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Article by DailyStocks_admin    (01-29-08 03:52 AM)

The Daily Magic Formula Stock for 01/27/2008 is Getty Images Inc. According to the Magic Formula Investing Web Site, the ebit yield is 13% and the EBIT ROIC is >100 %.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


Dailystocks.com makes NO RECOMMENDATIONS whatsoever, and provides this for informational purpose only.

BUSINESS OVERVIEW

Overview of the Business

Getty Images, Inc. was founded in 1995 and is a leading creator and distributor of visual content and one of the first places creative professionals turn to discover, license and manage imagery. The company’s award-winning photographers and imagery help customers create inspiring work which appears every day in the world’s most influential newspapers, magazines, advertising campaigns, films, television programs, books and websites. Headquartered in Seattle, Washington and serving customers in more than 100 countries, Getty Images believes in the power of imagery to drive positive change, educate, inform, and entertain. We deliver our products digitally via the Internet and CDs. Our imagery is licensed through company-owned offices, a global network of delegates, who act as sales agents where we don’t have wholly-owned offices, and distributors. We pioneered the solution to aggregate and distribute visual content and, since 1995, have brought many of the visual content industry’s leading imagery onto gettyimages.com and in 2006 added istockphoto.com.



We provide high quality, relevant imagery to: creative professionals at advertising agencies, graphic design firms, corporations, film and broadcasting companies; editorial customers involved in newspaper, magazine, book, CD and online publishing; and corporate marketing departments and other business customers. By aggregating the content of our various leading imagery collections on the Internet and partnering with other imagery providers, we offer a comprehensive and user-friendly solution for our customers’ imagery needs. Our goal is to be the leading image solutions provider in every major market, offering visual communications professionals imagery and related services at multiple price points on multiple platforms.



Products and Services



We offer our customers a variety of visual content, including creative or “stock” imagery, stock footage, editorial imagery (news, sports, entertainment and archival imagery), illustrations and related services as described below:



CREATIVE OR “STOCK” IMAGERY

We supply creative, still images that cover a wide variety of contemporary subjects including lifestyle, business, science, health and beauty, sports, transportation and travel. Imagery is offered to customers through our creative photography collections ( The Image Bank, Photodisc, Digital Vision, Allsport Concepts, Iconica, Lifesize, MedioImages, Photonica, Photographer’s Choice, Reportage, Retrofile, Riser, Stockbyte, Stockdisc, Stone, Stone+ , Taxi and Taxi Japan ) as well as through image partners such as National Geographic and Time Life Pictures. As of December 31, 2006, we offered imagery through over 100 creative collections on our website www.gettyimages.com. In February 2006, we acquired iStockphoto, Inc., a leading distributor of photographs taken by amateur and hobbyist photographers. This imagery represents a new and growing imagery category and is distributed through a separate website www.istockphoto.com. It has long been our stated strategy to offer products at all price points and on all platforms. www.istockphoto.com represents an initial step toward owning and operating multiple websites and brands in order to address customer needs in the marketplace.



In May 2007, we acquired Publisher’s Toolbox, Inc. (dba Punchstock), a leading aggregator/distributor of stock photography, which has been especially successful with design and communication firms. We intend to maintain the Punchstock brand, and www.punchstock.com will offer customers an additional site where they can find professional-quality, model-released imagery with simple, straightforward licensing. The site is designed to attract customers who have budget constraints as a primary licensing consideration. We believe customers looking for promotional offers will likely be attracted to this site.



Punchstock currently distributes relevant content from a variety of sources. We intend to continue to offer content obtained from a wide-variety of sources, since having access to imagery from a number of providers has been an integral part of the value proposition for current Punchstock customers.



EDITORIAL IMAGERY

We cover major world events in order to supply news, sports, and entertainment photographs to customers who are reporting on these subjects. Editorial imagery also includes extensive archival image collections containing iconic and historic imagery. Editorial images are provided through Getty Images Editorial collections as well as the collections of image partners including Agence France-Presse.

In April 2007, we acquired MediaVast, Inc., licensing primarily under the brand name WireImage, which we believe will enable us to further grow our entertainment and celebrity imagery business by providing customers more choices of imagery and richer and more accessible entertainment content.



We plan to maintain www.wireimage.com and the MediaVast, Inc. brands, including FilmMagic and Contour. This represents an additional component of our multi-site strategy. WireImage has built a reputation for depth and breadth of entertainment coverage, a growing reputation in sports coverage, and offers innovative products like podcasts, audio and video.



FOOTAGE

We offer footage (moving imagery) to customers engaged in producing commercial motion pictures, television advertisements and programming, web-based advertisements, trade show and promotional videos, documentaries and other footage-based media. Our collections include contemporary and archival footage covering a broad range of topics. These products are supplied through our footage collections ( Archive Films, Image Bank Film, Digital Vision and Photodisc ), as well as the collections of image partners including Universal Studios, dick clark productions, Discovery FilmSource and AP Archive. As of December 31, 2006, we offered footage clips through 24 footage collections on our gettyimages.com website. In addition, through our istockphoto.com website we supply a collection of moving imagery created by hobbyist and amateur filmmakers.



OTHER

We also offer related products and services such as assignment services, media management services and our imagenet product. In assignment services we handle all aspects of a custom photography project for a customer, such as photographing executives for an annual report, producing product shots for a brochure or documenting a news or sports event. We use a global network of experienced photographers on staff or on contract for assignment photography projects. Media management provides a hosted service that allows customers to manage their portfolio of digital assets, including images and other marketing materials. Image.net is a product that allows companies to distribute their promotional materials within a secure environment.



Customers



We serve a variety of customers in four main categories: agencies (advertising and design agencies), corporate customers (in-house advertising groups and corporate marketing departments), publishing and media companies, and a variety of production companies, as described in further detail below. Due to our large number of customers and their dispersion across many geographic areas, we are not dependent on a single customer or a few customers, the loss of which would have a material adverse effect on us.



AGENCIES

Advertising and design agencies need to access imagery as part of their everyday working lives. These customers have a commercial or advertising message they are trying to convey and, consequently, are typically looking for a specific conceptual image. Image relevance and accessibility are important factors in the customer’s decision to license imagery.



CORPORATE CUSTOMERS

We offer a variety of imagery to corporate marketing departments and other business customers. These customers require imagery for a wide range of business communication materials for internal and external use, including advertisements, annual reports, brochures, employee communications, newsletters, presentations and company websites.



PUBLISHING AND MEDIA COMPANIES

We supply images to professionals who use imagery in the publication of newspapers, books and magazines, both online and in traditional media. In addition to creative imagery, these customers seek imagery that covers major political, news, social and sporting events ranging from contemporary photographs to imagery from the beginning of photography in the early nineteenth century. These customers are looking for imagery that illustrates the story they are covering and often require that the editorial imagery be delivered during or immediately following the event.



PRODUCTION COMPANIES

We supply footage to production companies that are creating feature films, television shows, broadcast advertisements (television and Internet), as well as other video materials. These customers use footage clips as a replacement for custom shooting in a variety of applications.

Sources of Availability of Content



The content we provide to our customers is created by a substantial number of contributors (photographers, filmmakers and illustrators). We do not rely on any single or small group of contributors to meet our content needs; general categories of contributors are as follows:



CREATIVE IMAGERY

We have creative research and/or imagery teams in London, Los Angeles, New York, Paris, Seattle, Sydney, Tokyo and Beijing that analyze customer requests and buying behavior and perform research in key markets in order to target, source and produce images. We have contractual relationships with contributing photographers, including highly respected, internationally renowned professional photographers representing a variety of styles, specialties and backgrounds. In many cases, we provide on-site art direction for our photographers, working with them on location around the world. We also represent imagery from a number of image partners and have a small staff of in-house creative photographers. In 2006, we accepted approximately 150,000 new images from contracted and in-house photographers into our creative photography collections, plus approximately 400,000 images from partner collections, bringing our total creative imagery collection on gettyimages.com to over 1.8 million images. All new images accepted into our collections are digitized, edited, assigned keywords, as necessary, and posted on our website where they are available for search, selection, license and download 24 hours a day, seven days a week.



