Interpublic Group of Companies (IPG)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

For the fiscal year ended December 31, 2005

Commission file number 1-6686

THE INTERPUBLIC GROUP OF COMPANIES, INC.

(Exact name of registrant as specified in its charter)

1114 Avenue of the Americas, New York, New York 10036

(Address of principal executive offices) (Zip Code)

(212) 704-1200

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Securities Registered Pursuant to Section 12(g) of the Act: None

          Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

          Large accelerated filer þ          Accelerated filer o          Non-accelerated filer o

          As of June 30, 2005, the aggregate market value of the shares of registrant’s common stock held by non-affiliates was $5,201,493,786. The number of shares of the registrant’s common stock outstanding as of February 28, 2006 was 436,029,334.

DOCUMENTS INCORPORATED BY REFERENCE

      The following sections of the Proxy Statement for the Annual Meeting of Stockholders to be held on May 25, 2006 are incorporated by reference in Part III: “Election of Directors,” “Corporate Governance Practices and Board Matters,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Compensation of Executive Officers,” “Report of the Compensation Committee of the Board of Directors,” “Outstanding Shares,” “Related Party Transactions” and “Appointment of Independent Auditors.”

TABLE OF CONTENTS

EXPLANATORY NOTE

      In this report, we have restated the financial data we previously published for each interim period in 2005. The interim period restatements relate primarily to accounting for goodwill impairments, revenue recognition and a number of miscellaneous items including accounting for leases and international compensation arrangements.

      The restated financial data and related disclosures are contained in Note 23 to the Consolidated Financial Statements in Item 8. We have not amended any of our previously filed reports. The financial data and other financial information for interim periods in 2005 in our quarterly reports on Form 10-Q for the quarters ended March 31, June 30 and September 30, 2005 should no longer be relied upon.

STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE

      This annual report on Form 10-K contains forward-looking statements. Statements in this report that are not historical facts, including statements about management’s beliefs and expectations, constitute forward-looking statements. These statements are based on current plans, estimates and projections, and are subject to change based on a number of factors, including those outlined in this report under Item 1A, Risk Factors. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update publicly any of them in light of new information or future events.

      Forward-looking statements involve inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those contained in any forward-looking statement. Such factors include, but are not limited to, the following:

      Investors should carefully consider these factors and the additional risk factors outlined in more detail in Item 1A, Risk Factors, in this report.

AVAILABLE INFORMATION

      Information regarding our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to these reports, will be made available, free of charge, at our website at http://www.interpublic.com, as soon as reasonably practicable after we electronically file such reports with, or furnish them to, the SEC. Any document that we file with the SEC may also be read and copied at the SEC’s Public Reference Room located at Room 1580, 100 F Street, N.E., Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Our filings are also available to the public from the SEC’s website at http://www.sec.gov, and at the offices of the New York Stock Exchange (“NYSE”). For further information on obtaining copies of our public filings at the NYSE, please call (212) 656-5060.

      Our Corporate Governance Guidelines, Code of Conduct and each of the charters for the Audit Committee, Compensation Committee and the Corporate Governance Committee are available free of charge on our website at http://www.interpublic.com, or by writing to The Interpublic Group of Companies, Inc., 1114 Avenue of the Americas, New York, New York 10036, Attention: Secretary.

PART I

      The Interpublic Group of Companies, Inc. was incorporated in Delaware in September 1930 under the name of McCann-Erickson Incorporated as the successor to the advertising agency businesses founded in 1902 by A.W. Erickson and in 1911 by Harrison K. McCann. The Company has operated under the Interpublic name since January 1961.

Our Client Offerings

      The Interpublic Group of Companies, Inc., together with its subsidiaries (the “Company”, “Interpublic”, “we”, “us” or “our”), is one of the world’s largest advertising and marketing services companies, comprised of hundreds of communication agencies around the world that deliver custom marketing solutions on behalf of our clients. Our agencies cover the spectrum of marketing disciplines and specialties, from traditional services such as consumer advertising and direct marketing, to services such as experiential marketing and branded entertainment. With offices in over 100 countries and approximately 43,000 employees, our agencies work with our clients to create global and local marketing campaigns. These marketing programs seek to build brands, influence consumer behavior and sell products.

      To meet the challenge of an increasingly complex consumer culture, we create customized marketing solutions for each of our clients. Engagements between clients and agencies fall into five basic categories, or models. In the single-discipline model, clients work directly with one agency in one discipline. The project collaboration model is employed when sister agencies are brought in on a project basis as a client’s needs expand. In the integrated agency-of-record model, a multi-disciplinary agency provides a fuller range of marketing services for a client. The lead company model is applied when a lead agency manages the work at several of our agencies. Finally, in the virtual network model, clients have a representative at the holding company level to oversee the fullest range of our marketing spectrum.

      While our agencies work on behalf of our clients using one of these models, we provide resources and support to ensure that our agencies can best meet our clients’ needs. Based in New York City, the holding company sets company-wide financial objectives, directs collaborative inter-agency programs, establishes fiscal management and operational controls, guides personnel policy, conducts investor relations and initiates, manages and approves mergers and acquisitions. In addition, it provides limited centralized functional services that offer our companies some operational efficiencies, including accounting and finance, marketing information retrieval and analysis, legal services, real estate expertise, recruitment aid, employee benefits and executive compensation management.

Our Disciplines and Agencies

      We have hundreds of specialized agencies. The following is a sample of some of our brands.

      Our global networks offer our largest clients a full range of marketing and communications services. Combined, their footprint spans over 100 countries:

      We have many full-service marketing agencies whose distinctive resources provide clients with multi-disciplinary communication services:

      We also have many domestic advertising agencies that provide North American clients with traditional services in print and broadcast media:

      Our one-to-one marketing companies specialize in using a full range of digital, interactive and traditional media services to communicate directly with consumers in relevant and innovative ways:

      The worldwide leader in experiential marketing, Jack Morton Worldwide, is part of our group. Jack Morton creates interactive experiences whose goal is to improve performance, increase sales and build brand recognition. The agency produces meetings and events, environmental design, exhibits, digital media and learning programs.

      Our media offering addresses changes in today’s fragmented media landscape, with capabilities in planning, research, negotiating and buying, as well as media research, product placement and programming. Our major media agencies are:

      To help activate consumer demand, our promotion agencies offer clients a range of options, including sweepstakes, incentive programs, sampling opportunities and trade programming:

      Our public relations agencies offer such worldwide services as consumer PR, corporate communications, crisis management, web relations and investor relations:

      We also have special marketing services agencies that we believe are best-in-class for their niche markets:

      Our sports and entertainment marketing firms manage top athletes and sporting events and represent some of the world’s most-recognized celebrities:

      Our affiliated multicultural agency partners, in which we own a minority interest, target specific demographic segments:

      Interpublic maintains separate agency brands to manage the broadest range of clients, even ones that operate in similar business areas. Having distinct agencies allows us to avoid potential conflicts of interest among our clients in the same industry. To help manage these companies effectively, however, we have organized our agencies into five global operating divisions. Four of these divisions, McCann WorldGroup (“McCann”), The FCB Group (“FCB”), Lowe Worldwide (“Lowe”) and Draft Worldwide (“Draft”), provide a distinct comprehensive array of global communications and marketing services. The fifth global operating division, The Constituency Management Group (“CMG”), which includes Weber Shandwick, MWW Group, FutureBrand, DeVries, Golin Harris, Jack Morton and Octagon Worldwide (“Octagon”), provides clients with diversified services, including public relations, meeting and event production, sports and entertainment marketing, corporate and brand identity and strategic marketing consulting.

