Tableof Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 
| **(Mark One)** |       |                                                                                                    |
|----------------|------------|---------------------------------------------------------------------------------------------------------|
|           | ** ** | ** **                                                                                              |
| x              | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|           | ** ** | ** **                                                                                              |
|           |       | **For the quarterly period ended September 30,  2008**                                                  |
| ** **     | ** ** | ** **                                                                                              |
| ** **     | ** ** | **OR**                                                                                                  |
| ** **     | ** ** | ** **                                                                                              |
| o              | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|           | ** ** | ** **                                                                                              |
|           |       | **For the transition period from       to     **                |

 

**Commission File Number: 001-14049**

 

 

**IMS Health Incorporated**

(Exact Name of Registrantas Specified in its Charter)

 

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

 

**901 Main Avenue, Norwalk, CT06851**

(Address of principal executiveoffices)(Zip Code)

 

**(203) 845-5200**

(Registrant’s telephonenumber, including area code)

 

**N/A**

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

 

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

xYes   oNo

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer or asmaller reporting company.  Seedefinitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 
| Large Accelerated Filer x |   | Accelerated Filer o         |
|---------------------------|--------|-----------------------------|
|                      |   |                        |
| Non-Accelerated Filer o   |   | Smaller Reporting Company o |

 

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

 

Indicate the number of shares outstanding of each ofthe issuer’s classes of common stock, as of the latest practicable date.  At September 30, 2008, there were181,872,716 shares of IMS Health Incorporated Common Stock, $0.01 par value,outstanding.

 

 

 

----

Tableof Contents

 

**IMSHEALTH INCORPORATED**

 

**INDEX TO FORM 10-Q**

 
| ** **                                                                                                         | ** ** | **PAGE(S)**  |
|--------------------------------------------------------------------------------------------------------------------|------------|--------------|
| **PART I.  FINANCIAL INFORMATION**                                                                            | ** ** | ** **   |
| ** **                                                                                                         | ** ** | ** **   |
| **Item 1.  Financial Statements (Unaudited)**                                                                      | ** ** | ** **   |
| Condensed  Consolidated Statements of Financial Position  As of September 30, 2008 and December 31, 2007 |       | 3            |
| Condensed Consolidated  Statements of Income                                                                       |       |         |
| Three Months Ended  September 30, 2008 and 2007                                                               |       | 4            |
| Nine months Ended  September 30, 2008 and 2007                                                                |       | 5            |
| Condensed Consolidated  Statements of Cash Flows                                                                   |       |         |
| Nine months Ended  September 30, 2008 and 2007                                                                |       | 6            |
| Notes to Condensed Consolidated Financial Statements                                                               |       | 7-28         |
|                                                                                                               |       |         |
| **Item 2. Management’s Discussion and Analysis of  Financial  Condition and Results of Operations**           |       | 29 – 50 |
| ** **                                                                                                         |       |         |
| **Item 3. Quantitative and Qualitative Disclosures About  Market Risk**                                            |       | 51           |
| ** **                                                                                                         |       |         |
| **Item 4. Controls and Procedures**                                                                                |       | 51           |
| ** **                                                                                                         | ** ** | ** **   |
| **PART II.  OTHER INFORMATION**                                                                               | ** ** | ** **   |
| ** **                                                                                                         |       |         |
| **Item  1. Legal Proceedings**                                                                                     |       | 52           |
| ** **                                                                                                         | ** ** | ** **   |
| **Item  1A. Risk Factors**                                                                                         |       | 52 – 57 |
| ** **                                                                                                         | ** ** | ** **   |
| **Item 2. Unregistered  Sales of Equity Securities and Use of Proceeds**                                           |       | 57           |
| ** **                                                                                                         | ** ** | ** **   |
| **Item 6.  Exhibits**                                                                                              |       | 58           |
| ** **                                                                                                         | ** ** | ** **   |
| **SIGNATURES**                                                                                                     |       | 59           |
| ** **                                                                                                         | ** ** | ** **   |
| **EXHIBITS**                                                                                                       |       | 60           |

 

2

----

Tableof Contents

 

**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 September 30,  2008** | ** **    | **As of December 31,  2007** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------|---------------|---------------------------------------------|------------|
| **Assets:**                                                                                                              |       |                                         |          |                                        |       |
| **Current  Assets:**                                                                                                     |       |                                         |          |                                        |       |
| Cash and cash  equivalents                                                                                               | ** ** | **$**                                        | **229,188**   |                                        | $          | 218,249 |   |
| Accounts  receivable, net of allowances of $7,405 and $8,980 in 2008 and 2007, respectively                              | ** ** | **388,921**                                  |          | 415,926                                     |       |
| Other current  assets                                                                                                    | ** ** | **208,425**                                  |          | 205,998                                     |       |
| **Total  Current Assets**                                                                                                | ** ** | **826,534**                                  |          | 840,173                                     |       |
| Securities and  other investments                                                                                        | ** ** | **7,117**                                    |          | 5,415                                       |       |
| Property, plant  and equipment, net of accumulated depreciation of $214,736 and $201,122 in  2008 and 2007, respectively | ** ** | **193,062**                                  |          | 188,877                                     |       |
| Computer  software                                                                                                       | ** ** | **256,674**                                  |          | 269,032                                     |       |
| Goodwill (Note  6)                                                                                                       | ** ** | **676,210**                                  |          | 651,709                                     |       |
| Other assets                                                                                                             | ** ** | **293,393**                                  |          | 288,998                                     |       |
| **Total  Assets**                                                                                                        | ** ** | **$**                                        | **2,252,990** |                                        | $          | 2,244,204 |   |
| ** **                                                                                                               |       |                                         |          |                                        |       |
| **Liabilities,  Minority Interests and Shareholders’ Deficit:**                                                     |       |                                         |          |                                        |       |
| **Current  Liabilities:**                                                                                                |       |                                         |          |                                        |       |
| Accounts payable                                                                                                         | ** ** | **$**                                        | **91,740**    |                                        | $          | 117,488 |   |
| Accrued and  other current liabilities                                                                                   | ** ** | **279,088**                                  |          | 333,534                                     |       |
| Accrued income  taxes                                                                                                    | ** ** | **56,455**                                   |          | 61,791                                      |       |
| Short-term  deferred tax liability                                                                                       | ** ** | **7,616**                                    |          | 7,415                                       |       |
| Deferred  revenues                                                                                                       | ** ** | **80,180**                                   |          | 114,316                                     |       |
| **Total  Current Liabilities**                                                                                           | ** ** | **515,079**                                  |          | 634,544                                     |       |
| Postretirement  and postemployment benefits                                                                              | ** ** | **78,877**                                   |          | 79,992                                      |       |
| Long-term debt  (Note 9)                                                                                                 | ** ** | **1,398,906**                                |          | 1,203,209                                   |       |
| Other  liabilities                                                                                                       | ** ** | **254,023**                                  |          | 265,330                                     |       |
| **Total  Liabilities**                                                                                                   | ** ** | **$**                                        | **2,246,885** |                                        | $          | 2,183,075 |   |
| ** **                                                                                                               |       |                                         |          |                                        |       |
| **Commitments  and Contingencies (Note 7)**                                                                              |       |                                         |          |                                        |       |
| **Minority  Interests**                                                                                                  | ** ** | **$**                                        | **102,214**   |                                        | $          | 101,444 |   |
|                                                                                                                     |       |                                         |          |                                        |       |
| **Shareholders’  Deficit:**                                                                                         |       |                                         |          |                                        |       |
| Common Stock,  par value $.01, authorized 800,000 shares; issued 335,045 shares in 2008 and  2007, respectively          | ** ** | **$**                                        | **3,350**     |                                        | $          | 3,350 |   |
| Capital in  excess of par                                                                                                | ** ** | **542,195**                                  |          | 535,500                                     |       |
| Retained  earnings                                                                                                       | ** ** | **2,967,434**                                |          | 2,771,278                                   |       |
| Treasury stock,  at cost, 153,173 and 143,818 shares in 2008 and 2007, respectively                                      | ** ** | **(3,569,972**                               | )             | (3,355,790                                  | )          |
| Cumulative  translation adjustment                                                                                       | ** ** | **16,451**                                   |          | 61,924                                      |       |
| Unamortized  postretirement and postemployment balances (SFAS No. 158)                                              | ** ** | **(55,574**                                  | )             | (56,584                                     | )          |
| Unrealized gain  on changes in fair value of cash flow hedges, net of tax                                                | ** ** | **7**                                        |          | 7                                           |       |
| **Total  Shareholders’ Deficit**                                                                                    | ** ** | **$**                                        | **(96,109**   | )                                           | $          | (40,315 | ) |
| **Total  Liabilities, Minority Interests and Shareholders’ Deficit**                                                | ** ** | **$**                                        | **2,252,990** |                                        | $          | 2,244,204 |   |

 

## ***See accompanying Notes to the Condensed Consolidated FinancialStatements (Unaudited).***

 

3

----

Tableof Contents

 

## **IMS HEALTH INCORPORATED**

**CONDENSEDCONSOLIDATED STATEMENTS OF INCOME (Unaudited)**

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

 
| ** **                                                                                               | ** ** | **Three Months Ended  September 30,** | ** **  |
|----------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|-------------|
| ** **                                                                                               | ** ** | **2008**                                             | ** **  | **2007** | ** ** |
|                                                                                                     |       |                                                 |        |   |   |
| Information and  analytics revenue                                                                       | ** ** | **$**                                                | **445,654** |   | $ | 419,270 |   |
| Consulting and  services revenue                                                                         | ** ** | **128,061**                                          |        | 119,540 |   |
| **Operating  Revenue**                                                                                   | ** ** | **573,715**                                          |        | 538,810 |   |
|                                                                                                     |       |                                                 |        |   |   |
| Operating costs  of information and analytics                                                            | ** ** | **191,114**                                          |        | 177,021 |   |
| Direct and incremental  costs of consulting and services                                                 | ** ** | **61,380**                                           |        | 55,722 |   |
| External-use  software amortization                                                                      | ** ** | **12,291**                                           |        | 12,209 |   |
| Selling and  administrative expenses                                                                     | ** ** | **161,708**                                          |        | 157,281 |   |
| Depreciation and  other amortization                                                                     | ** ** | **23,246**                                           |        | 19,475 |   |
| **Operating  Income**                                                                                    | ** ** | **123,976**                                          |        | 117,102 |   |
| Interest income                                                                                          | ** ** | **3,107**                                            |        | 1,909 |   |
| Interest expense                                                                                         | ** ** | **(12,119**                                          | )           | (9,903 | ) |
| Gains from  investments, net                                                                             | ** ** | **379**                                              |        | 353 |   |
| Other expense,  net                                                                                      | ** ** | **(4,973**                                           | )           | (9,569 | ) |
| **Non-Operating  Loss, Net**                                                                             | ** ** | **(13,606**                                          | )           | (17,210 | ) |
| Income before  provision for income taxes                                                                | ** ** | **110,370**                                          |        | 99,892 |   |
| Provision for  income taxes (Note 11)                                                                    | ** ** | **(34,458**                                          | )           | (42,767 | ) |
| **Net  Income**                                                                                          | ** ** | **$**                                                | **75,912**  |   | $ | 57,125 |   |
|                                                                                                     |       |                                                 |        |   |   |
| **Basic  Earnings Per Share of Common Stock**                                                            | ** ** | **$**                                                | **0.42**    |   | $ | 0.29 |   |
| **Diluted  Earnings Per Share of Common Stock**                                                          | ** ** | **$**                                                | **0.41**    |   | $ | 0.29 |   |
|                                                                                                     | ** ** | ** **                                           |        |   |   |
| Weighted average  number of shares outstanding – Basic                                              | ** ** | **182,157**                                          |        | 194,870 |   |
| Dilutive effect  of shares issuable as of period-end under stock-based compensation plans and  other     | ** ** | **956**                                              |        | 3,328 |   |
| Adjustment of  shares outstanding applicable to exercised and cancelled stock options during  the period | ** ** | **8**                                                |        | 158 |   |
| **Weighted  Average Number of Shares Outstanding – Diluted**                                        | ** ** | **183,121**                                          |        | 198,356 |   |

 

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

 

4

----

Tableof Contents

 

## **IMS HEALTH INCORPORATED**

**CONDENSEDCONSOLIDATED STATEMENTS OF INCOME (Unaudited)**

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

* *
| ** **                                                                                               | ** ** | **Nine Months Ended  September 30,** | ** **    |
|----------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|---------------|
| ** **                                                                                               | ** ** | **2008**                                            | ** **    | **2007** | ** ** |
|                                                                                                     |       |                                                |          |   |   |
| Information and  analytics revenue                                                                       | ** ** | **$**                                               | **1,355,281** |   | $ | 1,247,982 |   |
| Consulting and  services revenue                                                                         | ** ** | **393,323**                                         |          | 338,649 |   |
| **Operating  Revenue**                                                                                   | ** ** | **1,748,604**                                       |          | 1,586,631 |   |
|                                                                                                     |       |                                                |          |   |   |
| Operating costs  of information and analytics                                                            | ** ** | **576,566**                                         |          | 525,499 |   |
| Direct and  incremental costs of consulting and services                                                 | ** ** | **203,102**                                         |          | 170,046 |   |
| External-use  software amortization                                                                      | ** ** | **38,048**                                          |          | 35,830 |   |
| Selling and  administrative expenses                                                                     | ** ** | **492,497**                                         |          | 451,406 |   |
| Depreciation and  other amortization                                                                     | ** ** | **66,656**                                          |          | 57,548 |   |
| **Operating  Income**                                                                                    | ** ** | **371,735**                                         |          | 346,302 |   |
| Interest income                                                                                          | ** ** | **8,682**                                           |          | 5,436 |   |
| Interest expense                                                                                         | ** ** | **(35,352**                                         | )             | (27,875 | ) |
| Gains from  investments, net                                                                             | ** ** | **379**                                             |          | 2,317 |   |
| Other expense,  net                                                                                      | ** ** | **(33,604**                                         | )             | (12,367 | ) |
| **Non-Operating  Loss, Net**                                                                             | ** ** | **(59,895**                                         | )             | (32,489 | ) |
| Income before  provision for income taxes                                                                | ** ** | **311,840**                                         |          | 313,813 |   |
| Provision for  income taxes (Note 11)                                                                    | ** ** | **(99,058**                                         | )             | (97,725 | ) |
| **Net  Income**                                                                                          | ** ** | **$**                                               | **212,782**   |   | $ | 216,088 |   |
|                                                                                                     |       |                                                |          |   |   |
| **Basic  Earnings Per Share of Common Stock**                                                            | ** ** | **$**                                               | **1.16**      |   | $ | 1.10 |   |
| **Diluted  Earnings Per Share of Common Stock**                                                          | ** ** | **$**                                               | **1.16**      |   | $ | 1.08 |   |
|                                                                                                     | ** ** | ** **                                          |          |   |   |
| Weighted average  number of shares outstanding – Basic                                              | ** ** | **183,145**                                         |          | 195,997 |   |
| Dilutive effect  of shares issuable as of period-end under stock-based compensation plans and  other     | ** ** | **1,022**                                           |          | 3,118 |   |
| Adjustment of shares  outstanding applicable to exercised and cancelled stock options during the  period | ** ** | **36**                                              |          | 936 |   |
| **Weighted  Average Number of Shares Outstanding – Diluted**                                        | ** ** | **184,203**                                         |          | 200,051 |   |

 

*Seeaccompanying Notes to the Condensed Consolidated Financial Statements (Unaudited).*

 

5

----

Tableof Contents

 

**IMSHEALTH INCORPORATED**

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

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

 
| ** **                                                                               | ** ** | **Nine Months Ended September 30,** | ** **  |
|------------------------------------------------------------------------------------------|------------|----------------------------------------------------|-------------|
| ** **                                                                               | ** ** | **2008**                                           | ** **  | **2007** | ** ** |
| ** **                                                                               |       |                                               |        |   |   |
| **Cash  Flows from Operating Activities:**                                               |       |                                               |        |   |   |
| Net income                                                                               | ** ** | **$**                                              | **212,782** |   | $ | 216,088 |   |
| **Adjustments  to reconcile net income to net cash provided by operating activities:**   |       |                                               |        |   |   |
| Depreciation and  amortization                                                           | ** ** | **104,704**                                        |        | 93,378 |   |
| Bad debt expense                                                                         | ** ** | **1,685**                                          |        | 1,701 |   |
| Deferred income  taxes                                                                   | ** ** | **1,033**                                          |        | (9,760 | ) |
| Gains from  investments, net                                                             | ** ** | **(379**                                           | )           | (2,317 | ) |
| Minority  interests in net income of consolidated companies                              | ** ** | **5,842**                                          |        | 5,829 |   |
| Non-cash  stock-based compensation charges                                               | ** ** | **22,052**                                         |        | 28,598 |   |
| Net tax  (expense) benefit on stock-based compensation                                   | ** ** | **(296**                                           | )           | 11,704 |   |
| Excess tax  benefits from stock-based compensation                                       | ** ** | **(94**                                            | )           | (4,984 | ) |
| Change in assets  and liabilities, excluding effects from acquisitions and dispositions: |       |                                               |        |   |   |
| Net decrease  (increase) in accounts receivable                                          | ** ** | **21,479**                                         |        | (58,190 | ) |
| Net increase in  work-in-process inventory                                               | ** ** | **(1,027**                                         | )           | (3,031 | ) |
| Net increase in  prepaid expenses and other current assets                               | ** ** | **(12,859**                                        | )           | (18,441 | ) |
| Net decrease in  accounts payable                                                        | ** ** | **(26,807**                                        | )           | (11,360 | ) |
| Net decrease in  accrued and other current liabilities                                   | ** ** | **(11,443**                                        | )           | (15,016 | ) |
| Net decrease in  accrued severance, impairment and other charges                         | ** ** | **(38,623**                                        | )           | (1,860 | ) |
| Net decrease in  deferred revenues                                                       | ** ** | **(35,383**                                        | )           | (11,929 | ) |
| Net increase in  accrued income taxes                                                    | ** ** | **4,176**                                          |        | 26,079 |   |
| Net decrease in  pension assets (net of liabilities)                                     | ** ** | **3,103**                                          |        | 5,269 |   |
| Net decrease in  other long-term assets (net of long-term liabilities)                   | ** ** | **2,617**                                          |        | 534 |   |
| **Net  Cash Provided by Operating Activities**                                           | ** ** | **252,562**                                        |        | 252,292 |   |
| **Cash  Flows Used in Investing Activities:**                                            |       |                                               |        |   |   |
| Capital  expenditures                                                                    | ** ** | **(30,782**                                        | )           | (41,222 | ) |
| Additions to  computer software                                                          | ** ** | **(51,280**                                        | )           | (73,692 | ) |
| Proceeds from  sale of capital asset, net                                                | ** ** | **1,392**                                          |        | — |   |
| Proceeds from  sales of investments, net                                                 | ** ** | **379**                                            |        | 4,957 |   |
| Payments for  acquisitions of businesses, net of cash acquired                           | ** ** | **(50,395**                                        | )           | (30,731 | ) |
| Funding of  venture capital investments                                                  | ** ** | **(1,700**                                         | )           | (1,200 | ) |
| Other investing  activities, net                                                         | ** ** | **(3,821**                                         | )           | (4,697 | ) |
| **Net  Cash Used in Investing Activities**                                               | ** ** | **(136,207**                                       | )           | (146,585 | ) |
| **Cash  Flows Used in Financing Activities:**                                            |       |                                               |        |   |   |
| Net increase in  revolving credit facility and other                                     | ** ** | **56,164**                                         |        | 191,332 |   |
| Proceeds from  private placement notes                                                   | ** ** | **240,000**                                        |        | — |   |
| Repayment of  private placement notes                                                    | ** ** | **(150,000**                                       | )           | — |   |
| Payments for  purchase of treasury stock                                                 | ** ** | **(230,433**                                       | )           | (386,771 | ) |
| Proceeds from  exercise of stock options                                                 | ** ** | **5,520**                                          |        | 134,949 |   |
| Excess tax  benefits from stock-based compensation                                       | ** ** | **94**                                             |        | 4,984 |   |
| Dividends paid                                                                           | ** ** | **(16,626**                                        | )           | (17,955 | ) |
| Proceeds from  employee stock purchase plan and other                                    | ** ** | **(25**                                            | )           | 3,334 |   |
| Decrease in cash  overdrafts                                                             | ** ** | **(1,876**                                         | )           | (4,449 | ) |
| Payments to  minority interests and other financing activities                           | ** ** | **(5,072**                                         | )           | (5,071 | ) |
| **Net  Cash Used in Financing Activities**                                               | ** ** | **(102,254**                                       | )           | (79,647 | ) |
| Effect of  Exchange Rate Changes on Cash and Cash Equivalents                            | ** ** | **(3,162**                                         | )           | 12,579 |   |
| **Increase  in Cash and Cash Equivalents**                                               | ** ** | **10,939**                                         |        | 38,639 |   |
| **Cash  and Cash Equivalents, Beginning of Period**                                      | ** ** | **218,249**                                        |        | 157,346 |   |
| **Cash  and Cash Equivalents, End of Period**                                            | ** ** | **$**                                              | **229,188** |   | $ | 195,985 |   |

 

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

 

6

----

Tableof Contents

 

**IMS HEALTH INCORPORATED**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)**

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

 

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

 

The accompanying Condensed Consolidated Financial Statements (Unaudited)have been prepared in accordance with accounting principles generally acceptedin the United States of America for interim financial information and Article 10of Regulation S-X under the Securities and Exchange Act of 1934, asamended.  The Condensed ConsolidatedFinancial Statements (Unaudited) do not include all the information and notesrequired by accounting principles generally accepted in the United States ofAmerica for complete financial statements. In the opinion of management, all adjustments, all of which are of anormal recurring nature, considerednecessary for a fair presentation of the statements of financial position,income and cash flows for the periods presented have been included.  The results of operations for interim periodsare not necessarily indicative of the results expected for the full year.  The December 31, 2007 balance sheet datawas derived from audited financial statements, but does not include alldisclosures required by accounting principles generally accepted in the UnitedStates of America.  The CondensedConsolidated Financial Statements (Unaudited) and related notes should be readin conjunction with the Consolidated Financial Statements and related notes ofIMS Health Incorporated (the “Company” or “IMS”) included in its 2007 AnnualReport on Form 10-K.  Certain prioryear amounts have been reclassified to conform to the 2008 presentation.  Amounts presented in the CondensedConsolidated Financial Statements (Unaudited) may not add due to rounding.

