**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 
| **ý** | ** ** | **QUARTERLY REPORT UNDER SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**         |
|------------|------------|----------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                     |
| ** ** | ** ** | **FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30,  2005**                                              |
|       |       |                                                                                                     |
| **o**      | ** ** | **TRANSITION REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |
|       |       |                                                                                                     |
| ** ** | ** ** | **FOR THE TRANSITION PERIOD FROM TO**                                                                    |

 

**COMMISSIONFILE NUMBER: 001-14049**

 

**IMS Health Incorporated**

(EXACT NAME OFREGISTRANT AS SPECIFIED IN ITS CHARTER)

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

 

**1499 PostRoad, Fairfield, CT 06824**

(Address ofprincipal executive offices)(Zip Code)

 

**(203) 319-4700**

(Registrant’stelephone number, including area code)

 

 

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

 

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

ý Yes   oNo

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2 ofthe Exchange Act).  ýYes   oNo

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).  oYesý No

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date.  At September 30,2005, there were 231,696,468 shares of IMS Health Incorporated Common Stock,$0.01 par value, outstanding.

 

 

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**IMS HEALTH INCORPORATED**

 

**INDEX TO FORM 10-Q**

 

 
| **PART I.  FINANCIAL INFORMATION**                                                                            | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|
| Item 1.  Financial Statements (Unaudited)                                                                          | ** ** |
| Condensed  Consolidated Statements of Financial Position  As of September 30, 2005 and December 31, 2004 | 3          |
| Condensed  Consolidated Statements of Income  Three Months Ended September 30, 2005 and 2004                  | 4          |
| Condensed  Consolidated Statements of Income  Nine Months Ended September 30, 2005 and 2004                   | 5          |
| Condensed  Consolidated Statements of Cash Flows  Nine Months Ended September 30, 2005 and 2004               | 6          |
| Notes  to Condensed Consolidated Financial Statements                                                              | 7-28       |
| **Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations**           | 29-44      |
| **Item 3.  Quantitative and Qualitative Disclosures About Market Risk**                                            | 45         |
| **Item 4. Controls  and Procedures**                                                                               | 45         |
| ** **                                                                                                         |       |
| **PART II. OTHER  INFORMATION**                                                                               |       |
| **Item 1. Legal  Proceedings**                                                                                     | 46         |
| ** **                                                                                                         | ** ** |
| **Item  6. Exhibits**                                                                                              | 46         |
|                                                                                                               |       |
| **SIGNATURES**                                                                                                     | 47         |
|                                                                                                               |       |
| **EXHIBITS**                                                                                                       | 48         |

 

2

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**PART I. FINANCIAL INFORMATION**

**Item 1. FINANCIAL STATEMENTS**

 

**IMS HEALTH INCORPORATED**

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

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

 
| ** **                                                                                                                                           | ** ** | **As of September 30,  2005** | ** **    | **As of December 31,  2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|---------------|-----------------------------------|------------|
| **Assets:**                                                                                                                                          |       |                               |          |                              |       |
| **Current Assets:**                                                                                                                                  |       |                               |          |                              |       |
| Cash and cash equivalents                                                                                                                            | ** ** | **$**                              | **246,199**   | ** **                        | $          | 444,903 |   |
| Restricted cash (Note 16)                                                                                                                            | ** ** | **105,404**                        | ** **    | —                            |       |
| Short-term marketable securities                                                                                                                     | ** ** | **—**                         | ** **    | 15,053                            |       |
| Accounts receivable, net of allowances of $6,289 and $8,270 in 2005 and 2004,  respectively                                                     | ** ** | **287,919**                        | ** **    | 264,783                           |       |
| Other current assets                                                                                                                                 | ** ** | **198,186**                        | ** **    | 211,780                           |       |
| **Total Current Assets**                                                                                                                             | ** ** | **837,708**                        | ** **    | 936,519                           |       |
| Securities and other investments                                                                                                                     | ** ** | **8,668**                          | ** **    | 7,915                             |       |
| Property, plant and equipment, net of accumulated  depreciation of $197,024 and $192,440 in 2005 and 2004, respectively                              | ** ** | **137,025**                        | ** **    | 145,214                           |       |
| Computer software                                                                                                                                    | ** ** | **232,403**                        | ** **    | 230,021                           |       |
| Goodwill                                                                                                                                             | ** ** | **433,500**                        | ** **    | 302,229                           |       |
| Other assets                                                                                                                                         | ** ** | **283,395**                        | ** **    | 268,808                           |       |
| **Total Assets**                                                                                                                                     | ** ** | **$**                              | **1,932,699** | ** **                        | $          | 1,890,706 |   |
| **Liabilities, Minority Interests and Shareholders’  Equity:**                                                                                  |       |                               | ** **    |                              |       |
| **Current Liabilities:**                                                                                                                             |       |                               | ** **    |                              |       |
| Accounts payable                                                                                                                                     | ** ** | **$**                              | **64,956**    | ** **                        | $          | 70,344 |   |
| Accrued and other current liabilities                                                                                                                | ** ** | **216,375**                        | ** **    | 237,139                           |       |
| Accrued income taxes                                                                                                                                 | ** ** | **177,387**                        | ** **    | 116,985                           |       |
| Short-term deferred tax liability                                                                                                                    | ** ** | **11,216**                         | ** **    | 9,923                             |       |
| Deferred revenues                                                                                                                                    | ** ** | **109,722**                        | ** **    | 119,730                           |       |
| **Total Current Liabilities**                                                                                                                        | ** ** | **579,656**                        | ** **    | 554,121                           |       |
| Postretirement and post employment benefits                                                                                                          | ** ** | **99,734**                         | ** **    | 99,899                            |       |
| Long-term debt (Note 9)                                                                                                                              | ** ** | **570,478**                        | ** **    | 626,670                           |       |
| Other liabilities                                                                                                                                    | ** ** | **169,889**                        | ** **    | 252,326                           |       |
| **Total Liabilities**                                                                                                                                | ** ** | **$**                              | **1,419,757** | ** **                        | $          | 1,533,016 |   |
| **Commitments and Contingencies (Note 8)**                                                                                                           |       |                               | ** **    |                              |       |
| **Minority Interests**                                                                                                                               | ** ** | **$**                              | **99,832**    | ** **                        | $          | 101,976 |   |
|                                                                                                                                                 |       |                               | ** **    |                              |       |
| **Shareholders’ Equity:**                                                                                                                       |       |                               | ** **    |                              |       |
| Common Stock, par value $.01, authorized 800,000  shares; issued 335,045 shares at September 30, 2005 and December 31,  2004, respectively | ** ** | **3,350**                          | ** **    | 3,350                             |       |
| Capital in excess of par                                                                                                                             | ** ** | **465,919**                        | ** **    | 477,768                           |       |
| Retained earnings                                                                                                                                    | ** ** | **2,237,007**                      | ** **    | 2,056,079                         |       |
| Treasury stock, at cost, 103,349 and 105,916 shares  at September 30, 2005 and December 31, 2004, respectively                             | ** ** | **(2,222,848**                     | **)**         | (2,268,414                        | )          |
| Cumulative translation adjustment                                                                                                                    | ** ** | **(45,519**                        | **)**         | 12,239                            |       |
| Minimum pension liability adjustment, net of taxes  of $11,129 at September 30, 2005 and December 31, 2004                                 | ** ** | **(24,691**                        | **)**         | (24,691                           | )          |
| Unrealized loss on changes in fair value of cash  flow hedges, net of tax                                                                            | ** ** | **(130**                           | **)**         | (665                              | )          |
| Unrealized gain on investments, net of tax                                                                                                           | ** ** | **22**                             | ** **    | 48                                |       |
| **Total Shareholders’ Equity**                                                                                                                  | ** ** | **$**                              | **413,110**   | ** **                        | $          | 255,714 |   |
| **Total Liabilities, Minority Interests and  Shareholders’ Equity**                                                                             | ** ** | **$**                              | **1,932,699** | ** **                        | $          | 1,890,706 |   |

 

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

 

3

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## **IMS HEALTH INCORPORATED**

**CONDENSEDCONSOLIDATED STATEMENTS OF INCOME (Unaudited)**

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

 
| ** **                                                                                              | ** ** | **Three Months Ended  September 30,** | ** **  |
|---------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|-------------|
| ** **                                                                                              | ** ** | **2005**                                   | ** **  | **2004** | ** ** |
|                                                                                                    |       |                                       |        |   |   |
| **Operating Revenue**                                                                                   | ** ** | **$**                                      | **432,796** | ** ** | $ | 384,171 |   |
|                                                                                                    |       |                                       | ** **  |   |   |
| Operating costs                                                                                         | ** ** | **199,654**                                | ** **  | 165,575 |   |
| Selling and administrative expenses                                                                     | ** ** | **96,098**                                 | ** **  | 92,350 |   |
| Depreciation and amortization                                                                           | ** ** | **26,339**                                 | ** **  | 23,355 |   |
| Merger costs (Note 16)                                                                                  | ** ** | **8,474**                                  | ** **  | — |   |
| **Operating Income**                                                                                    | ** ** | **102,231**                                | ** **  | 102,891 |   |
| Interest income                                                                                         | ** ** | **2,448**                                  | ** **  | 1,834 |   |
| Interest expense                                                                                        | ** ** | **(7,140**                                 | **)**       | (4,751 | ) |
| Gains from investments, net                                                                             | ** ** | **252**                                    | ** **  | 2,188 |   |
| Loss on issuance of investees’ stock, net                                                          | ** ** | **—**                                 | ** **  | 31 |   |
| Other income (expense), net                                                                             | ** ** | **7,655**                                  | ** **  | (3,342 | ) |
| **Non-Operating Income (Loss), Net**                                                                    | ** ** | **3,215**                                  | ** **  | (4,040 | ) |
| Income before provision for income taxes                                                                | ** ** | **105,446**                                | ** **  | 98,851 |   |
| Provision for income taxes (Note 11)                                                                    | ** ** | **(34,306**                                | **)**       | (33,881 | ) |
| TriZetto equity income, net of income taxes of  $(427) for 2004                                         | ** ** | **—**                                 | ** **  | 662 |   |
| **Net Income**                                                                                          | ** ** | **$**                                      | **71,140**  | ** ** | $ | 65,632 |   |
|                                                                                                    |       |                                       | ** **  |   |   |
| **Basic Earnings Per Share of Common Stock**                                                            | ** ** | **$**                                      | **0.31**    | ** ** | $ | 0.28 |   |
|                                                                                                    |       |                                       | ** **  |   |   |
| **Diluted Earnings Per Share of Common Stock**                                                          | ** ** | **$**                                      | **0.30**    | ** ** | $ | 0.28 |   |
| Weighted average number of shares outstanding –  Basic                                             | ** ** | **229,945**                                | ** **  | 232,981 |   |
| Dilutive effect of shares issuable as of period-end  under stock option plans                           | ** ** | **4,090**                                  | ** **  | 4,048 |   |
| Adjustment of shares outstanding applicable to  exercised and cancelled stock options during the period | ** ** | **600**                                    | ** **  | 118 |   |
| **Weighted Average Number of Shares Outstanding –  Diluted**                                       | ** ** | **234,635**                                | ** **  | 237,147 |   |

 

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

 

4

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## **IMS HEALTH INCORPORATED**

**CONDENSEDCONSOLIDATED STATEMENTS OF INCOME (Unaudited)**

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

 
| ** **                                                                                              | ** ** | **Nine Months Ended  September 30,** | ** **    |
|---------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|---------------|
| ** **                                                                                              | ** ** | **2005**                                  | ** **    | **2004** | ** ** |
|                                                                                                    |       |                                      |          |   |   |
| **Operating Revenue**                                                                                   | ** ** | **$**                                     | **1,277,062** | ** ** | $ | 1,125,330 |   |
|                                                                                                    |       |                                      | ** **    |   |   |
| Operating costs                                                                                         | ** ** | **572,514**                               | ** **    | 481,485 |   |
| Selling and administrative expenses                                                                     | ** ** | **309,616**                               | ** **    | 274,876 |   |
| Depreciation and amortization                                                                           | ** ** | **76,658**                                | ** **    | 67,378 |   |
| Merger costs (Note 16)                                                                                  | ** ** | **15,874**                                | ** **    | — |   |
| **Operating Income**                                                                                    | ** ** | **302,400**                               | ** **    | 301,591 |   |
| Interest income                                                                                         | ** ** | **7,195**                                 | ** **    | 4,899 |   |
| Interest expense                                                                                        | ** ** | **(20,292**                               | **)**         | (13,184 | ) |
| Gains from investments, net                                                                             | ** ** | **2,624**                                 | ** **    | 10,715 |   |
| Loss on issuance of investees’ stock, net                                                          | ** ** | **—**                                | ** **    | (60 | ) |
| Other income (expense), net                                                                             | ** ** | **25,555**                                | ** **    | (2,169 | ) |
| **Non-Operating Income, Net**                                                                           | ** ** | **15,082**                                | ** **    | 201 |   |
| Income before provision for income taxes                                                                | ** ** | **317,482**                               | ** **    | 301,792 |   |
| Provision for income taxes (Note 11)                                                                    | ** ** | **(122,820**                              | **)**         | (89,354 | ) |
| TriZetto equity loss, net of income taxes of $393  for 2004                                             | ** ** | **—**                                | ** **    | (607 | ) |
| **Net Income**                                                                                          | ** ** | **$**                                     | **194,662**   | ** ** | $ | 211,831 |   |
| ** **                                                                                              | ** ** | ** **                                | ** **    |   |   |
| **Basic Earnings Per Share of Common Stock**                                                            | ** ** | **$**                                     | **0.85**      | ** ** | $ | 0.90 |   |
|                                                                                                    |       |                                      | ** **    |   |   |
| **Diluted Earnings Per Share of Common Stock**                                                          | ** ** | **$**                                     | **0.84**      | ** ** | $ | 0.89 |   |
| Weighted average number of shares outstanding –  Basic                                             | ** ** | **227,901**                               | ** **    | 234,369 |   |
| Dilutive effect of shares issuable as of period-end  under stock option plans                           | ** ** | **2,999**                                 | ** **    | 4,380 |   |
| Adjustment of shares outstanding applicable to  exercised and cancelled stock options during the period | ** ** | **1,234**                                 | ** **    | 464 |   |
| **Weighted Average Number of Shares Outstanding –  Diluted**                                       | ** ** | **232,134**                               | ** **    | 239,213 |   |

 

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

 