      A group of leading stand-alone agencies provide clients with a full range of advertising and marketing services. These agencies partner with our global operating groups as needed, and include Campbell-Ewald, Hill Holliday, Deutsch and Mullen.

      We believe this organizational structure allows us to provide comprehensive solutions for clients and enables stronger financial and operational growth opportunities. We practice a decentralized management style, providing agency management with a great deal of operational autonomy.

Our Financial Reporting Segments

      As of December 31, 2005, for financial reporting purposes we have three reportable segments. The largest segment, Integrated Agency Networks (“IAN”), is comprised of McCann, FCB, Lowe, Draft, our media agencies, and our leading stand-alone agencies. CMG comprises our second reportable segment. Our third reportable segment is comprised of our Motorsports operations (“Motorsports”), which were sold during 2004 and had immaterial residual operating results in 2005. See Note 20 to the Consolidated Financial Statements for further discussion.

Principal Markets

      Our agencies are located in over 100 countries and in every significant world market. We provide services for clients whose businesses are broadly international in scope, as well as for clients whose businesses are limited to a single country or a small number of countries. The United States (“U.S.”), Europe (excluding the United Kingdom (“UK”)), the UK, Asia Pacific and Latin America represented 55.2%, 18.1%, 9.9%, 7.5% and 4.1% of our total revenue, respectively, in 2005. For further discussion concerning revenues and long-lived assets on a geographical basis for each of the last three years, see Note 20 to the Consolidated Financial Statements.

Sources of Revenue

      Our revenues are primarily derived from the planning and execution of advertising programs in various media and the planning and execution of other marketing and communications programs. Most of our client contracts are individually negotiated. Accordingly, the terms of client engagements and the basis on which we earn commissions and fees vary significantly. Our client contracts are becoming increasingly complex arrangements that frequently include provisions for incentive compensation and govern vendor rebates and credits. Our largest clients are multinational entities and we often provide services to these clients out of multiple offices and across various agencies. In arranging for such services to be provided, we may enter into global, regional and local agreements. Multiple agreements of this nature are reviewed by legal counsel to determine the governing terms to be followed by the offices and agencies involved.

      Revenues for creation, planning and placement of advertising are primarily determined on a negotiated fee basis and, to a lesser extent, on a commission basis. Fees are usually calculated to reflect hourly rates plus proportional overhead and a mark-up. Many clients include an incentive compensation component in their total compensation package. This provides added revenue based on achieving mutually agreed-upon qualitative and/or quantitative metrics within specified time periods. Commissions are earned based on services provided, and are usually derived from a percentage or fee over the total cost to complete the assignment. Commissions can also be derived when clients pay us the gross rate billed by media and we pay for media at a lower net rate; the difference is the commission that we earn, which is either retained in total or shared with the client depending on the nature of the services agreement.

      We pay media charges with respect to contracts for advertising time or space that we place on behalf of our clients. To reduce our risk from a client’s non-payment, we typically pay media charges only after we receive funds from our clients. Generally, we act as the client’s agent rather than the primary obligor. In some instances we agree with the media provider that we will only be liable to pay the media after the client has paid us for the media charges.

      We also generate revenue in negotiated fees from our public relations, sales promotion, event marketing, sports and entertainment marketing and corporate and brand identity services.

      Our revenue is directly dependent upon the advertising, marketing and corporate communications requirements of our clients and tends to be higher in the second half of the calendar year as a result of the holiday season and lower in the first half as a result of the post-holiday slow-down in client activity. Depending on the terms of the client contract, fees for services performed can be primarily recognized three ways: proportional performance, straight-line (or monthly basis) or completed contract. Fee revenue recognized on a completed contract basis also contributes to the higher seasonal revenues experienced in the fourth quarter due to the majority of our contracts ending at December 31. As is customary in the industry, these contracts provide for termination by either party on relatively short notice, usually 90 days. See Note 1 to the Consolidated Financial Statements for further discussion of our revenue recognition accounting policies.

Clients

      In the aggregate, our top ten clients based on revenue accounted for approximately 24.7% and 23.5% of revenue in 2005 and 2004, respectively. Based on revenue for the year ended December 31, 2005, our largest clients were General Motors Corporation, Microsoft, Unilever, Johnson & Johnson, and Verizon. While the loss of the entire business of any one of our largest clients might have a material adverse effect upon our business, we believe that it is unlikely that the entire business of any of these clients would be lost at the same time. This is because we represent several different brands or divisions of each of these clients in a number of geographic markets, as well as provide services across multiple advertising and marketing disciplines, in each case through more than one of our agency systems. Representation of a client rarely means that we handle advertising for all brands or product lines of the client in all geographical locations. Any client may transfer its business from one of our agencies to a competing agency, and a client may reduce its marketing budget at any time.

Personnel

      As of December 31, 2005, we employed approximately 43,000 persons, of whom approximately 18,000 were employed in the U.S. Because of the personal service character of the advertising and marketing communications business, the quality of personnel is of crucial importance to our continuing success. There is keen competition for qualified employees.

      We are subject to a variety of possible risks that could adversely impact our revenues, results of operations or financial condition. Some of these risks relate to the industry in which we operate, while others are more specific to us. The following factors set out potential risks we have identified that could adversely affect us. See also Statement Regarding Forward-Looking Disclosure.

      We have identified numerous material weaknesses in our internal control over financial reporting, and our internal control over financial reporting was not effective as of December 31, 2005. For a detailed description of these material weaknesses, see Item 8, Management’s Assessment on Internal Control Over Financial Reporting, of our Form 10-K. Each of our material weaknesses results in more than a remote likelihood that a material misstatement will not be prevented or detected. As a result, we must perform extensive additional work to obtain reasonable assurance regarding the reliability of our financial statements. Given the extensive material weaknesses identified, even with this additional work there is a risk of errors not being prevented or detected, which could result in further restatements.

      Because of our decentralized structure and our many disparate accounting systems of varying quality and sophistication, we have extensive work remaining to remedy our material weaknesses in internal control over financial reporting. We are in the process of developing a work plan for remedying all of the identified material weaknesses, and this work will extend beyond 2006. There can be no assurance as to when the remediation plan will be completed or when the material weaknesses will be remedied. There will also continue to be a serious risk that we will be unable to file future periodic reports with the SEC in a timely manner, that a default could result under the indentures governing our debt securities or under our three-year revolving credit agreement (the “Three-Year Revolving Credit Facility”) or credit facilities of our subsidiaries and that our future financial statements could contain errors that will be undetected.

