UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2006

OR

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

For the transition period from                                          to                                          

Commission File Number: 0-21878

SIMON WORLDWIDE, INC.

(Exact name of registrant as specified in its charter)

DELAWARE	04-3081657
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

5200 WEST CENTURY BOULEVARD, LOS ANGELES, CALIFORNIA 90045
(Address of principal executive offices)
(Zip code)

(310) 417-4660
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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

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

Large accelerated filer o     Accelerated filer o     Non-accelerated filer 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

At November 3, 2006, 16,673,193 shares of the registrant’s common stock were outstanding.

SIMON WORLDWIDE, INC.

FORM 10-Q
TABLE OF CONTENTS

			PAGE
			NUMBER
PART I	FINANCIAL INFORMATION
	Item 1.	Condensed Financial Statements (Unaudited)
		Consolidated Balance Sheets — September 30, 2006 and December 31, 2005		3
		Consolidated Statements of Operations — For the three and nine months ended September 30, 2006 and 2005		4
		Consolidated Statements of Comprehensive Income (Loss) — For the three and nine months ended September 30, 2006 and 2005		5
		Consolidated Statements of Cash Flows - For the nine months ended September 30, 2006 and 2005		6
		Notes to Condensed Consolidated Financial Statements		7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		17
	Item 4.	Controls and Procedures		17
PART II	OTHER INFORMATION
	Item 1.	Legal Proceedings		18
	Item 1A.	Risk Factors		18
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		18
	Item 3.	Defaults Upon Senior Securities		18
	Item 4.	Submission of Matters to a Vote of Security Holders		18
	Item 5.	Other Information		18
	Item 6.	Exhibits		18
	SIGNATURE			19
Ex-31.1 Section 302 Certification of J. Anthony Kouba
Ex-31.2 Section 302 Certification of Greg Mays
Ex-32 Section 906 Certification of J. Anthony Kouba and Greg Mays

2

PART I — FINANCIAL INFORMATION

Item 1. Condensed Financial Statements (Unaudited)

SIMON WORLDWIDE, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(Unaudited)

	September 30,			December 31,
	2006			2005
ASSETS
Current assets:
Cash and cash equivalents	$	17,746		$	16,310
Restricted cash		—			2,818
Prepaid expenses and other current assets		69			316
Assets from discontinued operations to be disposed of — current (Note 4)		564			541
Total current assets		18,379			19,985
Property and equipment, net		—			4
Other assets		93			109
Investments		9,575			11,456
Assets from discontinued operations to be disposed of — non-current (Note 4)		236			268
Total non-current assets		9,904			11,837
	$	28,283		$	31,822
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable:
Trade	$	157		$	187
Affiliates		181			176
Accrued expenses and other current liabilities		282			373
Liabilities from discontinued operations — current (Note 4)		800			809
Total current liabilities		1,420			1,545
Commitments and contingencies
Redeemable preferred stock, Series A1 senior cumulative participating convertible, $.01 par value, 32,061 shares issued and outstanding at September 30, 2006, and 31,118 shares issued and outstanding at December 31, 2005, stated at redemption value of $1,000 per share (Note 10)		32,061			31,118
Stockholders’ deficit:
Common stock, $.01 par value; 50,000,000 shares authorized; 16,673,193 shares issued and outstanding at September 30, 2006, and 16,653,193 shares issued and outstanding at December 31, 2005		167			167
Additional paid-in capital		138,502			138,500
Retained deficit		(153,280	)		(150,802	)
Unrealized gain on investments		9,413			11,294
Total stockholders’ deficit		(5,198	)		(841	)
	$	28,283		$	31,822

See the accompanying Notes to Condensed Consolidated Financial Statements.

3

SIMON WORLDWIDE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except per share data)