FOOTAGE

We maintain and license a growing library of commercially relevant cinematography covering a broad range of contemporary and archival subjects. Our footage collections represent imagery from hundreds of filmmakers, film producers and image partners, and each footage clip is cataloged for quick access and retrieval in film, videotape and digital formats.



MICROPAYMENT IMAGERY AND FOOTAGE

In February 2006, we purchased iStockphoto, Inc., the pioneer of the micropayment stock image marketplace business model, through which customers can license single images from $1 to $15 based on the size of the digital file. iStockphoto operates the leading micropayment website, and as of December 31, 2006, offered over 1.2 million images to more than one million members worldwide (receiving applications from more than 30,000 contributing artists for approval). In September 2006, iStockphoto began accepting video submissions, and the collection has quickly grown to over 12,000 videos. At the time of our acquisition, iStockphoto operated an English language website, and we added localized websites in French, German and Spanish during 2006.



EDITORIAL IMAGERY

For editorial content, availability of imagery is time-critical. To this end, we have production teams in London, New York and Sydney through which photographers may submit imagery at any time. Editorial content is produced by staff photographers as well as contributing photographers and other imagery providers with whom we have contractual relationships. We receive thousands of digital editorial images per week from our photographers around the world and make these available through our website and through a wire service. By using digital technology, we are able to make new images available online within minutes of photographer transmission from major news, sports and entertainment events. In addition, we have made important archival imagery available on our website, which is also of interest to editorial customers. We identify upcoming events that will generate demand for particular archival images, and we actively market the availability of those images to our editorial customers. We also offer in-depth research services for our customers’ more extensive editorial projects.



Marketing, Sales, and Distribution



MARKETING

We reach our customers through diverse marketing channels including our websites (online marketing), direct mail and e-mail (direct marketing), and events and interactive campaigns (experience marketing). Marketing activities aim to build awareness for the Getty Images and iStockphoto brands and drive revenue by promoting the latest imagery and related services available on gettyimages.com and istockphoto.com. We strive to provide relevant communications to our international customers by producing localized marketing materials, including local language and locally applicable content, where appropriate.

Website Marketing Our websites, www.gettyimages.com and www.istockphoto.com, act as marketing tools, in addition to sales tools. For example, we often invite customers to view our latest creative imagery in themed “galleries” on gettyimages.com. We also provide behind-the-scenes insights from photographers on both of our websites and regularly feature imagery from the latest breaking stories in the editorial section of gettyimages.com.



Direct Marketing Direct mail and e-mail are part of our integrated marketing campaigns aimed at gaining new customers through prospecting and at promoting our latest imagery and related services to our existing customer base.



Experience Marketing We highlight the most creative and innovative usages of imagery through interactive campaigns, blogs and on-line sales promotions. In addition, we organize events in leading creative cities around the world to showcase our photographers and their work. These events include lectures, seminars, exhibitions and sponsorship of major industry events such as the Cannes Advertising Festival and Visa Pour L’Image, the world’s largest photojournalism festival.



SALES AND DISTRIBUTION

We license our imagery through our websites, company-owned offices and a global network of delegates and distributors, serving customers in more than 100 countries. A direct sales force and national accounts management team target high volume users of images, while our technical support staff, who have expertise in digital image applications, design tools and photo manipulation methodologies, assist customers in using our images.



We encourage our customers to take advantage of the comprehensive image search capabilities of our websites and digital delivery of most images. We believe the ability to search for, select, license and download images over the Internet offers our customers convenience and speed and enables us to achieve greater economies of scale. Direct communication with our customers, however, remains a significant component of our sales strategy. Our sales representatives assist customers in finding the images they need and keep them informed about our latest products and services.



Product Rights Customers may license rights to use single images, footage clips or multiple images through subscriptions or CDs. Ownership of imagery does not pass to customers who license the imagery from us.



Licensing Methods Customers may license images using one of four licensing methods: rights-managed, rights-ready, royalty-free or subscription. We group our still and moving image collections into categories corresponding to these licensing methods. We offer portfolios of creative imagery for license under each of these methods, while editorial imagery may be licensed through subscriptions or rights-managed licenses.



For rights-managed licensing, the license fee is based on how the image will be used, including geographical distribution, license duration, medium, exclusivity and circulation. For example, an image to be used as an eighth of a page photo in a brochure to be distributed in one city for three months will cost less to license than an image to be used in a global advertising campaign for a year that includes print advertising, billboards and point-of-purchase displays. We also offer Flexible License Packs, which are designed to provide customers a quick and cost effective way to license an image for multiple preset media without having to enter into separate license agreements.



For rights-ready licensing, the license fee is based on how the image will be used with eight broadly defined usage categories. For example, an image to be used for commercial purposes in a print advertisement or display will cost more to license than an image to be used for an internal company communication piece. There is a ten-year duration limitation on each license and no restrictions on geographic distribution.



For royalty-free licensing, the license fee is based on the size of the digital file, from standard resolution to high resolution. Once the customer has licensed an image, that customer may use that image multiple times for multiple projects without paying additional fees. Royalty-free images may be licensed on a single image basis, as part of a collection of images on a CD or virtual CD (a group of images offered online for one fee), or through a subscription. All images licensed through our micropayment site istockphoto.com are licensed under the royalty-free method.



Subscription licensing is available for selected editorial and royalty-free creative images. Under this licensing method, customers pay a periodic fee and then may utilize multiple images during the subscription period.

Operations and Technology



We employ a centralized and integrated technology platform as the foundation for gettyimages.com and the related back-office systems. This platform enables customers to search, select, license and download our imagery from one location, gettyimages.com. It also supports centralized sales order processing, customer database management, finance and accounting systems. These systems span multiple operational activities, including customer interaction, transaction processing, order fulfillment and invoicing. Our systems infrastructure is hosted both internally and at an external hosting provider, both of which provide 24-hour monitoring, power generators and back-up systems.



We have a second datacenter in London, England to support business continuity in the event of an emergency. The London facility also provides 24-hour monitoring, emergency power generators and back-up systems.



Gettyimages.com is currently available in 12 language versions including: U.S. English, U.K. English, Chinese, French, German, Greek, Italian, Japanese, Polish, Portuguese (Brazil), Spanish, and Turkish.



The technology architecture supporting gettyimages.com employs a set of software applications to: 1) categorize digital content and embed appropriate keywords and search data; 2) search large information databases across languages and linguistic context; 3) present detailed information related to specific digital content elements; 4) manage online e-commerce transactions for the license of much of our digital content; 5) manage invoice generation and accounts receivable from customers; and 6) track a broad range of intellectual property rights and permissions. These applications are a combination of our proprietary technologies and commercially available licensed technologies. We focus our internal development efforts on creating and enhancing the specialized proprietary software that is unique to our business. We intend to continue to investigate, qualify and develop technology and internal systems that support key areas of our business to enhance the experience of our customers.



istockphoto.com operates on a separate platform hosted at an external hosting provider. This platform provides similar functionality as described above. istockphoto.com is currently available in 4 language versions including: U.S. English, French, German, and Spanish.



Competition



The market for visual content and related services is highly competitive. We believe that the principal competitive factors are:
• name recognition;
• company reputation;
• the quality, relevance and breadth of the images in a company’s collections;
• the quality of contributing photographers, filmmakers and other imagery partners under contract with a company;
• effective use of current and emerging technology;
• customer service and customer relationships;
• pricing and licensing models, policies and practices; and
• accessibility of imagery and speed and ease of search and fulfillment.



Some of our current and potential significant competitors include:
• other general visual content providers such as Corbis Corporation, Jupitermedia Corporation, Amana Inc., Alamy Limited, Index Stock Imagery, Inc., Photolibrary Group Limited and Masterfile Corporation;
• specialized visual content companies that are well established in their local, content or product-specific market segments such as Reuters Group PLC, the Associated Press, and ZUMA Press, Inc.;
• other companies operating micropayment sites such as Dreamstime LLC and Fotolia LLC;
• commissioned photographers; and
• online search engines which provide for image search, such as Google, Yahoo and Microsoft.