5

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**IMSHEALTH INCORPORATED**

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

*(Dollarsin thousands)*

 
| ** **                                                                               | ** ** | **Nine Months Ended September 30,** | ** **  |
|------------------------------------------------------------------------------------------|------------|------------------------------------------|-------------|
| ** **                                                                               | ** ** | **2005**                                 | ** **  | **2004** | ** ** |
| **Cash Flows Provided by Operating Activities:**                                         |       |                                     |        |   |   |
| Net income                                                                               | ** ** | **$**                                    | **194,662** | ** ** | $ | 211,831 |   |
| **Adjustments to reconcile net income to net cash  provided by operating activities:**   |       |                                     | ** **  |   |   |
| Depreciation and amortization                                                            | ** ** | **76,658**                               | ** **  | 67,378 |   |
| Bad debt expense                                                                         | ** ** | **2,552**                                | ** **  | 1,000 |   |
| Deferred income taxes                                                                    | ** ** | **8,559**                                | ** **  | 8,710 |   |
| Gains from investments, net                                                              | ** ** | **(2,624**                               | **)**       | (10,715 | ) |
| Loss on issuance of investees’ stock, net                                           | ** ** | **—**                               | ** **  | 60 |   |
| TriZetto equity loss, net                                                                | ** ** | **—**                               | ** **  | 607 |   |
| Minority interests in net income of consolidated  companies                              | ** ** | **2,525**                                | ** **  | 4,397 |   |
| Non-cash stock compensation charges                                                      | ** ** | **3,511**                                | ** **  | 2,345 |   |
| Change in assets and liabilities, excluding effects  from acquisitions and dispositions: |       |                                     | ** **  |   |   |
| Net increase in restricted cash                                                          | ** ** | **(105,404**                             | **)**       | — |   |
| Net (increase) decrease in accounts receivable                                           | ** ** | **(11,383**                              | **)**       | 19,207 |   |
| Net decrease (increase) in inventory                                                     | ** ** | **5,037**                                | ** **  | (2,305 | ) |
| Net increase in prepaid expenses and other current  assets                               | ** ** | **(37,098**                              | **)**       | (15,704 | ) |
| Net decrease in accounts payable                                                         | ** ** | **(11,089**                              | **)**       | (1,769 | ) |
| Net decrease in accrued and other current  liabilities                                   | ** ** | **(11,957**                              | **)**       | (23,855 | ) |
| Net decrease in accrued severance, impairment and  other charges                         | ** ** | **(25,034**                              | **)**       | (5,252 | ) |
| Net decrease in deferred revenues                                                        | ** ** | **(15,293**                              | **)**       | (12,470 | ) |
| Net (decrease) increase in accrued income taxes                                          | ** ** | **(11,369**                              | **)**       | 19,161 |   |
| Net (increase) decrease in pension assets (net of  liabilities)                          | ** ** | **(2,332**                               | **)**       | 1,162 |   |
| Net decrease in other long-term assets                                                   | ** ** | **2,402**                                | ** **  | 2,269 |   |
| Net tax benefit on stock option exercises                                                | ** ** | **13,450**                               | ** **  | 8,424 |   |
| **Net Cash Provided by Operating Activities**                                            | ** ** | **75,773**                               | ** **  | 274,481 |   |
| **Cash Flows Used in Investing Activities:**                                             |       |                                     | ** **  |   |   |
| Capital expenditures                                                                     | ** ** | **(13,384**                              | **)**       | (14,271 | ) |
| Additions to computer software                                                           | ** ** | **(60,724**                              | **)**       | (58,259 | ) |
| Proceeds from sale of TriZetto                                                           | ** ** | **37,414**                               | ** **  | — |   |
| Investments in short-term marketable securities                                          | ** ** | **15,351**                               | ** **  | 17,867 |   |
| Payments for acquisitions of businesses, net of cash  acquired                           | ** ** | **(191,840**                             | **)**       | (23,078 | ) |
| Funding of venture capital investments                                                   | ** ** | **(1,000**                               | **)**       | (500 | ) |
| Other investing activities, net                                                          | ** ** | **2,398**                                | ** **  | 3,722 |   |
| **Net Cash Used in Investing Activities**                                                | ** ** | **(211,785**                             | **)**       | (74,519 | ) |
| **Cash Flows Used in Financing Activities:**                                             |       |                                     | ** **  |   |   |
| Net (decrease) increase in debt                                                          | ** ** | **(53,602**                              | **)**       | 70,801 |   |
| Payments for purchase of treasury stock                                                  | ** ** | **(147,945**                             | **)**       | (277,075 | ) |
| Proceeds from exercise of stock options                                                  | ** ** | **162,310**                              | ** **  | 80,923 |   |
| Dividends paid                                                                           | ** ** | **(13,734**                              | **)**       | (14,204 | ) |
| Proceeds from employee stock purchase plan                                               | ** ** | **2,391**                                | ** **  | 1,841 |   |
| Increase in cash overdrafts                                                              | ** ** | **3,976**                                | ** **  | 2,932 |   |
| Payments to minority interests                                                           | ** ** | **(2,418**                               | **)**       | (4,889 | ) |
| **Net Cash Used in Financing Activities**                                                | ** ** | **(49,022**                              | **)**       | (139,671 | ) |
| Effect of Exchange Rate Changes on Cash and Cash  Equivalents                            | ** ** | **(13,670**                              | **)**       | (1,090 | ) |
| **(Decrease) Increase in Cash and Cash Equivalents**                                     | ** ** | **(198,704**                             | **)**       | 59,201 |   |
| **Cash and Cash Equivalents, Beginning of Period**                                       | ** ** | **444,903**                              | ** **  | 344,432 |   |
| **Cash and Cash Equivalents, End of Period**                                             | ** ** | **$**                                    | **246,199** | ** ** | $ | 403,633 |   |

 

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

 

6

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

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

 

**Note 1.**          Interim CondensedConsolidated Financial Statements (unaudited)

** **

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

 

**Note 2.**          Basis of Presentation

** **

TheCompany is a leading global provider of information solutions to the pharmaceuticaland healthcare industries.  The Company’srevenues are derived primarily from the sale of a broad line of marketinformation, sales management and consulting services to the pharmaceutical andhealthcare industries.  The Company’sinformation products are developed to meet client needs by using data securedfrom a worldwide network of suppliers in the markets where operationsexist.  Key information products include:

 

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

 

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

 

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

 

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

 

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

 

7

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The Company ismanaged on a global business model with global leaders for the majority of itscritical business processes and accordingly has one reportable segment (SeeNote 15).

 

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

** **

In December 2004,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standard (“SFAS”) No. 123R, “Share-Based Payment”, which is arevision of SFAS No. 123, “Accounting for Stock Based Compensation”, andsupersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accountingfor Stock Issued to Employees.”  SFAS No. 123Restablishes standards for the accounting of transactions in which an entityexchanges its equity instruments for goods or services, or incurs liabilitiesin exchange for goods or services that are based on the fair value of theentity’s equity instruments or that may be settled by the issuance of equityinstruments.  SFAS No. 123R focusesprimarily on accounting for transactions in which an entity obtains employeeservices in share-based payment transactions. SFAS No. 123R requires a public entity to measure the cost of allemployee share-based payments, including grants of employee stock options,using a fair-value based method, such as the Black-Scholes option valuationmodel at the date of the grant.  Theresulting cost is then recognized as compensation cost in the ConsolidatedStatements of Income over the service period during which an employee isrequired to provide service in exchange for the award (usually the vestingperiod).  In April 2005, theSecurities and Exchange Commission deferred the effective date of SFAS No. 123Rto the first annual reporting period beginning after June 15, 2005.  The Company is currently evaluating theimpact of SFAS No. 123R; however, based upon outstanding as well as futureanticipated stock-based award grants through December 31, 2006, theCompany expects that the adoption under the modified prospective method willhave approximately an $0.11 to $0.12 fully diluted earnings per share impact onits consolidated results of operations for the year ending December 31,2006.  For a description of the Company’smodel and assumptions used to calculate the fair value of the Company’sstock-based awards, refer to Note 13 of the Company’s 2004 Annual Report on Form 10-Kas filed with the Securities and Exchange Commission.

 

In December 2004, the FASB issued SFAS No. 153,“Exchanges of Nonmonetary Assets-An Amendment of APB Opinion No. 29.”  SFAS No. 153 amends APB No. 29, “Accountingfor Nonmonetary Transactions,” to eliminate the exception from fair valuemeasurement for nonmonetary exchanges of similar productive assets and replacesit with a general exception for exchanges of nonmonetary assets that do nothave commercial substance.  SFAS No. 153specifies that a nonmonetary exchange has commercial substance if the futurecash flows of the entity are expected to change significantly as a result ofthe exchange.  SFAS No. 153 iseffective for nonmonetary exchanges occurring in fiscal periods beginning afterJune 15, 2005.  The adoption of SFASNo. 153 is not expected to have a material impact on the Company’sfinancial position, results of operations or cash flows for the year ending December 31,2006.

 

In June 2005, the FASB issued SFAS No. 154, “AccountingChanges and Error Corrections.”  SFAS No. 154will require entities that voluntarily make a change in accounting principle toapply that change retrospectively to prior periods’ financial statements, unlessit would be impracticable to do so.  SFASNo. 154 supersedes APB No. 20, “Accounting Changes,” which previouslyrequired most voluntary changes in accounting principle to be recognized byincluding in the current period’s net income the cumulative effect of changingto the new accounting principle. SFAS No. 154 also

 

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makes a distinctionbetween “retrospective application” of an accounting principle and the “restatement”of financial statements to reflect the correction of an error.  Further, under SFAS No. 154, if anentity changes its method of depreciation, amortization, or depletion forlong-lived, non-financial assets, the change must be accounted for as a changein accounting estimate.  Under APB No. 20,such a change would have been reported as a change in accountingprinciple.  SFAS No. 154 applies toaccounting changes and error corrections that are made in fiscal yearsbeginning after December 15, 2005. The adoption of SFAS No. 154 is not expected to have a materialimpact on the Company’s financial position, results of operations or cash flowsfor the year ending December 31, 2006.

 

**Note 4.**          Summary of SignificantAccounting Policies

** **

*Stock-basedcompensation.**** * SFAS No. 123, “Accountingfor Stock-Based Compensation” requires that companies with stock-basedcompensation plans either recognize compensation expense based on the fairvalue of options granted or continue to apply the existing accounting rules anddisclose pro forma net income and earnings per share assuming the fair valuemethod had been applied.  The Company haschosen to continue applying APB Opinion No. 25, “Accounting for StockIssued to Employees” and related interpretations in accounting for itsplans.  If the compensation cost for theCompany’s stock-based compensation plans was determined based on the fair valueat the grant dates for awards under those plans, consistent with the method ofSFAS No. 123, the Company’s net income and earnings per share would havebeen reduced to the pro forma amounts indicated below for the three and ninemonths ended September 30:

 
| ** **          | ** **                                                                                                  | **Three Months Ended September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------|-------------------------------------------------------------------------------------------------------------|-------------------------------------------|------------|-------------------------------------------|------------|
| ** **          | ** **                                                                                                  | **2005**                                  | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net Income:         | As reported                                                                                                 |                                      | **$**      | **71,140**                                | ** ** | $ | 65,632 |   | **$** | **194,662** | ** ** | $ | 211,831 |   |
|                | Add: Stock-based employee compensation expense  included in reported net income, net of tax                 | ** **                                | **1,059**  | ** **                                | 677        |   | **2,991** | ** ** | 2,334 |   |
|                | Deduct: Total stock-based employee compensation  expense under fair value method for all awards, net of tax | ** **                                | **(6,885** | **)**                                     | (6,818     | ) | **(21,253** | **)** | (19,888 | ) |
|                | Pro forma                                                                                                   | ** **                                | **$**      | **65,314**                                | ** ** | $ | 59,491 |   | **$** | **176,400** | ** ** | $ | 194,277 |   |
| Earnings Per Share: |                                                                                                        |                                      | ** ** |                                      |       |   | ** ** |   |   |
| Basic               | As reported                                                                                                 |                                      | **$**      | **0.31**                                  | ** ** | $ | 0.28 |   | **$** | **0.85** | ** ** | $ | 0.90 |   |
|                | Pro forma                                                                                                   | ** **                                | **$**      | **0.28**                                  | ** ** | $ | 0.26 |   | **$** | **0.77** | ** ** | $ | 0.83 |   |
| Diluted             |                                                                                                        |                                      |       | ** **                                |       |   |   | ** ** |   |   |
|                | As reported                                                                                                 | ** **                                | **$**      | **0.30**                                  | ** ** | $ | 0.28 |   | **$** | **0.84** | ** ** | $ | 0.89 |   |
|                | Pro forma                                                                                                   | ** **                                | **$**      | **0.28**                                  | ** ** | $ | 0.25 |   | **$** | **0.76** | ** ** | $ | 0.81 |   |

 

For a description of the Company’s other criticalaccounting policies, please refer to the Company’s 2004 Annual Report on Form 10-Kas filed with the Securities and Exchange Commission.

 

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**Note 5.**          Acquisitions

** **

The Company makesacquisitions in order to expand its products, services and geographicreach.  During the nine months ended September 30,2005, the Company completed nine acquisitions for an aggregate cost ofapproximately $151,000.  Theseacquisitions were Taskarena Software Engineering GmbH (Germany), SAI Healthcare(U.S.), Synchronous Knowledge, Inc. (U.S.), M-Tag (Australia and UK),Fricke & Pirk (Germany), BASS (Korea), Areks (France, Japan,Switzerland and U.S.), Pharmetrics (U.S.) and Envision (U.S.) 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 each of these acquisitions occurred as ofJanuary 1, 2005 or 2004, the impact on the Company’s results of operationswould not have been significant. Goodwill of approximately $89,604 was recorded in connection with theseacquisitions.  For tax purposes,approximately $57,700 of goodwill is deductible in connection with theseacquisitions.

 

Additionally,during January 2005, the Company paid approximately $36,000 to acquire the50% interest in IHA.IMS Health GmbH (“IHA”) not owned by the Company.  The Company is currently evaluating thepotential purchase price allocation resulting from this payment but expectsthat a majority of the payment will be recorded as goodwill.  For the nine months ended September 30,2004, the Company consolidated the results of IHA and recorded minorityinterest expense for the 50% not owned by the Company.

 

During the ninemonths ended September 30, 2004, the Company completed five acquisitionsfor an aggregate cost of $19,757.  Theacquisitions were Source Belgium S.A. (Belgium), H.E.D.M. Bvba (Belgium),SciCon Wissenschaftliche Unternehmensberatung GmbH (Germany), Groupe PR(France) and Institute for Medical Marketing Research (Sweden) and wereaccounted for under the purchase method of accounting.  As such, the aggregate purchase price hadbeen allocated on a preliminary basis to the assets and liabilities acquiredbased on estimated fair values as of the closing date.  The Company finalized the purchase priceallocation for these acquisitions during the second quarter of 2005 which didnot have a material impact on the Company’s results of operations.  The Condensed Consolidated FinancialStatements (unaudited) include the results of these acquired companiessubsequent to the closing of the acquisitions. Had these acquisitions occurred as of January 1, 2004 or 2003, theimpact on the Company’s results of operations would not have beensignificant.  Goodwill of approximately$17,400 was recorded in connection with these acquisitions, of which none isdeductible for tax purposes.

 

**Note 6.**          Goodwill and IntangibleAssets

** **

During the first nine months of 2005, the Companyrecorded additional goodwill of $148,508 related primarily to the acquisitionof the remaining 50% of IHA in January 2005, the preliminary allocation ofpurchase price for the nine acquisitions completed during 2005 (see Note 5) andpayments on earn-out agreements for acquisitions completed prior to 2005.  During the nine months

 

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ended September 30,2004, the Company recorded additional goodwill of $17,899 related primarily tothe preliminary allocation of purchase price for the four acquisitionscompleted in the first nine months of 2004 (see Note 5) and payments onearn-out agreements on acquisitions completed prior to 2004.