	For the three months						For the nine months
	ended September 30,						ended September 30,
	2006			2005			2006			2005
Revenue	$	—		$	—		$	—		$	—
General and administrative expenses		733			776			2,781			2,255
Operating loss from continuing operations		(733	)		(776	)		(2,781	)		(2,255	)
Interest income		235			189			647			438
Loss from continuing operations before income taxes		(498	)		(587	)		(2,134	)		(1,817	)
Income tax benefit		—			—			—			—
Net loss from continuing operations		(498	)		(587	)		(2,134	)		(1,817	)
Income (loss) from discontinued operations, net of tax (Note 4)		90			(661	)		604			(493	)
Net loss		(408	)		(1,248	)		(1,530	)		(2,310	)
Preferred stock dividends		(320	)		(307	)		(948	)		(914	)
Net loss available to common stockholders	$	(728	)	$	(1,555	)	$	(2,478	)	$	(3,224	)
Loss per share from continuing operations available to common stockholders:
Loss per common share — basic and diluted	$	(0.05	)	$	(0.05	)	$	(0.19	)	$	(0.16	)
Weighted average shares outstanding — basic and diluted		16,673			16,653			16,663			16,653
Income (loss) per share from discontinued operations:
Income (loss) per common share — basic and diluted	$	0.01		$	(0.04	)	$	0.04		$	(0.03	)
Weighted average shares outstanding — basic and diluted		16,673			16,653			16,663			16,653
Net loss available to common stockholders:
Loss per common share — basic and diluted	$	(0.04	)	$	(0.09	)	$	(0.15	)	$	(0.19	)
Weighted average shares outstanding — basic and diluted		16,673			16,653			16,663			16,653

See the accompanying Notes to Condensed Consolidated Financial Statements.

4

SIMON WORLDWIDE, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(in thousands)

	For the three months						For the nine months
	ended September 30,						ended September 30,
	2006			2005			2006			2005
Net loss	$	(408	)	$	(1,248	)	$	(1,530	)	$	(2,310	)
Other comprehensive income (loss):
Unrealized gain (loss) on investments		(1,881	)		—			(1,881	)		11,294
Comprehensive income (loss)	$	(2,289	)	$	(1,248	)	$	(3,411	)	$	8,984

See the accompanying Notes to Condensed Consolidated Financial Statements.

5

SIMON WORLDWIDE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	For the nine months
	ended September 30,
	2006			2005
Cash flows from operating activities:
Net loss	$	(1,530	)	$	(2,310	)
Income (loss) from discontinued operations		604			(493	)
Loss from continuing operations		(2,134	)		(1,817	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		4			7
Cash provided by (used in) discontinued operations		595			(877	)
Cash transferred from (to) discontinued operations		(138	)		503
Increase (decrease) in cash from changes in working capital items:
Prepaid expenses and other current assets		247			425
Accounts payable		(25	)		(99	)
Accrued expenses and other current liabilities		(91	)		(135	)
Net cash used in operating activities		(1,542	)		(1,993	)
Cash flows from investing activities:
Decrease in restricted cash		2,818			825
Cash provided by discontinued operations		142			36
Other, net		16			40
Net cash provided by investing activities		2,976			901
Cash flows from financing activities:
Proceeds from the exercise of stock options		2			—
Net increase (decrease) in cash and cash equivalents		1,436			(1,092	)
Cash and cash equivalents, beginning of period		16,310			18,892
Cash and cash equivalents, end of period	$	17,746		$	17,800
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes	$	3		$	6
Supplemental non-cash financing activities:
Dividends paid in kind on redeemable preferred stock	$	943		$	906

See the accompanying Notes to Condensed Consolidated Financial Statements.

6

SIMON WORLDWIDE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared by Simon Worldwide, Inc. (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes in accordance with accounting principles generally accepted in the United States of America for complete financial statements and should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting only of those considered necessary for fair presentation of the Company’s financial position, results of operations and cash flows at the dates and for the periods presented.

Prior to August 2001, the Company was a multi-national, full service promotional marketing company. In August 2001, McDonald’s Corporation (“McDonald’s”), the Company’s principal customer, terminated its 25-year relationship with the Company as a result of the embezzlement by a former Company employee of winning game pieces from McDonald’s promotional games administered by the Company. Other customers also terminated their relationships with the Company, resulting in the Company no longer having a business. By April 2002, the Company had effectively eliminated a majority of its on-going promotions business operations and was in the process of disposing of its assets and settling its liabilities related to the promotions business and defending and pursuing litigation with respect thereto. The process is on-going and will continue for some indefinite period primarily dependent upon on-going litigation. During the second quarter of 2002, the discontinued activities of the Company, consisting of revenues, operating costs, general and administrative costs and certain assets and liabilities associated with the Company’s promotions business, were classified as discontinued operations for financial reporting purposes.

At September 30, 2006, the Company had two stock-based compensation plans. The Company adopted the disclosure provisions of Financial Accounting Standards Board (“FASB”) Statement No. 123, “Accounting for Stock-Based Compensation,” as amended by FASB Statement No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure—An Amendment of FASB Statement No. 123,” and revised by FASB Statement No. 123(R), “Share-Based Payment.” Statement No. 123(R) eliminated the alternative to use the intrinsic value method of accounting under APB Opinion No. 25, “Accounting for Stock Issued to Employees,” that was available under Statement No. 123 as originally issued. Under APB Opinion No. 25, issuing stock options to employees generally resulted in recognition of no compensation cost. Statement No. 123(R) requires entities to recognize the cost of employee services received in exchange for awards of equity instruments based on the fair value at grant-date of those awards (with limited exceptions).

