**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

# **FORM 10-Q**

# ** **

**(Mark one)**

 
| **ý**                                                                                                                                                                                                                                                                                                                                                       | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                             |                                                                                          |
| **For the  quarterly period ended June 30, 2005**                                                                                                                                                                                                                                                                                                                |
|                                                                                                                                                                                                                                                                                                                                                             |                                                                                          |
| **OR**                                                                                                                                                                                                                                                                                                                                                           |
|                                                                                                                                                                                                                                                                                                                                                             |                                                                                          |
| **o**                                                                                                                                                                                                                                                                                                                                                            | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                                                                                                                                                             |                                                                                          |
| **For the transition period  from                            to                           ** |

 

**Commissionfile number 001-14049**

 

**IMSHealth Incorporated**

(Exact name ofregistrant as specified in its charter)

 
| **Delaware**                              | ** ** | **06-1506026**                        |
|-------------------------------------------|------------|---------------------------------------|
| (State of  Incorporation)                 |       | (I.R.S. Employer  Identification No.) |
|                                      |       |                                  |
| **1499  Post Road, Fairfield, CT**        | ** ** | **06824**                             |
| (Address of  principal executive offices) |       | (Zip Code)                            |

 

Registrant’s telephonenumber, including area code    **(203)319-4700**

 

**Not Applicable**

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

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySections 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes ý  No o  

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act).  Yes ý  No o

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date:

 

| **Title  of Class**                     | ** ** | **Shares Outstanding  At June 30, 2005** |
|-----------------------------------------|------------|------------------------------------------|
| Common Stock,  par value $.01 per share |       | 225,772,045                              |

 

 

----

 

**IMSHEALTH INCORPORATED**

 

**INDEX TOFORM 10-Q**

 
| **PART I. FINANCIAL INFORMATION**                                                                       |   |
|---------------------------------------------------------------------------------------------------------|--------|
| **Item 1. Financial Statements  (Unaudited)**                                                           | 3      |
| Condensed Consolidated  Statements of Financial Position  As of June 30, 2005 and December 31, 2004     | 3      |
| Condensed Consolidated  Statements of Income  Three Months Ended June 30, 2005 and 2004                 | 4      |
| Condensed Consolidated Statements of Income  Six Months Ended June 30, 2005 and 2004                    | 5      |
| Condensed Consolidated  Statements of Cash Flows  Six Months Ended June 30, 2005 and 2004               | 6      |
| Notes to Condensed  Consolidated Financial Statements                                                   | 7      |
| **Item 2. Management’s  Discussion and Analysis of Financial Condition and Results of Operations** | 30     |
| **Item 3. Quantitative and  Qualitative Disclosures About Market Risk**                                 | 46     |
| **Item 4. Controls  and Procedures**                                                                    | 46     |
| ** **                                                                                              |   |
| **PART II. OTHER  INFORMATION**                                                                         | 47     |
| **Item 1. Legal  Proceedings**                                                                          | 47     |
| ** **                                                                                              |   |
| **Item 2. Changes in Securities, Use of Proceeds and  Issuer Purchases of Equity Securities**           | 47     |
|                                                                                                    |   |
| **Item 4.  Submission of Matters to a Vote of Security Holders**                                        | 47     |
|                                                                                                    |   |
| **Item 6. Exhibits**                                                                                    | 48     |
|                                                                                                    |   |
| **SIGNATURES**                                                                                          | 49     |
| ** **                                                                                              |   |
| **EXHIBITS**                                                                                            | 50     |

 

2

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**PART I.FINANCIAL INFORMATION**

**Item 1.FINANCIAL STATEMENTS**

 

**IMS HEALTH INCORPORATED**

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

*(Dollars and shares in thousands,except per share data)*

* *
| ** **                                                                                                                            | ** ** | **As of June 30,  2005** | ** **    | **As of December 31,  2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|---------------|------------------------------|------------|
| **Assets:**                                                                                                                           |       |                     | ** **    |                         |       |
| **Current  Assets:**                                                                                                                  |       |                     | ** **    |                         |       |
| Cash and cash  equivalents                                                                                                            | ** ** | **$**                    | **399,809**   | ** **                   | $          | 444,903 |   |
| Short-term  marketable securities                                                                                                     | ** ** | **—**               | ** **    | 15,053                       |       |
| Accounts  receivable, net of allowances of $6,328 and $8,270 in 2005 and 2004, respectively                                      | ** ** | **296,574**              | ** **    | 264,783                      |       |
| Other current  assets                                                                                                                 | ** ** | **201,200**              | ** **    | 211,780                      |       |
| **Total Current  Assets**                                                                                                             | ** ** | **897,583**              | ** **    | 936,519                      |       |
| Securities and  other investments                                                                                                     | ** ** | **8,326**                | ** **    | 7,915                        |       |
| Property, plant  and equipment, net of accumulated depreciation of $193,234 and $192,440 in  2005 and 2004, respectively              | ** ** | **137,497**              | ** **    | 145,214                      |       |
| Computer  software                                                                                                                    | ** ** | **232,995**              | ** **    | 230,021                      |       |
| Goodwill                                                                                                                              | ** ** | **350,163**              | ** **    | 302,229                      |       |
| Other assets                                                                                                                          | ** ** | **277,322**              | ** **    | 268,808                      |       |
| **Total  Assets**                                                                                                                     | ** ** | **$**                    | **1,903,886** | ** **                   | $          | 1,890,706 |   |
| **Liabilities,  Minority Interests and Shareholders’ Equity:**                                                                   |       |                     | ** **    |                         |       |
| **Current  Liabilities:**                                                                                                             |       |                     | ** **    |                         |       |
| Accounts payable                                                                                                                      | ** ** | **$**                    | **57,069**    | ** **                   | $          | 70,344 |   |
| Accrued and  other current liabilities                                                                                                | ** ** | **208,789**              | ** **    | 237,139                      |       |
| Accrued income  taxes                                                                                                                 | ** ** | **153,472**              | ** **    | 116,985                      |       |
| Short-term  deferred tax liability                                                                                                    | ** ** | **9,478**                | ** **    | 9,923                        |       |
| Deferred  revenues                                                                                                                    | ** ** | **120,572**              | ** **    | 119,730                      |       |
| **Total  Current Liabilities**                                                                                                        | ** ** | **549,380**              | ** **    | 554,121                      |       |
| Postretirement  and postemployment benefits                                                                                           | ** ** | **99,364**               | ** **    | 99,899                       |       |
| Long-term debt  (Note 9)                                                                                                              | ** ** | **710,407**              | ** **    | 626,670                      |       |
| Other  liabilities                                                                                                                    | ** ** | **214,105**              | ** **    | 252,326                      |       |
| **Total  Liabilities**                                                                                                                | ** ** | **$**                    | **1,573,256** | ** **                   | $          | 1,533,016 |   |
| **Commitments  and Contingencies (Note 8)**                                                                                           |       |                     | ** **    |                         |       |
| **Minority  Interests**                                                                                                               | ** ** | **$**                    | **99,708**    | ** **                   | $          | 101,976 |   |
|                                                                                                                                  |       |                     | ** **    |                         |       |
| **Shareholders’  Equity:**                                                                                                       |       |                     | ** **    |                         |       |
| Common Stock,  par value $.01, authorized 800,000 shares; issued 335,045 shares at June 30,  2005 and December 31, 2004, respectively | ** ** | **3,350**                | ** **    | 3,350                        |       |
| Capital in  excess of par                                                                                                             | ** ** | **471,144**              | ** **    | 477,768                      |       |
| Retained  earnings                                                                                                                    | ** ** | **2,170,482**            | ** **    | 2,056,079                    |       |
| Treasury stock,  at cost, 109,273 and 105,916 shares at June 30, 2005 and December 31, 2004,  respectively                            | ** ** | **(2,353,475**           | **)**         | (2,268,414                   | )          |
| Cumulative  translation adjustment                                                                                                    | ** ** | **(35,651**              | **)**         | 12,239                       |       |
| Minimum pension  liability adjustment, net of taxes of $11,129 at June 30, 2005 and December 31,  2004                           | ** ** | **(24,691**              | **)**         | (24,691                      | )          |
| Unrealized loss  on changes in fair value of cash flow hedges, net of tax                                                             | ** ** | **(235**                 | **)**         | (665                         | )          |
| Unrealized  (loss) gain on investments, net of tax                                                                                    | ** ** | **(2**                   | **)**         | 48                           |       |
| **Total  Shareholders’ Equity**                                                                                                  | ** ** | **$**                    | **230,922**   | ** **                   | $          | 255,714 |   |
| **Total  Liabilities, Minority Interests and Shareholders’ Equity**                                                              | ** ** | **$**                    | **1,903,886** | ** **                   | $          | 1,890,706 |   |

## ** **

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

 

3

----

 

## **IMSHEALTH INCORPORATED**

**CONDENSEDCONSOLIDATED STATEMENTS OF INCOME (Unaudited)**

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

 
| ** **                                                                                               | ** ** | **Three Months Ended  June 30,** | ** **  |
|----------------------------------------------------------------------------------------------------------|------------|----------------------------------|-------------|
| ** **                                                                                               | ** ** | **2005**                         | ** **  | **2004** | ** ** |
|                                                                                                     |       |                             | ** **  |   |   |
| **Operating  Revenue**                                                                                   | ** ** | **$**                            | **433,282** | ** ** | $ | 379,583 |   |
|                                                                                                     |       |                             | ** **  |   |   |
| Operating costs                                                                                          | ** ** | **189,503**                      | ** **  | 163,222 |   |
| Selling and  administrative expenses                                                                     | ** ** | **107,440**                      | ** **  | 91,576 |   |
| Depreciation and  amortization                                                                           | ** ** | **25,642**                       | ** **  | 22,317 |   |
| Merger costs  (Note 16)                                                                                  | ** ** | **7,400**                        | ** **  | — |   |
| **Operating  Income**                                                                                    | ** ** | **103,297**                      | ** **  | 102,468 |   |
| Interest income                                                                                          | ** ** | **2,392**                        | ** **  | 2,103 |   |
| Interest expense                                                                                         | ** ** | **(6,999**                       | **)**       | (4,162 | ) |
| Gains (losses)  from investments, net                                                                    | ** ** | **(299**                         | **)**       | 2,074 |   |
| Loss on issuance  of investees’ stock, net                                                          | ** ** | **—**                       | ** **  | (91 | ) |
| Other income  (expense), net                                                                             | ** ** | **8,639**                        | ** **  | (1,604 | ) |
| **Non-Operating  Income (Loss), Net**                                                                    | ** ** | **3,733**                        | ** **  | (1,680 | ) |
| Income before  provision for income taxes                                                                | ** ** | **107,030**                      | ** **  | 100,788 |   |
| Provision for  income taxes (Note 11)                                                                    | ** ** | **(13,851**                      | **)**       | (35,364 | ) |
| TriZetto equity  loss, net of income taxes of $196 for 2004                                              | ** ** | **—**                       | ** **  | (303 | ) |
| **Net  Income**                                                                                          | ** ** | **$**                            | **93,179**  | ** ** | $ | 65,121 |   |
|                                                                                                     |       |                             | ** **  |   |   |
| **Basic  Earnings Per Share of Common Stock**                                                            | ** ** | **$**                            | **0.41**    | ** ** | $ | 0.28 |   |
| ** **                                                                                               | ** ** | ** **                       | ** **  | ** ** |   |   |   |
| **Diluted  Earnings Per Share of Common Stock**                                                          | ** ** | **$**                            | **0.41**    | ** ** | $ | 0.27 |   |
| ** **                                                                                               | ** ** | ** **                       | ** **  | ** ** |   |   |   |
| Weighted average  number of shares outstanding – Basic                                              | ** ** | **225,863**                      | ** **  | 235,142 |   |
| Dilutive effect  of shares issuable as of period-end under stock option plans                            | ** ** | **3,429**                        | ** **  | 5,017 |   |
| Adjustment of  shares outstanding applicable to exercised and cancelled stock options during  the period | ** ** | **186**                          | ** **  | 137 |   |
| **Weighted  Average Number of Shares Outstanding – Diluted**                                        | ** ** | **229,478**                      | ** **  | 240,296 |   |

 

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

 

4

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## **IMSHEALTH INCORPORATED**

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

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

 
| ** **                                                                                               | ** ** | **Six Months Ended  June 30,** | ** **  |
|----------------------------------------------------------------------------------------------------------|------------|--------------------------------|-------------|
| ** **                                                                                               | ** ** | **2005**                       | ** **  | **2004** | ** ** |
|                                                                                                     |       |                           | ** **  |   |   |
| **Operating  Revenue**                                                                                   | ** ** | **$**                          | **844,266** | ** ** | $ | 741,159 |   |
|                                                                                                     |       |                           | ** **  |   |   |
| Operating costs                                                                                          | ** ** | **372,860**                    | ** **  | 315,910 |   |
| Selling and  administrative expenses                                                                     | ** ** | **213,518**                    | ** **  | 182,526 |   |
| Depreciation and  amortization                                                                           | ** ** | **50,319**                     | ** **  | 44,023 |   |
| Merger costs  (Note 16)                                                                                  | ** ** | **7,400**                      | ** **  | — |   |
| **Operating  Income**                                                                                    | ** ** | **200,169**                    | ** **  | 198,700 |   |
| Interest income                                                                                          | ** ** | **4,747**                      | ** **  | 3,065 |   |
| Interest expense                                                                                         | ** ** | **(13,152**                    | **)**       | (8,433 | ) |
| Gains from  investments, net                                                                             | ** ** | **2,372**                      | ** **  | 8,527 |   |
| Loss on issuance  of investees’ stock, net                                                          | ** ** | **—**                     | ** **  | (91 | ) |
| Other income,  net                                                                                       | ** ** | **17,900**                     | ** **  | 1,173 |   |
| **Non-Operating  Income, Net**                                                                           | ** ** | **11,867**                     | ** **  | 4,241 |   |
| Income before  provision for income taxes                                                                | ** ** | **212,036**                    | ** **  | 202,941 |   |
| Provision for  income taxes (Note 11)                                                                    | ** ** | **(88,514**                    | **)**       | (55,473 | ) |
| TriZetto equity  loss, net of income taxes of $820 for 2004                                              | ** ** | **—**                     | ** **  | (1,269 | ) |
| **Net  Income**                                                                                          | ** ** | **$**                          | **123,522** | ** ** | $ | 146,199 |   |
| ** **                                                                                               | ** ** | ** **                     | ** **  |   |   |
| **Basic  Earnings Per Share of Common Stock**                                                            | ** ** | **$**                          | **0.54**    | ** ** | $ | 0.62 |   |
|                                                                                                     |       |                           | ** **  |   |   |
| **Diluted  Earnings Per Share of Common Stock**                                                          | ** ** | **$**                          | **0.54**    | ** ** | $ | 0.61 |   |
| ** **                                                                                               | ** ** | ** **                     | ** **  |   |   |
| Weighted average  number of shares outstanding – Basic                                              | ** ** | **226,863**                    | ** **  | 235,074 |   |
| Dilutive effect  of shares issuable as of period-end under stock option plans                            | ** ** | **3,303**                      | ** **  | 4,901 |   |
| Adjustment of  shares outstanding applicable to exercised and cancelled stock options during  the period | ** ** | **319**                        | ** **  | 354 |   |
| **Weighted  Average Number of Shares Outstanding – Diluted**                                        | ** ** | **230,485**                    | ** **  | 240,329 |   |

 

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

 

5

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**IMS HEALTH INCORPORATED**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)**

