e10ksb

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-KSB

(Mark One)


þ		ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2006


o		TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 0-10560

CTI Group (Holdings) Inc.

(Name of small business issuer in its charter)


Delaware		51-0308583
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

333 North Alabama St., Suite 240		46204
Indianapolis, IN		(Zip Code)
(Address of principal executive offices)

Issuer’s telephone number, including area code:
(317) 262-4666

Securities registered under Section 12(b) of the Exchange Act:
None

Securities registered under Section 12(g) of the Exchange Act:

Class A Common Stock, Par Value $.01 Per Share
(Title of class)

Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. o

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The issuer’s revenues for its most recent fiscal year were $12,811,385.

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the issuer based on the closing price of Class A common stock as of March 23, 2007 was $2,644,160.

As of March 23, 2007, the number of shares of Class A common stock outstanding was 29,178,271. As of March 23, 2007, treasury stock included 140,250 shares of Class A common stock.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the registrant’s definitive proxy statement, in connection with its 2007 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission within 120 days after December 31, 2006, are incorporated by reference into Part III of this Annual Report on Form 10-KSB.

Transitional Small Business Disclosure Format (check one): Yes o No þ

Forward-Looking Statements

This Annual Report on Form 10-KSB (the “Annual Report”) contains “forward-looking” statements. CTI Group (Holdings) Inc. (the “Company”) is including this cautionary statement regarding forward-looking statements for the express purpose of availing itself of protections of the safe harbor provided by the Private Securities Litigation Reform Act of 1995 with respect to all such forward-looking statements. Examples of forward-looking statements include, but are not limited to:

	•		projections of revenues, capital expenditures, growth, prospects, dividends, capital structure and other financial matters;

	•		statements of plans and objectives of the Company or its management or board of directors;

	•		statements of future economic performance;

	•		statements of assumptions underlying other statements and statements about the Company and its business relating to the future; and

	•		any statements using such words as “anticipate”, “expect”, “may”, “project”, “intend” or similar expressions.

The Company’s ability to predict projected results or the effect of certain events on the Company’s operating results is inherently uncertain. Therefore, the Company wishes to caution each reader of this Annual Report to carefully consider the risk factors stated elsewhere in this document, any or all of which have in the past and could in the future affect the ability of the Company to achieve its anticipated results and could cause actual results to differ materially from those discussed herein, including, but not limited to: ability to successfully integrate the operations of, and to realize benefits from, the acquisition of Ryder Systems Limited, ability to attract and retain customers to purchase its products, ability to develop or launch new software products, technological advances by third parties and competition, ability to protect the Company’s patented technology, ability to obtain settlements in connection with its patent enforcement activities. The Company disclaims any intent or obligations to update forward-looking statements contained in the Annual Report.

PART I

Item 1. Description of Business

Background

CTI Group (Holdings) Inc. and subsidiaries (the “Company” or “CTI”) design, develop, market and support intelligent electronic invoice processing, enterprise communications management software and services solutions, and carrier class voice over internet protocol (“VOIP”) management applications.

The Company was originally incorporated in Pennsylvania in 1968 and reincorporated in the State of Delaware in 1988, pursuant to a merger into a wholly owned subsidiary formed as a Delaware corporation. In November 1995, the Company changed its name to CTI Group (Holdings) Inc.

On December 22, 2006, the Company entered into a Share Transfer Agreement (the “Share Transfer Agreement”). Pursuant to the Share Transfer Agreement, the Company acquired all of the issued and outstanding shares of capital stock of Ryder Systems Limited (“Ryder”), a privately held software development company registered in England, for a purchase price of £5.6 million (the “Purchase Price”), which was equal to approximately $11.0 million as of December 22, 2006. The assets of Ryder consist primarily of goodwill, intangible assets, cash and accounts receivable. The Company financed the acquisition of Ryder through a combination of cash from working capital, the Acquisition Loan and the Revolving Loan, as defined below. Approximately $900,000 of the Purchase Price is being held in an escrow account to satisfy any potential claims, breach of warranties or realized minimum net asset values, as defined in the Share Transfer Agreement, which may arise within a one year period following the acquisition.

The Company believes the acquisition of Ryder provides for: a growing recurring revenue stream with leading international telecommunication service providers, proprietary technology and development base which provides for a rich functionality of solutions to supplement the Company’s capabilities to pre-empt technological market developments, increased ability to take advantage of new growth opportunities through access of new sales networks and channels, enhanced ability to cross-sell existing products, services and solutions in other markets.

Ryder has experienced significant historical growth. Unaudited proforma revenues for Ryder amounted to $9 million and $6.6 million for the years ended December 31, 2006 and 2005, respectively. There can be no assurance that the Company will be successful in the integration of Ryder or that Ryder revenues will continue to grow. See “Risk Factors on page 14 and 15 regarding the acquisition of Ryder”.

Markets, Products, and Services

The Company is comprised of three business segments: Electronic Invoice Management (“EIM”), Telemanagement (“Telemanagement”) and Patent Enforcement Activities (“Patent Enforcement”). EIM designs, develops and provides services and software tools that enable telecommunication service providers to better meet the needs of their enterprise customers. EIM software and services are provided and sold directly to telecommunication service providers who then market and distribute the software to their enterprise customers. Using the Company’s software and services, telecommunication service providers are able to electronically invoice their enterprise customers in a form and format that enables the enterprise customers to improve their ability to analyze, allocate and manage telecommunications expenses while reducing the resource investment required to process, validate, approve, and pay their telecommunication invoices. Telemanagement designs, develops and provides software and services used by enterprise, governmental and institutional end users to manage their telecommunications service and equipment usage. Patent Enforcement involves the licensing, protection, enforcement and defense of the Company’s intellectual property, including patents. Ryder’s products were included in the EIM segment. In 2006, the Company embarked on the development of VOIP management applications which are incorporated in the EIM segment.

Electronic Invoice Management

EIM designs, develops and provides electronic invoice presentment, analysis and payment software that enables Internet-based customer self-care for wireline, wireless and convergent providers of telecommunications

services. EIM software and services are used primarily by telecommunications services providers to enhance their customer relationships while reducing the providers’ operational expenses related to paper-based invoice delivery and customer support relating to billing inquiries. The Company has historically marketed its EIM products and services in North America directly to telecommunication service providers who then market and distribute the product to their enterprise customers, which consist primarily of businesses, government agencies and institutions. With the acquisition of Ryder, the Company now actively markets EIM products and services in both North America and Europe.

EIM Market

General. The telecommunications industry, as it relates to the EIM market segment, is comprised of those service providers who sell, resell, wholesale, or otherwise supply voice, data, video and other content delivery methods to consumers, businesses, government agencies and other end-users. Such providers perform a broad range of services including, but not necessarily limited to:

	•		wireline and long distance;

	•		wireless telephony and data;

	•		messaging and paging;

	•		IP telephony, video, and data;

	•		DSL/cable/broadband services; and

	•		satellite telephony and data.

Providers of these services are typically carriers who fall into regulatory categories that include:

	•		regional bell operating companies (“RBOC”s);

	•		independent local exchange carriers;

	•		competitive access providers;

	•		competitive local exchange carriers;

	•		interexchange carriers;

	•		wireless carriers;

	•		satellite service providers;

	•		IP and data services providers; and

	•		cable/broadband service providers.

Competition and integration continue to reshape the communications industry. Continued downward pressure on prices is driven by strong competition, the increasing replacement of wireline services with wireless alternatives, the introduction of new technologies based on internet protocol (“IP”) including voice over internet protocol (“VoIP”), video (“IPTV”), and merger and acquisition activities of key service providers. As a result of such pricing pressures, the Company has been required to reduce its pricing and achieve product revenue growth through increased volume sales or processing of call detail records (“CDR”).

The industry dynamics noted above present clear opportunities for the Company’s software and service offerings. As service provider margins decline, the Company believes that it continues to deliver a value message that demonstrates how its EIM and Telemanagement solutions create competitive differentiation, stronger customer relationships, enhanced lifetime value and increased operational efficiencies.

The following market drivers are consistent across the telecommunications industry segments targeted by the Company. Each of these drivers is expected to positively impact the Company’s growth strategies and represents rationale in support of the Company’s strategic business positioning. The following trends are concurrent and are predicted to enhance the growing demand for the enhanced invoice delivery, processing and payment capabilities provided by the Company’s SmartBill^® product suite.

Convergence and Complexity. The nature, size, needs and complexity of the telecommunications industry continue to change. Consolidation and service expansion continue to narrow the playing field in the Tier 1 service provider segment that includes Verizon Communications, Inc., Sprint Corp/Nextel Communications, Inc. and Cingular Wireless, LLC. Opportunity exists within the Tier 1 segment but is not the primary focus of

the Company. Broad opportunities exist in the smaller Tier 2, 3 and 4 market segments that include the regional, niche, and smaller markets. Expanded/bundled service offerings (local and long distance, voice and data, wireline and wireless, broadband DSL and cable-based access) are valued by end customers but add significant complexity to the customer/provider relationship. The industry has evolved around the Integrated Communications Provider (“ICP”) model. Many service providers are achieving or have developed their ICP model via acquisition and third-party resale. The Company’s EIM and Telemanagement software and services enable the ICPs to deliver a viable, integrated and converged experience to their customers – even if the providers’ internal systems and infrastructure may not yet support such integration.

Customer Relationship Management. The Internet continues to redefine the relationship between service providers and their customers. The industry has invested significant capital in an attempt to streamline its interaction with customers and prospects alike. Service providers and industry analysts view web-enabled customer self-care as the key to reducing costs by transitioning many service and support functions directly to customers. A provider who successfully migrates customer support functions onto the Web and into the hands of the customer consistently drives down costs, drives up profits and increases customer satisfaction by enabling the customer to save time, enhance convenience, and create the customer’s own “personalized” user experience. Adoption and use of the tools extended by service providers has been disappointing. By delivering a compelling process and cost advantage to enterprise customers, the Company believes it can drive adoption and improve the return on investment (“ROI”) for service providers.

Customer Ownership. Managing the life cycle and maximizing the return from, and retention of, customers are increasingly recognized to be more important than to simply focus on acquiring more customers. In an industry experiencing increased acquisition costs, accelerating customer turnover, and declining margins, it is vital to focus on retention and revenue per customer. Service providers are seeking options enabling competitive differentiation in service delivery, product bundling and customer self-care. The Company’s electronic invoice presentment and payment (“EIPP”) platform strengthens the service provider’s competitive position while optimizing key operational costs involving customer care and paper billing fulfillment.

Outsource/Service Bureau. The providers in the telecommunications industry today are demonstrating increasing interest in establishing third party relationships that add value to their product portfolio while allowing the provider to focus on its core competencies. The outsourcing/ASP delivery model represents an alternative to the risks and costs associated with rapidly changing technologies. Service providers are migrating from in-house development to packaged vendor solutions. At no time in their history has competition been so prevalent and the need to extend service portfolios so important. Companies are seeking rapid systems acquisition and implementation from outside parties.

Single Vendor Relationships. As competition continues to intensify across virtually every communications segment, carriers and service providers are looking to their billing and customer management infrastructure as one of the key differentiators. The industry is moving toward vendor relationships that can offer integrated solutions. Critical to this requirement are speed of implementation, scalability, modularity, and seamless integration with other critical business support systems. As the global telecommunications market continues to evolve, end customers will be drawn to service providers who not only offer a broad array of services but who will enable them to see all telecommunication expenditures from a single point of contact (“360º Visibility”). Whether established incumbents or new market entrants, telecommunications providers require systems that allow all services to be bundled together into value plans that encourage customer retention and adoption of additional services. Furthermore, providers require customer management systems that enable increasingly complex customer relationships to be managed through a unified, user-friendly interface into the customer database.

EIM Products and Services

SmartBill^®, SmartBill^® Connect, and Analysis and Analysis Online.

The Company’s EIM product suite includes the SmartBill^®, SmartBill^® Connect, Analysis, and Analysis Online software and services solutions. CTI’s products support the integrated communications provider model and the related need to invoice and effectively and efficiently manage their relationships with customers. Software and

services are designed to collect and process data describing accounts receivable, to generate and deliver invoices, to support a customer service call center, and to interface with other business support systems. These products are mission-critical to providers inasmuch as they affect cash flow, customer relationship management and the ability to rapidly define, design, package and market competitive services more quickly and efficiently than their competitors. In the past, all sales for billing software and services were completed through the Company’s direct sales force.

SmartBill^{^®}. CTI’s flagship product is the SmartBill^® system which is an electronic bill presentment and analysis tool. SmartBill^® is currently sold via distributor relationships established with wireline telecommunications providers who offer the products as value-added elements of their service offerings to business customers. Under its agreements with its distributors, CTI is responsible for software design and development, on-going fulfillment of monthly cycle-based billings and, in many cases, direct technical support for the distributors’ end user customers.

Many times each month, CTI’s service provider clients deliver complete billing information for their SmartBill^® customers to CTI. This data is then processed by CTI using its technology. The processed data is then made available to the service provider’s customers on CD-ROM or via the Internet. These customers utilize the end user application to create an array of standard reports or they can create customized reports through the application of filters that further refine their search for business support data. SmartBill^® also enables customers to apply a flat rate or percentage mark-up for rebilling of communication charges to internal or external clients. Each month, CTI processes more than 2 billion call data records for more than 8,000 end users of CTI’s product suite.

Analysis. The Company obtained Analysis through the Ryder acquisition. Analysis, which was considered Ryder’s flagship product, is an electronic bill presentment and analysis tool. Analysis is currently sold via distributor relationships established with wireless telecommunications providers who offer the products as value-added elements of their service offerings to business customers. Under its agreements with its distributors, The Company is responsible for software design and development, on-going fulfillment of monthly cycle-based billings and, in many cases, direct technical support for the distributors’ end user customers.

Many times each month, the Company’s service provider clients deliver complete billing information for their Analysis customers to CTI. This data is then processed by CTI using its technology. The processed data is then made available to the service provider’s wireless customers on CD-ROM or via the Internet. These customers utilize the end user application to create an array of standard reports or they can create customized reports through the application of filters that further refine their search for business support data.

SmartBill^{^®} Connect is an Internet-based software solution delivered by the Company under its historic ASP business/service delivery model offering service providers a full range of Electronic-Care (“E-Care”) capabilities that can strengthen and build on existing investments in technology – preserving the full functionality of current systems – while allowing them to service and support future customer growth. The solution offers an opportunity to customers to interactively perform reporting, analysis, cost allocation, approval and, optionally, electronic-payment of their communications invoice. SmartBill^® Connect empowers business customers with a tool providing 360° Visibility into communications expenditures, increased control of cost and usage information and optimization of the business processes involved in receipt, verification, approval and payment of their recurring operational expenses. The Company believes that improving the flow and control of these important business processes will promote adoption of self-care among business customers of wireline telecommunication service providers, increase customer satisfaction and retention while lowering customer service costs.

Analysis Online, acquired through the Ryder acquisition, is an Internet-based software solution delivered by the Company under its historic ASP business/service delivery model offering service providers a full range of E-Care capabilities that can strengthen and build on existing investments in technology – preserving the full functionality of current systems – while allowing them to service and support future customer growth. Analysis Online was obtained through the Ryder acquisition. The solution offers an opportunity to customers to interactively perform reporting, analysis, cost allocation, approval and, optionally, electronic-payment of their communications invoice. Analysis Online empowers business customers with a tool providing 360° Visibility into communications expenditures, increased control of cost and usage information and optimization of the

business processes involved in receipt, verification, approval and payment of their recurring operational expenses. The Company believes that improving the flow and control of these important business processes will promote adoption of self-care among business customers of wireless telecommunication service providers, increase customer satisfaction and retention while lowering customer service costs.

Customers. The combination of services offered within the CTI product suite and the level of performance delivered by CTI create strong and lasting relationships. CTI’s relationship with its largest customers has spanned more than a decade. For the years ended December 31, 2006 and 2005, the Company had sales to a single customer aggregating $5,020,637 (39% of revenues) and $5,594,946 (37% of revenues), respectively. Such customer represents 41% and 42% of software sales, service fee and license fee revenues for the years ended December 31, 2006 and 2005, respectively. The contract with this customer contains an automatic annual renewal provision renewed automatically in March; however, such agreement does contain a 120-day advance notice termination provision. The contract with this customer was renewed in March 2007. The loss of this customer would have a substantial negative impact on the Company’s operations and financial condition. Generally, the Company enters into multi-year service provider contracts which include auto-renewal clauses to alleviate production cessation.

SplitBill and Dynamic Reports.

SplitBill, which was acquired with the Ryder acquisition, serves organizations that leverage mobility services. These organizations typically find that their services are being used for a variety of commercial and non-commercial purposes. For example, an employee’s cellular phone may be used to make personal calls. Service providers benefit from personal usage of commercial services by recognizing an increase in average revenue per user (“ARPU”). The service provider’s customer, however, needs to be able to recover the personal expenditures on such services, appropriately manage the tax consequences, and accomplish this without incurring an increase in overhead and administration costs. The tax consequences of personal usage of commercial services is most apparent in the United Kingdom, where enterprises are statutorily required to disclose personal usage and receive tax benefits only for commercial usage.

SplitBill enables business administrators to identify, differentiate, and allocate non-commercial costs on their communications invoices. The product further includes an approval and workflow processing function that virtually eliminates the overhead and administration costs associated with such efforts. Finally, the approval process ensures appropriate levels of accountability within the organization while establishing a clear audit trail for financial control purposes.

Service providers distribute SplitBill to organizations that need to recover personal expenditures related to commercial communications services. SplitBill increases the ARPU of the provider in three ways. First, the product ensures that all communications usage, regardless of the personal nature of such usage, passes over the provider’s network, therefore increasing the service provider’s revenues and profitability. Second, the provider experiences reduced customer loss. By enabling enterprise end-users to leverage services for commercial and non-commercial purposes, the service is further entrenched into the organization. Finally, the product solves a key financial challenge for enterprise customers, delivering sustainable value, leading to revenue recognition by the service provider.

Dynamic Reports was acquired with the Ryder acquisition and is a low-cost, analysis solution targeting small businesses and consumers. Dynamic Reports is delivered each billing period by email directly to the customer and provides a selection of reports that gives a comprehensive understanding of phone usage at a glance. Interactive functionality is an option with Dynamic Reports and allows users to select and change key usage reports and individual handsets to monitor activity from the homepage.

Customers. SplitBill customers are primarily Tier 1 and Tier 2 wireless telecommunication service providers. Dynamic Reports was released in 2006 and has yet to build a significant customer base.

emPulse and SmartRecord^® IP.

As voice and data services continue to commoditize, the Company anticipates that service providers will be seeking alternative business models to replace revenue lost directly as a result of pricing pressures. The Company believes that one such business model is the delivery of managed or hosted voice and video services.

Traditionally, organizations that required advanced voice and video services would purchase enabling communications hardware and software, operate and maintain this equipment, and depreciate the associated capital expense over time. This approach had two major disadvantages for such organizations. The first being that organizations would experience significant capital and operational expenditures related to acquiring these advanced services. The second being that the capabilities of the acquired equipment would not materially improve as voice and video service technology evolved.

Service providers recognized these challenges and began, as part of their next generation network (“NGN”) strategies, to deliver managed and hosted service offerings that don’t require the customer to purchase expensive equipment up-front and virtually eliminate the operational expenditures associated with managing and maintaining an enterprise-grade communications network. Service providers incrementally improve revenue by enabling competitive voice and video features while reducing costs by delivering these services on high-capacity, low-cost next generation networks.

Due to the profitability and ARPU advantage possible by delivering such managed and hosted service offerings, providers not only look at acquiring new customers but converting legacy customers onto the NGN platform. This conversion process, while potentially producing marked financial results for a service provider, is not trivial. Many legacy features and functions are not available on NGN platforms, primarily due to the immaturity of the service delivery model.

The Company’s hosted voice and video over IP applications are intended to eliminate customer resistance to conversion to next generation platforms, while creating new revenue opportunities for service providers through the delivery of compelling value added services. The Company primarily markets two applications, emPulse and SmartRecord IP. These applications enable managed and hosted service customers of service providers to analyze voice, video, and data usage, record and monitor communications, and perform administration and back office functions such as cost allocation or client bill back. These applications are commonly available in the market as enterprise-grade products. Customers can purchase these products when upgrading or acquiring a new enterprise communications platform. The Company has taken the business benefits of these enterprise-grade applications and has delivered provider-grade managed and hosted service applications intended to enable service providers to create a new recurring revenue stream, while ensuring that enterprise customers have the tools necessary and relevant to their particular line of business or vertical.

emPulse is a web-based communications traffic analysis solution that was released in March 2007. emPulse analyzes and reports on a variety of statistics related to communications, including but not limited to, detailed traffic, communications quality of service, bandwidth utilization, call center statistics, and organizational utilization information. emPulse integrates with the managed or hosted communications switch and routing facilities to acquire this information, which is then processed and analyzed. End-users log into the service provider’s website where they are presented with a reporting and analytics interface.