The Company adopted Statement No. 123(R) using the modified prospective transition method, which requires the application of the accounting standard as of January 1, 2006, the first day of the Company’s 2006 fiscal year. The modified prospective transition method requires only newly issued or modified awards of equity instruments, or previously issued but unvested awards of equity instruments to be accounted for at fair value. As such, the Company’s condensed consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of Statement No. 123(R). In addition, because there were no employee stock options granted or vested after the effective date of Statement No. 123(R), there is no impact on net income as reported in the accompanying condensed consolidated financial statements. See Note 3 for additional information.

At September 30, 2006, and December 31, 2005, the Company had a passive investment in a limited liability company controlled by an affiliate. See Note 5.

The operating results for the three and nine months ended September 30, 2006, are not necessarily indicative of the results to be expected for the full year.

RECENTLY ISSUED ACCOUNTING STANDARDS

In July 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109,” which prescribes a recognition threshold and measurement process for recording in the financial statements uncertain tax positions taken or expected to be taken in a tax return. In addition, FIN 48 provides guidance on the derecognition, classification, accounting in interim periods, and disclosure requirements for uncertain tax positions. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company does not expect the adoption FIN 48 to have a material effect on its consolidated statements of financial position or results of operations.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 (“SFAS 157”), “Fair Value Measurements,” which provides guidance for applying the definition of fair value to various accounting pronouncements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company does not expect the adoption SFAS 157 to have a material effect on its consolidated statements of financial position or results of operations.

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin 108 (“SAB 108”), “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” which addresses how uncorrected errors in previous years should be considered when quantifying errors in the current year financial statements. SAB 108 is effective for fiscal years ending after November 15, 2006, and companies are allowed to record the effects as a cumulative-effect adjustment to retained earnings upon adoption. The Company does not expect the adoption SAB 108 to have a material effect on its consolidated statements of financial position or results of operations.

7

2. Absence of Operating Business; Going Concern

As a result of the loss of its customers, the Company no longer has any operating business. Since August 2001, the Company has concentrated its efforts on reducing its costs and settling numerous claims, contractual obligations and pending litigation. As a result of these efforts, the Company has been able to resolve a significant number of outstanding liabilities that existed at December 31, 2001, or arose subsequent to that date. At September 30, 2006, the Company had reduced its workforce to 4 employees from 136 employees at December 31, 2001. The Company is currently managed by the Chief Executive Officer, together with a principal financial officer and an acting general counsel.

At September 30, 2006, and December 31, 2005, the Company had stockholders’ deficit of $(5.2) million and $(.8) million, respectively. For the nine months ended September 30, 2006 and 2005, the Company had a net loss of $(1.5) million and $(2.3) million, respectively. The Company continues to incur losses in 2006 within its continuing operations for the general and administrative expenses being incurred to manage the affairs of the Company and resolve outstanding legal matters. By utilizing cash received pursuant to the settlement with McDonald’s in 2004, management believes it has sufficient capital resources and liquidity to operate the Company for the foreseeable future. In connection with the Company’s settlement of its litigation with McDonald’s and related entities, the Company received net cash proceeds, after attorney’s fees, of approximately $13 million and due to the elimination of liabilities associated with the settlement of approximately $12 million, the Company recorded a gain of approximately $25 million in 2004. However, as a result of the stockholders’ deficit at December 31, 2005, significant losses from operations, lack of operating revenue, and pending legal actions, the Company’s independent registered public accounting firm has expressed substantial doubt about the Company’s ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

The Board of Directors continues to consider various alternative courses of action for the Company, including possibly acquiring or combining with one or more operating businesses. The Board of Directors has reviewed and analyzed a number of proposed transactions and will continue to do so until it can determine a course of action going forward to best benefit all shareholders, including the holder of the Company’s outstanding preferred stock. The Company cannot predict when the Directors will have developed a proposed course of action or whether any such course of action will be successful. Management believes it has sufficient capital resources and liquidity to operate the Company for the foreseeable future.