*(Dollars in thousands)*

 
| ** **                                                                               | ** ** | **Six Months Ended June 30,** | ** **  |
|------------------------------------------------------------------------------------------|------------|-------------------------------|-------------|
| ** **                                                                               | ** ** | **2005**                      | ** **  | **2004** | ** ** |
| **Cash  Flows Provided by Operating Activities:**                                        |       |                          | ** **  |   |   |
| Net income                                                                               | ** ** | **$**                         | **123,522** | ** ** | $ | 146,199 |   |
| **Adjustments  to reconcile net income to net cash provided by operating activities:**   |       |                          | ** **  |   |   |
| Depreciation and  amortization                                                           | ** ** | **50,319**                    | ** **  | 44,023 |   |
| Bad debt expense                                                                         | ** ** | **1,707**                     | ** **  | 450 |   |
| Deferred income  taxes                                                                   | ** ** | **6,208**                     | ** **  | 32,966 |   |
| Gains from  investments, net                                                             | ** ** | **(2,372**                    | **)**       | (8,527 | ) |
| Loss on issuance  of investees’ stock, net                                          | ** ** | **—**                    | ** **  | 91 |   |
| TriZetto equity  loss, net                                                               | ** ** | **—**                    | ** **  | 1,269 |   |
| Minority  interests in net income of consolidated companies                              | ** ** | **1,596**                     | ** **  | 2,781 |   |
| Non-cash stock  compensation charges                                                     | ** ** | **2,117**                     | ** **  | 1,492 |   |
| Change in assets  and liabilities, excluding effects from acquisitions and dispositions: |       |                          | ** **  |   |   |
| Net increase in  accounts receivable                                                     | ** ** | **(30,302**                   | **)**       | (17,601 | ) |
| Net decrease  (increase) in inventory                                                    | ** ** | **4,136**                     | ** **  | (3,055 | ) |
| Net increase in  prepaid expenses and other current assets                               | ** ** | **(37,736**                   | **)**       | (10,846 | ) |
| Net (decrease)  increase in accounts payable                                             | ** ** | **(16,239**                   | **)**       | 3,736 |   |
| Net decrease in  accrued and other current liabilities                                   | ** ** | **(30,604**                   | **)**       | (27,590 | ) |
| Net decrease in  accrued severance, impairment and other charges                         | ** ** | **(16,955**                   | **)**       | (3,374 | ) |
| Net increase in  deferred revenues                                                       | ** ** | **130**                       | ** **  | 393 |   |
| Net increase  (decrease) in accrued income taxes                                         | ** ** | **8,308**                     | ** **  | (12,774 | ) |
| Net (increase)  decrease in pension assets (net of liabilities)                          | ** ** | **(2,773**                    | **)**       | 385 |   |
| Net decrease in  other long-term assets                                                  | ** ** | **598**                       | ** **  | 5,345 |   |
| Net tax benefit  on stock option exercises                                               | ** ** | **4,253**                     | ** **  | 6,029 |   |
| **Net  Cash Provided by Operating Activities**                                           | ** ** | **65,913**                    | ** **  | 161,392 |   |
| **Cash  Flows Used in Investing Activities:**                                            |       |                          | ** **  |   |   |
| Capital  expenditures                                                                    | ** ** | **(8,195**                    | **)**       | (10,997 | ) |
| Additions to  computer software                                                          | ** ** | **(39,139**                   | **)**       | (36,736 | ) |
| Proceeds from  sale of TriZetto                                                          | ** ** | **37,414**                    | ** **  | — |   |
| Investments in  short-term marketable securities                                         | ** ** | **15,053**                    | ** **  | 12,287 |   |
| Payments for  acquisitions of businesses, net of cash acquired                           | ** ** | **(91,507**                   | **)**       | (19,275 | ) |
| Funding of  venture capital investments                                                  | ** ** | **(1,000**                    | **)**       | (500 | ) |
| Other investing  activities, net                                                         | ** ** | **403**                       | ** **  | 1,455 |   |
| **Net  Cash Used in Investing Activities**                                               | ** ** | **(86,971**                   | **)**       | (53,766 | ) |
| **Cash  Flows Used in Financing Activities:**                                            |       |                          | ** **  |   |   |
| Net increase in  debt                                                                    | ** ** | **84,899**                    | ** **  | 72,766 |   |
| Payments for  purchase of treasury stock                                                 | ** ** | **(147,945**                  | **)**       | (204,284 | ) |
| Proceeds from  exercise of stock options                                                 | ** ** | **47,502**                    | ** **  | 60,220 |   |
| Dividends paid                                                                           | ** ** | **(9,119**                    | **)**       | (9,500 | ) |
| Proceeds from  employee stock purchase plan                                              | ** ** | **2,389**                     | ** **  | 1,847 |   |
| Increase in cash  overdrafts                                                             | ** ** | **9,134**                     | ** **  | 2,011 |   |
| Payments to  minority interests and other financing activities                           | ** ** | **(1,612**                    | **)**       | (1,613 | ) |
| **Net  Cash Used in Financing Activities**                                               | ** ** | **(14,752**                   | **)**       | (78,553 | ) |
| Effect of  Exchange Rate Changes on Cash and Cash Equivalents                            | ** ** | **(9,284**                    | **)**       | (1,608 | ) |
| **(Decrease)  Increase in Cash and Cash Equivalents**                                    | ** ** | **(45,094**                   | **)**       | 27,465 |   |
| **Cash  and Cash Equivalents, Beginning of Period**                                      | ** ** | **444,903**                   | ** **  | 344,432 |   |
| **Cash  and Cash Equivalents, End of Period**                                            | ** ** | **$**                         | **399,809** | ** ** | $ | 371,897 |   |

 

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

 

6

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**IMS HEALTH INCORPORATED**

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

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

 

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

** **

The accompanying Condensed Consolidated FinancialStatements (unaudited) have been prepared in accordance with accountingprinciples generally accepted in the United States of America for interimfinancial information and Article 10 of Regulation S-X under the SecuritiesExchange Act of 1934, as amended.  TheCondensed Consolidated Financial Statements (unaudited) do not include all theinformation and notes required by accounting principles generally accepted inthe United States of America for complete financial statements.  In the opinion of management, alladjustments, all of which are of a normal recurring nature, considerednecessary for a fair presentation of financial position, results of operationsand cash flows for the periods presented have been included.  The results of operations for interim periodsare not necessarily indicative of the results expected for the full year.  The Condensed Consolidated FinancialStatements (unaudited) and related notes should be read in conjunction with theConsolidated Financial Statements and related notes of IMS Health Incorporated(the “Company” or “IMS”) included in its 2004 Annual Report on Form 10-K.  Certain prior year amounts have beenreclassified to conform to the 2005 presentation.  Amounts presented in the CondensedConsolidated Financial Statements (unaudited) may not add due to rounding.

 

**Note 2.  Basisof Presentation**

** **

TheCompany is a leading global provider of information solutions to thepharmaceutical and healthcare industries. The Company’s revenues are derived primarily from the sale of a broadline of market information, sales management and consulting services to thepharmaceutical and healthcare industries. The Company’s information products are developed to meet client needs byusing data secured from a worldwide network of suppliers in the markets whereoperations exist.  Key informationproducts include:

 

•                  Sales Force Effectiveness to optimizesales force productivity and territory management;

 

•                  Portfolio Optimization to provideclients with insights into market opportunity and business developmentassessment; and

 

•                  Launch and Brand Management and Otherto support client needs relative to market segmentation and positioning andlife cycle management for prescription and over-the-counter pharmaceuticalproducts.

 

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

 

TheCompany operates in more than 100 countries. The Company also owns a venture capital unit, Enterprise Associates, LLC(“Enterprises”), which is focused on investments in emerging businesses.  Until December 21, 2004, the Company alsoowned an approximately 25.0% equity interest in the TriZetto Group, Inc. “TriZetto”(See Note 7).

 

7

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The Company is managed ona global business model with global leaders for the majority of its criticalbusiness processes and accordingly has one reportable segment (See Note 15).

 

**Note 3.  Summaryof Recent Accounting Pronouncements**

** **

In December 2004, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standard (“SFAS”) No. 123R, “Share-Based Payment”, which is arevision of SFAS No. 123, “Accounting for Stock Based Compensation”, andsupersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting forStock Issued to Employees.”  SFAS No.123R establishes standards for the accounting of transactions in which anentity exchanges its equity instruments for goods or services, or incursliabilities in exchange for goods or services that are based on the fair valueof the entity’s equity instruments or that may be settled by the issuance ofequity instruments.  SFAS No. 123Rfocuses primarily on accounting for transactions in which an entity obtainsemployee services in share-based payment transactions.  SFAS No. 123R requires a public entity tomeasure the cost of all employee share-based payments, including grants ofemployee stock options, using a fair-value based method, such as theBlack-Scholes option valuation model at the date of the grant.  The resulting cost is then recognized ascompensation cost in the Consolidated Statements of Income over the serviceperiod during which an employee is required to provide service in exchange forthe award (usually the vesting period). In April 2005, the Securities and Exchange Commission deferred theeffective date of SFAS No. 123R to the first annual reporting period beginningafter June 15, 2005.  The Company iscurrently evaluating the impact of SFAS No. 123R; however, based uponoutstanding as well as future anticipated stock-based award grants throughDecember 31, 2006, the Company expects that the adoption under the modifiedprospective method will have approximately an $0.11 to $0.12 fully dilutedearnings per share impact on its consolidated results of operations for theyear ending December 31, 2006.  For a descriptionof the Company’s model and assumptions used to calculate the fair value of theCompany’s stock-based awards, refer to Note 13 of the Company’s 2004 AnnualReport on Form 10-K as filed with the Securities and Exchange Commission.

 

In December 2004, theFASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets-An Amendment of APBOpinion No. 29.”  SFAS No. 153 amends APBNo. 29, “Accounting for Nonmonetary Transactions,” to eliminate the exceptionfrom fair value measurement for nonmonetary exchanges of similar productiveassets and replaces it with a general exception for exchanges of nonmonetaryassets that do not have commercial substance. SFAS No. 153 specifies that a nonmonetary exchange has commercialsubstance if the future cash flows of the entity are expected to changesignificantly as a result of the exchange. SFAS No. 153 is effective for nonmonetary exchanges occurring in fiscalperiods beginning after June 15, 2005. The adoption of SFAS No. 153 is not expected to have a material impacton the Company’s financial position, results of operations or cash flows forthe year ending December 31, 2006.

 

In June 2005, the FASBissued SFAS No. 154, “Accounting Changes and Error Corrections.”  SFAS No. 154 will require entities thatvoluntarily make a change in accounting principle to apply that changeretrospectively to prior periods’ financial statements, unless it would beimpracticable to do so.  SFAS No. 154supersedes APB No. 20, “Accounting Changes,” which previously required mostvoluntary changes in accounting principle to be recognized by including in thecurrent period’s net income the cumulative effect of changing to the newaccounting principle.

 

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SFAS No. 154 also makes adistinction between “retrospective application” of an accounting principle andthe “restatement” of financial statements to reflect the correction of anerror.  Further, under SFAS No. 154, ifan entity changes its method of depreciation, amortization, or depletion forlong-lived, non-financial assets, the change must be accounted for as a changein accounting estimate.  Under APB No.20, such a change would have been reported as a change in accountingprinciple.  SFAS No. 154 applies toaccounting changes and error corrections that are made in fiscal yearsbeginning after December 15, 2005.  Theadoption of SFAS No. 154 is not expected to have a material impact on theCompany’s financial position, results of operations or cash flows for the yearending December 31, 2006.

 

**Note 4.  Summaryof Significant Accounting Policies**

** **

*Stock-basedcompensation.**** * SFAS No. 123, “Accountingfor Stock-Based Compensation” requires that companies with stock-basedcompensation plans either recognize compensation expense based on the fairvalue of options granted or continue to apply the existing accounting rules anddisclose pro forma net income and earnings per share assuming the fair valuemethod had been applied.  The Company haschosen to continue applying APB Opinion No. 25, “Accounting for Stock Issued toEmployees” and related interpretations in accounting for its plans.  If the compensation cost for the Company’sstock-based compensation plans was determined based on the fair value at thegrant dates for awards under those plans, consistent with the method of SFASNo. 123, the Company’s net income and earnings per share would have beenreduced to the pro forma amounts indicated below for the three and six monthsended June 30:

 
| ** **           | ** **                                                                                                   | **Three Months Ended  June 30,** |       | **Six Months Ended  June 30,** | ** ** |
|----------------------|--------------------------------------------------------------------------------------------------------------|----------------------------------|------------|--------------------------------|------------|
| ** **           | ** **                                                                                                   | ** **                       | **2005**   | ** **                     | **2004**   |   | **2005** | ** ** | **2004** | ** ** |
| Net Income:          | As reported                                                                                                  |                             | **$**      | **93,179**                     | ** ** | $ | 65,121 |   | **$** | **123,522** | ** ** | $ | 146,199 |   |
|                 | Add: Stock-based  employee compensation expense included in reported net income, net of tax                  | ** **                       | **1,014**  | ** **                     | 913        |   | **1,932** | ** ** | 1,657 |   |
|                 | Deduct: Total  stock-based employee compensation expense under fair value method for all  awards, net of tax | ** **                       | **(8,016** | **)**                          | (7,708     | ) | **(14,369** | **)** | (13,070 | ) |
|                 | Pro forma                                                                                                    | ** **                       | **$**      | **86,177**                     | ** ** | $ | 58,326 |   | **$** | **111,085** | ** ** | $ | 134,786 |   |
| Earnings Per  Share: |                                                                                                         |                             | ** ** |                           |       |   | ** ** |   |   |
| Basic                | As reported                                                                                                  |                             | **$**      | **0.41**                       | ** ** | $ | 0.28 |   | **$** | **0.54** | ** ** | $ | 0.62 |   |
|                 | Pro forma                                                                                                    | ** **                       | **$**      | **0.38**                       | ** ** | $ | 0.25 |   | **$** | **0.49** | ** ** | $ | 0.57 |   |
| Diluted              |                                                                                                         |                             |       | ** **                     |       |   |   | ** ** |   |   |
|                 | As reported                                                                                                  | ** **                       | **$**      | **0.41**                       | ** ** | $ | 0.27 |   | **$** | **0.54** | ** ** | $ | 0.61 |   |
|                 | Pro forma                                                                                                    | ** **                       | **$**      | **0.38**                       | ** ** | $ | 0.24 |   | **$** | **0.48** | ** ** | $ | 0.56 |   |

 

For a description of theCompany’s other critical accounting policies, please refer to the Company’s2004 Annual Report on Form 10-K as filed with the Securities and ExchangeCommission.

 

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**Note 5.  Acquisitions**

** **

The Company makesacquisitions in order to expand its products, services and geographicreach.  During the six months ended June30, 2005, the Company completed six acquisitions for an aggregate cost ofapproximately $51,000.  Theseacquisitions were Taskarena Software Engineering 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 purchasemethod of accounting.  As such, theaggregate purchase price has been allocated on a preliminary basis to theassets acquired based on estimated fair values as of the closing date.  The purchase price allocations will befinalized after the completion of the valuation of certain assets andliabilities.  Any adjustments resultingfrom the finalization of the purchase price allocations are not expected to havea material impact on the Company’s results of operations.  The Condensed Consolidated FinancialStatements (unaudited) include the results of these acquired companiessubsequent to the closing of the acquisitions. Had each of these acquisitions occurred as of January 1, 2005 or 2004,the impact on the Company’s results of operations would not have beensignificant.  Goodwill of approximately$24,591 was recorded in connection with these acquisitions.  For tax purposes, approximately $29,300 ofgoodwill is deductible in connection with these acquisitions.

 

Additionally, duringJanuary 2005, the Company paid approximately $36,000 to acquire the 50%interest in IHA.IMS Health GmbH (“IHA”) not owned by the Company.  The Company is currently evaluating the potentialpurchase price allocation resulting from this payment but expects that amajority of the payment will be recorded as goodwill.  For the six months ended June 30, 2004, theCompany consolidated the results of IHA and recorded minority interest expensefor the 50% not owned by the Company.

 

During the six monthsended June 30, 2004, the Company completed four acquisitions for an aggregatecost of $19,497.  The acquisitions wereSource Belgium S.A. (Belgium), H.E.D.M. Bvba (Belgium), SciCon WissenschaftlicheUnternehmensberatung GmbH (Germany) and Groupe PR (France) and were accountedfor under the purchase method of accounting. As such, the aggregate purchase price had been allocated on apreliminary basis to the assets and liabilities acquired based on estimatedfair values as of the closing date.  TheCompany finalized the purchase price allocation for these acquisitions duringthe second quarter of 2005 which did not have a material impact on the Company’sresults of operations.  The Condensed ConsolidatedFinancial Statements (unaudited) include the results of these acquiredcompanies subsequent to the closing of the acquisitions.  Had these acquisitions occurred as of January1, 2004 or 2003, the impact on the Company’s results of operations would nothave been significant.  Goodwill ofapproximately $17,358 was recorded in connection with these acquisitions, ofwhich none is deductible for tax purposes.