SmartRecord^® IP was released in February 2007. SmartRecord^® IP provides integrated call recording options to service providers for their hosted and managed service customers. Based upon patent pending technology, this application enables the service provider’s customers to record, monitor, and archive communications for regulatory and quality management purposes.

Service providers can distribute these products to their managed and hosted service customers by either directly reselling the product or by integrating it into an existing service bundle, increasing the value and price of the overall bundle offering. The Company believes that the hosted IP telephony market will grow to approximately $6 billion by 2010.

Customers. The applications are marketed to Tier 2 and Tier 3 service providers who have a hosted or managed communications service offering. These provider relationships are built either directly or indirectly through relationships with soft switch manufacturers.

Telemanagement

Telemanagement provides software and services for end users to manage their usage of multi-media communications services and equipment.

Telemanagement Market, Products and Services

The Company’s primary Telemanagement products and services are comprised of Proteus Office, Proteus Trader, Proteus Enterprise, and Proteus Service Bureau (collectively, “Proteus^®”). Telemanagement products are used by companies, institutions and government agencies for fiscal or legal purposes to track communications activity and to control costs associated with operating communications networks. Proteus^® is a user friendly, Microsoft Windows^® based product. Proteus^® performs functions of call recording, call accounting, cost allocation, client bill-back, analyses of trunk traffic and calling and usage patterns, toll fraud detection, directory services and integration with other private branch exchange (“PBX”) peripheral products. Proteus^® also integrates Internet, e-mail and mobile data analysis and reporting with its traditional voice capabilities. The Company’s Telemanagement products and services have been developed, and historically marketed, primarily in Europe. Telemanagement product sales are made through direct and distributor sales channels. In 2005 and 2006, the Company marketed and distributed its Telemanagement products and services in North America.

The Company has also invested in enhancing its telemanagement solution for the new wave of IP telephony products and has already been approved by several leading telecom manufacturers to bundle Proteus^® with their IP solution at the source. The Company believes that this strategy positions it for global expansion, as IP technology gains market share.

As well as creating new market opportunities, this IP telephony integration provides many operational benefits, in that it requires no site visit for installation and self learns organizational data. Both of these elements have traditionally been resource hungry and often a barrier to channel sales growth.

Proteus^® is an enterprise traffic analysis and communications management software solution that is available in four versions to meet the specific needs of corporate users: Proteus^® Office, Proteus^® Trader, Proteus^® Enterprise, and Proteus^® Service Bureau.

Proteus^® Trader is aimed at the communications management requirements of the global financial investment and trading markets. Some investment banks are now using the product worldwide.

Proteus^® Enterprise and Proteus^® Office are specifically designed for general business use and respectively address the market requirements of large corporate users to small and medium sized companies.

Proteus^® Service Bureau is a hosted enterprise traffic analysis and communications management solution that is provided to customers and billed on a month to month basis.

Proteus^® is a Windows OS product that applies technology to upgrade and expand traditional call accounting and telemanagement market applications. Windows platform features, for example, include: call accounting report distribution via e-mail, call detail record polling via Internet, Intranets or wide area network, telephony applications programming interface dialer which facilitates point-and-click dialing from database-resident corporate and local directories, and 911 notification which allows organizations to assign any number of Windows-based PCs on their corporate local area network with an immediate screen-pop notification when a 911 call is made (the screen-pop pinpoints the caller’s exact location within the building).

Customers. Telemanagement products are marketed to organizations with internal telecommunications systems supporting an aggregate of telephone, fax and modem equipment, and more recently mobile, Internet and e-mail technologies. The Company’s clients include Fortune 500 companies, mid-size and small-cap companies, hospitals, universities, government agencies and investment banks. CTI anticipates that it can further expand its products and services through internal development of its own technological capabilities, by seeking to partner with companies offering complementary technology or by pursuing possible acquisitions.

CTI generates revenue through service bureau contracts, software licensing agreements and maintenance agreements supporting licensed software. Maintenance agreements are either on a time and material basis or full service agreements that are generally for periods of 12 months. For software licensing agreements on a direct distribution basis, payment terms are a 50% deposit upon receipt of order and the 50% balance upon installation, which is normally completed within 10 days. Occasionally, larger software orders may require up

to 3 months to complete, custom software development and installation. For software licensing via distributor channels, payment terms are net 30 days. Service bureau contracts provide monthly recurring revenue. Generally, contracts of 12 to 36 months carry automatic 12-month renewals until canceled. CTI purchases data collection devices specifically designed for use with telecommunications switches and other hardware such as modems as are necessary to perform the telemanagement business. CTI rents or resells such equipment to end-users.

Patent Enforcement Activities

CTI owns two patents, TransAct^SM, which cover a method and process to prepare, display, and analyze usage and cost information for services including, but not limited to, telecommunications, financial card services, and utilities (e.g., electricity, oil, gas, water). The TransAct^SM patents expire in 2011. The information can be provided to a user in an advantageous format that allows the user to quickly and easily retrieve, display, and analyze the information. The systems covered by these patents enable customer data to be sorted and processed in a manner so that the customer’s generation of reports is much faster than using a non-patented method. This patented TransAct^SM technology is incorporated in the Company’s SmartBill^® product. Other companies have developed programs to replicate this patented process that the Company believes violate its patents.

The Company’s patent enforcement activities involve the licensing, protection, enforcement and defense of the Company’s intellectual property and rights. The Company has instituted a marketing approach for patent enforcement activities whereby the Company, in certain cases, actively pursues a licensing arrangement with violators rather than litigation. The nature of patent enforcement activities can require the Company to incur significant costs without realization of revenue until subsequent future periods.

The Company has historically undertaken numerous enforcement activities, in which it has been successful in certain instances in enforcing its patents. As a matter of course, the defense of an outstanding lawsuit attacks the validity of the patents. The Company does not anticipate that such attack will be successful but the results of litigation are difficult to predict. There can be no assurance that the Company will continue to be successful in enforcing its patents in the future or potentially be defeated in its enforcement activities, which could then jeopardize the successful future enforcement activities. See Part I – Item 3. “Legal Proceedings.”

Employees

As of December 31, 2006, CTI employed 143 people on a full-time basis and 3 on a part-time basis: 49 full-time employees were located in the United States and 94 full-time employees were located in the United Kingdom. The 3 part-time employees were located in the United Kingdom. None of the Company’s employees are represented by a labor union. The Company believes it maintains a good relationship with its workforce.

Intellectual Property

Patents. See “Patent Enforcement Activities” above.

Trademarks. The Company maintains registered trademarks. The main registered trademarks relate to its main billing product SmartBill^®, its Telemanagement product Proteus^®, and the CTI name. The Company currently has a service mark on its patented process, TransAct^SM.

Technology, Research & Development

The Company’s product development efforts are focused on increasing and improving the functionality for its existing products and developing new products for eventual release. In 2006, research and development expenditures amounted to approximately $2,206,793 which included approximately $500,000 in capitalized software development costs which were primarily related to next generation releases of Proteus^®. In 2005, research and development expenditures amounted to approximately $2,665,885 which included approximately $656,000 in capitalized software development costs. Capitalized software development costs related to the development of the SmartBill^®, SmartBill^® Connect, and Proteus^®, next generation releases and initial releases of SmartRecord^® IP and emPulse.

Governmental Regulations

CTI does not believe that compliance with federal, state, local or foreign laws or regulations, including compliance with federal, state, local and foreign environmental laws and regulations, has a material effect on its capital expenditures, operating results or competitive position, or that it will be required to make any material capital expenditures in connection with governmental laws and regulations. The Company is not subject to industry specific laws or regulations.

Competition

CTI competes with a number of companies that provide products and services that serve the same function as products and services provided by CTI.

EIM. The delivery of multiple telecommunications services from a single provider requires the service provider to present a single and comprehensive view of all of its services to the end customer. Prior to the release of SmartBill^® Connect, the Company’s value message to the service provider focused on supporting the provider’s enterprise customers who had complex service mixes and difficult to manage billing hierarchies. As such, the Company competed in a very narrowly defined niche. The Company found itself competing against Electronic Bill Presentment and Payment providers whose web-based solutions were positioned as a single solution that could support large users while delivering presentment and payment to the entire spectrum of end customers. With SmartBill^® Connect, the Company maintains its previous functional capabilities while now being able to scale functionality and deliver Internet-based presentment and payment to the smallest of users. The Company believes that it is now able to compete directly with providers of Electronic Billing Analysis (“EBA”) and with providers of Electronic Bill Presentment and Payment (“EBPP”) solutions. This combination positions the Company as a provider of Electronic Invoice Management that delivers content-and-capability bundles that are defined differently for different market segments.

There are only a few competitors selling a product that directly competes with SmartBill^®. However, several telecommunications companies offer a similar product using in-house resources. The Company’s main source of differentiation from its competitors, in the EIM segment is via technology. The Company has two patents on its SmartBill^® and SmartBill^® Connect processes. These patents enable customer data to be sorted in a manner so that the customer’s generation of reports is much faster than using a non-patented method.

The Company’s major competitors include: CheckFree Services Corp., edocs, Inc., Amdocs Limited, Veramark Technologies, Inc., Info Directions, Inc. In addition to these direct competitors, the Company faces intense competition from internal IT within the service providers’ business operations.

Telemanagement. The Company’s Telemanangement segment operates in a highly fragmented market. Competitors, such as Avotus^® Corporation, BTS, Softech, Inc., Oak Tiger, and Veramark Technologies, Inc. compete against the Company in the Telemanagement sector. The Company differentiates itself from its competitors based on reporting capabilities and ease of user interface. Proteus^® integrates with a wide variety of telephone systems and third party applications such as dealer boards and voice recording equipment. Proteus^TM also connects directly over the local area network, which eliminates the need for cables that are associated with similar products.

Acquisition

On December 22, 2006, the Company entered into the Share Transfer Agreement. Pursuant to the Share Transfer Agreement, the Company acquired all of the issued and outstanding shares of capital stock of Ryder, a privately held software development company registered in England, for the Purchase Price of £5.6 million, which was equal to approximately $11.0 million as of December 22, 2006. The assets of Ryder consist primarily of cash and accounts receivable. The Company financed the acquisition of Ryder through a combination of cash from working capital, the Acquisition Loan and the Revolving Loan, as defined below. Approximately $900,000 of the purchase price is being held in an escrow account to satisfy any potential claims, breech of warranties or realized minimum net asset values, as defined in the Share Transfer Agreement, which may arise within a one year period following the acquisition.

The Purchase Price was subject to adjustment to the extent that Ryder’s net asset value (the “Completion NAV”) on the date of the Share Transfer Agreement did not equate to £1.24 million which was approximately $2.4 million as of December 22, 2006. The parties have agreed that the requirements of the Completion NAV were met.

Merger

On February 12, 2001, Centillion Data Systems, Inc. (“Centillion”) consummated a merger (the “Merger”) with the Company. Simultaneous with the Merger with Centillion, the Company acquired Celltech Information Systems, Inc. (“Celltech”).

Pursuant to the terms of the Merger, all of the outstanding shares of Centillion were exchanged for 17,698,253 shares of the Company’s Class A common stock and 2,833,334 shares of the Company’s Class B common stock. Celltech stockholders were issued 1,234,698 shares of the Company’s Class A common stock and $262,599 in cash, in exchange for all Celltech stock issued and outstanding.

Centillion’s patents, its right to enforce its patents and its current and future patent enforcement actions and claims, were transferred to a limited liability company that is wholly owned by the Company (“Centillion Data Systems, LLC” or “Tracking LLC”). Tracking LLC has executed a perpetual irrevocable royalty-free license agreement authorizing the Company to use the patents. As part of the Merger consideration and in connection with the transfer to Tracking LLC, 2,833,334 newly authorized shares of the Company’s Class B common stock were issued to the former Centillion stockholders. The Company and the holders of the stock had certain rights to convert the Class B common stock into Class A common stock based on the value of Tracking LLC. Under the Company’s Certificate of Incorporation, as amended, adopted in connection with the Merger, until February 12, 2006 shares of Class B common stock could be converted at the election of the holders of more than 50% of the outstanding shares of Class B common stock into the number of shares of Class A common stock determined by dividing the value of Tracking LLC by 88% of the average market price of Class A common stock. The average market price of Class A common stock at any date would be the average of the last reported sale prices on any market or exchange on which Class A common stock is traded over the period of the most recent twenty consecutive business days before such date or if Class A common stock is not so traded, the average of the highest bid and the lowest asked quotations in the over-the-counter market during such period. As of February 7, 2006, Fairford Holdings Limited (“Fairford”), the record holder of 2,371,244 shares of Class B common stock representing approximately 84% of the 2,833,334 shares of issued and outstanding shares of Class B common stock, notified the Company of its election to convert all of the issued and outstanding shares of Class B common stock into shares of Class A common stock in accordance with the procedures set forth in the Certificate of Incorporation. Mr. Salah Osseiran, the majority holder of the Company’s Class A common stock and a director of the Company, is deemed to be the indirect beneficial owner of 2,371,244 shares of Class B common stock held by Fairford, as a grantor and sole beneficiary of a revocable trust which is the sole stockholder of Fairford. As of March 31, 2006, 2,833,334 shares of Class B common stock were converted into 1,100,812 shares, excluding fractional shares, of Class A common stock, of which 921,279 shares were issued to an entity controlled by Mr. Osseiran, a director and majority stockholder of the Company, and 68,838 shares were issued directly to, and to entities controlled by, Mr. Garrison, a director of the Company. The number of shares of Class A common stock issued upon conversion of the Class B common stock was calculated using a value of Tracking LLC of $271,482.69 and 88% of an average market price of Class A common stock of approximately $0.2803 (i.e. $0.24662).

Risk Factors

Unless the context indicates otherwise, all references to “we,” “us,” “our,” in this subsection “Risk Factors” refer to the Company or CTI. We are subject to a number of risks listed below, which could have a material adverse effect on the value of the securities issued by us. You should carefully consider all of the information contained in, or incorporated by reference into, this Form 10-KSB and, in particular, the risks described below before investing in our Class A common stock or other securities. If any of the following risks actually occur, our business, financial condition or results of operations could be materially harmed and you may lose part or all of your investment.

If we continue to incur losses, our business, financial condition, and results of operations will be negatively impacted.

We suffered a net loss of approximately $1.1 million in fiscal 2006 due primarily to decreased revenue without comparable reduction in expenses from our Patent Enforcement segment. Although we realized a net income in 2005 and 2004, our December 31, 2006 accumulated deficits remain at approximately $16.0 million. Although we have developed a business plan and implemented a number of programs, including the discontinuance of unprofitable product lines, there can be no assurance that our business plan adequately addresses the circumstances and situations which, resulted in losses. If we continue to incur losses, our business, financial condition, and results of operations will be negatively impacted.

Restrictive covenants in the Loan Agreement related to our Acquisition Loan and Revolving Loan may reduce our operating flexibility which may have an adverse effect on our business and financial condition.

The Loan Agreement related to our Acquisition Loan and Revolving Loan contains various financial covenants as well as covenants that restrict our ability to, among other matters:

	•		incur other indebtedness;

	•		dispose of all, or any part, of our business or assets;

	•		make acquisitions; and

	•		issue securities.

These restrictions may limit our ability to obtain future financing, make capital expenditures or otherwise take advantage of business opportunities that may arise from time to time. Our ability to meet the financial covenants can be affected by events beyond our control, such as general economic conditions. As of December 31, 2006, we were in compliance with all the covenants of the Acquisition Loan and the Revolving Loan.

Pursuant to the terms of the Loan Agreement, the failure to comply with covenants constitutes an event of default and entitles the lender to, among other things, declare all or a portion of the loan due and payable or foreclose on the collateral securing the loan. If the lender accelerates the repayment of borrowings or forecloses on the collateral, it will have a material adverse effect on our business, financial condition and results of operations.

The acquisition of Ryder may result in unforeseen liabilities which could adversely affect our business financial condition and results of operations.

In December 2006, we acquired the stock of Ryder. With the stock acquisition, we assume all liabilities, both known and unknown, of Ryder. Although we undertook significant due diligence, we may be subject to unforeseen obligations or liabilities.

We may be unable to successfully integrate our operations with Ryder’s operations and achieve the anticipated benefits of Ryder’s acquisition, which could have an adverse effect on our business, financial condition and results of operations.

Our business plan assumes the successful integration of Ryder’s operations with our operations. The difficulties of integrating the operations of Ryder and CTI include, but are not limited to:

•

integrating personnel with diverse business backgrounds;

	•		combining different corporate cultures; and

	•		retaining key employees.

The process of integrating operations could cause the disruption of our business due to the loss of key personnel or inconsistencies in standards and procedures or controls and policies that could adversely affect our operations or our ability to achieve some of the benefits of the acquisition. The integration of Ryder and CTI will require the experience and expertise of certain key employees of Ryder. We cannot be sure, however, that we will be successful in retaining these employees for the time period necessary to successfully integrate the operations of Ryder and CTI. The diversion of management’s attention and any delays or difficulties encountered in connection with the integration process could have an adverse effect on our business, financial condition and results of operations.

We may be required to record impairments on our intangible assets and goodwill which could have an adverse material impact on our financial condition and results of operations.

We recorded intangible assets of approximately $6.0 million and goodwill of approximately $4.9 million related to the Ryder acquisition. We will continuously assess the value of the intangibles; however, there can be no assurances that there will not be an impairment on the value of such intangibles in the future. If these assets become impaired, such assets will be expensed in the periods they become impaired which could have a material adverse impact on our financial condition and results of operations.

Since we derive a substantial percentage of our revenue from contracts with a few customers, the loss of one or all of these customers could have a negative impact on our financial condition and results of operations.

We derive a substantial portion of our revenues from a few customers. A single customer generated approximately $5.0 million (39% of total revenue) in revenues in fiscal 2006 and $5.6 million (37% of total revenue) in fiscal 2005. Although that customer’s contract now includes an automatic annual renewal provision effective each March, it does contain a four months prior notification termination clause. The contract was automatically renewed in March 2007. The loss of that customer would have a substantial negative impact on our financial condition and results of operations.

We may not be successful in developing or launching our new software products and services, which could have a negative impact on our financial condition and results of operations.

We invest significant resources in the research and development of new and enhanced software products and services. We incurred research and development expenses of approximately $1.7 million and $2.0 million during 2006 and 2005, respectively. In addition, we incurred and capitalized approximately $0.5 million and $0.7 million in internal software development costs which were primarily related to next generation releases of SmartBill^®, and Proteus^®. The net book value of capitalized software amounted to $1.4 million at December 31, 2006. We cannot assure you that we will be successful in our efforts selling new software products, which could result in an impairment of the value of the related capitalized software costs and corresponding adverse effect on our financial condition and operating results.

The telecommunications billing services industry is subject to continually evolving industry standards and rapid technological changes to which the Company may not be able to respond which, in turn, could have a negative impact on our financial condition and results of operations.

The markets for our software products and services are characterized by rapidly changing technology, evolving industry standards and frequent new product introductions. Our business success will depend in part upon our continued ability to enhance the existing products and services, to introduce new products and services quickly and cost-effectively, to meet evolving customer needs, to achieve market acceptance for new product and service offerings and to respond to emerging industry standards and other technological changes. We may not be able to respond effectively to technological changes or new industry standards. Moreover, there can be no assurance that our competitors will not develop competitive products, or that any new competitive products will not have an adverse effect on our operating results. Our products are consistently subject to pricing pressure.

We intend further to refine, enhance and develop some of our existing software and billing systems and to change all of our billing and accounts receivable management services operations over to the most proven software systems and technology to reduce the number of systems and technologies that must be maintained and supported. There can be no assurance that:

	•		we will be successful in refining, enhancing and developing our software and billing systems in the future;

	•		the costs associated with refining, enhancing and developing these software products and billing systems will not increase significantly in future periods;

	•		we will be able to successfully migrate our billing and accounts receivable management services operations to the most proven software systems and technology; or

	•		our existing software and technology will not become obsolete as a result of ongoing technological developments in the marketplace.

If any of the foregoing events occur, this could have a negative impact on our financial condition and results of operations.

We may not be able to compete successfully in segments, which would have a negative impact on our financial condition and results of operations.

We compete with a number of companies, primarily in the United States and United Kingdom, that provide products and services that serve the same function as those provided by us, many of which are larger than us and have greater financial resources and better name recognition for their products than we do. Although we operate in a highly fragmented market, numerous competitors in the United States and the United Kingdom provide products and services comparable to our products and services which have the potential to acquire some or all of our market share in their respective geographic markets which could have a negative impact on our financial condition and results of operations.

We may be unable to protect our TransAct^SM technology and enforce our intellectual property rights, which will have a negative impact on our financial condition and results of operations.

We own two patents used in our TransAct^SM technology, which cover a method and process to prepare, display, and analyze usage and cost information for services such as, but not limited to, telecommunications, financial card services, and utilities. The patented TransAct^SM technology is incorporated in our SmartBill^® product, which is the flagship product of our EIM segment representing 50% of our total revenues in fiscal 2006. Other companies have developed programs which replicate the TransAct^SM technology and which we believe violates our patents. Although we have undertaken enforcement activities, including litigation, to protect or enforce our patents, we cannot assure you that the steps taken to protect the TransAct^SM process will always be successful. Our failure to enforce our intellectual property rights will have a negative impact on our financial condition and results of operations. The patents expire in 2011.