There are also hundreds, if not thousands, of small stock photography and footage agencies, image content aggregators and individual photographers throughout the world with whom we compete.

Intellectual Property



Most of the images in our creative collections are obtained from independent photographers and filmmakers on an exclusive basis. Professional photographers and filmmakers often prefer to retain ownership of their work. As a result, copyright to an image remains with the contributing photographer or filmmaker in most cases, while we obtain the right to market the image on their behalf for a period of time. We own the copyright to photographs taken by staff photographers as well as to a number of photographs that we have acquired from others. As such, a substantial portion of the images in our editorial collections and certain images in our creative collections are owned by us though some are in the public domain.



We also own numerous trademarks that are important to our business. Depending on the jurisdiction, trademarks are valid as long as they are in use and/or their registrations are properly maintained and they have not been found to have become generic. Registrations of trademarks generally can be renewed indefinitely as long as the trademarks are in use. Please see “We May Lose the Right to Use ‘Getty Images’ Trademarks in the Event We Experience a Change of Control” within Item 1A of this Annual Report on Form 10-K for more information about certain of our trademarks.



Relationship With Our Employees



At December 31, 2006, we had 1,750 employees. Of these, 943 were located in the Americas, 663 in Europe and 144 in the rest of the world. We believe that we have satisfactory relations with our employees.



Compliance With Federal, State, And Local Environmental Provisions



All of our facilities are subject to environmental laws and regulations. Compliance with these provisions has not had, and we do not expect such compliance to have, any material adverse effect on our capital expenditures, earnings or competitive position.



Financial Information About Segments And Geographic Areas



We operate the company in two business segments, traditional licensing and micropayments. These two segments are aggregated for accounting purposes since they meet the aggregation criteria described in Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information.” Our revenue is generated through a diverse customer base, and there is no reliance on a single customer or small group of customers; no customer represented 10% or more of our total revenue in the periods presented in this Annual Report on Form 10-K.


CEO BACKGROUND

Mr. Bailey has been a Director since February 1998 and served as a Director of Getty Communications Limited, our predecessor, from September 1996 to February 1998. Mr. Bailey co-founded Cambridge Associates LLC, an investment consulting firm, in May 1973 and currently serves as its Senior Managing Director and Treasurer. He also is co-founder, Treasurer and a Director of The Plymouth Rock Company, SRB Corporation, Inc., Direct Response Corporation and Homeowners Direct Company, all four of which are insurance companies and insurance company affiliates. Additionally, Mr. Bailey serves as a Director of Apartment Investment & Management Company (AIMCO), a multi-family dwelling real estate investment trust.

Mr. Garb has been a Director since February 1998 and served as a Director of Getty Communications Limited, our predecessor, from May 1996 to February 1998. Mr. Garb also served as a Director of Getty Investments L.L.C. from June 1996 until October 2003. Mr. Garb currently is of counsel to the law firm of Loeb & Loeb LLP, where he has practiced since 1968. Mr. Garb is also a Trustee of the J. David Gladstone Institutes, a nonprofit medical research organization.

Mr. Spoon has been a Director since May 2006. Mr. Spoon has been a managing general partner of Polaris Ventures since 2000, where he focuses on investments in digital media, e-commerce and distance learning. Mr. Spoon has held senior leadership positions at the Washington Post Company, where he worked for 18 years, including President, Chief Operating Officer, board member, Chief Financial Officer, President of Newsweek, Head of Newspaper Marketing and Head of Corporate Business Development. Prior to his tenure at the Washington Post, Mr. Spoon was an officer at the Boston Consulting Group. Mr. Spoon also serves as a Director of Danaher Corporation and IAC/InterActiveCorp, and is a member of the Smithsonian Institution Board of Regents, the Massachusetts Institute of Technology Corporation and The Council on Foreign Relations.

Mr. Sporborg has been a Director since February 1998 and served as a Director of Getty Communications Limited, our predecessor, from May 1996 to February 1998. Mr. Sporborg held various positions at Hambros Bank Limited from 1962 to 1998, including Deputy Chairman of Hambros PLC and Hambros Bank Limited, Chairman and Chief Executive of Hambros Group Investments Ltd. and Chairman of Hambros Insurance Services Group PLC. Mr. Sporborg founded and was Chairman of the Board of Directors of Countrywide plc, a real estate agency and financial services company from 1987 until May 2007. He is the Chairman of the Board of Directors of Chesnara plc, a life assurance company. Mr. Sporborg also serves as a Director of Lindsey Morden Group Inc., an insurance services company.

Mr. Getty is a co-founder of Getty Images, and has been a Director since February 1998, serving as our Executive Chairman from September 1998 to May 2004. In May 2004, Mr. Getty relinquished his role as an executive officer of the company but remains as (non-executive) Chairman of the Board. Mr. Getty served as Co-Chairman of Getty Images from February 1998 to September 1998. He served as Executive Chairman of Getty Communications Limited, our predecessor, from April 1996 to February 1998. From March 1995 to April 1996, Mr. Getty served as the Joint Chairman of Getty Communications Limited. Mr. Getty also is the Chairman of the Board of Directors of Getty Investments L.L.C.

Mr. Klein is a co-founder of Getty Images and has been our Chief Executive Officer and a Director since February 1998. Mr. Klein served as Chief Executive Officer and as a Director of Getty Communications Limited, our predecessor, from April 1996 to February 1998. From March 1995 to April 1996, Mr. Klein served as the Joint Chairman of Getty Communications Limited. Mr. Klein serves on the Board of Directors of Getty Investments L.L.C. and as a Director of RealNetworks, Inc. a leading creator of digital media services and software. He also serves on the Board of Trustees of the Groton School, on the Board of Directors of Friends of the Global Fight Against Aids, Tuberculosis and Malaria, one of the leading organizations working to educate, engage and mobilize Americans on the fight to end the worldwide burden of these diseases by focusing its efforts on decision-makers in Washington DC, and on the Advisory Board of the Global Business Coalition on HIV/AIDS, Tuberculosis and Malaria, the pre-eminent organization leading the business fight against HIV/AIDS and a mission to harness the power of the global business community to end the HIV/AIDS, tuberculosis and malaria epidemics.

Mr. Stein has been a Director since June 2002. Mr. Stein served as Senior Vice President and Chief Financial Officer of ICOS Corporation, a biotechnology company, from January 2001 to January 2007. Prior to that, Mr. Stein was Executive Vice President and Chief Financial Officer of Nordstrom, Inc., a leading fashion specialty retailer, from October 1998 to September 2000. Mr. Stein served as Executive Vice President and Chief Financial Officer of Marriott International, Inc. from 1993 to 1998. Prior to his work at Marriott, he spent eighteen years at Arthur Andersen as a partner in their Washington, DC office. Mr. Stein also serves on the Board of Directors of Apartment Investment & Management Company (AIMCO), a multi-family dwelling real estate investment trust. He also serves on the Board of Trustees of the Fred Hutchinson Cancer Research Center.


COMPENSATION

COMPENSATION DISCUSSION AND ANALYSIS



Our compensation programs are designed to attract and retain highly qualified employees and to motivate them to maximize shareholder returns by achieving annual and long-term financial goals. Our compensation programs also allow the performance of individual employees against non-financial targets (such as adherence to our Leadership Principles 1 ) to play a role in determining total compensation. Our leadership principles define the kind of company we want to be by setting forth leadership behaviors that form the cornerstone of everything we do. Our compensation programs are intended to be competitive with prevailing market practices and to link each employee’s compensation directly to our financial performance. The following discussion addresses the following aspects of our compensation programs and policies:


• Our executive compensation program objectives and what the program is designed to reward.
• The role of the Compensation Committee, our executive officers and our compensation consultant in the development and administration of the executive compensation program.
• The details of our executive compensation program, including:
• The elements of the program, why we choose to pay each element, and how each element fits into our overall compensation objectives.
• How we determine the amounts to pay.