 

**Note 6.  Goodwilland Intangible Assets**

** **

During the first half of2005, the Company recorded additional goodwill of $80,359 related primarily tothe acquisition of the remaining 50% of IHA in January 2005, the preliminaryallocation of purchase price for the six acquisitions completed during 2005(see Note 5) and payments on earn-out agreements for acquisitions completedprior to 2005.  During the six months 

 

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ended June 30, 2004, theCompany recorded additional goodwill of $13,136 related primarily to thepreliminary allocation of purchase price for the four acquisitions completed inthe first half of 2004 (see Note 5) and payments on earn-out agreements onacquisitions completed prior to 2004.

 

All of the Company’sother acquired intangibles are subject to amortization.  Intangible assetamortization expense was $3,953 and $8,295 during the three and six monthsended June 30, 2005,  respectively.  AtJune 30, 2005, intangible assets were primarily composed of customerrelationships, databases and trade names (included in Other assets) andcomputer software. The gross carrying amounts and related accumulatedamortization of these intangibles were $104,694 and $32,891, respectively, atJune 30, 2005 and $75,170 and $18,148, respectively, at June 30, 2004.  These intangibles are amortized over periodsranging from two to fifteen years.  As ofJune 30, 2005, the weighted average amortization periods of the acquiredintangibles by asset class are listed in the following table:

 
| **Intangible Asset Type**         | ** ** | **Weighted Average  Amortization (Years) Period** | ** ** |
|-----------------------------------|------------|---------------------------------------------------|------------|
| Customer  Relationships           |       | 8.8                                               |       |
| Computer  Software and Algorithms |       | 7.1                                               |       |
| Databases                         |       | 4.3                                               |       |
| Trade Names                       |       | 4.3                                               |       |
| Other                             |       | 3.8                                               |       |
| Weighted average                  |       | 8.0                                               |       |

 

Based on current estimated useful lives, amortizationexpense associated with intangible assets at June 30, 2005 is estimated to beapproximately $3,800 for each of the remaining two quarters in 2005.  Annual amortization expense associated withintangible assets is estimated to be as follows:

 

| **Year Ended  December 31,** | ** ** | **Amortization  Expense** | ** ** |
|------------------------------|------------|---------------------------|------------|
| 2006                         |       | 13,622                    |       |
| 2007                         |       | 11,278                    |       |
| 2008                         |       | 9,566                     |       |
| 2009                         |       | 7,096                     |       |
| 2010                         |       | 5,267                     |       |
| Thereafter                   |       | 17,391                    |       |

 

**Note 7.  Investmentsin Equity Investees**

** **

On December 21, 2004, the Company and TriZetto Group, Inc. (“TriZetto”)entered 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 remainingbalance of $37,414 in January 2005.  Thebalance of $37,414 was included in Other current assets in the Company’sConsolidated Statements of Financial Position at December 31,

 

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2004.  As a result of the transaction, the Companyrecorded a pre-tax gain of $38,803 in the fourth quarter of 2004.

 

Prior to the sale of theTriZetto shares, the Company accounted for its investment in TriZetto under theequity method of accounting.  The Company’sshare of the adjusted operating results of TriZetto amounted to losses of $303and $1,269 for the three and six months ended June 30, 2004, respectively(net of deferred tax benefits of $196 and $820, respectively).

 

**Note 8.  Contingencies**

 

The Company and itssubsidiaries are involved in legal and tax proceedings, claims and litigationarising in the ordinary course of business. Management periodically assesses the Company’s liabilities andcontingencies in connection with these matters based upon the latestinformation available.  For those matterswhere management currently believes it is probable that the Company will incura loss and that the probable loss or range of loss can be reasonably estimated,the Company has recorded reserves in the Condensed Consolidated FinancialStatements (Unaudited) based on its best estimates of such loss.  In other instances, because of theuncertainties related to either the probable outcome or the amount or range ofloss, management is unable to make a reasonable estimate of a liability, ifany.  However, even in many instanceswhere the Company has recorded a reserve, the Company is unable to predict withcertainty the final outcome of the matter or whether resolution of the matterwill materially affect the Company’s results of operations, financial positionor cash flows.  As additional informationbecomes available, the Company adjusts its assessment and estimates of suchliabilities accordingly.

 

The Company routinelyenters into agreements with its suppliers to acquire data and with itscustomers to sell data, all in the normal course of business.  In these agreements, the Company sometimesagrees to indemnify and hold harmless the other party for any damages suchother party may suffer as a result of potential intellectual propertyinfringement and other claims.  Theseindemnities typically have terms of approximately two years.  The Company has not accrued a liability withrespect to these matters, as the exposure is considered remote.

 

Based on its review ofthe latest information available, in the opinion of management, the ultimateliability of the Company in connection with pending tax and legal proceedings,claims and litigation will not have a material effect on the Company’s resultsof operations, cash flows or financial position, with the possible exception ofthe matters described below.

 

*Legacyand Related Matters*

 

In order to understandthe Company’s exposure to the potential liabilities described below, it isimportant to understand the relationship between the Company and its predecessorsand other parties that, through various corporate reorganizations andcontractual commitments, have assumed varying degrees of responsibility withrespect to such matters.

 

In November 1996, thecompany then known as The Dun & Bradstreet Corporation (“D&B”)separated into three public companies by spinning-off ACNielsen Corporation (“ACNielsen”)and Cognizant Corporation (“Cognizant”) (the “1996 Spin-Off”).  Pursuant to the agreements effecting

 

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the 1996 Spin-Off, among other things, certainliabilities, including contingent liabilities relating to the IRI Action(defined below) and tax liabilities arising out of certain prior businesstransactions (the “D&B Legacy Tax Matters”), described more fully below,were allocated among D&B, ACNielsen and Cognizant.

 

In June 1998, Cognizantseparated into two public companies by spinning off IMS (the “1998 Spin-Off”)and then changed its name to Nielsen Media Research, Inc. (“NMR”).  As a result of the 1998 Spin-Off, the Companyand NMR are jointly and severally liable for all liabilities of Cognizant underthe agreements effecting the 1996 Spin-Off. As between themselves, however, the Company and NMR agreed that IMS willassume 75%, and NMR will assume 25%, of any payments to be made in respect ofthe IRI Action, including any legal fees and expenses related thereto incurredin 1999 or thereafter (IMS agreed to be responsible for legal fees and expensesincurred during 1998).  In addition, theCompany and NMR agreed they would share equally Cognizant’s share of liabilityarising out of the D&B Legacy and Related Tax Matters after the Companypaid the first $130,000 of such liability. NMR’s aggregate liability for payments in respect of the IRI Action andthe D&B Legacy Tax Matters (see below) shall not exceed $125,000.

 

Also during 1998, D&Bseparated into two public companies by spinning off The Dun & BradstreetCorporation (“D&B I”) and then changed its name to R.H. Donnelley (“Donnelley”).  As a result of their separation in 1998,Donnelley and D&B I are each jointly and severally liable for allliabilities of D&B under the agreements effecting the 1996 Spin-Off.

 

During 2000, D&B Iseparated into two public companies by spinning off The Dun & BradstreetCorporation (“D&B II”) and then changed its name to Moody’s Corporation (“Moody’s”).  Pursuant to their separation in 2000, Moody’sand D&B II are each jointly and severally liable for all of D&B I’sliabilities under the agreements effecting the 1996 Spin-Off.

 

*IRILitigation.*  In July1996, Information Resources, Inc. (“IRI”) filed a complaint, subsequentlyamended in 1997, in the U.S. District Court of the Southern District of NewYork, naming as defendants a company then known as The Dun & BradstreetCorporation and now known as Donnelley, A.C. Nielsen Company (a subsidiary ofACNielsen) and I.M.S. International, Inc. (a predecessor of the Company) (the “IRIAction”).  At the time of the filing ofthe complaint, each of the other defendants was a wholly-owned subsidiary ofDonnelley.  The amended complaint allegedvarious violations of U.S. antitrust laws under Sections 1 and 2 of the ShermanAntitrust Act.  IRI sought damages inexcess of $650,000, which IRI asked to be trebled, as well as punitive damagesin an unspecified amount.

 

On February 1, 2005, theU.S. District Court for the Southern District of New York entered a finaljudgment against IRI dismissing IRI’s claims with prejudice and on themerits.  IRI has filed a notice of appealto the U.S. Court of Appeals for the Second Circuit.  The parties have submitted briefs on the matter to the Second Circuitand are awaiting the scheduling of oral arguments.

 

In connection with the1996 Spin-Off, D&B (now Donnelley), Cognizant (now NMR) and ACNielsenentered into an Indemnity and Joint Defense Agreement with respect to the IRIAction.  In 2001, ACNielsen was acquiredby VNU N.V., a publicly traded Dutch company (“VNU”). 

 

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VNU assumed ACNielsen’s obligations under the originalIndemnity and Joint Defense Agreement.

 

On July 30, 2004, VNU andits U.S. subsidiaries, VNU, Inc., ACNielsen, AC Nielsen (US), Inc. (“ACN (US)”),and NMR (collectively, the “VNU Parties”), Donnelley, D&B II, Moody’s andthe Company entered into an Amended and Restated Indemnity and Joint DefenseAgreement (the “Amended JDA”).  Pursuantto the Amended JDA, any and all liabilities incurred by Donnelley, D&B II,Moody’s or IMS relating to a judgment (even if not final) or any settlementbeing entered into in the IRI Action (“IRI Liabilities”) will be jointly andseverally assumed and fully discharged exclusively by the VNU Parties.  Under the Amended JDA, the VNU Parties agreedto, jointly and severally, indemnify Donnelley, D&B II, Moody’s and IMSfrom and against all IRI Liabilities to which they become subject.

 

As described above, theVNU Parties have assumed exclusive responsibility for the payment of all IRILiabilities.  Provided that the VNUParties are able to fulfill their obligations under the Amended JDA, and thatthey ultimately do fulfill such obligations, the Company believes that thefinal resolution of the IRI Action should not have a material adverse effect onthe Company’s financial position, results of operations or cash flows.  However, because liability for violations ofthe antitrust laws is joint and several and because the rights and obligationsrelating to the Amended JDA are based on contractual relationships, the failureof the VNU Parties to fulfill their obligations under the Amended JDA couldresult in the other parties bearing all or a share of the IRI Liabilities.  Joint and several liability for the IRIAction means that even where more than one defendant is determined to have beenresponsible for an alleged wrongdoing, the plaintiff can collect all or part ofthe judgment from just one of the defendants. This is true regardless of whatever contractual allocation ofresponsibility the defendants and any other indemnifying parties may have made,including the allocations described above between the VNU Parties, Donnelley,D&B II, Moody’s and IMS.

 

Accordingly, and as aresult of the allocations of liability described above, in the event the VNUParties default on their obligations under the Amended JDA, the Company will beresponsible for 75% of Cognizant’s share of any liabilities arising out of theIRI Action (which, under the application of joint and several liabilitydescribed above, could be all the IRI Liabilities since the Company is asuccessor to a named defendant) and NMR will be responsible for 25% of any suchliabilities; provided that NMR’s aggregate liability for payments in respect ofthe IRI Action and the D&B Legacy Tax Matters shall not exceed$125,000.  To date, NMR has made paymentsof approximately $57,000 relating to the IRI Action and the D&B Legacy TaxMatters.  Further, if the VNU Partiesdefault on their obligations, NMR, one of the VNU Parties, may default on itsobligation to share any IRI Liabilities with the Company, or at the time the IRILiabilities arise, NMR may have previously made sharing payments up to its$125,000 cap.  In either such event, theCompany could be liable for an amount up to all the IRI Liabilities.

 

While, as describedabove, the IRI Action has been dismissed with prejudice on the merits, IRI hasfiled an appeal.  Therefore, the Companyis unable to predict the final outcome of the IRI Action (including theappeal), the financial condition of any of the VNU Parties or the other defendantsat the time of any such outcome or whether the VNU Parties or the otherdefendants will fulfill their obligations under the Amended JDA or otherrelated contractual agreements.  

 

14

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Hence, the Company cannot estimate such parties’ abilityto pay the IRI Liabilities, if any, pursuant to the Amended JDA or the amountof any final judgment or settlement in the IRI Action.  Nonetheless,management presently believes that the risk that the Company will incur anymaterial liabilities with respect to the IRI Action is remote and, therefore no liability in respect of this matter has beenaccrued in the Company’s financial statements.  If, however, IRI were to prevail in whole orin part in this action and if the VNU Parties fail to fulfill theirindemnification obligations, the outcome of this matter could have a materialadverse effect on the Company’s financial position, results of operations andcash flows.  On July 11, 2005, IMSannounced a definitive agreement to merge with VNU, which agreement is morefully described in Note 16.

 

*D&BLegacy and Related Tax Matters.*  During the second quarter of 2003, the IRSissued an agent’s final examination report seeking to disallow certain royaltyexpense deductions claimed by D&B on its 1995 and 1996 tax returns inconnection with a specified partnership (the “Partnership”) organized byDonnelley prior to the 1996 Spin-Off (the “DLA Matter”).  Also in the second quarter of 2003, theIRS issued an additional agent’s final examination report to the Partnershipseeking to reallocate certain partnership income to D&B for 1996.  D&B II and the Company believe that thepositions taken by the IRS in the report to the Partnership are inconsistentwith the IRS’s denial of the royalty expense deductions claimed by D&Bbecause such an assertion is duplicative. In addition, the IRS has asserted penalties for the years describedabove based on its interpretation of applicable law.

 

Under the 1996 Spin-Offagreements, to the extent relevant here, Donnelley has the right and obligationto manage certain tax controversies with the IRS to the extent thosecontroversies relate to tax liabilities for Donnelley’s tax years 1995 and 1996arising from the DLA Matter.  Donnelleyhas apparently assigned this right and obligation to D&B II.  However, under the 1996 Spin-Off agreements,Donnelley cannot agree to any final settlement with respect to the DLA Matterwithout NMR’s consent, which right of consent NMR shares with IMS pursuant tothe terms of the 1998 Spin-Off agreements.  If NMR and the Company withhold consent, then NMR and the Company wouldhave the right and obligation to assume responsibility for management of theDLA Matter and indemnify Donnelley to the extent that the ultimate liabilityarising from the controversy exceeded the proposed settlement.

 

D&B II, as agent forDonnelley in the D&B Legacy Tax Matters, has filed protests relating to theproposed assessments for the DLA Matter with the IRS Office of Appeals.  D&B II advised that it would attempt toresolve these matters in the administrative appeals process before proceedingto litigation if necessary.  During thefirst quarter of 2004, as a result of information from D&B II regarding aproposed mediation with the IRS to settle partnership items related to the DLAMatter, the Company reclassified its tax reserves related to the DLA Matterfrom long-term (Other liabilities) to short-term (Accrued income taxes).

 

In June 2004, the Companywas advised that D&B II believed that it had reached a basis for settlementwith the IRS regarding the 1995 and 1996 corporate and partnership proposedassessments (the “Preliminary Settlement Terms”).  The agreement to the Preliminary SettlementTerms was tentative and non-binding. Under the Preliminary Settlement Terms, Donnelley would retainapproximately 15% of the tax benefit associated with the transaction and pay apenalty of

 

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approximately 7% and the duplicative “inconsistentpositions” described above would be eliminated.

 

In September 2004,D&B II advised the Company that the IRS had withdrawn its agreement to thePreliminary Settlement Terms.  D&B IIcontinued to negotiate with the IRS and subsequently developed a revised proposedsettlement (the “Revised Proposed Settlement”). In October, Donnelley and D&B II presented the Revised ProposedSettlement to NMR and IMS and requested their consent. On October 28, 2004, theCompany responded to Donnelley’s and D&B II’s request for consent to theRevised Proposed Settlement by consenting to the settlement of tax liabilitieswith respect to the DLA Matter.  However,the Revised Proposed Settlement addressed matters beyond the DLA Matter andthese matters would have an adverse impact on the Company for tax yearssubsequent to the 1996 Spin-Off and with respect to which the Company believesneither Donnelley nor D&B II has the authority to negotiate or propose asettlement.  The Company advisedDonnelley that, to the extent the Revised Proposed Settlement addressed issuesbeyond the DLA Matter, the negotiation and presentation of the Revised ProposedSettlement constituted a breach of the 1996 Spin-Off agreements.