3. Stock Plan

1993 Omnibus Stock Plan

Under its 1993 Omnibus Stock Plan, as amended (the “Omnibus Plan”), which terminated in May 2003 except as to options outstanding at that time, the Company reserved up to 3,000,000 shares of its common stock for issuance pursuant to the grant of incentive stock options, nonqualified stock options, or restricted stock. The Omnibus Plan is administered by the Compensation Committee of the Board of Directors. Subject to the provisions of the Omnibus Plan, the Compensation Committee had the authority to select the optionees or restricted stock recipients and determine the terms of the options or restricted stock granted, including: (i) the number of shares; (ii) the exercise period (which may not exceed ten years); (iii) the exercise or purchase price (which in the case of an incentive stock option cannot be less than the market price of the common stock on the date of grant); (iv) the type and duration of options or restrictions, limitations on transfer, and other restrictions; and (v) the time, manner, and form of payment.

Generally, an option is not transferable by the option holder except by will or by the laws of descent and distribution. Also, and in general, no incentive stock option may be exercised more than 60 days following termination of employment. However, in the event that termination is due to death or disability, the option is exercisable for a maximum of 180 days after such termination.

Options granted under this plan generally become exercisable in three equal installments commencing on the first anniversary of the date of grant. Options granted during 2003 became exercisable in two equal installments commencing on the first anniversary of the date of grant. No further options may be granted under the Omnibus Plan.

8

1997 Acquisition Stock Plan

The 1997 Acquisition Stock Plan (the “1997 Plan”) is intended to provide incentives in connection with the acquisitions of other businesses by the Company. The 1997 Plan is identical in all material respects to the Omnibus Plan, except that the number of shares available for issuance under the 1997 Plan is 1,000,000 shares.

There were no stock options granted under the plans during the nine months ended September 30, 2006 and 2005.

The following summarizes the status of the Company’s stock options as of September 30, 2006, and changes for the nine months then ended:

				Weighted
				Exercise
	Shares			Price
Outstanding at the beginning of period		215,000		$	4.51
Granted		—			—
Exercised		(20,000	)		0.10
Expired or forfeited		(5,000	)		16.50
Outstanding at end of period		190,000			4.66
Options exercisable at end of period		190,000	(a)	$	4.66
Options available for future grant		1,000,000	(b)
Weighted average fair value of options granted during period	Not applicable

(a)	Outstanding pursuant to the 1993 Omnibus Stock Plan.
(b)	Available for issuance under the 1997 Plan.

The following table summarizes information about stock options outstanding at September 30, 2006:

				Options Outstanding								Options Exercisable
						Weighted
Range of						Average		Weighted		Aggregate				Weighted		Aggregate
Exercise				Number		Remaining		Average		Intrinsic		Number		Average		Intrinsic
Prices				Outstanding		Contractual Life		Price		Value		Exercisable		Price		Value
$   0.10	—	$	1.99		75,000		6.60	$	0.10	$	17,250		75,000	$	0.10	$	17,250
$   2.00	—	$	5.38		65,000		2.88		4.60		—		65,000		4.60		—
$   7.56	—	$	8.81		25,000		3.09		8.31		—		25,000		8.31		—
$ 12.25	—	$	15.50		25,000		1.29		14.85		—		25,000		14.85		—
$   0.10	—	$	15.50		190,000		4.17	$	4.66				190,000	$	4.66

The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on the Company’s closing stock price of $.33 on September 29, 2006 (as no closing price was available for September 30, 2006).

9

4. Discontinued Operations

By April 2002, the Company had effectively eliminated a majority of its on-going promotions business operations. Accordingly, the discontinued activities of the Company have been classified as discontinued operations in the accompanying condensed consolidated financial statements. The Company includes sufficient cash within its discontinued operations to ensure assets from discontinued operations to be disposed of cover liabilities from discontinued operations. Management believes it has sufficient capital resources and liquidity to operate the Company for the foreseeable future. At September 30, 2006, the Company’s elimination of its on-going promotions business operations was substantially complete.

Assets and liabilities related to discontinued operations at September 30, 2006, and December 31, 2005, as disclosed in the accompanying condensed consolidated financial statements, consist of the following (in thousands):

	September 30,		December 31,
	2006		2005
Assets:
Cash and cash equivalents	$	295	$	163
Restricted cash		269		378
Total current assets		564		541
Other assets		236		268
Assets from discontinued operations to be disposed of	$	800	$	809
Liabilities:
Accounts payable — trade	$	—	$	19
Accrued expenses and other current liabilities		800		790
Total current liabilities		800		809
Liabilities from discontinued operations	$	800	$	809