 

**Note 2.  Basis of Presentation**

 

IMS is the leading global provider of market intelligence to thepharmaceutical and healthcare industries. The Company offers leading-edgemarket intelligence products and services that are integral to the Company’sclients’ day-to-day operations, including portfolio optimization capabilities;launch and brand management solutions; sales force effectiveness innovations;managed markets and consumer health offerings; and consulting and servicessolutions that improve return on investment (“ROI”) and the delivery of qualityhealthcare worldwide. The Company’s information products are developed to meetclient needs by using data secured from a worldwide network of suppliers inmore than 100 countries. Key information products include:

 

·                  Sales Force Effectiveness to optimize salesforce productivity and territory management;

 

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

 

·                  Launch, Brand Management and Other to supportclient needs relative to market segmentation and positioning, life cyclemanagement for prescription and consumer health pharmaceutical products andhealth economics and outcomes research offerings.

 

Within these key information products, the Company provides consultingand services that use in-house capabilities and methodologies to assistpharmaceutical clients in analyzing and evaluating market trends, strategiesand tactics, and to help in the development and implementation of customizedsoftware applications and data warehouse tools.

 

The Company operates in more than 100 countries.

 

7

----

Tableof Contents

 

**IMS HEALTH INCORPORATED**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)**

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

 

The Company is managed on a global business model with global leadersfor the majority of its critical business processes and accordingly has onereportable segment (see Note 15).

 

**Note 3.  Summary of Recent Accounting Pronouncements**

 

InSeptember 2006, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards (“SFAS”) No. 157, “Fair ValueMeasurements.” Thisstatement defines fair value, establishes a framework for measuring fair valueunder generally accepted accounting principles, and expands disclosures aboutfair value measurements. This statement is effective for financial statements issued for fiscalyears beginning after November 15, 2007, and interim periods within thosefiscal years.  In February 2008, theFASB issued Staff Positions No. FAS 157-1 and No. FAS 157-2 whichdelayed the effective date of SFAS No. 157 for one year for certain nonfinancial assets and liabilities and removed certain leasing transactions fromits scope.  The adoption of SFAS No. 157,effective January 1, 2008, did not have a material impact on the Company’sfinancial position, results of operations or cash flows.  The Company is currently evaluating theimpact of SFAS No. 157 for certain non financial assets and liabilities onits financial results.

 

InFebruary 2007, the FASB issued SFAS No. 159, “The Fair Value Optionfor Financial Assets and Financial Liabilities–Including an amendment of FASBStatement No. 115.” This statement permits entities to choose to measuremany financial instruments and certain other items at fair value.  Entities shall report unrealized gains andlosses on items for which the fair value option has been elected in earnings ateach subsequent reporting date.  Thisstatement is effective as of the beginning of an entity’s first fiscal yearthat begins after November 15, 2007. The adoption of SFAS No. 159, effective January 1, 2008, didnot have a material impact on the Company’s financial position, results ofoperations or cash flows as the Company did not elect the fair valuemeasurement option for any additional financial instruments or other items.

 

InDecember 2007, the FASB issued SFAS No. 141R, “Business Combinations.”  This statement establishes principles andrequirements for how an acquirer recognizes and measures in its financialstatements the identifiable assets acquired, the liabilities assumed, anynoncontrolling interest in the acquiree and the goodwill acquired.  This statement also establishes disclosurerequirements to enable the evaluation of the nature and financial effects ofthe business combination.  This statementis effective for fiscal years beginning after December 15, 2008.  The impact on the Company’s financial resultswill be dependent on the terms and conditions of acquisitions consummated on orafter January 1, 2009, the effective date for the Company.

 

InDecember 2007, the FASB issued SFAS No. 160, “NoncontrollingInterests in Consolidated Financial Statements - an Amendment of ARB No. 51.”This statement establishes accounting and reporting standards pertaining toownership interests in subsidiaries held by parties other than the parent, theamount of net income attributable to the parent and to the noncontrollinginterest, changes in a parent’s ownership interest, and the valuation of anyretained noncontrolling equity investment when a subsidiary is deconsolidated.This statement also establishes disclosure requirements that identify anddistinguish between the interests of the parent and the interests of thenoncontrolling owners.  This statement iseffective for fiscal years beginning on or after December 15, 2008.  The

 

8

----

Tableof Contents

 

**IMS HEALTH INCORPORATED**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)**

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

 

adoptionof SFAS No. 160, effective January 1, 2009, is not expected to have amaterial impact on the Company’s financial position, results of operations orcash flows.

 

InMarch 2008, the FASB issued SFAS No. 161, “Disclosures aboutDerivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133.”  This statement requires enhanced disclosuresabout an entity’s derivative and hedging activities and thereby improves thetransparency of financial reporting. Entities will be required to provide enhanced disclosures about (a) howand why an entity uses derivative instruments, (b) how derivativeinstruments and related hedged items are accounted for under SFAS No. 133,“Accounting for Derivative Instruments and Hedging Activities,” and itsrelated interpretations, and (c) how derivative instruments and relatedhedged items affect an entity’s financial position, financial performance, andcash flows.  This statement is effective for financialstatements issued for fiscal years and interim periods beginning after November 15,2008, with early application encouraged. This statement encourages, but does not require, comparative disclosuresfor earlier periods at initial adoption. The Company is currentlyevaluating the new disclosure requirements under this statement.

 

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy ofGenerally Accepted Accounting Principles.”  The statement identifies the sources ofaccounting principles and the framework for selecting the principles used inthe preparation of financial statements of nongovernmental entities that arepresented in conformity with generally accepted accounting principles (“GAAP”)in the United States.  This statement iseffective 60 days following the United States Securities and ExchangeCommission’s (“SEC”) approval of the Public Company Accounting Oversight Board(“PCAOB”) amendments to AU Section 411, “The Meaning of Present Fairly inConformity With Generally Accepted Accounting Principles.”  The adoption of this statement is notexpected to have an impact on the Company’s financial results.

 

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

 

*Operating Costs of Information and Analytics*

 

Operating costs of information and analytics (“I&A”) include costsof data, data processing and collection and costs attributable to personnelinvolved in production, data management and delivery of the Company’s I&Aofferings.

 

One of the Company’s major expenditures is the cost for the data itreceives from suppliers.  After receiptof the raw data and prior to the data being available for use in any part ofits business, the Company is required to transform the raw data into usefulinformation through a series of comprehensive processes.  These processes involve significant employeecosts and data processing costs.

 

Costs associated with the Company’s data purchases are deferred withinwork-in-process inventory and recognized as expense as the corresponding dataproduct revenue is recognized by the Company, generally over a thirty to sixtyday period.

 

9

----

Table of Contents

 

**IMS HEALTH INCORPORATED**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)**

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

 

*Direct and Incremental Costs of Consulting and Services*

 

Direct and incremental costs of consulting and services (“C&S”)include the costs of the Company’s consulting staff directly involved withdelivering revenue generating engagements, related accommodations and the costsof primary market research data purchased specifically for certain individualC&S engagements.  Although theCompany’s data is used in multiple customer solutions across differentofferings within both I&A and C&S, the Company does not have ameaningful way to allocate the direct cost of the data between I&A andC&S revenues.  As such, the directand incremental costs of C&S do not reflect the total costs incurred todeliver its C&S revenues.

 

Costs associated with the Company’s time and material and fixed-priceC&S contracts are recognized as incurred.

 

**Note 5.  Acquisitions**

 

The Company makesacquisitions in order to expand its products, services and geographic reach.During the nine months ended September 30, 2008, the Company completedfour acquisitions at an aggregate cost of approximately $31,900.  These acquisitions were Robinson and JamesResearch Pty Limited (Australia), Fourth Hurdle Consulting Limited (U.K.),Health Benchmarks, Inc. (U.S.) and RMBC Pharma Limited (Russia) and wereaccounted for under the purchase method of accounting.  As such, the aggregate purchase price hasbeen allocated on a preliminary basis to the assets acquired based on estimatedfair values as of the closing date.  Thepurchase price allocations will be finalized after the completion of thevaluation of certain assets and liabilities. Any adjustments resulting from the finalization of the purchase priceallocations are not expected to have a material impact on the Company’s resultsof operations.  The CondensedConsolidated Financial Statements (Unaudited) include the results of theseacquired companies subsequent to the closing of the acquisitions.  Had these acquisitions occurred as of January 1,2008 or 2007, the impact on the Company’s results of operations would not havebeen significant. Goodwill of approximately $22,200 was recorded in connectionwith these acquisitions, of which approximately $6,200 is deductible for taxpurposes.

 

During the nine monthsended September 30, 2007, the Company completed five acquisitions at anaggregate cost of approximately $18,000. These acquisitions were ValueMedics Research, LLC (U.S.), MERGForschungsgruppe Medizinische Okonomie, GmbH (Germany), Datasurf Co. (Japan),Aremis Consultants Holding SA (France) and Brynlake Limited (U.K.) and wereaccounted for under the purchase method of accounting.  As such, the aggregate purchase price hadbeen allocated on a preliminary basis to the assets acquired based on estimatedfair values as of the closing dates.  TheCompany finalized the purchase price allocations for these acquisitions during2007 and 2008, which did not have a material impact on the Company’s results ofoperations.  The Condensed ConsolidatedFinancial Statements (Unaudited) include the results of these acquiredcompanies subsequent to the closing of these acquisitions.  Had these acquisitions occurred as of January 1,2007 or 2006, the impact on the Company’s results of operations would not havebeen significant.  Goodwill ofapproximately $12,385 was recorded in connection with these acquisitions, ofwhich approximately $8,500 is deductible for tax purposes.

 

10

----

Tableof Contents

 

**IMS HEALTH INCORPORATED**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)**

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

 

**Note 6.  Goodwill and Intangible Assets**

 

During the nine months ended September 30, 2008, the Company’sgoodwill increased by $24,501 due to the preliminary allocations of purchaseprice for the acquisitions completed during the nine months ended September 30,2008 (see Note 5).  During the ninemonths ended September 30, 2007, the Company’s goodwill increased by$47,771 due to foreign currency translation adjustments and the preliminaryallocations of purchase price for the acquisitions completed during the ninemonths ended September 30, 2007 (see Note 5).

 

All ofthe Company’s other acquired intangibles are subject to amortization.  Intangibleasset amortization expense was $4,814 and $14,303 during the three and ninemonths ended September 30, 2008, respectively, and $4,161 and $13,018during the three and nine months ended September 30, 2007, respectively.  AtSeptember 30, 2008, intangible assets were primarily composed of customerrelationships, databases and trade names (principally included in Other assets)and computer software.  The grosscarrying amounts and related accumulated amortization of these intangibles were$184,983 and $93,901, respectively, at September 30, 2008 and $176,330 and$79,598, respectively, at December 31, 2007.  These intangibles are amortized over periodsranging from two to twenty years.  As of September 30,2008, the weighted average amortization periods of the acquired intangibles byasset class are listed in the following table:

 
| **Intangible Asset Type**         | ** ** | **Weighted  Average********Amortization Period (Years)** |
|-----------------------------------|------------|----------------------------------------------------------|
| Customer  Relationships           |       | 10.0                                                     |
| Computer  Software and Algorithms |       | 6.9                                                      |
| Databases                         |       | 4.7                                                      |
| Trade Names                       |       | 4.3                                                      |
| Other                             |       | 3.5                                                      |
| Weighted average                  |       | 8.9                                                      |

 

Based on currentestimated useful lives, amortization expense associated with intangible assetsat September 30, 2008 is estimated to be approximately $4,762 for theremaining quarter in 2008.  Thereafter,annual amortization expense associated with intangible assets is estimated tobe as follows:

 
| **Year Ended  December 31,** | ** ** | **Amortization  Expense** | ** ** |
|----------------------------------------|------------|---------------------------|------------|
| 2009                                   |       | $                         | 17,096     |   |
| 2010                                   |       | 13,002                    |       |
| 2011                                   |       | 11,369                    |       |
| 2012                                   |       | 9,450                     |       |
| 2013                                   |       | 8,902                     |       |
| Thereafter                             |       | $                         | 26,500     |   |

 

11

----

Tableof Contents

 

**IMS HEALTH INCORPORATED**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)**

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

 

**Note7.**  **Contingencies**

 

The Company and its subsidiaries are involved in legal and taxproceedings, claims and litigation arising in the ordinary course of business.Management periodically assesses the Company’s liabilities and contingencies inconnection with these matters based upon the latest information available. Forthose matters where management currently believes it is probable that theCompany will incur a loss and that the probable loss or range of loss can bereasonably estimated, the Company has recorded reserves in the CondensedConsolidated Financial Statements (Unaudited) based on its best estimates ofsuch loss. In other instances, because of the uncertainties related to eitherthe probable outcome or the amount or range of loss, management is unable tomake a reasonable estimate of a liability, if any. However, even in manyinstances where the Company has recorded a reserve, the Company is unable topredict with certainty the final outcome of the matter or whether resolution ofthe matter will materially affect the Company’s results of operations,financial position or cash flows. As additional information becomes available,the Company adjusts its assessment and estimates of such liabilitiesaccordingly.

 

The Company routinely enters into agreements with its suppliers toacquire data and with its customers to sell data, all in the normal course ofbusiness. In these agreements, the Company sometimes agrees to indemnify andhold harmless the other party for any damages such other party may suffer as aresult of potential intellectual property infringement and other claims relatedto the use of the data. These indemnities typically have terms of approximatelytwo years. The Company has not accrued a liability with respect to thesematters, as the exposure is considered remote.

 

In connection with the agreements governing the relationship among theCompany and two of its subsidiaries and two third-party investors with respectto IMS Health Licensing Associates, L.L.C. (the “LLC Agreements”), the Companyalso entered into a guaranty agreement. Under the terms of this guarantyagreement, the Company guarantees in favor of the third-party investors theperformance of the Company’s subsidiaries under the LLC Agreements and agreesto indemnify and hold harmless the third-party investors against damages, includingspecified delay damages, the third-party investors may suffer as a result offailures to perform under the LLC Agreements by the Company and itssubsidiaries.

 

Based on its review of the latest information available, in the opinionof management, the ultimate liability of the Company in connection with pendingtax and legal proceedings, claims and litigation will not have a materialeffect on the Company’s results of operations, cash flows or financialposition, with the possible exception of the matters described below.

 

*D&B Legacy and Related Tax Matters*

 

*Sharing Disputes. *In 1996 the company then known as The Dun &Bradstreet Corporation (“D&B”) and now known as R.H. Donnelley Corporation(“Donnelley”) separated into three public companies by spinning off ACNielsenCorporation (“ACNielsen”) and the company then known as Cognizant Corporation (“Cognizant”)(the “1996 Spin-Off”).  Cognizant is nowknown as Nielsen Media Research, Inc., a subsidiary of The NielsenCompany, formerly known as VNU N.V. (“NMR”). The agreements effecting the 1996 Spin-Off allocated tax-relatedliability with respect to certain prior

 

12

----

Tableof Contents

 

**IMS HEALTH INCORPORATED**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)**

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

 

business transactions (the “Legacy Tax Controversies”) between D&Band Cognizant.  The D&B portion ofsuch liability is now shared among Donnelley and certain of its formeraffiliates (the “Donnelley Parties”), and the Cognizant portion of suchliability is shared between NMR and the Company pursuant to the agreementseffecting Cognizant’s spin-off of the Company in 1998 (the “1998 Spin-Off”).

 

The underlying tax controversies with the Internal Revenue Service (“IRS”)have substantially all been resolved and the Company paid to the IRS theamounts that it believed were due and owing. In the first quarter of 2006, Donnelley indicated that it disputed theamounts contributed by the Company toward the resolution of these matters basedon the Donnelley Parties’ interpretation of the allocation of liability underthe 1996 Spin-Off agreements.  TheDonnelley Parties on the one hand, and NMR and the Company, on the other hand,have attempted to resolve these disputes through negotiation.  The 1996 Spin-Off agreements provide that ifthe parties cannot reach agreement through negotiation they must arbitrate thedisputes.  The Company intends tovigorously defend itself with respect to such disputes.  As of September 30, 2008, the Companyhad a reserve of approximately $11,800 (liability and interest, net of taxbenefit) for these matters.

 

On August 14, 2006, the Donnelley Parties commenced arbitrationregarding one of these disputes (referred to herein as the “Dutch PartnershipDispute”) by filing a Notice of Arbitration and Statement of Claim (the “DonnelleyStatement”) with the American Arbitration Association International Center forDispute Resolution (the “AAA”).  In theDonnelley Statement, the Donnelley Parties claimed that the Company and NMRcollectively owed approximately an additional $10,800 with respect to the DutchPartnership Dispute.  On October 16,2006, the Company and NMR filed a Statement of Defense denying all claims madeby the Donnelley Parties in the Donnelley Statement.   In October 2007, a hearing on themerits of the parties’ claims took place before an AAA arbitration panel, andon December 6, 2007, the panel issued a Partial Award.  In the Partial Award, the panel directed theparties to attempt to agree on the allocation of liability between the partiesfor the tax controversy underlying the Dutch Partnership Dispute, in accordancewith principles set out in the Partial Award. The parties were unable to reach agreement and, in March 2008, eachsubmitted to the AAA arbitration panel their own calculation of the allocationof liability.  In July 2008, the AAAarbitration panel issued a Clarifying Order addressing in concept some (but notall) of the matters disputed by the parties in March 2008 in connectionwith the application of the principles set forth in the Partial Award.  In the Clarifying Order, the panel directedthe parties to submit an agreed joint computation of the principal amount ofthe liability to be shared, as well as proposed provisions for interest and/orcosts or, if no agreement could be reached with respect to those matters,commentary by each of the parties as to the appropriate approach to be appliedwith respect thereto by the panel. The parties reached agreement on theapplication of the decisions of the AAA arbitration panel and consented to theentry of a consent award by the panel as of September 8, 2008.  Under the consent award, the parties agreedto the allocation of the principal amount of liability to be shared and toprovisions for interest and costs resulting in a payment of $4,600 ($3,100 netof tax benefit) and an additional interest and cost payment of $2,600 ($1,700net of tax benefit) by the Company to the Donnelley Parties (see Note 11).  The consent award represents the finalresolution of the Dutch Partnership Dispute.

 

*The Partnership (Tax Year 1997)*.  The IRS is seeking to reallocatecertain items of partnership income and expense as well as disallow certainitems of partnership expense with respect to a partnership now substantiallyowned by the Company (the “Partnership”) on the Partnership’s 1997 tax

 

13

----

Tableof Contents

 

**IMS HEALTH INCORPORATED**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)**

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

 

return.  During 1997, thePartnership was substantially owned by Cognizant, but liability for this matterwas allocated to the Company pursuant to the agreements effecting the 1998Spin-Off.  The Company has filed a formalprotest relating to the proposed assessment for 1997 with the IRS Office ofAppeals.  The Company is attempting toresolve this matter in the administrative appeals process before proceeding tolitigation if necessary. If the IRS were to ultimately prevail in its position,the Company’s liability (tax and interest, net of tax benefit) with respect totax year 1997 would be approximately $22,300, which amount the Company hasreserved in current accrued income taxes payable at September 30, 2008.

 

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

 

*IMS Health Government Solutions Voluntary Disclosure ProgramParticipation*

 

Our wholly-ownedsubsidiary, IMS Government Solutions Inc., is primarily engaged in providingservices and products under contracts with the U.S. government.  U.S. government contracts are subject toextensive legal and regulatory requirements and, from time to time, agencies ofthe U.S. government have the ability to investigate whether contractors’operations are being conducted in accordance with such requirements.  U.S. government investigations, whetherrelating to these contracts or conducted for other reasons, could result inadministrative, civil or criminal liabilities, including repayments, fines orpenalties being imposed on us, or could lead to suspension or debarment fromfuture U.S. government contracting.  U.S.government investigations often take years to complete and may result in no adverseaction against us.

 

IMS Government Solutionshas discovered potential noncompliance with various contract clauses andrequirements under its General Services Administration Contract which wasawarded in 2002 to its predecessor company, Synchronous Knowledge Inc.(Synchronous Knowledge Inc. was acquired by IMS in May 2005).  Upon discovery of the potentialnoncompliance, the Company began remediation efforts, promptly disclosed thepotential noncompliance to the U.S. government, and was accepted into theDepartment of Defense Voluntary Disclosure Program.  The Company filed its Voluntary DisclosureProgram Report (“Disclosure Report”) on August 29, 2008.  Based on the Company’s findings as disclosedin the Disclosure Report, the Company recorded a reserve of approximately$3,700 for this matter in the third quarter of 2008.  The Company is currently unable to determinethe outcome of this matter pending the resolution of the Voluntary DisclosureProgram process and the Company’s ultimate liability arising from this mattercould exceed its current reserve.