Our business may suffer as a result of the settlement of outstanding patent claims.

We have written letters and filed lawsuits claiming the possible infringement of our patents in connection with the TransAct^SM technology. We entered into various settlements in prior actions and we may negotiate additional settlements in the future. Those settlements provided substantial cash payments to us and, in return, we waived our claims for past patent violations and granted in certain instances one time purchase of ongoing licenses to use the technology to the parties involved in those actions. See Part I – Item 3. “Legal Proceedings.” Although we strive to arrange for continued licensing revenue stream in the case of potential infringers, we may not be successful in negotiating such licensing agreements. Since those parties are our potential customers, the effect of granting one time purchase of ongoing licenses as well as the fact that we brought legal claims against those parties could reduce our ability to find new customers for our products which could have a negative impact on our financial condition and results of operations.

We are subject to many risks associated with doing business outside the United States which could have a negative impact on our financial condition and results of operations.

With the acquisition of Ryder, the majority of our operations will be conducted in the United Kingdom. We face many risks in connection with our operations outside the United States, including, but not limited to:

	•		adverse fluctuations in currency exchange rates;

	•		political and economic disruptions;

	•		the imposition of tariffs and import and export controls; and

	•		increased customs or local regulations.

The occurrence of any one or more of the foregoing could have a material negative effect on our financial condition and results of operations.

We may experience an unfavorable outcome on an IRS audit which could adversely affect us.

In November 2006, the Internal Revenue Service notified us of the disallowance of the deductibility of the write-off $10.5 million promissory note taken during the 2003 tax year. We believe our position is valid and is supportable. We plan to defend our position vigorously and believe we will ultimately prevail in our appeal process. While we are unable to determine the ultimate outcome, an unfavorable result of the appeal process could have a material adverse impact on our financial position and debt covenant compliance.

We may not be successful when we enter new markets and that lack of success could limit the our growth.

As we enter into new markets outside the United States, including countries in Asia, Africa, and Europe, we face the uncertainty of not having previously done business in those commercial, political and social settings. Accordingly, despite our best efforts, the likelihood of success in each new market, which we enter, is unpredictable for reasons particular to each new market. For example, our success in any new market is based primarily on strong acceptance of our products and services in such market. It is also possible that some unforeseen circumstances could arise which would limit our ability to continue to do business or to expand in that new market. Our potential failure to succeed in the new markets would limit our ability to expand and grow.

If we fail to maintain an effective system of internal control over financial reporting and disclosure controls and procedures, we may be unable to accurately report our financial results and comply with the reporting requirements under the Exchange Act. As a result, current and potential stockholders may lose confidence in our financial reporting and disclosure required under the Exchange Act, which could adversely affect our business and we could be subject to regulatory scrutiny.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”), we will be required, beginning with our annual report on
Form 10-KSB for the fiscal year ending December 31, 2007, to include in our annual reports on Form 10-KSB, our management’s report on internal control over financial reporting and, beginning with our annual report on Form 10-KSB for the fiscal year ending December 31, 2008, the registered public accounting firm’s attestation report on our management’s assessment of our internal control over financial reporting. We are in the process of preparing an internal plan of action for compliance with the requirements of Section 404. As a result, we cannot guarantee that we will not have any “significant deficiencies” or “material weaknesses” within our processes. Compliance with the requirements of Section 404 is expected to be expensive and time-consuming. If we fail to complete this evaluation in a timely manner, we could be subject to regulatory scrutiny and a loss of public confidence in our internal control over financial reporting. In addition, any failure to establish an effective system of disclosure controls and procedures could cause our current and

potential stockholders and customers to lose confidence in our financial reporting and disclosure required under the Exchange Act, which could adversely affect our business.

Control of our company is concentrated among our directors and executive officers and their respective affiliates who can exercise significant influence over all matters requiring stockholder approval.

As of March 23, 2007, our directors and executive officers and their respective affiliates owned 72.5% of the outstanding Class A common stock. These stockholders can exercise significant influence over all matters requiring stockholder approval, including the election of directors and the approval of major corporate transactions. Such concentration of ownership may also delay or prevent a change in control of us.

We are subject to the penny stock rules which may adversely affect trading in our Class A common stock.

On March 23, 2007, the closing price of our Class A common stock was $0.32. Our Class A common stock is a “penny stock” security under the rules promulgated under the Exchange Act. In accordance with these rules, broker-dealers participating in certain transactions involving penny stocks must first deliver a disclosure document that describes, among other matters, the risks associated with trading in penny stocks. Furthermore, the broker-dealer must make a suitability determination approving the customer for penny stock transactions based on the customer’s financial situation, investment experience and objectives. Broker-dealers must also disclose these determinations in writing to the customer and obtain specific written consent from the customer. The effect of these restrictions will probably decrease the willingness of broker-dealers to make a market in our Class A common stock, decrease liquidity of our Class A common stock and increase transaction costs for sales and purchases of our Class A common stock as compared to other securities.

There is not presently an active market for shares of our Class A common stock, and, therefore, you may be unable to sell any shares of Class A common stock in the event that you need a source of liquidity.

Although our Class A common stock is quoted on the Over-the-Counter Bulletin Board, the trading in our Class A common stock has substantially less liquidity than the trading in the securities of many other companies listed on that market. A public trading market in the securities having the desired characteristics of depth, liquidity and orderliness depends on the presence in the market of willing buyers and sellers of our securities at any time. This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control. In the event an active market for the securities does not develop, you may be unable to resell your shares of Class A common stock at or above the price you pay for them or at any price.

Item 2. Description of Property

Rent and lease expense was $360,765 and $436,807 for the years ended December 31, 2006 and 2005, respectively. The Company leased office space through November 30, 2006 consisting of 20,003 square feet in Indianapolis in the United States at an annual rent of $209,353 per year. In October 2006, the Company signed a new lease in Indianapolis for 15,931 square feet of office space for an average of $257,643 per year. The Indianapolis lease expires in February 2014. The Company leases 3,485 square feet of office space near London in the United Kingdom at an annual rate equivalent to $147,908 per annum. The London lease expires in December 2013; however, it can be cancelled without penalty with a six month advance notice. The Company leases 9,360 square feet of office space in Blackburn in the United Kingdom at an annual rate equivalent to approximately $142,000. The Blackburn lease expires December 2008. The Company believes that, although its facilities are adequate to meet its current level of sales, additional space may be required to support future growth.

Item 3. Legal Proceedings

BellSouth Corporation et al.

The Company filed a lawsuit for patent infringement under 35 U.S.C. §271 et seq. against BellSouth Corporation (“BellSouth”), Citizens Communications, Inc., Convergys Corporation, Mid America Computer Corporation, Qwest, Telephone Data Systems, Inc. and Traq-Wireless, Inc. in the United States District Court

for the Southern District of Indiana on January 12, 2004. The lawsuit seeks treble damages, attorneys’ fees and an injunction for infringement of U.S. Patent No. 5,287,270.

The Company settled with defendant Telephone Data Systems, Inc. and dismissed its complaint against it on July 16, 2004. The Company also settled with defendant Traq-Wireless, Inc. and dismissed the complaint against it on July 30, 2004. The Company dismissed its complaint against Mid America Computer Corporation on April 12, 2004 and against Citizens Communications, Inc. on July 22, 2004. The Company has amended its complaint to substitute Qwest Corporation and Qwest Communications International, Inc. as defendants instead of Qwest.

On May 21, 2004, an action was brought against the Company in the United States District Court for the Northern District of Georgia by BellSouth Telecommunications, Inc., BellSouth Business Systems, Inc. and BellSouth Billing, Inc. seeking a declaratory judgment of non-infringement and invalidity of the Company’s Patent No. 5,287,270. The parties to both lawsuits involving BellSouth negotiated a settlement agreement in September 2004, and the revenue for the settlement was recorded in the quarter ended September 30, 2004. The complaint against Bellsouth was dismissed on October 4, 2004.

Qwest Corporation filed a motion in the United States District Court for the Southern District of Indiana seeking to dismiss the complaint against it on jurisdictional grounds or, alternatively, to transfer the case to the United States District Court for the Western District of Washington. The parties then engaged in jurisdictional discovery. On February 14, 2005, the United States District Court for the Southern District of Indiana denied the motion as moot in light of the consolidation of this action with the action disclosed under “Qwest Corporation.”

In May 2005, an anonymous request for re-examination of the Company’s Patent No. 5,287,270 was filed with the U.S. Patent Office. The Company suspects that such request was filed as a tactical matter from one or more of the aforementioned defendants. The Company believes that the request for re-examination is without merit and is unable to determine the outcome or ramifications at this time.

On May 13, 2005, Qwest Corporation, Qwest International and Qwest Communications Corporation filed a motion to stay the litigation in the United States District Court for the Southern District of Indiana, which was denied by the Court. On July 20, 2005, the foregoing Qwest entities filed a renewed motion for stay, which was denied by the Court.

Qwest Corporation

On May 11, 2004, an action was brought against the Company in the United States District Court for the Western District of Washington by Qwest Corporation seeking a declaratory judgment of non-infringement and invalidity of the Company’s Patent No. 5,287,270. An amended complaint was filed on July 13, 2004 adding Qwest Communications Corporation to that action. The Company filed a motion with the United States District Court for the Western District of Washington seeking to dismiss that action or, in the alternative, to transfer it to the United States District Court for the Southern District of Indiana.

On November 12, 2004, the United States District Court for the Western District of Washington granted the Company’s motion to the extent of transferring the action to the United States District Court for the Southern District of Indiana. The Company asserted counterclaims alleging patent infringement and the United States District Court for the Southern District of Indiana then consolidated the transferred action with the pending patent infringement lawsuit disclosed above under “BellSouth Corporation et al.”

BT Group PLC

The Company is a plaintiff in a lawsuit filed against BT Group PLC for infringement of European Patent (UK) No. EP 0541535 B1 in connection with the Billing Analyst product used by BT Group PLC. The lawsuit was filed on October 6, 2004 in the Patents County Court in London, UK. The Company seeks the payment of damages and costs, an injunction and destruction of infringing articles.

Avolent, Inc.

The Company was a plaintiff in a lawsuit for patent infringement of the Company’s patents under 35 U.S.C. §271 et seq. against Avolent, Inc. in the United States District Court for the District of Delaware on September 30, 2005. The lawsuit sought treble damages, attorneys’ fees and an injunction for infringement of U.S. Patent No. 5,287,270. On September 19, 2006, the Company entered into a settlement agreement with Avolent, Inc.

Cincinnati Bell, Inc.

The Company filed a lawsuit for patent infringement of the Company’s patents under 35 U.S.C. §271 et seq. against Cincinnati Bell, Inc. in the United States District Court for the Southern District of Ohio on December 19, 2005. The lawsuit seeks treble damages, attorneys’ fees and an injunction for infringement of U.S. Patent No. 5,287,270.

IRS Audit

In November 2006, the Internal Revenue Service notified the Company of the disallowance of the deductibility of the write-off $10.5 million promissory note taken during the 2003 tax year. The Company believes its position is valid and is supportable. The Company plans to defend its position vigorously and believes it will ultimately prevail in its appeal process. While the Company is unable to determine the ultimate outcome, an unfavorable result of the appeal process could have a material adverse impact on the Company’s financial position and debt covenant compliance.

General

The Company is from time to time subject to claims and administrative proceedings that are filed in the ordinary course of business that are unrelated to Patent Enforcement. The Company believes the ultimate resolution of any such claims or administrative proceedings, either individually or in the aggregate, will not have a materially adverse effect on the Company’s financial condition or results of operations.

Item 4. Submission of Matters to a Vote of Security Holders

None

PART II

Item 5. Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities

The shares of the Company’s Class A common stock, $0.01 par value per share, are quoted on the OTC Bulletin Board (Symbol “CTIG”). The table below sets forth for the indicated periods the high and low bid price ranges for Class A common stock as reported by the OTC Bulletin Board. These prices represent prices between dealers and do not include retail markups, markdowns or commissions and may not necessarily represent actual transactions.


	Quarterly Class A Common Stock Price Ranges
	2006				2005
	High		Low		High		Low
1st Quarter	$	0.33	$	0.23	$	0.64	$	0.36
2nd Quarter	$	0.39	$	0.30	$	0.58	$	0.33
3rd Quarter	$	0.45	$	0.30	$	0.40	$	0.24
4th Quarter	$	0.32	$	0.22	$	0.45	$	0.31

At March 23, 2007, the closing price for a share of Class A common stock was $0.32.

At March 23, 2007, the number of stockholders of record of the Company’s Class A common stock was 468.

No dividends were paid on the Company’s Class A or Class B common stock in the fiscal years ended December 31, 2006 and 2005. The Company’s covenants under the Acquisition Loan and the Revolving Loan restrict the Company’s ability to pay dividends.

For the information regarding the Company’s equity compensation plans, see Part III, Item 11. “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”

Recent Sales of Unregistered Securities

As of March 31, 2006, in connection with the conversion of shares of Class B common stock into shares of Class A common stock, the Company issued 1,100,812 shares of Class A common stock in exchange for 2,833,334 shares of Class B common stock in reliance on the exemption from the registration under Section 3(a)(9) of the Securities Act of 1933, as amended (the “Securities Act”). See Part II, Item 7 — Notes to the Consolidated Financial Statements for the year ended December 31, 2006, Note 3, “Merger, Acquision and Discontinued Operations” for a description of the terms of the conversion of Class B common stock.

The Company believes that the conversion met all of the requirements of the exemption provided by Section 3(a)(9) of the Securities Act because (i) the Company was the issuer of both (a) shares of Class A common stock issued in the conversion and (b) shares of Class B common stock converted into shares of Class A common stock; (ii) the conversion involved an exchange exclusively with the Company’s existing security holders and did not involve any new consideration being paid by security holders; and (iii) the Company did not pay, and does not need to pay, any compensation for soliciting holders of Class B common stock to participate in the conversion.

Item 6. Management’s Discussion and Analysis or Plan of Operation

Overview

The Company is comprised of three business segments: Electronic Invoice Management (“EIM”), Telemanagement (“Telemanagement”) and Patent Enforcement Activities (“Patent Enforcement”). EIM designs, develops and provides services and software tools that enable telecommunication service providers to better meet the needs of their enterprise customers. EIM software and services are provided and sold directly to telecommunication service providers who then market and distribute such software to their enterprise customers. Using the Company’s software and services, telecommunication service providers are able to electronically invoice their enterprise customers in a form and format that enables the enterprise customers to improve their ability to analyze, allocate and manage telecommunications expenses while driving internal efficiencies into their invoice receipt, validation, approval and payment workflow processes. Telemanagement designs, develops and provides software and services used by enterprise, governmental and institutional end users to manage their telecommunications service and equipment usage. Patent Enforcement involves the licensing, protection, enforcement and defense of the Company’s intellectual property, including patents.

The Company generates its revenues and cash from several sources: software sales, license fees, processing fees, implementation fees, training and consulting services, and enforcement revenues.

The Company’s software products and services are subject to changing technology and evolving customer needs which require the Company to continually invest in research and development in order to respond to such demands. The limited financial resources available to the Company require the Company to concentrate on those business segments and product lines which provide the greatest returns on investment. The EIM segment, as compared to the other business segments, provides the predominant share of income from operations and cash flow from operations. The majority of Telemanagement segment revenues are derived from its UK operations. The Company acquired new EIM products with the Ryder acquisition. The Company believes that the new products will enable the Company to offer a more complete range of EIM products to the international market.

The Company believes that as voice and data services continue to commoditize, service providers are seeking alternative business models to replace revenue lost directly as a result of pricing pressures. One such business model is the delivery of managed or hosted voice and video services.

Due to the profitability and revenue per user (“ARPU”) advantage possible by delivering such managed and hosted service offerings, providers not only look at acquiring new customers but converting legacy customers onto the NGN platform. The Company believes that this conversion process, is significant. Many legacy features and functions are not available on NGN platforms, primarily due to the immaturity of the service delivery model.

The Company’s new hosted voice and video over IP applications will help eliminate customer resistance to conversion to next generation platforms, while creating new revenue opportunities for service providers through the delivery of compelling value added services. In 2007, The Company intends to market two applications, emPulse, web-based communications traffic analysis solution, and SmartRecord^® IP, which enable service

providers to selectively intercept communications on behalf of their hosted and managed service customers. These applications will also enable managed and hosted service customers of service providers to analyze voice, video, and data usage, record and monitor communications, and perform administration and back office functions such as cost allocation or client bill back. These applications were released as enterprise-grade products in the first quarter of 2007. The Company anticipates that customers will purchase these products when upgrading or acquiring a new enterprise communications platform. The Company has taken the business benefits of these enterprise-grade applications and has delivered provider-grade managed and hosted service applications, enabling service providers to create a new recurring revenue stream, while ensuring that enterprise customers have the tools necessary and relevant to their particular line of business or vertical. The Company’s future success is directly related to the successful market penetration of emPulse and SmartRecord^® IP.

The Company’s inability to successfully integrate or operate Ryder could have a material adverse impact on the financial condition of the Company which could result in non-compliance with restrictive financial covenants set forth in the Revolving Loan and Acquisition Loan agreements. The non-compliance of such restricted covenants may cause the lender to accelerate the repayment of the Revolving Loan and/or the Acquisition Loan or the foreclosure on the collateral, which would also have a material adverse impact on our business, financial condition and results of operations.

Financial Condition

In the fiscal year ended December 31, 2006, the Company experienced a decrease in financial position. Total stockholders’ equity decreased $855,163 to $9,629,890 as of December 31, 2006 primarily as a result of the fiscal year 2006 net loss of $1,087,640. At December 31, 2006, cash and cash equivalents were $1,691,349 compared to $1,617,004 at December 31, 2005. The Company realized a decline in net current assets (current assets less current liabilities) of approximately $6,315,000 which is primarily attributable to the expenditure of $3,627,493 of cash, cash equivalents and short-term investments in connection with the acquisition of the capital stock of Ryder along with the transfer of $3,000,000 of short-term investments into long-term restricted cash used as collateral for the Company’s revolving line of credit. The majority of the asset acquired in the Ryder acquisition was attributed to goodwill, intangible assets, cash, and accounts receivables. The Company generates approximately 43% of its revenues from operations in the United Kingdom where the functional currency, the UK pound, has strengthened by approximately 14% in relation to the US dollar in 2006. As a result of the Ryder acquisition, it is anticipated that the majority of revenues will be generated from operations in the United Kingdom in 2007.

Results of Operations (Year Ended December 31, 2006 Compared to Year Ended December 31, 2005)

Revenues.

Revenues from operations decreased $2,489,272 to $12,811,385 in the year ended December 31, 2006 as compared to $15,300,657 for the year ended December 31, 2005. The decrease in revenue was primarily the result of decreased EIM, Telemanagement, and Patent Enforcement segment revenues. The impact of revenue from Ryder is insignificant since revenues from Ryder are only for the period after the acquisition from December 22, 2006 to December 31, 2006. The EIM segment revenues decreased by $889,799 which was primarily attributable to reduced processing revenue from the Company’s two largest customers. The Telemanagement segment revenues decrease of $275,637 was attributable to a reduction in Proteus^® Trader revenue in the United Kingdom in 2006 which was partially off-set by an increase in Proteus^® revenue in the United States. The decrease in the patent license fee and enforcement revenue of $1,323,836 was due to fewer settlements being reached in 2006. A major customer represented 39% of total revenues for the year ended December 31, 2006 and 37% of total revenues for the year ended December 31, 2005, and such customer represented 41% of software sales, service fee and license fee revenues for the year ended December 31, 2006 and 42% for the year ended December 31, 2005.

Costs of Products and Services Excluding Depreciation and Amortization.

Costs of products and services, excluding depreciation and amortization, decreased $581,797 to $3,455,584 as compared to $4,037,381 for the year ended December 31, 2005 primarily due to cost reductions in the Company’s EIM segment. The EIM segment cost of products and services, excluding depreciation and amortization, decreased $490,358 which was primarily due to the decrease in the size of the EIM support staff in the United States. The Telemanagement segment cost of products and services, excluding depreciation and

amortization, decreased $91,439 primarily due to costs related to decreased revenue. For software sales, service fee and license fee revenues, the cost of products and services, excluding depreciation and amortization, was 28.1% of revenue for the year ended December 31, 2006 as compared to 30.0% of revenue for the year ended December 31, 2005.

Patent License Fee and Enforcement Costs.

Patent license fee and enforcement cost for the year ended December 31, 2006 decreased by $270,274 to $950,733 as compared to $1,221,007 for the year ended December 31, 2005. The decrease was primarily related to a $276,185 reduction of legal contingency fees incurred in the year ended December 31, 2006 when compared to the year ended December 31, 2005 due to fewer patent infringement settlements being realized in the year ended December 31, 2006.

Selling, General and Administrative Costs.