 

All ofthe Company’s other acquired intangibles are subject to amortization.  Intangibleasset amortization expense was $5,038 and $13,333 during the three and ninemonths ended September 30, 2005, respectively and $2,970 and $8,703 duringthe three and nine months ended September 30, 2004, respectively.  At September 30,2005, intangible assets were primarily composed of customer relationships,databases and trade names (included in Other assets) and computer software. Thegross carrying amounts and related accumulated amortization of theseintangibles were $132,519 and $37,930, respectively, at September 30, 2005and $74,987 and $20,580, respectively, at September 30, 2004.  These intangibles are amortized over periodsranging from two to fifteen years.  As ofSeptember 30, 2005, the weighted average amortization periods of theacquired intangibles by asset class are listed in the following table:

 
| **Intangible Asset Type**         | ** ** | **Weighted Average  Amortization (Years) Period** | ** ** |
|-----------------------------------|------------|---------------------------------------------------|------------|
| Customer  Relationships           |       | 9.0                                               |       |
| Computer  Software and Algorithms |       | 6.5                                               |       |
| Databases                         |       | 4.7                                               |       |
| Trade Names                       |       | 4.3                                               |       |
| Other                             |       | 3.9                                               |       |
| Weighted average                  |       | 8.0                                               |       |

 

Based on currentestimated useful lives, amortization expense associated with intangible assetsat September 30, 2005 is estimated to be approximately $5,000 for theremaining quarter in 2005.  Annualamortization expense associated with intangible assets is estimated to be asfollows:

 

| **Year Ended  December 31,** | ** ** | **Amortization  Expense** | ** ** |
|-----------------------------------|------------|---------------------------|------------|
| 2006                              |       | 17,469                    |       |
| 2007                              |       | 15,451                    |       |
| 2008                              |       | 13,407                    |       |
| 2009                              |       | 10,502                    |       |
| 2010                              |       | 7,769                     |       |
| Thereafter                        |       | 24,955                    |       |

 

**Note 7.**          Investments in EquityInvestees

** **

On December 21, 2004, the Company and TriZetto Group, Inc. (“TriZetto”)entered into a share purchase agreement pursuant to which the Company sold toTriZetto all of the 12,142,857 shares of Common Stock, par value $0.001 pershare, of TriZetto owned by the Company for an aggregate cash consideration of$81,964. The Company received $44,550 in December 2004 and the remainingbalance of $37,414 in January 2005. The balance of $37,414 was included in Other current assets in

 

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the Company’s Consolidated Statements of Financial Position at December 31,2004.  As a result of the transaction,the Company recorded a pre-tax gain of $38,803 in the fourth quarter of 2004.

 

Priorto the sale of the TriZetto shares, the Company accounted for its investment inTriZetto under the equity method of accounting. The Company’s share of the adjusted operating results of TriZettoamounted to a gain of $662 and a loss of $607 for the three and nine monthsended September 30, 2004, respectively (net of income taxes of $(427) and$393, respectively).

 

**Note8.**  **Contingencies**

 

The Company andits subsidiaries are involved in legal and tax proceedings, claims andlitigation arising in the ordinary course of business.  Management periodically assesses the Company’sliabilities and contingencies in connection with these matters based upon thelatest information available.  For thosematters where management currently believes it is probable that the Companywill incur a loss and that the probable loss or range of loss can be reasonablyestimated, the Company has recorded reserves in the Condensed ConsolidatedFinancial Statements (Unaudited) based on its best estimates of such loss.  In other instances, because of theuncertainties related to either the probable outcome or the amount or range ofloss, management is unable to make a reasonable estimate of a liability, if any.  However, even in many instances where theCompany has recorded a reserve, the Company is unable to predict with certaintythe final outcome of the matter or whether resolution of the matter willmaterially affect the Company’s results of operations, financial position orcash flows.  As additional informationbecomes available, the Company adjusts its assessment and estimates of suchliabilities accordingly.

 

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

 

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

 

*Legacyand Related Matters*

 

In order tounderstand the Company’s exposure to the potential liabilities described below,it is important to understand the relationship between the Company and itspredecessors and other parties that, through various corporate reorganizationsand contractual commitments, have assumed varying degrees of responsibilitywith respect to such matters.

 

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

 

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

 

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

 

Also during 1998,D&B separated into two public companies by spinning off The Dun &Bradstreet Corporation (“D&B I”) and then changed its name to R.H.Donnelley (“Donnelley”).  As a result oftheir separation in 1998, Donnelley and D&B I are each jointly andseverally liable for all liabilities of D&B under the agreements effectingthe 1996 Spin-Off.

 

During 2000,D&B I separated into two public companies by spinning off The Dun &Bradstreet Corporation (“D&B II”) and then changed its name to Moody’sCorporation (“Moody’s”).  Pursuant totheir separation in 2000, Moody’s and D&B II are each jointly and severallyliable for all of D&B I’s liabilities under the agreements effecting the1996 Spin-Off.

 

*IRILitigation.*  In July 1996,Information Resources, Inc. (“IRI”) filed a complaint, subsequentlyamended in 1997, in the U.S. District Court of the Southern District of NewYork, naming as defendants a company then known as The Dun &Bradstreet Corporation and now known as Donnelley, A.C. Nielsen Company (asubsidiary of ACNielsen) and I.M.S. International, Inc. (a predecessor ofthe Company) (the “IRI Action”).  At thetime of the filing of the complaint, each of the other defendants was awholly-owned subsidiary of Donnelley. The amended complaint alleged various violations of U.S. antitrust lawsunder Sections 1 and 2 of the Sherman Antitrust Act.  IRI sought damages in excess of $650,000,which IRI asked to be trebled, as well as punitive damages in an unspecifiedamount.

 

On February 1,2005, the U.S. District Court for the Southern District of New York entered afinal judgment against IRI dismissing IRI’s claims with prejudice and on themerits.  IRI has filed a notice of appealto the U.S. Court of Appeals for the Second Circuit.  Oral arguments were held on October 18, 2005.

 

In connection withthe 1996 Spin-Off, D&B (now Donnelley), Cognizant (now NMR) and ACNielsenentered into an Indemnity and Joint Defense Agreement with respect to the IRIAction.  In 2001, ACNielsen was acquiredby VNU N.V., a publicly traded Dutch company (“VNU”).  VNU assumed ACNielsen’s obligations under theoriginal Indemnity and Joint Defense Agreement.

 

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On July 30,2004, VNU and its U.S. subsidiaries, VNU, Inc., ACNielsen, AC Nielsen (US), Inc.(“ACN (US)”), and NMR (collectively, the “VNU Parties”), Donnelley, D&B II,Moody’s and the Company entered into an Amended and Restated Indemnity andJoint Defense Agreement (the “Amended JDA”). Pursuant to the Amended JDA, any and all liabilities incurred byDonnelley, D&B II, Moody’s or IMS relating to a judgment (even if notfinal) or any settlement being entered into in the IRI Action (“IRI Liabilities”)will be jointly and severally assumed and fully discharged exclusively by theVNU Parties.  Under the Amended JDA, theVNU Parties agreed to, jointly and severally, indemnify Donnelley, D&B II,Moody’s and IMS from and against all IRI Liabilities to which they becomesubject.

 

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

 

Accordingly, andas a result of the allocations of liability described above, in the event theVNU Parties default on their obligations under the Amended JDA, the Companywill be responsible for 75% of Cognizant’s share of any liabilities arising outof the IRI Action (which, under the application of joint and several liabilitydescribed above, could be all the IRI Liabilities since the Company is asuccessor to a named defendant) and NMR will be responsible for 25% of any suchliabilities; provided that NMR’s aggregate liability for payments in respect ofthe IRI Action and the D&B Legacy Tax Matters shall not exceed$125,000.  To date, NMR has made paymentsof approximately $91,000  relating to theIRI Action and the D&B Legacy Tax Matters. Further, if the VNU Parties default on their obligations, NMR, one ofthe VNU Parties, may default on its obligation to share any IRI Liabilitieswith the Company, or at the time the IRI Liabilities arise, NMR may havepreviously made sharing payments up to its $125,000 cap.  In either such event, the Company could beliable for an amount up to all the IRI Liabilities.

 

While, asdescribed above, the IRI Action has been dismissed with prejudice on themerits, IRI has filed an appeal. Therefore, the Company is unable to predict the final outcome of the IRIAction (including the appeal), the financial condition of any of the VNUParties or the other defendants at the time of any such outcome or whether theVNU Parties or the other defendants will fulfill their obligations under theAmended JDA or other related contractual agreements.  Hence, the Company cannot estimate suchparties’ ability to pay the IRI Liabilities, if any, pursuant to the AmendedJDA or the amount of any final judgment or settlement in the IRI Action.  Nonetheless,management presently believes that the risk that the Company will incur anymaterial liabilities with respect to the IRI Action is remote and, therefore no liability in respect of this matter has beenaccrued in the

 

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Company’sfinancial statements.  If,however, IRI were to prevail in whole or in part in this action and if the VNUParties fail to fulfill their indemnification obligations, the outcome of thismatter could have a material adverse effect on the Company’s financialposition, results of operations and cash flows. On July 11, 2005, IMS announced a definitive agreement to mergewith VNU, which agreement is more fully described in Note 16.

 

*D&BLegacy and Related Tax Matters.*  During the second quarter of 2003, the IRSissued an agent’s final examination report seeking to disallow certain royaltyexpense deductions claimed by D&B on its 1995 and 1996 tax returns inconnection with a specified partnership (the “Partnership”) organized byD&B prior to the 1996 Spin-Off (the “DLA Matter”).  Also in the second quarter of 2003, theIRS issued an additional agent’s final examination report to thePartnership seeking to reallocate certain partnership income to D&B for1996.  D&B II and the Company believethat the positions taken by the IRS in the report to the Partnership areinconsistent with the IRS’s denial of the royalty expense deductions claimed byD&B because such an assertion is duplicative.  In addition, the IRS has asserted penaltiesfor the years described above based on its interpretation of applicable law.

 

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

 

D&B II, asagent for Donnelley in the D&B Legacy Tax Matters, has filed protestsrelating to the proposed assessments for the DLA Matter with the IRS Office ofAppeals.  D&B II advised that itwould attempt to resolve these matters in the administrative appeals processbefore proceeding to litigation if necessary. During the first quarter of 2004, as a result of information fromD&B II regarding a proposed mediation with the IRS to settle partnershipitems related to the DLA Matter, the Company reclassified its tax reservesrelated to the DLA Matter from long-term (Other liabilities) to short-term(Accrued income taxes).

 

In June 2004,the Company was advised that D&B II believed that it had reached a basisfor settlement with the IRS regarding the 1995 and 1996 corporate andpartnership proposed assessments (the “Preliminary Settlement Terms”).  The agreement to the Preliminary SettlementTerms was tentative and non-binding. Under the Preliminary Settlement Terms, Donnelley would retainapproximately 15% of the tax benefit associated with the transaction and pay apenalty of approximately 7% and the duplicative “inconsistent positions”described above would be eliminated.

 

In September 2004,D&B II advised the Company that the IRS had withdrawn its agreement to thePreliminary Settlement Terms.  D&B IIcontinued to negotiate with the IRS and subsequently developed a revisedproposed settlement (the “Revised Proposed Settlement”).  In October, Donnelley and D&B IIpresented the Revised Proposed Settlement to NMR and IMS and requested

 

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their consent. On October 28,2004, the Company responded to Donnelley’s and D&B II’s request for consentto the Revised Proposed Settlement by consenting to the settlement of taxliabilities with respect to the DLA Matter. However, the Revised Proposed Settlement addressed matters beyond theDLA Matter and these matters would have an adverse impact on the Company fortax years subsequent to the 1996 Spin-Off and with respect to which the Companybelieves neither Donnelley nor D&B II has the authority to negotiate orpropose a settlement.  The Companyadvised Donnelley that, to the extent the Revised Proposed Settlement addressedissues beyond the DLA Matter, the negotiation and presentation of the RevisedProposed Settlement constituted a breach of the 1996 Spin-Off agreements.

 

On October 29,2004, Donnelley and D&B II advised NMR and the Company that they weretreating the Company’s position as a withholding of consent, and that thereforeunder the 1996 Spin-Off agreements, NMR and the Company were obligated toassume management of the controversy and to indemnify Donnelley to the extentany ultimate resolution of the controversy was less favorable to Donnelley thanthat contained in the Revised Proposed Settlement.  Such excess liability was estimated toapproximate $6,800. The Company does not believe this liability is probable andhas not recorded any reserves for this item. The Company does not agree withthese assertions and believes that Donnelley breached the terms of the 1996Spin-Off agreements by negotiating and requesting consent for matters beyondits authority.

 

During the secondquarter of 2005, D&B II advised the Company that the IRS had again proposeda settlement agreement.  This proposedsettlement agreement reflected the financial terms set forth in the PreliminarySettlement Terms described above but does not address matters beyond the DLAMatter.  Donnelley and D&B IIpresented this proposed settlement agreement to NMR and IMS and requested theirconsent.  NMR and IMS consented and thesettlement agreement is now effective. In October 2005, the Company paid$34,000 to the IRS in substantial satisfaction of its share of the totalliability for the DLA Matter.   Thisamount was previously accrued by the Company.

 

In January 2004,the IRS issued an agent’s final examination report to the Partnership seekingto reallocate certain items of partnership income and expense as well asdisallow certain items of partnership expense on the Partnership’s 1997 taxreturn during which year Cognizant was a partner in the Partnership.  In January 2004, the IRS issued agent’sfinal examination reports to the Partnership and the Company seeking to reverseitems of partnership income and loss and disallow certain royalty expensedeductions claimed by the Company on its 1998 and 1999 tax returns arising fromthe Company’s participation in the Partnership. If the IRS were to ultimately prevail in the foregoing positions, theCompany’s liability (tax and interest) for 1997 would be approximately $18,900,and its aggregate liability (tax and interest) for 1998 and 1999 would beapproximately $28,500 (all net of income tax benefit for interest).  If the IRS were to take a comparable positionwith respect to all of the Company’s tax returns filed subsequent to 1999 andultimately prevail, the Company’s additional liability (tax and interest) wouldbe approximately $52,500 (net of income tax benefit for interest).

 

In addition, theIRS has asserted penalties for 1997 through 1999.  If the IRS were to prevail in its assertionof penalties and interest thereon for these years, the Company estimates thatits liability for such penalties and interest would be approximately $9,200(all net of income tax benefit).  TheCompany disputes the IRS’s position.

 

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The Company hasfiled protests relating to the proposed assessments for 1997, 1998 and 1999with the IRS Office of Appeals. Notwithstanding the fact that the Company will attempt to resolve thesematters in the administrative appeals process before proceeding to litigationif necessary, during the first and third quarters of 2005, the tax reservesrelated to 1998 through 2003, were reclassified from long-term (Otherliabilities) to short-term (Accrued income taxes) based on informal discussionswith the IRS and the possibility of assessment.

 

Inanother D&B Legacy Tax Matter, in June 2000, the IRS issued a formalnotice of adjustment regarding Donnelley’s utilization of certain capitallosses generated during 1989 and 1990. D&B I, as agent for Donnelley, advised the Company that on May 12,2000, it filed an amended tax return for the 1989 and 1990 tax periods, whichreflected $561,582 of additional tax and interest due.  In May 2000, D&B I paid the IRS$349,291 and the Company paid the IRS $212,291; NMR subsequently reimbursed theCompany approximately $41,000.  D&B Ifiled a complaint for a refund in the U.S. District Court on September 21,2000 to contest this assessment.  In June 2004,D&B II advised the Company that it had decided not to pursue the refundclaim and believed it had reached a basis for settlement with the IRS.  A definitive settlement agreement wasexecuted on December 6, 2004.  Thesettlement requires Donnelley to withdraw its complaint for a refund.  In the first quarter of 2005, Donnelleyreceived tax bills from the IRS in an aggregate amount of approximately $47,500with respect to this settlement.  TheCompany has paid the IRS approximately $10,900 in respect of these tax bills,which amount the Company believes represents its share of the total liabilityrelated to this matter.  Donnelley andD&B II have advised the Company that they believe the Company and NMR eachowe approximately an additional $7,400 (or approximately $4,900 net of taxbenefits) for this matter.  ShouldD&B II pursue arbitration, management does not believe that D&B IIwould prevail.

 

As of September 30, 2005, the Company hadreserves for these tax matters of approximately $138,000 in the aggregate,including the $34,000 paid to the IRS in October.  In the opinion of management, it is notprobable, but may be reasonably possible that the Company will have additionalliability of $9,200 in excess of the amount reserved for these matters attributableto potential penalties (and net interest thereon) for the years 1997 through1999.  In the opinion of management, theCompany’s reserves for the foregoing tax matters are adequate for the probableexposure and, accordingly, based on information currently available, managementdoes not believe that these matters will have a material adverse effect on theCompany’s consolidated financial position or results of operations but may havea material adverse effect on cash flows in the period in which any such amountsare paid.