      As a result of the extent of the deficiencies in our internal control over financial reporting, we incurred significant professional fees and other expenses in 2005 to prepare our consolidated financial statements and to comply with the requirements of Section 404 of the Sarbanes-Oxley Act. Until our remediation is completed, we will continue to incur the expenses and management burdens associated with the manual procedures and additional resources required to prepare our consolidated financial statements. The cost of this work will continue to be significant in 2006 and beyond.

      We may continue to suffer adverse effects from the restatement of previously issued financial statements that we presented in our annual report on Form 10-K for the year ended December 31, 2004, as amended (the “2004 Form 10-K”). In the 2004 Form 10-K, we restated our previously reported financial statements for the years ended December 31, 2003, 2002, 2001 and 2000, and for the first three quarters of 2004 and all four quarters of 2003 (the “Prior Restatement”). In this report, we have restated the financial data for the first three quarters of 2005.

      As a result of these matters, we have recorded liabilities for vendor discounts and other obligations that will necessitate cash settlement that may negatively impact our cash flow in future years. We may also become subject to fines or other penalties or damages in our ongoing SEC investigation or new regulatory actions or civil litigation. Any of these matters may also contribute to further ratings downgrades, negative publicity and difficulties in attracting and retaining key clients, employees and management personnel.

      The SEC opened a formal investigation in response to the restatement we first announced in August 2002 and, as previously disclosed, the SEC staff’s investigation has expanded to encompass our Prior Restatement. In particular, since we filed our 2004 Form 10-K, we have received subpoenas from the SEC relating to matters addressed in our Prior Restatement. We continue to cooperate with the investigation. We expect that the investigation will result in monetary liability, but because the investigation is ongoing, in particular with respect to the Prior Restatement, we cannot reasonably estimate either the timing of a resolution or the amount. Accordingly, we have not yet established any accounting provision relating to these matters. Potential adverse developments in connection with the investigation, including any expansion of the scope of the investigation, could also negatively impact us and could divert the efforts and attention of our management team from our ordinary business operations.

      The marketing communications business is highly competitive. Our agencies and media services must compete with other agencies, and with other providers of creative or media services, in order to maintain existing client relationships and to win new clients. The client’s perception of the quality of an agency’s creative work, our reputation and the agencies’ reputations are important factors in determining our

competitive position. An agency’s ability to serve clients, particularly large international clients, on a broad geographic basis is also an important competitive consideration. On the other hand, because an agency’s principal asset is its people, freedom of entry into the business is almost unlimited and a small agency is, on occasion, able to take all or some portion of a client’s account from a much larger competitor.

      Many companies put their advertising and marketing communications business up for competitive review from time to time. We have won and lost client accounts in the past as a result of such periodic competitions. Our ability to attract new clients and to retain existing clients may also, in some cases, be limited by clients’ policies or perceptions about conflicts of interest. These policies can, in some cases, prevent one agency, or even different agencies under our ownership, from performing similar services for competing products or companies.

      In addition, issues arising from our deficiencies in our internal control over financial reporting could divert the efforts and attention of our management from our ordinary business operations or have an adverse impact on clients’ perceptions of us and adversely affect our overall ability to compete for new and existing business.

      Employees, including creative, research, media, account and practice group specialists, and their skills and relationships with clients, are among our most important assets. An important aspect of our competitiveness is our ability to attract and retain key employees and management personnel. Our ability to do so is influenced by a variety of factors, including the compensation we award, and could be adversely affected by our recent financial performance and financial reporting difficulties.

      Economic downturns often more severely affect the marketing services industry than other industries. In the past, some clients have responded to weak economic performance in any region where we operate by reducing their marketing budgets, which are generally discretionary in nature and easier to reduce in the short-term than other expenses related to operations. This pattern may recur in the future.

      In recent periods we have experienced operating losses that have adversely affected our cash flows from operations. We have recorded liabilities and incurred substantial professional fees in connection with the Prior Restatement. It is also possible that we will be required to pay fines or other penalties or damages in connection with the ongoing SEC investigation or future regulatory actions or civil litigation. These items have impacted and will impact our liquidity in future years negatively and could require us to seek new or additional sources of liquidity to fund our working capital needs. There can be no guarantee that we would be able to access any such new sources of new liquidity on commercially reasonable terms or at all. If we are unable to do so, our liquidity position could be adversely affected.

      Our long-term debt is currently rated B+ with negative outlook by Standard and Poor’s, Ba1 with negative outlook by Moody’s, and B+ with stable outlook by Fitch. It is possible that our credit ratings will be reduced further. Ratings downgrades or comparatively weak ratings can adversely affect us, because ratings are an important factor influencing our ability to access capital. Our clients and vendors may also consider our credit profile when negotiating contract terms, and if they were to change the terms on which they deal with us, it could have a significant adverse affect on our liquidity.

      We have a large and diverse client base and at any given time, one or more of our clients may experience financial distress, file for bankruptcy protection or go out of business. If any client with whom we have a substantial amount of business experiences financial difficulty, it could delay or jeopardize the

collection of accounts receivable, may result in significant reductions in services provided by us and may have a material adverse effect on our financial position, results of operations and liquidity. For a description of our client base, see Item 1, Business- Clients.

      International revenues represent a significant portion of our revenues, approximately 45% in 2005. Our international operations are exposed to risks that affect foreign operations of all kinds, including local legislation, monetary devaluation, exchange control restrictions and unstable political conditions. These risks may limit our ability to grow our business and effectively manage our operations in those countries. In addition, because a high level of our revenues and expenses is denominated in currencies other than the U.S. dollar, primarily the Euro and Pound Sterling, fluctuations in exchange rates between the U.S. dollar and such currencies may materially affect our financial results.

      We evaluate all of our long-lived assets (including goodwill, other intangible assets and fixed assets), investments and deferred tax assets for possible impairment or realizability at least annually and whenever there is an indication of impairment or lack of realizability. If certain criteria are met, we are required to record an impairment charge or valuation allowance. In the past, we have recorded substantial amounts of goodwill, investment and other impairment charges, and have been required to establish substantial valuation allowances with respect to deferred tax assets and loss carry-forwards.

      As of December 31, 2005, we have substantial amounts of intangibles, investments and deferred tax assets on our Consolidated Balance Sheet. Future events, including our financial performance and strategic decisions, could cause us to conclude that further impairment indicators exist and that the asset values associated with intangibles, investments and deferred tax assets may have become impaired. Any resulting impairment loss would have an adverse impact on our reported earnings in the period in which the charge is recognized. In connection with the U.S. deferred tax assets, management believes that it is more likely than not that a substantial amount of the deferred tax assets will be realized; a valuation allowance has been established for the remainder. The amount of the deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future U.S. taxable income are lower than anticipated.