Selling, general and administrative expenses decreased $112,359 to $6,981,826 compared to $7,094,185 for the year ended December 31, 2005. The decrease was primarily attributed to the Company’s emphasis on cost containment in order to maintain the cost efficiencies realized in prior years.

Research and Development Expense.

Research and development expense decreased $303,381 to $1,706,504 compared to $2,009,885 for the year ended December 31, 2005. The decrease in expense was primarily due to the reduction in development staff costs for the year ended December 31, 2006. The amount of capitalized development costs related to internally developed software for resale were $500,289 and $656,345 for the years ended December 31, 2006 and 2005, respectively. The reduction in capitalizable software development costs is due to the reduction in the size of the development staff. Research and development expense relates primarily to personnel costs.

Depreciation and Amortization.

Depreciation and amortization for the year ended December 31, 2006 decreased $33,561 to $1,064,699 from $1,098,260 for the year ended December 31, 2005. This decrease was primarily due to the amortization expense associated with prior versions of SmartBill being fully amortized during the year ended December 31, 2006. Approximately $776,111 and $734,292 of amortization expense was related to capitalized software costs for the years ended December 31, 2006 and 2005, respectively.

Interest Income and Other Income.

Interest income increased $47,892 to $344,600 for the year ended December 31, 2006 compared to $296,708 for the year ended December 31, 2005. The increase in interest income was primarily associated with an increase in the interest rate realized on investments and on notes receivable related to patent enforcement settlements.

Taxes.

The Company records a valuation allowance against its net deferred tax asset to the extent management believes, it is more likely than not, that the asset will not be realized. At December 31, 2006, the Company provided a valuation allowance against the Company’s net deferred tax assets of the Company’s net operating loss carryforwards in the United States. Given profitability from operations in the United Kingdom, the deferred tax assets related to the United Kingdom operations do not have a valuation allowance.

The net tax expense of $69,953 for the year ended December 31, 2006 was primarily attributable to the taxable profit of $245,485 realized from the Company’s UK operations. The net tax benefit of $11,169 for the year ended December 31, 2005 was primarily attributable to a $120,747 benefit from the resolution of a prior year state tax contingency upon the completion of a state tax audit which offset UK tax expense of $109,578 in connection with the taxable profit realized in the United Kingdom.

Liquidity and Capital Resources

Historically, our principal needs for funds have been for operating activities (including costs of products and services, patent enforcement activities, selling, general and administrative expenses, research and development, and working capital needs), and capital expenditures, including software development. Cash flows from operations and existing cash, cash equivalents, and short-term investments have been adequate to meet our business objectives. Cash, cash equivalents, and short-term investments decreased by $6,405,655 to $1,691,349 as of December 31, 2006 from $8,097,004 as of December 31, 2005. Cash provided by operations was $20,428, cash used in investing activity was $7,289,638, and cash provided by financing activities was $7,184,182 for the year ended December 31, 2006. Cash flow provided by operations of $20,428 was primarily attributable to the Company’s recognizing net loss which was offset by a non-cash add-back of depreciation and amortization. Cash flows utilized by investing activities of $7,289,638 related primarily to the acquisition of Ryder, an increase in restricted cash, and capitalized costs incurred in the development and enhancements of the Company’s products partially off-set by the liquidation of short-term available for sale securities. Cash flows provided by financing activities of $7,184,182 was primarily attributable to the issuance of debt. Cash generated from the EIM segment of $1,517,998 was off-set by cash used in following segments: Telemanagement segment of $341,993; the Patent Enforcement segment of $450,802; and the Corporate expenses of $2,073,224. Income / (loss) from operations on a geographical basis amounts to $(1,579,743) for the United States and $231,782 for the United Kingdom.

The following table presents selected financial results by business segment:


	Electronic
	Invoice					Patent			Reconciling
2006	Management		Telemanagement			Enforcement			Amounts			Consolidated

Net revenues	$	6,595,752	$	5,692,712		$	522,921		$	—		$	12,811,385
Gross profit / (loss) (Revenues less costs of products [excluding depreciation and amortization] and patent license cost)		5,170,166		3,662,714			(427,812	)		—			8,405,068
Depreciation and Amortization		971,530		46,752			22,990			23,426			1,064,698
Income (loss) from operations		1,517,998		(341,933	)		(450,802	)		(2,073,224	)		(1,347,961	)
Long-lived assets		13,388,333		752,331			840,802			3,066,421			18,047,887

2005

Net revenues	$	7,485,551	$	5,968,349		$	1,846,757		$	—		$	15,300,657
Gross profit (Revenues less costs of products [excluding depreciation and amortization] and patent license cost)		5,569,608		3,846,911			625,750			—			10,042,269
Depreciation and Amortization		917,141		142,653			22,990			15,476			1,098,260
Income (loss) from operations		1,484,724		329,318			602,760			(2,576,863	)		(160,061	)
Long-lived assets		2,194,513		465,262			715,473			89,847			3,465,095

The following table presents selected financial results by geographic location based on location of customer:


2006	United States			United Kingdom		Consolidated

Net revenues	$	7,357,947		$	5,453,438	$	12,811,385
Gross profit (Revenues less costs of products [excluding depreciation and amortization] and patent license cost)		4,770,056			3,635,012		8,405,068
Depreciation and Amortization		1,004,888			59,810		1,064,698
Income / (loss) from operations		(1,579,743	)		231,782		(1,347,961	)
Long-lived assets		5,602,795			12,445,092		18,047,887

2005

Net revenues	$	9,624,240		$	5,676,417	$	15,300,657
Gross profit (Revenues less costs of products [excluding depreciation and amortization] and patent license cost)		6,375,950			3,666,319		10,042,269
Depreciation and Amortization		957,373			140,887		1,098,260
Income from operations		(660,536	)		500,475		(160,061	)
Long-lived assets		2,999,833			465,262		3,465,095

The Company experienced a net loss for the year ended December 31, 2006. The primary reason for the net loss was a decrease of $1,323,836 in the Company’s Patent Enforcement segment revenues which resulted in a loss from operations in the Patent Enforcement segment of $450,802 combined with increased costs related to marketing the Company’s Telemanagement product, Proteus^®, in the United States.

The Company derives a substantial portion of its revenues from a single EIM customer. This single customer generated approximately $5,020,637 (39% of total revenue) of revenues in fiscal 2006 and $5,594,946 (37% of total revenue) in fiscal 2005. Although that customer’s contract includes an automatic annual renewal provision effective each March, it does contain a four months prior notification termination clause. The contract was renewed in March 2007. The loss of that customer would have a substantial negative impact on the Company’s operations.

On December 22, 2006, the Company entered into the Share Transfer Agreement. Pursuant to the Share Transfer Agreement, the Company acquired all of the issued and outstanding shares of capital stock of Ryder, a privately held software development company registered in England, for the Purchase Price of £5.6 million, which was equal to approximately $11.0 million as of December 22, 2006. The assets of Ryder consist primarily of goodwill, intangible assets, cash and accounts receivable. The Company financed the acquisition of Ryder through a combination of cash from working capital, the Acquisition Loan and the Revolving Loan, as defined below. Approximately $900,000 of the purchase price is being held in an escrow account to satisfy any potential claims, breach of warranties or realized minimum net asset values, as defined in the Share Transfer Agreement, which may arise within a one year period following the acquisition.

During 2006, the Company entered into the following debt obligations. The Company has available the Revolving Loan with a bank for the lesser of (a) $8,000,000, or (b) the sum of 80% of eligible domestic trade accounts receivable, 90% of eligible, insured foreign trade accounts receivable and 100% of cash placed in a restricted account. The Revolving Loan expires on December 21, 2009, unless extended. Borrowings under the

line of credit bear interest (7.70% at December 31, 2006) at LIBOR plus 2.35% payable monthly. All borrowings are collateralized by substantially all assets of the Company. The outstanding balance on the Revolving Loan was $4,978,698 at December 31, 2006. Borrowings under the Revolving Loan are subject to certain financial covenants and restrictions on indebtedness, encumbrances, investments, business combinations, and other related items. The carrying amount of receivables that serve as collateral for borrowings totaled $5,056,974 at December 31, 2006.

The Company entered into a loan agreement (the “Loan Agreement”) on December 22, 2006 pursuant to which the Company obtained an acquisition loan (the “Acquisition Loan”) in the amount of $2,600,000. The Acquisition Loan is secured by a letter of credit from SEB bank in favor of National City Bank, a national banking association (“NCB”). The letter of credit was obtained by a guarantee from a wholly-owned subsidiary of Fairford Holdings Limited, a British Virgin Islands company (“Fairford”). As of March 23, 2007, Fairford owned 61.4% of the Company’s outstanding Common Stock. Mr. Osseiran, the majority holder of the Company’s Common Stock and director of the Company, is a director of Fairford and a grantor and sole beneficiary of a revocable trust which is the sole stockholder of Fairford. Mr. Dahl, a director of the Company, is the director of Fairford. The Acquisition Loan expires on December 21, 2009, unless extended. Borrowings under the Acquisition Loan bear interest (7.35% at December 31, 2006) at LIBOR plus 2.00% payable monthly. All borrowings under the Acquisition Loan are collateralized by substantially all assets of the Company. The outstanding balance on the term loan was $2,600,000 at December 31, 2006.

Provisions under the Revolving Loan and Acquisition Loan require the Company to comply with certain covenants. These covenants include limitations on, among other things, indebtedness, investments, the issuance of guarantees and the payment of dividends. For example, subject to certain exceptions, the Company agreed under the Loan Agreement, among other matters, that, without NCB’s prior written consent, the Company shall not, and shall not permit any of its subsidiaries to: (i) incur or have outstanding any indebtedness in excess of $20,000 individually or $100,000 in the aggregate; (ii) dispose of all, or any part, of business or assets; (iii) make any acquisitions, or (iv) issue any additional shares of stock or other securities and the Company shall not issue more than 10% of the Company’s capital stock pursuant to its stock option plan on a fully-diluted basis. At December 31, 2006, the Company was in compliance with all applicable covenants contained in the Revolving Loan and Acquisition Loan agreements.

The Loan Agreement requires the Company to pay a fee with respect to the unused portion of the Revolving Loan of 0.25% per annum for each calendar quarter on the average daily amount by which $8.0 million exceeds the outstanding principal amount of the Revolving Loan during such calendar quarter. Pursuant to the Loan Agreement, the Company is obligated to pay NCB a nonrefundable commitment fee of $25,000 and a funds transfer fee in the amount of approximately $20,319.

Each of the Promissory Notes is secured by: (i) the Loan Agreement; (ii) the Guaranties (collectively, “U.S. Guaranties”) from the Company’s direct and indirect wholly-owned subsidiaries to NCB; (iii) the Security Agreements (collectively, “Security Agreements”) from each of the Company and its U.S. direct and indirect wholly-owned subsidiaries; (iv) the Charge Over Shares in Ryder from CTI Data to NCB (v) the Debentures (collectively, “Debentures”) between NCB and each of the Company, CTI Data and Ryder; and (vi) the Guarantee and Indemnities (collectively, “UK Guarantees”) between NCB and each of CTI Data and Ryder.

The Company’s obligations under the Loan Documents, as defined in the Loan Agreement, are jointly and severally guarantied by the Company’s subsidiaries under the U.S. Guaranties, dated as of December 22, 2006. In addition, pursuant to the UK Guarantees, each of CTI Data and Ryder guarantied the Company’s obligations under the Loan Documents and agreed to indemnify NCB for any losses or liabilities suffered by NCB as a result of the Company’s obligations under the Loan Documents being unenforceable, void or invalid.

respective obligations under the U.S. Guaranties. Under the Debentures, dated as of December 22, 2006, each of the Company, Ryder and CTI Data also secured their respective liabilities to NCB.

Each of the Company and CTI Data entered into a charge over shares agreement with NCB, dated as of December 22, 2006, pursuant to which they granted a security interest to NCB, as further security for the obligations under the Acquisition Loan and Revolving Loan, in all of the shares of the capital stock of CTI Data and Ryder, respectively.

Pursuant to the Loan Agreement, the following events, among other circumstances, constitute an event of default and may cause all obligations of the Company under each of the Promissory Notes to become immediately due and payable: (i) any amount due under the Acquisition Loan Note and/or the Revolving Note is not paid within ten days of when due; (ii) a default under any of the Loan Documents; (iii) any default in the payment of the principal or any other sum for any other indebtedness having a principal amount in excess of $10,000 or in the performance of any other term, condition or covenant contained in any agreement under which any such indebtedness is created, the effect of which default is to permit the holder of such indebtedness to cause such indebtedness to become due prior to its stated maturity; and (iv) any sale or other transfer of any ownership interest of the Company or its subsidiaries, which results in any change in control of the Company or a change in the Chairman or Chief Executive Officer of the Company.

The Company added Ryder’s products and customers to the EIM segment. The Ryder products and customers give the Company international presence in the EIM market as well as a strong Tier 1 customer base which the Company believes will reduce the Company’s dependence on a single customer.

On January 21, 2005, the Company completed the sale of the Company’s discontinued assets and liabilities (see Note 6: Discontinued Operations). The sales price was $464,000 of which $180,000 in cash was received along with a non-interest bearing note of $284,000 payable in 12 monthly installments of $15,000 and a final monthly payment of $104,000. The Company imputed interest on the note at a rate of 6% and recorded a note receivable of $272,397. The note receivable was paid in full as of December 31, 2006.

During fiscal 2006, the Company entered into Confidential Settlement Agreements relating to Patent Enforcement activities totaling $400,000 of which the Company received $40,000 of cash and accepted notes for the remaining $360,000. The Company recorded the remaining payments at a discount at an imputed interest rate of 9.25%. The settlement receivable as of December 31, 2006 amounted to $952,396.

During fiscal 2005, the Company entered into Confidential Settlement Agreements relating to Patent Enforcement activities totaling $1,375,000 of which the Company received $400,000 of cash and accepted notes for the remaining $975,000. The Company recorded the remaining payments at a discount with imputed interest ranging from 7.83% to 8.00%.

In October 2006, the Company signed a new lease in Indianapolis for 15,931 square feet of office space for an average of $257,643 per year. The Indianapolis lease expires in February 2014.

In connection with the twelfth amendment to the lease entered into by the Company and Lockerbie Marketplace, LLC (the “Landlord”) in May, 2004, the Company received a lease incentive of $200,000 from the Landlord to purchase furniture and other office improvements (the “Allowance”). In the twelve months ended December 31, 2005, the Landlord paid $200,000 of the Allowance to purchase furniture for the Company. The Company recorded this non-cash transaction by increasing fixed assets and establishing a deferred rent incentive in liabilities. When the deferred rent incentive benefit is recognized by the Company, the benefit will be shown as an adjustment to reconcile net cash in the Company’s Consolidated Statement of Cash Flows.

The Company paid $20,907 in state income taxes and $86,803 in foreign income tax for the year ended December 31, 2006.

Off-Balance Sheet Arrangements

The Company has no material off-balance sheet arrangements.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to revenue recognition, bad debts, depreciation and amortization, investments, income taxes, capitalized software, accrued compensation, contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

The Company believes the following critical accounting policies affect the more significant judgments and estimates used in the preparation of the consolidated financial statements. For the description of other critical accounting policies used by the Company, see Item 7. “Financial Statements – Notes to Consolidated Financial Statements – Note 1” in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2006.

Income Taxes. The Company is required to estimate its income taxes. This process involves estimating the Company’s actual current tax obligations together with assessing differences resulting from different treatment of items for tax and accounting purposes which result in deferred income tax assets and liabilities.

The Company’s deferred tax assets are assessed for each reporting period as to whether it is more likely than not that they will be recovered from future taxable income, including assumptions regarding on-going tax planning strategies. To the extent the Company believes that recovery is uncertain, the Company will establish a valuation allowance for assets not expected to be recovered. Changes to the valuation allowance are included as an expense or benefit within the tax provision in the statement of operations.

The Company accounts for income taxes using the asset and liability method in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes”. Under the liability method, a deferred tax asset or liability is determined based on the difference between the financial statement and tax bases of assets and liabilities, as measured by the enacted tax rates assumed to be in effect when these differences are expected to reverse.

The Company records a valuation allowance against its net deferred tax asset to the extent management believes, it is more likely than not, that the asset will not be realized. At December 31, 2006, the Company provided a valuation allowance against the Company’s net deferred tax assets of the Company’s net operating loss carryforwards in the United States. Given profitability from operations in the United Kingdom, deferred tax assets related to the United Kingdom operations do not have a valuation allowance.

Research and Development and Software Development Costs. Research and development costs are charged to operations as incurred. Software Development Costs are considered for capitalization when technological feasibility is established in accordance with SFAS 86. The Company bases its determination of when technological feasibility is established based on the development team’s determination that the Company has completed all planning, designing, coding and testing activities that are necessary to establish that the product can be produced to meet its design specifications including, functions, features, and technical performance requirements.

Impairment. In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the Company reviews the recoverability of the carrying value of its long-lived assets, including intangible assets with definite lives. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. When such events occur, the Company compares the carrying amount of the assets to the undiscounted expected future cash flows. If this comparison indicates there is impairment, the amount of the impairment is calculated using discounted expected future cash flows.

SFAS 86 requires the periodic evaluation of capitalized computer software costs. The excess of any unamortized computer software costs over its related net realizable value at a balance sheet date shall be written down. The Company periodically evaluates capitalized computer software costs for impairment. The Company had $1,393,893 of capitalized software costs as of December 31, 2006.

Revenue Recognition and Accounts Receivable Reserves. The Company’s revenue recognition policy is consistent with the requirements of Staff Accounting Bulletin No. 104, Revenue Recognition (“SAB 104”) which supersedes SAB No. 101, “Revenue Recognition in Financial Statements.” SAB No. 104 primarily rescinds the accounting guidance contained in SAB No. 101 related to multiple-element revenue arrangements, which was superseded as a result of the issuance of EITF Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables.” Additionally, SAB No. 104 revises or rescinds portions of the SEC’s “Revenue Recognition in Financial Statements, Statement of Position No. 97-2, Software Revenue Recognition (“SOP 97-2”), and other applicable revenue recognition guidance and interpretations. In general, the Company records revenue when it is realized, or realizable, and earned. Revenues from software licenses are recognized upon shipment, delivery or customer acceptance, based on the substance of the arrangement or as defined in the sales agreement provided there are no significant remaining vendor obligations to be fulfilled and collectibility is reasonably assured. Software sales revenue is generated from licensing software to new customers and from licensing additional users and new applications to existing customers.

The Company’s sales arrangements typically include services in addition to software. Service revenues are generated from support and maintenance, processing, training, consulting, and customization services. For sales arrangements that include bundled software and services, the Company accounts for any undelivered service offering as a separate element of a multiple-element arrangement. Amounts deferred for services are determined based upon vendor-specific objective evidence of the fair value of the elements as prescribed in SOP 97-2. Support and maintenance revenues are recognized on a straight-line basis over the term of the agreement. Revenues from processing, training, consulting, and customization are recognized as provided to customers. If the services are essential to the functionality of the software, revenue from the software component is deferred until the essential service is complete.

If an arrangement to deliver software or a software system, either alone or together with other products or services, requires significant production, modification, or customization of software, the service element does not meet the criteria for separate accounting set forth in paragraph 65 of SOP 97-2. If the criteria for separate accounting are not met, the entire arrangement is accounted for in conformity with Accounting Research Bulletin (“ARB”) No. 45, using the relevant guidance in SOP 81-1. The Company carefully evaluates the circumstances surrounding the implementations to determine whether the percentage-of-completion method or the completed-contract method should be used. Most implementations relate to the Company’s Telemanagement products and are completed in less than 30 days once the work begins. The Company uses the completed-contract method on contracts that will be completed within 30 days since it produces a result similar to the percentage-of-completion method. On contracts that will take over 30 days to complete, the Company uses the percentage-of-completion method of contract accounting.

The Company also realizes patent license fee and enforcement revenues. These revenues are realized once the Company has received a signed settlement or judgment and the collection of the receivable is deemed probable.

The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company continuously monitors collections and payments from its customers and the allowance for doubtful accounts is based on historical experience and any specific customer collection issues that the Company has identified. If the financial condition of its customers were to deteriorate resulting in an impairment of their ability to make payments, additional allowances may be required. Where an allowance for doubtful accounts has been established with respect to customer receivables, as payments are made on such receivables or if the customer goes out of business with no chance of collection, the allowances will decrease with a corresponding adjustment to accounts receivable as deemed appropriate.

Legal Costs Related to Patent Enforcement Activities. Hourly legal costs incurred while pursuing patent license fee and enforcement revenues are expensed as incurred. Legal fees that are contingent on the successful outcome of an enforcement claim are recorded when the patent license fee and enforcement revenues are realized.