 

In addition tothese matters, the Company and its predecessors have entered, and the Companycontinues to enter, into global tax planning initiatives in the normal courseof their businesses.  These activitiesare subject to review by applicable tax authorities.  As a result of the review process,uncertainties exist and it is possible that some of these matters could beresolved adversely to the Company.

 

*MattersBefore the Belgian Competition Service*

 

Complaints werefiled in 1998 and 1999 against the Company with the Belgian Competition Service(“BCS”) by SmithKline Beecham Pharma S.A. (“SKB”) and Source InformaticsBelgium S.A. (“Source”) alleging abuse of a dominant position on the Belgianmarket and requests were made

 

17

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for the adoptionof interim measures pending consideration of the complaints.  In October 1999 and 2000, the Chairmanof the Belgian Competition Council (“BCC”) adopted interim measures against theCompany, with which the Company has complied. In June 2004 the BCS sent information requests to the Company,Source and various third parties in respect of the SKB complaint filed in1998.  The Company and Source respondedto the requests.  In December 2004,the Company received a formal statement of objections alleging that the Companyhad abused its dominant position on the Belgian market in violation of Article 82of the EC Treaty and corresponding Belgian law. Under Belgian law, the Company has the opportunity to provide itscomments to the statement of objections, both in writing (which the Companysubmitted in February 2005) and orally. Once the investigation iscomplete, the BCC will issue a proposed decision to be adopted by the BCC, andthe reasons therefor. The Company will then be given access to the investigationfile, will be given the right to contest in writing any findings of the reportand to produce evidence of its own, and the right to present its defense at anoral hearing. The BCC will ultimately determine whether the Company violated Article 82of the EC Treaty and corresponding Belgian law and may impose fines against theCompany.

 

In a separatematter, in October 2004, the BCS notified IMS of a request for informationin connection with IMS’s acquisition of Source in April 2004.  The BCS is investigating whether suchacquisition may violate Article 82 of the EC Treaty and correspondingBelgian law.  The Company responded tothe request for information in December 2004.

 

The Companyintends to continue to vigorously defend itself in these matters before theBelgian competition authorities. Management of the Company is unable to predict at this time the finaloutcome of these matters or whether adverse resolutions thereof couldmaterially affect the Company’s results of operations, cash flows or financialposition in the period in which such adverse resolution occurs.

 

*OtherContingencies*

 

*ContingentConsideration.*  Underthe terms of the purchase agreements related to acquisitions made from 2001 to2005, the Company may be required to pay additional amounts as contingentconsideration based on the achievement of certain targets during 2003 to2007.  Substantially all of anyadditional payments will be recorded as goodwill in accordance with EITF No. 95-8,“Accounting for Contingent Consideration Paid to the Shareholders of anAcquired Enterprise in a Purchase Business Combination.”  As of September 30, 2005, approximately$4,000 was earned and paid under these contingencies.  Based on current estimates, managementexpects the remaining additional contingent payments under these agreements tototal approximately $71,000.  It isexpected that these contingent payments will be resolved within a specifiedtime period after the end of each respective calendar year from 2005 through2007.

 

*SynavantSpin-Off.*  In August 2000,the Company spun off Synavant, Inc. in a transaction qualifying as taxfree under Section 355 of the Internal Revenue Code (“IRC”).  If, contrary to expectations, the spin-off ofSynavant were not to qualify as tax free under Section 355, then, ingeneral, a corporate tax would be payable by the consolidated group, of whichthe Company is a common parent and Synavant is a member, based on thedifference between (x) the fair market value of the Synavant common stockon the date of the spin-off and (y) the adjusted basis of such Synavant

 

18

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common stock.  In addition, under the consolidated returnrules, each member of the consolidated group would be severally liable for suchtax liability.  Pursuant to the terms ofthe spin-off, the Company would be liable for the resulting corporate tax,except in certain circumstances.  In theopinion of management and based on the opinion of tax counsel, McDermott, Will &Emery, it is not probable, but may be reasonably possible, that the Companywill incur liability for this matter; therefore, the Company has not recordedreserves for this matter.  The Companyestimates that the aggregate liability in this regard would not exceed$100,000.

 

*CTSSplit-Off.*  On February 6,2003, the Company completed an exchange offer to distribute its majorityinterest in Cognizant Technology Solutions (“CTS”) in a transaction qualifyingas tax free under Section 355 of the IRC. The Company exchanged 0.309 shares of CTS class B common shares for eachshare of the Companythat was tendered.  Under terms of theoffer, the Company accepted 36,540 IMS common shares tendered in exchange forall 11,291 CTS common shares that the Company owned.  As theoffer was oversubscribed, the Company accepted tendered IMS shares on apro-rata basis in proportion to the number of shares tendered.  The proration factor was approximately 21.1%.

 

If, contrary toexpectations, the CTS distribution were not to qualify as tax free under Section 355,then, in general, a corporate tax would be payable by the Company based on thedifference between (x) the fair market value of the CTS class B commonstock at the time of the exchange offer and (y) the Company’s adjusted tax basis in suchclass B common stock.  Pursuant to thedistribution agreement entered into between the Company and CTS in connection with the distribution, CTSagreed to indemnify theCompany in the event the transaction is taxable as a result of a breachof certain representations made by CTS, subject to certain exceptions.  In the opinion of management and based on theopinion of tax counsel, McDermott, Will & Emery, it is not probable,but may be reasonably possible, that the Companywill incur liability for this matter, therefore, the Company has notrecorded reserves for this matter.  The Company estimates that the aggregate taxliability in this regard would not exceed $215,725.

 

*Other Tax Contingencies.*In addition to the tax items discussed above,the Company has tax reserves of approximately $24,000 that relate to variouspositions it has taken on tax returns filed in numerous countries over the lastseveral years.  These reserves representthe Company’s best estimate of the probable liability should the tax returnpositions be challenged by the relevant tax authorities.  While the amount is material in theaggregate, no individual item is material and no single event will have amaterial impact related to these reserves. See Note 16 for additional tax related matters.

 

*Other Litigation.*  For a description of two class actionlitigations, referred to by the Company as the Douglas Litigation and theMayberry Litigation, that the Company settled during the first quarter of 2004,please see the Company’s Annual Report on Form 10-K for the year ended December 31,2004.

 

19

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**Note 9.**          Financial Instruments

** **

*ForeignExchange Risk Management*

 

The Companytransacts business in more than 100 countries and is subject to risksassociated with changing foreign exchange rates.  The Company’s objective is to reduce earningsand cash flow volatility associated with foreign exchange rate changes.  Accordingly, the Company enters into foreigncurrency forward contracts to minimize the impact of foreign exchange movementson net income and on the value of non-functional currency assets andliabilities.

 

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

 

The impact offoreign exchange risk management activities on pre-tax income in the three andnine months ended September 30, 2005 was a net gain of $8,611 and $29,443,respectively, and net gains (losses) in the three and nine months ended September 30,2004 of $(502) and $5,089, respectively. In addition, at September 30, 2005, the Company had approximately$246,201 in foreign exchange forward contracts outstanding with variousexpiration dates through December 2005 relating to non-functional currencyassets and liabilities.  Foreign exchangeforward contracts are recorded at estimated fair value.  The estimated fair values of the forwardcontracts are based on quoted market prices. Unrealized and realized gains and losses on these contracts are notdeferred and are included in the Condensed Consolidated Statements of Income(unaudited) in Other income, net.

 

*FairValue of Financial Instruments*

 

At September 30,2005, the Company’s financial instruments included cash, cash equivalents,  restricted cash, receivables, accountspayable and long-term debt.  At September 30,2005, the fair values of cash, cash equivalents, restricted cash, receivablesand accounts payable approximated carrying values due to the short-term natureof these instruments.  At September 30,2005, the fair value of long-term debt approximated carrying value.  

 

*CreditConcentrations*

 

The Companycontinually monitors its positions with, and the credit quality of, thefinancial institutions which are counterparties to its financial instrumentsand does not anticipate non-performance by the counterparties.  The Company would not realize a material lossas of September 30, 2005 in the event of non-performance by any onecounterparty.  The Company enters intotransactions only with financial institution counterparties that have a creditrating of A or better.  In addition, theCompany limits the amount of credit exposure with any one institution.

 

The Companymaintains accounts receivable balances ($287,919****and$264,783, net of allowances, at September 30, 2005 and December 31,2004, respectively), principally from customers in the pharmaceuticalindustry.  The Company’s tradereceivables do not represent significant concentrations of credit risk at September 30,2005 due to the high quality of its customers and their dispersion across manygeographic areas.

 

20

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*Linesof Credit*

 

On April 5,2004, the Company entered into a $700,000 revolving credit facility with asyndicate of 12 banks (the “Unsecured Facility”).  The Unsecured Facility replaced the Company’slines of credit with several domestic and international banks.  On March 9, 2005, the Companyrenegotiated with the syndicate of 12 banks to amend and restate the UnsecuredFacility (the “Amended and Restated Facility”). The terms of the Amended and Restated Facility extended the maturity ofthe facility in its entirety to a term of five years, maturing March 2010,reduced the borrowing margins and increased subsidiary borrowing limits.  Total borrowings under these existing lineswere $422,799 and $476,400 at September 30, 2005 and December 31,2004, respectively, all of which were classified as long-term.  The Company defines long-term lines as thosewhere the lines are non-cancelable 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 theAmended and Restated Facility are LIBOR plus 50 basis points and can vary basedon the Company’s Debt to EBITDA ratio. The weighted average interest rates for the Company’s lines were 0.71%and 2.83% at September 30, 2005 and December 31, 2004,respectively.  In addition, the Companyis required to pay a commitment fee on any unused portion of the facilities of0.10%.

 

The Company’stotal debt of $570,478 and $626,670 at September 30, 2005 and December 31,2004, respectively, included $150,000 of private placement debt (as furtherdiscussed below), and an adjustment to the carrying amount of fair value hedgeddebt.  At September 30, 2005, theCompany had approximately $277,201 available under its existing bank creditfacilities.

 

In March and April 2002,the Company entered into interest rate swaps on a portion of its variable ratedebt portfolio.  $50,000 of these swapsmatured in March 2005.  Theremaining arrangement converts the variable interest rates to a fixed interestrate of 5.08% on a notional amount of $25,000 and matures in April 2006.  The Company accounted for the interest rateswaps as cash flow hedges and recorded any changes in fair value in OtherComprehensive Income (see Note 13).  TheCompany determines the fair values based on estimated prices quoted byfinancial institutions.  The fair valuesof these swaps were $(210) and $(1,022) as of September 30, 2005 and December 31,2004, respectively.

 

In January 2003,the Company closed a private placement transaction pursuant to which it issued$150,000 of five-year debt to several highly rated insurance companies at afixed rate of 4.60%.  The Company usedthe proceeds to pay down short-term debt. The Company also swapped $100,000 of its fixed rate debt to floatingrate based on six-month LIBOR plus a margin of approximately 107 basispoints.  The Company accounted for theseswaps as fair value hedges under the provisions of SFAS No. 133, “Accountingfor Derivative Instruments and Hedging Activities.”  The Company determined the fair values basedon estimated prices quoted by financial institutions.  The fair value of the swap  was $(2,321) and $270 as of September 30,2005 and December 31, 2004, respectively.

 

The Company’s financing arrangements provide forcertain covenants and events of default customary for similar instruments,including in the case of its main bank arrangements and the 2003 privateplacement transaction, covenants to maintain specific ratios of consolidatedtotal indebtedness to EBITDA and of EBITDA to certain fixed charges.  At September 30, 2005, the Company wasin compliance with these financial debt covenants and it anticipates that itwill remain in compliance with the covenants over the term of the borrowingarrangements.

 

21

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**Note 10.**   Pension and PostretirementBenefits

** **

**The following tables provide the Company’s expenseassociated with pension benefits that are accounted for under SFAS No. 87,for the three and nine months ended September 30, 2005. For a completedescription of the Company’s pension and postretirement benefits, refer to Note12 of the Company’s 2004 Annual Report on Form 10-K as filed with theSecurities and Exchange Commission.**

** **
| **Components of Net Periodic Benefit Cost for the** | ** ** | **Pension Benefits** | ** ** | **Other Benefits** | ** ** |
|-----------------------------------------------------|------------|----------------------|------------|--------------------|------------|
| **Three Months Ended September 30,**           | ** ** | **2005**             | ** ** | **2004**           | ** ** | **2005** | ** ** | **2004** | ** ** |
| Service cost                                        | ** ** | **$**                | **2,456**  | ** **         | $          | 2,595 |   | **$** | **8** | ** ** | $ | 17 |   |
| Interest cost                                       | ** ** | **3,591**            | ** ** | 3,370              |       | **191** | ** ** | 167 |   |
| Expected return  on plan assets                     | ** ** | **(5,466**           | **)**      | (4,721             | )          | **0** | ** ** | 0 |   |
| Amortization of  prior service cost (credit)        | ** ** | **(55**              | **)**      | (57                | )          | **(247** | **)** | (247 | ) |
| Amortization of  transition obligation              | ** ** | **(1**               | **)**      | (23                | )          | **0** | ** ** | 0 |   |
| Amortization of  net loss                           | ** ** | **771**              | ** ** | 648                |       | **119** | ** ** | 60 |   |
| Net periodic  benefit cost (income)                 | ** ** | **$**                | **1,296**  | ** **         | $          | 1,812 |   | **$** | **71** | ** ** | $ | (3 | ) |

** **
| **Components of Net Periodic Benefit Cost for the** | ** ** | **Pension  Benefits** | ** ** | **Other  Benefits** | ** ** |
|-----------------------------------------------------|------------|-----------------------|------------|---------------------|------------|
| **Nine Months Ended September 30,**            | ** ** | **2005**              | ** ** | **2004**            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Service cost                                        | ** ** | **$**                 | **7,073**  | ** **          | $          | 7,866 |   | **$** | **44** | ** ** | $ | 100 |   |
| Interest cost                                       | ** ** | **10,857**            | ** ** | 10,025              |       | **525** | ** ** | 593 |   |
| Expected return on plan  assets                     | ** ** | **(16,615**           | **)**      | (14,093             | )          | **0** | ** ** | 0 |   |
| Amortization of prior  service cost (credit)        | ** ** | **(166**              | **)**      | (170                | )          | **(741** | **)** | (741 | ) |
| Amortization of  transition obligation              | ** ** | **(3**                | **)**      | (69                 | )          | **0** | ** ** | 0 |   |
| Amortization of net loss                            | ** ** | **2,222**             | ** ** | 1,945               |       | **245** | ** ** | 376 |   |
| Net periodic benefit cost                           | ** ** | **$**                 | **3,368**  | ** **          | $          | 5,504 |   | **$** | **73** | ** ** | $ | 328 |   |

* *

**Note 11.**             Income Taxes

** **

TheCompany operates in more than 100 countries around the world and its earningsare taxed at the applicable income tax rate in each of these countries.

 

Forthe nine months ended September 30, 2005, the Company’s effective tax ratewas reduced primarily due to a favorable non-U.S. audit settlement of approximately $29,300.  For the nine months ended September 30,2005, the effective tax rate was also impacted by $39,600 of tax expenserelated to the decision to repatriate approximately $647,000 of foreignearnings back to the U.S. during 2005 under the American Jobs Creation Act of2004 (“AJCA”).  In the first quarter of2005, $67,100 of tax expense was recorded related to the AJCA of which, $24,300and $3,200 were reversed in the second and third quarters of 2005,respectively, primarily as a result of a technical correction passed byCongress to the AJCA.  For the nine months ended September 30,2004, the Company’s effective tax rate was reduced primarily due to a favorablepartial U.S. audit settlement of approximately $15,100.