      Our Three-Year Revolving Credit Facility contains covenants that limit our operational flexibility and require us to meet specified financial ratios. The Three-Year Revolving Credit Facility does not permit us (i) to make cash acquisitions in excess of $50.0 million until October 2006, or thereafter in excess of $50.0 million until expiration of the agreement in May 2007, subject to increases equal to the net cash proceeds received in the applicable period from any disposition of assets; (ii) to make capital expenditures in excess of $210.0 million annually; (iii) to repurchase or to declare or pay dividends on our capital stock (except for any convertible preferred stock, convertible trust preferred instrument or similar security, which includes our outstanding 5.375% Series A Mandatory Convertible Preferred Stock and our 5.25% Series B Cumulative Convertible Perpetual Preferred Stock), except that we may repurchase our capital stock in connection with the exercise of options by our employees or with proceeds contemporaneously received from an issue of new shares of our capital stock; and (iv) to incur new debt at our subsidiaries, other than unsecured debt incurred in the ordinary course of business of our subsidiaries outside the U.S. and unsecured debt, which may not exceed $10.0 million in the aggregate, incurred in the ordinary course of business of our U.S. subsidiaries. Under the Three-Year Revolving Credit Facility, we are also subject to financial covenants with respect to our interest coverage ratio, debt to EBITDA ratio and minimum EBITDA.

      We have in the past been required to seek and successfully have obtained amendments and waivers of the financial covenants under our committed bank facility. There can be no assurance that we will be in compliance with these covenants in future periods. If we do not comply and are unable to obtain the necessary amendments or waivers at that time, we would be unable to borrow or obtain additional letters

of credit under the Three-Year Revolving Credit Facility and could choose to terminate the facility and provide a cash deposit in connection with any outstanding letters of credit. The lenders under the Three-Year Revolving Credit Facility would also have the right to terminate the facility, accelerate any outstanding principal and require us to provide a cash deposit in an amount equal to the total amount of outstanding letters of credit. The outstanding amount of letters of credit was $162.4 million as of December 31, 2005. We have not drawn under the Three-Year Revolving Credit Facility over the past two years, and we do not currently expect to draw under it. So long as there are no amounts to be accelerated under the Three-Year Revolving Credit Facility, termination of the facility would not trigger the cross-acceleration provisions of our public debt.

      Any future impairment charge (excluding valuation allowance charges) could result in a violation of the financial covenants of our Three-Year Revolving Credit Facility, which requires us to maintain minimum levels of consolidated EBITDA (as defined in that facility) and established ratios of debt to consolidated EBITDA and interest coverage ratios. A violation of any of these financial covenants could trigger a default under this facility and adversely affect our liquidity.

      From time to time, we communicate to the market certain targets and milestones for our financial and operating performance including, but not limited to, the areas of revenue growth, operating expense reduction and operating margin growth. These targets and milestones are intended to provide metrics against which to evaluate our performance, but they should not be understood as predictions or guidance about our expected performance. Our ability to meet any target or milestone is subject to inherent risks and uncertainties, and we caution investors against placing undue reliance on them. See “Statement Regarding Forward-Looking Disclosure.”

      Our industry is subject to government regulation and other governmental action, both domestic and foreign. There has been an increasing tendency on the part of advertisers and consumer groups to challenge advertising through legislation, regulation, the courts or otherwise, for example on the grounds that the advertising is false and deceptive or injurious to public welfare. Through the years, there has been a continuing expansion of specific rules, prohibitions, media restrictions, labeling disclosures and warning requirements with respect to the advertising for certain products. Representatives within government bodies, both domestic and foreign, continue to initiate proposals to ban the advertising of specific products and to impose taxes on or deny deductions for advertising, which, if successful, may have an adverse effect on advertising expenditures and consequently our revenues.

      None.

      Substantially all of our office space is leased from third parties. Several of our leases will be expiring within the next few months, while the remainder will be expiring within the next 19 years. Certain leases are subject to rent reviews or contain escalation clauses, and certain of our leases require the payment of various operating expenses, which may also be subject to escalation. Physical properties include leasehold improvements, furniture, fixtures and equipment located in our offices. We believe that facilities leased or owned by us are adequate for the purposes for which they are currently used and are well maintained. See Note 21 to the Consolidated Financial Statements for a discussion of our lease commitments.

      We are or have been involved in legal and administrative proceedings of various types. While any litigation contains an element of uncertainty, we have no reason to believe that the outcome of such proceedings or claims will have a material adverse effect on our financial condition except as described below.

SEC Investigation

      The SEC opened a formal investigation in response to the restatement we first announced in August 2002 and, as previously disclosed, the SEC staff’s investigation has expanded to encompass our Prior Restatement. In particular, since we filed our 2004 Form 10-K, we have received subpoenas from the SEC relating to matters addressed in our Prior Restatement. We continue to cooperate with the investigation. We expect that the investigation will result in monetary liability, but because the investigation is ongoing, in particular with respect to the Prior Restatement, we cannot reasonably estimate either the timing of a resolution or the amount. Accordingly, we have not yet established any accounting provision relating to these matters.

      This item is answered in respect of the Annual Meeting of Stockholders held on November 14, 2005 (the “Annual Meeting”). At the Annual Meeting, the following number of votes were cast with respect to each matter voted upon:

      Proposal to approve Management’s nominees for director as follows:

      Proposal to approve The Interpublic Group of Companies Employee Stock Purchase Plan (2006):

      Proposal to approve confirmation of the appointment of PricewaterhouseCoopers LLP as independent auditors for 2005:

      Shareholder proposal to arrange for the prompt sale of the Company to the highest bidder:

Executive Officers of Interpublic

      There is no family relationship among any of the executive officers.

      Mr. Roth became our Chairman of the Board and Chief Executive Officer, effective January 19, 2005. Prior to that time, Mr. Roth served as our Chairman of the Board from July 13, 2004 to January 2005. Mr. Roth served as Chairman and Chief Executive Officer of The MONY Group Inc. from February 1994 to June 2004. Mr. Roth has been a member of the Board of Directors of Interpublic since February 2002. He is also a director of Pitney Bowes Inc. and Gaylord Entertainment Company.

      Mr. Camera was hired in May 1993. He was elected Vice President, Assistant General Counsel and Assistant Secretary in June 1994, Vice President, General Counsel and Secretary in December 1995, and Senior Vice President, General Counsel and Secretary in February 2000.

      Mr. Conte was hired in March 2000 as Senior Vice President, Taxes and General Tax Counsel. Prior to joining us, Mr. Conte served as Vice President, Senior Tax Counsel for Revlon Consumer Products Corporation from September 1987 to February 2000.

      Mr. Cyprus was hired in May 2004 as Senior Vice President, Controller and Chief Accounting Officer. Prior to joining us, Mr. Cyprus served as Vice President and Controller of AT&T from January 1999 to May 2004. On March 22, 2006, we announced that Mr. Cyprus would be leaving the Company effective March 31, 2006.