I. Compensation Programs – Objectives and Design

The primary basis of our general compensation philosophy and practice is that total compensation should vary along with the success of Getty Images in achieving its financial objectives and of the individual employee in achieving his or her non-financial objectives, and that long-term incentive compensation should be closely aligned with the shareholders’ interests. This approach applies to all of our employees, with a more significant portion of compensation being variable (that is, at-risk and tied to Getty Images’ financial performance) as an employee’s level of responsibility increases.



Another important aspect of our compensation philosophy and practice is that our compensation programs should be straightforward in their design and application. We believe that this approach has the benefit of allowing employees to understand clearly how they will be compensated. This approach also makes it easier to predict and measure the compensation that employees have realized and will realize in the future, and to reduce the chance of the compensation programs having unintended consequences.



II. Role of the Compensation Committee, our Executive Officers and our Compensation Consultant

The Compensation Committee has oversight responsibility for our compensation plans, policies and programs both for our executive officers and for our other employees. Our management team, in particular our Human Resources Department, works with our Chief Executive Officer and our other executive officers to develop and design our compensation plans, policies and programs. The more significant plans, policies and programs, including all in which any executive officer participates, then are reviewed with the Compensation Committee at formal meetings and via informal discussions in order to provide the information necessary, or requested by the Committee to evaluate, modify as needed, and ultimately approve the plans, policies and programs. The Compensation Committee also has engaged Towers Perrin, a leading compensation consulting firm, to assist the Compensation Committee in the performance of its duties. On decisions regarding the compensation of specific executive officers, the Compensation Committee works closely with the Chief Executive Officer, with the Chief Executive Officer making recommendations regarding each of the other executive officer’s compensation for discussion with and, ultimately, approval by the Committee. On the Chief Executive Officer’s compensation, the Compensation Committee works with Towers Perrin to obtain the information and advice necessary for it to make the decisions.



Towers Perrin reports directly to the Compensation Committee, which has authority to engage and retain any outside advisors to provide advice regarding all aspects of executive compensation and benefits. We have not commissioned a custom survey from Towers Perrin in the past nor do we have current plans to request such a survey. Rather, we have relied upon the Towers Perrin Executive Compensation Survey, which provides Getty Images with market data for our executive positions, including the Chief Executive Officer. Towers Perrin provides us with comparative compensation information for equivalent positions from peer companies, using benchmark and market practice data for base salaries, incentives, and stock awards. Towers Perrin has also supplied relevant and timely

information to the Compensation Committee and management on such matters as regulatory changes and updates, current industry practices relating to executive compensation and other such issues. This information is utilized by the Chief Executive Officer when making executive compensation recommendations to the Compensation Committee and by the Committee when evaluating these recommendations. In addition to the services provided to the Compensation Committee, Towers Perrin also has advised management on our sales commission programs and on our long-term incentive compensation program for all other employees. The Compensation Committee believes that Towers Perrin has provided valuable independent advice to the Compensation Committee that is untainted by its other engagements; Nevertheless, the Compensation Committee believes that best practices dictate that the Committee should have a consultant that does not do any other work for the company. As a result, going forward management will retain another compensation consultant and Towers Perrin will provide advice only to the Compensation Committee. The Compensation Committee also believes that Towers Perrin’s advice was enhanced by its in-depth knowledge of our culture and compensation programs that it gained as a result of the work it did on these other projects. The Human Resources and Legal Departments also work with Towers Perrin as required in performing certain of the tasks assigned to Towers Perrin by the Compensation Committee. Such work includes, for example, providing information on our current practices, advising on proposals that may be considered regarding executive or other compensation, and providing detail on our compensation structure such as current and historical salaries, benefits, bonus and equity compensation so that, as required, Towers Perrin can provide us with relevant feedback and comparative data.

We provide base salaries that are competitive with those companies with whom we compete for talented employees. We set our target base salaries at the 50 th percentile for comparable jobs at comparable companies nationwide, in order to provide our employees with competitive base salaries. We believe our target base salaries are an important part of an attractive overall compensation and benefits package.



We offer an annual pay-for-performance cash incentive plan dependent on our annual financial performance and the individual employee’s performance against specific performance objectives and our Leadership Principles. A greater percentage of an employee’s award is determined by performance against financial objectives as the employee’s level of responsibility increases.

The objective of this plan is to provide a means to align the interests of our non-sales employees to our critical annual financial objectives and to reward all non-sales employees for achieving these objectives. This plan covers all executive officers, except the Senior Vice President, Global Sales.

For non-executive Sales employees, their cash commission plan payout is solely dependent upon individual and/or group sales targets. For the more senior employees in the Sales function (including our Senior Vice President, Global Sales), a part of variable cash compensation is determined by personal performance against specific performance objectives and our Leadership Principles.

Our sales commission plan is designed to provide significant incentives for Sales employees at all levels to achieve the monthly, quarterly and annual sales targets.



Our long-term compensation is in the form of equity awards, primarily in the form of restricted stock units, although the Compensation Committee likely will continue to make awards of stock options to the Chief Executive Officer.

A restricted stock unit award is a grant of a right to receive shares of our common stock that vests over time. As the restricted stock unit awards vest, employees receive shares that they own outright. In contrast, stock options are options to purchase shares of our common stock upon the payment of the award exercise price, with the recipient being able to exercise the options only as the award vests over time. The exercise price for a stock option award is no less than the fair market value of our common stock on the date of the award, which we define as the average of the high and low trading prices of our common stock on the date of the award. This means that the award recipient receives value from the stock option award only if the price of our common stock appreciates.

The long-term compensation program is designed to allow annual awards of restricted stock units for a significant number of our employees, although our executive officers may not receive awards each year. The use of equity as the vehicle for our long-term compensation program builds on the annual cash incentive programs by rewarding key employees for their efforts in achieving our financial objectives. In addition, equity incentive awards may be able to tie our employees’ compensation (that of our more senior employees, in particular) more closely to shareholder returns than cash incentives.

The time-based vesting schedules (back-end loaded in the case of the Chief Executive Officer as described below in this Compensation Discussion and Analysis under the subheading Equity Compensation ) are intended to support retention.



We aim to provide our employees with a competitive, comprehensive and well-balanced compensation package.

While the specifics of the benefits programs vary by country, we typically provide health, disability and life insurance, as well as defined contribution retirement plans. We also provide limited additional benefits for the executive officers and other senior management, such as supplemental life and disability insurance.

MANAGEMENT DISCUSSION FROM LATEST 10K

RESTATEMENT OF FINANCIAL STATEMENTS



As announced on November 9, 2006, a Special Committee was established by our Board of Directors to conduct an independent investigation relating to the company’s equity compensation grant practices and related accounting for equity compensation grants. The Special Committee consisted of two independent members of our Board of Directors who were assisted in their investigation by independent outside legal counsel.



Together with its independent counsel, the Special Committee conducted an extensive review of equity compensation grant practices and awards made by the company, or in connection with companies we acquired, between July 14, 1994 and November 1, 2006 (the “Relevant Period”), which covered 7,102 stock option grants and 1,062 restricted stock unit (“RSU”) grants made on 465 occasions. During the investigation, numerous documents were reviewed, and extensive interviews of current and former employees and directors of the company and other individuals were conducted by the Special Committee’s independent counsel. On April 10, 2007, the Special Committee presented its findings to the Board of Directors.



As also announced on November 9, 2006, the Securities and Exchange Commission (the “SEC”) had earlier notified us that it is conducting an informal inquiry into the company’s equity compensation grant practices. We continue to cooperate fully with the SEC in this informal inquiry.

We have not amended and do not intend to amend any of our previously filed Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for the periods affected by the restatements other than through this document, except for the 2006 Quarterly Reports on Form 10-Q for the quarters ended March 31, 2006 and June 30, 2006. Previously filed financial statements for fiscal years ended 1998 through 2005, the interim periods contained therein, together with all earnings and other press releases containing our financial information for those periods and the earnings releases for the 2006 quarters ended March 31, 2006, June 30, 2006, September 30, 2006 and December 31, 2006 should not be relied upon.