Net income (loss) from discontinued operations for the three and nine months ended September 30, 2006 and 2005, as disclosed in the accompanying condensed consolidated financial statements, consists of the following (in thousands):

	For the three months						For the nine months
	ended September 30,						ended September 30,
	2006			2005			2006			2005
Net sales	$	—		$	—		$	—		$	—
Cost of sales		—			—			—			—
Gross profit		—			—			—			—
General and administrative expenses		—			57			—			193
Loss (gain) on settlement (Note 9)		(74	)		555			(599	)		555
Impairment (Note 5)		—			—			13			—
Operating income (loss)		74			(612	)		586			(748	)
Interest income		16			—			45			—
Other income (loss) (Note 9)		—			(49	)		(27	)		255
Net income (loss) from discontinued operations	$	90		$	(661	)	$	604		$	(493	)

5. Long-term Investments

In the past, with its excess cash, the Company had made strategic and venture investments in a portfolio of privately held companies. These investments were in technology and internet related companies that were at varying stages of development, and were intended to provide the Company with an expanded technology and internet presence, to enhance the Company’s position at the leading edge of e-business and to provide venture investment returns. These companies in which the Company has invested are subject to all the risks inherent in technology and the internet. In addition, these

10

companies are subject to the valuation volatility associated with the investment community and capital markets. The carrying value of the Company’s investments in these companies is subject to the aforementioned risks.

Periodically, the Company performs a review of the carrying value of all its investments in these companies, and considers such factors as current results, trends and future prospects, capital market conditions and other economic factors. Based on its review, the Company recorded an nominal investment impairment during the second quarter of 2006. The carrying value of the Company’s investment portfolio totaled $9.6 million as of September 30, 2006, and includes an investment in Yucaipa AEC Associates, LLC (“Yucaipa AEC”), a limited liability company that is controlled by Yucaipa, which also controls the holder of the Company’s outstanding preferred stock. Yucaipa AEC’s principal investment is shares of common stock in Source Interlink Companies, Inc. (“Source”). Prior to February 28, 2005, this investment was in Alliance Entertainment Corp. (“Alliance”), a home entertainment product distribution, fulfillment, and infrastructure company providing both brick-and-mortar and e-commerce home entertainment retailers with complete business-to-business solutions, which was acquired by Source on that date. At December 31, 2001, the Company’s investment in Yucaipa AEC had a carrying value of $10.0 million which was accounted for under the cost method. In June 2002, certain events occurred which indicated an impairment and the Company recorded a pre-tax non-cash charge of $10.0 million to write down this investment in June 2002.

In March 2004, the Emerging Issues Task Force (“EITF”) of the FASB, issued EITF 03-16, “Accounting for Investments in Limited Liability Companies,” which required the Company to change its method of accounting for its investment in Yucaipa AEC from the cost method to the equity method for periods ending after July 1, 2004.

On February 28, 2005, Alliance merged with Source, a publicly-traded, direct-to-retail magazine distribution and fulfillment company in North America and a provider of magazine information and front-end management services for retailers. On the date of the merger, the Company’s pro-rata investment in Yucaipa AEC was valued by multiplying the number of Source shares indirectly held by the Company by the stock price of Source on that date. Accordingly, on February 28, 2005, to reflect the change in its underlying investment within Yucaipa AEC, the Company recorded an unrealized gain to Other Comprehensive Income of $11.3 million, which does not reflect any discount for illiquidity. As the Company’s investment in Yucaipa AEC is accounted for under the equity method, the Company adjusts the value of its investment based on its pro rata share of the earnings and losses of Yucaipa AEC. During the third quarter of 2006 and based on a review by management, the Company reduced the carrying value of its investment in Yucaipa AEC to $9.4 million by recording an unrealized loss to Other Comprehensive Income of $1.9 million. The Company has no power to dispose of or liquidate its holding in Yucaipa AEC or its indirect interest in Source, which power is held by Yucaipa AEC. Furthermore, in the event of a sale or liquidation of the Source shares by Yucaipa AEC, the amount and timing of any distribution of the proceeds of such sale or liquidation to the Company is discretionary with Yucaipa AEC.

While the Company will continue to periodically evaluate its investments, there can be no assurance that its investment strategy will be successful, and thus the Company might not ever realize any benefits from its portfolio of investments.

6. Short-Term Borrowings

Restricted cash included within continuing operations totaled $0 at September 30, 2006, and $2.8 million at December 31, 2005, which primarily consisted of amounts deposited into an irrevocable trust (Note 7). In addition, restricted cash included within discontinued operations at September 30, 2006, and December 31, 2005, totaled $.3 million and $.4 million, respectively, and primarily consisted of amounts deposited with lenders to satisfy the Company’s obligation pursuant to its outstanding standby letter of credit.