 

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Whilethe Company intends to continue to seek global tax planning initiatives, therecan be no assurance that the Company will be able to successfully implementsuch initiatives to reduce or maintain its overall tax rate.

 

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

 

**Note 12.**             IMS Health CapitalStock

** **

On December 14,2004, the Board of Directors authorized a stock repurchase program to buy up to10,000 shares.  As of September 30,2005, approximately 4,374 of the 10,000 shares remained available forrepurchase under the December 2004 program.  As a result of the proposed merger with VNUN.V., the Company has suspended its current stock repurchase program (see Note16).

 

On February 10,2004, the Board of Directors authorized a stock repurchase program to buy up to10,000 shares.  This program wascompleted in January 2005 at a total cost of $232,770.

 

On April 15,2003, the Board of Directors authorized a stock repurchase program to buy up to10,000 shares.  This program wascompleted in May 2004 at a total cost of $243,520.

 

During the ninemonths ended September 30, 2005, the Company repurchased approximately6,213 shares of outstanding Common Stock at a total cost of approximately$147,945 under these programs.  Duringthe nine months ended September 30, 2004, the Company repurchasedapproximately 11,176 shares of outstanding Common Stock at a total cost of approximately$277,075, including the repurchase of 4,600 shares on January 9, 2004 pursuant to anaccelerated share repurchase program (“ASR”). As required under the ASR agreement, the Company paid an additional $942of cash in May 2004 as the final settlement amount based on an increase inour share price over the settlement period. Shares acquired through the repurchase programs described aboveare open-market purchases or privately negotiated transactions in compliancewith Securities and Exchange Commission Rule 10b-18.

 

The Companyre-issued approximately 8,535 treasury shares under option exercises forproceeds of approximately $162,310 during the nine months ended September 30,2005.  In addition, the Company paiddividends of $0.02 per share for a total of approximately $4,615 during thethree months ended September 30, 2005. For the nine months ended September 30, 2005, the Company paiddividends of $0.06 per share for a total of $13,734.

 

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**Note 13.**             Comprehensive Income

** **

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

 
| ** **                                         | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                         | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Net Income**                                     | ** ** | **$**                                      | **71,140** | ** **                                | $          | 65,632 |   | **$** | **194,662** | ** ** | $ | 211,831 |   |
| Other comprehensive income, net of taxes:          |       |                                       | ** ** |                                      |       |   | ** ** |   |   |
| Unrealized gains (losses) on:                      |       |                                       | ** ** |                                      |       |   | ** ** |   |   |
| Available-for-sale equity securities               | ** ** | **37**                                     | ** ** | (352                                      | )          | **(40** | **)** | 75 |   |
| Reclassification adjustment                        | ** ** | **—**                                 | ** ** | 312                                       |       | **—** | ** ** | 531 |   |
| Tax benefit (provision) on above                   | ** ** | **(13**                                    | **)**      | 14                                        |       | **14** | ** ** | (212 | ) |
| Change in unrealized gains (losses) on investments | ** ** | **24**                                     | ** ** | (26                                       | )          | **(26** | **)** | 394 |   |
| Foreign currency translation losses                | ** ** | **(9,868**                                 | **)**      | (573                                      | )          | **(57,758** | **)** | (7,986 | ) |
| Changes in fair value of cash flow hedges          | ** ** | **105**                                    | ** ** | 383                                       |       | **535** | ** ** | 1,359 |   |
| Total other comprehensive loss                     | ** ** | **(9,739**                                 | **)**      | (216                                      | )          | **(57,249** | **)** | (6,233 | ) |
| **Comprehensive Income**                           | ** ** | **$**                                      | **61,401** | ** **                                | $          | 65,416 |   | **$** | **137,413** | ** ** | $ | 205,598 |   |

 

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

 

During the fourth quarter of 2004, the Company recorded $36,890 ofSeverance, impairment and other charges as a component of operatingincome.  As a result of leveraging priorinvestments in technology and process improvements, the Company committed to aplan to eliminate selected positions involved primarily in production anddevelopment.  The plan resulted in acharge for one-time termination benefits relating to a headcount reduction ofapproximately 465 employees located primarily in Europe and the U.S.  These severance benefits werecalculated pursuant to the terms of established employee protection plans, inaccordance with local statutory minimum requirements or individual employeecontracts, as applicable.

 

All of the 2004fourth quarter charge will be settled in cash. The Company currently expectsthat all termination actions under this plan will be completed by the end of2005.

 

| ** **                         | ** ** | **Severance Related  Charges** | ** ** |
|------------------------------------|------------|--------------------------------|------------|
| Charge at December 31, 2004   |       | $                              | 36,890     |   |
| 2004 utilization                   |       | (452                           | )          |
| 2005 utilization                   |       | (18,268                        | )          |
| Balance at September 30, 2005 |       | $                              | 18,170     |   |

 

The Company currently expects that a substantial portion of the cashoutlays relating to the 2004 fourth quarter charge will be applied against theremaining September 30, 2005 balance during the remainder of 2005 and2006.

 

During the three months ended March 31, 2003, the Company recorded$37,220 of Severance, impairment and other charges as a component of operatingincome.  These charges were designed tofurther streamline operations and increase productivity through a worldwide reductionin headcount of approximately 80 employees and charges related to impairedcontracts and assets.  Theseverance benefits were calculated pursuant to the terms of establishedemployee protection plans, in accordance with local statutory minimumrequirements or individual employee contracts, as applicable.  Thecontract-related charges were for impaired data supply and data processingcontacts primarily in the Company’s U.S. and Japanese operations.  The asset write-down portion of the 2003charge related to the Company’s decision to abandon certain products and assuch, certain computer software primarily in the U.S., Japan and Europe waswritten-down to its net realizable value.

 

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| ** **                         | ** ** | **Severance  Related  Charges** | ** ** | **Contract  Related  Charges** | ** ** | **Asset  Write-  Downs** | ** ** | **Total** | ** ** |
|------------------------------------|------------|---------------------------------|------------|--------------------------------|------------|--------------------------|------------|-----------|------------|
| Charge at June 30, 2003       |       | $                               | 9,958      |                           | $          | 22,307                   |       | $         | 4,955      |   | $ | 37,220 |   |
| 2003 utilization                   |       | (6,197                          | )          | (7,047                         | )          | (6,634                   | )          | (19,878   | )          |
| 2004 utilization                   |       | (1,637                          | )          | (3,614                         | )          | —                   |       | (5,251    | )          |
| 2005 utilization                   |       | (378                            | )          | (4,775                         | )          | —                   |       | (5,153    | )          |
| Adjustments                        |       | (1,746                          | )          | 67                             |       | 1,679                    |       | —    |       |
| Balance at September 30, 2005 |       | $                               | —     |                           | $          | 6,938                    |       | $         | —     |   | $ | 6,938 |   |

 

The cash portion of the first quarter 2003 charge amounted to $30,586, ofwhich the Company paid approximately $5,153 during the first nine months of 2005. The remaining accrual of $6,938 at September 30, 2005 relates to lease obligations.

 

The Companyexpects that cash outlays will be applied against the $6,938 balance remainingof the first quarter 2003 charge at September 30, 2005 as follows:

 
| **Year Ended  December 31,** | ** ** | **Cash Outlays** | ** ** |
|-----------------------------------|------------|------------------|------------|
| 2005                              |       | $                | 2,043      |   |
| 2006                              |       | 2,504            |       |
| 2007                              |       | 713              |       |
| 2008                              |       | 258              |       |
| 2009                              |       | 258              |       |
| Thereafter                        |       | 1,162            |       |
| Total                             |       | $                | 6,938      |   |

 

During 2003, the Company reversed approximately $1,750 of severancerelated charges originally included in the first quarter 2003 charge due to theCompany’s refinement of estimates.  TheCompany also recorded additional charges during 2003 of approximately $1,700related primarily to a software impairment.

 

During the fourthquarter of 2001, the Company completed the assessment of its CompetitiveFitness Program (the “Program”).  Thisprogram was designed to streamline operations, increase productivity, andimprove 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.

 

| ** **                         | ** ** | **Severance  Related  Charges** | ** ** | **Contract  Related  Charges** | ** ** | **Asset  Write-  Downs** | ** ** | **Total** | ** ** |
|------------------------------------|------------|---------------------------------|------------|--------------------------------|------------|--------------------------|------------|-----------|------------|
| Charge at December 31, 2001   |       | $                               | 39,652     |                           | $          | 26,324                   |       | $         | 28,640     |   | $ | 94,616 |   |
| 2001 utilization                   |       | (3,692                          | )          | (6,663                         | )          | (27,887                  | )          | (38,242   | )          |
| 2002 utilization                   |       | (26,277                         | )          | (9,819                         | )          | (1,474                   | )          | (37,570   | )          |
| 2003 utilization                   |       | (6,384                          | )          | (2,720                         | )          | (241                     | )          | (9,345    | )          |
| 2004 utilization                   |       | (455                            | )          | (1,232                         | )          | —                   |       | (1,687    | )          |
| 2005 utilization                   |       | (197                            | )          | (1,418                         | )          | —                   |       | (1,615    | )          |
| Adjustments                        |       | (688                            | )          | (274                           | )          | 962                      |       | —    |       |
| Balance at September 30, 2005 |       | $                               | 1,959      |                           | $          | 4,198                    |       | $         | —     |   | $ | 6,157 |   |

 

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The Companyexpects that cash outlays will be applied against the  $6,157 balance remaining in the fourth quarter2001 program at September 30, 2005 as follows:

 

| **Year Ended  December 31,** | ** ** | **Cash Outlays** | ** ** |
|-----------------------------------|------------|------------------|------------|
| 2005                              |       | $                | 601        |   |
| 2006                              |       | 2,216            |       |
| 2007                              |       | 1,835            |       |
| 2008                              |       | 262              |       |
| 2009                              |       | 262              |       |
| Thereafter                        |       | 981              |       |
| Total                             |       | $                | 6,157      |   |

 

The Company expects that future results will benefit from the 2001 and2003 restructuring charges to the extent of the contract-related charges andasset write-downs primarily through 2007. The Company’s severance actions in the 2001 and 2003 programs related toa shifting of resources around the Company. The benefits from the 2004 severance actions will be partially offset byheadcount additions in selected locations. The benefits will be realized primarily in Operating costs and Sellingand administrative expense, with a partial year of benefit realized in 2005 anda full year of benefit realized in 2006. For the 2001 and 2003 charges, the statement of income lines that willbe impacted in future periods are Operating costs for the contract-relatedcharges and Depreciation and amortization related to the assetwrite-downs.  However, the Company doesnot expect a material impact on future cash flows due to the fact that it isstill contractually obligated to continue to make payments under impairedcontracts.

 

**Note 15.**             Operations byBusiness Segment

** **

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

 

The Companymaintains regional geographic management to facilitate local execution of itsglobal strategies.  However, the Companymaintains global leaders for the majority of its critical business processes;and the most significant performance evaluations and resource allocations madeby the Company’s chief operating decision makers are made on a globalbasis.  As such, the Company hasconcluded that it maintains one operating and reportable segment.

 

26

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**GeographicFinancial Information:**

 

The following represents selected geographicinformation for the regions in which we operate for the three and nine monthsended September 30, 2005 and 2004:

 
| ** **                                      | ** ** | **Americas  (1)** | ** ** | **Europe  (2)** | ** ** | **Asia Pacific  (3)** | ** ** | **Corporate &  Other** | ** ** | **Total  IMS** | ** ** |
|-------------------------------------------------|------------|-------------------|------------|-----------------|------------|-----------------------|------------|---------------------------------|------------|----------------|------------|
| **Three months ended September 30, 2005:** |       |              |       |            |       |                  |       |                            |       |           |       |
| Operating Revenue  (4)                          |       | $                 | 198,733    |            | $          | 172,097               |       | $                               | 61,966     |           | —     |   | $ | 432,796 |   |
| Operating Income (5)                            |       | $                 | 74,863     |            | $          | 24,278                |       | $                               | 26,550     |           | $          | (23,460 | ) | $ | 102,231 |   |
| **Nine months ended September 30, 2005:**  | ** ** | ** **        | ** ** | ** **      | ** ** | ** **            | ** ** | ** **                      | ** ** | ** **     | ** ** |
| Operating Revenue (4)                           |       | $                 | 565,012    |            | $          | 534,154               |       | $                               | 177,896    |           | —     |   | $ | 1,277,062 |   |
| Operating Income (5)                            |       | $                 | 211,765    |            | $          | 72,820                |       | $                               | 80,078     |           | $          | (62,263 | ) | $ | 302,400 |   |
| **Three months ended September 30, 2004:** |       |              |       |            |       |                  |       |                            |       |           |       |
| Operating Revenue  (4)                          |       | $                 | 175,707    |            | $          | 156,590               |       | $                               | 51,874     |           | —     |   | $ | 384,171 |   |
| Operating Income (5)                            |       | $                 | 70,093     |            | $          | 20,250                |       | $                               | 26,885     |           | $          | (14,337 | ) | $ | 102,891 |   |
| **Nine months ended September 30, 2004:**  | ** ** | ** **        | ** ** | ** **      | ** ** | ** **            | ** ** | ** **                      | ** ** | ** **     | ** ** |
| Operating Revenue (4)                           |       | $                 | 515,705    |            | $          | 455,337               |       | $                               | 154,288    |           | —     |   | $ | 1,125,330 |   |
| Operating Income (5)                            |       | $                 | 202,596    |            | $          | 66,305                |       | $                               | 81,130     |           | $          | (48,440 | ) | $ | 301,591 |   |

 

----

**Notes toGeographic Financial Information:**

 

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

 

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

 

*(3)**             Asia Pacific includesJapan, Australia and other countries in the Asia Pacific region.*

 

*(4)**             Operating revenuerelates to external customers and is primarily based on the location of thecustomer.  The operating revenue for thegeographic regions includes the impact of foreign exchange in convertingresults into U.S. Dollars.*

 

*(5)**             Operating income forthe three geographic regions does not reflect the allocation of certainexpenses that are maintained in Corporate and Other and as such, is not a truemeasure of the respective regions’ profitability.   The operating income for the geographicsegments includes the impact of foreign exchange in converting results intoU.S. Dollars.*

 

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

 
| ** **                             | ** ** | **Three Months Ended  September 30,** | ** **  | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------|------------|--------------------------------------------|-------------|-------------------------------------------|------------|
| ** **                             | ** ** | **2005**                                   | ** **  | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Sales Force  Effectiveness             | ** ** | **$**                                      | **207,967** |                                      | $          | 193,917 | ** ** | **$** | **615,366** |   | $ | 563,590 |   |
| Portfolio  Optimization                | ** ** | **$**                                      | **124,132** |                                      | $          | 109,716 | ** ** | **$** | **371,961** |   | $ | 335,540 |   |
| Launch and Brand  Management and Other | ** ** | **$**                                      | **100,697** |                                      | $          | 80,538 | ** ** | **$** | **289,735** |   | $ | 226,200 |   |
| Total Operating  Revenue               | ** ** | **$**                                      | **432,796** |                                      | $          | 384,171 | ** ** | **$** | **1,277,062** |   | $ | 1,125,330 |   |

 

**Note 16.**   VNU Merger

** **

On July 11, 2005, the Company announced adefinitive agreement to merge with VNU N.V. (“VNU”), a global information andmedia company based in Haarlem, The Netherlands.  VNU is a leader and has recognized brands inmarketing information (ACNielsen), media measurement and

 

27

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information(Nielsen Media Research) and business information (publications and tradeshows).  Under the terms of theagreement, the Company’s shareholders will receive $11.25 in cash and 0.60415VNU shares for each IMS share.  TheCompany expects the merger to be completed in the first quarter of 2006,subject to the approval of shareholders of the Company and VNU, regulatory approvalsand other customary conditions.