 

On October 29, 2004,Donnelley and D&B II advised NMR and the Company that they are treating theCompany’s position as a withholding of consent, and that therefore under the1996 Spin-Off agreements, NMR and the Company are obligated to assumemanagement of the controversy and to indemnify Donnelley to the extent anyultimate resolution of the controversy is less favorable to Donnelley than thatcontained in the Revised Proposed Settlement. Such excess liability could approximate $5,000. The Company does notbelieve this liability is probable and has not recorded any reserves for thisitem. The Company does not agree with these assertions and believes thatDonnelley breached the terms of the 1996 Spin-Off agreements by negotiating andrequesting consent for matters beyond its authority.

 

During the second quarterof 2005, D&B II advised the Company that the IRS had again proposed asettlement agreement.  This proposedsettlement agreement reflects the financial terms set forth in the PreliminarySettlement Terms described above but does not address matters beyond the DLAMatter.  Donnelley and D&B IIpresented this proposed settlement agreement to NMR and IMS and requested theirconsent.  NMR and IMS consented and thesettlement agreement is now effective. The Company’s share of the totalliability for the DLA Matter is approximately $33,700 (tax, interest andpenalties, net of tax benefits).

 

In January of 2004, theIRS issued an agent’s final examination report to the Partnership seeking toreallocate certain items of partnership income and expense as well as disallowcertain items of partnership expense on the Partnership’s 1997 tax returnduring which year Cognizant was a partner in the Partnership.  In January 2004, the IRS issued agent’s finalexamination reports to the Partnership and the Company seeking to reverse itemsof partnership income and loss and disallow certain royalty expense deductionsclaimed by the Company on its 1998 and 1999 tax returns arising from theCompany’s participation in the Partnership. If the IRS were to ultimately prevail in the foregoing positions, theCompany’s liability (tax and interest) for 1997 would be approximately $18,700,and its aggregate liability (tax and interest) for 1998 and 1999 would beapproximately $28,200 (all net of income tax benefit for interest).  If the IRS were to take a comparable positionwith respect to all of the Company’s tax years subsequent to 1999 and 

 

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ultimately prevail, the Company’s additional liability(tax and interest) would be approximately $52,000 (net of income tax benefitfor interest).

 

In addition, the IRS hasasserted penalties for 1997 through 1999. If the IRS were to prevail in its assertion of penalties and interestthereon for these years, the Company estimates that its liability for suchpenalties and interest would be approximately $9,100 (all net of income taxbenefit).  The Company disputes the IRS’sposition.

 

The Company has filedprotests relating to the proposed assessments for 1997, 1998 and 1999 with theIRS Office of Appeals.  Notwithstandingthe fact that the Company will attempt to resolve these matters in theadministrative appeals process before proceeding to litigation if necessary,during the first quarter of 2005, the tax reserves related to 1998 and 1999were reclassified from long-term (Other liabilities) to short-term (Accruedincome taxes) based on an informal discussion with the IRS and the possibilityof an assessment.

 

In another D&B LegacyTax Matter, in June 2000, the IRS issued a formal notice of adjustmentregarding Donnelley’s utilization of certain capital losses generated during1989 and 1990.  D&B I, as agent forDonnelley, advised the Company that on May 12, 2000, it filed an amendedtax return for the 1989 and 1990 tax periods, which reflected $561,582 ofadditional tax and interest due.  In May2000, D&B I paid the IRS $349,291 and the Company paid the IRS $212,291;NMR subsequently reimbursed the Company approximately $41,000.  D&B I filed a complaint for a refund inthe U.S. District Court on September 21, 2000 to contest thisassessment.  In June 2004, D&B IIadvised the Company that it had decided not to pursue the refund claim andbelieved it had reached a basis for settlement with the IRS.  A definitive settlement agreement wasexecuted on December 6, 2004.  Thesettlement requires Donnelley to withdraw its complaint for a refund.  In the first quarter of 2005, Donnelleyreceived tax bills from the IRS in an aggregate amount of approximately $47,500with respect to this settlement.  TheCompany has paid the IRS approximately $10,900 in respect of these tax bills,which amount the Company believes represents its share of the total liabilityrelated to this matter.  Donnelley andD&B II have advised the Company that they believe the Company and NMR eachowe approximately an additional $7,200 (or approximately $4,800 net of taxbenefits) for this matter.  ShouldD&B II pursue arbitration, management does not believe that D&B IIwould prevail.

 

As of June 30, 2005, theCompany had reserves for these tax matters of approximately $139,000 in theaggregate.  In the opinion of management,it is not probable, but may be reasonably possible that the Company will haveadditional liability of $9,100 in excess of the amount reserved for thesematters attributable to potential penalties (and net interest thereon) for theyears 1997 through 1999.  In the opinionof management, the Company’s reserves for the foregoing tax matters areadequate for the probable exposure and, accordingly, based on informationcurrently available, management does not believe that these matters will have amaterial adverse effect on the Company’s consolidated financial position orresults of operations but may have a material adverse effect on cash flows inthe period in which any such amounts are paid.

 

In addition to thesematters, the Company and its predecessors have entered, and the Companycontinues to enter, into global tax planning initiatives in the normal courseof their businesses.  These activitiesare subject to review by applicable tax authorities.  As a result of the review 

 

17

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process, uncertainties exist and it is possible thatsome of these matters could be resolved adversely to the Company.

 

*MattersBefore the European Commission and Belgian Competition Service*

 

In December 2000, NationalData Corporation (now NDCHealth Corporation, “NDC”) filed a complaint againstthe Company with the European Commission (the “Commission”), requesting thatthe Commission initiate a proceeding against the Company for an allegedinfringement of Article 82 of the EC Treaty.  Article 82 of the EC Treaty relates toabuses of a dominant position that adversely affect competition.  The complaint concerned an IMS geographicmapping structure used for the reporting of regional sales data in Germany.

 

In July 2001, theCommission ordered interim measures against the Company pending a finaldecision (the “Interim Decision”).  Underthe Interim Decision, the Company was ordered to grant a license of thegeographic mapping structure on commercially reasonable terms without delay toNDC and to any other competitor then present in the German regional sales datamarket that requested a license.

 

In August 2001, theCompany filed an appeal with the Court of First Instance (“CFI”) seeking thesuspension and annulment of the Interim Decision in its entirety (the “AnnulmentAppeal”).  In October 2001, the Presidentof the CFI suspended the Interim Decision pending a judgment on the AnnulmentAppeal.

 

In August 2003, theCommission withdrew its Interim Decision and then subsequently (in October2003), the Commission applied to the CFI to have the Annulment Appeal declaredmoot in its entirety.

 

In March 2005, the CFIissued an Order granting the Commission’s request to have the Annulment Appealdeclared moot in its entirety.  As aresult, there are no further legal proceedings before the Commission orEuropean Courts in respect of the Interim Decision and IMS is not under anyduty to license its geographic mapping structure to NDC in Germany.

 

Complaints were filed in1998 and 1999 against the Company with the Belgian Competition Service (“BCS”)by SmithKline Beecham Pharma S.A. (“SKB”) and Source Informatics Belgium S.A. (“Source”)alleging abuse of a dominant position on the Belgian market and requests weremade for the adoption of interim measures pending consideration of thecomplaints.  In October 1999 and 2000,the Chairman of the Belgian Competition Council (“BCC”) adopted interimmeasures against the Company, with which the Company has complied.  In June 2004 the BCS sent informationrequests to the Company, Source and various third parties in respect of the SKBcomplaint filed in 1998.  The Company andSource responded to the requests.  In December2004, the Company received a formal statement of objections alleging that theCompany had abused its dominant position on the Belgian market in violation ofArticle 82 of the EC Treaty and corresponding Belgian law.  Under Belgian law, the Company has theopportunity to provide its comments to the statement of objections, both inwriting (which the Company submitted in February 2005) and orally. Once theinvestigation is complete, the BCC will issue a proposed decision to be adoptedby the BCC, and the reasons therefor. The Company will then be given 

 

18

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access to the investigation file, will be given theright to contest in writing any findings of the report and to produce evidenceof its own, and the right to present its defense at an oral hearing. The BCCwill ultimately determine whether the Company violated Article 82 of the ECTreaty and corresponding Belgian law and may impose fines against the Company.

 

In a separate matter, inOctober 2004, the BCS notified IMS of a request for information in connectionwith IMS’s acquisition of Source in April 2004. The BCS is investigating whether such acquisition may violate Article 82of the EC Treaty and corresponding Belgian law. The Company responded to the request for information in December 2004.

 

The Company intends tocontinue to vigorously defend itself in these matters before the Belgiancompetition authorities.  Management ofthe Company is unable to predict at this time the final outcome of thesematters or whether adverse resolutions thereof could materially affect the Company’sresults of operations, cash flows or financial position in the period in whichsuch adverse resolution occurs.

 

*OtherContingencies*

 

*ContingentConsideration.*  Underthe terms of the purchase agreements related to acquisitions made from 2001 to2004, the Company may be required to pay additional amounts as contingentconsideration based on the achievement of certain targets during 2003 to2007.  Substantially all of anyadditional payments will be recorded as goodwill in accordance with EITF No. 95-8,“Accounting for Contingent Consideration Paid to the Shareholders of anAcquired Enterprise in a Purchase Business Combination.”  As of June 30, 2005, approximately $4,000 wasearned and paid under these contingencies. Based on current estimates, management expects the remaining additionalcontingent payments under these agreements to total approximately $45,000.  It is expected that these contingent paymentswill be resolved within a specified time period after the end of eachrespective calendar year from 2005 through 2007.

 

*SynavantSpin-Off.*  In August2000, the Company spun off Synavant, Inc. in a transaction qualifying as taxfree under Section 355 of the Internal Revenue Code (“IRC”).  If, contrary to expectations, the spin-off ofSynavant were not to qualify as tax free under Section 355, then, ingeneral, a corporate tax would be payable by the consolidated group, of whichthe Company is a common parent and Synavant is a member, based on thedifference between (x) the fair market value of the Synavant common stockon the date of the spin-off and (y) the adjusted basis of such Synavantcommon stock.  In addition, under theconsolidated return rules, each member of the consolidated group would beseverally liable for such tax liability. Pursuant to the terms of the spin-off, the Company would be liable forthe resulting corporate tax, except in certain circumstances.  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 Company will incur liability for thismatter; therefore, the Company has not recorded reserves for this matter.  The Company estimates that the aggregateliability in this regard would not exceed $100,000.

 

*CTSSplit-Off.*  On February6, 2003, the Company completed an exchange offer to distribute its majorityinterest in Cognizant Technology Solutions (“CTS”) in a transaction qualifyingas tax free under Section 355 of the IRC. The Company exchanged 0.309 shares of CTS class B common

 

19

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shares for each share of the Company that wastendered.  Under terms of the offer, theCompany accepted 36,540 IMS common shares tendered in exchange for all 11,291CTS common shares that theCompany owned.  As the offer wasoversubscribed, the Company accepted tendered IMS shares on a pro-rata basis inproportion to the number of shares tendered. The proration factor was approximately 21.1%.

 

If, contrary toexpectations, the CTS distribution were not to qualify as tax free underSection 355, then, in general, a corporate tax would be payable by the Company based on thedifference between (x) the fair market value of the CTS class B commonstock at the time of the exchange offer and (y) the Company’s adjusted tax basis in suchclass B common stock.  Pursuant to thedistribution agreement entered into between the Company and CTS in connection with the distribution, CTSagreed to indemnify theCompany in the event the transaction is taxable as a result of a breachof certain 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.

 

*Other Tax Contingencies.*In addition to the tax items discussed above,the Company has tax reserves of approximately $23,000 that relate to variouspositions it has taken on tax returns filed in numerous countries over the lastseveral years.  These reserves representthe Company’s best estimate of the probable liability should the tax returnpositions be challenged by the relevant tax authorities.  While the amount is material in theaggregate, no individual item is material and no single event will have amaterial impact related to these reserves. See Note 16 for additional tax related matters.

 

*Other Litigation.*  For a description of two class actionlitigations, referred to by the Company as the Douglas Litigation and theMayberry Litigation, that the Company settled during the first quarter of 2004,please see the Company’s Annual Report on Form 10-K for the year ended December31, 2004.

 

**Note 9.  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.

 

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 Swedish Krona.

 

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The impact of foreignexchange risk management activities on pre-tax income in the three and sixmonths ended June 30, 2005 was a net gain of $9,596 and $20,832, respectively,and net gains in the three and six months ended June 30, 2004 of $1,222 and$5,591, respectively.  In addition, atJune 30, 2005, the Company had approximately $426,269 in foreign exchangeforward contracts outstanding with various expiration dates through December2005 relating to non-functional currency assets and liabilities.  Foreign exchange forward contracts arerecorded at estimated fair value.  Theestimated fair values of the forward contracts are based on quoted marketprices.  Unrealized and realized gainsand losses on these contracts are not deferred and are included in the CondensedConsolidated Statements of Income (unaudited) in Other income, net.

 

*FairValue of Financial Instruments*

 

At June 30, 2005, theCompany’s financial instruments included cash, cash equivalents, receivables,accounts payable and long-term debt.  At June30, 2005, the fair values of cash, cash equivalents, receivables and accountspayable approximated carrying values due to the short-term nature of theseinstruments.  At June 30, 2005, the fairvalue of long-term debt approximated carrying value.  

 

*CreditConcentrations*

 

The Company continuallymonitors its positions with, and the credit quality of, the financialinstitutions which are counterparties to its financial instruments and does notanticipate non-performance by the counterparties.  The Company would not realize a material lossas of June 30, 2005 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 ($296,574****and $264,783,net of allowances, at June 30, 2005 and December 31, 2004, respectively),principally from customers in the pharmaceutical industry.  The Company’s trade receivables do notrepresent significant concentrations of credit risk at June 30, 2005 due to thehigh quality of its customers and their dispersion across many geographicareas.

 

*Linesof Credit*

 

On April 5, 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 of fiveyears, maturing March 2010, reduced the borrowing margins and increasedsubsidiary borrowing limits.  Totalborrowings under these existing lines were $561,300 and $476,400 at June 30,2005 and December 31, 2004, respectively, all of which were classified aslong-term.  The Company defines long-termlines as those where the lines are non-cancelable for more than 365 days fromthe balance sheet date by the financial institutions except for specified,objectively measurable violations of the provisions of the

 

21

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agreement.  Ingeneral, rates for borrowing under the Amended and Restated Facility are LIBORplus 50 basis points and can vary based on the Company’s Debt to EBITDAratio.  The weighted average interestrates for the Company’s lines were 3.71% and 2.83% at June 30, 2005 andDecember 31, 2004, respectively.  Inaddition, the Company is required to pay a commitment fee on any unused portionof the facilities of 0.10%.

 

The Company’s total debtof $710,407 and $626,670 at June 30, 2005 and December 31, 2004, respectively,included $150,000 of private placement debt (as further discussed below), andan adjustment to the carrying amount of fair value hedged debt.  At June 30, 2005, the Company had approximately$138,700 available under its existing bank credit facilities.

 

In March and April 2002,the Company entered into interest rate swaps on a portion of its variable ratedebt portfolio.  $50,000 of these swapsmatured in March 2005.  The remainingarrangement converts the variable interest rates to a fixed interest rate of5.08% on a notional amount of $25,000 and matures in April 2006.  The Company accounted for the interest rateswaps as cash flow hedges and recorded any changes in fair value in Other ComprehensiveIncome (see Note 13).  The Companydetermines the fair values based on estimated prices quoted by financialinstitutions.  The fair values of theseswaps were $(370) and $(1,022) as of June 30, 2005 and December 31, 2004,respectively.

 

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 value of the swap  was $(893) and $270 as of June 30, 2005 andDecember 31, 2004, respectively.