Related Party Transactions

As of February 7, 2006, Fairford, the record holder of 2,371,244 shares of Class B common stock representing approximately 84% of the 2,833,334 issued and outstanding shares of Class B common stock, notified the Company of its election to convert all of the issued and outstanding shares of Class B common stock into shares of Class A common stock in accordance with the procedures set forth in the Certificate of Incorporation. Mr. Salah Osseiran, the majority holder of the Company’s Class A common stock and director of the Company, is deemed to be the indirect beneficial owner of 2,371,244 shares of Class B common stock held by Fairford, as a grantor and sole beneficiary of a revocable trust which is the sole stockholder of Fairford. Pursuant to the Certificate of Incorporation, the foregoing conversion of shares of Class B common stock into shares of Class A common stock was effective as of March 31, 2006. The Company determined that, as of March 31, 2006, the unaudited Net Book Value of the Tracking LLC was $271,482.69. Therefore, 2,833,334 shares of Class B common stock were converted into 1,100,812 shares, excluding fractional shares, of Class A common stock, of which 921,279 shares of Class A common stock were issued to an entity controlled by Mr. Osseiran, a director and majority stockholder of the Company, and 68,838 shares were issued directly to, and to entities controlled by, Mr. Garrison, the Company’s director. The number of shares of Class A common stock issued upon conversion of Class B common stock was calculated using 88% of an average market price of Class A common stock of approximately $0.2803 (i.e. $0.24662).

On February 16, 2007, the Company and, Fairford Holdings Scandinavia AB, a wholly-owned subsidiary of Fairford Holdings Limited (“Fairford Scandinavia”), entered into the Securities Purchase Agreement (the “Agreement”), dated February 16, 2007. Pursuant to the Agreement, on February 16, 2007, the Company issued to Fairford Scandinavia a Class A Common Stock Purchase Warrant (the “Warrant”) to purchase shares of Class A Common Stock (“Common Stock”) of the Company in consideration for securing the issuance of a $2.6 million letter of credit (the “Letter of Credit”) from SEB bank to National City Bank. Due to National City Bank’s receipt of the Letter of Credit, the Company was able to obtain the Acquisition Loan at a favorable cash-backed interest rate. Pursuant to the Warrant, Fairford Scandinavia is entitled to purchase 419,495 shares of Common Stock at the exercise price of $0.34 per share, subject to adjustments as described in the Warrant, at any time prior to the 10th anniversary of the date of issuance. As of February 16, 2007, prior to issuance of the Warrant, Fairford owned 61% of the Company’s outstanding Common Stock and Fairford Scandinavia did not own any of the Company’s securities. Mr. Osseiran, the majority holder of the Company’s Class A common stock and a director of the Company, is a director of Fairford, the President of Fairford Scandinavia and a grantor and sole beneficiary of a revocable trust which is the sole stockholder of Fairford. Mr. Dahl, a director of the Company, is a director of Fairford and the Chairman of Fairford Scandinavia.

During the fiscal year ended December 31, 2006, options to purchase 250,000 shares of the Company’s Class A common stock, at an exercise price of $0.31 per share, were granted to Mr. Birbeck, the Company’s Chairman of the Board of Directors, Chief Executive Officer, and President. The options vested immediately upon grant. During the fiscal year ended December 31, 2005, options to purchase 500,000 shares of the Company’s Class A common stock, at an exercise price of $0.40 per share, were issued to Mr. Birbeck. The options vested immediately upon grant.

As a result of the consummation of the sale of the assets of Xila Communications. LLC (“Xila”), the former Centillion Data Systems, Inc. stockholders and directors (“Centillion Affiliates”) received 1,140,564 shares of Class A common stock of the Company. Of the Class A common stock issued to Centillion Affiliates: (i) 954,549 shares were issued to entities controlled by or affiliated with Mr.Osseiran, a director and majority stockholder of the Company; (ii) 71,323 shares were issued directly to and to an entity affiliated with Mr. Garrison, the Company’s director and (iii) 37,442 shares were issued to employees all of whom are not deemed to be executive officers of the Company. Xila was sold to an unrelated third party in January 2005.

During the fiscal year ended December 31, 2005, options to purchase 6,250 shares of the Company’s Class A common stock, at an exercise price of $0.34 per share, were issued to Mr. Osseiran, a director and majority stockholder of the Company. The options vest in four equal annual installments beginning on the first anniversary of the date of grant.

The Company incurred $60,000 in fees and $11,079 in expenses associated with Board of Directors activities in 2006 and $186,328 in fees and $73,288 in expenses associated with Board of Directors activities in 2005.

During the fiscal year ended December 31, 2005, the Company paid approximately $32,000 for sales management software and consulting services to an entity of which the Company’s current Chairman of the Board, President, and Chief Executive Officer, Mr. Birbeck, is a founder and director. Mr. Birbeck was elected Chairman of the Board of Directors on July 5, 2005 and appointed President and Chief Executive Officer of the Company on September 13, 2005.

On October 13, 2005, the employment of the Company’s former Chief Executive Officer and President, Mr. Bradley Houlberg, was terminated. In connection with Mr. Houlberg’s termination of employment, the Company recorded $114,000 of expense and reimbursed Mr. Houlberg for accrued but unused 2005 vacation in the amount of $9,687 and reasonable outstanding business expenses.

During the fiscal year ended December 31, 2005, options to purchase 100,000 shares of the Company’s Class A common stock at an exercise price of $0.39 per share were issued to Mr. Hanuschek, the Chief Financial Officer of the Company. The options vest in three installments: (i) 50% of the option grant vests immediately upon grant, (ii) 25% of the option grant vests on the first anniversary of the date of the grant, (iii) 25% of the option grant vests on the second anniversary of the date of the grant.

Recently Issued and Adopted Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123 (revised in 2004), “Share-Based Payment” (“SFAS No. 123-R”). SFAS No. 123-R replaces SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”) and supersedes Accounting Principles Board (“APB”) Statement No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”). SFAS No. 123-R requires that the compensation cost relating to share-based payment transactions be recognized in the financial statements. That cost is measured based on the fair value of the equity or liability instruments issued. The Company is no longer permitted to follow the intrinsic value accounting method of APB No. 25, which resulted in no expense being recorded for stock option grants for which the strike price was equal to the fair value of the underlying stock on the date of grant. The adoption of the modified perspective method as permitted under SFAS No. 123-R applies to all of the Company’s outstanding unvested share-based payment awards as of January 1, 2006 and all prospective awards and will not require the Company’s financial statements for any prior interim periods or fiscal years to reflect any restated amounts.

In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” (“FIN 48”) an interpretation of FASB Statement No. 109, “Accounting for Income Taxes”. FIN 48 requires that a position taken or expected to be taken in a tax return be recognized in the financial statements when it is more likely than not (i.e. a likelihood of more than 50%) that the position would be sustained upon examination by tax authorities. A recognized tax position is then measured at the largest amount of benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. FIN 48 also requires expanded disclosures including identification of tax positions for which it is reasonably possible that total amounts of unrecognized tax benefits will significantly change in the next 12 months, a description of tax years that remain subject to examination by a major tax jurisdiction, a tabular reconciliation of the total amount of unrecognized tax benefits at the beginning and end of each annual reporting period, the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate and the total amounts of interest and penalties recognized in the statements of operations and financial position. FIN 48 will be effective for public companies for fiscal years beginning after December 15, 2006. The Company is currently in the process of accessing the impact, if any, of the recognition and measurement requirements of FIN 48 on its existing tax positions. Upon adoption, the cumulative effect of applying the

recognition and measurement provisions of FIN 48, if any, will be reflected as an adjustment to the opening balance of retained earnings.

In September 2006, FASB issued SFAS No. 157, “Fair Value Measurements”. In addition to defining fair value, SFAS No. 157 provides a framework for the measurement of fair value and expands disclosure requirements about fair value measurements. SFAS 157 will be effective for fiscal years beginning after November 15, 2007. The Company has yet to evaluate the impact of SFAS 157 on its financial statements.

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108 (“SAB 108”). SAB 108 was issued to provide interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The provisions of SAB 108 are effective for fiscal years ending after November 15, 2006. The adoption of SAB 108 had no impact on the Company’s financial statements or results of operations.

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders
CTI Group (Holdings) Inc.

We have audited the accompanying consolidated balance sheet of CTI Group (Holdings) Inc. as of December 31, 2006 and 2005 and the related consolidated statements of operations, cash flows, and stockholders’ equity and comprehensive income for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the 2006 and 2005 consolidated financial statements referred to above present fairly, in all material respects, the financial position of CTI Group (Holdings) Inc. as of December 31, 2006 and 2005, and the results of its operations and its cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.

/s/ Crowe Chizek and Company LLC
Crowe Chizek and Company LLC
Indianapolis, Indiana
April 2, 2007

CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2006 and 2005


	December 31,			December 31,
	2006			2005
ASSETS
Cash and cash equivalents	$	1,691,349		$	1,617,004
Short-term investments		—			6,480,000
Trade accounts receivable, less allowance for doubtful accounts of $72,967 and $30,021, respectively		3,484,468			2,478,067
Note and settlement receivable		172,724			234,880
Prepaid expenses		468,225			372,885
Deferred financing costs		132,345			—
Income taxes refundable		167,357			—
Deferred income tax benefit		1,715			3,610
Other current assets		65,154			20,905

Total current assets		6,183,337			11,207,351

Restricted cash		3,654,172			429,700
Long term settlement receivable – net of current portion		779,672			631,353
Property, equipment, and software, net		2,354,615			2,243,623
Deferred financing costs – long term		264,691			—
Intangible assets, net		5,996,229			84,119
Goodwill		4,922,208			—
Other assets		76,300			76,300

Total assets	$	24,231,224		$	14,672,446


LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable	$	361,065		$	487,603
Accrued expenses		2,465,565			1,101,306
Accrued wages and other compensation		693,291			1,101,743
Income tax payable		72,182			86,645
Deferred tax liability		203,417			—
Deferred revenue		1,663,549			1,390,617

Total current liabilities		5,459,069			4,167,914

Note payable –long term		7,578,698
Lease incentive – long term		21,470			—
Deferred revenue – long term		12,678			19,479
Deferred tax liability – long term		1,529,419			—

Total liabilities		14,601,334			4,187,393

Commitments and contingencies

Stockholders’ equity:
Class A common stock, par value $.01; 47,166,666 shares authorized; 29,178,271 issued and outstanding at December 31, 2006 and 28,065,459 issued and outstanding at December 31, 2005		291,783			280,655
Class B convertible common stock, par value $.01; 0 shares authorized, issued and outstanding at December 31, 2006 and 2,833,334 shares authorized, issued and outstanding as of December 31, 2005		—			28,333
Additional paid-in capital		25,415,341			25,271,951
Accumulated deficit		(15,958,971	)		(14,834,331	)
Other comprehensive income (loss)		73,880			(69,412	)
Treasury stock, 140,250 shares Class A common stock at December 31, 2006 and December 31, 2005, at cost		(192,143	)		(192,143	)

Total stockholders’ equity		9,629,890			10,485,053

Total liabilities and stockholders’ equity	$	24,231,224		$	14,672,446

See accompanying notes to consolidated financial statements.

CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

For the years ended December 31, 2006 and 2005


	December 31,			December 31,
	2006			2005
Revenues:
Software sales, service fee and license fee	$	12,288,464		$	13,453,900
Patent license fee and enforcement		522,921			1,846,757

Total revenues		12,811,385			15,300,657

Cost and expenses:
Costs of products and services, excluding depreciation and amortization		3,455,584			4,037,381
Patent license fee and enforcement costs		950,733			1,221,007
Selling, general and administration		6,981,826			7,094,185
Research and development		1,706,504			2,009,885
Depreciation and amortization		1,064,699			1,098,260

Total costs and expenses		14,159,346			15,460,718


Loss from operations		(1,347,961	)		(160,061	)

Other income:
Interest income		344,600			296,708
Other income / (loss)		(14,326	)		(5,447	)


Income / (loss)from continuing operations before income taxes		(1,017,687	)		131,200

Tax expense / (benefit)		69,953			(11,169	)


Income / (loss) from continuing operations, net of tax		(1,087,640	)		142,369

Discontinued operations
Income from discontinued operations, net of tax		—			10,497
Gain on sale of discontinued operations, net of tax		—			370,268

Income from discontinued operations, net of tax		—			380,765


Net (loss) / income	$	(1,087,640	)	$	523,134


Basic and diluted net income per common share from continuing operations	$	(0.04	)	$	0.01

Basic and diluted net income per common share from discontinued operations	$	0.00		$	0.01

Basic and diluted net income per common share	$	(0.04	)	$	0.02


Basic weighted average common shares outstanding		28,902,790			27,832,854
Diluted weighted average common shares outstanding		28,902,790			30,307,906

See accompanying notes to consolidated financial statements

CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended December 31, 2006 and 2005


	December 31,			December 31,
	2006			2005
Cash flows provided by operating activities:
Net income	$	(1,087,640	)	$	523,134
Adjustments to reconcile net income to cash provided by operating activities:
Net income from discontinued operations		—			(10,497	)
Depreciation and amortization		1,064,699			1,098,260
Gain on sale of discontinued assets		—			(370,268	)
Allowance for doubtful accounts		8,804			5,343
Deferred income taxes		26,853			41,948
Stock option grant expense		86,665			2,222
Recognition of rent incentive benefit		(97,447	)		(81,082	)
Loss on disposal of property and equipment		15,291			—
Changes in operating activities:
Trade accounts receivables		660,016			(220,532	)
Note and settlement receivables		(204,597	)		(756,180	)
Prepaid expenses		(32,957	)		(31,502	)
Other assets		(8,380	)		21,767
Accounts payable		(231,544	)		272,053
Accrued expenses, wages and other compensation		57,637			14,213
Deferred revenue		(180,628	)		360,748
Income taxes refundable		(56,344	)		241,902
Cash provided by / (used in) discontinued operations		—			44,754

Cash provided by operating activities		20,428			1,156,283


Cash flows used in investing activities:
Additions to property, equipment, and software		(578,771	)		(763,550	)
Increase in restricted cash		(3,157,556	)		(445,285	)
Purchases of short-term available for sale securities investments		(13,000,000	)		(27,250,000	)
Sales of short-term available for sale securities investments		19,480,000			26,800,000
Acquisition of business, net of cash and cash equivalents acquired		(10,152,311	)		—
Cash received from payment of note receivable on sale of discontinued assets		119,000			165,000
Sale of discontinued assets		—			180,000

Cash used in investing activities		(7,289,638	)		(1,313,835	)


Cash flows provided by financing activities:
Issuance of debt		7,578,698			—
Deferred financing fees		(397,036	)		—
Exercise of stock options		2,520			6,368

Cash provided by financing activities		7,184,182			6,368

Effect of foreign currency exchange rates on cash and cash equivalents		159,373			(123,492	)


Increase / (decrease) in cash and cash equivalents		74,345			(274,676	)
Cash and cash equivalents, beginning of year		1,617,004			1,891,680



Cash and cash equivalents, end of year	$	1,691,349		$	1,617,004

See accompanying notes to consolidated financial statements.

CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

AND COMPREHENSIVE INCOME

For the years ended December 31, 2006 and 2005


																	Retained
											Additional						Earnings			Other
	Class A Common Stock				Class B Common Stock						Paid-in			Comprehensive			(Accumulated			Comprehensive			Treasury			Stockholders’
	Shares		Amount		Shares			Amount			Capital			Income			deficit)			Income (loss)			Stock			Equity
Balance, December 31, 2004		26,893,145	$	268,932		2,833,334		$	28,333		$	25,275,084					$	(15,357,465	)	$	18,361		$	(192,143	)	$	10,041,102
Comprehensive Loss
Net income		—		—		—			—			—			523,134			523,134			—			—			523,134
Foreign currency translation Adjustments		—		—		—			—			—			(87,773	)		—			(87,773	)		—			(87,773	)

Comprehensive income		—		—		—			—			—		$	435,361			—			—			—			—

Stock option expense		—		—		—			—			2,222						—			—			—			2,222
Stock issued upon exercise of stock Options		31,750		317		—			—			6,051						—			—			—			6,368
Issuance of shares related to the CDS Agreement		1,140,564		11,406		—			—			(11,406	)					—			—			—			—


Balance, December 31, 2005		28,065,459	$	280,655		2,833,334		$	28,333		$	25,271,951					$	(14,834,331	)	$	(69,412	)	$	(192,143	)	$	10,485,053
Comprehensive Loss
Net income		—		—		—			—			—			(1,087,640	)		(1,087,640	)		—			—			(1,087,640	)
Foreign currency translation adjustments		—		—		—			—			—			143,292			—			143,292			—			143,292

Comprehensive income		—		—		—			—			—		$	(944,348	)		—			—			—			—

Stock option expense		—		—		—			—			86,665						—			—			—			86,665
Stock issued upon exercise of stock options		12,000		120		—			—			2,400						—			—			—			2,520
Issuance of shares related to the conversion of class B common stock to shares of Class A common stock		1,100,812		11,008		(2,833,334	)		(28,333	)		54,325						(37,000	)		—			—			—


Balance, December 31, 2006		29,178,271	$	291,783	$	—		$	—		$	25,415,341					$	(15,958,971	)	$	73,880		$	(192,143	)	$	9,629,890

See accompanying notes to consolidated financial statements.

CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BUSINESS: CTI Group (Holdings) Inc. and wholly-owned subsidiaries (the “Company” or “CTI”) design, develop, market and support billing and data management software and services. The Company operates in three business segments: Electronic Invoice Management, Telemanagement and Patent Enforcement Activities.

The Company’s future operations involve a number of risks and uncertainties. Factors that could affect future operating results and cause actual results to vary from historical results include, but are not limited to: loss of its significant customers, inability to enhance existing products and services to meet the evolving needs of customers, failure to enforce intellectual property rights, adverse fluctuations in currency exchange rates and disruption in telecommunications industry and general economic conditions.

BASIS OF PRESENTATION: The consolidated financial statements include the accounts of the Company and its subsidiaries, after elimination of all significant intercompany accounts and transactions. The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America.

The Company sold Xila Communications, LLC, (“Xila”), an entity owned by CDS Holdings, LLC on January 21, 2005 as stipulated in the CDS Asset Purchase Agreement (“CDS Agreement”). Therefore, the financial results of Xila have been presented as discontinued operations in accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”) in the consolidated financial statements. The information in the notes to the consolidated financial statements is for continuing operations, unless otherwise stated.

FOREIGN CURRENCY TRANSLATION: The consolidated financial statements include the accounts of the Company’s wholly owned UK-based subsidiaries. The financial statements of the Company’s foreign subsidiaries have been included in the consolidated financial statements and have been translated to U.S. dollars in accordance with SFAS 52, “Foreign Currency Translation.” Assets and liabilities are translated at current rates in effect at the consolidated balance sheet date and stockholder’s equity is translated at historical exchange rates. Revenue and expenses are translated at the average exchange rate for the applicable period. Any resulting translation adjustments are made directly to accumulated other comprehensive income. Included in selling, general and administrative expenses is a transaction loss of approximately $173,000 for the year ended December 31, 2006 and a transaction gain of approximately $4,000 for the year ended December 31, 2005.

CASH AND CASH EQUIVALENTS: Cash and cash equivalents include the cash on hand, demand deposits and highly liquid investments. The Company considers all highly liquid investments, with maturity of three months or less, to be cash equivalents.

SHORT-TERM INVESTMENTS: The Company considers all debt securities with maturities of more than three months but less than one year as short-term investments and classifies investments in such short-term debt securities as either held to maturity or available for sale. These investments are diversified among high credit quality securities in accordance with the Company’s investment policy. Short-term investments include auction rate securities, which are categorized as available for sale given their liquidity and frequent interest reset features. Our investments in these securities are recorded at cost, which approximates fair market value due to their variable interest rates, which typically reset every 7 to 35 days, and we have the ability to quickly liquidate these securities. As a result, we had no cumulative gross unrealized gains / (losses) or gross realized gains / (losses) from our current investments. All income generated from these current investments was recorded as Interest income. As of December 31, 2006 and 2005, the Company had $0 and $6,480,000, respectively, of auction rate securities.

ADVERTISING COSTS: The Company expenses advertising costs as incurred. For the years ended December 31, 2006 and 2005, advertising expense was $190,926 and $119,642, respectively.

USE OF ESTIMATES: The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and

CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Accordingly, actual results could differ from those estimates. Estimates utilized by the Company include the determination of the collectibility of receivables, valuation of stock options, recoverability and/or impairment of intangible assets, depreciation and amortization, accrued compensation and other liabilities, commitments and contingencies, and capitalization and impairment of computer software development costs.

FAIR VALUE OF FINANCIAL INSTRUMENTS: The Company’s financial instruments consist primarily of cash and cash equivalents, short-term investments, accounts receivable, accounts payable, and accrued expenses. The book values of these financial instruments are considered to be representative of their respective fair values due to the short maturity of these instruments. Based on borrowing rates currently available to the Company for the line of credit and note payable with similar terms, the carrying value of the Company’s line of credit and note payable obligations approximate fair value.

PROPERTY AND EQUIPMENT: Property and equipment are stated at cost. Depreciation and amortization are calculated on a straight-line basis over the estimated useful lives of the assets. Furniture, fixtures and equipment are depreciated over the estimated useful lives of three to five years. Leasehold improvements are amortized over the period of the lease or the useful lives of the improvements, whichever is shorter. All maintenance and repair costs are charged to operations as incurred.