7. Indemnification Trust Agreement

In March 2002, the Company, Simon Marketing (a subsidiary of the Company), and a Trustee entered into an Indemnification Trust Agreement (the “Agreement” or the “Trust”), which required the Company and Simon Marketing to fund an irrevocable trust in the amount of $2.7 million. The Trust was set up to augment the Company’s existing insurance coverage for indemnifying directors, officers, and certain described consultants who are entitled to indemnification against liabilities arising out of their status as directors, officers, and/or consultants (individually “Indemnitee” or collectively “Indemnitees”). The Trust was to pay Indemnitees for amounts to which the Indemnitees were legally and properly entitled under the Company’s indemnity obligation and were not paid to the Indemnitees by another party. At December 31, 2005, these funds were included in restricted cash in the accompanying consolidated balance sheets. On March 1, 2006, the Trust expired by its own terms without any claims having been made and all funds held by the Trust plus accrued interest, less Trustee fees, totaling approximately $2.8 million were returned to the Company.

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8. Earnings Per Share Disclosure

The following is a reconciliation of the numerators and denominators of the basic and diluted EPS computation for “loss available to common stockholders” and other related disclosures required by FASB Statement No. 128, “Earnings per Share,” (in thousands, except share and per share data):

	For the Three Months Ended September 30,
	2006								2005
	Income			Shares		Per Share			Income			Shares		Per Share
	(Numerator)			(Denominator)		Amount			(Numerator)			(Denominator)		Amount
Basic and diluted EPS:
Loss from continuing operations	$	(498	)						$	(587	)
Preferred stock dividends		(320	)							(307	)
Loss from continuing operations available to common stockholders	$	(818	)		16,673,193	$	(0.05	)	$	(894	)		16,653,193	$	(0.05	)
Income (loss) from discontinued operations	$	90			16,673,193	$	0.01		$	(661	)		16,653,193	$	(0.04	)
Net loss	$	(408	)						$	(1,248	)
Preferred stock dividends		(320	)							(307	)
Net loss available to common stockholders	$	(728	)		16,673,193	$	(0.04	)	$	(1,555	)		16,653,193	$	(0.09	)

For the three months ended September 30, 2006 and 2005, 3,869,428 and 3,718,444 shares on a converted basis, respectively, of convertible preferred stock (see Note 10) were not included in the computation of diluted EPS, and 190,000 and 215,000 shares, respectively, related to stock options exercisable were not included in the computation of diluted EPS, as the average market price of the Company’s common stock did not exceed the weighted average exercise price of such options, because to do so would have been antidilutive.

	For the Nine Months Ended September 30,
	2006								2005
	Income			Shares		Per Share			Income			Shares		Per Share
	(Numerator)			(Denominator)		Amount			(Numerator)			(Denominator)		Amount
Basic and diluted EPS:
Loss from continuing operations	$	(2,134	)						$	(1,817	)
Preferred stock dividends		(948	)							(914	)
Loss from continuing operations available to common stockholders	$	(3,082	)		16,662,570	$	(0.19	)	$	(2,731	)		16,653,193	$	(0.16	)
Income (loss) from discontinued operations	$	604			16,662,570	$	0.04		$	(493	)		16,653,193	$	(0.03	)
Net loss	$	(1,530	)						$	(2,310	)
Preferred stock dividends		(948	)							(914	)
Net loss available to common stockholders	$	(2,478	)		16,662,570	$	(0.15	)	$	(3,224	)		16,653,193	$	(0.19	)

For the nine months ended September 30, 2006 and 2005, 3,831,481 and 3,681,978 shares on a converted basis, respectively, of convertible preferred stock (see Note 10) were not included in the computation of diluted EPS, and 202,179 and 194,203 shares, respectively, related to stock options exercisable were not included in the computation of diluted EPS, as the average market price of the Company’s common stock did not exceed the weighted average exercise price of such options, because to do so would have been antidilutive.

9. Loss (Gain) on Settlement and Other Income (Loss)

In February 2001, the Company sold its Corporate Promotions Group (“CPG”) business to Cyrk, Inc. (“Cyrk”), formerly known as Rockridge Partners, Inc., for $8 million in cash and a note in the amount of $2.3 million. Cyrk also assumed certain liabilities of the CPG business. One of the obligations assumed by Cyrk was to Winthrop Resources Corporation (“Winthrop”). As a condition to Cyrk assuming this obligation, however, the Company was required to provide a $4.2 million letter of credit as collateral for Winthrop in case Cyrk did not perform the assumed obligation. The available amount under this letter of credit reduced over time as the underlying obligation to Winthrop reduced. The letter of credit had semi-annual expirations through August 2007 when the underlying obligation would be satisfied.