 

The Company’s financingarrangements provide for certain covenants and events of default customary forsimilar instruments, including in the case of its main bank arrangements andthe 2003 private placement transaction, covenants to maintain specific ratios ofconsolidated total indebtedness to EBITDA and of EBITDA to certain fixedcharges.  At June 30, 2005, the Companywas in compliance with these financial debt covenants and it anticipates thatit will remain in compliance with the covenants over the term of the borrowingarrangements.

 

**Note 10.  Pension and Postretirement Benefits**

** **

**The following tables provide the Company’s expenseassociated with pension benefits that are accounted for under SFAS No. 87, forthe three and six months ended June 30, 2005. For a complete description of theCompany’s pension and postretirement benefits, refer to Note 12 of the Company’s2004 Annual Report on Form 10-K as filed with the Securities and ExchangeCommission.**

 

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| **Components of Net Periodic  Benefit Cost for the** | ** ** | **Pension Benefits** |       | **Other Benefits** | ** ** |
|------------------------------------------------------|------------|----------------------|------------|--------------------|------------|
| **Three Months Ended June 30,**                      | ** ** | **2005**             | ** ** | **2004**           |       | **2005** | ** ** | **2004** | ** ** |
| Service cost                                         | ** ** | **$**                | **2,302**  | ** **         | $          | 2,430 |   | **$** | **18** | ** ** | $ | 29 |   |
| Interest cost                                        | ** ** | **3,624**            | ** ** | 3,237              |       | **167** | ** ** | 217 |   |
| Expected return  on plan assets                      | ** ** | **(5,563**           | **)**      | (5,410             | )          | **0** | ** ** | 0 |   |
| Amortization of  prior service cost (credit)         | ** ** | **(56**              | **)**      | (80                | )          | **(247** | **)** | (247 | ) |
| Amortization of  transition obligation               | ** ** | **(1**               | **)**      | (23                | )          | **0** | ** ** | 0 |   |
| Amortization of  net loss                            | ** ** | **723**              | ** ** | 254                |       | **63** | ** ** | 167 |   |
| Net periodic  benefit cost                           | ** ** | **$**                | **1,029**  | ** **         | $          | 407 |   | **$** | **1** | ** ** | $ | 166 |   |

 
| **Components of Net Periodic  Benefit Cost for the Six** | ** ** | **Pension Benefits** |       | **Other Benefits** | ** ** |
|----------------------------------------------------------|------------|----------------------|------------|--------------------|------------|
| **Months Ended June 30,**                                | ** ** | **2005**             | ** ** | **2004**           |       | **2005** | ** ** | **2004** | ** ** |
| Service cost                                             | ** ** | **$**                | **4,617**  | ** **         | $          | 5,272 |   | **$** | **36** | ** ** | $ | 83 |   |
| Interest cost                                            | ** ** | **7,266**            | ** ** | 6,656              |       | **334** | ** ** | 426 |   |
| Expected return  on plan assets                          | ** ** | **(11,149**          | **)**      | (9,372             | )          | **0** | ** ** | 0 |   |
| Amortization of  prior service cost (credit)             | ** ** | **(111**             | **)**      | (114               | )          | **(494** | **)** | (494 | ) |
| Amortization of  transition obligation                   | ** ** | **(2**               | **)**      | (46                | )          | **0** | ** ** | 0 |   |
| Amortization of  net loss                                | ** ** | **1,451**            | ** ** | 1,296              |       | **126** | ** ** | 316 |   |
| Net periodic  benefit cost                               | ** ** | **$**                | **2,072**  | ** **         | $          | 3,692 |   | **$** | **2** | ** ** | $ | 331 |   |

* *

**Note 11.  IncomeTaxes**

** **

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

 

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, the effective tax rate was alsoimpacted by $42,800 of tax expense related to the decision  to repatriate approximately $647,000 offoreign earnings back to the U.S. during 2005 under the American Jobs CreationAct of 2004 (“AJCA”).  In the firstquarter of 2005, $67,100 of tax expense was recorded related to the AJCA ofwhich, $24,300 was reversed in the second quarter of 2005 primarily as a resultof a technical correction passed by Congress to the AJCA.  Forthe six months ended June 30, 2004, the Company’s effective tax rate wasreduced primarily due to a favorable partial U.S. audit settlement ofapproximately $15,100.

 

While the Company intends tocontinue to seek global tax planning initiatives, there can be no assurancethat the Company will be able to successfully implement such initiatives toreduce or maintain its overall tax rate.

 

The Company accrues for taxloss contingencies in the period in which they are probable and estimable inaccordance 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.

 

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**Note 12.  IMS Health Capital Stock**

** **

On December 14, 2004, the Board of Directorsauthorized a stock repurchase program to buy up to 10,000 shares.  As of June 30, 2005, approximately 4,374 ofthe 10,000 shares remained available for repurchase under the December 2004program.  As a result of the proposedmerger with VNU N.V., the Company has suspended its current stock repurchaseprogram (see Note 16).

 

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

 

On April 15, 2003, theBoard of Directors authorized a stock repurchase program to buy up to 10,000shares.  This program was completed inMay 2004 at a total cost of $243,520.

 

During the six monthsended June 30, 2005, the Company repurchased approximately 6,213 shares ofoutstanding Common Stock at a total cost of approximately $147,945 under theseprograms.  During the six months ended June30, 2004, the Company repurchased approximately 8,057 shares of outstandingCommon Stock at a total cost of approximately $204,284, including therepurchase of 4,600 shares on January 9, 2004 pursuant to an accelerated share repurchaseprogram (“ASR”).  As required under theASR agreement, the Company paid an additional $942 of cash in May 2004 as thefinal settlement amount based on an increase in our share price over thesettlement period.  Sharesacquired through the repurchase programs described above are open-marketpurchases or privately negotiated transactions in compliance with Securitiesand Exchange Commission Rule 10b-18.

 

The Company re-issuedapproximately 2,611 treasury shares under option exercises for proceeds ofapproximately $47,502 during the six months ended June 30, 2005.  In addition, the Company paid dividends of$0.02 per share for a total of approximately $4,549 during the three monthsended June 30, 2005.  For the six monthsended June 30, 2005, the Company paid dividends of $0.04 per share for a totalof $9,119.

 

**Note 13.  Comprehensive Income**

** **

*Thefollowing table sets forth the components of comprehensive income, net ofincome tax expense:*

 
| ** **                                          | ** ** | **Three Months Ended  June 30,** |       | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                          | ** ** | **2005**                         | ** ** | **2004**                       |       | **2005** | ** ** | **2004** | ** ** |
| **Net  Income**                                     | ** ** | **$**                            | **93,179** | ** **                     | $          | 65,121 |   | **$** | **123,522** | ** ** | $ | 146,199 |   |
| Other  comprehensive income, net of taxes:          |       |                             | ** ** |                           |       |   | ** ** |   |   |
| Unrealized gains  (losses) on:                      |       |                             | ** ** |                           |       |   | ** ** |   |   |
| Available-for-sale  equity securities               | ** ** | **28**                           | ** ** | 498                            |       | **(77** | **)** | 427 |   |
| Reclassification  adjustment                        | ** ** | **—**                       | ** ** | —                         |       | **—** | ** ** | 219 |   |
| Tax benefit  (provision) on above                   | ** ** | **(10**                          | **)**      | (174                           | )          | **27** | ** ** | (226 | ) |
| Change in  unrealized gains (losses) on investments | ** ** | **18**                           | ** ** | 324                            |       | **(50** | **)** | 420 |   |
| Foreign currency  translation losses                | ** ** | **(21,592**                      | **)**      | (2,422                         | )          | **(47,890** | **)** | (7,413 | ) |
| Changes in fair  value of cash flow hedges          | ** ** | **77**                           | ** ** | 870                            |       | **430** | ** ** | 976 |   |
| Total other  comprehensive loss                     | ** ** | **(21,497**                      | **)**      | (1,228                         | )          | **(47,510** | **)** | (6,017 | ) |
| **Comprehensive  Income**                           | ** ** | **$**                            | **71,682** | ** **                     | $          | 63,893 |   | **$** | **76,012** | ** ** | $ | 140,182 |   |

 

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**Note 14.** 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 465 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. The Company currently expects that alltermination actions under this plan will be completed by the end of 2005.

 

| ** **                   | ** ** | **Severance Related  Charges** | ** ** |
|------------------------------|------------|--------------------------------|------------|
| Charge at  December 31, 2004 |       | $                              | 36,890     |   |
| 2004 utilization             |       | (452                           | )          |
| 2005 utilization             |       | (12,778                        | )          |
| Balance at June  30, 2005    |       | $                              | 23,660     |   |

 

TheCompany currently expects that a substantial portion of the cash outlaysrelating to the 2004 fourth quarter charge will be applied against theremaining June 30, 2005 balance during the remainder of 2005 and 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.  Theseverance benefits were calculated pursuant to the terms of established employeeprotection plans, in accordance with local statutory minimum requirements orindividual employee contracts, as applicable. The contract-related chargeswere for impaired data supply and data processing contacts primarily in theCompany’s U.S. and Japanese operations. The asset write-down portion of the 2003 charge related to the Company’sdecision to abandon certain products and as such, certain computer softwareprimarily in the U.S., Japan and Europe was written-down to its net realizablevalue.

 

| ** **                | ** ** | **Severance  Related  Charges** | ** ** | **Contract  Related   Charges** | ** ** | **Asset  Write-Downs** | ** ** | **Total** | ** ** |
|---------------------------|------------|---------------------------------|------------|---------------------------------|------------|------------------------|------------|-----------|------------|
| Charge at June  30, 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          |       | (264                            | )          | (2,825                          | )          | —                 |       | (3,089    | )          |
| Adjustments               |       | (1,746                          | )          | 67                              |       | 1,679                  |       | —    |       |
| Balance at June  30, 2005 |       | $                               | 114        |                            | $          | 8,888                  |       | $         | —     |   | $ | 9,002 |   |

 

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Thecash portion of the first quarter 2003 charge amounted to $30,586, of which theCompany paid approximately $3,089 during the first half of 2005.  Theremaining accrual of $9,002 atJune 30, 2005 relates to lease obligations and continuing payments related toemployee termination benefits.

 

The Company expects thatcash outlays will be applied against the $9,002 balance remaining of the firstquarter 2003 charge at June 30, 2005 as follows:

 

| **Year Ended   December 31,** | ** ** | **Cash Outlays** | ** ** |
|-------------------------------|------------|------------------|------------|
| 2005                          |       | $                | 4,107      |   |
| 2006                          |       | 2,504            |       |
| 2007                          |       | 713              |       |
| 2008                          |       | 258              |       |
| 2009                          |       | 258              |       |
| Thereafter                    |       | 1,162            |       |
| Total                         |       | $                | 9,002      |   |

 

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 (the “Program”).  This programwas designed to streamline operations, increase productivity, and improveclient service.  In connection with thisprogram, the Company recorded $94,616 of Severance, impairment and othercharges during the fourth quarter of 2001 as a component of operating income

 

| ** **                   | ** ** | **Severance  Related  Charges** | ** ** | **Contract  Related  Charges** | ** ** | **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             |       | (131                            | )          | (957                           | )          | —                 |       | (1,088    | )          |
| Adjustments                  |       | (688                            | )          | (274                           | )          | 962                    |       | —    |       |
| Balance at June  30, 2005    |       | $                               | 2,025      |                           | $          | 4,659                  |       | $         | —     |   | $ | 6,684 |   |

 

26

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The Company expects thatcash outlays will be applied against the  $6,684 balance remaining in the fourthquarter 2001 program at June 30, 2005 as follows:

 

| **Year Ended   December 31,** | ** ** | **Cash Outlays** | ** ** |
|-------------------------------|------------|------------------|------------|
| 2005                          |       | $                | 1,128      |   |
| 2006                          |       | 2,216            |       |
| 2007                          |       | 1,835            |       |
| 2008                          |       | 262              |       |
| 2009                          |       | 262              |       |
| Thereafter                    |       | 981              |       |
| Total                         |       | $                | 6,684      |   |

 

TheCompany expects that future results will benefit from the 2001 and 2003restructuring charges to the extent of the contract-related charges and assetwrite-downs primarily through 2007.  TheCompany’s severance actions in the 2001 and 2003 programs related to a shiftingof resources around the Company.  Thebenefits from the 2004 severance actions will be partially offset by headcountadditions in selected locations.  Thebenefits will be realized primarily in Operating costsand Selling and administrative expense, with a partial year of benefit realizedin 2005 and a full year of benefit realized in 2006.  For the 2001 and 2003 charges, the statementof income lines that will be impacted in future periods are Operating costs forthe contract-related charges and Depreciation and amortization related to theasset write-downs.  However, the Companydoes not expect a material impact on future cash flows due to the fact that itis still contractually obligated to continue to make payments under impairedcontracts.

 

**Note 15.**  Operations by Business Segment

** **

Operating segments aredefined as components of an enterprise about which financial information isavailable that is evaluated on a regular basis by the chief operatingdecision-maker, or decision-making groups, in deciding how to allocateresources to an individual segment and in assessing performance of thesegment.  The Company operates a globallyconsistent business model, offering pharmaceutical business information,software and related 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 of its critical business processes;and the most significant performance evaluations and resource allocations madeby the Company’s chief operating decision makers are made on a globalbasis.  As such, the Company hasconcluded that it maintains one operating and reportable segment.

 

**GeographicFinancial Information:**

 

The following representsselected geographic information for the regions in which we operate for thethree and six months ended June 30, 2005 and 2004:

 

27

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| ** **                             | ** ** | **Americas  (1)** | ** ** | **Europe   (2)** | ** ** | **Asia Pacific  (3)** | ** ** | **Corporate &  Other** | ** ** | **Total  IMS** | ** ** |
|----------------------------------------|------------|-------------------|------------|------------------|------------|-----------------------|------------|----------------------------|------------|----------------|------------|
| **Three  months ended June 30, 2005:** |       |              |       |             |       |                  |       |                       |       |           |       |
| Operating Revenue (4)                  |       | $                 | 189,322    |             | $          | 186,648               |       | $                          | 57,312     |           | —     |   | $ | 433,282 |   |
| Operating Income  (5)                  |       | $                 | 71,196     |             | $          | 30,597                |       | $                          | 25,463     |           | $          | (23,959 | ) | $ | 103,297 |   |
| **Six  months ended June 30, 2005:**   | ** ** | ** **        | ** ** | ** **       | ** ** | ** **            | ** ** | ** **                 | ** ** | ** **     | ** ** |
| Operating  Revenue (4)                 |       | $                 | 366,279    |             | $          | 362,057               |       | $                          | 115,930    |           | —     |   | $ | 844,266 |   |
| Operating Income  (5)                  |       | $                 | 136,902    |             | $          | 48,542                |       | $                          | 53,528     |           | $          | (38,803 | ) | $ | 200,169 |   |
| **Three  months ended June 30, 2004:** |       |              |       |             |       |                  |       |                       |       |           |       |
| Operating Revenue (4)                  |       | $                 | 172,746    |             | $          | 156,403               |       | $                          | 50,434     |           | —     |   | $ | 379,583 |   |
| Operating Income  (5)                  |       | $                 | 67,648     |             | $          | 27,618                |       | $                          | 25,378     |           | $          | (18,176 | ) | $ | 102,468 |   |
| **Six  months ended June 30, 2004:**   | ** ** | ** **        | ** ** | ** **       | ** ** | ** **            | ** ** | ** **                 | ** ** | ** **     | ** ** |
| Operating  Revenue (4)                 |       | $                 | 339,998    |             | $          | 298,747               |       | $                          | 102,414    |           | —     |   | $ | 741,159 |   |
| Operating Income  (5)                  |       | $                 | 132,503    |             | $          | 46,055                |       | $                          | 54,245     |           | $          | (34,103 | ) | $ | 198,700 |   |

 

----

**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.*

 

A summary of theCompany’s operating revenue by product line, as of and for the three and sixmonths ended June 30, 2005 and 2004 is presented below:

 
| ** **                             | ** ** | **Three Months Ended June 30,** | ** **  | **Six Months Ended June 30,** | ** ** |
|----------------------------------------|------------|---------------------------------|-------------|-------------------------------|------------|
| ** **                             | ** ** | **2005**                        | ** **  | **2004**                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| Sales Force  Effectiveness             | ** ** | **$**                           | **207,454** |                          | $          | 189,996 | ** ** | **$** | **407,399** |   | $ | 369,674 |   |
| Portfolio  Optimization                | ** ** | **122,338**                     |        | 111,034                       | ** ** | **247,828** |   | 225,823 |   |
| Launch and Brand  Management and Other | ** ** | **103,490**                     |        | 78,553                        | ** ** | **189,039** |   | 145,662 |   |
| Total Operating Revenue                | ** ** | **$**                           | **433,282** |                          | $          | 379,583 | ** ** | **$** | **844,266** |   | $ | 741,159 |   |

 

**Note 16.**  Subsequent Events

** **

*Acquisitions*

 

DuringJuly 2005, the Company completed three acquisitions for an aggregate cost ofapproximately $96,000.  Theseacquisitions were Areks (France, Japan, Switzerland and U.S.), 

 

28

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Pharmetrics (U.S.) andEnvision (U.S.) and will be accounted for under the purchase method ofaccounting; the respective purchase price will be allocated to the assetsacquired and the liabilities assumed based on estimated fair values as of theclosing date.  Had these acquisitionsoccurred as of January 1, 2005 or 2004, the impact on the Company’s results ofoperations would not have been significant.