COMPUTER SOFTWARE: Under the provisions of SFAS No 86, “Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed” (“SFAS 86”), expenditures for producing product masters incurred subsequent to establishing technological feasibility are capitalized and are amortized on a product-by-product basis ranging from three to four years. The amortization is computed using the greater of a) the straight-line method over the estimated economic life of the product or b) the ratio that the current gross revenue for the products bear to the total current and anticipated future gross revenue of the products. SFAS 86 requires the periodic evaluation of capitalized computer software costs. The excess of any unamortized computer software costs over its related net realizable value at a balance sheet date shall be written down. See Note 5. The Company capitalized $500,289 and $656,345 for the years ended December 31, 2006 and 2005, respectively, in costs related to its software development. The amortization expense for developed software was $776,111 and $734,292 for the years ended December 31, 2006 and 2005, respectively.

GOODWILL AND INTANGIBLE ASSETS: Goodwill is tested for impairment on an annual basis and between annual tests in certain circumstances, and written down when impaired. A third party valuation was performed in connection with the Ryder acquisition on December 22, 2006 in order to determine fair value of goodwill and intangibles. Purchased intangible assets other than goodwill are amortized over their useful lives unless these lives are determined to be indefinite. Purchased intangible assets are carried at cost, less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets, generally 3-15 years. Intangible assets consist of patents, purchased technology, trademarks and trade names, and customer accounts.

LONG-LIVED ASSETS: The Company reviews the recoverability of the carrying value of its long-lived assets, including intangible assets with definite lives using the methodology prescribed in SFAS 144. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. When such events occur, the Company compares the carrying amount of the assets to the undiscounted expected future cash flows. If this comparison indicates there is impairment, the amount of the impairment is typically calculated using discounted expected future cash flows.

DEFERRED FINANCING COSTS: Costs relating to obtaining financing are capitalized and amortized over the term of the related debt using the straight-line method. When a loan is paid in full, any unamortized financing costs are removed from the related accounts and charged to operations.

REVENUE RECOGNITION: The Company’s revenue recognition policy is consistent with the requirements of Staff Accounting Bulletin No. 104, “Revenue Recognition” (“SAB 104”) which supersedes SAB No. 101, “Revenue Recognition in Financial Statements.” SAB No. 104 primarily revises or rescinds portions of the accounting guidance contained in SAB No. 101 related to multiple-element revenue arrangements, which was superseded as a result of the issuance of EITF Issue No. 00-21, “Accounting for Revenue Arrangements with

CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Multiple Deliverables.” Additionally, SAB No. 104 rescinds the SEC’s “Revenue Recognition in Financial Statements, Statement of Position No. 97-2, Software Revenue Recognition (“SOP 97-2”), and other applicable revenue recognition guidance and interpretations. In general, the Company records revenue when it is realized, or realizable, and earned. Revenues from software licenses are recognized upon shipment, delivery or customer acceptance, based on the substance of the arrangement or as defined in the sales agreement provided there are no significant remaining vendor obligations to be fulfilled and collectibility is reasonably assured. Software sales revenue is generated from licensing software to new customers and from licensing additional users and new applications to existing customers.

The Company’s Telemanagement sales arrangements typically include services in addition to software. Service revenues are generated from support and maintenance, processing, training, consulting, and customization services. For sales arrangements that include bundled software and services, the Company accounts for any undelivered service offering as a separate element of a multiple-element arrangement. Amounts deferred for services are determined based upon vendor-specific objective evidence of the fair value of the elements as prescribed in SOP 97-2. Support and maintenance revenues are recognized on a straight-line basis over the term of the agreement. Revenues from processing, training, consulting, and customization are recognized as provided to customers. If the services are essential to the functionality of the software, revenue from the software component is deferred until the essential service is complete.

If an arrangement to deliver software or a software system, either alone or together with other products or services, requires significant production, modification, or customization of software, the service element does not meet the criteria for separate accounting set forth in paragraph 65 of SOP 97-2. If the criteria for separate accounting are not met, the entire arrangement is accounted for in conformity with ARB No. 45, using the relevant guidance in SOP 81-1. The Company carefully evaluates the circumstances surrounding the implementations to determine whether the percentage-of-completion method or the completed-contract method should be used. Most implementations relate to the Company’s Telemanagement products and are completed in less than 30 days once the work begins. The Company uses the completed-contract method on contracts that will be completed within 30 days since it produces a result similar to the percentage-of-completion method. On contracts that will take over 30 days to complete, the Company uses the percentage-of-completion method of contract accounting.

LEGAL COSTS RELATED TO PATENT ENFORCEMENT ACTIVITIES: Professional fees and legal costs incurred while pursuing patent license fee and enforcement revenues are expensed as incurred. Legal fees that are contingent on the successful outcome of an enforcement claim are recorded when the patent license fee and enforcement revenues are realized.

STOCK BASED COMPENSATION: In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123R, “Share-Based Payment” (SFAS 123R). SFAS 123R requires companies to recognize the cost of employee services received in exchange for awards of equity instruments, such as stock options and restricted stock, based on the fair value of those awards at the date of grant and eliminates the choice to account for employee stock options under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25). The Company adopted SFAS 123R effective January 1, 2006 using the Black-Scholes-Merton formula and the modified prospective method and as such, results for prior periods have not been restated. Prior to January 1, 2006, no compensation expense was recognized for stock option grants as all such grants had an exercise price not less than fair market value on the date of grant.

CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


	December 31
	2005
Net income:
As reported	$	523,134
Deduct: Total stock based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(198,034	)

Pro forma net income	$	325,100

Basic and Diluted income per share:
As reported	$	0.02

Pro forma	$	0.01

INCOME TAXES: The Company accounts for income taxes following the provisions of SFAS No. 109 “Accounting for Income Taxes”, which requires recording income taxes under the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for the tax consequences of “temporary differences” by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded based on a determination of the ultimate realizability of net deferred tax assets.

BASIC AND DILUTED INCOME / (LOSS) PER COMMON SHARE: Net income (loss) per common share is computed in accordance with the provision of SFAS No. 128, “Earnings Per Share”. Basic earnings (loss) per share is computed by dividing reported earnings (loss) available to common stockholders by the weighted average number of common shares outstanding for the year. Diluted earnings (loss) per share is computed by dividing reported earnings (loss) available to common stockholders by adjusted weighted average shares outstanding for the year assuming the exercise of all potentially dilutive stock options and the conversion of Class B common shares into Class A common shares.


	For the Twelve Months Ended December 31,
	2006			2005
Net (loss)/income	$	(1,087,640	)	$	523,134


Average shares of common stock outstanding used to compute basic earnings per share		28,902,790			27,832,854

Additional common shares to be issued assuming exercise of stock options		—			505,095

Additional common shares to be issued assuming conversion of Class B shares		—			1,969,957

Average shares of common and common equivalent stock outstanding used to compute diluted earnings per share		28,902,790			30,307,906


Net (loss)/income per share – Basic:

Net (loss)/income per share	$	(0.04	)	$	0.02


Weighted average common and common equivalent shares outstanding		28,902,790			30,307,906


Net (loss)/income per share – Diluted:

Net (loss)/income per share	$	(0.04	)	$	0.02


Weighted average common and common equivalent shares outstanding		28,902,790			30,307,906

For the years ended December 31, 2006 and December 31, 2005 options to purchase 1,988,000 and 2,150,750, respectively, shares of Class A common stock at exercise prices ranging from $.20 to $.50 were outstanding.

The Company had a series of Class B common stock that was converted into 1,100,812 shares of the Company’s Class A common stock as of March 31, 2006 based on the value of Tracking LLC (a wholly owned subsidiary of the Company that owns the patented technology used in the Company’s business) and the quoted market value of the Company’s Class A common stock as defined (see Note 3).

CONCENTRATION OF CREDIT RISK: The Company invests its cash primarily in deposits with major banks. At times, these deposits may be in excess of statutory insured limits. As of December 31, 2006, such deposits exceeded statutory insured limits by $1,602,892. Concentration of credit risk with respect to trade receivables

CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

is moderate due to the relatively diverse customer base. Ongoing credit evaluation of customers’ financial condition is performed and generally no collateral is received. The Company maintains reserves for probable credit losses and such losses in the aggregate have not exceeded management’s estimates. The Company wrote-off approximately $1,200 and $27,000 of receivables deemed to be uncollectible against the established allowance for doubtful accounts for the years ended December 31, 2006 and 2005, respectively.

COMPREHENSIVE INCOME (LOSS): Comprehensive income (loss) consists of net income (loss) and foreign currency translation adjustments and is presented in the Consolidated Statement of Stockholders’ Equity and Comprehensive income (loss).

RESEARCH AND DEVELOPMENT: Research and development costs are expensed as incurred. Total research and development costs expensed were $1,706,504 and $2,009,885 for the years ended December 31, 2006 and 2005, respectively.

SHIPPING AND HANDLING FEES AND COSTS: The Company bills customers for shipping and handling. Shipping and handling costs, which are included in cost of products and services in the accompanying consolidated statements of operations, include shipping supplies and third-party shipping costs.

RECENTLY ISSUED AND ADOPTED ACCOUNTING PRONOUNCEMENTS: In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” (“FIN 48”) an interpretation of FASB Statement No. 109, “Accounting for Income Taxes”. FIN 48 requires that a position taken or expected to be taken in a tax return be recognized in the financial statements when it is more likely than not (i.e. a likelihood of more than 50%) that the position would be sustained upon examination by tax authorities. A recognized tax position is then measured at the largest amount of benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. FIN 48 also requires expanded disclosures including identification of tax positions for which it is reasonably possible that total amounts of unrecognized tax benefits will significantly change in the next 12 months, a description of tax years that remain subject to examination by a major tax jurisdiction, a tabular reconciliation of the total amount of unrecognized tax benefits at the beginning and end of each annual reporting period, the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate and the total amounts of interest and penalties recognized in the statements of operations and financial position. FIN 48 will be effective for the Company on January 1, 2007. The Company is currently in the process of accessing the impact, if any, of the recognition and measurement requirements of FIN 48 on its existing tax positions. Upon adoption, the cumulative effect of applying the recognition and measurement provisions of FIN 48, if any, will be reflected as an adjustment to the opening balance of retained earnings.

NOTE 2 – SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In accordance with EITF Issue no. 98-5 the discount in average market price used related to the conversion of Class B common stock to Class A common stock which amounted to $37,000 is deemed to be analogous to a dividend and has been recorded as a reduction to retained earnings (accumulated deficit) in 2006.

The Company paid $20,907 in state income taxes and $86,803 in foreign income tax for the year ended December 31, 2006.

NOTE 3 – ACQUISITION, MERGER, AND DISCONTINUED OPERATIONS

Acquisition

On December 22, 2006, the Company entered into a Share Transfer Agreement (the “Share Transfer Agreement”). Pursuant to the Share Transfer Agreement, the Company acquired all of the issued and outstanding shares of capital stock of Ryder Systems Limited (“Ryder”), a privately held software development company registered in England, for a purchase price of £5.6 million (the “Purchase Price”), which was equal to approximately $11.0 million as of December 22, 2006. The assets of Ryder consist primarily of cash and accounts receivable. The Company financed the acquisition of Ryder through a combination of cash from working capital, the Acquisition Loan and the Revolving Loan, as defined below. Approximately $900,000 of the purchase price is being held in an escrow account to satisfy any potential claims, breech of warranties or realized minimum net asset values, as defined in the Share Transfer Agreement, which may arise within a one year period following the acquisition. The total purchase price was as follows:


Cash	$	3,627,493
Debt		7,425,860
Costs of acquisition		337,469

Total	$	11,390,822

The Company allocated the purchase price to tangible assets, liabilities assumed, and identifiable intangible assets acquired, based on their estimated fair values. The excess of the purchase price over the aggregate fair values was recorded as goodwill. The fair value assigned to identifiable intangible assets acquired is determined using the income approach, which discounts expected future cash flows to present value using estimates and assumptions determined by management. Purchased intangibles are amortized on a straight-line basis over their respective useful lives. The total preliminary allocation of the purchase price as of December 31, 2006 was as follows:

CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Cash and cash equivalents	$	1,238,511
Accounts receivable		1,482,784
Income tax receivable		132,131
Property and equipment		570,683
Goodwill		4,922,208
Purchased intangible assets		5,950,000
Prepaid expenses		52,738
Other current and noncurrent assets		35,299
Accounts payable		(76,899	)
Deferred revenue		(268,721	)
Accrued expenses		(942,230	)
Deferred tax liabilities, net		(1,705,682	)

Total	$	11,390,822

Intangible assets consist primarily of customer relationships, technology and tradenames. The intangible assets attributable to customer relationships relate to Ryder’s ability to maintain relationships with existing customers. Technology intangibles include a combination of patented and unpatented technology, trade secrets, and computer software that represent the foundation for current and planned new products. The following table presents details of the purchased intangible assets acquired as part of the acquisition:


	Weighted-Average
	Useful Life
	(in Years)		Amount
Tradenames		9.0	$	180,000
Technology		8.0		1,620,000
Customer relationships		9.0		4,150,000

Total			$	5,950,000

Unaudited Pro Forma Financial Statements

Unaudited pro forma statement of operations for the years ended December 31, 2006 and December 31, 2005 are included below. The unaudited pro forma combined statements of operations give effect to the acquisition as if it had occurred on January 1, 2005. This information is not necessarily indicative of the results that actually would have been attained if the acquisition had occurred on the date specified nor is it intended to project the Company’s results of operations or financial position for any future period or date. Such information should be read in conjunction with the historical consolidated financial statements of the Company.

Ryder’s historical audited financial statements are presented in British pounds and were prepared in accordance with generally accepted accounting principles in the United Kingdom (“UK GAAP”), which differs in certain respects from those generally accepted accounting principles in the United States of America (“US GAAP”). The Company’s consolidated financial statements were prepared in US GAAP and are presented in US dollars. As presented in this unaudited pro forma financial information, Ryder’s financial statements were reconciled to US GAAP and were translated from British pounds to US dollars and adjustments have been made to Ryder’s financial information to conform with the Company’s financial information presented under US GAAP.

The unaudited pro forma financial information is based on historical financial statements. The Company’s fiscal year ends on December 31, while Ryder’s fiscal year ended on April 30. Ryder’s financial information has been adjusted to a December 31 year end.

The results of Ryder included in the unaudited pro forma financial information statement of operations for the year ended December 31, 2006 have been translated into US dollars at the average of the average daily closing rate for each month for the twelve months January 2006 through December 2006. The rate of exchange used for the translation is British pounds 1.00 to US dollars 1.8582.

CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The results of Ryder included in the unaudited pro forma financial information statement of operations for the year ended December 31, 2005 have been translated into US dollars at the average of the average daily closing rate for each month for the twelve months January 2005 through December 2005. The rate of exchange used for the translation is British pounds 1.00 to US dollars 1.8147.

Unaudited pro forma consolidated statement of continuing operations for the year ended December 31, 2006


							Pro Forma
	CTI Group			Ryder			Adjustments			Consolidated
Revenues:
Software sales, service fee and license fee revenue	$	12,288,464		$	9,087,160			—		$	21,375,624
Patent license fee and enforcement revenues		522,921			—			—			522,921


		12,811,385			9,087,160			—			21,898,545

Cost and Expenses:
Cost of products and services, exc, depreciation and amortization		3,455,584			561,209			—			4,016,793
Patent license fee and enforcement cost		950,733			—			—			950,733
Selling, general and administration		6,981,826			6,696,406			—			13,678,232
Research and development		1,706,504			—			—			1,706,504
Depreciation and amortization		1,064,699			426,749			678,056	(a)		2,169,504


Income / (loss) from operations		(1,347,961	)		1,402,796			(678,056	)		(623,221	)


Other income / (expense)
Interest income / (expense)		344,600			18,251			(811,687)	(b)		(448,836	)
Other expense		(14,326	)		—			—			(14,326	)

Total other income / (expense)		330,274			18,251			(811,687	)		(463,162	)


Income / (loss) before income taxes		(1,017,687	)		1,421,047			(1,489,743	)		(1,086,383	)

Tax benefit / (expense)		(69,953	)		(303,000	)		446,923	(c)		73,970


Net income / (loss)		(1,087,640	)		1,118,047			(1,042,820	)		(1,012,413	)



Basic and diluted net income / (loss) per common share	$	(0.04	)							$	(0.04	)


Basic and diluted weighted average common shares outstanding		28,902,790									28,902,790

CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unaudited pro forma consolidated statement of continuing operations for the year ended December 31, 2005


							Pro Forma
	CTI Group			Ryder			Adjustments			Consolidated
Revenues:
Software sales, service fee and license fee revenue	$	13,453,900		$	6,562,721			—		$	20,016,621
Patent license fee and enforcement revenues		1,846,757			—			—			1,846,757


		15,300,657			6,562,721			—			21,863,378


Cost and Expenses:
Cost of products and services, excluding depreciation and amortization		4,037,381			331,280			—			4,368,661
Patent license fee and enforcement cost		1,221,007			—			—			1,221,007
Selling, general and administration		7,094,185			6,365,572			—			13,459,757
Research and development		2,009,885			—			—			2,009,885
Depreciation and amortization		1,098,260			324,107			678,056	(a)		2,100,423


Income / (loss) from operations		(160,061	)		(458,238	)		(678,056	)		(1,296,355	)


Other income / (expense)
Interest income / (expense)		296,708			25,121			(908,273)	(b)		(586,444	)
Other expense		(5,447	)		55			—			(5,392	)

Total other income / (expense)		291,261			25,176			(908,273	)		(591,836	)


Income / (loss) before income taxes		131,200			(433,062	)		(1,586,329	)		(1,888,191	)

Tax benefit / (expense)		11,169			(16,910	)		475,899	(c)		470,158


Net income / (loss)		142,369			(449,972	)		(1,110,430	)		(1,418,033	)



Basic and diluted net income / (loss) per common share	$	0.01								$	(0.05	)


Basic weighted average common shares outstanding		27,832,854									27,832,854
Diluted weighted average common shares outstanding		30,307,906									30,307,906

The following notes explain the pro forma adjustments:


a)		Adjustment to estimate amortization expense on the intangibles related to the purchase of Ryder.

b)		Adjustment to estimate interest expense on the Acquisition Loan and Revolving Loan.

c)		Adjustment to record tax expense at an estimated statutory rate of 30%.

Merger

CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

agreement authorizing the Company to use the patents. As part of the Merger consideration and in connection with the transfer to Tracking LLC, 2,833,334 newly authorized shares of the Company’s Class B common stock were issued to the former Centillion stockholders. The Company and the holders of the stock had certain rights to convert the Class B common stock into Class A common stock based on the value of Tracking LLC. Under the Company’s Certificate of Incorporation, as amended, adopted in connection with the Merger, until February 12, 2006 shares of Class B common stock could be converted at the election of the holders of more than 50% of the outstanding shares of Class B common stock into the number of shares of Class A common stock determined by dividing the value of Tracking LLC by 88% of the average market price of Class A common stock. The average market price of Class A common stock at any date would be the average of the last reported sale prices on any market or exchange on which Class A common stock is traded over the period of the most recent twenty consecutive business days before such date or if Class A common stock is not so traded, the average of the highest bid and the lowest asked quotations in the over-the-counter market during such period. As of February 7, 2006, Fairford Holdings Limited (“Fairford”), the record holder of 2,371,244 shares of Class B common stock representing approximately 84% of the 2,833,334 shares of issued and outstanding shares of Class B common stock, notified the Company of its election to convert all of the issued and outstanding shares of Class B common stock into shares of Class A common stock in accordance with the procedures set forth in the Certificate of Incorporation. Mr. Salah Osseiran, the majority holder of the Company’s Class A common stock and director of the Company, is deemed to be the indirect beneficial owner of 2,371,244 shares of Class B common stock held by Fairford, as a grantor and sole beneficiary of a revocable trust which is the sole stockholder of Fairford. As of March 31, 2006, 2,833,334 shares of Class B common stock were converted into 1,100,812 shares, excluding fractional shares, of Class A common stock, of which 921,279 shares were issued to an entity controlled by Mr. Osseiran, a director and majority stockholder of the Company, and 68,838 shares were issued directly to, and to entities controlled by, Mr. Garrison, the Company’s director. The number of shares of Class A common stock issued upon conversion of the Class B common stock was calculated using a value of Tracking LLC of $271,482.69 and 88% of an average market price of Class A common stock of approximately $0.2803 (i.e. $0.24662). In accordance with EITF Issue no. 98-5 the discount in average market price which amounted to $37,000 is deemed to be analogous to a dividend and has been reported as a reduction to retained earnings (accumulated deficit) in 2006.