 

Inconnection with the proposed merger with VNU, the Company has incurred mergercosts of $15,874 through September 30, 2005, primarily for professionalfees.  The Company currently expectstotal merger-related costs to range between $40,000 and $45,000, primarily forinvestment banking and professional fees.

 

TheCompany may also reorganize certain of its subsidiaries provided certainconditions to the proposed merger have been satisfied.  As a result of these reorganizations, theCompany may incur tax-related charges of approximately $55,000 to $60,000 priorto the effective date of the merger.  Asof September 30, 2005 the Company has not recorded any tax-related chargesin connection with any potential reorganizations since the Company does nothave any intention to undertake these reorganizations unless the conditions ofthe proposed merger with VNU are satisfied.

 

Further, the Company has Employment andChange-in-Control Agreements (“CIC”) with certain of its executives thatprovide for severance and other benefits if, following a change in control ofIMS, the executive’s employment is adversely affected.  In connection with the proposed merger withVNU and the CIC provisions under these agreements, the Company funded $105,404in a Rabbi Trust on September 23, 2005. These amounts will be payable to the executives only in the event theproposed merger with VNU is completed and the executive suffers an adversechange in his or her employment status. As such, the funds in the Rabbi Trust are reflected as restricted cashon our Condensed Consolidated Statement of Financial Position (unaudited) as ofSeptember 30, 2005.

 

28

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

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

 

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

 

***Our Business***

*** ***

IMSHealth Incorporated (“we”, “us” or “our”) is a leading global provider ofinformation solutions to the pharmaceutical and healthcare industries. Our revenues are derived primarily from the sale of a broad line of marketinformation, sales management and consulting services to the pharmaceutical andhealthcare industries.  Our information products are developed to meetclient needs by using data secured from a worldwide network of suppliers in themarkets where operations exist.  Key information products include:

 

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

 

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

 

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

 

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

 

We operate in more than 100 countries.  We alsoown a venture capital unit, Enterprise Associates, LLC (“Enterprises”), whichis focused on investments in emerging businesses.  Until December 21, 2004, we also ownedan approximately 25% equity interest in the TriZetto Group, Inc.  “TriZetto” (See Note 7 to the CondensedConsolidated Financial Statements (Unaudited)).

 

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

 

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

 

**OperatingResults**

 

*Reclassifications. *Certain prior-year amounts have been reclassified to conform to the2005 presentation.

 

*Referencesto constant dollar results. *Wereport results in U.S. Dollars but we do business on a global basis.  Exchange rate fluctuations affect the rate atwhich we translate foreign revenues and expenses into U.S. Dollars and haveimportant effects on our results.  Inorder to illustrate these

 

29

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effects, thediscussion of our business in this report sometimes describes the magnitude ofchanges in constant dollar terms.  Webelieve this information facilitates a comparative view of business growth.  In the first nine months of 2005, the U.S.Dollar was generally weaker against other currencies compared to the first ninemonths of 2004, so growth at constant dollar exchange rates was lower thangrowth at actual currency exchange rates. See “How Exchange Rates Affect Our Results” below and the discussion of “MarketRisk” in the Management Discussion and Analysis in our annual report on Form 10-Kfor the year ended December 31, 2004 for a more complete discussionregarding the impact of foreign currency translation on our business.

 

**Summaryof Operating Results**

 
| ** **                           | ** ** | ** **                                 | ** **  | **% Variance** | ** ** |
|--------------------------------------|------------|--------------------------------------------|-------------|----------------|------------|
| ** **                           | ** ** | **Three months ended  September 30,** | ** **  | **2005**       | ** ** |
| ** **                           | ** ** | **2005**                                   | ** **  | **2004**       | ** ** | **vs. 2004** | ** ** |
| Operating  revenue                   | ** ** | **$**                                      | **432,796** |           | $          | 384,171 |   | 12.7 | % |
| Operating costs                      | ** ** | **199,654**                                |        | 165,575        |       | 20.6 | % |
| Selling and  administrative expenses | ** ** | **96,098**                                 |        | 92,350         |       | 4.1 | % |
| Depreciation and  amortization       | ** ** | **26,339**                                 |        | 23,355         |       | 12.8 | % |
| Merger costs                         | ** ** | **8,474**                                  |        | —         |       | N/A |   |
| Operating income                     | ** ** | **$**                                      | **102,231** |           | $          | 102,891 |   | (0.6 | )% |

 
| ** **                           | ** ** | ** **                                | ** **    | **% Variance** | ** ** |
|--------------------------------------|------------|-------------------------------------------|---------------|----------------|------------|
| ** **                           | ** ** | **Nine months ended  September 30,** | ** **    | **2005**       | ** ** |
| ** **                           | ** ** | **2005**                                  | ** **    | **2004**       | ** ** | **vs. 2004** | ** ** |
| Operating  revenue                   | ** ** | **$**                                     | **1,277,062** |           | $          | 1,125,330 |   | 13.5 | % |
| Operating costs                      | ** ** | **572,514**                               |          | 481,485        |       | 18.9 | % |
| Selling and  administrative expenses | ** ** | **309,616**                               |          | 274,876        |       | 12.6 | % |
| Depreciation and  amortization       | ** ** | **76,658**                                |          | 67,378         |       | 13.8 | % |
| Merger costs                         | ** ** | **15,874**                                |          | —         |       | N/A |   |
| Operating income                     | ** ** | **$**                                     | **302,400**   |           | $          | 301,591 |   | 0.3 | % |

 

***Operating Income***

 

Our operatingincome for the third quarter of 2005 decreased 0.6% to $102,231 from $102,891in the third quarter of 2004.  The changewas due to the increase in our operating revenue, offset by increases in ouroperating costs and selling and administrative expenses driven primarily bycosts associated with acquisitions, increased cost of data, consulting andservices capabilities and costs associated with the proposed merger with VNUN.V. (See Note 16 to our Condensed Consolidated Financial Statements(Unaudited) for a description of the proposed merger with VNU).  Our operating income decreased 1.5% inconstant dollar terms.  Absent the costsassociated with the proposed merger, operating income would have increased 7.6%at reported rates and 6.8% at constant dollar terms.  Our operating income for the first ninemonths of 2005 increased 0.3% to $302,400 from $301,591 for the first ninemonths of 2004.  The change was primarilydue to the increase in our operating revenue, partially offset by increases inour operating costs and selling and administrative expenses driven primarily bycosts associated with acquisitions, consulting and services capabilities,

 

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increased cost ofdata, and costs associated with the proposed merger with VNU.  Our operating income decreased 1.1% inconstant dollar terms.  Absent the costsassociated with the merger, operating income would have increased 5.5% atreported rates and 4.2% at constant dollar terms.

 

***OperatingRevenue***

 

Revenue in 2004reflects a reclassification of consulting and services revenue into the otherthree business lines to conform to the 2005 presentation.

 

Our operatingrevenue for the third quarter of 2005 grew 12.7% to $432,796 from $384,171 inthe third quarter of 2004. On a constant dollar basis our operating revenuegrowth was 12.0%.  Acquisitions madeduring 2004 and 2005 contributed 5.4 percentage points of reported operatingrevenue and constant dollar revenue growth. Our operating revenue for the first nine months of 2005 grew 13.5% to$1,277,062 from $1,125,330 for the first nine months of 2004. On a constantdollar basis our operating revenue growth was 11.4%.  Acquisitions made during 2004 and 2005contributed 4.2 percentage points of reported operating revenue growth and 4.0percentage points of constant dollar revenue growth.  The increase in our operating revenueresulted from growth in revenue in all three of our business lines, togetherwith the effect of currency translation. On a constant dollar basis, all business lines grew.

 

**Summaryof Operating Revenue**

 
| ** **                             | ** ** | ** **                                | ** **    | **% Variance**   | ** ** |
|----------------------------------------|------------|-------------------------------------------|---------------|------------------|------------|
| ** **                             | ** ** | **Three months ended September 30,** | ** **    | **2005 vs 2004** | ** ** |
| ** **                             | ** ** | **2005**                                  | ** **    | **2004**         | ** ** | **Reported Rates** | ** ** | **Constant Dollar** | ** ** |
| Sales Force  Effectiveness             | ** ** | **$**                                     | **207,967**   |             | $          | 193,917 |   | 7.2 | % | 6.4 | % |
| Portfolio  Optimization                | ** ** | **$**                                     | **124,132**   |             | $          | 109,716 |   | 13.1 | % | 12.5 | % |
| Launch and Brand  Management and Other | ** ** | **$**                                     | **100,697**   |             | $          | 80,538 |   | 25.0 | % | 24.8 | % |
| Operating  Revenue                     | ** ** | **$**                                     | **432,796**   |             | $          | 384,171 |   | 12.7 | % | 12.0 | % |
|                                   | ** ** | ** **                                | ** **    |             |       |   |   |   |   |   |   |
| ** **                             | ** ** | ** **                                | ** **    | **% Variance**   | ** ** |
| ** **                             | ** ** | **Nine months ended September 30,**  | ** **    | **2005 vs 2004** | ** ** |
| ** **                             | ** ** | **2005**                                  | ** **    | **2004**         | ** ** | **Reported Rates** | ** ** | **Constant Dollar** | ** ** |
| Sales Force  Effectiveness             | ** ** | **$**                                     | **615,366**   |             | $          | 563,590 |   | 9.2 | % | 7.1 | % |
| Portfolio  Optimization                | ** ** | **$**                                     | **371,961**   |             | $          | 335,540 |   | 10.9 | % | 8.8 | % |
| Launch and Brand  Management and Other | ** ** | **$**                                     | **289,735**   |             | $          | 226,200 |   | 28.1 | % | 25.9 | % |
| Operating  Revenue                     | ** ** | **$**                                     | **1,277,062** |             | $          | 1,125,330 |   | 13.5 | % | 11.4 | % |

 

•                  *Sales Force Effectiveness* revenue grew primarily due to DDDdata offerings in Japan, Sales and Account Management consulting engagements inEurope and Japan, Xponent and the suite of new long-term care products in theUnited States, and steady growth in all of the other regions.

 

•                  *Portfolio Optimization* revenue grew primarily due to thedemand for our assessments of market strategies aimed at generic threats, aswell as continued demand for MIDAS Quantum global information offerings.

 

31

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•                  *Launch and Brand Management and other product lines* revenuegrew primarily due to the increasing demand for health economics and outcomesresearch analytics and our broader capabilities in promotion evaluationglobally.

 

Consulting andservices revenue, as included in the business lines above, was $67,285 in thethird quarter of 2005, up 64.0% from $41,039 in the third quarter of 2004 (up63.5% on a constant-dollar basis). Consulting and services revenue was $184,351 for the first nine monthsof 2005, up 52.8% from $120,674 for the first nine months of 2004 (up 50.4% ona constant-dollar basis).  Approximately two-thirds of the consulting andservices revenue growth for the third quarter and first nine months of 2005 wasattributable to acquisitions completed during 2004 and the first nine months of2005.

 

***OperatingCosts***

 

Our operatingcosts include data processing costs, the costs of data collection andproduction, and costs attributable to personnel involved in production, datamanagement and the processing and delivery of our consulting and servicesofferings.  Our operating costs grew20.6% to $199,654 in the third quarter of 2005, from $165,575 in the thirdquarter of 2004.  The increase in ouroperating costs was primarily due to operating costs of acquired businesses,increased cost of data, and increases in costs related to consulting andservices.  The effect of foreign currencytranslation increased our operating costs by approximately $1,000 for the thirdquarter of 2005.  Excluding the effect ofthe change in foreign currency translation, our operating costs grew 20.1% inthe third quarter of 2005 as compared to the third quarter of 2004.  Our operating costs grew 18.9% to $572,514for the first nine months of 2005, from $481,485 for the first nine months of2004.  The increase in our operatingcosts was primarily due to**operatingcosts of acquired businesses, increased cost of data, increases in costsrelated to consulting and services, and foreign currency translation.  The effect of foreign currency translationincreased our operating costs by approximately $10,800 for the first ninemonths of 2005.  Excluding the effect ofthe change in foreign currency translation, our operating costs grew 16.7% inthe first nine months of 2005 as compared to the first nine months of 2004.

 

Our operatingcosts generally have increased at a rate greater than operating revenues in eachof the last three full fiscal years. This increase has been due to higher data costs to support revenuegrowth and acquisitions**.**

 

***Sellingand Administrative Expenses***

 

Our selling andadministrative expenses consist primarily of the costs attributable to sales,marketing, and administration, including human resources, legal, management andfinance.  Our selling and administrativeexpenses grew 4.1% in the third quarter of 2005, to $96,098 from $92,350 in thethird quarter of 2004.  Our selling andadministrative expenses grew 12.6% in the first nine months of 2005, to$309,616 from $274,876 for the first nine months of 2004.

 

•                  *Foreign Currency Translation*: The effect of foreign currencytranslation increased our selling and administrative expenses by approximately$1,000 for the third quarter of 2005 as compared to the third quarter of2004.  The effect of foreign currencytranslation increased our selling and administrative expenses by approximately$7,000 for the first nine

 

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months of 2005 ascompared to the first nine months of 2004. Excluding the effect of the changein foreign currency translation, our selling and administrative expenses grew3.2% and 9.9% in the third quarter and first nine months of 2005 as compared tothe third quarter and first nine months of 2004, respectively.

 

•                  *Sales and Marketing*: Sales and marketing expense increasedby approximately $4,000 and $7,000 in the third quarter and first nine monthsof 2005, compared to the third quarter and first nine months of 2004,respectively, to support revenue growth.

 

•                  *Consulting*: Consulting and services expenses increased by approximately $3,000 and$9,000 in the third quarter and first nine months of 2005, compared to thethird quarter and first nine months of 2004, respectively, to support thegrowth in this revenue stream.

 

•                  *Software Development*:  Software Development costs decreasedapproximately $4,000 and $3,000 in the third quarter and first nine months of2005, compared to the third quarter and first nine months of 2004,respectively, due to a reduction in new product development.

 

***Depreciationand Amortization***

 

Our depreciationand amortization charges increased 12.8% to $26,339 in the third quarter of2005, from $23,355 in the third quarter of 2004, and 13.8% to $76,658 for thefirst nine months of 2005, from $67,378 for the first nine months of 2004,primarily due to computer software amortization associated with new productswhich increased by approximately $1,500 and $6,000, respectively, andamortization of intangibles related to recent acquisitions, which increased byapproximately $2,500 and $5,500 in the third quarter and first nine months of2005 compared to the third quarter and first nine months of 2004, respectively.

 

***MergerCosts***

 

During the thirdquarter and first nine months of 2005, we incurred $8,474 and $15,874 of costs,respectively, in connection with the proposed merger with VNU.  See Note 16 to our Condensed ConsolidatedFinancial Statements (Unaudited) for a description of the proposed merger withVNU.

 

***Trendsin our Operating Margins***

 

Our operatingmargin for the third quarter of 2005 was 23.6%, as compared to 26.8% in thethird quarter of 2004.  Our operatingmargin for the first nine months of 2005 was 23.7% as compared to 26.8% in thefirst nine months of 2004.  During thethird quarter and first nine months of 2005, we incurred $8,474 and $15,874,respectively, of costs in connection with the proposed merger with VNU.  If these costs had not been incurred, ouroperating margin for the third quarter and first nine months of 2005 would havebeen 25.6% and 24.9%, respectively.  Thedecrease in our operating margins for the third quarter and first nine monthsof 2005 (excluding the merger costs) is primarily due to continuing investmentsin new products and consulting and services capabilities, increased cost ofdata, and operating costs in Japan.

