006 filed on May 5, 2006).                                                                                                                                                                                                                                                                               |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.2            |       | Master Note Purchase Agreement, dated April 27,  2006, among IMS Health Incorporated, The Northwestern Mutual Life Insurance  Company, The Northwestern Mutual Life Insurance Company for its Group Annuity  Separate Account, Metropolitan Life Insurance Company, MetLife Investors  Insurance Company, MetLife Investors USA Insurance Company, and The Travelers  Life and Annuity Reinsurance Company (incorporated by reference to Exhibit  99.1 to the Company’s Current Report on Form 8-K, filed on May 2, 2006). |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.3            |       | 1998 IMS Health Incorporated Employees’ Stock  Incentive Plan (As amended and restated effective May 5, 2006)  (incorporated by reference to Appendix B to the IMS Health Incorporated Proxy  Statement on Schedule 14A for the 2006 Annual Meeting of Shareholders, File  No. 001-14049).                                                                                                                                                                                                                       |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.4            |       | $50,000,000 Credit Agreement between IMS Health  Incorporated and Fortis Capital Corp., dated as of June 27, 2006  (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on  Form 8-K, filed on June 30, 2006).                                                                                                                                                                                                                                                                                  |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 31.1            |       | CEO 302 Certification pursuant to Rule 13a-14(a)/15d-14(a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 31.2            |       | CFO 302 Certification pursuant to Rule  13a-14(a)/15d-14(a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 32.1            |       | Joint CEO/CFO Certification Required Under Section  906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                                       |

 

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**SIGNATURES**

Pursuant to 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/ Nancy E.  Cooper             |
| Date: August 4,  2006 | Nancy E. Cooper                  |
|                  | Senior Vice  President and       |
|                  | Chief Financial  Officer         |
|                  | (principal  financial officer)   |
|                  | /s/ Leslye G.  Katz              |
| Date: August 4,  2006 | Leslye G. Katz                   |
|                  | Vice President,  Controller      |
|                  | (principal  accounting officer)  |

 

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**EXHIBIT INDEX**
| **Exhibit Number** | ** ** | **Description of Exhibits**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | ** ** | ** ** |
|--------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| 10.1               |       | Summary Sheet for  Non-Employee Director Remuneration as in effect at April 18, 2006  (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report  on Form 10-Q for the quarter ended March 31, 2006 filed on May 5,  2006).                                                                                                                                                                                                                                                                                     |
| 10.2               |       | Master Note Purchase  Agreement, dated April 27, 2006, among IMS Health Incorporated, The  Northwestern Mutual Life Insurance Company, The Northwestern Mutual Life  Insurance Company for its Group Annuity Separate Account, Metropolitan Life  Insurance Company, MetLife Investors Insurance Company, MetLife Investors USA  Insurance Company, and The Travelers Life and Annuity Reinsurance Company  (incorporated by reference to Exhibit 99.1 to the  Company’s Current Report on Form 8-K,  filed on May 2, 2006). |
| 10.3               |       | 1998 IMS Health  Incorporated Employees’ Stock Incentive Plan (As amended and restated  effective May 5, 2006) (incorporated by reference to Appendix B to the  IMS Health Incorporated Proxy Statement on Schedule 14A for the 2006 Annual  Meeting of Shareholders, File No. 001-14049).                                                                                                                                                                                                                              |
| 10.4               |       | $50,000,000  Credit Agreement between IMS Health Incorporated and Fortis Capital Corp.,  dated as of June 27, 2006 (incorporated by reference to Exhibit 10.1 to  the Company’s Current Report on Form 8-K, filed on June 30, 2006).                                                                                                                                                                                                                                                                                         |
| 31.1               |       | CEO 302 Certification  pursuant to Rule 13a-14(a)/15d-14(a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 31.2               |       | CFO 302 Certification  pursuant to Rule 13a-14(a)/15d-14(a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 32.1               |       | Joint CEO/CFO  Certification Required Under Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                                              |

 

 

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