Discontinued Operations

On December 31, 2003, the Company and CDS entered into an Asset Purchase Agreement (the “CDS Agreement”). Pursuant to the CDS Agreement, the Company acquired the net assets (the “Assets”) of CDS, excluding approximately $34,130 in cash which was retained by Centillion Affiliates in escrow for costs associated with the dissolution and liquidation of CDS. CDS’ membership interest (“Xila Interest”) in Xila Communications, LLC (“Xila”) constituted most of the Assets purchased by the Company under the CDS Agreement. CDS transferred the Assets to the Company in exchange for (i) the cancellation of the Note; (ii) the Company’s payment or performance, when due, of certain assumed obligations of CDS; and (iii) the Company’s performance, when due, of the post-closing covenants contained in the CDS Agreement. Xila provided the Company’s telecommunication services.

Pursuant to the Company’s post-closing covenants set forth in the CDS Agreement, described above, the Company agreed to sell Xila’s assets to eGIX, Inc., an Indiana corporation (“eGIX”), and, on October 28, 2004, Xila entered into an Asset Purchase Agreement with eGIX (the “Xila Agreement”). Pursuant to the Xila Agreement, eGIX acquired substantially all of the net assets of Xila, excluding certain cash and cash equivalents, accounts receivables and prepaid expenses (the “Net Assets”).

Xila and eGIX also entered into the Services Agreement (the “Services Agreement”) on October 28, 2004, pursuant to which eGIX operated all financial aspects of Xila’s business, was entitled to the revenues of the business and was responsible for the expenses and liabilities of the business starting from October 1, 2004. In consideration for entering into the Services Agreement, Xila was receiving $15,000 per month beginning October 31, 2004 regardless of the profitability of the business.

In connection with the Xila Agreement and the Services Agreement, Xila and eGIX also entered into a three-year Telecommunications Services Agreement, on October 28, 2004, pursuant to which eGIX provided local, long distance and international connectivity services to Xila and moved Xila’s customers from Xila’s present

CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

service providers to eGIX’s network, and the existing agreements between Xila and its connectivity providers were terminated.

On January 21, 2005, after receiving necessary regulatory approvals and consents under the Xila Agreement, the sale of the Net Assets was consummated, in connection with which the Company received a purchase price of $464,000 consisting of a $180,000 cash payment and a non-interest bearing note of $284,000. The promissory note was paid in twelve equal monthly installments of $15,000 following the closing the final payment of $104,000 was received on February 22, 2006. Upon closing of the Xila Agreement, the existing Service Agreement and Telecommunications Services Agreement were terminated. In accordance with the CDS Agreement, the Company issued, in the first quarter of fiscal 2005, 1,140,564 shares of Class A common stock in connection with the sale of the Net Assets.

The Company recorded a gain on the sale of $370,268 in the first quarter of fiscal 2005. Xila’s financial results were presented as discontinued operations in the consolidated financial statements. In the first quarter of fiscal 2005, Xila changed its name to XC, LLC.

NOTE 4 — GOODWILL AND AMORTIZABLE INTANGIBLE ASSETS

Intangible assets consist of the following:


	December 31,
	2006			2005
Goodwill	$	4,922,208		$	—
Patents		344,850			344,850
Tradenames		180,000			—
Customer base		4,576,813			426,813
Technology		1,620,000			—
Other Intangibles		493,672			493,672

		12,137,543			1,265,335
Less accumulated amortization		(1,219,108	)		(1,181,216	)

	$	10,918,437		$	84,119

Amortization expense on intangible assets amounted to $37,892 and $116,788 for the years ended December 31, 2006 and 2005, respectively. Amortization expense on intangible assets with a definite life for the next 5 years as of December 31 is as follows: 2007 — $706,682; 2008 - $706,601; 2009 — $698,761; 2010 — $683,611; 2011 $683,611; and thereafter — $2,516,961.

NOTE 5 — PROPERTY, EQUIPMENT AND SOFTWARE DEVELOPMENT COSTS

Property, equipment and software development costs consist of the following:


	December 31,
	2006			2005
Equipment	$	1,445,059		$	1,012,926
Furniture		632,128			615,356
Leasehold improvements		306,617			342,016
Software development costs		4,462,253			3,619,255

		6,846,057			5,589,553
Less accumulated depreciation and amortization		(4,491,442	)		(3,345,930	)

	$	2,354,615		$	2,243,623

Depreciation and amortization expense on property, equipment, and software amounted to $1,026,807 and $981,472 for the years ended December 31, 2006 and 2005, respectively. Fixed assets no longer in use in 2006 with an original cost of $256,458 were written off. In 2005, fixed assets, with an original cost of $624,431, were written off.

CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Amortization expense of developed software amounted to $776,111 and $734,292 for the years ended December 31, 2006 and 2005, respectively. Amortization expense of developed software relates to cost of sales.

NOTE 6 — COMMITMENTS AND CONTINGENCIES

A. LEASE COMMITMENTS:

The Company leases its office facilities and certain equipment under non-cancelable long-term operating leases, which expire at various dates. Minimum aggregate annual rentals for the future five-year periods and thereafter, subject to certain escalation clauses, through non-cancelable long-term operating leases are as follows:


Year ending December 31:

2007		448,808
2008		480,830
2009		344,171
2010		352,137
2011		360,102
Thereafter		792,558

Total	$	2,778,606

Rent and lease expense was $360,765 and $436,807 for the years ended December 31, 2006 and 2005, respectively. The Company leased office space through November 2006 consisting of 20,003 square feet in Indianapolis in the United States at an annual rent of $209,353 per year. In October 2006, the Company signed a new lease in Indianapolis for 15,931 square feet of office space for an average of $257,643 per year. The Indianapolis lease expires in February 2014. The Company leases 3,485 square feet of office space near London in the United Kingdom at an annual cost equivalent to $148,000 per annum. The London lease expires in December 2013 but the Company may terminate the lease effective January, 2007 or thereafter, upon a minimum of six months advance notice of the date of termination and payment of the equivalent of one quarterly rent payment. The Company leases 9,360 square feet of office space in Blackburn in the United Kingdom at an annual rate equivalent to approximately $142,000. The Blackburn lease expires December 2008. The Company believes that, although its facilities are adequate to meet its current level of sales, additional space may be required to support future growth.

B. CONTINGENCIES:

The Company is subject to claims and lawsuits arising primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company.

C. EMPLOYMENT AGREEMENTS:

The Company has entered into employment agreements with certain members of management. The terms of these agreements could include, but are not limited to, compensation, non competition, severance and change in control clauses. As of December 31, 2006 and 2005, all relevant amounts have been accrued for under these agreements.

NOTE 7 — SHORT-TERM AND LONG-TERM DEBT OBLIGATIONS

During 2006, the Company entered into the following debt obligations.

CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company has available a revolving loan (the “Revolving Loan”) with a bank for the lesser of (a) $8,000,000, or (b) the sum of 80% of eligible domestic trade accounts receivable, 90% of eligible, insured foreign trade accounts receivable and 100% of cash placed in a restricted account. The Revolving Loan expires on December 21, 2009, unless extended. Borrowings under the line of credit bear interest (7.70% at December 31, 2006) at LIBOR plus 2.35% payable monthly. All borrowings are collateralized by substantially all assets of the Company. The outstanding balance on the Revolving Loan was $4,978,698 at December 31, 2006. Borrowings under the Revolving Loan are subject to certain financial covenants and restrictions on indebtedness, encumbrances, investments, business combinations, and other related items. The carrying amount of receivables that serve as collateral for borrowings totaled $5,056,974 at December 31, 2006.

The Company entered into a loan agreement (the “Loan Agreement”) on December 22, 2006 pursuant to which the Company obtained an acquisition loan (the “Acquisition Loan”) in the amount of $2,600,000. The Acquisition Loan is secured by a letter of credit from SEB bank to National City Bank, a national banking association (“NCB”). The letter of credit was secured by a guarantee from a wholly-owned subsidiary of Fairford Holdings Limited, a British Virgin Islands company (“Fairford”). As of March 23, 2007, Fairford owned 61.4% of the Company’s outstanding Common Stock. Mr. Osseiran, the majority holder of the Company’s Common Stock and director of the Company, is a director of Fairford and a grantor and sole beneficiary of a revocable trust which is the sole stockholder of Fairford. Mr. Dahl, a director of the Company, is the director of Fairford. The Acquisition Loan expires on December 21, 2009, unless extended. Borrowings under the Acquisition Loan bear interest (7.35% at December 31, 2006) at LIBOR plus 2.00% payable monthly. All borrowings under the Acquisition Loan are collateralized by substantially all assets of the Company. The outstanding balance on the term loan was $2,600,000 at December 31, 2006.

Borrowings under the Revolving Loan and the Acquisition Loan are subject to certain financial covenants and restrictions on indebtedness, encumbrances, investments, business combinations, and other related items. For example, subject to certain exceptions, the Company agreed under the Loan Agreement, among other matters, that, without NCB’s prior written consent, the Company shall not, and shall not permit any of its subsidiaries to: (i) incur or have outstanding any indebtedness in excess of $20,000 individually or $100,000 in the aggregate; (ii) dispose of all, or any part, of business or assets; (iii) make any acquisitions, or (iv) issue any additional shares of stock or other securities and the Company shall not issue more than 10% of the Company’s capital stock pursuant to its stock option plan on a fully-diluted basis. As of December 31, 2006, the Company was in compliance with all covenants.

The Loan Agreement require the Company to pay a fee with respect to the unused portion of the Revolving Loan of 0.25% per annum for each calendar quarter on the average daily amount by which $8.0 million exceeds the outstanding principal amount of the Revolving Loan during such calendar quarter. Pursuant to the Loan Agreement, the Company is obligated to pay NCB a nonrefundable commitment fee of $25,000 and a funds transfer fee in the amount of approximately $20,319.

CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

under the Loan Documents and agreed to indemnify NCB for any losses or liabilities suffered by NCB as a result of the Company’s obligations under the Loan Documents being unenforceable, void or invalid.

Pursuant to the Security Agreements, dated as of December 22, 2006, the Company and each of its U.S. subsidiaries granted a security interest to NCB in substantially all of their respective assets as security for the performance of the Company’s obligations under the Loan Agreement and, in case of the U.S. subsidiaries, their respective obligations under the U.S. Guaranties. Under the Debentures, dated as of December 22, 2006, each of the Company, Ryder and CTI Data also secured their respective liabilities to NCB.

Accrued interest consists of the following at December 31, 2006, and December 31, 2005:


	December 31
	2006		2005

Accrued interest on the revolving line of credit	$	25,302	$	—
Accrued Interest on the term-loan		12,740		—

Total	$	38,042	$	—

Long-term debt consists of the following at December 31, 2006, and December 31, 2005:


	December 31
	2006		2005

Balances outstanding on the revolving line of credit	$	4,978,698	$	—
Balances outstanding on the term-loan		2,600,000		—

Total	$	7,578,698	$	—

Future maturities of long-term debt are as follows as of December 31, 2006


2007	$	—
2008		—
2009		7,578,698
Thereafter		—

Total	$	7,598,698

CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 — INCOME TAXES

The provision (benefit) for income taxes consists of the following:


	Years ended December 31,
	2006		2005
Income tax (benefit) expense:
Current provision Federal	$	—	$	(49,988	)
State		6,936		(70,760	)
Foreign		33,980		64,156
Deferred Federal		—		—
State		—		—
Foreign		29,037		45,423

Expense / (benefit) for income taxes	$	69,953	$	(11,169	)

A reconciliation of income tax expense (benefit) at the statutory rate to income tax expense (benefit) at the Company’s effective tax rate is as follows:


	December 31,
	2006			2005
Computed tax (benefit) / expense of continuing operations at the expected statutory rate	$	(355,844	)	$	22,809
Computed tax expense of discontinued operations at the expected statutory rate		—			129,460
State tax expense / (benefit), net		4,261			(46,702	)
Nondeductible goodwill and intangible assets		(1,338	)		5,233
Reduction in tax contingency accrual		(1,274	)		(49,988	)
Adjustment of prior year estimated tax provision		(1,715	)		(46,944	)
Tax credits earned		—			(22,490	)
Utilization of net operating losses		—			—
Change in valuation allowance		425,863			(2,547	)

	$	69,953		$	(11,169	)

The components of the overall net deferred tax assets are as follows:


	Years Ended December 31,
	2006			2005
Assets
Net operating losses	$	4,020,704		$	4,112,885
Allowance for doubtful accounts		3,644			7,646
Vacation and bonus compensation and other accruals		614,251			161,591
Property tax		7,527			13,011
Stock options expensed		36,833			—
Capital loss carryforward		10,365			10,365
Tax credit carryforward		231,811			231,811

Total assets	$	4,925,135		$	4,737,309

Liabilities
Depreciation and amortization		(613,768	)		(774,491	)
Deferred acquisition intangibles		(1,780,529	)		—
Other		—			—

Total liabilities		(2,394,297	)		(774,491	)
Valuation allowance		(4,261,947	)		(3,759,208	)


Deferred tax asset, net	$	(1,731,109	)	$	3,610

CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

At December 31, 2006 the Company had available unused net operating losses of $9,935,476 and tax credit carryforwards of approximately $231,811 that may be applied against future taxable income and that expire 2008 to 2024. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate resolution of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning in making these assessments. At December 31, 2006 the Company had a valuation allowance of $4,261,947 established against unused U.S. net operating loss carryforwards of $9,935,476 and tax credits of $231,811 as utilization of these tax attributes is not assured in the United States.

NOTE 9 – STOCK BASED COMPENSATION

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123R, “Share-Based Payment” (“SFAS 123R”). SFAS 123R requires companies to recognize the cost of employee services received in exchange for awards of equity instruments, such as stock options and restricted stock, based on the fair value of those awards at the date of grant and eliminates the choice to account for employee stock options under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25). The Company adopted SFAS 123R effective January 1, 2006 using the Black-Scholes-Merton formula and the modified prospective method and as such, results for prior periods have not been restated. Prior to January 1, 2006, no compensation expense was recognized for stock option grants as all such grants had an exercise price not less than fair market value on the date of grant.

The Company’s Amended and Restated Stock Option and Restricted Stock Plan (the “Plan”) provides for the issuance of incentive and nonqualified stock options to purchase, and restricted stock grants of, shares of the Company’s Class A common stock. Individuals eligible for participation in the Plan include designated officers and other employees (including employees who also serve as directors), non-employee directors, independent contractors and consultants who perform services for the Company. The terms of each grant under the Plan are determined by the Board of Directors, or a committee of the board administering the Plan, in accordance with the terms of the Plan. Outstanding stock options become immediately exercisable upon a change of control of the Company as in accordance with the terms of the Plan. Stock options granted under the Plan typically become exercisable over a one to five year period. Generally, the options have various vesting periods, which include immediate and term vesting periods.

In 2002, the Company’s stockholders authorized an additional 2,000,000 shares for grant under the Plan. In connection with the shares that could be issued under the Plan, the Company filed a registration statement on Form S-8. Such registration statement also covered certain options granted prior to the Merger, which were not granted under the Plan (“Outside Plan

Stock Options”). At December 31, 2006, the Company had options to purchase 1,988,000 shares of Class A common stock outstanding under the Plan which included 60,000 Outside Plan Stock Options. The Company had options to purchase 1,742,625 shares of Class A common stock that were exercisable as of December 31, 2006 which included 60,000 Outside Plan Stock Options.

On December 8, 2005, the Company’s stockholders approved the CTI Group (Holdings) Inc. Stock Incentive Plan (the “Stock Incentive Plan”) at the Company’s 2005 Annual Meeting of Stockholders. In connection with the shares that can be issued under the Stock Incentive Plan, the Company filed a registration statement on Form S-8. The Stock Incentive Plan replaced the Plan. No new grants will be granted under the Plan. Grants that were made under the Plan prior to the stockholders’ approval of the Stock Incentive Plan will continue to be administered under the Plan.

CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Stock Incentive Plan is administered by the Compensation Committee of the board of directors. Under the Stock Incentive Plan, the Compensation Committee is authorized to grant awards to non-employee directors, executive officers and other employees of, and consultants and advisors to, the Company or any of its subsidiaries and to determine the number and types of such awards and the terms, conditions, vesting and other limitations applicable to each such award. In addition, the Compensation Committee has the power to interpret the Stock Incentive Plan and to adopt such rules and regulations as it considers necessary or appropriate for purposes of administering the Stock Incentive Plan.

The following types of awards or any combination of them may be granted under the Stock Incentive Plan: (i) incentive stock options, (ii) non-qualified stock options, (iii) stock grants, and (iv) performance awards.

The maximum number of shares of Class A common stock with respect to which awards may be granted or measured to any individual participant under the Stock Incentive Plan during each of the Company’s fiscal years will not exceed 1,500,000 shares of Class A common stock, subject to certain adjustments.

The aggregate number of shares of Class A common stock that will be reserved for awards, including shares of Class A common stock underlying stock options, to be granted under the Stock Incentive Plan is 3,000,000 shares, subject to adjustments for stock splits, recapitalizations and other specified events. Such shares may be treasury shares or authorized but unissued shares. If any outstanding award is cancelled, forfeited, or surrendered to the Company, shares of Class A common stock allocable to such award may again be available for awards under the Stock Incentive Plan. Incentive stock options may be granted only to participants who are executive officers and other employees of the Company or any of its subsidiaries on the day of the grant, and non-qualified stock options may be granted to any participant in the Stock Incentive Plan. No stock option granted under the Stock Incentive Plan will be exercisable later than ten years after the date it is granted. As of December 31, 2006, options to purchase 250,000 shares of Class A common stock were granted under the Stock Incentive Plan.

Information with respect to options is as follows:


				Exercise		Weighted
	Options			Price Range		Average
	Shares			Per Share		Exercise Price

Outstanding, December 31, 2004		2,563,250			$0.20-$0.50	$	0.32
Granted		853,750			0.34 - 0.40		0.39
Exercised		(31,750	)		0.20 - 0.21		0.21
Cancelled		(1,234,500	)		0.21 – 0.49		0.37

Outstanding, December 31, 2005		2,150,750		$	0.21-$0.50	$	0.32
Granted		250,000			0.31		0.31
Exercised		(12,000	)		0.21		0.21
Cancelled		(400,750	)		0.21 – 0.49		0.35

Outstanding, December 31, 2006		1,988,000		$	0.21-$0.50	$	0.32

The following table summarizes options exercisable at December 31, 2006:

ExercisePrice

Weighted

Aggregate

Weighted

Option

Range

Average

Intrinsic

Remaining

Per Share

Exercise Price

Value

Contractual Term

December 31, 2005

1,456,625

$0.21-$0.50

0.33

289,967

7.96 years

December 31, 2006

1,738,500

$0.21-$0.50

0.32

358,235

7.53 years

The following table summarizes non-vested options:


	Option
	Shares
December 31, 2005		694,125
Granted		250,000
Cancelled		(123,750	)
Vested		(570,875	)

December 31, 2006		249,500

CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Included within Selling, general and administrative expense for the twelve months ended December 31, 2006 is $86,665 of stock-based compensation. Stock-based compensation expenses are recorded in the Corporate Allocation segment as these amounts are not included in internal measures of segment operating performance.

The fair value of each option award is estimated on the date of grant using a closed-form option valuation model (Black-Scholes-Merton formula) that uses the assumptions noted in the following table. Because closed-form valuation models incorporate ranges of assumptions for inputs, those ranges are disclosed. Expected volatilities are based on implied volatilities from historical volatility of the Company’s stock. The Company uses historical data to estimate option exercise and employee termination within the valuation model; separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The expected term of options granted is derived from general practices used by other companies in the software industry and estimates by the Company of the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.


	2006			2005
Risk-free interest rate		4.64	%		4.10	%
Dividend yield		0.00	%		0.00	%
Volatility factor		67.88	%		71.88	%
Expected lives	5 years			5 years

NOTE 10 — MAJOR CUSTOMERS

For the years ended December 31, 2006 and 2005 the Company had sales to a single customer aggregating $5,020,637 (39% of total revenues) and $5,594,946 (37% of total revenues), respectively. Such customer represents 41% and 42% of software sales, service fee and license fee revenues for the years ended December 31, 2006 and 2005, respectively. The Company had receivables from this single customer of $383,900 (11% of trade accounts receivable, net) and $547,123 (22% of the trade accounts receivable, net) as of December 31, 2006 and December 31, 2005, respectively. The contract with this customer contains an automatic annual renewal provision renewed automatically in March; however, such agreement does contain a 120-day advance notice termination provision. The contract with this customer was renewed in March 2007. The loss of this customer would have a substantial negative impact on the Company.

NOTE 11 — RETIREMENT PLAN

The Company maintains a defined contribution plan qualified under Section 401(k) of the Internal Revenue Code that covers certain eligible U.S., full-time employees. The Company matches 50% of participant contributions up to 6% of participant compensation. The Company made contributions of $64,422 in 2006 and $57,884 in 2005. The Company maintains a defined contribution plan for its U.K. employees. The Company made contributions of approximately $68,516 in 2006 and $60,977 in 2005.

NOTE 12 — SEGMENT INFORMATION

The Company designs, develops, markets and supports billing and data management software and services. In accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” the Company has three reportable segments, Electronic Invoice Management (“EIM”), Telemanagment (“Telemanagement”) and Patent Enforcement Activities (“Patent Enforcement”). These segments are managed separately because the services provided by each segment require different technology and marketing strategies.