The Special Committee’s Conclusions



The Special Committee concluded that the evidence obtained and reviewed in its investigation did not establish any intentional wrongdoing by current employees, officers or directors of the company. The Special Committee and the company’s management have determined that incorrect measurement dates for certain equity compensation awards were used for financial accounting purposes, and certain previously issued grants were modified without properly recording compensation expense and, as a result, we are restating certain of our prior financial statements to correct the accounting for those awards. The use of incorrect measurement dates resulted from a number of reasons, including delays in the approval of awards, the absence of definitive documentation and modifications of previously awarded grants. The Special Committee also identified certain awards for which grant dates were selected retroactively. However, the Special Committee has concluded that the evidence does not establish that there was any intentional wrongdoing in connection with those awards. Nearly all of the grants for which the measurement dates have been changed (approximately 99% of the grants) were awarded in 2001 and earlier years.



In addition to the adjustments to our previously filed financial statements as described above, the Board of Directors has adopted the following recommendations of the Special Committee.


• Two additional independent directors will be recruited and appointed to the company’s Board of Directors.
• Membership of the Audit and Compensation Committees of the Board of Directors will be changed.
• The Equity Compensation Committee has been discontinued.
• Enhancements will be made in the oversight of the company’s corporate governance practices with respect to the company’s equity compensation programs.
• Senior management will be charged with ensuring that the equity compensation policies and processes are appropriate and provide effective controls, and that the company’s accounting for equity compensation is appropriate.
• Certain of the company’s equity compensation administrative processes and functions will move from the company’s human resources organization to the finance organization, under the supervision of the Chief Financial Officer.
•The Board of Directors unanimously adopted an Equity Compensation Grant Policy on April 10, 2007, which provides, among other things, that:
• All terms of each equity grant must be finalized and approved by the Board of Directors or the Compensation Committee on or prior to the grant date;
• All stock options must have an exercise price equal to or greater than the average of the high and low market price on the grant date;
• All recipients of equity grants must be notified, in writing, of such grants as soon as possible following approval; and
• Any equity compensation issues or actions will be reported by senior management on a timely basis to the Board of Directors or the Compensation Committee, no less frequently than quarterly.



Background



Between 1994 and 1996, the Board of Directors granted stock options to Getty Communications (Getty Images’ predecessor) employees and in connection with acquisitions, including grants to employees and officers of acquired companies. From 1996 to 1998, the Compensation Committee had the authority to, and did, grant options to employees, officers and directors. From August 1998 through 2001, the Compensation Committee continued to grant options to executive officers, and created option “pools” from which the Chief Executive Officer and Senior Vice Presidents were authorized to grant options to employees and non-executive officers. These pools were used by the executive officers to grant options in connection with the hiring and promotion of employees or as incentive awards. In August 2001, the Board of Directors created the Stock Option Committee, appointing Chief Executive Officer Jonathan Klein as the sole member with delegated authority to grant options to employees and non-executive officers. In 2005, the Stock Option Committee was renamed the Equity Compensation Committee, and we moved to primarily granting RSUs rather than options.



A total of 7,102 option grants and 1,062 RSU grants were awarded during the Relevant Period, as follows:


“Pool options” in which “pools” of options were approved by the Compensation Committee for later grant to employees by executive officers (2,277 grants).


“Acquisition option grants” in which options were granted by the Board of Directors or Compensation Committee to employees and officers in connection with our acquisition of other companies and in which outstanding options held by employees of acquired companies were exchanged for Getty Images options at pre-determined conversion ratios (1,464 grants).


“Other option grants” which cover all remaining stock option grants during the Relevant Period (3,361 grants).


“RSU grants” in which RSUs were granted by the Equity Compensation Committee, the Compensation Committee and the Board of Directors to employees, officers and directors (1,062 grants).



The Special Committee and the company have determined that it is necessary to revise the measurement dates for approximately 45% of these awards (“Adjusted Options”). Over half of the awards for which the measurement date is being revised relate to the company’s only all employee grant in February of 2000 to employees below the vice president level. In addition, the measurement dates for many awards were revised due to: (i) the use of the date of the approval of a pool of options as the measurement date as opposed to the date that the terms of each grant were finalized; (ii) the use of the date that a Unanimous Written Consent approving equity awards was faxed to Compensation Committee members for their approval, rather than the date when the approvals of the Compensation Committee members had been faxed back, as the measurement date for the associated grants; and (iii) the absence of a detailed list of recipients and associated grants prior to the date certain grants were entered into our equity award tracking system.



We previously applied Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related Interpretations and provided the required pro forma disclosures under Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” through our fiscal year ended December 31, 2005. We have used the accelerated method of expensing stock options provided in Financial Accounting Standards Board Interpretation No. 28, “Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans” for recording expense and for our pro forma disclosures. Under APB Opinion No. 25, a non-cash, stock-based compensation expense was required to be recognized for any option for which the exercise price was below the market price on the measurement date. Because most of the company’s Adjusted Options had an exercise price below the market price on the measurement date, there should have been a non-cash charge for each of these options under APB Opinion No. 25 equal to the number of option shares, multiplied by the difference between the exercise price and the market price on the measurement date. That expense should have been amortized over the service period of the option.



The company also reviewed modifications made to previously granted options and determined that we did not record the appropriate amount of compensation expense for some of the modifications (“Modified Options”). We did not record the appropriate amount of stock-based compensation expense under APB Opinion No. 25 related to Adjusted or Modified Options in our previously issued financial statements, and are recording these expenses in this Annual Report on Form 10-K.

Equity-based compensation is not deductible for corporate income tax purposes in most countries. The after-tax amounts in the table reflect reduction of compensation expense for tax benefits in the United States in all years and in the United Kingdom in 2003. For the United Kingdom prior to 2003 and for all other countries in all years, there is no tax benefit recorded for the associated compensation expense.



In addition, in 2001, we analyzed our existing net deferred tax assets (DTAs) and determined that not all the existing DTAs would be realized over the period covered by our analysis and therefore recorded a valuation allowance equal to approximately $12 million. We performed a similar analysis in 2002 and as a result, increased the valuation allowance associated with the exercise of employee stock options in 2002 to $15.1 million. In 2003, we updated our estimate of future taxable income and determined that it was now more likely than not that we would realize more of the DTA than the net balance at December 31, 2003. Therefore, we reduced our valuation allowance by $25.3 million, including the $15.1 million related to stock option exercises. We reviewed the valuation allowance in light of the restatement of equity-based compensation and determined that an additional valuation allowance of $4.9 million should be recorded at December 31, 2001 and then released at December 31, 2003.

As noted above, we have also made two adjustments to deferred tax assets that were previously considered immaterial. The first item related to the accounting for unrealized foreign currency gains and losses on long-term intercompany loans between our United States and United Kingdom subsidiaries. We incorrectly recorded deferred tax assets on the unrealized foreign currency gains and losses in the United Kingdom from 1999 to 2005, instead of recording them as part of the net foreign currency translation adjustments (losses) gains within accumulated other comprehensive income (loss). The second item related to an intercompany loan established in 2005 for which we did not include the unrealized gains or losses in taxable income, causing our deferred taxes related to our net operating losses to be misstated and other comprehensive income to also be misstated.



The revenue and deferred revenue adjustment relates to fees paid by photographers for making certain of their images available for license on our website for two years. We had previously recognized these fees when received, as they were previously considered immaterial, and are now recognizing the fees ratably over the two year period, resulting in a decrease in revenue and an increase in deferred revenue in the periods reported herein.



In addition, we evaluated the impact of the restatements on our consolidated tax provision. The company and our subsidiaries file tax returns in numerous tax jurisdictions around the world. In the United States for all years reflected above and the United Kingdom in 2003 and subsequent years, we are able to claim a tax deduction relating to stock options exercised. In those jurisdictions where a tax deduction will be allowed, we have recorded deferred tax assets to reflect future tax deductions to the extent we believe such assets to be recoverable. In addition, we also determined that, as a result of the changes in the measurement dates, we should not have taken a deduction in the US in prior years for stock option related amounts pertaining to certain executives under the Internal Revenue Code Section 162(m). Section 162(m) limits the deductibility of compensation above certain thresholds. As a result, our tax liabilities have increased by approximately $2.4 million.