      Mr. Dowling was hired in January 2000 as Vice President and General Auditor. He was elected Senior Vice President, Financial Administration of Interpublic in February 2001, and Senior Vice President, Chief Risk Officer in November 2002. Prior to joining us, Mr. Dowling served as Vice President and General Auditor for Avon Products, Inc. from April 1992 to December 1999.

      Mr. Gatfield was hired in April 2004 as Executive Vice President, Global Operations and Innovation. He was elected Executive Vice President, Strategy and Network Operations in December 2005, and in February 2006 was also named Chief Executive Officer of Lowe Worldwide. Prior to joining us, he served as Chief Operating Officer from 2001 to 2004 and as Regional Managing Director for the Asia Pacific region from 1997 to 2000 for Leo Burnett Worldwide.

      Mr. Krakowsky was hired in January 2002 as Senior Vice President, Director of Corporate Communications. He was elected Executive Vice President, Strategy and Corporate Relations in December 2005. Prior to joining us, he served as Senior Vice President, Communications Director for Young & Rubicam from August 1996 to December 2000. During 2001, Mr. Krakowsky was complying with the terms of a non-competition agreement entered into with Young & Rubicam.

      Mr. Mergenthaler was hired in August 2005 as Executive Vice President and Chief Financial Officer. Prior to joining us, he served as Executive Vice President and Chief Financial Officer for Columbia House Company from July 2002 to July 2005. Mr. Mergenthaler served as Senior Vice President and Deputy Chief Financial Officer for Vivendi Universal from December 2001 to March 2002. Prior to that time Mr. Mergenthaler was an executive at Seagram Company Ltd. from November 1996 to December 2001.

      Mr. Sompolski was hired in July 2004 as Executive Vice President, Chief Human Resources Officer. Prior to joining us, he served as Senior Vice President of Human Resources and Administration for Altria Group from November 1996 to January 2003.

PART II

Price Range of Common Stock

      Our common stock is listed and traded on the New York Stock Exchange (“NYSE”) under the symbol “IPG.” The following table provides the high and low closing sales prices per share for the periods shown below as reported on the NYSE. At February 28, 2006, there were 43,701 registered holders of our common stock.

Dividend Policy

      No dividend was paid on our common stock during 2003, 2004, or 2005. Our future dividend policy will be determined on a quarter-by-quarter basis and will depend on earnings, financial condition, capital requirements and other factors. The current terms of our Three-Year Revolving Credit Facility limit our ability to declare and pay dividends. For a discussion of the restrictions under our Three-Year Revolving Credit Facility, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources. In addition, the terms of our outstanding series of preferred stock do not permit us to pay dividends on our common stock unless all accumulated and unpaid dividends have been or contemporaneously are declared and paid or provision for the payment thereof has been made. Our future dividend policy may also be influenced by the impact of our securities with participating rights in earnings available to common stockholders, including our 4.50% Convertible Senior Notes and Series A Mandatory Convertible Preferred Stock. For a discussion of our participating securities, see Note 13 to the Consolidated Financial Statements.

Transfer Agent and Registrar for Common Stock

      The transfer agent and registrar for our common stock is:

          Mellon Investor Services, Inc.

          480 Washington Boulevard

          29^th Floor

          Jersey City, NJ 07310

          Tel: (877) 363-6398

Sales of Unregistered Securities

      In the fourth quarter of 2005, we issued securities without registration under the Securities Act of 1933, as amended (the “Securities Act”) in payment of deferred compensation for acquisitions we made in earlier periods and for raising capital. The specific transactions were as follows:

      Each share of our Series B Preferred Stock may be converted at any time, at the option of the holder, into 73.1904 shares of our common stock, which is equivalent to an initial conversion price of approximately $13.66, plus cash in lieu of fractional shares. The conversion rate is subject to adjustment upon the occurrence of certain events. On or after October 15, 2010, we may cause shares of our Series B Preferred Stock to be automatically converted into shares of our common stock at the then prevailing conversion rate if the closing price of our common stock multiplied by the conversion rate then in effect equals or exceeds 130% of the liquidation preference for 20 trading days during any consecutive 30 trading day period.

Repurchase of Equity Securities

      The following table provides information regarding our purchases of equity securities during the fourth quarter of 2005:

THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND

SUMMARY SELECTED FINANCIAL DATA

(Amounts in Millions, Except Per Share Amounts)

THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in Millions, Except Per Share Amounts)

      Certain classification revisions have been made to the prior period financial statements to conform to the current year presentation. These classification revisions included amounts previously recorded in current assets as accounts receivable of $537.7, $528.6, $315.8 and $249.2 to expenditures billable to clients and amounts previously recorded in current liabilities as accounts payable of $1,411.5, $1,197.0, $1,075.1 and $1,010.0 to accrued liabilities in the accompanying Consolidated Balance Sheets as of December 31, 2004, 2003, 2002 and 2001, respectively. The classification of these amounts were revised to more appropriately reflect the composition of the year end balances of accounts receivable as amounts billed to clients and accounts payable as amounts for which we have received invoices from vendors. These classification revisions had no impact on our results of operations or changes in our stockholders’ equity.

THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Amounts in Millions, Except Per Share Amounts)

      The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help you understand The Interpublic Group of Companies, Inc. and its subsidiaries (the “Company”, “Interpublic”, “we”, “us” or “our”). MD&A is provided as a supplement to and should be read in conjunction with our financial statements and the accompanying notes. Our MD&A includes the following sections:

      OVERVIEW provides a description of our business, the drivers of our business, and how we analyze our business. It then provides an analysis of our 2005 performance and a description of the significant events impacting 2005 and thereafter.

      RESULTS OF OPERATIONS provides an analysis of the consolidated and segment results of operations for 2005 compared to 2004 and 2004 compared to 2003.

      LIQUIDITY AND CAPITAL RESOURCES provides an overview of our cash flows, financing, contractual obligations and derivatives and hedging activities.

      INTERNAL CONTROL OVER FINANCIAL REPORTING provides a description of the status of our compliance with Section 404 of the Sarbanes-Oxley Act of 2002 and related rules. For more detail, see Item 8, Financial Statements and Supplementary Data, and Item 9A, Controls and Procedures.

      LIABILITIES RELATED TO OUR PRIOR RESTATEMENT provides a description and update of the significant liabilities recorded as part of our previously reported restated financial statements for the years ended December 31, 2003, 2002, 2001 and 2000 (“Prior Restatement”). For additional information, see Item 8, Financial Statements and Supplementary Data.

      OUT OF PERIOD ADJUSTMENTS provides a description and impact of amounts recorded as part of our 2005 financial statements which relate to a prior annual period. The out of period adjustments primarily relate to errors in accounting related to vendor credits or discounts, income taxes as well as the impact of other miscellaneous adjustments.

      CRITICAL ACCOUNTING ESTIMATES provides a discussion of our accounting policies that require critical judgment, assumptions and estimates.

      OTHER MATTERS provides a discussion of our significant non-operational items which impact our financial statements, such as the SEC investigation.