 

*Other Contingencies*

 

*Contingent Consideration*.  Under the terms of certain purchaseagreements related to acquisitions made since 2002, the Company may be requiredto pay additional amounts as contingent consideration based on the achievement ofcertain performance related targets during 2008 and 2009.  Substantially all of these additionalpayments will be recorded as goodwill in accordance with Emerging Issues TaskForce (“EITF”) No. 95-8, “Accounting for Contingent Consideration Paid tothe

 

14

----

Tableof Contents

 

**IMS HEALTH INCORPORATED**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)**

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

 

Shareholders of an Acquired Enterprise in a Purchase BusinessCombination.”  As of September 30,2008, approximately $67,200 had been earned under these contingencies since2002.  The Company paid approximately$19,300 under these contingencies during the nine months ended September 30,2008.  Based on current estimates, theCompany expects that additional contingent consideration under these agreementsmay total approximately $5,000.  It isexpected that these contingencies will be resolved within a specified timeperiod after the end of each respective calendar year for 2008 and 2009.

 

**Note 8.  Stock-BasedCompensation**

 

The following table summarizes activity of stock options for theperiods indicated:

 
| ** **                                                       | ** ** | ** ** | ** ** | **Weighted**       | ** ** |
|------------------------------------------------------------------|------------|------------|------------|--------------------|------------|
| ** **                                                       | ** ** | ** ** | ** ** | **Average**        | ** ** |
| ** **                                                       | ** ** | ** ** | ** ** | **Exercise**       | ** ** |
| ** **                                                       | ** ** | ** ** | ** ** | **Price Per** | ** ** |
| ** **                                                       | ** ** | **Shares** | ** ** | **Share**          | ** ** |
| Options  Outstanding, December 31, 2005                     |       | 29,984     |       | $                  | 22.91      |   |
| Granted                                                          |       | 11         |       | $                  | 24.54      |   |
| Exercised                                                        |       | (6,161     | )          | $                  | 19.36      |   |
| Forfeited                                                        |       | (699       | )          | $                  | 23.58      |   |
| Cancelled                                                        |       | (1,739     | )          | $                  | 28.93      |   |
| Options  Outstanding, December 31, 2006                     |       | 21,396     |       | $                  | 23.43      |   |
| Granted                                                          |       | —     |       | —             |       |
| Exercised                                                        |       | (6,299     | )          | $                  | 22.72      |   |
| Forfeited                                                        |       | (200       | )          | $                  | 24.14      |   |
| Cancelled                                                        |       | (371       | )          | $                  | 27.61      |   |
| **Options  Outstanding, December 31, 2007**                 | ** ** | **14,526** | ** ** | **$**              | **23.62**  | ** ** |
| **Granted**                                                      | ** ** | **1,159**  | ** ** | **$**              | **22.58**  | ** ** |
| **Exercised**                                                    | ** ** | **(277**   | **)**      | **$**              | **19.91**  | ** ** |
| **Forfeited**                                                    | ** ** | **(87**    | **)**      | **$**              | **23.85**  | ** ** |
| **Cancelled**                                                    | ** ** | **(1,830** | **)**      | **$**              | **25.78**  | ** ** |
| **Options  Outstanding, September 30, 2008**                | ** ** | **13,491** | ** ** | **$**              | **23.31**  | ** ** |
| **Options  Vested or Expected to Vest, September 30, 2008** | ** ** | **13,382** | ** ** | **$**              | **23.31**  | ** ** |
| **Exercisable,  September 30, 2008**                        | ** ** | **12,348** | ** ** | **$**              | **23.37**  | ** ** |

 

15

----

Tableof Contents

 

**IMS HEALTH INCORPORATED**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)**

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

 

The following table summarizes activity ofrestricted stock units (“RSUs”) with service conditions:

 
| ** **                                               | ** ** | ** ** | ** ** | **Weighted**        | ** ** |
|----------------------------------------------------------|------------|------------|------------|---------------------|------------|
| ** **                                               | ** ** | ** ** | ** ** | **Average**         | ** ** |
| ** **                                               | ** ** | ** ** | ** ** | **Grant Date** | ** ** |
| ** **                                               | ** ** | **Shares** | ** ** | **Fair Value** | ** ** |
| Unvested,  December 31, 2005                        |       | 444        |       | $                   | 20.30      |   |
| Granted                                                  |       | 1,386      |       | $                   | 26.12      |   |
| Vested                                                   |       | (217       | )          | $                   | 22.03      |   |
| Forfeited                                                |       | (55        | )          | $                   | 25.79      |   |
| Unvested,  December 31, 2006                        |       | 1,558      |       | $                   | 25.04      |   |
| Granted                                                  |       | 1,219      |       | $                   | 29.64      |   |
| Vested                                                   |       | (296       | )          | $                   | 26.06      |   |
| Forfeited                                                |       | (148       | )          | $                   | 28.09      |   |
| **Unvested,  December 31, 2007**                    | ** ** | **2,333**  | ** ** | **$**               | **27.16**  | ** ** |
| **Granted**                                              | ** ** | **1,319**  | ** ** | **$**               | **22.45**  | ** ** |
| **Vested**                                               | ** ** | **(522**   | **)**      | **$**               | **27.67**  | ** ** |
| **Forfeited**                                            | ** ** | **(276**   | **)**      | **$**               | **26.93**  | ** ** |
| **Unvested,  September 30, 2008**                   | ** ** | **2,854**  | ** ** | **$**               | **24.91**  | ** ** |
| **Vested  or Expected to Vest, September 30, 2008** | ** ** | **2,648**  | ** ** | **$**               | **24.91**  | ** ** |

 

Thefollowing table summarizes activity of RSUs with performance conditions:

 
| ** **                                               | ** ** | ** ** | ** ** | **Weighted**        | ** ** |
|----------------------------------------------------------|------------|------------|------------|---------------------|------------|
| ** **                                               | ** ** | ** ** | ** ** | **Average**         | ** ** |
| ** **                                               | ** ** | ** ** | ** ** | **Grant Date** | ** ** |
| ** **                                               | ** ** | **Shares** | ** ** | **Fair Value** | ** ** |
| Unvested,  December 31, 2005                        |       | 375        |       | $                   | 21.12      |   |
| Granted                                                  |       | 154        |       | $                   | 24.53      |   |
| Vested                                                   |       | (181       | )          | $                   | 21.76      |   |
| Forfeited                                                |       | (28        | )          | $                   | 24.08      |   |
| Unvested,  December 31, 2006                        |       | 320        |       | $                   | 22.14      |   |
| Granted                                                  |       | 123        |       | $                   | 29.16      |   |
| Vested                                                   |       | (84        | )          | $                   | 18.65      |   |
| Forfeited                                                |       | (6         | )          | $                   | 27.00      |   |
| **Unvested,  December 31, 2007**                    | ** ** | **353**    | ** ** | **$**               | **25.34**  | ** ** |
| **Granted**                                              | ** ** | **237**    | ** ** | **$**               | **24.44**  | ** ** |
| **Vested**                                               | ** ** | **(80**    | **)**      | **$**               | **24.12**  | ** ** |
| **Forfeited**                                            | ** ** | **(11**    | **)**      | **$**               | **27.12**  | ** ** |
| **Unvested,  September 30, 2008**                   | ** ** | **499**    | ** ** | **$**               | **25.06**  | ** ** |
| **Vested  or Expected to Vest, September 30, 2008** | ** ** | **485**    | ** ** | **$**               | **25.05**  | ** ** |

 

16

----

Tableof Contents

 

**IMS HEALTH INCORPORATED**

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

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

 

The following tablesummarizes activity of non-employee director deferred stock granted in lieu ofboard meeting fees:

 
| ** **                               | ** ** | ** ** | ** ** | **Weighted**        | ** ** |
|------------------------------------------|------------|------------|------------|---------------------|------------|
| ** **                               | ** ** | ** ** | ** ** | **Average**         | ** ** |
| ** **                               | ** ** | ** ** | ** ** | **Grant Date** | ** ** |
| ** **                               | ** ** | **Shares** | ** ** | **Fair Value** | ** ** |
| Outstanding,  December 31, 2005     |       | 30         |       | $                   | 22.12      |   |
| Granted                                  |       | 3          |       | $                   | 26.13      |   |
| Outstanding,  December 31, 2006     |       | 33         |       | $                   | 22.49      |   |
| Granted                                  |       | 5          |       | $                   | 29.50      |   |
| **Outstanding, December 31, 2007**  | ** ** | **38**     | ** ** | **$**               | **23.37**  | ** ** |
| **Granted**                              | ** ** | **4**      | ** ** | **$**               | **22.45**  | ** ** |
| **Outstanding, September 30, 2008** | ** ** | **42**     | ** ** | **$**               | **23.28**  | ** ** |

 

Thefollowing table summarizes the components and classification of stock-basedcompensation expense for the periods indicated:

 
| ** **                                       | ** ** | **Three Months Ended   September 30,** | ** ** | **Nine Months Ended   September 30,** | ** ** |
|--------------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                       | ** ** | **2008**                                                   | ** ** | **2007**                                                  | ** ** | **2008** | ** ** | **2007** | ** ** |
| Stock  Options                                   | ** ** | **$**                                                      | **424**    |                                                      | $          | 2,546 | ** ** | **$** | **3,641** | ** ** | $ | 11,625 |   |
| RSUs                                             | ** ** | **5,401**                                                  |       | 5,856                                                     | ** ** | **18,413** | ** ** | 16,415 |   |
| Employee  Stock Purchase Plan                    | ** ** | **—**                                                 |       | 183                                                       | ** ** | **(2** | **)** | 558 |   |
| Total  Stock-Based Compensation Expense          | ** ** | **$**                                                      | **5,825**  |                                                      | $          | 8,585 | ** ** | **$** | **22,052** | ** ** | $ | 28,598 |   |
|                                             |       |                                                       |       |                                                      |       |   | ** ** |   |   |
| Operating  Costs of I&A                      | ** ** | **$**                                                      | **679**    |                                                      | $          | 849 | ** ** | **$** | **2,300** | ** ** | $ | 2,810 |   |
| Direct  and Incremental Costs of C&S         | ** ** | **948**                                                    |       | 982                                                       | ** ** | **2,659** | ** ** | 2,879 |   |
| Selling  and Administrative Expenses             | ** ** | **4,198**                                                  |       | 6,754                                                     | ** ** | **17,093** | ** ** | 22,909 |   |
| Total  Stock-Based Compensation Expense          | ** ** | **$**                                                      | **5,825**  |                                                      | $          | 8,585 | ** ** | **$** | **22,052** | ** ** | $ | 28,598 |   |
|                                             |       |                                                       |       |                                                      |       |   | ** ** |   |   |
| Tax Benefit on  Stock-Based Compensation Expense | ** ** | **$**                                                      | **1,911**  |                                                      | $          | 2,579 | ** ** | **$** | **7,038** | ** ** | $ | 8,695 |   |
|                                             |       |                                                       |       |                                                      |       |   | ** ** |   |   |
| Capitalized Stock-Based  Compensation Expense    | ** ** | **$**                                                      | **49**     |                                                      | $          | 73 | ** ** | **$** | **155** | ** ** | $ | 250 |   |

 

For a completedescription of the Company’s Stock Incentive Plans and its accounting policiesregarding stock-based compensation, refer to Notes 2 and 11 to the Company’sConsolidated Financial Statements included in the Company’s 2007 Annual Reporton Form 10-K as filed with the SEC.

 

**Note 9. Financial Instruments**

** **

*ForeignExchange Risk Management*

 

The Company transactsbusiness in more than 100 countries and is subject to risks associated withchanging foreign exchange rates. The Company’s objective is to reduce earningsand cash flow 

 

17

----

Table of Contents

 

**IMS HEALTH INCORPORATED**

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

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

 

volatility associatedwith foreign exchange rate changes. Accordingly, the Company enters intoforeign currency forward contracts to minimize the impact of foreign exchangemovements on net income, non-U.S. Dollar anticipated royalties, 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 foreigncurrency transactions for investment or speculative purposes. The principalcurrencies hedged are the Euro, the Japanese Yen, the British Pound, the SwissFranc and the Canadian Dollar.

 

The impact of foreignexchange risk management activities on pre-tax income for the three and ninemonths ended September 30, 2008 were net losses of $2,934 and $27,662,respectively, and net losses of $7,603 and $6,418 for the three and nine monthsended September 30, 2007, respectively. In addition, at September 30, 2008, the Company had assets ofapproximately $549,824 and liabilities of $547,195 in foreign exchange forwardcontracts outstanding with various expiration dates through September 2009relating to non-U.S. Dollar anticipated royalties and non-functional currencyassets and liabilities (see below). Foreign exchange forward contracts arerecorded at estimated fair value. The estimated fair values of the forwardcontracts are based on quoted market prices.

 

Unrealized and realizedgains and losses on the contracts hedging net income and non-functionalcurrency assets and liabilities do not qualify for hedge accounting inaccordance with SFAS No. 133, “Accounting for Derivative Instruments andHedging Activities,” as amended by SFAS No. 138, “Accounting for CertainDerivative Instruments and Certain Hedging Activities,” and SFAS No. 149, “Amendmentof Statement 133 on Derivative Instruments and Hedging Activities,”(collectively, “SFAS No. 133”), and therefore are not deferred and areincluded in the Consolidated Statements of Income in Other income (expense),net.

 

Unrealized gains andlosses on the contracts hedging non-U.S. Dollar anticipated royalties qualifyfor hedge accounting under SFAS No. 133 and are therefore deferred andincluded in OCI “Other Comprehensive Income.”

 

*FairValue Disclosures*

 

At September 30,2008, the Company’s financial instruments included cash, cash equivalents,receivables, accounts payable and long-term debt.  At September 30, 2008, the fair valuesof cash, cash equivalents, receivables and accounts payable approximatedcarrying values due to the short-term nature of these instruments.  At September 30, 2008, the fair value oflong-term debt approximated carrying value.

 

Effective January 1,2008, the Company adopted SFAS No. 157, “Fair Value Measurements,” (seeNote 3).  SFAS No. 157 establishes athree-level hierarchy for disclosure of fair value measurements as follows:

 
| Level 1 – |   | Quoted prices in active  markets for identical assets or liabilities.                                                                                                                                                                         |
|----------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|           |   |                                                                                                                                                                                                                                          |
| Level 2 – |   | Quoted prices for  similar assets or liabilities in active markets or quoted prices for  identical assets or liabilities in inactive markets; and model-derived  valuations in which all significant inputs are observable in active markets. |

 

18

----

Tableof Contents

 

**IMS HEALTH INCORPORATED**

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

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

 
| Level 3 – |   | Unobservable inputs  reflecting management’s own assumptions about the inputs used in pricing the  asset or liability. |
|----------------|--------|-----------------------------------------------------------------------------------------------------------------------------|

 

The following tablesummarizes assets and liabilities measured at fair value on a recurring basisat September 30, 2008:

 
| ** **      | ** ** | **Basis of Fair Value Measurements** | ** ** |
|-----------------|------------|----------------------------------------------------------|------------|
| ** **      | ** ** | **Level 1**                                         | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
| **Assets**      |       |                                                     |       |   |   |   |   |   |   |
| Derivatives (1) |       | —                                                   |       | $ | 549,824 |   | — |   | $ | 549,824 |   |
|            |       |                                                     |       |   |   |   |   |   |   |
| **Liabilities** |       |                                                     |       |   |   |   |   |   |   |
| Derivatives (1) |       | —                                                   |       | $ | 547,195 |   | — |   | $ | 547,195 |   |

 

----

*(1)  Derivatives consist offoreign exchange forward contracts based on observable market inputs of spotand forward rates.*

 

*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 September 30, 2008 in the event of non-performance by any onecounterparty.  In general, the Companyenters into transactions only with financial institution counterparties thathave a credit rating of A or better. In addition, the Company limits the amountof credit exposure with any one institution.

 

The Company maintainsaccounts receivable balances ($388,921 and $415,926, net of allowances, at September 30,2008 and December 31, 2007, respectively), principally from customers inthe pharmaceutical industry.  The Company’strade receivables do not represent significant concentrations of credit risk atSeptember 30, 2008 due to the credit worthiness of its customers and theirdispersion across many geographic areas.

 

19

----

Tableof Contents

 

**IMS HEALTH INCORPORATED**

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

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

 

*Linesof Credit*

 

The followingtable summarizes the Company’s long-term debt at September 30, 2008 and December 31,2007:

 
| ** **                                                                                                                | ** ** | **2008**    | ** **    | **2007**   | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|-------------|---------------|------------|------------|
| 4.6% Private  Placement Notes, principal payment of $150,000 due January 2008, net of  interest rate swaps of $(981) | ** ** | **$**       | **—**    |       | $          | 149,019 |   |
| 5.58% Private  Placement Notes, principal payment of $105,000 due January 2015                                       | ** ** | **105,000** | ** **    | **—** | ** ** |
| 5.99% Private  Placement Notes, principal payment of $135,000 due January 2018                                       | ** ** | **135,000** | ** **    | **—** | ** ** |
| 5.55% Private  Placement Notes, principal payment of $150,000 due April 2016                                         | ** ** | **150,000** |          | 150,000    |       |
| 1.70% Private  Placement Notes, principal payment of 34,395,000 Japanese Yen due  January 2013                       | ** ** | **322,989** |          | 300,787    |       |
| Revolving Credit  Facility:                                                                                               |       |        |          |       |       |
| Japanese Yen  denominated borrowings at average floating rates of approximately 1.28%                                     | ** ** | **383,317** |          | 397,973    |       |
| Swiss Franc  denominated borrowings                                                                                       | ** ** | **—**  |          | 54,730     |       |
| U.S. Dollar  denominated borrowings at average floating rates of approximately 3.75%                                      | ** ** | **252,600** |          | 100,700    |       |
| Bank Term Loan,  principal payment of $50,000 due June 2010 at average floating rate of  approximately 3.11%         | ** ** | **50,000**  |          | 50,000     |       |
| Total Long-Term  Debt                                                                                                     | ** ** | **$**       | **1,398,906** |       | $          | 1,203,209 |   |

 

In February 2008,the Company closed a private placement transaction pursuant to which it issued$105,000 of seven-year debt at a fixed rate of 5.58%, and $135,000 of ten-yeardebt at a fixed rate of 5.99% to several highly rated insurance companies.  The Company used the proceeds for share repurchases(see Note 12) and to refinance existing debt.

 

In July 2006, the Company entered into a $1,000,000 revolvingcredit facility with a syndicate of 12 banks (“Revolving Credit Facility”)replacing its existing $700,000 facility. The terms of the Revolving Credit Facility extended the maturity of thefacility in its entirety to a term of five years, maturing July 2011,reduced the borrowing margins, and increased subsidiary borrowing limits.  Total borrowings under the Revolving CreditFacility were $635,917 and $553,403 at September 30, 2008 and December 31,2007, respectively, all of which were classified as long-term.  The Company defines long-term lines as thosewhere the lines are non-cancellable for more than 365 days from the balancesheet date by the financial institutions except for specified, objectivelymeasurable violations of the provisions of the agreement.  In general, rates for borrowing under theRevolving Credit Facility are LIBOR plus 40 basis points and can vary based onthe Company’s Debt to EBITDA ratio.  Theweighted average interest rates for the Company’s lines were 2.26% and 2.16% atSeptember 30, 2008 and December 31, 2007, respectively.  In addition, the Company is required to pay acommitment fee on any unused portion of the facilities of 0.01%.  At September 30, 2008, the Company hadapproximately $364,083 available under its existing bank credit facilities.

 

InJune 2006, the Company closed a $50,000 three-year term loan with abank.  The term loan allows the Companyto borrow at a floating rate with a lower borrowing margin than the Company’srevolving credit facility.  The term loanalso provides the Company with two one-year options to extend the term at theCompany’s discretion.  In August 2008,the Company exercised the first one-year option to extend the term through June 2010.  The Company used the proceeds to refinance 

 

20

----

Tableof Contents

 

**IMS HEALTH INCORPORATED**

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

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

 

existingdebt borrowed under the revolving credit facility.

 

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

 

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

 

InJanuary 2003, the Company closed a private placement transaction pursuantto which it issued $150,000 of five-year debt to several highly rated insurancecompanies at a fixed rate of 4.60%.  TheCompany used the proceeds to pay down existing short-term debt.  The Company also swapped $100,000 of itsfixed rate debt to floating rate based on six-month LIBOR plus a margin ofapproximately 107 basis points.  TheCompany accounted for these swaps as fair value hedges under the provisions ofSFAS No. 133, “Accounting for Derivative Instruments and HedgingActivities.”  The Company determined thefair values based on estimated prices quoted by financial institutions.  The fair values of these swaps were $(981) asof December 31, 2007.  These notesand the related swaps matured and were paid off in January 2008.  Although these notes were due within 365 daysat December 31, 2007, the Company classified the notes as long-term at December 31,2007 in compliance with SFAS No. 6, “Classification of Short-TermObligations Expected to be Refinanced,” as the Company had the ability andintent to refinance these notes with another long-term debt arrangement.

 

TheCompany’s financing arrangements provide for certain covenants and events ofdefault customary for similar instruments, including in the case of its mainbank arrangements, the private placement transactions, and the term loan,covenants to maintain specific ratios of consolidated total indebtedness to EBITDAand of EBITDA to certain fixed charges. At September 30, 2008, the Company was in compliance with thesefinancial debt covenants.

 

**Note 10. Pension and Postretirement Benefits**

** **

The following tableprovides the Company’s expense associated with pension benefits that areaccounted for under SFAS No. 87, “Employers’ Accounting for Pensions,” andpostretirement benefits that are accounted for under SFAS No. 106, “Employers’Accounting for Postretirement Benefits Other Than Pensions.”  For a complete description of the Company’spension and postretirement benefits, refer to Note 10 to the Company’sConsolidated Financial Statements included in the Company’s 2007 Annual Reporton Form 10-K as filed with the SEC.