 

Recentacquisitions also have had an adverse effect on our operating margins due tothe fact that some of the businesses we have acquired have historicallyexperienced lower operating margins than

 

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ours, and therevenue and cost synergies that we incorporate into our business plans are notall immediately realized.  We alsoexperience higher intangible amortization in the first year after completing anacquisition and may incur additional costs in integrating the acquiredoperations into ours, both of which tend to increase our costs and thusdecrease our operating margins in the initial year of each completedacquisition.

 

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

 

***Non-OperatingIncome***

 

Our non-operatingincome improved to $3,215 in the third quarter of 2005 from a net expense of$4,040 in the third quarter of 2004.  Ournon-operating income grew to $15,082 for the first nine months of 2005 from $201for the first nine months of 2004.  Theincrease in our non-operating income was primarily due to the followingfactors:

 

•                  *Interest Expense, net*: Net interest expense was $4,692 and$13,097 for the third quarter and first nine months of 2005, respectively,compared with $2,917 and $8,285 for the third quarter and first nine months of2004, respectively, primarily due to higher debt levels through August andhigher interest rates.

 

•                  *Gains from Investments, net*: We had gains from investmentsof $252 during the third quarter of 2005, primarily as a result of gains withinthe Enterprise portfolio partially offset by fees and write-offs ofinvestments.  Gains from investments of$2,188 in the third quarter of 2004 were primarily from the sale of investmentswithin the Enterprise portfolio.  We hadgains from investments of $2,624 during the first nine months of 2005,primarily as a result of a divestiture of an interest we had in a Germancompany.  Gains from investments of$10,715 during the first nine months of 2004 were primarily from the sale ofinvestments within the Enterprise portfolio.

 

•                  *Other Income, net*: Other income, net, increased by $10,997and $27,724 in the third quarter and first nine months of 2005,respectively.  The increase was primarilydue to net foreign exchange hedge gains of $8,611 and $29,443 in the thirdquarter and first nine months of 2005, respectively, compared with net foreignexchange hedge gains/(losses) of $(502) and $5,089 in the third quarter andfirst nine months of 2004, respectively.

 

***Taxes***

 

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

 

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Congress to the AJCA. For the nine months ended September 30, 2004, our effective taxrate was reduced primarily due to a favorable partial U.S. audit settlement ofapproximately $15,100.

 

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

 

## **Operating Results by Geographic Region**

 

The following represents selected geographicinformation for the regions in which we operate for the three and nine monthsended September 30, 2005 and 2004:

 
| ** **                                       | ** ** | **Americas  (1)** | ** ** | **Europe  (2)** | ** ** | **Asia Pacific  (3)** | ** ** | **Corporate &  Other** | ** ** | **Total  IMS** | ** ** |
|--------------------------------------------------|------------|-------------------|------------|-----------------|------------|-----------------------|------------|---------------------------------|------------|----------------|------------|
| **Three  months ended September 30, 2005:** |       |              |       |            |       |                  |       |                            |       |           |       |
| Operating Revenue  (4)                           |       | $                 | 198,733    |            | $          | 172,097               |       | $                               | 61,966     |           | —     |   | $ | 432,796 |   |
| Operating Income (5)                             |       | $                 | 74,863     |            | $          | 24,278                |       | $                               | 26,550     |           | $          | (23,460 | ) | $ | 102,231 |   |
| **Nine  months ended September 30, 2005:**  | ** ** | ** **        | ** ** | ** **      | ** ** | ** **            | ** ** | ** **                      | ** ** | ** **     | ** ** |
| Operating Revenue (4)                            |       | $                 | 565,012    |            | $          | 534,154               |       | $                               | 177,896    |           | —     |   | $ | 1,277,062 |   |
| Operating Income (5)                             |       | $                 | 211,765    |            | $          | 72,820                |       | $                               | 80,078     |           | $          | (62,263 | ) | $ | 302,400 |   |
| **Three  months ended September 30, 2004:** |       |              |       |            |       |                  |       |                            |       |           |       |
| Operating Revenue  (4)                           |       | $                 | 175,707    |            | $          | 156,590               |       | $                               | 51,874     |           | —     |   | $ | 384,171 |   |
| Operating Income (5)                             |       | $                 | 70,093     |            | $          | 20,250                |       | $                               | 26,885     |           | $          | (14,337 | ) | $ | 102,891 |   |
| **Nine  months ended September 30, 2004:**  | ** ** | ** **        | ** ** | ** **      | ** ** | ** **            | ** ** | ** **                      | ** ** | ** **     | ** ** |
| Operating Revenue (4)                            |       | $                 | 515,705    |            | $          | 455,337               |       | $                               | 154,288    |           | —     |   | $ | 1,125,330 |   |
| Operating Income (5)                             |       | $                 | 202,596    |            | $          | 66,305                |       | $                               | 81,130     |           | $          | (48,440 | ) | $ | 301,591 |   |

 

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**Notes toGeographic Financial Information:**

 

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

 

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

 

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

 

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

 

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

 

***Americas Region***

 

Operatingrevenue growth in the Americas region was 13.1% in the third quarter of 2005,compared to the third quarter of 2004, and 9.6% in the first nine months of2005, compared to the first nine months of 2004.  The growth for the third quarter and firstnine months was primarily due to

 

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strong performance inconsulting and services within the launch and brand management and otherbusiness lines and continued overall strength of the sales force effectivenessbusiness line.

 

Operatingincome in the Americas region grew 6.8% in the third quarter of 2005, comparedto the third quarter of 2004, and 4.5% in the first nine months of 2005,compared to the first nine months of 2004. The operating income growth for the third quarter and first nine monthsof 2005 reflects revenue growth in the region, partially offset by increasedcost of data and investment in consulting capabilities.

 

***EuropeRegion***

 

Operatingrevenue growth in the Europe region was 9.9% in the third quarter of 2005,compared to the third quarter of 2004, and 17.3% for the first nine months of2005, compared to the first nine months of 2004.  The growth in the third quarter and firstnine months of 2005 was primarily due to strong growth in our consulting andservices related to all of our business lines, in addition to growth in brandmanagement and portfolio optimization data sales.

 

Operatingincome in the Europe region increased by 19.9% in the third quarter of 2005,compared to the third quarter of 2004, and 9.8% in the first nine months of2005, compared to the first nine months of 2004.  The growth in the third quarter and firstnine months of 2005 was primarily driven by operating revenue growth partiallyoffset by increased cost of data and investments in the consulting business.

 

***Asia Pacific Region***

 

Operating revenue in the Asia Pacific region increased19.5% in the third quarter of 2005, compared to the third quarter of 2004, and15.3% in the first nine months of 2005 compared to the first nine months of2004.  The growth in the third quarter andfirst nine months of 2005 was due to continued strong growth in the region,including solid growth in Japan, and foreign exchange.

 

Operating income in the Asia Pacific region decreased by1.2% in the third quarter of 2005, compared to the third quarter of 2004,primarily due to revenue growth in Japan offset by increased investments in newproducts and data costs in Japan. Operating income in the Asia Pacific region decreased by 1.3% in thefirst nine months of 2005, compared to the first nine months of 2004, primarilydue to increased investments in new products and data costs in Japan.

 

### **How Exchange Rates AffectOur Results**

### ** **

IMS operates globally, deriving a significant portionof its operating income from non-U.S. operations.  As a result, fluctuations in the value offoreign currencies relative to the U.S. dollar may increase the volatility ofU.S. dollar operating results.  IMSenters into forward foreign currency contracts to partially offset the effectof currency fluctuations.  In 2005,foreign currency translation increased U.S. dollar revenue growth byapproximately 0.7 percentage points in the third quarter of 2005 and 2.1percentage points in the first nine months of 2005, while impact on operatingincome

 

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growth was an approximateincrease of 0.8 percentage points for the third quarter of 2005 and 1.3percentage points in the first nine months of 2005.

 

Non-U.S. monetaryassets are maintained in currencies other than the U.S. dollar, principally theEuro, the Japanese Yen, the British Pound, the Swiss Franc, and the AustralianDollar.  Where monetary assets are heldin the functional currency of the local entity, changes in the value of thesecurrencies relative to the U.S. dollar are charged or credited to Cumulativetranslation adjustment in the Consolidated Statements of Shareholders’Equity.  The effect of exchange ratechanges during 2005 decreased the U.S. dollar amount of Cash and cashequivalents by $13,670.

 

***Liquidity and Capital Resources***

*** ***

Our cash and cashequivalents decreased $198,704during the first nine months of 2005 to $246,199at September 30, 2005 compared to $444,903at December 31, 2004.  The decreasereflects cash provided by operating activities of $75,773 offset by cash used in investing activitiesof $211,785 and financing activities of $49,022.  Including thechange in short-term marketable securities, which is included in cash used ininvesting activities, our cash and cash equivalents and short-term marketablesecurities decreased to $246,199at September 30, 2005 compared to $459,956at December 31, 2004, a decrease of $213,757.

 

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

 

•                  development of software to be used inour new products and capital expenditures to expand and upgrade our informationtechnology capabilities and to build or acquire facilities to house our growingbusiness (we currently expect to spend approximately $105,000 to $115,000during 2005 for software development and capital expenditures);

 

•                  acquisitions;

 

•                  dividends to our shareholders (weexpect 2005 dividends will be $0.08 per share or approximately $18,000);

 

•                  payments for taxrelated matters, including the D&B Legacy Tax Matters discussed further inNote 8 to our Condensed Consolidated Financial Statements (Unaudited).  Payments for certain of the D&B LegacyTax Matters could be up to approximately $72,800 prior to December 31,2005; and

 

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

 

Netcash provided by operating activities amounted to $75,773 for the nine months ended September 30, 2005, adecrease in cash provided of $198,708 overthe comparable period in 2004.  Thedecrease relates primarily to the funding of $105,404 to a Rabbi Trust inconjunction with the proposed VNU merger (see Note 16 to our CondensedConsolidated Financial Statements

 

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(Unaudited)), accountsreceivable, prepaid expenses, accounts payable and severance, impairment andother charges during the nine months ended September 30, 2005.

 

Netcash used in investing activities amounted to $211,785 for the nine months ended September 30, 2005, an increasein cash used of $137,266 overthe comparable period in 2004.  Theincrease during the first nine months of 2005 relates primarily to the factthat we made payments of $191,840 foracquisitions during the first nine months of 2005, compared to payments madefor acquisitions of $23,078 duringthe comparable period in 2004.  This waspartially offset by $37,414 of proceeds from the sale of our investment inTriZetto (see Note 7 of the Condensed Consolidated Financial Statements(unaudited)).

 

Netcash used in financing activities amounted to $49,022 for the nine months ended September 30, 2005, a decreaseof $90,649 over the comparableperiod in 2004.  This decrease in cashused was primarily due to a decrease of $129,130 in purchases of our stockduring the first nine months of 2005 compared to the first nine months of2004.  Refer to the Stock RepurchasePrograms section for further information on our variance between the firstquarters of 2005 and 2004.  The decreasein cash used was also due to an increase of $81,387 in proceeds from theexercise of stock options during the first nine months of 2005 compared to thefirst nine months of 2004.  These amountswere partially offset by a $124,403 decrease in net borrowings during the firstnine months of 2005 compared to the first nine months of 2004.

 

Our financingactivities include cash dividends we paid of $0.02 per share quarterly, whichamounted to $13,734 and $14,204 during the first nine months of 2005 and 2004,respectively.  The payments and level ofcash dividends made by us are reviewed quarterly and are subject to thediscretion of our Board of Directors. Any future dividends, other than the $0.02 per share dividend for thefirst four quarters of 2005, which were declared by our Board of Directors inFebruary, April, July and October 2005, will be based on, andaffected by, a number of factors, including our operating results and financialrequirements.

 

As discussed underthe Taxes section, we will repatriate approximately $647,000 of foreignearnings back to the U.S. during 2005 under the AJCA.  In the third quarter of 2005, approximately90% of the Company’s repatriation was executed, with the balance expected to becompleted by the end of 2005.  Foreignearnings repatriated under the AJCA have increased liquidity in the U.S., witha corresponding reduction in liquidity at our foreign subsidiaries.  Certain foreign subsidiaries had to borrow inorder to repatriate their earnings to the U.S. We expect our significant positive foreign cash flows will be sufficientto repay any foreign debt and replenish foreign cash balances over time.  We utilize a variety of tax planning andfinancing strategies in an effort to ensure that our worldwide cash isavailable in the locations in which it is needed.

 

**Taxand other Contingencies**

 

We are exposed to certainknown tax and other contingencies that are material to our investors.  Thefacts and circumstances surrounding these contingencies and a discussion oftheir effect on us are included in Note 8 to our Condensed ConsolidatedFinancial Statements (Unaudited) for the period

 

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endedSeptember 30, 2005.  We do not knowof any material tax or other contingencies, other than those described in Note8 to our Condensed Consolidated Financial Statements (Unaudited).

 

These contingencies may have a material effecton our liquidity, capital resources or results of operations. Although we have established reserves for D&B Legacy Tax Matters inaccordance with SFAS No. 5, “Accounting for Contingencies”, the actualliability may exceed the amount of the reserve. We have not established any reserves in respect of the othercontingencies.  In addition, even where our reserves are adequate, theincurrence of any of these liabilities may have a material effect on ourliquidity and the amount of cash available to us for other purposes.

 

Management believes that we have made appropriatearrangements in respect of the future effect on us of these known tax andother contingencies.  Management also believes that the amount of cashavailable to 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 operationsand invest in the growth of our business.

 

**Stock Repurchase Programs**

 

On December 14,2004, the Board of Directors authorized a stock repurchase program to buy up to10,000 shares.  As of September 30,2005, approximately 4,374 of the 10,000 shares remained available forrepurchase under the December 2004 program.  As a result of the proposed merger with VNUN.V., the Company has suspended its current stock repurchase program (see Note16 to our Condensed Consolidated Financial Statements (unaudited)).

 

On February 10,2004, the Board of Directors authorized a stock repurchase program to buy up to10,000 shares.  This program wascompleted in January 2005 at a total cost of $232,770.

 

On April 15,2003, the Board of Directors authorized a stock repurchase program to buy up to10,000 shares.  This program wascompleted in May 2004 at a total cost of $243,520.

 

During the ninemonths ended September 30, 2005, the Company repurchased approximately6,213 shares of outstanding Common Stock at a total cost of approximately$147,945 under these programs.  Duringthe nine months ended September 30, 2004, the Company repurchasedapproximately 11,176 shares of outstanding Common Stock at a total cost ofapproximately $277,075, including the repurchase of 4,600 shares on January 9,2004 pursuant toan accelerated share repurchase program (“ASR”).  As required under the ASR agreement, theCompany paid an additional $942 of cash in May 2004 as the finalsettlement amount based on an increase in our share price over the settlementperiod.  Shares acquired throughthe repurchase programs described above are open-market purchases or privatelynegotiated transactions in compliance with Securities and Exchange Commission Rule 10b-18.

 

The Companyre-issued approximately 8,535 treasury shares under option exercises forproceeds of approximately $162,310 during the nine months ended September 30,2005.  In addition, the Company paiddividends of $0.02 per share for a total of approximately $4,615 during thethree months ended September 30, 2005. For the nine months ended September 30, 2005, the Company paiddividends of $0.06 per share for a total of $13,734.