Electronic Invoice Management: EIM designs, develops and provides electronic invoice presentment, analysis and payment software that enables internet-based customer self-care for wireline, wireless and convergent providers of telecommunications services. EIM software and services are used primarily by

CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

telecommunications services providers to enhance their customer relationships while reducing the providers operational expenses related to paper-based invoice delivery and customer support relating to billing inquiries. The Company provided these services primarily through facilities located in Indianapolis, Indiana and facilities located in Blackburn in the United Kingdom. In 2006, the Company embarked on the development of voice over internet protocol (“VOIP”) management applications which are incorporated in the EIM segment.

Telemanagment: Through its operations in the United Kingdom and Indianapolis and the utilization of the Proteus^TM products, the Company offers telemanagement software and services for end users to manage their usage of multi-media communications services and equipment.

Patent Enforcement Activities: Patent Enforcement involves the licensing, protection, enforcement and defense of the Company’s intellectual property and rights.

The accounting policies for segment reporting are the same as those described in Note 1 of the Notes to Consolidated Financial Statements. Summarized financial information concerning the Company’s reportable segments is shown in the following table.

Reconciling items for operating income (loss) on the following table represent corporate expenses and depreciation. Included in the long-lived assets in the reconciling items is $3,000,000 of restricted cash being used as collateral.

The following table presents selected financial results by business segment:


	Electronic
	Invoice					Patent			Reconciling
2006	Management		Telemanagement			Enforcement			Amounts			Consolidated

Net revenues	$	6,595,752	$	5,692,712		$	522,921		$	—		$	12,811,385
Gross profit / (loss) (Revenues less costs of products [excluding depreciation and amortization] and patent license cost)		5,170,166		3,662,714			(427,812	)		—			8,405,068
Depreciation and Amortization		971,530		46,752			22,990			23,426			1,064,698
Income (loss) from operations		1,517,998		(341,933	)		(450,802	)		(2,073,224	)		(1,347,961	)
Long-lived assets		13,388,333		752,331			840,802			3,066,421			18,047,887

2005

Net revenues	$	7,485,551	$	5,968,349		$	1,846,757		$	—		$	15,300,657
Gross profit (Revenues less costs of products [excluding depreciation and amortization] and patent license cost)		5,569,608		3,846,911			625,750			—			10,042,269
Depreciation and Amortization		917,141		142,653			22,990			15,476			1,098,260
Income (loss) from operations		1,484,724		329,318			602,760			(2,576,863	)		(160,061	)
Long-lived assets		2,194,513		465,262			715,473			89,847			3,465,095

CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table presents selected financial results by geographic location based on location of customer:


2006	United States			United Kingdom		Consolidated

Net revenues	$	7,357,947		$	5,453,438	$	12,811,385
Gross profit (Revenues less costs of products [excluding depreciation and amortization] and patent license cost)		4,770,056			3,635,012		8,405,068
Depreciation and Amortization		1,004,888			59,810		1,064,698
Income / (loss) from operations		(1,579,743	)		231,782		(1,347,961	)
Long-lived assets		5,602,795			12,445,092		18,047,887

2005

Net revenues	$	9,624,240		$	5,676,417	$	15,300,657
Gross profit (Revenues less costs of products [excluding depreciation and amortization] and patent license cost)		6,375,950			3,666,319		10,042,269
Depreciation and Amortization		957,373			140,887		1,098,260
Income from operations		(660,536	)		500,475		(160,061	)
Long-lived assets		2,999,833			465,262		3,465,095

NOTE 13 — RELATED PARTY TRANSACTIONS

CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On February 16, 2007, the Company and, Fairford Holdings Scandinavia AB, a wholly-owned subsidiary of Fairford Holdings Limited (“Fairford Scandinavia”), entered into the Securities Purchase Agreement (the “Agreement”), dated February 16, 2007. Pursuant to the Agreement, on February 16, 2007, the Company issued to Fairford Scandinavia a Class A Common Stock Purchase Warrant (the “Warrant”) to purchase shares of Class A Common Stock (“Common Stock”) of the Company in consideration for securing the issuance of a $2.6 million letter of credit (the “Letter of Credit”) from SEB bank to National City Bank. Due to National City Bank’s receipt of the Letter of Credit, the Company was able to obtain the Acquisition Loan at a favorable cash-backed interest rate. Pursuant to the Warrant, Fairford Scandinavia is entitled to purchase 419,495 shares of Common Stock at the exercise price of $0.34 per share, subject to adjustments as described in the Warrant, at any time prior to the 10th anniversary of the date of issuance. The expense related to the Stock Warrants of $85,273 was recorded in the year ended December 31, 2006 as deferred finance costs. As of February 16, 2007, prior to the issuance of the Warrant, Fairford owned 61% of the Company’s outstanding Common Stock and Fairford Scandinavia did not own any of the Company’s securities. Mr. Osseiran, the majority holder of the Company’s Class A common stock and a director of the Company, is a director of Fairford, the President of Fairford Scandinavia and a grantor and sole beneficiary of a revocable trust which is the sole stockholder of Fairford. Mr. Dahl, a director of the Company, is a director of Fairford and the Chairman of Fairford Scandinavia.

Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

As reported on the Company’s Form 8-K filed on June 29, 2005, the Company dismissed PricewaterhouseCoopers LLP (“PwC”) as the Company’s independent registered public accounting firm on June 24, 2005. The decision was recommended and unanimously approved by the Company’s Audit Committee of the Board of Directors.

The reports of PwC on the Company’s financial statements for either of the past two fiscal years ended December 31, 2004 and 2003, respectively, contained no adverse opinion or disclaimer of opinion and were not modified as to uncertainty, audit scope, or accounting principles.

In connection with its audits for the two most recent fiscal years ended December 31, 2004 and 2003, respectively, and through June 24, 2005, there have been no disagreements with PwC on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of PwC, would have caused it to make reference to the subject matter of the disagreement in connection with its report on the financial statements for such period.

During the two most recent fiscal years and through June 24, 2005, there have been no reportable events (as described in Item 304(a)(1)(iv)(B) of Regulation S-B).

The Audit Committee of the Board of Directors of the Company engaged Crowe Chizek and Company LLC (“Crowe Chizek”) as its independent registered public accounting firm effective as of June 24, 2005. During the two most recent fiscal years ended December 31, 2004 and 2003, respectively, and through June 24, 2005, the Company has not consulted with Crowe Chizek regarding either: (i) the application of accounting principles to a specified transaction, either completed or contemplated, or the type of audit opinion that might be rendered on the Company’s financial statements; or (ii) any matter that was the subject of a disagreement or event identified in Item 304(a)(1)(iv) of Regulation S-B.

Item 8A. Controls and Procedures

The Company, under the supervision and with the participation of its management, including its principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective in reaching a reasonable level of assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.

The Company’s principal executive officer and principal financial officer also conducted an evaluation of internal control over financial reporting (“Internal Control”) to determine whether any changes in Internal Control occurred during the quarter (the Company’s fourth fiscal quarter in the case of an annual report) that have materially affected or which are reasonably likely to materially affect Internal Control. Based on that evaluation, there has been no such change during the quarter covered by this report.

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. The Company conducts periodic evaluations to enhance, where necessary its procedures and controls.

Item 8B. Other Information

None

PART III

Item 9. Directors, Executive Officers, Promoters, Control Persons, and Corporate Governance; Compliance with Section 16(a) of the Exchange Act

The required information is incorporated by reference from the Company’s definitive proxy statement in connection with its 2007 Annual Stockholders’ Meeting (“2007 Annual Meeting”) to be filed with the Securities and Exchange Commission (the “Commission”) within 120 days of the Company’s fiscal year ended December 31, 2006.

Item 10. Executive Compensation

The required information is incorporated by reference from the Company’s definitive proxy statement in connection with its 2007 Annual Meeting to be filed with the Commission within 120 days of the Company’s fiscal year ended December 31, 2006.

Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Item 12. Certain Relationships and Related Transactions, and Director Independence

PART IV

Item 13. Exhibits

(a) Exhibits

2.1 Agreement and Plan of Merger, dated February 3, 2000, including amendments thereto, between CTI Group (Holdings) Inc. and Centillion Data Systems, Inc., incorporated by reference to Annex A to the Definitive Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on January 23, 2001.

2.2 Agreement and Plan of Merger, dated April 5, 2000, including amendments thereto, between CTI Group (Holdings) Inc., CTI Billing Solutions, Inc., David A. Warren, Frank S. Scarpa, Valerie E. Hart and Richard J. Donnelly, incorporated by reference to Annex H to the Definitive Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on January 23, 2001.

2.3 Agreement amending Agreement and Plan of Merger, dated May 15, 2001, among CTI Group (Holdings) Inc., CTI Billing Solutions, Inc. and David A. Warren, incorporated by reference to Exhibit 10.20 to the Quarterly Report on Form 10-QSB filed with the Securities and Exchange Commission on August 14, 2001.

3.1 Certificate of Incorporation, incorporated by reference to the Definitive Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on February 19, 1988.

3.2 Certificate of Amendment of the Certificate of Incorporation, incorporated by reference to the Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on February 15, 1991.

3.3 Certificate of Amendment of the Certificate of Incorporation dated November 16, 1995 incorporated by reference to Exhibit 3.3 to the Annual Report on Form 10-KSB filed with the Securities Exchange and Commission on March 30, 2004.

3.4 Certificate of Amendment of the Certificate of Incorporation dated November 3, 1999 incorporated by reference to Exhibit 3.4 to the Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on March 30, 2004.

3.5 Amendment to the Certificate of Incorporation, incorporated by reference to Exhibit 3.1(i) to the Current Report on Form 8-K filed with the Securities and Exchange Commission on May 8, 2001.

3.6 Amended Bylaws adopted July 15, 2004 incorporated by reference to Exhibit 3.1 to the Quarterly Report on Form 10-QSB filed with the Securities and Exchange Commission on August 16, 2004.

4.1 Acquisition Loan Promissory Note, dated December 22, 2006 incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on December 29, 2006.

4.2 Revolving Line of Credit Promissory Note, dated December 22, 2006 incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on December 29, 2006.

10.1 Amended and Restated Stock Option and Restricted Stock Plan, incorporated by reference to Appendix II to the Definitive Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on May 6, 2002. *

10.2 Letter, dated September 6, 2001, to Anthony P. Johns, incorporated by reference to Exhibit 10.4.1 to the Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on April 2, 2002. *

10.3 Chief Executive Employment Agreement, dated January 28, 2002, between Bradley C. Houlberg and

CTI Group (Holdings) Inc., incorporated by reference to Exhibit 10.5 to the Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on April 2, 2002. *

10.4 Employment Agreement, dated May 30, 2000, between Manfred Hanuschek and CTI Group (Holdings) Inc., incorporated by reference to Exhibit 10.6 to the Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on April 2, 2002. *

10.4.1 Amendment No. 1 to Employment Agreement, dated May 30, 2000, between Manfred Hanuschek and CTI Group (Holdings) Inc., dated January 18, 2002, incorporated by reference to Exhibit 10.6.1 to the Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on April 2, 2002. *

10.5 Eleventh Amendment to Lease Agreement, dated January 23, 2001, by and between Lockerbie Vermont LLC and Centillion Data Systems, Inc., incorporated by reference to Exhibit 10.10 to the Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on April 2, 2002.

10.6 Settlement Agreement by and between Anthony P. Johns, Fairford Holdings Limited, Stephen J. Bartkiw, Harold D. Garrison and CTI Group (Holdings) Inc., dated June 20, 2002, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on June 21, 2002.

10.7 Johns Family Purchase Agreement, dated June 11, 2002, among Robert Johns, Elizabeth Chiddicks, Jason Johns, Paul Johns, Stephen J. Bartkiw, and CTI Group (Holdings) Inc., incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on June 21, 2002.

10.8 Termination Agreement, dated January 30, 2003, between CTI Group (Holdings) Inc. and CCP-CPN One, Ltd. regarding early termination of Houston office lease, incorporated by reference to Exhibit 10.10 to the Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on April 15, 2003.

10.9 Termination Agreement, dated October 30, 2002, between CTI Group (Holdings) Inc. and WHVPW Real Estate Limited Partnership regarding early termination of Valley Forge office lease, incorporated by reference to Exhibit 10.11 to the Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on April 15, 2003.

10.10 Option Grant to A. Burt, dated February 27, 1998*, Option Grant to A. Burt, dated May 25, 1999*, Option Grant to T. Indrakumar, dated February 27, 1998 and Option Grant to A. Khan, dated October 1, 1999, incorporated by reference to Exhibit 10.2 to the Registration Statement on Form S-8 filed with the Securities and Exchange Commission on December 2, 2002.

10.11 Asset Purchase Agreement, dated as of December 31, 2003, by and between CTI Group (Holdings) Inc. and CDS Holdings, LLC, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 15, 2004.

10.12 Twelfth Amendment to Lease Agreement, dated December 1, 2003, by and between Lockerbie Marketplace, L.L.C. and CTI Group (Holdings) Inc., incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-QSB filed with the Securities and Exchange Commission on August 16, 2004.

10.13 Amendment No. 1 to Chief Executive Employment Agreement between Bradley C. Houlberg and CTI Group (Holdings) Inc. dated October 20, 2004 incorporated by reference to Exhibit 10.4 to the Quarterly Report on Form 10-QSB filed with the Securities and Exchange Commission on November 15, 2004. *

10.14 Chief Executive Employment Agreement between Bradley C. Houlberg and CTI Group (Holdings) Inc. dated December 21, 2004 incorporated by reference to Exhibit 10.16 to the Annual Report on Form 10-KSB filed with the Securities Exchange and Commission on March 31, 2005. *

10.15 Asset Purchase Agreement between Xila Communications, LLC and eGIX, Inc. dated as of October 28, 2004 incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-QSB filed with the Securities and Exchange Commission on November 15, 2004.

10.16 Services Agreement between Xila Communications, LLC and eGIX, Inc. dated October 19, 2004 incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-QSB filed with the Securities and Exchange Commission on November 15, 2004.

10.17 Telecommunications Services Agreement between Xila Communications, LLC and eGIX, Inc. dated October 28, 2004 incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-QSB filed with the Securities and Exchange Commission on November 15, 2004.

10.18 Adjustment to base compensation of CFO, Manfred Hanuschek, incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on December 14, 2004. *

10.19 Lease Agreement, dated April 20, 2005, by and between Spherion Technology (UK) Limited and CTI Data Solutions Limited, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on April 26, 2005.

10.20 Underlease agreement between CTI Data Solutions Limited and Interim Technology (UK) Limited dated August 10, 2000, incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on April 26, 2005.

10.21 Lessee covenants contained in Superior Lease, dated April 4, 1989, by and between Conifer Court Limited (superior landlord), GN Elmi Limited and G N Elmi a.s., incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on April 26, 2005.

10.22 Chief Executive Employment Agreement between John Birbeck and CTI Group (Holdings) Inc. dated September 13, 2005, incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on February 3, 2006. *

10.23 CTI Group (Holdings) Inc. Stock Incentive Plan incorporated by reference to Appendix III to the Company’s definitive proxy statement filed with the Securities and Exchange Commission on November 23, 2005. *

10.24 Form of Incentive Stock Option Agreement under CTI Group (Holdings) Inc. Stock Incentive Plan incorporated by reference to Exhibit 10.3 to the Current Report of Form 8-K filed with the Securities and Exchange Commission on February 3, 2006. *

10.25 Form of Nonqualified Stock Option Agreement under CTI Group (Holdings) Inc. Stock Incentive Plan incorporated by reference to Exhibit 10.4 to the Current Report of Form 8-K filed with the Securities and Exchange Commission on February 3, 2006. *

10.26 Form of Stock Agreement under CTI Group (Holdings) Inc. Stock Incentive Plan incorporated by reference to Exhibit 10.4 to the Current Report of Form 8-K filed with the Securities and Exchange Commission on February 3, 2006. *

10.27 Separation agreement between Bradley Houlberg and CTI Group (Holdings) Inc. dated October 20, 2005 incorporated by reference to Exhibit 10.1 to the Current Report of Form 8-K filed with the Securities and Exchange Commission on October 26, 2005. *

10.28 Compensation arrangements for the Board of Directors of CTI Group (Holdings) Inc. incorporated by reference to Exhibit 10.2 to the Current Report of Form 8-K filed with the Securities and Exchange Commission on February 3, 2006. *

10.29 Stock option grant to Salah Osseiran on July 13, 2005 incorporated by reference to the Current Report of Form 8-K filed with the Securities and Exchange Commission on July 15, 2005. *

10.30 Stock option grant to Manfred Hanuschek on October 11, 2005 incorporated by reference to the Current Report of Form 8-K filed with the Securities and Exchange Commission on October 14, 2005. *

10.31 Office Lease dated October 18, 2006, between DH Realty, LLC and CTI Group (Holdings) Inc. incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on October 24, 2006.

10.32 Tenancy Agreement dated February 8, 2006, between European Settled Estates PLC and Ryder Systems Limited.

10.33 Share Transfer Agreement, dated December 22, 2006, between CTI Data Solutions Limited, Ryder Systems Trustee Limited, Susan Patricia Haworth and Messrs. Paul Ryder Haworth, Andrew Wilson and David Latham incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on December 29, 2006.

10.34 Loan Agreement, dated as of December 22, 2006, by and between CTI Group (Holdings) Inc. and National City Bank incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on December 29, 2006.

10.35 CTI Group (Holdings) Inc. Security Agreement, dated as of December 22, 2006 incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on December 29, 2006.

10.36 Debenture, dated as of December 22, 2006, between CTI Group (Holdings) Inc. and National City Bank incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on December 29, 2006.

10.37 Charge Over Shares in CTI Data Solutions Ltd., dated as of December 22, 2006, between CTI Group (Holdings) Inc. and National City Bank incorporated by reference to Exhibit 10.5 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on December 29, 2006.

11.1 Statement re computation of per share earnings, incorporated by reference to Note 1 to Consolidated Financial Statements

14.1 Code of Ethics incorporated by reference to Exhibit 14.1 to the Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on March 30, 2004.

21.1 List of subsidiaries of CTI Group (Holdings) Inc. as of December 31, 2006.

23.1 Consent of Crowe Chizek and Company LLC.

31.1 Chief Executive Officer Certification Pursuant to Rule 13a-14 of the Exchange Act.

31.2 Chief Financial Officer Certification Pursuant to Rule 13a-14 of the Exchange Act.

32.1 Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350.

32.2 Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350.


*		Management contract or compensatory plan or agreement.

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

CTI Group (Holdings) Inc.


By:		/s/ John Birbeck

Name:		John Birbeck
Title:		Chairman, President and Chief Executive Officer
Date:		April 2, 2007

In accordance with the Exchange Act, this report was signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


April 2, 2007		/s/ John Birbeck

Date		John Birbeck
		Chairman, President and Chief Executive Officer
		(Principal Executive Officer)

April 2, 2007		/s/ Manfred Hanuschek

Date		Manfred Hanuschek
		Chief Financial Officer
		(Principal Financial Officer and Principal
		Accounting Officer)

April 2, 2007		/s/ Harold Garrison

Date		Harold Garrison,
		Member, Board of Directors

April 2, 2007		/s/ Rupert D. Armitage

Date		Rupert D. Armitage
		Member, Board of Directors

April 2, 2007		/s/ Bengt Dahl

Date		Bengt Dahl
		Member, Board of Directors

April 2, 2007		/s/ Thomas Grein

Date		Thomas Grein
		Member, Board of Directors

April 2, 2007		/s/ Salah Osseiran

Date		Salah Osseiran
		Member, Board of Directors


ITEM	PAGE
NO.	NO.
PART I
1. Description of Business		4
2. Description of Property		18
3. Legal Proceedings		18
4. Submission of Matters to a Vote of Security Holders		20

PART II
5. Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities		21
6. Management’s Discussion and Analysis or Plan of Operation		22
7. Financial Statements		34
8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		61
8A. Controls and Procedures		61
8B. Other Information		61

PART III
9. Directors, Executive Officers, Promoters, Control Persons and Corporate Governance; Compliance with Section 16(a) of the Exchange Act		62
10. Executive Compensation		62
11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		62
12. Certain Relationships and Related Transactions, and Director Independence		62
13. Exhibits		63
14. Principal Accountant Fees and Services		67

SIGNATURES		68
Tenancy Agreement dated February 8, 2006
List of Subsidiaries
Consent of Crowe Chizek and Company LLC
Chief Executive Officer Certification
Chief Financial Officer Certification
Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350
Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350


	Page
Report of Independent Registered Public Accounting Firm for the Consolidated Financial Statements for the years ended December 31, 2006 and 2005.		35

Consolidated Balance Sheets at December 31, 2006 and 2005.		36

Consolidated Statements of Operations for the years ended December 31, 2006 and 2005.		37

Consolidated Statements of Cash Flows for the years ended December 31, 2006 and 2005.		38

Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the years ended December 31, 2006 and 2005.		39

Notes to Consolidated Financial Statements		40