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Because the Company remained secondarily liable under the Winthrop lease restructuring, recognizing a liability at inception for the fair value of the obligation was not required under the provisions of FASB Interpretation 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others—an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34.” However, in the fourth quarter of 2003, Cyrk informed the Company that it was continuing to suffer substantial financial difficulties and that it might not be able to continue to discharge its obligations to Winthrop which was secured by the Company’s letter of credit. As a result of the foregoing, and in accordance with the provisions of FASB Statement No. 5, “Accounting for Contingencies,” the Company recorded a charge in 2003 of $2.8 million with respect to the liability arising from the Winthrop lease.

During the three and nine months ended September 30, 2005, the Company reduced its contingent loss liability related to the Winthrop lease by $.4 million and $.8 million, respectively, included in Other Income (Loss) in Note 4, to reflect the reduction in the Winthrop liability. During the fourth quarter of 2005, Winthrop drew down the $1.6 million balance of the Company’s letter of credit due to Cyrk’s default on its obligations to Winthrop. An equal amount of the Company’s restricted cash was drawn down by the Company’s bank which had issued the letter of credit. Due to this default, Cyrk’s $2.3 million subordinated note payable to the Company, which was forgiven by the Company in 2003, was reinstated.

On January 31, 2006, the Company and Cyrk entered into a Settlement Agreement and Mutual General Release pursuant to which: (1) Cyrk agreed to pay $1.6 million to the Company, of which $435,000 was paid on or before March 1, 2006, and the balance is payable, pursuant to a subordinated note (the “New Subordinated Note”), in forty-one (41) approximately equal consecutive monthly installments beginning April 1, 2006; (ii) Cyrk entered into a Confession of Judgment in Washington State Court for all amounts owing to the Company under the New Subordinated Note and the $2.3 million note (the “Old Subordinated Note”); (iii) Cyrk’s parent company agreed to subordinate approximately $4.3 million of Cyrk debt to the debt owed to the Company by Cyrk; and (iv) Cyrk and the Company entered into mutual releases of all claims except those arising under the Settlement Agreement, the New Subordinated Note or the Confession Judgment. So long as Cyrk does not default on the New Subordinated Note, the Company has agreed not to enter the Confession of Judgment in court. Cyrk’s obligations under the New Subordinated Note and the Old Subordinated Note are subordinated to Cyrk’s obligations to the financial institution which is Cyrk’s senior lender, which obligations are secured by, among other things, substantially all of Cyrk’s assets. In the event of a default by Cyrk of its obligations under the New Subordinated Note, there is no assurance that the Company will be successful in enforcing the Confession of Judgment.

During the three and nine months ended September 30, 2006, approximately $90,000 and $644,000, respectively, in payments were received by the Company pursuant to the New Subordinated Note. Such amounts, less imputed interest, are included in Loss (Gain) on Settlement in Note 4, and an allowance was recorded for the balance of the New Subordinated Note.

10. Redeemable Preferred Stock

In November 1999, Overseas Toys, L.P., an affiliate of Yucaipa, a Los Angeles, California based investment firm, invested $25 million into the Company in exchange for preferred stock and a warrant to purchase additional preferred stock. Under the terms of the investment, the Company issued 25,000 shares of a newly authorized senior cumulative participating convertible preferred stock (“preferred stock”) to Yucaipa for $25 million. Yucaipa is entitled, at their option, to convert each share of preferred stock into common stock equal to the sum of $1,000 per share plus all accrued and unpaid dividends, divided by $8.25 (3,908,122 and 3,793,185 shares as of September 30, 2006, and December 31, 2005, respectively).

In connection with the issuance of the preferred stock, the Company also issued a warrant to purchase 15,000 shares of a newly authorized series of preferred stock at a purchase price of $15 million. Each share of this series of preferred stock issued upon exercise of the warrant was convertible, at Yucaipa’s option, into common stock equal to the sum of $1,000 per share plus all accrued and unpaid dividends, divided by $9.00 (1,666,667 shares). The warrant expired on November 10, 2004.