 

*VNUMerger*

 

OnJuly 11, 2005, the Company announced a definitive agreement to merge with VNUN.V. (“VNU”), a global information and media companybased in Haarlem, The Netherlands.  VNUis a leader and has recognized brands in marketing information (ACNielsen),media measurement and information (Nielsen Media Research) and businessinformation (publications and trade shows). Under the terms of the agreement, the Company’s shareholders willreceive $11.25 in cash and .60415 VNU shares for each IMS share.  The Company expects the merger to becompleted in the first quarter of 2006, subject to the approval of shareholdersof the Company and VNU, regulatory approvals and other customary conditions.

 

In connection with theproposed merger with VNU, the Company has incurred merger costs of $7,400through June 30, 2005, primarily for professional fees.  The Company currently expects totalmerger-related costs to range between $40,000 and $45,000, primarily forinvestment banking and professional fees.

 

The Company may alsoreorganize certain of its subsidiaries provided certain conditions to theproposed merger have been satisfied.  Asa result of these reorganizations, the Company may incur tax-related charges ofapproximately $45,000 to $50,000 prior to the effective date of themerger.  As of June 30, 2005 the Companyhas not recorded any tax-related charges in connection with any potential reorganizations since the Company does not have anyintention to undertake these reorganizations unless the conditions of the proposedmerger with VNU are satisfied.

 

Further, the Company hasEmployment and Change-in-Control Agreements (“CIC”) with certain of itsexecutives that provide for severance and other benefits if, following a changein control of IMS, the executive’s employment is adversely affected.  In connection with the proposed merger withVNU, the CIC provisions under these agreements will require the Company to fundapproximately $130,000 into a Rabbi Trust no later than September 22,2005.  These amounts will be payable tothe executives only in the event the proposed merger with VNU is completed andthe executive suffers an adverse change in his or her employment status.

 

29

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**Item 2.**** Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

**(Dollars and shares in thousands, except for pershare data)**

 

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

 

***Our Business***

*** ***

IMS Health Incorporated (“we”,“us” or “our”) is a leading global provider of information solutions to thepharmaceutical and healthcare industries.  Our revenues are derivedprimarily from the sale of a broad line of market information, sales managementand consulting services to the pharmaceutical and healthcare industries. Our information products are developed to meet client needs by using datasecured from a worldwide network of suppliers in the markets where operationsexist.  Key information products include:

 

•                  Sales Force Effectiveness to optimizesales force productivity and territory management;

 

•                  Portfolio Optimization to provideclients with insights into market opportunity and business developmentassessment; and

 

•                  Launch and Brand Management and Otherto support client needs relative to market segmentation and positioning andlife cycle management for prescription and over-the-counter pharmaceuticalproducts.

 

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

 

We operate in more than100 countries.  We also own a venture capital unit, Enterprise Associates,LLC (“Enterprises”), which is focused on investments in emergingbusinesses.  Until December 21, 2004, wealso owned an approximately 25% equity interest in the TriZetto Group,Inc.  “TriZetto” (SeeNote 7 to the Condensed Consolidated Financial Statements (Unaudited)).

 

We manage on a globalbusiness model with global leaders for the majority of our critical businessprocesses and accordingly have one reportable segment.

 

We believe that importantmeasures of our financial condition and results of operations include operatingrevenue, constant dollar revenue growth, operating income, operating margin andcash flows.

 

**Operating Results**

 

*Reclassifications.** *Certain prior-year amounts have beenreclassified to conform to the 2005 presentation.

 

*Referencesto constant dollar results.** *We report results in U.S. Dollarsbut we do business on a global basis. Exchange rate fluctuations affect the rate at which we translate foreignrevenues and expenses into U.S. Dollars and have important effects on ourresults.  In order to illustrate these 

 

30

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effects,the discussion of our business in this report sometimes describes the magnitudeof changes in constant dollar terms.  Webelieve this information facilitates a comparative view of businessgrowth.  In the first six months of 2005,the U.S. Dollar was generally weaker against other currencies compared to thefirst six months of 2004, so growth at constant dollar exchange rates was lowerthan growth at actual currency exchange rates. See “How Exchange Rates Affect Our Results” below and the discussion of “MarketRisk” in the Management Discussion and Analysis in our annual report on Form10-K for the year ended December 31, 2004 for a more complete discussionregarding the impact of foreign currency translation on our business.

 

**Summary of Operating Results**

** **
| ** **                           | ** ** | ** **                      | ** **  | **% Variance** | ** ** |
|--------------------------------------|------------|---------------------------------|-------------|----------------|------------|
| ** **                           | ** ** | **Three months ended June 30,** | ** **  | **2005**       | ** ** |
| ** **                           | ** ** | **2005**                        | ** **  | **2004**       | ** ** | **vs. 2004** | ** ** |
| Operating  revenue                   | ** ** | **$**                           | **433,282** |           | $          | 379,583 |   | 14.1 | % |
| Operating costs                      | ** ** | **189,503**                     |        | 163,222        |       | 16.1 | % |
| Selling and  administrative expenses | ** ** | **107,440**                     |        | 91,576         |       | 17.3 | % |
| Depreciation and  amortization       | ** ** | **25,642**                      |        | 22,317         |       | 14.9 | % |
| Merger costs                         | ** ** | **7,400**                       |        | —         |       | N/A |   |
| Operating income                     | ** ** | **$**                           | **103,297** |           | $          | 102,468 |   | 0.8 | % |

 
| ** **                           | ** ** | ** **                    | ** **  | **% Variance** | ** ** |
|--------------------------------------|------------|-------------------------------|-------------|----------------|------------|
| ** **                           | ** ** | **Six months ended June 30,** | ** **  | **2005**       | ** ** |
| ** **                           | ** ** | **2005**                      | ** **  | **2004**       | ** ** | **vs. 2004** | ** ** |
| Operating  revenue                   | ** ** | **$**                         | **844,266** |           | $          | 741,159 |   | 13.9 | % |
| Operating costs                      | ** ** | **372,860**                   |        | 315,910        |       | 18.0 | % |
| Selling and  administrative expenses | ** ** | **213,518**                   |        | 182,526        |       | 17.0 | % |
| Depreciation and  amortization       | ** ** | **50,319**                    |        | 44,023         |       | 14.3 | % |
| Merger costs                         | ** ** | **7,400**                     |        | —         |       | N/A |   |
| Operating income                     | ** ** | **$**                         | **200,169** |           | $          | 198,700 |   | 0.7 | % |

 

***Operating Income***

 

Our operating income forthe second quarter of 2005 increased 0.8% to $103,297 from $102,468 in thesecond quarter of 2004.  The change wasdue to the increase in our operating revenue, partially offset by increases inour operating costs and selling and administrative expenses driven primarily byinvestments in new products, consulting and services capabilities, increasedcost of data and costs associated with the proposed merger with VNU N.V. (SeeNote 16 to our Condensed Consolidated Financial Statements (Unaudited) for adescription of the proposed merger with VNU). Our operating income decreased 0.5% in constant dollar terms.  Absent the costs associated with the proposedmerger, operating income would have increased 8.0% at reported rates and 6.8%at constant dollar terms.  Our operatingincome for the first six months of 2005 increased 0.7% to $200,169 from$198,700 for the first six months of 2004. The change was primarily due to the increase in our operating revenue,partially offset by increases in our operating costs and selling andadministrative expenses driven primarily by investments in new products,consulting and services capabilities,

 

31

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increasedcost of data and costs associated with the proposed merger with VNU.  Our operating income decreased 0.8% inconstant dollar terms.  Absent the costsassociated with the merger, operating income would have increased 4.5% atreported rates and 2.9% at constant dollar terms.

 

***OperatingRevenue***

 

Revenue in 2004 reflectsa reclassification of consulting and services revenue into the other threebusiness lines to conform to the 2005 presentation.

 

Our operating revenue forthe second quarter of 2005 grew 14.1% to $433,282 from $379,583 in the secondquarter of 2004. On a constant dollar basis our operating revenue growth was11.8%.  Acquisitions made during 2004 and2005 contributed 3.4 percentage points of reported operating revenue andconstant dollar revenue growth.  Ouroperating revenue for the first six months of 2005 grew 13.9% to $844,266 from$741,159 for the first six months of 2004. On a constant dollar basis ouroperating revenue growth was 11.1%. Acquisitions made during 2004 and 2005 contributed 3.6 percentage pointsof reported operating revenue growth and 3.5 percentage points of constantdollar revenue growth.  The increase inour operating revenue resulted from growth in revenue in all three of ourbusiness lines, together with the effect of currency translation.  On a constant dollar basis, all businesslines grew.

 

**Summary of Operating Revenue**

** **
| ** **                             | ** ** | ** **                      | ** **  | ** **       | ** ** | **% Variance**     | ** ** |
|----------------------------------------|------------|---------------------------------|-------------|------------------|------------|--------------------|------------|
| ** **                             | ** ** | **Three months ended June 30,** | ** **  | **2005 vs 2004** | ** ** |
| ** **                             | ** ** | **2005**                        | ** **  | **2004**         | ** ** | **Reported Rates** | ** ** | **Constant Dollar** | ** ** |
| Sales Force  Effectiveness             | ** ** | **$**                           | **207,454** |             | $          | 189,996            |       | 9.2 | % | 6.9 | % |
| Portfolio  Optimization                | ** ** | **$**                           | **122,338** |             | $          | 111,034            |       | 10.2 | % | 7.9 | % |
| Launch and Brand  Management and Other | ** ** | **$**                           | **103,490** |             | $          | 78,553             |       | 31.7 | % | 29.4 | % |
| Operating  Revenue                     | ** ** | **$**                           | **433,282** |             | $          | 379,583            |       | 14.1 | % | 11.8 | % |

 
| ** **                             | ** ** | ** **                    | ** **  | ** **       | ** ** | **% Variance**     | ** ** |
|----------------------------------------|------------|-------------------------------|-------------|------------------|------------|--------------------|------------|
| ** **                             | ** ** | **Six months ended June 30,** | ** **  | **2005 vs 2004** | ** ** |
| ** **                             | ** ** | **2005**                      | ** **  | **2004**         | ** ** | **Reported Rates** | ** ** | **Constant Dollar** | ** ** |
| Sales Force  Effectiveness             | ** ** | **$**                         | **407,399** |             | $          | 369,674            |       | 10.2 | % | 7.5 | % |
| Portfolio  Optimization                | ** ** | **$**                         | **247,828** |             | $          | 225,823            |       | 9.7 | % | 7.0 | % |
| Launch and Brand  Management and Other | ** ** | **$**                         | **189,039** |             | $          | 145,662            |       | 29.8 | % | 26.6 | % |
| Operating  Revenue                     | ** ** | **$**                         | **844,266** |             | $          | 741,159            |       | 13.9 | % | 11.1 | % |

 

•                  *Sales Force Effectiveness*revenue grew primarily due to DDD data offerings in Japan, Sales and AccountManagement consulting engagements in Europe and Japan, Xponent and the suite ofnew long-term care products in the United States, and steady growth in all ofthe other regions.

 

•                  *Portfolio Optimization*revenue grew primarily due to strong demand for certain of our core products,including our next generation MIDAS offering, called MIDAS Quantum.  In 

 

32

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addition, we had strong growth inour Hospital Audits in the US and Europe as well as in the PortfolioDevelopment consulting practice area in Europe, Asia Pacific and the UnitedStates.

 

•                  *Launch and BrandManagement and other product lines* revenue grew primarily due toPricing and Reimbursement, Promotion Management and Performance Managementconsulting revenue in the United States and Europe as well as Consumer Healthin Europe.

 

Consulting and servicesrevenue, as included in the business lines above, was $62,428 in the secondquarter of 2005, up 35.2% from $46,173 in the second quarter of 2004 (up 32.9%on a constant-dollar basis).  Consultingand services revenue was $117,066 for the first six months of 2005, up 47.0%from $79,635 for the first six months of 2004 (up 43.7% on a constant-dollarbasis).  Approximately two-thirds of the consulting andservices revenue growth for the second quarter and first six months of 2005 wasattributable to acquisitions completed during 2004 and the first half of 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 16.1% to $189,503 inthe second quarter of 2005, from $163,222 in the second quarter of 2004.  The increase in our operating costs wasprimarily due to**foreign currency translation,increased cost of data, increases in costs related to consulting and services,and operating costs of acquired businesses. The effect of foreign currency translation increased our operating costsby approximately $4,000 for the second quarter of 2005.  Excluding the effect of the change in foreigncurrency translation, our operating costs grew 13.5% in the second quarter of2005 as compared to the second quarter of 2004. Our operating costs grew 18.0% to $372,860 for the first six months of2005, from $315,910 for the first six months of 2004.  The increase in our operating costs wasprimarily due to**foreign currency translation,increased cost of data, increases in costs related to consulting and services,and operating costs of acquired businesses. The effect of foreign currency translation increased our operating costsby approximately $10,000 for the first six months of 2005.  Excluding the effect of the change in foreigncurrency translation, our operating costs grew 14.9% in the first six months of2005 as compared to the first six months of 2004.

 

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

 

***Sellingand Administrative Expenses***

 

Our selling andadministrative expenses consist primarily of the costs attributable to sales,marketing, and administration, including human resources, legal, management andfinance.  Our selling and administrativeexpenses grew 17.3% in the second quarter of 2005, to $107,440 from $91,576 inthe second quarter of 2004.  Our sellingand administrative expenses grew 17.0% in the first six months of 2005, to$213,518 from $182,526 for the first six months of 2004.

 

33

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•                  *Foreign CurrencyTranslation*: The effect of foreign currency translation increasedour selling and administrative expenses by approximately $3,000 for the secondquarter of 2005 as compared to the second quarter of 2004.  The effect of foreign currency translationincreased our selling and administrative expenses by approximately $7,000 forthe first six months of 2005 as compared to the first six months of 2004.Excluding the effect of the change in foreign currency translation, our sellingand administrative expenses grew 14.3% and 13.3% in the second quarter andfirst six months of 2005 as compared to the second quarter and first six monthsof 2004, respectively.

 

•                  *Sales and Marketing*:Sales and marketing expense increased by approximately $1,000 and $3,000 in thesecond quarter and first six months of 2005, compared to the second quarter andfirst six months of 2004, respectively, to support revenue growth.

 

•                  *Consulting*:  Consulting and services expenses increased byapproximately $2,000 and $6,000 in the second quarter and first six months of2005, compared to the second quarter and first six months of 2004,respectively, to support the growth in this revenue stream.

 

***Depreciationand Amortization***

 

Our depreciation andamortization charges increased 14.9% to $25,642 in the second quarter of 2005,from $22,317 in the second quarter of 2004, and 14.3% to $50,319 for the firstsix months of 2005, from $44,023 for the first six months of 2004, primarilydue to computer software amortization associated with new products whichincreased by approximately $2,500 and $4,500, respectively; and amortization ofintangibles related to recent acquisitions, which increased by approximately$1,500 and $3,000 in the second quarter and first six months of 2005 comparedto the second quarter and first six months of 2004, respectively.