 

21

----

Tableof Contents

 

**IMS HEALTH INCORPORATED**

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

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

 
| **Components of Net Periodic Benefit Cost for the ** | ** ** | **Pension Benefits** | ** ** | **Other Benefits** | ** ** |
|----------------------------------------------------------------------------------------------|------------|---------------------------|------------|-------------------------|------------|
| **Three Months Ended September 30,**                                     | ** ** | **2008**                  | ** ** | **2007**                |       | **2008** | ** ** | **2007** | ** ** |
| Service cost                                                                                 | ** ** | **$**                     | **3,761**  | ** **              | $          | 3,833 |   | **$** | **—** | ** ** | $ | (7 | ) |
| Interest cost                                                                                | ** ** | **5,094**                 | ** ** | 4,609                   |       | **191** | ** ** | 186 |   |
| Expected return  on plan assets                                                              | ** ** | **(7,765**                | **)**      | (7,374                  | )          | — | ** ** | — |   |
| Amortization of  prior service cost (credit)                                                 | ** ** | **2**                     | ** ** | 7                       |       | **(123** | **)** | (9 | ) |
| Amortization of  transition asset                                                            |       | —                    | ** ** | (1                      | )          | — | ** ** | — |   |
| Amortization of  net loss                                                                    | ** ** | **782**                   | ** ** | 1,176                   |       | **155** | ** ** | 138 |   |
| Curtailment  charge                                                                          |       | —                    | ** ** | —                  |       | **292** | ** ** | — |   |
| Net periodic benefit  cost                                                                   | ** ** | **$**                     | **1,874**  | ** **              | $          | 2,250 |   | **$** | **515** | ** ** | $ | 308 |   |

** **
| **Components of Net Periodic Benefit Cost for the ** | ** ** | **Pension Benefits** | ** ** | **Other Benefits** | ** ** |
|----------------------------------------------------------------------------------------------|------------|---------------------------|------------|-------------------------|------------|
| **Nine Months Ended September 30,**                                      | ** ** | **2008**                  | ** ** | **2007**                |       | **2008** | ** ** | **2007** |   |
| Service cost                                                                                 | ** ** | **$**                     | **12,376** | ** **              | $          | 12,072 |   | **$** | **—** | ** ** | $ | 5 |   |
| Interest cost                                                                                | ** ** | **15,374**                | ** ** | 13,802                  |       | **575** | ** ** | 540 |   |
| Expected return  on plan assets                                                              | ** ** | **(23,623**               | **)**      | (21,972                 | )          | — | ** ** | — |   |
| Amortization of  prior service cost (credit)                                                 | ** ** | **14**                    | ** ** | 16                      |       | **(129** | **)** | (27 | ) |
| Amortization of  transition asset                                                            |       | —                    | ** ** | (3                      | )          | — | ** ** | — |   |
| Amortization of  net loss                                                                    | ** ** | **2,046**                 | ** ** | 3,378                   |       | **446** | ** ** | 354 |   |
| Curtailment  charge                                                                          |       | —                    | ** ** | —                  |       | **292** | ** ** | — |   |
| Net periodic  benefit cost                                                                   | ** ** | **$**                     | **6,187**  | ** **              | $          | 7,293 |   | **$** | **1,184** | ** ** | $ | 872 |   |

** **

**The Company recorded a curtailmentcharge of $292 in the three months ended September 30, 2008 related to therestructuring plan initiated in the fourth quarter of 2007 (see Note 14).**

** **

**Note 11.  Income Taxes**

** **

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

 

For the threemonths ended September 30, 2008, the Company’s effective tax rate wasreduced by approximately $5,900 in connection with the resolution of a certainlegacy tax matter (see Note 7).  For thenine months ended September 30, 2008, the Company’s effective tax rate wasreduced by approximately $5,900 in connection with the resolution of suchcertain legacy tax matter, by approximately $10,300 due to audit settlementswith taxing authorities, and by approximately $4,900 due to the filing of anadvance pricing agreement (“APA”) between two taxing jurisdictions. The APAensures conformity between the jurisdictions’ taxing authorities regarding thetreatment of certain intercompany transactions, thereby allowing the Company torecord a corresponding tax benefit. Also during this period, the Companyrecorded tax expense for tax positions related to non-U.S. transactions offsetby a benefit related to the expiration of certain statutes of limitation,resulting in a net tax expense of approximately $4,300. For the three monthsended September 30, 2007, the Company recognized a tax charge ofapproximately $7,500 to revalue net deferred tax assets related to Germany 

 

22

----

Tableof Contents

 

**IMS HEALTH INCORPORATED**

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

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

 

as a result of theenactment, during the third quarter, of the German 2008 Business Tax Reform Actwhich reduced the German federal tax rate from 25% to 15%. For the nine monthsended September 30, 2007, the Company’s effective tax rate was reducedprimarily due to a favorable non-U.S. audit settlement for tax years 1998through 2002 of approximately $16,500 and a reorganization of certain non-U.S.subsidiaries yielding a tax benefit of approximately $4,400, partially offsetby a tax charge of $7,500 to revalue net deferred tax assets related to Germanyas discussed above.

 

The IRS concluded itsaudit of the Company’s 2004 and 2005 federal income tax returns during thesecond quarter of 2008.  The resolutionof the audit resulted in a tax payment of approximately $5,300 for which areserve had been previously established. The Company files numerous consolidated and separate income tax returnsin U.S. (federal and state) and non-U.S. jurisdictions.  With few exceptions, the Company is no longersubject to U.S. federal income tax examinations for years before 2004 and is nolonger subject to state and local income tax examination by tax authorities foryears before 1997.  Further, with fewexceptions, the Company is no longer subject to examination by tax authoritiesin its material non-U.S. jurisdictions prior to 2003.  It is reasonably possible that within thenext twelve months the Company could realize approximately $32,800 ofunrecognized benefits; $9,700 as a result of the termination of a non-U.S.agreement and $23,100 mainly as a result of the expiration of certain statutesof limitation.

 

For the three and ninemonths ended September 30, 2008, the Company recorded approximately $5,200and $15,200, respectively, of tax expense related to unrecognized tax benefitsthat if recognized, would favorably affect the effective tax rate.  Included in these amounts are approximately$2,500 and $7,800, respectively, of interest and penalties. For the three andnine months ended September 30, 2007, the Company recorded approximately$4,900 and $11,900, respectively, of tax expense related to unrecognized taxbenefits including approximately $3,000 and $6,700, respectively, of interestand penalties.

 

**Note 12.  IMS Health Capital Stock**

** **

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

 

On December 18, 2007, the Board ofDirectors authorized a stock repurchase program to buy up to 20,000shares.  As of September 30, 2008,9,945 shares remained available for repurchase under the December 2007program.

 

On December 19, 2006, the Board ofDirectors authorized a stock repurchase program to buy up to 10,000 shares.This program was completed in November 2007 at a total cost of $287,072.

 

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

 

During the nine months ended September 30,2008, the Company repurchased 10,055 shares of outstanding Common Stock underthese programs at a total cost of $230,433.

 

23

----

Tableof Contents

 

**IMS HEALTH INCORPORATED**

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

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

 

During the nine months ended September 30,2007, the Company repurchased approximately 13,168 shares of outstanding CommonStock under these programs at a total cost of $392,782, including therepurchase of 6,135 shares pursuant to an accelerated share repurchase program(“ASR”).  As part of the ASR, the Companysimultaneously entered into a forward contract for the final settlement of theASR transaction which was indexed to the price of the Company’s CommonStock.  The ASR agreement provided forthe final settlement amount to be in the Company’s Common Stock if the Companywere to owe an amount to the bank, or in either cash or additional shares ofthe Company’s Common Stock, at the Company’s sole discretion, if the bank wereto owe an amount to the Company.  As theagreement required the Company to deliver shares to the bank for finalsettlement, the forward contract element qualified for permanent equity classificationand the fair value of the forward contract, which was zero at the contract’sinception, was recorded in equity in accordance with the provisions of EITF00-19, “Accounting for Derivative Financial Instruments Indexed to, andPotentially Settled In, a Company’s Own Stock.” Subsequent changes in the fair value of the forward contract were notrecorded as the Company continued to classify the forward contract asequity.  Upon completion of the ASR in April 2007,the Company was required to pay approximately $6,000 in shares, and thereforeissued 203 treasury shares, as full settlement of its obligation under theASR.  The total cost of the ASR wasapproximately $176,000 or $28.68 per share. The Company funded the ASR through its existing bank credit facilities(see Note 9).

 

Total share repurchases during 2008positively impacted the Company’s diluted earnings per share (“EPS”) by $0.01and $0.03 per share for the three and nine months ended September 30,2008, respectively.  Total sharerepurchases during the comparable period in 2007 had no effect on the Company’sdiluted EPS for the three months ended September 30, 2007 and a positive impacton the Company’s diluted EPS of $0.01 for the nine months ended September 30,2007.

 

Shares acquired through the Company’srepurchase programs described above are open-market purchases or privatelynegotiated transactions in compliance with SEC Rule 10b-18, with theexception of purchases pursuant to the 2007 ASR.

 

Under the Company’s Restated Certificate of Incorporationas amended, the Company has authority to issue 820,000 shares with a par valueof $.01 per share of which 800,000 represent shares of Common Stock, 10,000represent shares of preferred stock and 10,000 represent shares of Series CommonStock.  The preferred and series CommonStock can be issued with varying terms, as determined by the Board ofDirectors.

 

24

----

Tableof Contents

 

**IMS HEALTH INCORPORATED**

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

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

 

**Note 13.  Comprehensive Income**

** **

The following table setsforth the components of comprehensive income, net of income tax expense:

 
| ** **                                        | ** ** | **Three Months Ended   September 30,** | ** ** | **Nine Months Ended   September 30,** | ** ** |
|---------------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                        | ** ** | **2008**                                                   | ** ** | **2007**                                                  |       | **2008** | ** ** | **2007** | ** ** |
| **Net  Income**                                   | ** ** | **$**                                                      | **75,912** | ** **                                                | $          | 57,125 |   | **$** | **212,782** | ** ** | $ | 216,088 |   |
| Other  comprehensive (loss) income, net of taxes: |       |                                                       | ** ** |                                                      |       |   | ** ** |   |   |
| Unrealized  losses on:                            |       |                                                       | ** ** |                                                      |       |   | ** ** |   |   |
| Available-for-sale  equity securities             |       | —                                                     | ** ** | (187                                                      | )          | — | ** ** | (204 | ) |
| Tax benefit on  above                             |       | —                                                     | ** ** | 65                                                        |       | — | ** ** | 71 |   |
| Change in  unrealized losses on investments       |       | —                                                     | ** ** | (122                                                      | )          | — | ** ** | (133 | ) |
| Foreign currency  translation (losses) gains      | ** ** | **(59,378**                                                | **)**      | (17,492                                                   | )          | **(45,473** | **)** | 20,984 |   |
| Amortization of  SFAS 158 service cost and other  | ** ** | **(251**                                                   | **)**      | 1,771                                                     |       | **1,010** | ** ** | 4,100 |   |
| Total other  comprehensive (loss) income          | ** ** | **(59,629**                                                | **)**      | (15,843                                                   | )          | **(44,463** | **)** | 24,951 |   |
| **Comprehensive  Income**                         | ** ** | **$**                                                      | **16,283** | ** **                                                | $          | 41,282 |   | **$** | **168,319** | ** ** | $ | 241,039 |   |

 

**Note 14.  Severance, Impairment and Other Charges**

** **

In response to healthcare marketplace dynamics, during the fourthquarter of 2007, the Company committed to a restructuring plan designed toeliminate approximately 1,070 positions worldwide in production anddevelopment, sales, marketing, consulting and services and administration.  The restructuring plan also included thewrite-down of two impaired computer software assets and related contractpayments to be incurred with no future economic benefit based on the Company’sdecision to abandon certain products in its EMEA region.  As a result, the Company recorded $88,690 ofSeverance, impairment and other charges as a component of operating income inthe fourth quarter of 2007.  Theseverance benefits were calculated pursuant to the terms of establishedemployee protection plans, in accordance with local statutory minimumrequirements or individual employee contracts, as applicable.

 

These charges were designed to strengthen client-facing operationsworldwide, increase the Company’s operating efficiencies and streamline itscost structure.  Some of the initiativesincluded in this restructuring plan were designed to better align the Company’sresources to help clients manage for change in a challenging climate.

 

The severance and contract payments portion of the charge wasapproximately $75,043 and will all be settled in cash.  The Company expects that all terminationactions under the restructuring plan will be completed by the end of 2008.

 

25

----

Tableof Contents

 

**IMS HEALTH INCORPORATED**

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

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

 
| ** **                          | ** ** | **Severance** | ** ** | **Contract** | ** ** | **Asset**  | ** ** | **Currency**    | ** ** | ** ** | ** ** |
|-------------------------------------|------------|---------------|------------|--------------|------------|------------|------------|-----------------|------------|------------|------------|
| ** **                          | ** ** | **related**   | ** ** | **related**  | ** ** | **write-** | ** ** | **translation** | ** ** | ** ** | ** ** |
| ** **                          | ** ** | **reserves**  | ** ** | **reserves** | ** ** | **downs**  | ** ** | **adjustments** | ** ** | **Total**  | ** ** |
| Charge at  December 31, 2007   |       | $             | 71,583     |         | $          | 3,460      |       | $               | 13,647     |       | $          | — |   | $ | 88,690 |   |
| 2007 utilization                    |       | —        |       | —       |       | (13,647    | )          | —          |       | (13,647    | )          |
| 2008 utilization                    |       | (36,549       | )          | (1,877       | )          | —     |       | —          |       | (38,426    | )          |
| Currency  translation adjustments   |       | —        |       | —       |       | —     |       | 512             |       | 512        |       |
| Balance at  September 30, 2008 |       | $             | 35,034     |         | $          | 1,583      |       | $               | —     |       | $          | 512 |   | $ | 37,129 |   |

 

The Company currently expects that cashoutlays will be applied against the $37,129 balance remaining in the 2007fourth quarter charge at September 30, 2008 as follows:

 
| **Year Ended December 31,** | ** ** | **Outlays** | ** ** |
|--------------------------------------------|------------|-------------|------------|
| 2008                                       |       | $           | 21,830     |   |
| 2009                                       |       | 13,867      |       |
| 2010                                       |       | 1,235       |       |
| 2011                                       |       | 197         |       |
| Total                                      |       | $           | 37,129     |   |

 

During the fourth quarter of 2001, the Company completed the assessmentof its Competitive Fitness Program. This program was designed to streamlineoperations, increase productivity and improve client service. In connectionwith this program, the Company recorded $94,616 of Severance, impairment andother charges during the fourth quarter of 2001 as a component of operatingincome.  As of September 30, 2008,approximately $1,170 remains to be utilized from 2008 to 2013 related toseverance payments.

 

In the first quarter of 2007, the Company reversed $640 ofcontract-related reserves from the fourth quarter 2001 charge due primarily tothe termination and settlement of exit related costs for an impairedlease.  These amounts were reversedagainst Selling and administrative expenses in the Condensed ConsolidatedStatements of Income (Unaudited).

 
| ** **                          | ** ** | **Severance** | ** ** | **Contract** | ** ** | **Asset**  | ** ** | ** ** | ** ** |
|-------------------------------------|------------|---------------|------------|--------------|------------|------------|------------|------------|------------|
| ** **                          | ** ** | **related**   | ** ** | **related**  | ** ** | **write-** | ** ** | ** ** | ** ** |
| ** **                          | ** ** | **reserves**  | ** ** | **reserves** | ** ** | **downs**  | ** ** | **Total**  | ** ** |
| Charge at  December 31, 2001   |       | $             | 39,652     |         | $          | 26,324     |       | $          | 28,640     |   | $ | 94,616 |   |
| 2001 – 2005  utilization       |       | (37,070       | )          | (22,315      | )          | (29,602    | )          | (88,987    | )          |
| 2006 utilization                    |       | (264          | )          | (1,887       | )          | —     |       | (2,151     | )          |
| 2007 utilization                    |       | (263          | )          | (1,208       | )          | —     |       | (1,471     | )          |
| 2007 reversals                      |       | —        |       | (640         | )          | —     |       | (640       | )          |
| 2008 utilization                    |       | (197          | )          | —       |       | —     |       | (197       | )          |
| Adjustments                         |       | (688          | )          | (274         | )          | 962        |       | —     |       |
| Balance at  September 30, 2008 |       | $             | 1,170      |         | $          | —     |       | $          | —     |   | $ | 1,170 |   |

 

26

----

Tableof Contents

 

**IMS HEALTH INCORPORATED**

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

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

 

The Company currently expects that the $1,170balance remaining in the 2001 fourth quarter charge will be utilized asfollows:

 
| **Year Ended December 31,** | ** ** | **Outlays** | ** ** |
|--------------------------------------------|------------|-------------|------------|
| 2008                                       |       | $           | 65         |   |
| 2009                                       |       | 262         |       |
| 2010                                       |       | 262         |       |
| 2011                                       |       | 262         |       |
| 2012                                       |       | 262         |       |
| Thereafter                                 |       | 57          |       |
| Total                                      |       | $           | 1,170      |   |

** **

**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 andrelated services to its customers in more than 100 countries.  See Note 2.

 

The Company maintainsregional geographic management to facilitate local execution of its globalstrategies.  However, the Companymaintains global leaders for the majority 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 the Company operatesfor the three and nine months ended September 30, 2008 and 2007.

 
| ** **                                       | ** ** | **Americas   (1)** | ** **  | **EMEA   (2)** | ** ** | **Asia Pacific   (3)** | ** ** | **Corporate &   Other** | ** **  | **Total   IMS** | ** ** |
|--------------------------------------------------|------------|-------------------------|-------------|---------------------|------------|----------------------------------|------------|---------------------------------------|-------------|----------------------|------------|
| **Three  months ended September 30, 2008:** |       |                    |        |                |       |                             |       |                                  |        |                 |       |
| Operating Revenue (4)                            | ** ** | **$**                   | **251,332** | ** **          | **$**      | **243,219**                      | ** ** | **$**                                 | **79,164**  | ** **           | **—** | ** ** | **$** | **573,715** | ** ** |
| Operating Income  (Loss) (5)                     | ** ** | **$**                   | **74,923**  | ** **          | **$**      | **34,276**                       | ** ** | **$**                                 | **27,266**  | ** **           | **$**      | **(12,489** | **)** | **$** | **123,976** | ** ** |
| **Nine  months ended September 30, 2008:**  | ** ** | ** **              | ** **  | ** **          | ** ** | ** **                       | ** ** | ** **                            | ** **  | ** **           | ** ** |
| Operating  Revenue (4)                           | ** ** | **$**                   | **760,782** | ** **          | **$**      | **744,513**                      | ** ** | **$**                                 | **243,309** | ** **           | **—** | ** ** | **$** | **1,748,604** | ** ** |
| Operating Income  (Loss) (5)                     | ** ** | **$**                   | **236,216** | ** **          | **$**      | **83,120**                       | ** ** | **$**                                 | **89,782**  | ** **           | **$**      | **(37,383** | **)** | **$** | **371,735** | ** ** |
| **Three  months ended September 30, 2007:** |       |                    |        |                |       |                             |       |                                  |        |                 |       |
| Operating Revenue (4)                            |       | $                       | 246,893     |                | $          | 219,781                          |       | $                                     | 72,136      |                 | —     |   | $ | 538,810 |   |
| Operating Income  (Loss) (5)                     |       | $                       | 85,678      |                | $          | 20,348                           |       | $                                     | 26,965      |                 | $          | (15,889 | ) | $ | 117,102 |   |
| **Nine  months ended September 30, 2007:**  | ** ** |                    |        |                |       |                             |       |                                  |        |                 |       |
| Operating  Revenue (4)                           |       | $                       | 718,941     |                | $          | 654,631                          |       | $                                     | 213,059     |                 | —     |   | $ | 1,586,631 |   |
| Operating Income  (Loss) (5)                     |       | $                       | 239,349     |                | $          | 69,826                           |       | $                                     | 81,745      |                 | $          | (44,618 | ) | $ | 346,302 |   |

 

27

----

Tableof Contents

 

**IMS HEALTH INCORPORATED**

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

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

 

----

**Notes to Geographic FinancialInformation:**

 
| *(1)*  | * * | *Americas includes the United  States, Canada and Latin America.*                                                                                                                                                                                                                                                                                                                  |
|--------|----------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |     |                                                                                                                                                                                                                                                                                                                                                                               |
| *(2)*  | * * | *EMEA includes countries in  Europe, the Middle East and Africa.*                                                                                                                                                                                                                                                                                                                  |
|   |     |                                                                                                                                                                                                                                                                                                                                                                               |
| *(3)*  | * * | *Asia Pacific includes Japan,  Australia and other countries in the Asia Pacific region.*                                                                                                                                                                                                                                                                                          |
|   |     |                                                                                                                                                                                                                                                                                                                                                                               |
| *(4)*  | * * | *Operating Revenue relates to  external customers and is primarily based on the location of the customer.  The Operating Revenue for the geographic regions includes the impact of  foreign exchange in converting results into U.S. dollars.*                                                                                                                                     |
|   |     |                                                                                                                                                                                                                                                                                                                                                                               |
| *(5)*  | * * | *Operating Income for the three  geographic regions does not reflect the allocation of certain expenses that  are maintained in Corporate and Other and as such, is not a true measure of  the respective regions’ profitability. The Operating Income amounts for the  geographic segments include the impact of foreign exchange in converting  results into U.S. dollars.* |

 

A summary of the Company’soperating revenue by product line for the three and nine months ended September 30,2008 and 2007 is presented below:

 
| ** **                 | ** ** | **Three Months Ended   September 30,** | ** **  | **Nine Months Ended   September 30,** | ** ** |
|----------------------------|------------|------------------------------------------------------------|-------------|-----------------------------------------------------------|------------|
| ** **                 | ** ** | **2008**                                                   | ** **  | **2007**                                                  | ** ** | **2008** | ** ** | **2007** | ** ** |
| Sales Force  Effectiveness | ** ** | **$**                                                      | **258,261** |                                                      | $          | 252,560 | ** ** | **$** | **794,900** |   | $ | 731,812 |   |
| Portfolio  Optimization    | ** ** | **158,991**                                                |        | 150,947                                                   | ** ** | **493,462** |   | 465,056 |   |
| Launch, Brand  and Other   | ** ** | **156,463**                                                |        | 135,303                                                   | ** ** | **460,242** |   | 389,763 |   |
| Operating  Revenue         | ** ** | **$**                                                      | **573,715** |                                                      | $          | 538,810 | ** ** | **$** | **1,748,604** |   | $ | 1,586,631 |   |

** **

**Note 16.  Subsequent Event**

** **

During October 2008,the Company completed the acquisition of the services practice group of SkuraCorporation, Inc. (Canada, U.S. and U.K.) for a cost of approximately$10,100.  This acquisition will beaccounted for under the purchase method of accounting and the purchase pricewill be allocated to the assets acquired and the liabilities assumed based onestimated fair values as of the closing date. Had this acquisition occurred as of January 1, 2008 or 2007, theimpact on the Company’s results of operations would not have been significant.