 

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**Debt**

** **

In recent years, we have increased debt levels tobalance appropriately the objective of generating an attractive cost of capitalwith providing us a reasonable amount of financial flexibility.  At September 30, 2005, our debt totaled$570,478, and management does not believe that this level of debt poses amaterial risk to us due to the following factors:

 

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

 

•                  at September 30,2005, we had $246,199 in worldwide cash and cash equivalents;

 

•                  at September 30,2005, we had $277,201 of unused debt capacity under our existing bank creditfacilities; and

 

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

 

On April 5,2004, we entered into a $700,000 revolving credit facility with a syndicate of12 banks (the “Unsecured Facility”).  TheUnsecured Facility replaced our lines of credit with several domestic andinternational banks.  On March 9,2005, we renegotiated with the syndicate of 12 banks to amend and restate theUnsecured Facility (the “Amended and Restated Facility”).  The terms of the Amended and RestatedFacility extended the maturity of the facility in its entirety to a term offive years, maturing March 2010, reduced the borrowing margins andincreased subsidiary borrowing limits. Total borrowings under these existing lines were $422,799 and $476,400at September 30, 2005 and December 31, 2004, respectively, all ofwhich were classified as long-term.  Wedefine long-term lines as those where the lines are non-cancelable for morethan 365 days from the balance sheet date by the financial institutions exceptfor specified, objectively measurable violations of the provisions of theagreement.  In general, rates forborrowing under the Amended and Restated Facility are LIBOR plus 50 basispoints and can vary based on our Debt to EBITDA ratio.  The weighted average interest rates for ourlines were 0.71% and 2.83% at September 30, 2005 and December 31,2004, respectively.  In addition, we arerequired to pay a commitment fee on any unused portion of the facilities of0.10%.

 

Our total debt of$570,478 and $626,670 at September 30, 2005 and December 31, 2004,respectively, included $150,000 of private placement debt (as further discussedbelow), and an adjustment to the carrying amount of fair value hedgeddebt.  At September 30, 2005, we hadapproximately $277,201 available under our existing bank credit facilities.

 

In March and April 2002,we entered into interest rate swaps on a portion of our variable rate debtportfolio.  $50,000 of these swapsmatured in March 2005.  Theremaining arrangement converts the variable interest rates to a fixed interestrate of 5.08% on a notional amount of $25,000 and matures in April 2006.  We accounted for the interest rate swaps ascash flow hedges and recorded any changes in fair value in Other ComprehensiveIncome (see Note 13 to our Condensed Consolidated Financial Statements(Unaudited)).  We determine the fairvalues based on estimated prices quoted by

 

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financial institutions.  The fairvalues of these swaps were $(210) and $(1,022) as of September 30, 2005and December 31, 2004, respectively.

 

In January 2003,we closed a private placement transaction pursuant to which we issued $150,000of five-year debt to several highly rated insurance companies at a fixed rateof 4.60%.  We used the proceeds to paydown short-term debt.  We also swapped$100,000 of our fixed rate debt to floating rate based on six-month LIBOR plusa margin of approximately 107 basis points. We accounted for these swaps as fair value hedges under the provisionsof SFAS No. 133, “Accounting for Derivative Instruments and HedgingActivities.”  We determined the fairvalues based on estimated prices quoted by financial institutions.  The fair value of the swap was $(2,321) and$270 as of September 30, 2005 and December 31, 2004, respectively.

 

Our financingarrangements provide for certain covenants and events of default customary forsimilar instruments, including in the case of our main bank arrangements andthe 2003 private placement transaction, covenants to maintain specific ratiosof consolidated total indebtedness to EBITDA and of EBITDA to certain fixedcharges.  At September 30, 2005, wewere in compliance with these financial debt covenants and we anticipate thatwe will remain in compliance with the covenants over the term of the borrowingarrangements.

 

**Severance, Impairment and OtherCharges**

 

During the fourth quarter of 2004, the Company recorded $36,890 ofSeverance, impairment and other charges as a component of operatingincome.  As a result of leveraging priorinvestments in technology and process improvements, the Company committed to aplan to eliminate selected positions involved primarily in production anddevelopment.  The plan resulted in acharge for one-time termination benefits relating to a headcount reduction ofapproximately 465 employees located primarily in Europe and the U.S.  These severance benefits werecalculated pursuant to the terms of established employee protection plans, inaccordance with local statutory minimum requirements or individual employeecontracts, as applicable.

 

All of the 2004fourth quarter charge will be settled in cash. The Company currently expects that all termination actions under thisplan will be completed by the end of 2005.

 

| ** **                          | ** ** | **Severance Related  Charges** | ** ** |
|-------------------------------------|------------|--------------------------------|------------|
| Charge at December 31,  2004   |       | $                              | 36,890     |   |
| 2004 utilization                    |       | (452                           | )          |
| 2005 utilization                    |       | (18,268                        | )          |
| Balance at September 30,  2005 |       | $                              | 18,170     |   |

 

The Company currently expects that a substantial portion of the cashoutlays relating to the 2004 fourth quarter charge will be applied against theremaining September 30, 2005 balance during the remainder of 2005 and2006.

 

The benefits from the 2004 severance actions will be partially offset byheadcount additions in selected locations. The benefits will be realized primarily in Operating costs and Sellingand

 

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

 

***RecentlyIssued Accounting Standards***

 

In December 2004,the FASB issued Statement of Financial Accounting Standard SFAS No. 123R, “Share-BasedPayment”, which is a revision of SFAS No. 123, “Accounting for Stock BasedCompensation”, and supersedes APB Opinion No. 25, “Accounting for StockIssued to Employees.”  SFAS No. 123Restablishes standards for the accounting of transactions in which an entityexchanges its equity instruments for goods or services, or incurs liabilitiesin exchange for goods or services that are based on the fair value of theentity’s equity instruments or that may be settled by the issuance of equityinstruments.  SFAS No. 123R focusesprimarily on accounting for transactions in which an entity obtains employeeservices in share-based payment transactions. SFAS No. 123R requires a public entity to measure the cost of allemployee share-based payments, including grants of employee stock options,using a fair-value based method, such as the Black-Scholes option valuationmodel at the date of the grant.  Theresulting cost is then recognized as compensation cost in the ConsolidatedStatements of Income over the service period during which an employee isrequired to provide service in exchange for the award (usually the vestingperiod).  In April 2005, theSecurities and Exchange Commission deferred the effective date of SFAS No. 123Rto the first annual reporting period beginning after June 15, 2005.  The Company is currently evaluating theimpact of SFAS No. 123R; however, based upon outstanding as well as futureanticipated stock-based award grants through December 31, 2006, theCompany expects that the adoption under the modified prospective method willhave approximately an $0.11 to $0.12 fully diluted earnings per share impact onits consolidated results of operations for the year ending December 31,2006.  For a description of the Company’smodel and assumptions used to calculate the fair value of the Company’s stock-basedawards, refer to Note 13 of the Company’s 2004 Annual Report on Form 10-Kas filed with the Securities and Exchange Commission.

 

In December 2004, the FASB issued SFAS No. 153,“Exchanges of Nonmonetary Assets-An Amendment of APB Opinion No. 29.”  SFAS No. 153 amends APB No. 29, “Accountingfor Nonmonetary Transactions,” to eliminate the exception from fair valuemeasurement for nonmonetary exchanges of similar productive assets and replacesit with a general exception for exchanges of nonmonetary assets that do nothave commercial substance.  SFAS No. 153specifies that a nonmonetary exchange has commercial substance if the futurecash flows of the entity are expected to change significantly as a result ofthe exchange.  SFAS No. 153 iseffective for nonmonetary exchanges occurring in fiscal periods beginning afterJune 15, 2005.  The adoption of SFASNo. 153 is not expected to have a material impact on the Company’sfinancial position, results of operations or cash flows for the year ending December 31,2006.

 

In June 2005, the FASB issued SFAS No. 154, “AccountingChanges and Error Corrections.”  SFAS No. 154will require entities that voluntarily make a change in accounting principle toapply that change retrospectively to prior periods’ financial statements,unless it would be impracticable to do so. SFAS No. 154 supersedes APB No. 20, “Accounting Changes,”which previously required most voluntary changes in accounting principle to berecognized by including in the current period’s net income the cumulativeeffect of changing to the new accounting principle. SFAS No. 154 also

 

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makes a distinctionbetween “retrospective application” of an accounting principle and the “restatement”of financial statements to reflect the correction of an error.  Further, under SFAS No. 154, if anentity changes its method of depreciation, amortization, or depletion forlong-lived, non-financial assets, the change must be accounted for as a changein accounting estimate.  Under APB No. 20,such a change would have been reported as a change in accountingprinciple.  SFAS No. 154 applies toaccounting changes and error corrections that are made in fiscal yearsbeginning after December 15, 2005. The adoption of SFAS No. 154 is not expected to have a materialimpact on the Company’s financial position, results of operations or cash flowsfor the year ending December 31, 2006.

 

***Forward-LookingStatements***

*** ***

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

 

•                  risks associatedwith operating on a global basis, including fluctuations in the value offoreign currencies relative to the U.S. dollar, and the ability to successfullyhedge such risks – we derived approximately 64% of our operating revenue in2004 from non-U.S. operations;

 

•                  to the extent weseek growth through acquisitions, alliances or joint ventures, the ability toidentify, consummate and integrate acquisitions, alliances and joint ventureson satisfactory terms;

 

•                  our ability todevelop new or advanced technologies, including sophisticated informationsystems, software and other technology used to deliver our products andservices and to do so on a timely and cost-effective basis, and the exposure tothe risk of obsolescence or incompatibility of these technologies with those ofour customers or suppliers;

 

•                  our ability tomaintain and defend our intellectual property rights in jurisdictions aroundthe world;

 

•                  our ability tosuccessfully maintain historic effective tax rates;

 

•                  competition,particularly in the markets for pharmaceutical information;

 

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•                  regulatory,legislative and enforcement initiatives to which we are or may become subject,relating particularly to tax and to patient privacy and the collection anddissemination of data and specifically, the use of anonymized patient-specificinformation, which we anticipate to be an increasingly important tool in thedesign, development and marketing of pharmaceuticals;

 

•                  regulatory,legislative and enforcement initiatives to which our customers in thepharmaceutical industry are or may become subject restricting the prices thatmay be charged for subscription or other pharmaceutical products or the mannerin which such products may be marketed or sold;

 

•                  deterioration ineconomic conditions, particularly in the pharmaceutical, healthcare, or otherindustries in which our customers operate;

 

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

 

•                  the impositionof additional restrictions on our use of or access to data, or the refusal bydata suppliers to provide data to us;

 

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

 

•                  to the extentunforeseen cash needs arise, the ability to obtain financing on favorableterms;

 

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

 

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

 

Consequently, allthe forward-looking statements contained in this Quarterly Report on Form 10-Qare qualified by the information contained herein, including, but not limitedto, the information contained under this heading and our Condensed ConsolidatedFinancial Statements (Unaudited) and notes thereto for the nine months ended September 30,2005 and by the material set forth under the headings “Business” and “FactorsThat May Affect Future Results” in our Annual Report on Form 10-K forthe year ended December 31, 2004. We are under no obligation to publicly release any revision to anyforward-looking statement contained or incorporated herein to reflect anyfuture events or occurrences.

 

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**Item3.  Quantitative and QualitativeDisclosures About Market Risk**

 

Information inresponse to this Item is set forth in “Note 9. Financial Instruments” in theNotes to the Condensed Consolidated Financial Statements (Unaudited) on pages 19through 20 hereof.

 

**Item 4.Controls and Procedures**

 

(a)          Evaluation of Disclosure Controls and Procedures

 

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

 

The Company’s Chief Executive Officer and****Chief Financial Officer have evaluated theeffectiveness of the Company’s disclosure controls and procedures (as such termis defined in Rules 13a-14c and 15d-14c under the Exchange Act) as of September 30,2005 (the “Evaluation Date”).  Based onsuch evaluation, such officers have concluded that, as of the Evaluation Date,the Company’s disclosure controls and procedures are effective in alerting themon a timely basis to material information relating to the Company (includingits consolidated subsidiaries) required to be included in the Company’speriodic filings under the Exchange Act.

 

(b)         Changes in Internal Control over Financial Reporting

 

There have been no changesin the Company’s internal control over financial reporting that occurred duringthe period covered by this report that have materially affected, or arereasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

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**PART II.  OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

Informationin response to this Item is incorporated by reference to the information setforth in “Note 8. Contingencies” in the Notes to the Condensed ConsolidatedFinancial Statements (Unaudited) on pages 12 through 19 hereof.

 

**Item 6. Exhibits**

 

(a)          Exhibits:

 
| **Exhibit  Number** | ** ** | **Description of Exhibits**                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.1                 |       | First Amendment  dated as of August 26, 2005 to the Note Purchase Agreement dated as of January 15,  2003, among IMS Health Incorporated and each purchaser party thereto relating  to the issuance and sale of $150,000,000 aggregate principal amount of 4.60%  Senior Notes due 2008                                                                                                                                                                                                        |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.1                |       | First Amendment  executed on July 18, 2005 and effective as of June 17, 2005 to the  Amended and Restated Credit Agreement among IMS Health Incorporated as a  Borrower, IMS AG as a Borrower, IMS Japan K.K. as a Borrower, The Lenders  Parties Thereto, Wachovia Bank, National Association, as Administrative  Agent, Barclays Bank PLC and ABN Amro Bank N.V., as Co-Syndication Agents, and  Suntrust Bank and Fortis Capital Corp, as Co-Documentation Agents dated April 5,  2004 |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 31.1                |       | CEO 302  Certification pursuant to Rule 13a-14(a)/15d-14(a)                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 31.2                |       | CFO 302  Certification pursuant to Rule 13a-14(a)/15d-14(a)                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 32.1                |       | Joint CEO/CFO Certification Required Under Section 906  of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                           |

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
|                         | IMS Health  Incorporated              |
|------------------------------|---------------------------------------|
|                         |                                  |
|                         |                                  |
| By:                          |                                  |  /s/ Nancy  E. Cooper |   |
| Date: November 2,  2005 |  Nancy E.  Cooper                |
|                         |  Senior  Vice President and      |
|                         |  Chief  Financial Officer        |
|                         |  (principal  financial officer)  |
|                         |                                  |
|                         |                                  |
|                         |  /s/ Leslye  G. Katz             |   |
| Date: November 2,  2005 |  Leslye G.  Katz                 |
|                         |  Vice  President, Controller     |
|                         |  (principal  accounting officer) |
|                              |                                       |  |  |

 

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# **EXHIBIT INDEX**

 
| **Exhibit  Number** | ** ** | **Description of Exhibits**                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.1                 |       | First Amendment  dated as of August 26, 2005 to the Note Purchase Agreement dated as of January 15,  2003, among IMS Health Incorporated and each purchaser party thereto relating  to the issuance and sale of $150,000,000 aggregate principal amount of 4.60%  Senior Notes due 2008                                                                                                                                                                                                        |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.1                |       | First Amendment  executed on July 18, 2005 and effective as of June 17, 2005 to the  Amended and Restated Credit Agreement among IMS Health Incorporated as a  Borrower, IMS AG as a Borrower, IMS Japan K.K. as a Borrower, The Lenders  Parties Thereto, Wachovia Bank, National Association, as Administrative  Agent, Barclays Bank PLC and ABN Amro Bank N.V., as Co-Syndication Agents,  and Suntrust Bank and Fortis Capital Corp, as Co-Documentation Agents dated April 5,  2004 |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 31.1                |       | CEO 302  Certification pursuant to Rule 13a-14(a)/15d-14(a)                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 31.2                |       | CFO 302  Certification pursuant to Rule 13a-14(a)/15d-14(a)                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 32.1                |       | Joint CEO/CFO  Certification Required Under Section 906 of the Sarbanes-Oxley Act of  2002                                                                                                                                                                                                                                                                                                                                                                                                          |

 

48

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