 

***MergerCosts***

 

During the second quarterof 2005, we incurred $7,400 of costs in connection with the proposed mergerwith VNU.  See Note 16 to our CondensedConsolidated Financial Statements (Unaudited) for a description of the proposedmerger with VNU.

 

***Trendsin our Operating Margins***

 

Our operating margin forthe second quarter of 2005 was 23.8%, as compared to 27.0% in the secondquarter of 2004.  Our operating marginfor the first six months of 2005 was 23.7% as compared to 26.8% in the firstsix months of 2004.  During the secondquarter of 2005, we incurred $7,400 of costs in connection with the proposedmerger with VNU.  If these costs had notbeen incurred, our operating margin for the second quarter and first six monthsof 2005 would have been 25.5% and 24.6%, respectively.  The decrease in our operating margins for thesecond quarter and first six months of 2005 (excluding the merger costs) isprimarily due to continuing investments in new products and consulting andservices capabilities, increased cost of data, and operating income declines inJapan, driven primarily by the ramp-up in the sales and product supportservices needed to support customer readiness programs for new offerings.

 

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Recent acquisitions alsohave had an adverse effect on our operating margins due to the fact that someof our small business acquisitions have historically experienced loweroperating margins than ours, and the revenue and cost synergies that weincorporate into our business plans are not all immediately realized.  We also experience higher intangibleamortization in the first year 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 year of each completed acquisition.

 

Operating marginsgenerally have declined over the past three years and may continue to declinein future periods as we invest in acquisitions and new products and services todrive future revenue growth.

 

***Non-OperatingIncome***

 

Our non-operating incomeimproved to $3,733 in the second quarter of 2005 from a net loss of $1,680 inthe second quarter of 2004.  Ournon-operating income grew to $11,867 for the first six months of 2005 from$4,241 for the first six months of 2004. The increase in our non-operating income was primarily due to the followingfactors:

 

•                  *Interest Expense, net*:Net interest expense was $4,607 and $8,405 for the second quarter and first sixmonths of 2005, respectively, compared with $2,059 and $5,368 for the secondquarter and first six months of 2004, respectively, primarily due to higherdebt levels and interest rates.

 

•                  *Gains from Investments,net*: We had losses from investments of $299 during the secondquarter of 2005, primarily as a result of fees within the Enterpriseportfolio.  Gains from investment of$2,074 in the second quarter of 2004 were primarily from the sale ofinvestments within the Enterprise portfolio. We had gains from investments of $2,372 during the first six months of2005, primarily as a result of a divestiture of an interest we had in a Germancompany.  Gains from investment of $8,527in the first quarter of 2004 were primarily from the sale of investments withinthe Enterprise portfolio.

 

•                  *Other Income, net*:Other income, net, increased by $10,243 and $16,727 in the second quarter andfirst six months of 2005, respectively. The increase was primarily due to net foreign exchange hedge gains of$9,596 and $20,832 in the second quarter and first six months of 2005,respectively, compared with net foreign exchange hedge gains of $1,222 and$5,591 in the second quarter and first six months of 2004, respectively.

 

***Taxes***

 

For the six months endedJune 30, 2005, our 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, the effective tax rate was alsoimpacted by $42,800 of tax expense related to the decision  to repatriate approximately $647,000 offoreign earnings back to the U.S. during 2005 under the American Jobs CreationAct of 2004 (“AJCA”).  In the firstquarter of 2005, $67,100 of tax expense was recorded related to the AJCA ofwhich, $24,300 was reversed in the second quarter of 2005 primarily as a resultof a technical correction passed by Congress to the AJCA.  Forthe six months ended June 30, 

 

35

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2004, our effective tax rate was reduced primarily due to a favorablepartial U.S. audit settlement of approximately $15,100.

 

For all periodspresented, our effective tax rate was reduced as a result of global taxplanning initiatives.  While we intend tocontinue to seek global tax planning initiatives, there can be no assurancethat we will be able to successfully implement such initiatives to reduce ormaintain 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, 2005 and 2004:

 
| ** **                             | ** ** | **Americas  (1)** | ** ** | **Europe   (2)** | ** ** | **Asia Pacific   (3)** | ** ** | **Corporate &  Other** | ** ** | **Total  IMS** | ** ** |
|----------------------------------------|------------|-------------------|------------|------------------|------------|------------------------|------------|----------------------------|------------|----------------|------------|
| **Three  months ended June 30, 2005:** |       |              |       |             |       |                   |       |                       |       |           |       |
| Operating Revenue (4)                  |       | $                 | 189,322    |             | $          | 186,648                |       | $                          | 57,312     |           | —     |   | $ | 433,282 |   |
| Operating Income  (5)                  |       | $                 | 71,196     |             | $          | 30,597                 |       | $                          | 25,463     |           | $          | (23,959 | ) | $ | 103,297 |   |
| **Six  months ended June 30, 2005:**   | ** ** | ** **        | ** ** | ** **       | ** ** | ** **             | ** ** | ** **                 | ** ** | ** **     | ** ** |
| Operating  Revenue (4)                 |       | $                 | 366,279    |             | $          | 362,057                |       | $                          | 115,930    |           | —     |   | $ | 844,266 |   |
| Operating Income  (5)                  |       | $                 | 136,902    |             | $          | 48,542                 |       | $                          | 53,528     |           | $          | (38,803 | ) | $ | 200,169 |   |
| **Three  months ended June 30, 2004:** |       |              |       |             |       |                   |       |                       |       |           |       |
| Operating Revenue (4)                  |       | $                 | 172,746    |             | $          | 156,403                |       | $                          | 50,434     |           | —     |   | $ | 379,583 |   |
| Operating Income  (5)                  |       | $                 | 67,648     |             | $          | 27,618                 |       | $                          | 25,378     |           | $          | (18,176 | ) | $ | 102,468 |   |
| **Six  months ended June 30, 2004:**   | ** ** | ** **        | ** ** | ** **       | ** ** | ** **             | ** ** | ** **                 | ** ** | ** **     | ** ** |
| Operating  Revenue (4)                 |       | $                 | 339,998    |             | $          | 298,747                |       | $                          | 102,414    |           | —     |   | $ | 741,159 |   |
| Operating Income  (5)                  |       | $                 | 132,503    |             | $          | 46,055                 |       | $                          | 54,245     |           | $          | (34,103 | ) | $ | 198,700 |   |

 

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**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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***Americas Region***

 

Operating revenue growthin the Americas region was 9.6% in the second quarter of 2005, compared to thesecond quarter of 2004, and 7.7% in the first six months of 2005, compared tothe first six months of 2004.  The growthfor the second quarter and first six months was primarily due to strongperformance in consulting and services within the launch and brand managementand other business lines and continued overall strength of the sales forceeffectiveness business line.

 

Operating income in theAmericas region grew 5.2% in the second quarter of 2005, compared to the secondquarter of 2004, and 3.3% in the first six months of 2005, compared to thefirst six months of 2004.  The operatingincome growth for the second quarter and first six months of 2005 reflectsrevenue growth in the region, partially offset by increased cost of data andinvestment in consulting capabilities.

 

***EuropeRegion***

 

Operating revenue growthin the Europe region was 19.3% in the second quarter of 2005, compared to thesecond quarter of 2004, and 21.2% for the first six months of 2005, compared tothe first six months of 2004.  The growthin the second quarter and first six months of 2005 was primarily due to stronggrowth in our consulting and services related to all of our business lines, inaddition to growth in core sales force effectiveness and portfolio optimizationdata sales, as well as foreign exchange.

 

Operating income in theEurope region increased by 10.8% in the second quarter of 2005, compared to thesecond quarter of 2004, and 5.4% in the first six months of 2005, compared tothe first six months of 2004.  The growthin the second quarter and first six months of 2005 was primarily driven byoperating revenue growth partially offset by increased cost of data andinvestments in the consulting business.

 

***Asia Pacific Region***

 

Operatingrevenue in the Asia Pacific region increased 13.6% in the second quarter of2005, compared to the second quarter of 2004, and 13.2% in the first six monthsof 2005 compared to the first six months of 2004.  The growth in the second quarter and firstsix months of 2005 was due to continued strong growth in the region, includingsolid growth in Japan, and foreign exchange.

 

Operatingincome in the Asia Pacific region increased by 0.3% in the second quarter of2005, compared to the second quarter of 2004, primarily due to revenue growthin Japan partially offset by increased investments in new products and datacosts in Japan.  Operating income in theAsia Pacific region decreased by 1.3% in the first six months of 2005, comparedto the first six months of 2004, primarily due to increased investments in newproducts and data costs in Japan.

 

### **How Exchange Rates Affect Our Results**

### ** **

IMS operates globally,deriving a significant portion of its operating income from non-U.S. operations.  As a result, fluctuations in the value offoreign currencies relative to the U.S. dollar may increase the volatility ofU.S. dollar operating results.  IMSenters into forward foreign currency contracts to partially offset the effectof currency fluctuations.  In 2005,foreign currency translation 

 

37

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increased U.S. dollarrevenue growth by approximately 2.3 percentage points in the second quarter of2005 and 2.8 percentage points in the first six months of 2005, while impact onoperating income growth was an approximate increase of 1.3 percentage pointsfor the second quarter of 2005 and 1.6 percentage points in the first sixmonths of 2005.

 

Non-U.S. monetary assetsare maintained in currencies other than the U.S. dollar, principally the Euro,the Japanese Yen, the British Pound, the Swiss Franc, and the AustralianDollar.  Where monetary assets are heldin the functional 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 Consolidated Statements of Shareholders’Equity.  The effect of exchange ratechanges during 2005 decreased the U.S. dollar amount of Cash and cashequivalents by $9,284.

 

***Liquidityand Capital Resources***

*** ***

Our cash and cashequivalents decreased $45,094during the first six months of 2005 to $399,809at June 30, 2005 compared to $444,903at December 31, 2004.  The decreasereflects cash provided by operating activities of $65,913 offset by cash used in investing activitiesof $86,971 and financing activities of $14,752.  Including thechange in short-term marketable securities, which is included in cash used ininvesting activities, our cash and cash equivalents and short-term marketablesecurities decreased to $399,809at June 30, 2005 compared to $459,956at December 31, 2004, a decrease of $60,417.

 

We currently expect that we willuse our cash and cash equivalents primarily to fund:

 

•                  development of software to be used in our new products andcapital expenditures to expand and upgrade our information technologycapabilities and to build or acquire facilities to house our growing business(we currently expect to spend approximately $95,000 to $105,000 during 2005 forsoftware development and capital expenditures);

 

•                  acquisitions;

 

•                  dividends to our shareholders (we expect 2005 dividends willbe $0.08 per share or approximately $18,000);

 

•                  payments for tax related matters,including the D&B Legacy Tax Matters discussed further in Note 8 to ourCondensed Consolidated Financial Statements (Unaudited).  Payments for certain of the D&B LegacyTax Matters could be up to approximately $62,000 prior to December 31, 2005;and

 

•                  pension andother postretirement benefit plan contributions (we currently expectcontributions to U.S. and non-U.S. pension and other postretirement benefitplans to total approximately $23,700 in 2005).

 

Net cash provided byoperating activities amounted to $65,913for the six months ended June 30, 2005, a decrease in cash provided of $95,479 over the comparable period in2004.  The decrease 

 

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relates primarily to the fundingof accounts receivable, prepaid expenses, accounts payable and severance, impairmentand other charges during the six months ended June 30, 2005.

 

Net cash used ininvesting activities amounted to $86,971 for the six months ended June 30, 2005, an increase in cash used of$33,205 over the comparable period in 2004. The increase during the first six months of 2005 relates primarily tothe fact that we made payments of $91,507 for acquisitions during the first sixmonths of 2005, compared to payments made for acquisitions of $19,275 duringthe comparable period in 2004.  We alsohad proceeds from the sale of investments of $3,023 in the first six months of2005, compared to $12,883 in the first six months of 2004.  These amounts were partially offset by$37,414 of proceeds from the sale of our investment in TriZetto (see Note 7 ofthe Condensed Consolidated Financial Statements (unaudited)).

 

Net cash used infinancing activities amounted to $14,752 for the six months ended June 30,2005, a decrease of $63,801 over the comparable period in 2004.  This decrease in cash used was primarily dueto a decrease of $56,339 in purchases of our stock during the first six monthsof 2005 compared to the first six months of 2004.  Refer to the Stock Repurchase Programssection for further information on our variance between the first quarters of2005 and 2004.

 

Our financing activitiesinclude cash dividends we paid of $0.02 per share quarterly, which amounted to$9,119 and $9,500 during the first six months of 2005 and 2004,respectively.  The payments and level ofcash dividends made by us are reviewed quarterly and are subject to thediscretion of our Board of Directors. Any future dividends, other than the $0.02 per share dividend for thefirst three quarters of 2005, which were declared by our Board of Directors inFebruary, April and July 2005, will be based on, and affected by, a number offactors, including our operating results and financial requirements.

 

As discussed under theTaxes section, we will repatriate approximately $647,000 of foreign earningsback to the U.S. during 2005 under the AJCA. Foreign earnings repatriated under the AJCA would increase liquidity inthe U.S., with a corresponding reduction in liquidity at our foreignsubsidiaries.  Some foreign subsidiarieswould be required to borrow in order to repatriate their earnings to theU.S.  We expect our significant positiveforeign cash flows would be sufficient to repay any foreign debt and replenishforeign cash balances over time.  Weutilize a variety of tax planning and financing strategies in an effort toensure that our worldwide cash is available in the locations in which it isneeded.

 

As discussed in Note 16 toour Condensed Consolidated Financial Statements (Unaudited), we have Employmentand Change-in-Control Agreements (“CIC”) with certain of our executives thatprovide for severance and other benefits if, following a change in control ofIMS, the executive’s employment is adversely affected.  In connection with the proposed merger withVNU, the CIC provisions under these agreements will require us to fundapproximately $130 million into a Rabbi Trust no later than September 22,2005.  These amounts will be payable tothe executives only in the event the proposed merger with VNU is completed andthe executive suffers an adverse change in his or her employment status.

 

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**Tax andother Contingencies**

 

Weare exposed to certain known tax and other contingencies that are material toour investors.  The facts and circumstances surrounding thesecontingencies and a discussion of their effect on us are included in Note 8 toour Condensed Consolidated Financial Statements (Unaudited) for the periodended June 30, 2005.  We do not know ofany material tax or other contingencies, other than those described in Note 8to our Condensed Consolidated Financial Statements (Unaudited).

 

Thesecontingencies may have a material effect on our liquidity, capitalresources or results of operations.  Although we have established reservesfor D&B Legacy Tax Matters in accordance with SFAS No. 5, “Accounting forContingencies”, the actual liability may exceed the amount of the reserve.  We have not established any reserves inrespect of the other contingencies.  In addition, even where our reservesare adequate, the incurrence of any of these liabilities may have a materialeffect on our liquidity and the amount of cash available to us for otherpurposes.

 

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

 

**Stock Repurchase Programs**

 

On December 14, 2004, the Board of Directorsauthorized a stock repurchase program to buy up to 10,000 shares.  As of June 30, 2005, approximately 4,374 ofthe 10,000 shares remained available for repurchase under the December 2004program.  As a result of the proposedmerger with VNU N.V., we have suspended our current stock repurchaseprogram.  See Note 16 to our CondensedConsolidated Financial Statements (Unaudited) for a description of the proposedmerger with VNU.

 

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.

 

On April 15, 2003, theBoard of Directors authorized a stock repurchase program to buy up to 10,000shares.  This program was completed inMay 2004 at a total cost of $243,520.

 

During the six monthsended June 30, 2005, the Company repurchased approximately 6,213 shares ofoutstanding Common Stock at a total cost of approximately $147,945 under theseprograms.  During the six months endedJune 30, 2004, the Company repurchased approximately 8,057 shares ofoutstanding Common Stock at a total cost of approximately $204,284, includingthe repurchase of 4,600 shares on January 9, 2004 pursuant to an accelerated share repurchaseprogram (“ASR”).  As required under theASR agreement, the Company paid an additional $942 of cash in May 2004 as thefinal settlement amount based on an increase in our share price over thesettlement period.  Sharesacquired through the repurchase programs described above are open-marketpurchases or privately negotiated transactions in compliance with Securitiesand Exchange Commission Rule 10b-18.