If certain of the Adjusted or Modified Options are not repriced, the holders of such options will, upon exercise of the options, incur personal income taxes and penalties in accordance with Internal Revenue Code (IRC) Section 409A (and other state tax laws) beyond what they would have incurred were the options not adjusted or modified. Certain of these options have already been exercised and therefore incremental taxes and penalties have been incurred by the holders, while other affected options remain outstanding. We are currently evaluating the company’s position with respect to reimbursing employees for incremental taxes and penalties incurred and to potentially repricing the affected options that remain outstanding. If the company takes such actions it will result in a charge to compensation expense in the period the decision is made or the expense is incurred, as applicable.



This restatement did not affect cash provided by operating activities in our consolidated statements of cash flows.



GENERAL



Overview

The image licensing business is dynamic and continually introduces opportunities and challenges. We believe that many opportunities exist in the business of licensing imagery. We believe that our best opportunities include growth in non-English speaking markets, growth in our footage and editorial products, growth and development of iStockphoto, our micropayment business, growth in creative stills as a result of the pending launch of our new website, as well as introducing new products and license models. Most recently, the challenges for the business have been associated with the introduction of new alternative licensing models, changing competitive dynamics as well as the shift of communication and advertising to the Internet, which has changed the communication methods used by many of our customers.



Although we already have products and services available in many markets throughout the world, much of the focus of our business has been in English speaking markets. The market for visual content in many non-English speaking countries remains fragmented, and we believe there is substantial opportunity in these markets. We plan to accelerate growth in licenses of both editorial and creative imagery in non-English speaking countries by expanding our product and service offerings in markets that we have not fully penetrated, by creating or acquiring locally relevant imagery and by localizing language and search capability on our website.



Stock footage is a relatively new industry with characteristics similar to stock photography. Footage clips can be used by customers in feature films, television commercials, web advertisements, and corporate videos, all of which are large markets that currently use a high volume of custom shot moving imagery. Our efforts to grow licenses of our footage product include increasing the breadth and depth of our collections, improving our technology to make it easier for our customers to search for and license footage clips and marketing to and educating customers and prospective customers about the benefits of using pre-shot footage.

Our editorial products have produced healthy revenue growth recently but are still primarily dominated by sales in English speaking markets. We recently launched the new editorial section of our website at www.gettyimages.com and for the first time have a combined database that allows customers to search both editorial and creative content simultaneously. In addition, we have begun rolling out our editorial products in foreign languages and we expect to eventually offer our editorial products in all of the languages for which we offer our creative content.



The micropayment model has introduced a large number of small office and home office customers to the stock photography market. These are customers that we believe did not historically license imagery under traditional licensing models. In February 2006, we acquired iStockphoto which we believe is the leader in this new model. We believe that over time we can employ our expertise in the stock photography business to drive changes and growth in this new market.



The micropayment model also creates some risk for our traditional creative product offerings. For certain customers and a limited number of projects, we believe that the micropayment image may be a viable substitute. This had an impact on our traditional creative stills volume in 2006, and we expect it to continue to have an impact in 2007. We believe that there are a variety of possible uses of imagery, and our objective is to offer imagery to our customers at all price points. We believe that our customers will continue to see the value associated with our traditional products and as such, those license models will retain their importance in the stock photography market.



Also in 2006, we saw a change in the competitive dynamics in the stock photography market. Our customers have been made aware of competitive alternatives through the increased advertising and marketing efforts of our competitors. Also, our customers have increasing access to, and awareness of, a variety of imagery sources on the Internet. In this environment, we believe our primary competitive differentiators include the highest quality imagery, the broadest and deepest collections and the best tools for use by our customers in finding and purchasing imagery. We continue to add high quality, relevant imagery to our industry leading collections, we are creating new license models for the benefit of our customers, we lead the industry in creative research and we are revitalizing our website, gettyimages.com with new features and search functionality in order to improve our customers’ experience.



Operating margins for our business have generally grown over the past five years and continue to be attractive, especially for a media business. For our traditional creative stills products, we believe we can continue to grow revenue faster than expenses. However, we have other products with good revenue growth potential that have attractive, yet lower, margin profiles. Growth in revenue from these products may have a slight negative impact on our overall operating margins, as we experienced in 2006.



Revenue



We generate our revenue from licensing rights to use visual content and from providing related services. Revenue is principally derived from a large number of relatively small transactions involving licensing rights to use single still images, stock footage or CDs containing multiple images. We also generate revenue from subscription image licenses, from assignment photo shoots and from additional products and services. In addition to being licensed directly by us, our imagery is also licensed through channel partners (distributors) and delegates worldwide.



Revenue generated from delegates comprised approximately 7% of our revenue in 2006 compared to 6% in 2005. Delegates typically earn and retain 35% to 40% of the license fee paid by their customers, and we recognize the remaining 60% to 65% as revenue.



STILL IMAGERY

We offer still imagery for license through four image portfolios: rights-managed, rights-ready, royalty-free, and editorial. Rights-managed images are licensed by customers on a use-by-use basis and generally have higher license fees based on the intended use or application of the image, geographic distribution, license duration, circulation and level of exclusivity. Our rights-managed collections are generally considered to represent our highest quality images.



The rights-ready model was introduced in the third quarter of 2006, and represents rights-managed quality imagery under a simplified license model (more akin to the royalty-free model). The license fee for a rights-ready image is based on a limited number of broadly defined usage categories with no geographic variable and a ten year license duration. Since its introduction, we have been adding images and collections to our rights-ready portfolio and we expect it to grow as a percentage of our total revenue over time.



Royalty-free images can be used by customers for multiple projects over an unlimited time period. Set pricing is established for royalty-free imagery based on the production or artistic value of the image with variability associated with the file size (image resolution). In addition to single image licenses, royalty-free imagery can be licensed through CDs and subscriptions.



Editorial imagery consists of news, sports, entertainment and archival imagery, and is licensed on a single image or subscription basis (except for archival).

FOOTAGE

We also maintain portfolios of rights-managed and royalty-free stock footage, or footage clips, for license by our customers. These license models for stock footage are essentially the same as those described for our creative stills portfolios.



Cost of Revenue



Cost of revenue consists primarily of royalties owed to contributors, comprised of photographers, filmmakers and image partners. Contributors are under contract with us and typically receive royalties of 10% to 50% of the total license fee, depending on the portfolio (as discussed above), where the imagery is licensed (licenses outside a contributor’s home territory result in lower royalties) and the terms of their contract. We also own the copyright to certain of the images in our collections (wholly-owned content) for which we do not pay any third party royalties. Cost of revenue also includes the cost of shipping and handling hard goods (CDs), costs of our assignment photo shoots and other costs related directly to the creation of revenue. Cost of revenue excludes depreciation and amortization associated with creating or buying these images.



Restructuring Costs



During 2006, we recorded a total of $27.3 million of restructuring costs. Approximately $21.7 million related to consolidation of certain office space in New York and Seattle and other related costs and was based on our evaluation of our options regarding the resultant excess space and our estimate of the total loss incurred on that space for the remainder of the respective lease terms. The remaining $5.6 million was a severance charge in the fourth quarter related to a realignment of resources.



Acquisitions of Businesses



On April 6, 2006, we purchased all of the shares of Pixel Images Holdings Limited, the parent company of Star Media Limited (dba Stockbyte) and Stockdisc Limited (dba Stockdisc) (collectively, “Stockbyte”) for $135.0 million in net cash (excluding direct acquisition costs). Stockbyte was a privately held stock photography agency based in Tralee, Ireland that licensed royalty-free imagery to its customers through distributors, including Getty Images, and through its two websites, www.stockbyte.com and www.stockdisc.com. Prior to the acquisition, we had a significant number of Stockbyte’s images available for license through our Image Partner program. We have integrated this business into ours, including redirecting both of their websites to www.gettyimages.com. The purchase was funded from existing cash and cash equivalents. The purchase price was allocated primarily to goodwill ($110.2 million) and identifiable intangible assets ($21.4 million).