 

28

----

Tableof Contents

 

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

 

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

 

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

 

***Executive Summary***

*** ***

***Our Business***

*** ***

IMSHealth Incorporated (“we,” “us” or “our”) is the leading global provider ofmarket intelligence to the pharmaceutical and healthcare industries. We offerleading-edge market intelligence products and services that are integral to ourclients’ day-to-day operations, including portfolio optimization capabilities;launch and brand management solutions; sales force effectiveness innovations;managed markets and consumer health offerings; and consulting and servicessolutions that improve return on investment (“ROI”) and the delivery of qualityhealthcare worldwide. Our information products are developed to meet clientneeds by using data secured from a worldwide network of suppliers in more than100 countries. Key information products include:

 

·      Sales Force Effectiveness to optimize salesforce productivity and territory management;

 

·      Portfolio Optimization to provide clientswith insights into market opportunity and business development assessment; and

 

·      Launch, Brand Management and Other to supportclient needs relative to market segmentation and positioning, life cyclemanagement for prescription and consumer health products and health economicsand outcomes research offerings.

 

Withinthese business lines, we provide consulting and services that use in-housecapabilities and methodologies to assist pharmaceutical clients in analyzingand evaluating market trends, strategies and tactics, and to help in thedevelopment and implementation of customized software applications and datawarehouse tools.

 

Weoperate in more than 100 countries.

 

Wemanage on a global business model with global leaders for the majority of ourcritical business processes and accordingly have one reportable segment.

 

Webelieve that important measures of our financial condition and results ofoperations include operating revenue, constant dollar revenue growth, operatingincome, constant dollar operating income growth, operating margin and cash flows.

 

**Performance Overview**

 

Our operatingrevenue grew 6.5% to $573,715 in the third quarter of 2008 as compared to$538,810 in the third quarter of 2007. Our operating revenue grew 10.2% to $1,748,604 in the nine months ended September 30,2008 as compared to $1,586,631 in the nine months ended September 30,2007.  The three and nine month operatingrevenue increases were a result of growth in all three of our businesslines.  Our operating income grew 5.9% to$123,976 in the third quarter of 2008 as compared to $117,102 in the thirdquarter of 2007.  Our operating incomegrew 7.3% to $371,735 in the nine months ended September 30, 2008 ascompared to $346,302 in the nine months ended September 30, 2007.  Both the three and nine month operatingincome growth were a result of increased operating revenues offset by increasesin 

 

29

----

Tableof Contents

 

operating costs,selling and administrative expenses and depreciation and amortization, asdiscussed below. Our net income was $75,912 for the third quarter of 2008 ascompared to $57,125 for the third quarter of 2007 and $212,782 for the ninemonths ended September 30, 2008 as compared to $216,088 for the ninemonths ended September 30, 2007, due to the Non-Operating Loss, net itemsdiscussed below and certain tax items as discussed in Note 11 of the CondensedConsolidated Financial Statements (Unaudited). Our diluted earnings per share of Common Stock increased to $0.41 forthe third quarter of 2008 as compared to $0.29 for the third quarter of 2007and increased to $1.16 for the nine months ended September 30, 2008 ascompared to $1.08 for the nine months ended September 30, 2007.

 

**Resultsof Operations**

 

*Reclassifications. *Certain prior-year amounts have been reclassified to conform to the2008 presentation.

 

*References to constant dollarresults and results excluding the effect of foreign currency translations. *We report results in U.S.dollars, but 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 may have significant effects on ourresults.  In order to illustrate theseeffects, the discussion of our business in this report sometimes describes themagnitude of changes in constant dollar terms or results excluding the effectof foreign currency translations.  Webelieve this information facilitates a comparative view of our business.  In the first nine months of 2008, the U.S.dollar was generally weaker against other currencies as compared to the firstnine months of 2007.  As a result, growthat constant dollar exchange rates was lower than growth at actual currencyexchange rates.  See “How Exchange RatesAffect Our Results” below and the discussion of “Market Risk” in the Management’sDiscussion and Analysis of Financial Condition and Results of Operationssection of our annual report on Form 10-K for the year ended December 31,2007 for a more complete discussion regarding the impact of foreign currencytranslation on our business.

 

**Summary of Operating Results**

 

| ** **                                  | ** ** | ** **                                               | ** **  | ** ** | ** ** | **% Variance** | ** ** |
|---------------------------------------------|------------|----------------------------------------------------------|-------------|------------|------------|---------------------|------------|
| ** **                                  | ** ** | **Three Months Ended September 30,** | ** **  | **2008**   | ** ** |
| ** **                                  | ** ** | **2008**                                                 | ** **  | **2007**   | ** ** | **vs 2007**    | ** ** |
| Information and analytics revenue (I&A) | ** ** | **$**                                                    | **445,654** | ** ** | $          | 419,270             |       | 6.3 | % |
| Consulting and  services revenue (C&S)  |       | **128,061**                                              | ** **  | 119,540    |       | 7.1                 | %          |
| Operating  Revenue                          |       | **573,715**                                              | ** **  | 538,810    |       | 6.5                 | %          |
|                                        |       | ** **                                               | ** **  |       |       |                |       |
| Operating costs  of I&A                 |       | **191,114**                                              | ** **  | 177,021    |       | 8.0                 | %          |
| Direct and  incremental costs of C&S    |       | **61,380**                                               | ** **  | 55,722     |       | 10.2                | %          |
| External-use  software amortization         | ** ** | **12,291**                                               | ** **  | 12,209     |       | 0.7                 | %          |
| Selling and  administrative expenses        | ** ** | **161,708**                                              | ** **  | 157,281    |       | 2.8                 | %          |
| Depreciation and  other amortization        | ** ** | **23,246**                                               | ** **  | 19,475     |       | 19.4                | %          |
| Operating Income                            | ** ** | **$**                                                    | **123,976** | ** ** | $          | 117,102             |       | 5.9 | % |

 

30

----

Tableof Contents

 
| ** **                                   | ** ** | ** **                                              | ** **    | ** ** | ** ** | **% Variance** | ** ** |
|----------------------------------------------|------------|---------------------------------------------------------|---------------|------------|------------|---------------------|------------|
| ** **                                   | ** ** | **Nine Months Ended September 30,** | ** **    | **2008**   | ** ** |
| ** **                                   | ** ** | **2008**                                                | ** **    | **2007**   | ** ** | **vs 2007**    | ** ** |
| Information and  analytics revenue (I&A) | ** ** | **$**                                                   | **1,355,281** | ** ** | $          | 1,247,982           |       | 8.6 | % |
| Consulting and  services revenue (C&S)   |       | **393,323**                                             | ** **    | 338,649    |       | 16.1                | %          |
| Operating  Revenue                           |       | **1,748,604**                                           | ** **    | 1,586,631  |       | 10.2                | %          |
|                                         |       | ** **                                              | ** **    |       |       |                |       |
| Operating costs  of I&A                  |       | **576,566**                                             | ** **    | 525,499    |       | 9.7                 | %          |
| Direct and  incremental costs of C&S     |       | **203,102**                                             | ** **    | 170,046    |       | 19.4                | %          |
| External-use  software amortization          | ** ** | **38,048**                                              | ** **    | 35,830     |       | 6.2                 | %          |
| Selling and  administrative expenses         | ** ** | **492,497**                                             | ** **    | 451,406    |       | 9.1                 | %          |
| Depreciation and  other amortization         | ** ** | **66,656**                                              | ** **    | 57,548     |       | 15.8                | %          |
| Operating Income                             | ** ** | **$**                                                   | **371,735**   | ** ** | $          | 346,302             |       | 7.3 | % |

 

***Operating Income***

 

Our operating income forthe third quarter of 2008 grew 5.9% to $123,976 from $117,102 in the thirdquarter of 2007.  This was due to theincrease in our operating revenue, offset by increases in our operating costs andselling and administrative expenses driven by increased cost of data,investments in consulting and services capabilities and expense associated witha charge related to our Government Solutions business (see Note 7 of Notes toCondensed Consolidated Financial Statements (Unaudited) for a description ofthis charge).  Our operating incomeincreased 1.1% in constant dollar terms. Absent the Government Solutions charge, non-GAAP operating income wouldhave increased 9.1% at reported rates (see “Reconciliation of U.S. GAAP Sellingand Administrative Expenses and Operating Income to Non-GAAP Selling andAdministrative Expenses and Operating Income” at the end of this Item 2) and4.4% in constant dollar terms.  Ouroperating income for the first nine months of 2008 grew 7.3% to $371,735 from$346,302 in the first nine months of 2007. This was due to the increase in our operating revenue, offset byincreases in our operating costs and selling and administrative expenses drivenby increased cost of data, investments in consulting and services capabilitiesand the Government Solutions charge.  Ouroperating income decreased 0.1% in constant dollar terms.  Absent the Government Solutions charge,non-GAAP operating income would have increased 8.4% at reported rates (see “Reconciliationof U.S. GAAP Selling and Administrative Expenses and Operating Income toNon-GAAP Selling and Administrative Expenses and Operating Income” at the endof this Item 2) and 1.0% at constant dollar terms.

 

***OperatingRevenue***

 

Our operating revenue forthe third quarter of 2008 grew 6.5% to $573,715 from $538,810 in the thirdquarter of 2007. On a constant dollar basis, operating revenue growth was2.6%.  Operating revenue for the firstnine months of 2008 grew 10.2% to $1,748,604 from $1,586,631 in the first ninemonths of 2007. On a constant dollar basis our operating revenue growth was4.2%.  On a constant dollar basis,acquisitions completed within the prior twelve months contributed approximately1.9 percentage points to our operating revenue growth for both the thirdquarter and first nine months of 2008. The increase in our operating revenue resulted from growth in revenuedue to higher purchases of products and C&S offerings from existing customersin all three of our business lines, together with the effect of approximately$21,000 and $97,000 of currency translation for the third quarter and firstnine months of 2008, respectively, as compared to the third quarter and firstnine months of 2007.  On a constantdollar basis, our Portfolio

 

31

----

Tableof Contents

 

Optimization and Launch, Brand Management and Other business linesgrew.

 

**Summaryof Operating Revenue**

 
| ** **                 | ** ** | ** **                                               | ** **  | ** **   | ** ** | **% Variance**        | ** ** |
|----------------------------|------------|----------------------------------------------------------|-------------|--------------|------------|----------------------------|------------|
| ** **                 | ** ** | ** **                                               | ** **  | ** **   | ** ** | **2008 vs 2007** | ** ** |
| ** **                 | ** ** | **Three Months Ended September 30,** | ** **  | **Reported** | ** ** | **Constant **         | ** ** |
| ** **                 | ** ** | **2008**                                                 | ** **  | **2007**     | ** ** | ** Rates**            | ** ** | **Dollar** | ** ** |
| Sales Force  Effectiveness | ** ** | **$**                                                    | **258,261** |         | $          | 252,560                    |       | 2.3 | % | (1.7 | )% |
| Portfolio  Optimization    | ** ** | **158,991**                                              |        | 150,947      |       | 5.3                        | %          | 1.4 | % |
| Launch, Brand  and Other   | ** ** | **156,463**                                              |        | 135,303      |       | 15.6                       | %          | 11.9 | % |
| Operating  Revenue         | ** ** | **$**                                                    | **573,715** |         | $          | 538,810                    |       | 6.5 | % | 2.6 | % |

 
| ** **                 | ** ** | ** **                                              | ** **    | ** **   | ** ** | **% Variance**        | ** ** |
|----------------------------|------------|---------------------------------------------------------|---------------|--------------|------------|----------------------------|------------|
| ** **                 | ** ** | ** **                                              | ** **    | ** **   | ** ** | **2008 vs 2007** | ** ** |
| ** **                 | ** ** | **Nine Months Ended September 30,** | ** **    | **Reported** | ** ** | **Constant **         | ** ** |
| ** **                 | ** ** | **2008**                                                | ** **    | **2007**     | ** ** | ** Rates**            | ** ** | **Dollar** | ** ** |
| Sales Force  Effectiveness | ** ** | **$**                                                   | **794,900**   | ** **   | $          | 731,812                    |       | 8.6 | % | 2.4 | % |
| Portfolio  Optimization    | ** ** | **493,462**                                             | ** **    | 465,056      |       | 6.1                        | %          | 0.4 | % |
| Launch, Brand  and Other   | ** ** | **460,242**                                             | ** **    | 389,763      |       | 18.1                       | %          | 12.0 | % |
| Operating  Revenue         | ** ** | **$**                                                   | **1,748,604** | ** **   | $          | 1,586,631                  |       | 10.2 | % | 4.2 | % |

 

·                  *Sales Force Effectiveness:* The Americas and EMEA contributedabout equally to the revenue decline for the third quarter of 2008 partiallyoffset by revenue growth in Asia Pacific. The Americas contributed more than one-half and EMEA contributed morethan one-quarter to the revenue growth for the first nine months of 2008.

 

·                  *Portfolio Optimization:* EMEA was the primary contributor tothe constant dollar revenue growth for the third quarter of 2008.  Asia Pacific contributed more than one-halfand the Americas contributed one-quarter to the constant dollar revenue growthfor the first nine months of 2008 which was almost completely offset by therevenue decline in EMEA.

 

·                  *Launch, Brand Management and Other:* EMEA contributed morethan one-half and the Americas contributed more than one-third to the revenuegrowth for the third quarter and first nine months of 2008.

 

Consulting and services (“C&S”)revenue, as included in the business lines above, was $128,061 in the thirdquarter of 2008, up 7.1% from $119,540 in the third quarter of 2007 (up 4.0% ona constant dollar basis).  All of theC&S revenue growth for the third quarter of 2008 was attributable toacquisitions completed during the prior twelve months.  C&S revenue, as included in the businesslines above, was $393,323 in the first nine months of 2008, up 16.1% from$338,649 in the first nine months of 2007 (up 10.2% on a constant dollarbasis).  Slightly more than one-half ofthe C&S revenue growth for the first nine months of 2008 was attributableto acquisitions completed during the prior twelve months.

 

***OperatingCosts of Information and Analytics***

 

Operating costs ofinformation and analytics (“I&A”) include costs of data, data processingand 

 

32

----

Tableof Contents

 

collection and costsattributable to personnel involved in production, data management and deliveryof the Company’s I&A offerings.

 

Our operating costs ofI&A grew 8.0% to $191,114 in the third quarter of 2008 from $177,021 in thethird quarter of 2007.  Our operatingcosts of I&A grew 9.7% to $576,566 in the first nine months of 2008 from$525,499 in the first nine months of 2007.

 

·                  *Foreign Currency Translation*: The effect of foreign currencytranslation increased our operating costs of I&A by approximately $8,000and $33,000 for the third quarter and first nine months of 2008, respectively,as compared to the third quarter and first nine months of 2007.

 

Excludingthe effect of foreign currency translation, our operating costs of I&A grew3.7% and 3.4% in the third quarter and first nine months of 2008, respectively,as compared to the third quarter and first nine months of 2007.

 

·                  *Data*: Data costs increased by approximately $7,000 and$18,000 in the third quarter and first nine months of 2008, respectively, ascompared to the third quarter and first nine months of 2007.

 

·                  *Production, Client Services and Other*: Production, client servicesand other costs remained relatively constant for the third quarter and firstnine months of 2008 as compared to the first nine months of 2007.

 

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

 

Direct and incrementalcosts of C&S include the costs of consulting staff directly involved withdelivering revenue-generating engagements, related accommodations and the costsof primary market research data purchased specifically for certain individualC&S engagements.  Direct andincremental costs of C&S do not include an allocation of direct costs ofdata that are included within I&A. Our direct and incremental costs of C&S grew 10.2% to $61,380 in thethird quarter of 2008 from $55,722 in the third quarter of 2007.  Our direct and incremental costs of C&Sgrew 19.4% to $203,102 in the first nine months of 2008 from $170,046 in thefirst nine months of 2007.

 

·                  *Foreign Currency Translation*: The effect of foreign currencytranslation increased our direct and incremental costs of C&S byapproximately $2,000 and $12,000 for the third quarter and first nine months of2008, respectively, as compared to the third quarter and first nine months of2007.

 

Excludingthe effect of foreign currency translation, our direct and incremental costs ofC&S grew 5.8% and 12.7% in the third quarter and first nine months of 2008,respectively, as compared to the third quarter and first nine months of 2007.

 

·                  C&S costsincreased by approximately $3,000 and $21,000 in the third quarter and firstnine months of 2008, respectively, as compared to the third quarter and firstnine months of 2007, due to increased labor, accommodations and primary marketresearch data expense, all directly related to C&S revenue growth.

 

***External-UseSoftware Amortization***

 

Our external-use software amortizationcharges represent the amortization associated with 

 

33

----

Tableof Contents

 

software we capitalized under the provisionsof Statement of FinancialAccounting Standards (“SFAS”) No. 86,“Accounting for the Costs of Computer Software to be Sold, Leased, or OtherwiseMarketed.” Our external-use software amortization charges grew 0.7% to $12,291in the third quarter of 2008 from $12,209 in the third quarter of 2007.  Our external-use software amortizationcharges grew 6.2% to $38,048 in the first nine months of 2008 from $35,830 inthe first nine months of 2007.  Thesewere due to increased software amortization associated with new products.

 

***Sellingand Administrative Expenses***

 

Our selling andadministrative expenses consist primarily of the expenses attributable tosales, marketing, and administration, including human resources, legal,management and finance.  During the thirdquarter of 2008, we also incurred approximately $3,700 of expense for a chargerelated to our Government Solutions business (see Note 7 of Notes to CondensedConsolidated Financial Statements (Unaudited)). Our selling and administrative expenses grew 2.8% in the third quarterof 2008, to $161,708 from $157,281 in the third quarter of 2007.  Absent the Government Solutions charge, ournon-GAAP selling and administrative expenses would have remained relativelyconstant as compared to third quarter of 2007 (see “Reconciliation of U.S. GAAP Selling and Administrative Expensesand Operating Income to Non-GAAP Selling and Administrative Expenses andOperating Income” at the end of this Item 2). Our selling and administrative expenses grew 9.1% to $492,497 in thefirst nine months of 2008 as compared to $451,406 in the first nine months of2007.  Absent the Government Solutionscharge, our non-GAAP selling and administrative expenses would have grown 8.3%in the first nine months of 2008 as compared to the first nine months of2007  (see “Reconciliation of U.S. GAAPSelling and Administrative Expenses and Operating Income to Non-GAAP Sellingand Administrative Expenses and Operating Income” at the end of this Item 2).

 

·                  *Foreign Currency Translation*: The effect of foreign currencytranslation increased our selling and administrative expenses by approximately$4,000 and $22,000 for the third quarter and first nine months of 2008,respectively, as compared to the third quarter and first nine months of 2007.

 

Excluding the effect offoreign currency translation and the Government Solutions charge, our sellingand administrative expenses declined 2.4% in the third quarter of 2008 ascompared to the third quarter of 2007 and grew 3.4% in the first nine months of2008 as compared to the first nine months of 2007 to support revenue growth.

 

·                  *Sales and Marketing*: Sales and marketing expenses decreasedby approximately $3,000 both in the third quarter and first nine months of2008, respectively, as compared to the third quarter and first nine months of2007.

 

·                  *Consulting and Services*: C&S expenses increased by approximately $3,000 and $4,000 in thethird quarter and first nine months of 2008, respectively, as compared to thethird quarter and first nine months of 2007. Absent the Government Solutions charge, C&S expenses would havedecreased by approximately $1,000 in the third quarter of 2008 as compared tothe third quarter of 2007 and increased by approximately $1,000 in the firstnine months of 2008 as compared to the first nine months of 2007.

 

·                  *Administrative and Other*: Other expenses remained relatively constant in the third quarter of 2008as compared to the third quarter of 2007 and increased by approximately $18,000in the first nine 

 

34

----

Tableof Contents

 

months of 2008 ascompared to the first nine months of 2007.

 

***Depreciationand Other Amortization***

 

Our depreciation andother amortization charges increased 19.4% to $23,246 in the third quarter of2008 from $19,475 in the third quarter of 2007, and 15.8% to $66,656 in thefirst nine months of 2008 from $57,548 in the first nine months of 2007 due toincreased depreciation related to new facilities and technology to upgrade ourfinancial systems and increased amortization related to internal-use softwareadditions.