      RECENT ACCOUNTING STANDARDS by reference to Note 22 to the Consolidated Financial Statements, provides a description of accounting standards which we have not yet been required to implement and may be applicable to our future operations, as well as those significant accounting standards which were adopted during 2005.

OVERVIEW

      We are one of the world’s largest advertising and marketing services companies, comprised of hundreds of communication agencies around the world that deliver custom marketing solutions on behalf of our clients. Our agencies cover the spectrum of marketing disciplines and specialties, from traditional services such as consumer advertising and direct marketing, to newer disciplines such as experiential marketing and branded entertainment. With offices in over 100 countries and approximately 43,000 employees, our agencies work with our clients to create global and local marketing campaigns that cross borders and media. These marketing programs seek to build brands, influence consumer behavior and sell products.

THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

(Amounts in Millions, Except Per Share Amounts)

      Interpublic maintains separate agency brands to manage the broadest range of clients, even ones that operate in similar business areas. Having distinct agencies allows us to avoid potential conflicts of interest among our clients in the same industry. To help manage these companies effectively, however, we have organized our agencies into five global operating divisions. Four of these divisions, McCann WorldGroup (“McCann”), The FCB Group (“FCB”), Lowe Worldwide (“Lowe”) and Draft Worldwide (“Draft”), provide a distinct, comprehensive array of global communications and marketing services. The fifth global operating division, The Constituency Management Group (“CMG”), which includes Weber Shandwick, MWW Group, FutureBrand, DeVries, Golin Harris, Jack Morton and Octagon Worldwide (“Octagon”), provides clients with diversified services, including public relations, meeting and event production, sports and entertainment marketing, corporate and brand identity and strategic marketing consulting.

      A group of leading stand-alone agencies provide clients with a full range of advertising and marketing services. These agencies partner with our global operating groups as needed, and include Campbell-Ewald, Hill Holiday, Deutsch and Mullen.

      We believe this organizational structure allows us to provide comprehensive solutions for clients, enables stronger financial and operational growth opportunities and allows us to improve operating efficiencies within our organization. We practice a decentralized management style, providing agency management with a great deal of operational autonomy, while holding them broadly responsible for their agencies’ financial and operational performance.

      As of December 31, 2005, for financial reporting purposes we have three reportable segments. The largest segment, Integrated Agency Networks (“IAN”), is comprised of McCann, FCB, Lowe, Draft, our media agencies, and our leading stand-alone agencies. CMG comprises our second reportable segment. Our third reportable segment is comprised of our Motorsports operations (“Motorsports”), which were sold during 2004 and had immaterial residual operating results in 2005.

      Our revenues are primarily derived from the planning and execution of advertising programs in various media and the planning and execution of other marketing and communications programs. Most of our client contracts are individually negotiated and accordingly, the terms of client engagements and the basis on which we earn commissions and fees vary significantly. Our client contracts are also becoming increasingly complex arrangements that frequently include provisions for incentive compensation and govern vendor rebates and credits.

      Revenues for creation, planning and placement of advertising are primarily determined on a negotiated fee basis and, to a lesser extent, on a commission basis. Fees are usually calculated to reflect hourly rates plus proportional overhead and a mark-up. Many clients include an incentive compensation component in their total compensation package. This provides added revenue based on achieving mutually agreed-upon qualitative and/or quantitative metrics within specified time periods. Commissions are earned based on services provided, and are usually derived from a percentage or fee over the total cost to complete the assignment. Commissions can also be derived when clients pay us the gross rate billed by media and we pay for media at a lower net rate; the difference is the commission that we earn, which is either retained in total or shared with the client depending on the nature of the services agreement.

      We pay media charges with respect to contracts for advertising time or space that we place on behalf of our clients. To reduce our risk from a client’s non-payment, we typically pay media charges only after we receive funds from our clients. Generally, we act as the client’s agent rather than the primary obligor. In some instances we agree with the media provider that we will only be liable to pay the media after the client has paid us for the media charges.

THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

(Amounts in Millions, Except Per Share Amounts)

      We also generate revenue in negotiated fees from our public relations, sales promotion, event marketing, sports and entertainment marketing and corporate and brand identity services.

      Our revenue is directly dependent upon the advertising, marketing and corporate communications requirements of our clients and tends to be higher in the second half of the calendar year as a result of the holiday season and lower in the first half as a result of the post-holiday slow-down in client activity. Depending on the terms of the client contract, fees for services performed can be primarily recognized three ways: proportional performance, straight-line (or monthly basis) or completed contract. Fee revenue recognized on a completed contract basis also contributes to the higher seasonal revenues experienced in the fourth quarter due to the majority of our contracts ending at December 31. As is customary in the industry, these contracts provide for termination by either party on relatively short notice, usually 90 days. See Note 1 to the Consolidated Financial Statements for further discussion of our revenue recognition accounting policies.

      Our revenue is driven by our ability to maintain and grow existing business, as well as generate new business. Our business is directly affected by economic conditions in the industries and regions we serve and by the marketing and advertising requirements and practices of our clients and potential clients. When economic conditions decline, companies generally decrease advertising and marketing budgets, and it becomes more difficult to achieve profitability. Our business is highly competitive, which tends to mitigate our pricing power and that of our competition.

      We believe that expanding the range of services we provide to our key clients is critical to our continued growth. We are focused on strengthening our collaboration across agencies, which we believe will increase our ability to better service existing clients and win new clients.

      The primary focus of our business analysis is on operating performance, specifically, changes in revenues and operating expenses.

      We analyze the increase or decrease in revenue by reviewing the components of the change, including: the impact of foreign currency exchange rate changes, the impact of net acquisitions and divestitures, and the balance, which we refer to as organic revenue change. As economic conditions and demand for our services can vary between geographic regions, we also analyze revenues by domestic and international sources.

      Our operating expenses are in two primary categories: salaries and related expenses, and office and general expenses. As with revenue, we analyze the increase or decrease in operating expenses by reviewing the following components of the change: the impact of foreign currency exchange rate changes, the impact of net acquisitions and divestitures, and the organic component of the change. Salaries and related expenses tend to fluctuate with changes in revenues and are measured as a percentage of revenues. Office and general expenses, which have both a fixed and variable component, tend not to vary as much with revenue.

      Our financial performance over the past several years has lagged behind that of our industry peers, due to lower revenue growth, as well as impairment, restructuring and other charges. 2005 performance was impacted by higher salaries and related and office and general expenses and lower revenues as discussed in more detail below. However, both impairment and restructuring charges have decreased and we are no longer burdened with Motorsports related costs.

THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

(Amounts in Millions, Except Per Share Amounts)

      Organic revenue growth and improving operating margin are our key corporate metrics. Our performance priorities are to:

      Our revenue is directly dependent upon the advertising, marketing and corporate communications requirements of our clients. Historically, we typically experience increased revenue and profitability in the fourth quarter of our fiscal year as a result of increased holiday-related client spending activity. The increase in fourth quarter revenue and profitability is also attributable to higher seasonal revenues due to the timing of revenue recognition for contracts that are accounted for on the completed contract method. For the three years ended December 31, 2005, 2004 and 2003, our fourth quarter revenue as a percentage of the respective full year revenue was approximately 30% for all years.