On February 9, 2006, we purchased all of the shares of iStockphoto, Inc., a privately held stock photography company located in Calgary, Alberta, Canada, for $50.0 million in cash. iStockphoto, Inc. licenses royalty-free imagery exclusively through its website, www.istockphoto.com, and is a leader in the micropayment licensing model (i.e. licensing imagery for as little as one dollar). The purchase was funded from existing cash and cash equivalents. The purchase price was allocated primarily to goodwill ($40.9 million) and identifiable intangible assets ($13.5 million).



We also completed the acquisition of Laura Ronchi, S.p.A, our Italian delegate, in the second quarter of 2006 and Image One – Gestão e Comercialização de Imagens, SA, our Portuguese delegate, in the fourth quarter of 2006.



On April 20, 2005, we acquired London-based Digital Vision Limited (Digital Vision), one of the world’s leading royalty-free photography businesses, for a purchase price of $179.6 million ($167.0 million of cash and $12.6 million of direct acquisition costs and liabilities assumed). The majority of the purchase price was allocated to goodwill ($135.3 million) and identifiable intangible assets ($33.2 million). Prior to the acquisition, we had a significant number of Digital Vision’s images available for license through our Image Partner program.



On June 8, 2005, we acquired Amana America, Inc., Amana Europe Limited and Iconica Limited (collectively Photonica) for a purchase price of $58.3 million ($48.1 million of cash and $10.2 million of direct acquisition costs and liabilities assumed). Photonica is a rights-managed stock photography agency with its principal offices in New York and London. The majority of the purchase price was allocated to goodwill ($41.4 million) and identifiable intangible assets ($11.6 million). We acquired this company to obtain access to some of the world’s leading collections of cutting edge, high-end rights-managed imagery and some of the most talented and creative photographers in Europe, the United States and Japan.



For all of these acquisitions, the results of operations of the acquired businesses since the respective dates of acquisition are included in our consolidated financial statements. None of the acquisitions were material, individually or in the aggregate, to the company as a whole and, therefore, pro forma financial information is not presented.



Subsequent to December 31, 2006, we have also acquired several other small companies.

The increase in revenue in 2006 was due primarily to an increase in royalty-free revenue resulting from increased licensing of micropayment images (which we did not license in 2005) and an increase in the volume and average prices for single-image royalty free images licensed. In addition, we had increased revenue from licensing of editorial imagery as a result of growth in each of our primary editorial products (news, sports and entertainment), increased revenue from other products (such as media manager and photo assignments) and growth in footage revenue. We also increased our efforts to identify and bill for unauthorized use of our images which allowed us to generate revenue from licenses we would not have received in the past. Revenue generated through our delegates also increased during the year. Revenue from single-image licenses of our rights-managed portfolio was flat year over year as increased volume was offset by a decrease in the average price per image (primarily as a result of a shift in the mix to lower priced usage categories).



Revenue increased across all major geographic areas in 2006 over the comparable periods in 2005. Changes in foreign currency exchange rates had very little impact on our revenue year over year. Revenue from rights-managed licenses, including rights-ready, decreased as a percent of total revenue from 43% in 2005 to 40% in 2006, while royalty-free, editorial and other revenue each increased 1% of total revenue to 38%, 13% and 5%, respectively. Management expects revenue to grow at a single-digit percentage rate in 2007.

CASH FLOWS PROVIDED BY OPERATING ACTIVITIES

Cash flows provided by operating activities in 2006 increased moderately over 2005. Growth of cash flows from operating activities was offset in part by a significant increase in cash paid for income taxes, which increased to $45.8 million in 2006 compared to $18.2 million in 2005. The increase in the tax payments was a result of fully utilizing our net operating loss carryforwards in the United States by the first quarter of 2006.



CASH FLOWS USED IN INVESTING ACTIVITIES

We paid $198 million and $234 million for acquisitions and $62 million and $58 million in capital expenditures in 2006 and 2005, respectively. In 2006, we liquidated all our short-term investments to fund acquisitions and stock repurchases.



CASH FLOWS PROVIDED BY FINANCING ACTIVITIES

We paid $207.7 million to repurchase a portion of our outstanding common stock in 2006. In addition to this cash outflow, cash inflows from proceeds from employee stock option exercises decreased year over year. Though proceeds from the exercise from stock options can fluctuate from year to year, we anticipate that because our stock-based compensation strategy has shifted away from stock options and towards restricted stock units, proceeds from stock option exercises will continue to decrease over the next few years. Approximately 3.4 million stock options were outstanding at December 31, 2006, of which 2.9 million were exercisable at a weighted-average exercise price of $44.28. The closing market price of our common stock on April 30, 2007 was $52.00.



We expect that our current cash and cash equivalents plus cash generated through future operating activities and our credit facility will meet our liquidity needs for at least the next twelve months. See the section titled “Subsequent Events” below for updated information on our credit facility, which will expire in March 2008, at which time we will need to repay any outstanding balances or obtain replacement financing. We currently do not expect our 0.5% convertible subordinated debentures to be converted in the next twelve months, but if they are converted we may need to obtain additional financing to meet that obligation. Our ability to generate cash flows for 2007 in line with our expectations is subject to many risks and uncertainties, including but not limited to: significant unexpected cash expenses; significant changes in interest rates or income tax laws; a significant decline in the market price of our common stock; and the risks discussed in Part I, Item 1A of this Annual Report on Form 10-K.

Convertible Subordinated Debentures On June 9, 2003, we issued $265.0 million in 0.5% convertible subordinated debentures (the “Original Debentures”) in a private placement. On December 16, 2004, we completed an exchange of all but $2.0 million of these Original Debentures for new 0.5% Series B convertible subordinated debentures (the “Debentures”). The final $2.0 million of the Original Debentures were exchanged for Debentures on May 12, 2005.



Key terms and conditions of our Debentures are:




The principal portion of the Debentures is required to be settled in cash, while the increase in value of the Debentures beyond the principal, if any, is payable in shares of our common stock. Prior to June 9, 2008, if the applicable stock price is less than or equal to the base conversion price of $61.08, no common shares would be issued upon conversion. If the applicable stock price is greater than the base conversion price, common shares would be issued upon conversion based on a conversion rate calculated in accordance with a pre-determined formula.




The Debentures may be converted at the holder’s option only under any of the following conditions: 1) the closing price of our common stock during a relevant measurement period as defined in the indenture is more than $73.30; 2) the credit rating assigned to the Debentures by Standard & Poor’s Ratings Services is below B- or by Moody’s Investors Service is below B3 (the ratings were B- and Ba2, respectively, at December 31, 2006); 3) the trading price of the Debenture during a relevant measurement period as defined in the indenture is less than 95% of the product of the closing price of our stock and the conversion rate in effect at such time; 4) the Debentures are called for redemption; or 5) upon the occurrence of certain corporate transactions as defined in the indenture.




We may redeem the Debentures for cash equal to the principal value plus any accrued and unpaid interest at any time on or after June 13, 2008, except that between June 13, 2008 and June 12, 2009, we may not redeem the Debentures unless the closing sale price of our common stock is greater than $76.35 for at least 20 trading days in a 30 consecutive trading day period ending on the trading day prior to the date of mailing our notice of redemption.




Holders may require us to redeem the Debentures for cash equal to the principal value plus any accrued and unpaid interest on June 9, 2008, 2013 and 2018.




We are required to pay contingent interest beyond the 0.5% coupon rate at the rate of 0.5% per year on the average trading price of the Debentures over a five-day trading period immediately preceding the first day of the applicable six-month period, commencing with the six-month period ending December 9, 2008, if such average trading price is greater than or equal to $1,200 per Debenture. The market price of our Debentures was approximately $986 per debenture at December 31, 2006.



The conversion contingencies relating to the credit rating assigned to, and the trading price of the Debentures compared to the product of the closing price of our common stock and the conversion rate in effect at such time, as well as the contingent interest feature, represent embedded derivatives. A valuation of the fair value of these derivatives is performed each quarter. The fair value of these derivatives was insignificant in all periods presented.