 

***Trendsin our Operating Margins***

 

Our operating margin forthe third quarter of 2008 was 21.6%, as compared to 21.7% in the third quarterof 2007.  Our operating margin for thefirst nine months of 2008 was 21.3%, as compared to 21.8% in the first ninemonths of 2007.  Margins in the thirdquarter and for the first nine months of 2008 were negatively impacted byincreased cost of data and our continuing investments in new products andconsulting and services capabilities. During the third quarter of 2008 we incurred $3,700 of expense for acharge related to our Government Solutions business (see Note 7 of Notes toCondensed Consolidated Financial Statements (Unaudited)).  Excluding this expense, our non-GAAPoperating margin for the third quarter and first nine months of 2008 would havebeen 22.3% and 21.5%, respectively (see “Reconciliation of U.S. GAAP Sellingand Administrative Expenses and Operating Income to Non-GAAP Selling andAdministrative Expenses and Operating Income” at the end of this Item 2).

 

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

 

***Non-OperatingLoss, net***

 

Our non-operating loss,net decreased to a loss of $13,606 in the third quarter of 2008 from a loss of$17,210 in the third quarter of 2007. Our non-operating loss, net increased to a loss of $59,895 in the firstnine months of 2008 from a loss of $32,489 in the first nine months of2007.  This was due to the followingfactors:

 

·                  *Interest Expense, net*: Net interest expense was $9,012 and$26,670 for the third quarter and first nine months of 2008, respectively, ascompared to $7,994 and $22,439 for the third quarter and first nine months of2007.  This was due to higher debt levelsin the third quarter and first nine months of 2008 as compared to the thirdquarter and first nine months of 2007.

 

·                  *Gains from Investments, net*: Gains from investments of $379for the third quarter and first nine months of 2008 were the result of the saleof marketable securities.  Net gains frominvestments of $353 during the third quarter of 2007 were a result of the saleof marketable securities and venture capital investments.  Gains from investments of $2,317 during thefirst nine months of 2007 were the result of the final distribution from ourEnterprise portfolio, offset by related management fees, and the sale ofmarketable securities and venture capital investments.

 

35

----

Tableof Contents

 

·                  *Other Expense, net*:***Otherexpense, net, declined by $4,596 in the third quarter of 2008 as compared tothe third quarter of 2007.  This was aresult of net foreign exchange losses of $2,934 in the third quarter of 2008 ascompared to net foreign exchange losses of $7,602 in the third quarter of 2007.  Other expense, net, grew by $21,237 in thefirst nine months of 2008 as compared to the first nine months of 2007.  This was a result of net foreign exchangelosses of $27,662 in the first nine months of 2008 as compared to net foreignexchange losses of $6,417 in the first nine months of 2007.*

 

***Taxes***

 

We operate in more than100 countries around the world and our earnings are taxed at the applicableincome tax rate in each of these countries.

 

For the three monthsended September 30, 2008, our effective tax rate was reduced byapproximately $5,900 in connection with the resolution of a certain legacy taxmatter (see Note 7 of Notes to Condensed Consolidated Financial Statements(Unaudited)). For the nine months ended September 30, 2008, our effectivetax rate was reduced by approximately $5,900 in connection with the resolutionof such certain legacy tax matter, by approximately $10,300 due to auditsettlements with taxing authorities, and by approximately $4,900 due to thefiling of an advance pricing agreement (“APA”) between two taxingjurisdictions. The APA ensures conformity between the jurisdictions’ taxingauthorities regarding the treatment of certain intercompany transactions,thereby allowing us to record a corresponding tax benefit. Also during thisperiod, we recorded tax expense for tax positions related to non-U.S.transactions offset by a benefit related to the expiration of certain statutesof limitation, resulting in a net tax expense of approximately $4,300. For thethree months ended September 30, 2007, we recognized a tax charge ofapproximately $7,500 to revalue net deferred tax assets related to Germany as aresult of the enactment, during the third quarter, of the German 2008 BusinessTax Reform Act which reduced the German federal tax rate from 25% to 15%. Forthe nine months ended September 30, 2007, our effective tax rate wasreduced primarily due to a favorable non-U.S. audit settlement for tax years1998 through 2002 of approximately $16,500 and a reorganization of certainnon-U.S. subsidiaries yielding a tax benefit of approximately $4,400, partiallyoffset by a tax charge of $7,500 to revalue net deferred tax assets related toGermany as discussed above.

 

The IRS concluded itsaudit of our 2004 and 2005 federal income tax returns during the second quarterof 2008.  The resolution of the audit resultedin a tax payment of approximately $5,300 for which a reserve had beenpreviously established.  We file numerousconsolidated and separate income tax returns in U.S. (federal and state) andnon-U.S. jurisdictions.  With fewexceptions, we are no longer subject to U.S. federal income tax examinationsfor years before 2004 and are no longer subject to state and local income taxexamination by tax authorities for years before 1997.  Further, with few exceptions, we are nolonger subject to examination by tax authorities in its material non-U.S.jurisdictions prior to 2003.  It isreasonably possible that within the next twelve months we could realizeapproximately $32,800 of unrecognized benefits; $9,700 as a result of thetermination of a non-U.S. agreement and $23,100 mainly as a result of theexpiration of certain statutes of limitation.

 

For the three and ninemonths ended September 30, 2008, we recorded approximately $5,200 and$15,200, respectively, of tax expense related to unrecognized tax benefits thatif recognized, would favorably affect the effective tax rate.  Included in these amounts are approximately$2,500 and $7,800, respectively, of interest and penalties. For the three andnine months ended September 30, 2007, we recorded approximately $4,900 and$11,900, respectively, of tax expense related to unrecognized tax benefitsincluding approximately $3,000 and $6,700, respectively, of interest andpenalties.

 

36

----

Table of Contents

 

While we intend tocontinue to seek global tax planning initiatives, there can be no assurancethat we will be able to successfully identify and implement such initiatives toreduce or maintain our overall tax rate and therefore rates may go up in thefuture.

 

## **OperatingResults by Geographic Region**

## ** **

The following represents selected geographicinformation for the regions in which we operate for the three and nine monthsended September 30, 2008 and 2007:

 
| ** **                                       | ** ** | **Americas  (1)** | ** **  | **EMEA  (2)** | ** ** | **Asia Pacific  (3)** | ** ** | **Corporate &  Other** | ** **  | **Total  IMS** | ** ** |
|--------------------------------------------------|------------|-------------------|-------------|---------------|------------|----------------------------|------------|---------------------------------|-------------|----------------|------------|
| **Three  months ended September 30, 2008:** |       |              |        |          |       |                       |       |                            |        |           |       |
| Operating Revenue (4)                            | ** ** | **$**             | **251,332** | ** **    | **$**      | **243,219**                | ** ** | **$**                           | **79,164**  | ** **     | **—** | ** ** | **$** | **573,715** | ** ** |
| Operating Income  (Loss) (5)                     | ** ** | **$**             | **74,923**  | ** **    | **$**      | **34,276**                 | ** ** | **$**                           | **27,266**  | ** **     | **$**      | **(12,489** | **)** | **$** | **123,976** | ** ** |
| **Nine  months ended September 30, 2008:**  | ** ** | ** **        | ** **  | ** **    | ** ** | ** **                 | ** ** | ** **                      | ** **  | ** **     | ** ** |
| Operating  Revenue (4)                           | ** ** | **$**             | **760,782** | ** **    | **$**      | **744,513**                | ** ** | **$**                           | **243,309** | ** **     | **—** | ** ** | **$** | **1,748,604** | ** ** |
| Operating Income  (Loss) (5)                     | ** ** | **$**             | **236,216** | ** **    | **$**      | **83,120**                 | ** ** | **$**                           | **89,782**  | ** **     | **$**      | **(37,383** | **)** | **$** | **371,735** | ** ** |
| **Three  months ended September 30, 2007:** |       |              |        |          |       |                       |       |                            |        |           |       |
| Operating Revenue (4)                            |       | $                 | 246,893     |          | $          | 219,781                    |       | $                               | 72,136      |           | **—** |   | $ | 538,810 |   |
| Operating Income  (Loss) (5)                     |       | $                 | 85,678      |          | $          | 20,348                     |       | $                               | 26,965      |           | $          | (15,889 | ) | $ | 117,102 |   |
| **Nine  months ended September 30, 2007:**  | ** ** | ** **        | ** **  | ** **    | ** ** | ** **                 | ** ** | ** **                      | ** **  | ** **     | ** ** |
| Operating  Revenue (4)                           |       | $                 | 718,941     |          | $          | 654,631                    |       | $                               | 213,059     |           | **—** |   | $ | 1,586,631 |   |
| Operating Income  (Loss) (5)                     |       | $                 | 239,349     |          | $          | 69,826                     |       | $                               | 81,745      |           | $          | (44,618 | ) | $ | 346,302 |   |

 

----

**Notes to Geographic Financial Information:**

 
| *(1)*    | *Americas includes the United  States, Canada and Latin America.*                                                                                                                                                                                                                                                                                                                  |
|----------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| * * | * *                                                                                                                                                                                                                                                                                                                                                                           |
| *(2)*    | *EMEA includes countries in  Europe, the Middle East and Africa.*                                                                                                                                                                                                                                                                                                                  |
|     |                                                                                                                                                                                                                                                                                                                                                                               |
| *(3)*    | *Asia Pacific includes Japan,  Australia and other countries in the Asia Pacific region.*                                                                                                                                                                                                                                                                                          |
|     |                                                                                                                                                                                                                                                                                                                                                                               |
| *(4)*    | *Operating Revenue relates to  external customers and is primarily based on the location of the customer.  The Operating Revenue for the geographic regions includes the impact of  foreign exchange in converting results into U.S. dollars.*                                                                                                                                     |
|     |                                                                                                                                                                                                                                                                                                                                                                               |
| *(5)*    | *Operating  Income for the three geographic regions does not reflect the allocation of  certain expenses that are maintained in Corporate and Other and as such, is  not a true measure of the respective regions’ profitability. The Operating  Income amounts for the geographic segments include the impact of foreign  exchange in converting results into U.S. dollars.* |

 

***Americas Region***

 

Operatingrevenue growth in the Americas region was 1.8% and 5.8% in the third quarterand first nine months of 2008, respectively, as compared to the third quarterand first nine months of 2007.  Excludingthe effect of foreign currency translations, operating revenue grew 1.3% and4.6% in the third quarter and first nine months of 2008, respectively, as comparedto the third quarter and first nine months of 2007.  This was driven primarily by Launch, Brandand Other business lines for the third quarter of 2008, partially offset by arevenue decline in Sales Force Effectiveness. For the first nine months of 2008,the revenue growth was driven more than one-half by Launch, Brand and Otherbusiness lines and more than one-quarter by Sales Force Effectiveness.

 

37

----

Table of Contents

 

Operatingincome in the Americas region declined 12.6% and 1.3% in the third quarter andfirst nine months of 2008, respectively, as compared to the third quarter andfirst nine months of 2007.  The operatingincome decline reflected revenue growth in the region which was more thanoffset by increases in operating expenses of $15,000 and $45,000 in the thirdquarter and first nine months of 2008, respectively.  Absent the Government Solutions charge (seeNote 7 of Notes to Condensed Consolidated Financial Statements (Unaudited)),operating income would have declined 8.2% in the third quarter of 2008 andwould have remained relatively constant for the first nine months of 2008 ascompared to 2007, respectively.  Excludingthe effect of foreign currency translations and the Government Solutionscharge, operating income would have declined by 8.7% in the third quarter of2008 and would have remained relatively constant in the first nine months of2008 as compared to 2007, respectively.

 

***EMEARegion***

 

Operatingrevenue increased in the EMEA region by 10.7% and 13.7% in the third quarterand first nine months of 2008, respectively, as compared to the third quarterand first nine months of 2007.  Excludingthe effect of foreign currency translations, operating revenue grew 3.6% and3.3% in the third quarter and first nine months of 2008, respectively, ascompared to the third quarter and first nine months of 2007.  The revenue growth in the third quarter of2008 was driven by Launch, Brand and Other and Portfolio Optimization businesslines, offset by declines in revenue growth in Sales Force Effectiveness.  The growth in the first nine months of 2008was driven primarily by Launch, Brand and Other business lines, offset by arevenue decline in Portfolio Optimization.

 

Operatingincome in the EMEA region grew 68.4% and 19.0% in the third quarter and firstnine months of 2008, respectively, as compared to the third quarter and firstnine months of 2007.  The operatingincome growth reflected revenue growth in the region offset by increases inoperating expenses of $10,000 and $77,000 in the third quarter and first ninemonths of 2008, respectively.  Excludingthe effect of foreign currency translations, operating income increased 51.4%in the third quarter of 2008 as compared to the third quarter of 2007 anddeclined by 4.6% in the first nine months of 2008 as compared to the first ninemonths of 2007.

 

***Asia Pacific Region***

 

Operating revenue in the Asia Pacific region increased9.7% and 14.2% in the third quarter and first nine months of 2008,respectively, as compared to the third quarter and first nine months of2007.  Excluding the effect of foreigncurrency translations, operating revenue grew 4.2% and 5.2% in the third quarterand first nine months of 2008, respectively, as compared to the third quarter and first nine monthsof 2007. The revenue growth in the third quarter of 2008 was driven morethan one-half by Sales Force Effectiveness and more than one-third by Launch,Brand and Other business lines.  For thefirst nine months of 2008, the revenue growth was driven by PortfolioOptimization and Sales Force Effectiveness, offset by a revenue decline in theLaunch, Brand and Other business lines.

 

Operating income in the Asia Pacific region increased by1.1% and 9.8% in the third quarter and first nine months of 2008, respectively,as compared to the third quarter and first nine months of 2007.  The operating income growth reflected revenue growthin the region offset by increases in operating expenses of $7,000 and $22,000in the third quarter and first nine months of 2008, respectively.  Excluding the effect of foreign currencytranslations, operating income decreased by 4.5% in the third quarter of 2008as compared to the third quarter of 2007 and increased 0.4% in the first ninemonths of 2008 as compared to the first nine months of 2007.

 

38

----

Table of Contents

 

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

### ** **

We operate globally, deriving a significant portion of our operatingincome from non-U.S. operations.  As aresult, fluctuations in the value of foreign currencies relative to the U.S.dollar may increase the volatility of U.S. dollar operating results.  We enter into foreign currency forwardcontracts to partially offset the effect of currency fluctuations.  In 2008, foreign currency translation increased U.S.dollar revenue growth by approximately 3.9 and 6.0 percentage points in thethird quarter and first nine months of 2008, respectively, while the impact onoperating income growth was an approximate increase of 4.8 and 7.4 percentagepoints in the third quarter and first nine months of 2008, respectively.

 

Non-U.S. monetary assets are maintained in currenciesother than the U.S. dollar, principally the Euro, the Japanese Yen and theSwiss Franc.  Where monetary assets areheld in the functional currency of the local entity, changes in the value ofthese currencies relative to the U.S. dollar are reflected in Cumulativetranslation adjustment in the Condensed Consolidated Statements of FinancialPosition (Unaudited).  The effect ofexchange rate changes during the first nine months of 2008 decreased the U.S.dollar amount of Cash and cash equivalents by $3,162.

 

Venezuela imposedcurrency exchange restrictions in February 2003, and subsequently adjustedits official exchange rates in February 2004 and once again in March 2005.  At September 30, 2008, IMS AG, our Swissoperating subsidiary, maintained a cash balance of approximately 63,548Venezuelan Bolívars (“Bolívars”), or approximately $29,600.  Maintaining this cash balance in anon-functional currency requires that we mark-to-market the cash balance ateach reporting date with the difference reflected as a gain or loss in thestatement of income.  We currently havelimited ability to exchange or liquidate this Bolívar balance.  We have recognized exchange losses on theBolívar balance in the past, resulting from changes in the official U.S. Dollarto Bolivar exchange rate.  It is notpossible for us to predict the extent to which we may be affected by futurechanges in exchange rates and exchange controls imposed by the localgovernment.  However, based on ahypothetical 10% decrease in the value of the Bolívar against the U.S. dollar,we would be required to record a pre-tax loss of approximately $2,700.

 

***Liquidity and Capital Resources***

*** ***

Our cash and cashequivalents increased $10,939 during the nine months ended September 30,2008 to $229,188 at September 30, 2008 compared to $218,249 at December 31,2007.  The increase reflects cashprovided by operating activities of $252,562, partially offset by cash used ininvesting and financing activities of $136,207 and $102,254, respectively, anda $3,162 decrease due to the effect of exchange rate changes.

 

We currently expect that we will use our cash andcash equivalents primarily to fund:

 

·                  development of software to be usedinternally and in our new products and capital expenditures to expand and upgradeour information technology capabilities and to build or acquire facilities tohouse our growing business (we currently expect to spend approximately $110,000to $120,000 during 2008 for software development and capital expenditures);

 

·                  acquisitions (see Note 5 of Notes toCondensed Consolidated Financial Statements (Unaudited));

 

39

----

Table of Contents

 

·                  share repurchases (see Note 12 of Notesto Condensed Consolidated Financial Statements (Unaudited));

 

·                  dividends to our shareholders (we expect2008 dividends will be $0.12 per share or approximately $22,000);

 

·                  payments for tax-related matters, including the D&B Legacy Tax Mattersdiscussed further in Note 7 to our Condensed Consolidated Financial Statements(Unaudited).  Payments for certain of theD&B Legacy Tax Matters could be up to approximately $24,100 in 2008; and

 

·                  pension and other postretirement benefit plan contributions (wecurrently expect contributions to U.S. and non-U.S. pension and otherpostretirement benefit plans to total approximately $12,200 in 2008).

 

See Forward-Looking Statements and Risk Factors below.

 

Net cash providedby operating activities amounted to $252,562 for the nine months ended September 30,2008, which was relatively flat from cash provided over the comparable periodin 2007.  A decrease in accountsreceivable balances and the lower funding of accrued expenses and other currentliabilities were offset by lower net income, higher severance and otherpayments related to our fourth quarter 2007 restructuring plan (see Note 14 ofNotes to Condensed Consolidated Financial Statements (Unaudited)), higherfunding of accounts payable and lower deferred revenue balances during the ninemonths ended September 30, 2008. The decrease in accounts receivable was driven by improved collectionsand an improvement in DSO (days sales outstanding).  DSO in the third quarter of 2008 was approximately10 days lower than the prior year comparable quarter.

 

Net cash used ininvesting activities amounted to $136,207 for the nine months ended September 30,2008, a decrease in cash used of $10,378 over the comparable period in2007.  The decrease relates to lower capitalexpenditures and computer software additions, partially offset by higherpayments for acquisitions during the nine months ended September 30, 2008.

 

Net cash used infinancing activities amounted to $102,254 for the nine months ended September 30,2008, an increase in cash used of $22,607 over the comparable period in2007.  The increase relates to lower netborrowings of debt and lower proceeds from the exercise of employee stockoptions, partially offset by lower purchases of treasury stock during the ninemonths ended September 30, 2008.

 

Our financingactivities include cash dividends we paid of $0.03 per share quarterly, whichamounted to $16,626 and $17,955 during the nine months ended September 30,2008 and 2007, respectively.  Thepayments and level of cash dividends made by us are subject to the discretionof our Board of Directors.  Any futuredividends, other than the $0.03 per share dividend for the fourth quarter of2008, which was declared by our Board of Directors in October 2008, willbe based on, and affected by, a number of factors, including our operatingresults and financial requirements.

 

IMS and two of its subsidiaries have entered into agreements (the “LLCAgreements”) with two third-party investors, whereby such investors contributed$100,000 to IMS Health Licensing Associates, L.L.C. (the “LLC”), a subsidiaryof IMS, in exchange for minority interests in the LLC.  Under the terms of the LLC Agreements, thethird party investors have the right to take steps that would result in theliquidation of their LLC interest on June 30, 2009.  We intend to negotiate an extension of suchdate and in the event we 

 

40

----

Table of Contents

 

are not successful in obtaining the extension we will seek to replacethe third parties prior to any such liquidation. (Refer to Note 7 to IMS’sConsolidated Financial Statements included in IMS’s 2007 Annual Report on Form 10-Kas filed with the SEC).

 

In 2007 werecorded a significant, broad based restructuring charge (see Note 14 of Notes to CondensedConsolidated Financial Statements (Unaudited)) and as a result of better execution under therestructuring plan we have realized more savings in 2008 than we hadanticipated.  As we plan for the fourthquarter of 2008 and next year, we will remain focused on all of the cost andexpense elements of our business, including managing the pace of hiring and discretionaryexpenses.  While we do not currentlyanticipate actions of the magnitude of the 2007 restructuring, we are lookingacross all elements of our cost and expense structure and we will be preparedto take the steps necessary to continue to enhance the variability of ouroperating model.  In addition, as aresult of the recent economic and financial market turmoil, we are seeingclients cutting costs and making decisions to delay and even not pursue certainprojects regardless of the return on investment benefits that may bederived.  In response, we will bere-evaluating our portfolio of offerings to minimize the potential for anynegative impact from these client actions on our offerings, related assets andresults of operations.

 

**Capital and Credit Markets**

 

Asthe capital and credit markets have worsened, we have performed additionalassessments to determine the impact, if any, of recent market developments,including the bankruptcy, restructuring or merging of certain financialcompanies, on our financial statements. Our additional assessments included a review of access to liquidity inthe capital and credit markets and financial institution counterpartycreditworthiness.  Based on ourassessment, we currently believe we have sufficient liquidity and access tocredit despite the current disruption of the capital and credit markets.  However, the recent unprecedented volatilityin capital and credit markets may create additional risks in the upcomingyears.

 

*Liquidityin the Capital and Credit Markets*

 

We believe we have sufficient liquidity despite the current disruptionof the capital and credit markets. We fund our liquidity needs for capitalinvestment, working capital, and other financial commitments through cash flowfrom continuing operations and our diversified credit facility ($364,083 inaggregate commitment available as of September 30, 2008).  While not significant to us to date,disruptions in capital and credit markets may result in increased borrowingcosts in the future.