      The organic decrease in revenue for the year ended and three months ended December 31, 2005 was $45.7 and $34.1, respectively when compared to the comparative period in 2004. Operating margin declined for the year ended and three months ended December 31, 2005 due to a significant organic increase in salaries and related expenses for the year ended and three months ended December 31, 2005 of $293.4 and $116.7, respectively when compared to the prior year, and an organic increase in office and general expenses for year ended and three months ended December 31, 2005 of $112.4 and $26.3, respectively when compared to the prior year. See below for discussion of the drivers of these changes.

      Included in our results of operations for the three months ended December 31, 2005 were certain out of period adjustments that resulted in decreased revenue and operating income of $17.3 and $21.6, respectively. When compared to the slight organic decrease in revenue and significant organic increase in salaries and related expenses and office and general expenses for the three months ended December 31, 2005, these out of period adjustments were immaterial to our quarterly results of operations. These adjustments were immaterial to the annual period ended December 31, 2005 and to any other prior annual period.

THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

(Amounts in Millions, Except Per Share Amounts)

      Organic revenue growth. In 2005, we experienced a small organic revenue decrease, compared to small organic revenue growth in 2004. The decrease resulted from client losses and a reduction in revenue from existing clients at IAN, offset partially by an increase at CMG due to client wins and additional business from existing clients in the U.S. and Europe. As a result, there were domestic and international organic revenue decreases of 0.5% and 0.9%, respectively. We experienced a small organic revenue decrease for the three months ended December 31, 2005 when compared to the comparative periods in 2004.

      Operating margin. Our operating margin was negative in 2005 and 2004. The decline in 2005 resulted from organic revenue decreases and increases in salaries and related as well as office and general expenses. Salaries and related expenses increased, both in absolute terms and as a percentage of revenues, due to increased severance expense as international headcount reductions occurred across several agencies. In addition, the increase was attributable to hiring additional creative talent to enable future revenue growth and additional staff to address weaknesses in our accounting and control environment and to develop shared services, which almost offset the number of employees severed. Office and general expenses increased, both in absolute terms and as a percentage of revenues, primarily due to higher professional fees associated with the Prior Restatement and our ongoing efforts in internal control compliance. Salary expense attributable to the additional headcount and the costs of remedying our internal control weaknesses will continue to be significant in 2006.

      These negative impacts to operating margin were partially offset by a decrease in the amount of charges related to impairment, restructuring and contract termination costs. If not for the reduction in these charges, our operating margin would have deteriorated significantly from 2004 to 2005 as described above. During 2005, we recorded asset impairments of $98.6, restructuring reversals of $7.3 and had no contract termination charges related to the Motorsports business, which is a $406.7 decrease when compared to these charges in 2004. Operating margin in 2004 was impacted by approximately $322.2 of asset impairment charges, $62.2 of restructuring charges and $113.6 of contract termination costs related to the Motorsports business.

      For the three months ended December 31, 2005 and 2004, our operating margin decreased significantly, to 3.0% from 15.9%. The decline in 2005 resulted from significant increases in salaries and related expenses and impairment charges, as well an increase in office and general expenses and an organic revenue decrease. Salaries and related expenses significantly increased, both in absolute terms and as a percentage of revenues, primarily due to an increase in severance expense as international headcount reductions occurred across several agencies as a result of client losses. In addition, the increase was attributable to hiring additional creative talent to enable future revenue growth and staff to address weaknesses in our accounting and control environment. During the three months ended December 31, 2005, impairment charges of $92.1 were recorded primarily related to our Lowe reporting unit following a major client loss and recent management defections. Office and general expenses increased, both in absolute terms and as a percentage of revenues, primarily due to higher production and media expenses

THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

(Amounts in Millions, Except Per Share Amounts)

due to an increase in arrangements where we act as principal, which requires us to record expenses on a gross basis, as well as higher professional fees.

THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

(Amounts in Millions, Except Per Share Amounts)

     Subsequent to 2005

RESULTS OF OPERATIONS

Consolidated Results of Operations — 2005 Compared to 2004

      The components of the 2005 change were as follows:

      For the year ended December 31, 2005, consolidated revenues decreased $112.7, or 1.8%, as compared to 2004, which was attributable to the effect of net acquisitions and divestitures of $107.4 and an organic revenue decrease of $45.7, partially offset by favorable foreign currency exchange rate changes of $40.4.

      The increase due to foreign currency changes was primarily attributable to the strengthening of the Brazilian Real and the Canadian Dollar in relation to the U.S. Dollar, which primarily affected our IAN segment. The net effect of acquisitions and divestitures is comprised of $46.0 at IAN, largely from dispositions at McCann during 2005, $12.1 at CMG and $49.3 from the sale of the Motorsports business during 2004.

THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

(Amounts in Millions, Except Per Share Amounts)

      During 2005, the organic revenue decrease of $45.7, or 0.7%, was driven by a decrease at IAN, partially offset by an increase at CMG. The decrease at IAN was a result of client losses and a reduction in revenue from existing clients primarily in our European offices. The increase at CMG was primarily driven by growth in public relations and sports marketing business both domestically and internationally as a result of increased revenue from existing clients and new client wins.

      For 2006, we expect the organic change in revenue to be flat or to decline due to the continuing impact of client losses that we experienced during 2005.

      Our revenue recognition policies are in accordance with Staff Accounting Bulletin (“SAB”) No. 104, Revenue Recognition. This accounting guidance governs the timing of when revenue is recognized. Accordingly, if work is being performed in a given quarter but there is insufficient evidence of an arrangement, the related revenue is deferred to a future quarter when the evidence is obtained. However, our costs of services are primarily expensed as incurred, except that incremental direct costs may be deferred under a significant long term contract until complete. With revenue being deferred until completion of the contract and costs primarily expensed as incurred, this will have a negative impact on our operating margin until the revenue can be recognized and in the period of revenue recognition. While this will not affect cash flow and did not have a significant impact on revenue recognition in 2005 as compared to 2004, it may affect organic revenue growth and margins in future periods. This effect is likely to be greater in comparing quarters than in comparing full years.

      In addition, we fulfill the role of an agent in most of our customer contracts however, in certain arrangements we act as principal. In accordance with Emerging Issues Task Force (“EITF”) Issue No. 99-19, when we act as principal, we recognize gross revenue and expenses inclusive of external media or production costs; when we act as an agent, we recognize revenue net of such costs. The mix of where we act as agent and where we act as principal is contract-dependent and varies from agency to agency, and from period to period. Accordingly, while our cash flows and profitability are not impacted, and while this effect did not have a significant impact on revenue in 2005 compared to 2004, it may affect organic revenue growth patterns in future periods.

THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

(Amounts in Millions, Except Per Share Amounts)

      The components of the 2005 change were as follows:

      Salaries and related expenses are the largest component of operating expenses and consist primarily of salaries and related benefits, and performance incentives. During 2005, salaries and related expenses increased to 63.7% of revenues, compared to 58.4% in 2004. In 2005, salaries and related expenses increased $293.4, excluding the increase related to foreign currency exchange rate changes of $19.3 and a decrease related to net acquisitions and divestitures of $46.6.

      Salaries and related expenses were impacted by changes in foreign currency rates, primarily attributable to the strengthening of the Brazilian Real and the Canadian Dollar in relation to the U.S. Dollar. The increase due to foreign currency rate changes was partially offset by the impact of net acquisitions and divestitures activity, which resulted largely from dispositions at McCann during 2005 and the sale of the Motorsports business during 2004.

      The increase in salaries and related expenses, both in absolute terms and as a percentage of revenue, excluding the impact of foreign currency and net acquisitions and divestitures, was primarily the result of higher severance expense, largely recorded in the fourth quarter for international headcount reductions within IAN as a result of client losses. In addition, the increase was attributable to our hiring additional creative talent to enable future revenue growth and additional staff to address weaknesses in our accounting and control environment and develop shared services at certain locations, which almost offset the number of employees severed. The increase in salaries and related expense as a percentage of revenue was also due, in part, to the fact that revenue decreased at the same time that salaries and related expenses increased for the reasons explained above.

      The components of the 2005 change were as follows:

THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

(Amounts in Millions, Except Per Share Amounts)

      Office and general expenses primarily consists of rent, office and equipment, depreciation, professional fees, other overhead expenses and certain out-of-pocket expenses related to our revenue. During 2005, office and general expenses increased to 36.5% of revenues, compared to 35.2% in 2004, largely due to the decrease in revenue year on year. In 2005, office and general expenses increased $112.4, excluding the increase related to foreign currency exchange rate changes of $13.9 and a decrease related to net acquisitions and divestitures of $88.6.

      Office and general expenses were impacted by changes in foreign currency rates, primarily attributable to the strengthening of the Brazilian Real and Canadian Dollar in relation to the U.S. Dollar. The increase due to foreign currency rate changes was offset by the impact of net acquisitions and divestitures activity, which resulted largely from dispositions at McCann during 2005 and the sale of the Motorsports business and McCann’s Transworld Marketing during 2004.

      The increase in office and general expenses, excluding the impact of foreign currency and net acquisition and divestitures activity, was primarily the result of higher professional fees at both IAN and our Corporate group driven by our ongoing efforts in internal control compliance, the Prior Restatement process and the preliminary application development and maintenance of information technology systems and processes related to our shared services initiatives. Except for the costs associated with the Prior Restatement process, these costs will continue to significantly impact financial results in 2006.

      During 2005 and 2004, we recorded net (reversals) and charges related to lease termination and other exit costs and severance and termination costs for the 2003 and 2001 restructuring programs of ($7.3) and $62.2, respectively. Included in the net (reversals) and charges were adjustments resulting from changes in management’s estimates for the 2003 and 2001 restructuring programs which decreased the restructuring reserves by $9.3 and $32.0 in 2005 and 2004, respectively. 2005 net reversals primarily consisted of changes to management’s estimates for the 2003 and 2001 restructuring programs primarily relating to our lease termination costs. 2004 net charges primarily related to the vacating of 43 offices and workforce reduction of approximately 400 employees related to the 2003 restructuring program and adjustments to management’s estimates for the 2001 restructuring program. A summary of the net (reversals) and charges by segment is as follows:

THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

(Amounts in Millions, Except Per Share Amounts)

      In addition to amounts recorded as restructuring charges, we recorded charges of $11.1 during 2004 related to the accelerated amortization of leasehold improvements on properties included in the 2003 program. These charges were included in office and general expenses on the Consolidated Statements of Operations. For additional information, see Note 6 to the Consolidated Financial Statements.

      Long-lived assets include land, buildings, equipment, goodwill and other intangible assets. Buildings, equipment and other intangible assets with finite lives are depreciated or amortized on a straight-line basis over their respective estimated useful lives. When necessary, we record an impairment charge for the amount that the carrying value of the asset exceeds the implied fair value. See Note 1 to the Consolidated Financial Statements for fair value determination and impairment testing methodologies.

      The following table summarizes long-lived asset impairment and other charges:

      The long-lived asset impairment charges recorded in 2005 and 2004 are due to the following:

      IAN — During the fourth quarter of 2005, we recorded a goodwill impairment charge of $91.0 at our Lowe reporting unit. A triggering event occurred subsequent to our 2005 annual impairment test that led us to believe that Lowe’s goodwill and other indefinite lived intangible assets may no longer be recoverable. As a result, we were required to assess whether our goodwill balance at Lowe was impaired. Specifically, in the fourth quarter, a major client was lost by Lowe’s London agency and the possibility of losing other clients is now considered a higher risk due to recent management defections and changes in the competitive landscape. This caused projected revenue growth to decline. As a result of these changes our long-term projections showed declines in discounted future operating cash flows. These revised cash flows caused the implied fair value of Lowe’s goodwill to be less than the book value.

      During the third quarter of 2005 as restated, we recorded a goodwill impairment charge of $5.8 at a reporting unit within our sports and entertainment marketing business. The long-term projections showed previously unanticipated declines in discounted future operating cash flows and, as a result, these discounted future operating cash flows caused the implied fair value of goodwill to be less than the related book value.

      IAN — During the third quarter of 2004, we recorded goodwill impairment charges of $220.2 at The Partnership reporting unit, which was comprised of Lowe Worldwide, Draft Worldwide, Mullen, Dailey & Associates and Berenter Greenhouse & Webster (“BGW”). Our long-term projections showed previously unanticipated declines in discounted future operating cash flows due to recent client losses, reduced client spending, and declining industry valuation metrics. These discounted future operating cash flow projections

THE INTERPUBLIC GROUP OF COMPANIES, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (Continued)

(Amounts in Millions, Except Per Share Amounts)

caused the estimated fair value of The Partnership to be less than the book value. The Partnership was subsequently disbanded in the fourth quarter of 2004 and the remaining goodwill was allocated based on the relative fair value of the agencies at the time of disbandment.

      CMG — As a result of the annual impairment review, a goodwill impairment charge of $91.7 was recorded at our CMG reporting unit, which was comprised of Weber Shandwick, GolinHarris, DeVries, MWW Group and FutureBrand. The fair value of CMG was adversely affected by declining industry market valuation metrics, specifically, a decrease in the EBITDA multiples used in the underlying valuation calculations. The impact of the lower EBITDA multiples caused the calculated fair value of CMG goodwill to be less than the related book value.

      For additional information, see Note 9 to the Consolidated Financial Statements.

      As discussed in Note 5 to the Consolidated Financial Statements, during 2004, we recorded a pretax charge of $113.6 related to a series of agreements with the British Racing Drivers Club and Formula One Administration Limited which released us from certain guarantees and lease obligations in the United Kingdom. We have exited this business and do not anticipate any additional material charges.