MANAGEMENT DISCUSSION FOR LATEST QUARTER

Many of the statements in this Quarterly Report on Form 10-Q are “forward-looking” statements and are based on our current expectations, assumptions and projections about Getty Images, Inc. and the market in which we operate. We intend these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. All forward-looking statements are made on the basis of our views as of the date this document is filed with the Securities and Exchange Commission (SEC). These forward-looking statements are not guarantees of future performance and are subject to certain risks and uncertainties that are difficult to predict with respect to timing, extent and likelihood. These risks and uncertainties could cause our actual results to differ materially from our past performance and our current expectations, assumptions and projections. Differences may result from actions taken by us as well as from risks and uncertainties beyond our control. These forward-looking statements are subject to a number of risks and uncertainties, including but not limited to the following:


• Increased competition could reduce our revenues, margins and operating results;


• Our financial results and stock price may fluctuate;


• We may not be successful in acquiring or integrating businesses;


• We may experience system and service disruptions and difficulties;


• Systems security risks and concerns may harm our business;


• Our business and prospects would suffer if we are unable to protect and enforce our intellectual property rights;


• Our products and services may infringe on intellectual property rights of third parties and any infringement may require us to incur substantial costs and distract our management;


• We have claims and lawsuits against us that may result in adverse outcomes;


• Certain of our stock holders can exercise significant influence over our business and affairs;


•We may lose the right to use “Getty Images” trademarks in the event we experience a change in control;


• Our business depends on our ability to attract and retain talented employees;


• An increase in government regulation of the internet and e-commerce could have a negative impact on our business;


• We may have additional tax liabilities;


• If our goodwill or other intangible assets become impaired we may be required to record a significant charge to earnings;


• We may not be able to obtain external financing or service our indebtedness;


• Changes in accounting may affect our reported earnings and operating income;


• We operate a global business that exposes us to additional risks;


• Certain provisions of our corporate documents and Delaware corporate law may deter a third party from acquiring us;


• We have been named a party to two shareholder derivative lawsuits relating to historical stock option practices, and we may be named in additional lawsuits; and


• The informal inquiry by the SEC into our historical stock option grant practices is ongoing, and the outcome of this inquiry may have adverse consequences.

Potential risks and uncertainties also include, among others, those specifically set forth in this section and those in Part I, Item 1A. “Risk Factors” and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A)” of our 2006 Amended Annual Report on Form 10-K/A. New risks emerge from time-to-time that may cause actual results to differ materially from those contained in any forward-looking statements. This should not be construed as a complete list of all factors that could adversely affect our consolidated financial position, results of operations or liquidity. Except as required by law, we undertake no obligation to update any forward-looking statement, whether as a result of new information, future developments or otherwise. Readers should carefully review all documents that we file with, and furnish to, the SEC, as we will periodically update these forward-looking statements through these documents. Therefore, these forward-looking statements should not be considered current beyond the date this document is filed with the SEC.

GENERAL

The following should be read in conjunction with our Condensed Consolidated Financial Statements and the notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our 2006 Amended Annual Report on Form 10-K/A.

Critical Accounting Policies and Estimates and Assumptions

There have been no material changes in our critical accounting policies and estimates and assumptions since December 31, 2006.

Goodwill Impairment Review

We review goodwill for impairment annually as of August 31 and between annual tests in certain circumstances. Circumstances that could indicate impairment and require us to perform impairment tests more frequently than annually include: significant adverse changes in legal factors or market and economic conditions; a significant decline in the financial results of our operations; significant changes in our strategic plans; adverse actions by regulators; unanticipated changes in competition and our market share; or a planned disposition of a significant portion of our business. When assessing impairment, we estimate the implied fair value of each of our operating segments based on a discounted cash flow model that involves significant assumptions and estimates, including our future financial performance, our future weighted average cost of capital and our interpretation of currently enacted tax laws. At August 31, 2007, the implied fair value of our goodwill exceeded its carrying value in both of our operating segments and, therefore, our goodwill was not impaired. As circumstances change, it is possible that future goodwill impairment tests could result in a loss on impairment of assets, which would be included in the determination of income from operations.

Acquisitions of Businesses

On April 25, 2007, we purchased all the shares of MediaVast, Inc., owner of WireImage and sub-brands FilmMagic and Contour Photos, located in New York, New York, for $197.3 million in net cash. MediaVast is one of the leading creators of entertainment and event imagery. The majority of the purchase price was allocated to goodwill ($166.7 million), identifiable intangible assets ($52.1 million) and deferred tax liabilities ($14.9 million).

On June 19, 2007, we purchased all of the shares of Pump Audio, Inc. for $41.3 million (before future potential cash adjustments based on the working capital of the acquired company). Pump Audio, Inc., located in New York, New York, is a leading provider of quality independent music to content creators around the world. The majority of the purchase price was allocated to goodwill ($36.4 million), identifiable intangible assets ($9.6 million) and deferred tax liabilities ($3.5 million).

We also purchased several other small companies subsequent to December 31, 2006. All acquisitions were accounted for using the purchase method of accounting and, accordingly, the results of operations of the acquired businesses since the respective dates of acquisition are included in our consolidated financial statements. All acquisitions year-to-date were not material, individually or in the aggregate, to the company as a whole and, therefore, pro forma financial information is not presented.

A reclassification of our debentures in the second quarter of 2007 from long-term to current (due to the ability of the holders to require us to redeem the debentures on June 9, 2008) decreased our working capital and current ratio. Had we not reclassified the debentures, our working capital and current ratio would have been $250.3 million and 2.22, respectively, at September 30, 2007. The remaining decline in working capital is due mainly to cash paid for acquisitions of businesses during 2007. For further discussion of our reclassification of the debentures, see Note 4 to the Condensed Consolidated Financial Statements contained in this report.

Cash flows from investing activities decreased in 2007 as we paid more to acquire businesses in 2007 than the comparable period in 2006, and as we did not have any proceeds from the sale of investments in 2007. Cash flows from financing activities increased in 2007 as we borrowed $120.0 million in funds from our senior credit facility (the Facility) to fund, in part, business acquisitions in 2007. In addition, we did not repurchase any of our common stock in 2007 as we did in 2006.

The interest rate on funds drawn down under the senior credit facility (the Facility) ranges from LIBOR plus 0.60% to 0.75% depending on our leverage ratio. We are charged 0.125% to 0.15% on funds available ($200 million) but not drawn down. The Facility permits us to maintain a maximum leverage ratio of 2.75 throughout its term. The leverage ratio is defined as our total interest bearing debt divided by a trailing four quarter earnings before interest expense, income tax expense, depreciation, amortization, non-cash items (including stock-based compensation expense) and any non-recurring items. The Facility is also subject to customary events of default, including events of default on our other outstanding debt, as applicable, upon the occurrence of which we would be required to immediately repay any funds drawn down under the Facility.

We expect that our current cash and cash equivalents plus cash generated through future operating and financing activities will meet our liquidity needs for at least the next 12 months, including repayment or refinancing of our senior credit facility in March of 2008 and repayment of our debentures if the holders require us to redeem the debentures in June of 2008.

Contractual Obligations and Rights

There have been no material changes in our contractual obligations and rights outside the normal course of business since the 2006 year end. However, we are now required to disclose our unrecognized tax benefits as commitments in accordance with Financial Accounting Standards Board Interpretation (FIN) No. 48, “Accounting for Uncertainty in Income Taxes.” The current portion of our unrecognized tax benefits at September 30, 2007 was $2.0 million, which is expected to be resolved in the next 12 months. The non-current portion at September 30, 2007 was $38.1 million, of which the timing of the resolution is uncertain. Management expects capital expenditures to total approximately $65 million for the full year of 2007.

RECENT ACCOUNTING PRONOUNCEMENTS

Proposed FASB Staff Position (FSP) No. APB 14-a, “Accounting for Convertible Debt Instruments that may be Settled in Cash upon Conversion (Including Partial Cash Settlement)”

This proposed FSP specifies that issuers of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) should separately account for the liability and equity components of such instruments in a manner that reflects the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. This FSP has not been finalized but is proposed to become effective January 1, 2008, with retrospective application required. If this FSP were to be finalized as proposed, our interest expense would increase significantly. However, there would be no change in the amount of interest we pay in cash.

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