 

*CreditConcentrations*

 

We continually monitorour positions with, and the credit quality of, the financial institutions whichare counterparties to our financial instruments and do not anticipatenon-performance by the counterparties. We would not realize a material loss as of September 30, 2008 inthe event of non-performance by any one counterparty.  In general, we enter into transactions onlywith financial institution counterparties that have a credit rating of A orbetter.  In addition, we limit the amountof credit exposure with any one institution. Particularly in light of the current credit environment, managementwill continue to monitor the status of these counterparties and will takeaction, as appropriate, to further manage its counterparty credit risk.

 

41

----

Table of Contents

 

Wemaintain accounts receivable balances ($388,921 and $415,926, net ofallowances, at September 30, 2008 and December 31, 2007,respectively), principally from customers in the pharmaceutical industry.  Our trade receivables do not representsignificant concentrations of credit risk at September 30, 2008 due to thecredit worthiness of our customers and their dispersion across many geographicareas.

 

**Tax andOther Contingencies**

 

Weare exposed to certain known tax and other contingencies that are material toour investors.  The facts and circumstances surrounding thesecontingencies and a discussion of their effect on us are included in Notes 7and 11 to our Condensed Consolidated Financial Statements (Unaudited) for theperiod ended September 30, 2008.

 

These contingencies may have a material effect onour liquidity, capital resources or results of operations.  Althoughwe have established reserves for D&B Legacy Tax Matters in accordance withSFAS No. 5, “Accounting for Contingencies,” the actual liability mayexceed the amount of the reserve.  Inaddition, even where our reserves are adequate, the incurrence of any of theseliabilities may have a material effect on our liquidity and the amount of cashavailable to us for other purposes.

 

Management believes that we have made appropriate arrangements inrespect of the future effect on us of these known tax and othercontingencies.  Management also believes that the amount of cash availableto us from our operations, together with cash from financing, will besufficient for us to pay any known tax and other contingencies as they becomedue without materially affecting our ability to conduct our operations and investin the growth of our business.

 

**Stock Repurchase Programs**

 

Our share repurchase programhas been developed to buy opportunistically, when we believe that our shareprice provides us with an attractive use of our cash flow and debt capacity.

 

On December 18, 2007, the Board of Directors authorized a stockrepurchase program to buy up to 20,000 shares. As of September 30, 2008, 9,945 shares remained available forrepurchase under the December 2007 program.

 

On December 19, 2006, the Board of Directors authorized a stockrepurchase program to buy up to 10,000 shares. This program was completed in November 2007at a total cost of $287,072.

 

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

 

During the nine months ended September 30, 2008, we repurchased10,055 shares of outstanding Common Stock under these programs at a total costof $230,433.

 

During the nine months ended September 30, 2007, we repurchasedapproximately 13,168 shares of outstanding Common Stock under these programs ata total cost of $392,782, including the repurchase of 6,135 shares pursuant toan accelerated share repurchase program (“ASR”).  As part of the ASR, we simultaneously enteredinto a forward contract for the final settlement of the ASR transaction whichwas indexed to the price of our Common Stock. The ASR agreement provided for the final settlement amount to be in ourCommon Stock if we were to owe an amount to the bank, or in either cash oradditional 

 

42

----

Table of Contents

 

shares of our Common Stock, at our sole discretion, if the bank were toowe an amount to us.  As the agreementrequired us to deliver shares to the bank for final settlement, the forwardcontract element qualified for permanent equity classification and the fairvalue of the forward contract, which was zero at the contract’s inception, wasrecorded in equity in accordance with the provisions of EITF 00-19, “Accountingfor Derivative Financial Instruments Indexed to, and Potentially Settled In, aCompany’s Own Stock.”  Subsequent changesin the fair value of the forward contract were not recorded as we continued toclassify the forward contract as equity. Upon completion of the ASR in April 2007, we were required to payapproximately $6,000 in shares, and therefore issued 203 treasury shares, asfull settlement of our obligation under the ASR.  The total cost of the ASR was approximately$176,000 or $28.68 per share.  We fundedthe ASR through our existing bank credit facilities (see Note 9 of Notes toCondensed Consolidated Financial Statements (Unaudited)).

 

Total share repurchases during 2008 positively impacted our dilutedearnings per share (“EPS”) by $0.01 and $0.03 per share for the three and ninemonths ended September 30, 2008, respectively.  Total share repurchases during the comparableperiod in 2007 had no effect on our diluted EPS for the three months ended September 30,2007 and a positive impact on our diluted EPS of $0.01 for the nine monthsended September 30, 2007.

 

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

 

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

 

**Borrowings**

 

In recent years, we haveincreased debt levels to balance appropriately the objective of generating anattractive cost of capital with providing us with a reasonable amount offinancial flexibility.  At September 30,2008, our debt totaled $1,398,906, and management does not believe that thislevel of debt poses a material risk to us due to the following factors:

 

·                  in each of the last three years, we havegenerated strong net cash provided by operating activities in excess of$300,000;

 

·                  at September 30, 2008, we had$229,188 in worldwide cash and cash equivalents;

 

·                  at September 30, 2008, we had$364,083 of unused debt capacity under our existing bank credit facilities; and

 

·                  we believe that we have the ability toobtain additional debt capacity outside of our existing debt arrangements.

 

43

----

Table of Contents

 

The following table summarizes our long-term debt at September 30,2008 and December 31, 2007:

 
| ** **                                                                                                                | ** ** | **2008**    | ** **    | **2007**   | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|-------------|---------------|------------|------------|
| 4.6% Private  Placement Notes, principal payment of $150,000 due January 2008, net of  interest rate swaps of $(981) | ** ** | **$**       | **—**    |       | $          | 149,019 |   |
| 5.58% Private  Placement Notes, principal payment of $105,000 due January 2015                                       | ** ** | **105,000** | ** **    | **—** | ** ** |
| 5.99% Private  Placement Notes, principal payment of $135,000 due January 2018                                       | ** ** | **135,000** | ** **    | **—** | ** ** |
| 5.55% Private  Placement Notes, principal payment of $150,000 due April 2016                                         | ** ** | **150,000** |          | 150,000    |       |
| 1.70% Private  Placement Notes, principal payment of 34,395,000 Japanese Yen due  January 2013                       | ** ** | **322,989** |          | 300,787    |       |
| Revolving Credit  Facility:                                                                                               |       |        |          |       |       |
| Japanese Yen denominated  borrowings at average floating rates of approximately 1.28%                                     | ** ** | **383,317** |          | 397,973    |       |
| Swiss Franc  denominated borrowings                                                                                       | ** ** | **—**  |          | 54,730     |       |
| U.S. Dollar  denominated borrowings at average floating rates of approximately 3.75%                                      | ** ** | **252,600** |          | 100,700    |       |
| Bank Term Loan,  principal payment of $50,000 due June 2010 at average floating rate of  approximately 3.11%         | ** ** | **50,000**  |          | 50,000     |       |
| Total Long-Term  Debt                                                                                                     | ** ** | **$**       | **1,398,906** |       | $          | 1,203,209 |   |

 

In February 2008, we closed a private placement transactionpursuant to which we issued $105,000 of seven-year debt at a fixed rate of5.58%, and $135,000 of ten-year debt at a fixed rate of 5.99% to several highlyrated insurance companies.  We used theproceeds for share repurchases (see Note 12 of Notes to CondensedConsolidated Financial Statements (Unaudited)) and to refinance existing debt.

 

In July 2006, we entered into a$1,000,000 revolving credit facility with a syndicate of 12 banks (“RevolvingCredit Facility”) replacing our existing $700,000 facility.  The terms of the Revolving Credit Facilityextended the maturity of the facility in its entirety to a term of five years,maturing July 2011, reduced the borrowing margins, and increasedsubsidiary borrowing limits.  Totalborrowings under the Revolving Credit Facility were $635,917 and $553,403 at September 30,2008 and December 31, 2007, respectively, all of which were classified aslong-term.  We define long-term lines asthose where the lines are non-cancellable for more than 365 days from thebalance sheet date by the financial institutions except for specified,objectively measurable violations of the provisions of the agreement.  In general, rates for borrowing under theRevolving Credit Facility are LIBOR plus 40 basis points and can vary based onthe Company’s Debt to EBITDA ratio.  Theweighted average interest rates for our lines were 2.26% and 2.16% at September 30,2008 and December 31, 2007, respectively. In addition, we are required to pay a commitment fee on any unusedportion of the facilities of 0.01%.  At September 30,2008, we had approximately $364,083 available under our existing bank creditfacilities.

 

In June 2006, we closed a $50,000 three-year term loan with abank.  The term loan allows us to borrowat a floating rate with a lower borrowing margin than our revolving creditfacility.  The term loan also provides uswith two one-year options to extend the term at our discretion.  In August 2008, we exercised the firstone-year option to extend the term through June 2010.  We used the proceeds to refinance existingdebt borrowed under the revolving credit facility.

 

In April 2006, we closed a private placement transaction pursuantto which we issued $150,000 of ten-year notes to two highly rated insurancecompanies at a fixed rate of 5.55%.  Weused the proceeds to refinance existing debt of $150,000 drawn under a shortterm credit agreement with a bank in January 2006.

 

In January 2006, we closed a private placement transactionpursuant to which our Japanese subsidiary 

 

44

----

Table of Contents

 

issued 34,395,000 Japanese Yen seven-year debt (equal to $300,000 atdate of issuance) to several highly rated insurance companies at a fixed rateof 1.70%.  We used the proceeds torefinance existing debt in Japan.

 

In January 2003, we closed a private placement transactionpursuant to which we issued $150,000 of five-year debt to several highly ratedinsurance companies at a fixed rate of 4.60%. We used the proceeds to pay down existing short-term debt.  We also swapped $100,000 of our fixed ratedebt to floating rate based on six-month LIBOR plus a margin of approximately107 basis points.  We accounted for theseswaps as fair value hedges under the provisions of SFAS No. 133, “Accountingfor Derivative Instruments and Hedging Activities.”  We determined the fair values based onestimated prices quoted by financial institutions.  The fair values of these swaps were $(981) asof December 31, 2007.  These notesand the related swaps matured and were paid off in January 2008.  Although these notes were due within 365 daysat December 31, 2007, we classified the notes as long-term at December 31,2007 in compliance with SFAS No. 6, “Classification of Short-TermObligations Expected to be Refinanced,” as we had the ability and intent torefinance these notes with another long-term debt arrangement.

 

Our financingarrangements provide for certain covenants and events of default customary forsimilar instruments, including in the case of our main bank arrangements, theprivate placement transactions, and the term loan, covenants to maintainspecific ratios of consolidated total indebtedness to EBITDA and of EBITDA tocertain fixed charges.  At September 30,2008, we were in compliance with these financial debt covenants.

 

**Severance, Impairment and Other Charges**

 

In response to healthcaremarketplace dynamics, during the fourth quarter of 2007, we committed to arestructuring plan designed to eliminate approximately 1,070 positionsworldwide in production and development, sales, marketing, consulting andservices and administration.  Therestructuring plan also included the write-down of two impaired computersoftware assets and related contract payments to be incurred with no futureeconomic benefit based on our decision to abandon certain products in our EMEAregion.  As a result, we recorded $88,690of Severance, impairment and other charges as a component of operating incomein the fourth quarter of 2007.  The severancebenefits were calculated pursuant to the terms of established employeeprotection plans, in accordance with local statutory minimum requirements orindividual employee contracts, as applicable.

 

These charges were designedto strengthen client-facing operations worldwide, increase our operatingefficiencies and streamline our cost structure. Some of the initiatives included in this restructuring plan weredesigned to better align our resources to help clients manage for change in achallenging climate.

 

The severance and contractpayments portion of the charge was approximately $75,043 and will all besettled in cash.  We expect that alltermination actions under the restructuring plan will be completed by the end of2008.

 

45

----

Table of Contents

 
| ** **                          | ** ** | **Severance** | ** ** | **Contract** | ** ** | **Asset**  | ** ** | **Currency**    | ** ** | ** ** | ** ** |
|-------------------------------------|------------|---------------|------------|--------------|------------|------------|------------|-----------------|------------|------------|------------|
| ** **                          | ** ** | **related**   | ** ** | **related**  | ** ** | **write-** | ** ** | **translation** | ** ** | ** ** | ** ** |
| ** **                          | ** ** | **reserves**  | ** ** | **reserves** | ** ** | **downs**  | ** ** | **adjustments** | ** ** | **Total**  | ** ** |
| Charge at  December 31, 2007   |       | $             | 71,583     |         | $          | 3,460      |       | $               | 13,647     |       | $          | — |   | $ | 88,690 |   |
| 2007 utilization                    |       | —        |       | —       |       | (13,647    | )          | —          |       | (13,647    | )          |
| 2008 utilization                    |       | (36,549       | )          | (1,877       | )          | —     |       | —          |       | (38,426    | )          |
| Currency  translation adjustments   |       | —        |       | —       |       | —     |       | 512             |       | 512        |       |
| Balance at  September 30, 2008 |       | $             | 35,034     |         | $          | 1,583      |       | $               | —     |       | $          | 512 |   | $ | 37,129 |   |

 

Wecurrently expect that cash outlays will be applied against the $37,129 balanceremaining in the 2007 fourth quarter charge at September 30, 2008 asfollows:

 
| **Year Ended December 31,** | ** ** | **Outlays** | ** ** |
|--------------------------------------------|------------|-------------|------------|
| 2008                                       |       | $           | 21,830     |   |
| 2009                                       |       | 13,867      |       |
| 2010                                       |       | 1,235       |       |
| 2011                                       |       | 197         |       |
| Total                                      |       | $           | 37,129     |   |

 

During the fourth quarter of2001, we completed the assessment of our Competitive Fitness Program. Thisprogram was designed to streamline operations, increase productivity andimprove client service. In connection with this program, we recorded $94,616 ofSeverance, impairment and other charges during the fourth quarter of 2001 as acomponent of operating income.  As of September 30,2008, approximately $1,170 remains to be utilized from 2008 to 2013 related toseverance payments.

 

In the first quarter of2007, we reversed $640 of contract-related reserves from the fourth quarter2001 charge due primarily to the termination and settlement of exit relatedcosts for an impaired lease.  Theseamounts were reversed against Selling and administrative expenses in theCondensed Consolidated Statements of Income (Unaudited).

 
| ** **                          | ** ** | **Severance** | ** ** | **Contract** | ** ** | **Asset**  | ** ** | ** ** | ** ** |
|-------------------------------------|------------|---------------|------------|--------------|------------|------------|------------|------------|------------|
| ** **                          | ** ** | **related**   | ** ** | **related**  | ** ** | **write-** | ** ** | ** ** | ** ** |
| ** **                          | ** ** | **reserves**  | ** ** | **reserves** | ** ** | **downs**  | ** ** | **Total**  | ** ** |
| Charge at  December 31, 2001   |       | $             | 39,652     |         | $          | 26,324     |       | $          | 28,640     |   | $ | 94,616 |   |
| 2001 – 2005  utilization       |       | (37,070       | )          | (22,315      | )          | (29,602    | )          | (88,987    | )          |
| 2006 utilization                    |       | (264          | )          | (1,887       | )          | —     |       | (2,151     | )          |
| 2007 utilization                    |       | (263          | )          | (1,208       | )          | —     |       | (1,471     | )          |
| 2007 reversals                      |       | —        |       | (640         | )          | —     |       | (640       | )          |
| 2008 utilization                    |       | (197          | )          | —       |       | —     |       | (197       | )          |
| Adjustments                         |       | (688          | )          | (274         | )          | 962        |       | —     |       |
| Balance at  September 30, 2008 |       | $             | 1,170      |         | $          | —     |       | $          | —     |   | 1,170 |   |
|                                     |            |               |            |              |            |            |            |            |            |  |  |  |  |

 

46

----

Table of Contents

 

We currently expect thatthe $1,170 balance remaining in the 2001 fourth quarter charge will be utilizedas follows:

 
| **Year Ended December 31,** | ** ** | **Outlays** | ** ** |
|--------------------------------------------|------------|-------------|------------|
| 2008                                       |       | $           | 65         |   |
| 2009                                       |       | 262         |       |
| 2010                                       |       | 262         |       |
| 2011                                       |       | 262         |       |
| 2012                                       |       | 262         |       |
| Thereafter                                 |       | 57          |       |
| Total                                      |       | $           | 1,170      |   |

 

**Recently Issued AccountingStandards**

 

InSeptember 2006, the Financial Accounting Standards Board (“FASB”) issuedSFAS No. 157, “Fair Value Measurements.”This statement defines fair value, establishes a framework formeasuring fair value under generally accepted accounting principles, andexpands disclosures about fair value measurements.This statement is effective for financial statements issued for fiscalyears beginning after November 15, 2007, and interim periods within thosefiscal years.  In February 2008, theFASB issued Staff Positions No. FAS 157-1 and No. FAS 157-2 whichdelayed the effective date of SFAS No. 157 for one year for certain nonfinancial assets and liabilities and removed certain leasing transactions fromits scope.  The adoption of SFAS No. 157,effective January 1, 2008, did not have a material impact on our financialposition, results of operations or cash flows. We are currently evaluating the impact of SFAS No. 157 for certainnon financial assets and liabilities on our financial results.

 

InFebruary 2007, the FASB issued SFAS No. 159, “The Fair Value Optionfor Financial Assets and Financial Liabilities–Including an amendment of FASBStatement No. 115.” This statement permits entities to choose to measuremany financial instruments and certain other items at fair value.  Entities shall report unrealized gains andlosses on items for which the fair value option has been elected in earnings ateach subsequent reporting date.  Thisstatement is effective as of the beginning of an entity’s first fiscal yearthat begins after November 15, 2007. The adoption of SFAS No. 159, effective January 1, 2008, didnot have a material impact on our financial position, results of operations orcash flows as we did not elect the fair value measurement option for anyadditional financial instruments or other items.

 

InDecember 2007, the FASB issued SFAS No. 141R, “Business Combinations.”  This statement establishes principles andrequirements for how an acquirer recognizes and measures in its financialstatements the identifiable assets acquired, the liabilities assumed, anynoncontrolling interest in the acquiree and the goodwill acquired.  This statement also establishes disclosurerequirements to enable the evaluation of the nature and financial effects ofthe business combination.  This statementis effective for fiscal years beginning after December 15, 2008.  The impact on our financial results will bedependent on the terms and conditions of acquisitions consummated on or after January 1,2009, the effective date for us.

 

InDecember 2007, the FASB issued SFAS No. 160, “NoncontrollingInterests in Consolidated Financial Statements - an Amendment of ARB No. 51.”This statement establishes accounting and reporting standards pertaining toownership interests in subsidiaries held by parties other than the parent, theamount of net income attributable to the parent and to the noncontrollinginterest, changes in a parent’s ownership interest, and the valuation of anyretained noncontrolling equity investment when a subsidiary is deconsolidated.This statement also establishes disclosure requirements that identify anddistinguish 

 

47

----

Table of Contents

 

betweenthe interests of the parent and the interests of the noncontrollingowners.  This statement is effective forfiscal years beginning on or after December 15, 2008.  The adoption of SFAS No. 160, effective January 1,2009, is not expected to have a material impact on our financial position,results of operations or cash flows.

 

InMarch 2008, the FASB issued SFAS No. 161, “Disclosures aboutDerivative Instruments and Hedging Activities–an amendment of FASB Statement No. 133.”  This statement requires enhanced disclosuresabout an entity’s derivative and hedging activities and thereby improves thetransparency of financial reporting. Entities will be required to provide enhanced disclosures about (a) howand why an entity uses derivative instruments, (b) how derivativeinstruments and related hedged items are accounted for under SFAS No. 133,“Accounting forDerivative Instruments and Hedging Activities,” and its related interpretations,and (c) how derivative instruments and related hedged items affect anentity’s financial position, financial performance, and cash flows.  This statement is effectivefor financial statements issued for fiscal years and interim periods beginningafter November 15, 2008, with early application encouraged.  This statement encourages, but does notrequire, comparative disclosures for earlier periods at initial adoption.  We arecurrently evaluating the new disclosure requirements under this statement.

 

InMay 2008, the FASB issued SFAS No. 162, “The Hierarchy of GenerallyAccepted Accounting Principles.”  Thestatement identifies the sources of accounting principles and the framework forselecting the principles used in the preparation of financial statements ofnongovernmental entities that are presented in conformity with generallyaccepted accounting principles (“GAAP”) in the United States.  This statement is effective 60 days followingthe United States Securities and Exchange Commission’s (“SEC”) approval of thePublic Company Accounting Oversight Board (“PCAOB”) amendments to AU Section 411,“The Meaning of Present Fairly in Conformity With Generally Accepted AccountingPrinciples.”  The adoption of thisstatement is not expected to have an impact on our financial results.