 

The Company re-issuedapproximately 2,611 treasury shares under option exercises for proceeds ofapproximately $47,502 during the six months ended June 30, 2005.  In addition, the Company paid dividends of$0.02 per share for a total of approximately $4,549 during the three monthsended June 

 

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30, 2005.  For the six months ended June 30, 2005, theCompany paid dividends of $0.04 per share for a total of $9,119.

 

**Debt ** 

** **

In recent years, we have increased debt levels tobalance appropriately the objective of generating an attractive cost of capitalwith providing us a reasonable amount of financial flexibility.  At June 30, 2005, our debt totaled $710,407,and management does not believe that this level of debt poses a material riskto us due to the following factors:

 

•                  in each ofthe last two years, we have generated strong net cash provided by operatingactivities in excess of $350,000;

 

•                  at June 30,2005, we had $399,809 in worldwide cash and cash equivalents;

 

•                  at June 30,2005, we had $138,700 of unused debt capacity under our existing bank creditfacilities; and

 

•                  we believethat we have the ability to obtain additional debt capacity outside of ourexisting debt arrangements.

 

On April 5, 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, reduced theborrowing margins and increased subsidiary borrowing limits.  Total borrowings under these existing lineswere $561,300 and $476,400 at June 30, 2005 and December 31, 2004,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 50 basis points and can vary based on our Debt to EBITDAratio.  The weighted average interestrates for our lines were 3.71% and 2.83% at June 30, 2005 and December 31,2004, respectively.  In addition, we arerequired to pay a commitment fee on any unused portion of the facilities of0.10%.

 

Our total debt of$710,407 and $626,670 at June 30, 2005 and December 31, 2004, respectively,included $150,000 of private placement debt (as further discussed below), andan adjustment to the carrying amount of fair value hedged debt.  At June 30, 2005, we had approximately$138,700 available under our existing bank credit facilities.

 

In March and April 2002,we entered into interest rate swaps on a portion of our variable rate debtportfolio.  $50,000 of these swapsmatured in March 2005.  The remainingarrangement converts the variable interest rates to a fixed interest rate of5.08% on a notional amount of $25,000 and matures in April 2006.  We accounted for the interest rate swaps ascash flow hedges and recorded any changes in fair value in Other ComprehensiveIncome (see Note 13 to our Condensed Consolidated Financial Statements(unaudited)).  We determine the fairvalues 

 

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basedon estimated prices quoted by financial institutions.  The fair values of these swaps were $(370)and $(1,022) as of June 30, 2005 and December 31, 2004, respectively.

 

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 value of the swap was $(893) and$270 as of June 30, 2005 and December 31, 2004, respectively.

 

Ourfinancing arrangements provide for certain covenants and events of defaultcustomary for similar instruments, including in the case of our main bankarrangements and the 2003 private placement transaction, covenants to maintainspecific ratios of consolidated total indebtedness to EBITDA and of EBITDA tocertain fixed charges.  At June 30, 2005,we were in compliance with these financial debt covenants and we anticipatethat we will remain in compliance with the covenants over the term of theborrowing arrangements.

 

**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 465 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. The Company currently expects that all termination actions under thisplan will be completed by the end of 2005.

 

| ** **                   | ** ** | **Severance Related  Charges** | ** ** |
|------------------------------|------------|--------------------------------|------------|
| Charge at  December 31, 2004 |       | $                              | 36,890     |   |
| 2004 utilization             |       | (452                           | )          |
| 2005 utilization             |       | (12,778                        | )          |
| Balance at June  30, 2005    |       | $                              | 23,660     |   |

 

TheCompany currently expects that a substantial portion of the cash outlaysrelating to the 2004 fourth quarter charge will be applied against theremaining June 30, 2005 balance during the remainder of 2005 and 2006.

 

Thebenefits from the 2004 severance actions will be partially offset by headcountadditions in selected locations.  Thebenefits will be realized primarily in Operating costs and Selling and 

 

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administrative expense, with a partial year of benefitrealized in 2005 and a full year of benefit realized in 2006.  See Note 14 of our Condensed ConsolidatedFinancial Statements (Unaudited) for a description of our 2001 and 2003restructuring programs.

 

***RecentlyIssued Accounting Standards***

 

In December 2004, theFASB issued Statement of Financial Accounting Standard SFAS No. 123R, “Share-BasedPayment”, which is a revision of SFAS No. 123, “Accounting for Stock BasedCompensation”, and supersedes APB Opinion No. 25, “Accounting for Stock Issuedto Employees.”  SFAS No. 123R establishesstandards for the accounting of transactions in which an entity exchanges itsequity instruments for goods or services, or incurs liabilities in exchange forgoods or services that are based on the fair value of the entity’s equityinstruments or that may be settled by the issuance of equity instruments.  SFAS No. 123R focuses primarily on accountingfor transactions in which an entity obtains employee services in share-basedpayment transactions.  SFAS No. 123Rrequires a public entity to measure the cost of all employee share-basedpayments, including grants of employee stock options, using a fair-value basedmethod, such as the Black-Scholes option valuation model at the date of thegrant.  The resulting cost is thenrecognized as compensation cost in the Consolidated Statements of Income overthe service period during which an employee is required to provide service inexchange for the award (usually the vesting period).  In April 2005, the Securities and ExchangeCommission deferred the effective date of SFAS No. 123R to the first annualreporting period beginning after June 15, 2005. The Company is currently evaluating the impact of SFAS No. 123R;however, based upon outstanding as well as future anticipated stock-based awardgrants through December 31, 2006, the Company expects that the adoption underthe modified prospective method will have approximately an $0.11 to $0.12 fullydiluted earnings per share impact on its consolidated results of operations forthe year ending December 31, 2006.  For adescription of the Company’s model and assumptions used to calculate the fairvalue of the Company’s stock-based awards, refer to Note 13 of the Company’s2004 Annual Report on Form 10-K as filed with the Securities and Exchange Commission.

 

In December 2004, theFASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets-An Amendment of APBOpinion No. 29.”  SFAS No. 153 amends APBNo. 29, “Accounting for Nonmonetary Transactions,” to eliminate the exceptionfrom fair value measurement for nonmonetary exchanges of similar productiveassets and replaces it with a general exception for exchanges of nonmonetaryassets that do not have commercial substance. SFAS No. 153 specifies that a nonmonetary exchange has commercialsubstance if the future cash flows of the entity are expected to changesignificantly as a result of the exchange. SFAS No. 153 is effective for nonmonetary exchanges occurring in fiscalperiods beginning after June 15, 2005. The adoption of SFAS No. 153 is not expected to have a material impacton the Company’s financial position, results of operations or cash flows forthe year ending December 31, 2006.

 

In June 2005, the FASBissued SFAS No. 154, “Accounting Changes and Error Corrections.”  SFAS No. 154 will require entities thatvoluntarily make a change in accounting principle to apply that changeretrospectively to prior periods’ financial statements, unless it would beimpracticable to do so.  SFAS No. 154supersedes APB No. 20, “Accounting Changes,” which previously required mostvoluntary changes in accounting principle to be recognized by including in thecurrent period’s net income the cumulative effect of changing to the newaccounting principle. SFAS No. 154 also 

 

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makesa distinction between “retrospective application” of an accounting principleand the “restatement” of financial statements to reflect the correction of anerror.  Further, under SFAS No. 154, ifan entity changes its method of depreciation, amortization, or depletion forlong-lived, non-financial assets, the change must be accounted for as a changein accounting estimate.  Under APB No.20, such a change would have been reported as a change in accountingprinciple.  SFAS No. 154 applies to accountingchanges and error corrections that are made in fiscal years beginning afterDecember 15, 2005.  The adoption of SFASNo. 154 is not expected to have a material impact on the Company’s financialposition, results of operations or cash flows for the year ending December 31,2006.

 

***Forward-Looking Statements***

*** ***

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 2004 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 orsuppliers;

 

•                  our abilityto maintain and defend our intellectual property rights in jurisdictions aroundthe world;

 

•                  our abilityto successfully maintain historic effective tax rates;

 

•                  competition,particularly in the markets for pharmaceutical information;

 

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•                  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,which we anticipate to be an increasingly important tool 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;

 

•                  deteriorationin economic conditions, particularly in the pharmaceutical, healthcare, orother industries in which our customers operate;

 

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

 

•                  theimposition of additional restrictions on our use of or access to data, or therefusal by data suppliers to 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 theextent unforeseen cash needs arise, the ability to obtain financing onfavorable terms;

 

•                  terrorist activity, the threat ofsuch activity, and responses to and results of such activity and threats,including but not limited to effects, domestically and/or internationally, onus, our personnel and facilities, our customers and suppliers, financialmarkets and general economic conditions; and

 

•                  theinability, for any reason, to consummate the merger with VNU N.V., as expected.

 

Consequently, all theforward-looking statements contained in this Quarterly Report on Form 10-Q arequalified by the information contained herein, including, but not limited to,the information contained under this heading and our Condensed Consolidated FinancialStatements (Unaudited) and notes thereto for the six months ended June 30, 2005and by the material set forth under the headings “Business” and “Factors ThatMay Affect Future Results” in our Annual Report on Form 10-K for the year endedDecember 31, 2004.  We are under noobligation to publicly release any revision to any forward-looking statementcontained or incorporated herein to reflect any future events or occurrences.

 

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**Item 3.****  Quantitative and QualitativeDisclosures About Market Risk**

 

Information in responseto this Item is set forth in “Note 9. Financial Instruments”in the Notes to the Condensed Consolidated Financial Statements (Unaudited) onpages 20 through 22 hereof.

 

**Item 4.**** Controls and Procedures**

 

(a)  Evaluationof Disclosure Controls and Procedures

 

The Company maintains disclosure controls andprocedures that are designed to ensure that information required to bedisclosed in the reports that the Company files or submits to the SEC under theSecurities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms, and that such information is accumulated and communicated tothe Company’s management, including its Chief Executive Officer and ChiefFinancial Officer, as appropriate, to allow timely decisions regarding requireddisclosure.  In designing and evaluatingthe disclosure controls and procedures, management recognized that any controlsand procedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives, as theCompany’s are designed to do, and management necessarily was required to applyits judgment in evaluating the cost-benefit relationship of possible controlsand procedures.

 

TheCompany’s Chief Executive Officer and****ChiefFinancial Officer have evaluated the effectiveness of the Company’s disclosurecontrols and procedures (as such term is defined in Rules 13a-14c and 15d-14cunder the Exchange Act) as of June 30, 2005 (the “Evaluation Date”).  Based on such evaluation, such officers haveconcluded that, as of the Evaluation Date, the Company’s disclosure controlsand procedures are effective in alerting them on a timely basis to materialinformation relating to the Company (including its consolidated subsidiaries)required to be included in the Company’s periodic filings under the ExchangeAct.

 

(b)  Changesin Internal Control over Financial Reporting

 

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

 

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**PART II.****  OTHERINFORMATION**

 

**Item 1.****Legal Proceedings**

 

Information in responseto this Item is incorporated by reference to the information set forth in “Note8. Contingencies” in the Notes to the Condensed ConsolidatedFinancial Statements (Unaudited) on pages 12 through 20 hereof.

 

**Item2.****  Changes in Securities, Use of Proceeds andIssuer Purchases of Equity Securities**

 
| **Period**       | ** ** | **Total Number  of Shares  Purchased(****1)** | ** ** | **Average  Price Paid  per Share** | ** ** | **Total Number of Shares  Purchased Under  Publicly Announced  Program** | ** ** | **Maximum Number of   Shares that May Yet Be  Purchased Under the  Program(****2)** | ** ** |
|------------------|------------|-----------------------------------------------|------------|------------------------------------|------------|--------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
|             |       |                                          |       |                               |       |                                                                     |       |                                                                                |       |
| April 1-30, 2005 |       | 1,244,900                                     |       | $                                  | 24.38      |                                                                     | 1,244,900  |                                                                                | 5,413,600  |   |
| May 1-31, 2005   |       | 249,400                                       |       | $                                  | 23.90      |                                                                     | 249,400    |                                                                                | 5,164,200  |   |
| June 1-30, 2005  |       | 790,000                                       |       | $                                  | 24.04      |                                                                     | 790,000    |                                                                                | 4,374,200  |   |
|             |       |                                          |       |                               |       |                                                                     |       |                                                                                |       |
| **Total**        |       | 2,284,300                                     |       | $                                  | 24.21      |                                                                     | 2,284,300  |                                                                                | 4,374,200  |   |

 

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(1)          All shares wererepurchased through the Company’s publicly announced stock repurchase program.

 

(2)          On December 14, 2004,the Company announced a stock repurchase program to buy up to 10,000,000 sharesof the Company’s common stock.  Unlessterminated earlier by resolution of the Company’s Board of Directors, thisprogram will expire when the Company has repurchased all shares authorized forrepurchase thereunder. As of June 30, 2005, 5,625,800 shares had been purchasedunder the December 2004 program.  As aresult of the proposed merger with VNU N.V., we have suspended our current stockrepurchase program.  See Note 16 to ourCondensed Consolidated Financial Statements (Unaudited) for a description ofthe proposed merger with VNU.

 

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

 

The Annual Meeting ofShareholders of IMS Health Incorporated was held on April 29, 2005.

 

The following nomineesfor director named in the Proxy Statement dated March 25, 2005 were elected atthe Meeting by the votes indicated:

 
| ** **               | ** ** | **For**         | ** ** | **Withheld**   | ** ** |
|--------------------------|------------|-----------------|------------|----------------|------------|
|                     |       |            |       |           |       |
| David R.  Carlucci       | ** ** | **200,705,838** | ** ** | **17,666,530** | ** ** |
|                     |       |            |       |           |       |
| Constantine L.  Clemente | ** ** | **141,857,397** | ** ** | **76,514,971** | ** ** |
|                     |       |            |       |           |       |
| Kathryn E.  Giusti       | ** ** | **141,873,604** | ** ** | **76,498,764** | ** ** |
|                     |       |            |       |           |       |
| M. Bernard  Puckett      | ** ** | **147,214,519** | ** ** | **71,157,849** | ** ** |

 

47

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The appointment of PricewaterhouseCoopersLLP as Independent Public Accountants was approved by the following vote:

 
| ** **       | ** ** | **For**     | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|------------------|------------|-------------|------------|-------------|------------|-------------|------------|
|             |       |        |       |        |       |        |       |
| Number of Shares |       | 213,785,857 |       | 34,281,410  |       | 1,151,924   |       |

 

The Shareholder Proposalregarding the Shareholder Rights Plan was approved by the following vote:

 
| ** **       | ** ** | **For**     | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker  Non-  Votes** | ** ** |
|------------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------------------|------------|
|             |       |        |       |        |       |        |       |                    |       |
| Number of Shares |       | 163,022,707 |       | 36,497,173  |       | 1,926,237   |       | 17,252,190              |       |

 

**Item 6.****Exhibits**

 

(a)                            Exhibits:

 
| **Exhibit   Number** | ** ** | **Description of Exhibits**                                                                |
|----------------------|------------|--------------------------------------------------------------------------------------------|
|                 |       |                                                                                       |
| 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 |

 

48

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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 3, 2005 |   |  Nancy E. Cooper                 |   |
|                 |   |  Senior Vice  President and      |   |
|                 |   |  Chief Financial  Officer        |   |
|                 |   |  (principal  financial officer)  |   |
|                 |   |                                  |   |
|                 |   |                                  |   |
|                 |   |  /s/ Leslye G.  Katz             |   |
| Date: August 3, 2005 |   |  Leslye G. Katz                  |   |
|                 |   |  Vice President,  Controller     |   |
|                 |   |  (principal  accounting officer) |   |

 

49

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**EXHIBIT INDEX**

 
| **Exhibit  Number** | ** ** | **Description of Exhibits**                                                                     |
|---------------------|------------|-------------------------------------------------------------------------------------------------|
|                |       |                                                                                            |
| 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 |

 

50

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