 

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

*** ***

This Quarterly Report on Form 10-Q, as well as informationincluded in oral statements or other written statements made or to be made byus, contain statements that, in our opinion, may constitute “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995.  The words such as “believe,” “expect,”“anticipate,” “intend,” “plan,” “foresee,” “likely,” “project,” “estimate,” “will,”“may,” “should,” “future,” “predicts,” “potential,” “continue” and similarexpressions identify these forward-looking statements, which appear in a numberof places in this Quarterly Report and include, but are not limited to, allstatements relating to plans for future growth and other business developmentactivities as well as capital expenditures, financing sources, dividends andthe effects of regulation and competition, foreign currency conversion and allother statements regarding our intent, plans, beliefs or expectations or thoseof our directors or officers.  Investorsare cautioned that such forward-looking statements are not assurances forfuture performance or events and involve risks and uncertainties that couldcause actual results and developments to differ materially from those coveredin such forward-looking statements. These risks and uncertainties include, 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 suchrisks—we derived approximately 63% of our operating revenue in 2007 from non-U.S.operations;

 

·                          deterioration in economicconditions, particularly in the pharmaceutical, healthcare or other industriesin which our customers operate;

 

48

----

Table ofContents

 

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

 

·                          to the extent unforeseen cash needsarise, the ability to obtain financing on favorable terms, or at all duringadverse credit market conditions;

 

·                          regulatory, legislative andenforcement initiatives to which we are or may become subject relatingparticularly to tax and to medical privacy and the collection and disseminationof data and, specifically, non-patient identifiable information, e.g., prescriberidentifiable information, or to the process of anonymizing data;

 

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

 

·                          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 ability to maintain effective security measures for our computerand communications systems; and failures or delays in the operation of ourcomputer or communications systems;

 

·                          our ability to successfully maintainhistoric effective tax rates;

 

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

 

·                          competition, particularly in themarkets for pharmaceutical information;

 

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

 

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

 

·                        terrorist activity, epidemics,credit market disruptions or other conditions that could disrupt commerce, thethreat of any such conditions, and responses to and results of such conditionsand threats, including but not limited to effects, domestically and/orinternationally, on us, our personnel and facilities, our customers andsuppliers, financial markets and general economic conditions.

 

Consequently, all of theforward-looking statements we make in this document are qualified by theinformation contained herein, including, but not limited to, the informationcontained under this heading, “Risk Factors” and our Condensed ConsolidatedFinancial Statements (Unaudited) and notes thereto for the 

 

49

----

Table of Contents

 

three and nine monthsended September 30, 2008 and by the material set forth under the headings “Business”and “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31,2007.  We are under no obligation topublicly release any revision to any forward-looking statement contained orincorporated herein to reflect any future events or occurrences.

 

**Reconciliationof U.S. GAAP Selling and Administrative Expenses and Operating Income toNon-GAAP Selling and Administrative Expenses and Operating Income(a)**

** **
| ** **                                    | ** ** | **Three Months Ended  September 30,** | ** **  | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------------|-------------|-----------------------------------------------------|------------|
| ** **                                    | ** ** | **2008**                                             | ** **  | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Selling and  administrative expenses          | ** ** | **$**                                                | **161,708** |                                                | $          | 157,281 | ** ** | **$** | **492,497** |   | $ | 451,406 |   |
| Non-GAAP  adjustment                          | ** ** | **3,748**                                            | **(b)**     | —                                              | ** ** | **3,748** | **(b)** | — |   |
| Non-GAAP Selling  and administrative expenses | ** ** | **$**                                                | **157,960** |                                                | $          | 157,281 | ** ** | **$** | **488,749** |   | $ | 451,406 |   |
|                                          |       |                                                 |        |                                                |       |   |   |   |   |
| Operating Income                              | ** ** | **$**                                                | **123,976** |                                                | $          | 117,102 | ** ** | **$** | **371,735** |   | $ | 346,302 |   |
| Non-GAAP  adjustment                          | ** ** | **3,748**                                            | **(b)**     | —                                              | ** ** | **3,748** | **(b)** | — |   |
| Non-GAAP  Operating Income                    | ** ** | **$**                                                | **127,724** |                                                | $          | 117,102 | ** ** | **$** | **375,483** |   | $ | 346,302 |   |

 

----

*(a)*          “Non-GAAP” measures differ from the “U.S. GAAP” measures for the threeand nine months ended September 30, 2008 by amounts that are detailedabove.  Non-GAAP measures are used bymanagement for the purposes of global business decision-making, includingdeveloping budgets and managing expenditures. Non-GAAP measures exclude certain U.S. GAAP measures to the extent thatmanagement believes exclusion will facilitate comparisons across periods andmore clearly indicate trends.  Althoughwe disclose Non-GAAP measures in order to give investors a view of our businessas seen by management, these Non-GAAP measures are not prepared specificallyfor investors, are not prepared under a comprehensive set of accounting rules,and are not a replacement for the more comprehensive information for investorsincluded in our U.S. GAAP financial statements. Our Non-GAAP measures differ in significant respects from U.S. GAAP andare likely to differ from the Non-GAAP measures used by other companies.

* *

*(b)*         Represents expense incurred of $3,748 during thethird quarter of 2008 for a charge related to our Government Solutionssubsidiary (see Note 7 of Notes to Condensed Consolidated Financial Statements(Unaudited)). This subsidiary had discovered potential noncompliance with various contract clauses and requirements under itsGeneral Services Administration Contract which was awarded in 2002 to itspredecessor company, Synchronous Knowledge Inc. (Synchronous Knowledge Inc. wasacquired by IMS in May 2005).  Upondiscovery of the potential noncompliance, we began remediation efforts,promptly disclosed the potential noncompliance to the U.S. government, and wereaccepted into the Department of Defense Voluntary Disclosure Program.  We filed our Voluntary Disclosure ProgramReport (“Disclosure Report”) on August 29, 2008.  Based on our findings as disclosed in theDisclosure Report, we recorded a reserve of approximately $3,748 for thismatter in the third quarter of 2008.  Weare currently unable to determine the outcome of this matter pending theresolution of the Voluntary Disclosure Program process and our ultimateliability arising from this matter could exceed our current reserve.  For geographical reporting purposes, thissubsidiary is included in our Americas region.

 

50

----

Tableof Contents

 

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

 

There has been nosignificant change in our exposure to market risk during the three and ninemonths ended September 30, 2008. For a discussion of our exposure to market risk, refer to Item 7A,Quantitative and Qualitative Disclosures About Market Risk, in our 2007 AnnualReport on Form 10-K.

 

**Item 4.Controls and Procedures**

 

(a)          Evaluation of Disclosure Controls and Procedures

 

The Company maintainsdisclosure controls and procedures that are designed to ensure that informationrequired to be disclosed in the reports that the Company files or submits tothe SEC under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”), is recorded, processed, summarized and reported within the time periodsspecified in the SEC’s rules and forms, and that such information isaccumulated and communicated to the Company’s management, including itsprincipal executive and principal financial officers, or persons performingsimilar functions, as appropriate, to allow timely decisions regarding requireddisclosure.

 

The Company’s ChiefExecutive Officer and Chief Financial Officer have evaluated the effectivenessof the Company’s disclosure controls and procedures (as such term is defined inRules 13a-14c and 15d-14c under the Exchange Act) as of September 30,2008 (the “Evaluation Date”). Based on such evaluation, such officers haveconcluded that, as of the Evaluation Date, the Company’s disclosure controlsand procedures are effective to ensure that information required to bedisclosed by the Company in the reports that the Company files or submits underthe Exchange Act is recorded, processed, summarized and reported within thetime periods specified in the SEC’s rules and forms and to ensure thatinformation required to be disclosed by the Company in the reports that theCompany files or submits under the Exchange Act is accumulated and communicatedto the Company’s management, including its principal executive and principalfinancial officers, or persons performing similar functions, as appropriate toallow timely decisions regarding required disclosure.

 

(b)         Changes in Internal Controlover Financial Reporting

 

Therehave been no changes in the Company’s internal control over financial reportingthat occurred during the period covered by this report that have materiallyaffected, or are reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

 

51

----

Table of Contents

 

**PART II. OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

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

 

**Item 1A. Risk Factors**

 

Inaddition to the other information included or incorporated by reference intothis Quarterly Report on Form 10-Q, including the matters addressed underthe caption “Forward-Looking Statements,” set forth below are some of the risksand uncertainties that, if they were to occur, could materially adverselyaffect our business or could cause our actual results to differ materially fromthe results contemplated by the forward-looking statements contained in thisreport and other public statements we make.

 

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

 

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

 

**Dataprotection and privacy laws may restrict our activities.**

 

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

 

Inaddition, there is an increasing public concern regarding data protection andprivacy issues and the number of jurisdictions with data protection and privacylaws has been slowly increasing. For example, there have been a number oflegislative and regulatory initiatives in the U.S. and abroad in the area ofaccess to medical data. These initiatives tend to seek to place restrictions onthe use and disclosure of patient-identifiable information without consent and,in some cases, seek to extend restrictions to non-patient-identifiableinformation, e.g., prescriber identifiable information, or to the process ofanonymizing data. There are also some initiatives that seek to restrict accessto this information to non-commercial uses. While most of the currentinitiatives should not impact our business, there can be no assurance thatthese initiatives or future initiatives will not adversely affect IMS’s abilityto generate or assemble data or to develop or market current or future productsor services.

 

52

----

Tableof Contents

 

**Hardware and software failures,delays in the operation of our computer and communications systems or thefailure to implement system enhancements may harm our business.**

 

Our success depends on theefficient and uninterrupted operation of our computer and communicationssystems. A failure of our network or data gathering procedures could impede theprocessing of data, delivery of databases and services, client orders andday-to-day management of our business and could result in the corruption orloss of data. While many of our operations have appropriate disaster recoveryplans in place, we currently do not have full backup facilities everywhere inthe world to provide redundant network capacity in the event of a systemfailure. Despite any precautions we may take, damage from fire, floods,hurricanes, power loss, telecommunications failures, computer viruses,break-ins, sabotage, breaches of security, epidemics and similar events at ourvarious computer facilities could result in interruptions in the flow of datato our servers and from our servers to our clients. In addition, any failure byour computer environment to provide our required data communications capacitycould result in interruptions in our service. In the event of a delay in thedelivery of data, we could be required to transfer our data collectionoperations to an alternative provider of server hosting services. Such atransfer could result in significant delays in our ability to deliver ourproducts and services to our clients. Additionally, significant delays in theplanned delivery of system enhancements, improvements and inadequateperformance of the systems once they are completed could damage our reputationand harm our business. Finally, long-term disruptions in the infrastructurecaused by events such as natural disasters, the outbreak of war, the escalationof hostilities, epidemics and acts of terrorism (particularly involving citiesin which we have offices) could adversely affect our businesses. Although wecarry property and business interruption insurance, our coverage may not be adequateto compensate us for all losses that may occur.

 

**Our business is subject to exchange rate fluctuations and our revenueand net income may suffer due to currency translations.**

 

Weoperate globally, deriving approximately 63% of our 2007 revenue from non-UnitedStates operations. As a result, fluctuations in the value of foreign currenciesrelative to the U.S. dollar increase the volatility of U.S. dollar denominatedoperating results. Emerging markets currencies tend to be considerably lessstable than those in established markets, which may further contribute tovolatility in our U.S. dollar-denominated operating results.

 

Asa result of devaluations and fluctuations in currency exchange rates or theimposition of limitations on conversion of foreign currencies into dollars, weare subject to currency translation exposure on the profits of our operations,in addition to economic exposure.

 

**Our international operations present risks to our current businessesthat could impede growth in the future.**

 

Internationaloperations are subject to various risks that could adversely affect ourbusiness, including:

 

·                       costs of customizing services for foreignclients;

 

·                       reduced protection for intellectual propertyrights in some countries;

 

·                       the burdens of complying with a wide varietyof foreign laws;

 

·                       exposure to local economic conditions; and

 

53

----

Table of Contents

 

·                  exposure to local political conditions,including the risks of an outbreak of war, the escalation of hostilities, actsof terrorism and nationalization, expropriation, price controls or otherrestrictive government actions.

 

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

 

Animportant aspect of our business strategy in the past has been growth throughacquisitions or joint ventures and we may continue to acquire or makeinvestments in complementary businesses, technologies, services or products.There can be no assurance that we will be able to continue to identify andconsummate acquisitions or joint ventures on satisfactory terms. Moreover,every acquisition and joint venture entails some degree of uncertainty andrisk. For example, we may be unsuccessful in identifying and evaluatingbusiness, legal or financial risks as part of the due diligence processassociated with a transaction. In addition, some acquisitions will havecontingent consideration components that may require us to pay additionalamounts in the future in relation to future performance results of the acquiredbusiness. If we do not properly assess these risks, or if we fail to realizethe benefits from one or more acquisitions, our business, results of operationsand financial condition could be adversely affected.

 

**We maybe unsuccessful in integrating any acquired operations with our existingbusiness.**

 

Wemay experience difficulties in integrating operations acquired from othercompanies. These difficulties include the diversion of management’s attentionfrom other business concerns and the potential loss of key employees of theacquired operations. Acquisitions also frequently involve significant costs,often related to integrating information technology, accounting and managementservices and rationalizing personnel levels. If we experience difficulties inintegrating one or more acquisitions, our business, results of operations andfinancial condition could be adversely affected.

 

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

 

Weoperate in more than 100 countries worldwide and our earnings are subject totaxation in many differing jurisdictions and at differing rates. We seek toorganize our affairs in a tax efficient manner, taking account of thejurisdictions in which we operate. Tax laws that apply to our business may beamended by the relevant authorities, for example, as a result of changes infiscal circumstances or priorities. Such amendments, or their application toour business, may adversely affect our reported results.

 

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

 

We(and our predecessors) have entered, and we continue to enter, into global taxplanning initiatives in the normal course of business. These activities aresubject to review by applicable tax authorities and courts. As a result of thereview process, uncertainties exist and it is possible that some of thesematters could be resolved adversely to us, including those tax related mattersdescribed in Part I, Item 1 of this Quarterly Report on Form 10-Q.Moreover, there can be no assurance that we will be able to maintain oureffective tax rate.

 

**We are,and may become, involved in litigation that could harm the value of ourbusiness.**

 

Inthe normal course of our business, we are involved in lawsuits, claims, auditsand investigations, such as those described in Part I, Item 1 of thisQuarterly Report on Form 10-Q. The outcome of these matters could have amaterial adverse effect on our business, results of operation or financialcondition. In 

 

54

----

Table of Contents

 

addition,we may become subject to future lawsuits, claims, audits and investigationsthat could result in substantial costs and divert our attention and resources.

 

**Significant technological changes could render our products andservices obsolete. We may not be able to develop the technology necessary forour business, or to do so efficiently.**

 

Weoperate in businesses that require sophisticated data collection and processingsystems and software and other technology. Some of the technologies supportingthe industries we serve are changing rapidly and we must continue to developcost-effective technologies for data collection and processing to accommodatesuch changes. We also must continue to deliver data to our clients in formsthat are easy to use while simultaneously providing clear answers to complexquestions. There can be no guarantee that we will be able to develop newtechnologies for data collection, processing and delivery or that we will beable to do so as quickly or cost-effectively as our competition. Significanttechnological change could render our products and services obsolete.

 

Moreover,the introduction of new products and services embodying new technologies andthe emergence of new industry standards could render existing products andservices obsolete. Our continued success will depend on our ability to adapt tochanging technologies, manage and process ever-increasing amounts of data andinformation and improve the performance, features and reliability of ourproducts and services in response to changing client and industry demands. Wemay experience difficulties that could delay or prevent the successful design,development, testing, introduction or marketing of our products and services.New products and services, or enhancements to existing products and services,may not adequately meet the requirements of current and prospective clients orachieve any degree of significant market acceptance.

 

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

 

Anumber of countries in which we operate have enacted regulations limiting theprices pharmaceutical companies may charge for drugs. We believe that such costcontainment measures will cause pharmaceutical companies to seek more effectivemeans of marketing their products (which will benefit us in the medium andlong-term). However, such governmental regulation may cause pharmaceuticalcompanies to revise or reduce their marketing programs in the near term, whichmay in turn reduce the demand for certain of our products and services. Thiscould result in decreased revenue, net income and earnings per share.

 

**Oursuccess will depend on our ability to protect our intellectual property rights.**

 

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

 

·                       obtaining patent protection for ourtechnology, products and services;

 

·                       defending our patents, copyrights and otherintellectual property;

 

·                       preserving our trade secrets and maintainingthe security of our know-how; and

 

·                       operating without infringing upon patents andproprietary rights held by third parties.

 

Werely on a combination of contractual provisions, confidentiality procedures andpatent, copyright, 

 

55

----

Table of Contents

 

trademark,service mark and trade secret laws to protect the proprietary aspects of ourproducts, services, databases and technologies. There can be no assurance thatthese protections will be adequate, or that we will adequately employ each andevery one of these protections at all times, to provide sufficient protectionin the future to prevent the use or misappropriation of our data, technologyand other products and services. Further, our competitors may develop products,services, databases or technologies that are substantially equivalent orsuperior to our products, services, databases or technologies. Although webelieve that our products, services, databases, technologies and relatedproprietary rights do not infringe upon the proprietary rights of thirdparties, there can be no assurance that third parties will not assertinfringement claims against us in the future. Litigation may be necessary toenforce our intellectual property rights, to protect our trade secrets and todetermine the validity and scope of our proprietary rights. For example, wehave been involved in litigation with Insight Health GmbH & Co. KG inGermany in order to protect our proprietary mapping software. In addition, thegrowing need for global data, along with increased competition andtechnological advances, puts increasing pressure on us to share ourintellectual property for client applications. Any future litigation,regardless of outcome, could result in substantial expense and diversion ofresources with no assurance of success and could seriously harm our business,financial condition and operating results.

 

**If we are unable to attract, retain and motivate employees, we will notbe able to compete effectively and will not be able to expand our business.**

 

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

 

**Consolidation in the industries in which our clients operate may putpressure on the pricing of our products and services, and could increase thecost of acquiring data, leading to decreased earnings.**

 

Consolidationin the pharmaceutical industry could put pressure on the pricing of ourinformation products and services, as the consolidated client seeks pricingconcessions from us, and could limit available dollars for our products andservices. In addition, when companies merge, the products and services theypreviously purchased separately are now purchased only once by the combinedentity, leading to contract compression and loss of revenue. While we haveexperienced success in mitigating the revenue impact of any pricing pressurethrough effective negotiations and by providing services to individualbusinesses within a particular group, there can be no assurance as to thedegree to which we will be able to continue to do so as consolidation continues.

 

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

 

Our future growth andsuccess will be dependent on our ability to successfully compete with othercompanies that provide similar services in the same markets, some of which mayhave financial, marketing, technical and other advantages.

 

56

----

Tableof Contents

 

**Disruptions in commerce couldadversely affect our business.**

 

Commerce could be disruptedby various political, economic, world health or other conditions. Examples ofsuch disruptions that could adversely affect our business include:

 

·                  terrorist activity, the threat of suchactivity, and responses to and results of such activity and threats, includingbut not limited to effects, domestically and/or internationally, on us, ourpersonnel and facilities, our customers and suppliers, financial markets andgeneral economic conditions;

 

·                  an outbreak of SARS, avian influenza (BirdFlu) or other epidemic, the fear of such an epidemic, and responses to andresults of such an epidemic or fear thereof, including but not limited toeffects, domestically and/or internationally, on us, our personnel andfacilities, our customers and suppliers, financial markets and general economicconditions; and

 

·                  credit market disruptions, the threat of suchdisruptions, and responses to and results of such disruptions and threats,including but not limited to effects, domestically and/or internationally, onus, our customers and suppliers, financial markets and general economicconditions.

 

Ifsuch disruptions result in cancellations of or reductions in customer orders orcontribute to a general decrease in economic activity, or directly impact ourmarketing, collection, production, delivery, financial and logistics functions,our results of operations and financial condition could be materially adverselyaffected.

 

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

 

The vast majority of ourrevenues are generated from sales to the pharmaceutical and healthcareindustries. To the extent the businesses we serve, especially our clients inthe pharmaceutical and healthcare industries, are subject to financialpressures of, for example, price controls, increased costs or reduced demandfor their products, the demand for our products and services, or the price ourclients are willing to pay for those products and services, may decline.

 

**Item2.  Unregistered Sales of EquitySecurities and Use of Proceeds**

 
| **Period**                | ** ** | **Total  Number of  Shares  Purchased** | ** ** | **Average  Price Paid  per Share** | ** ** | **Total Number of Shares  Purchased Under  Publicly Announced  Programs** | ** ** | **Maximum Number of  Shares that May Yet Be  Purchased Under the  Programs (1)** | ** ** |
|---------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------|------------|
| July 1-31, 2008      |       | —                                       |       | $                                            | —     |                                                                                               | —     |                                                                                                                          | 10,000,000 |   |
| August 1-31, 2008    |       | —                                       |       | —                                       |       | —                                                                                             |       | 10,000,000                                                                                                                    |       |
| September 1-30, 2008 |       | 54,700                                       |       | 19.99                                        |       | —                                                                                             |       | 9,945,300                                                                                                                     |       |
| **Total**                 |       | 54,700                                       |       | $                                            | 19.99      |                                                                                               | —     |                                                                                                                          | 9,945,300  |   |

 

----

(1)          In December 2007, theBoard of Directors authorized a stock repurchase program to buy up to20,000,000 shares. As of September 30, 2008, 9,945,300 shares remainedavailable for repurchase under the December 2007 program. Unlessterminated earlier by resolution of our Board of Directors, this program willexpire when we have repurchased all shares authorized for repurchasethereunder.  See Note 12 of our Notes toCondensed Consolidated Financial Statements (Unaudited) for further details.

 

57

----

Table of Contents

 

**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 |

 

58

----

Table of Contents

 

**SIGNATURES**

 

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

 

 
|                         | IMS Health Incorporated               |
|------------------------------|---------------------------------------|
|                         |                                  |
|                         |                                  |
|                         | By:                                   |  /s/ Leslye G.  Katz |
| Date: October 31,  2008 |  Leslye G. Katz                  |
|                         |  Senior Vice  President and      |
|                         |  Chief Financial  Officer        |
|                         |  (principal  financial officer)  |
|                         |                                  |
|                         |                                  |
|                         |  /s/ Harshan  Bhangdia           |
| Date: October 31,  2008 |  Harshan Bhangdia                |
|                         |  Vice President,  Controller     |
|                         |  (principal  accounting officer) |
|                              |                                       |  |

 

59

----

Table of Contents

 

# **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 |

 

60

----