Yucaipa has voting rights equivalent to the number of shares of common stock into which their preferred stock is convertible on the relevant record date and has the right to appoint a total of three directors to the Company’s seven-member Board of Directors and to designate the Chairman of the Board. Also, Yucaipa is entitled to receive an annual dividend equal to 4%, paid quarterly, of the base liquidation preference of $1,000 per share outstanding, payable in cash or in-kind at the Company’s option.

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In the event of liquidation, dissolution or winding up of the affairs of the Company, Yucaipa, as holder of the preferred stock, will be entitled to receive the redemption price of $1,000 per share plus all accrued dividends plus: (1) (a) 7.5% of the amount that the Company’s retained earnings exceeds $75 million less (b) the aggregate amount of any cash dividends paid on common stock which are not in excess of the amount of dividends paid on the preferred stock, divided by (2) the total number of preferred shares outstanding as of such date (the “adjusted liquidation preference”), before any payment is made to other stockholders.

The Company may redeem all or a portion of the preferred stock at a price equal to the adjusted liquidation preference of each share, if the average closing price of the Company’s common stock has exceeded $12.00 for sixty consecutive trading days on or after November 10, 2002, or, any time on or after November 10, 2004. The preferred stock is subject to mandatory redemption if a change in control of the Company occurs.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is a discussion of the financial condition and results of operations of the Company for the three and nine months ended September 30, 2006, as compared to the same periods in the previous year. This discussion should be read in conjunction with the condensed consolidated financial statements of the Company and related Notes included elsewhere in this Form 10-Q.

Forward-Looking Statements and Associated Risks

From time to time, the Company may provide forward-looking information such as forecasts of expected future performance or statements about the Company’s plans and objectives, including certain information provided below. These forward-looking statements are based largely on the Company’s expectations and are subject to a number of risks and uncertainties, certain of which are beyond the Company’s control. The Company wishes to caution readers that actual results may differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company including, without limitation, as a result of factors described in Item 1A. Risk Factors included in the Company’s December 31, 2005, Form 10-K for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995.

General

Prior to August 2001, the Company was a multi-national, full service promotional marketing company. In August 2001, McDonald’s Corporation (“McDonald’s”), the Company’s principal customer, terminated its 25-year relationship with the Company as a result of the embezzlement by a former Company employee of winning game pieces from McDonald’s promotional games administered by the Company. Other customers also terminated their relationships with the Company, resulting in the Company no longer having a business. By April 2002, the Company had effectively eliminated a majority of its ongoing promotions business operations and was in the process of disposing of its assets and settling its liabilities related to the promotions business and defending and pursuing related litigation. Although the settlement of litigation between the Company and McDonald’s was completed in August 2004, this process is ongoing and will continue for some indefinite period primarily dependent upon on-going litigation. During the second quarter of 2002, the discontinued activities of the Company, consisting of revenues, operating costs, general and administrative costs and certain assets and liabilities associated with the Company’s promotions business, were classified as discontinued operations for financial reporting purposes.

As a result of the loss of its customers, the Company no longer has any operating business. Since August 2001, the Company has concentrated its efforts on reducing its costs and settling numerous claims, contractual obligations and pending litigation. As a result of these efforts, the Company has been able to resolve a significant number of outstanding liabilities that existed at December 31, 2001, or arose subsequent to that date. At September 30, 2006, the Company had reduced its workforce to 4 employees from 136 employees at December 31, 2001. The Company is currently managed by the Chief Executive Officer, together with a principal financial officer and an acting general counsel.

Outlook

As a result of the stockholders’ deficit at December 31, 2005, significant losses from operations, lack of operating revenue, and pending legal actions, the Company’s independent registered public accounting firm has expressed substantial doubt about the Company’s ability to continue as a going concern. The accompanying condensed consolidated financial

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statements do not include any adjustments that might result from the outcome of these uncertainties. The Company has taken significant actions and will continue to take further action to reduce its cost structure. The Board of Directors of the Company continues to consider various alternative courses of action for the Company going forward, including possibly acquiring or combining with one or more operating businesses. The Board of Directors has reviewed and analyzed a number of proposed transactions and will continue to do so until it can determine a course of action going forward to best benefit all shareholders, including the holder of the Company’s outstanding preferred stock. The Company cannot predict when the Directors will have developed a proposed course of action or whether any such course of action will be successful. Management believes it has sufficient capital resources and liquidity to operate the Company for the foreseeable future.

RESULTS OF CONTINUING AND DISCONTINUED OPERATIONS

The discontinued activities of the Company have been classified as discontinued operations in the accompanying condensed consolidated financial statements. Continuing operations represent the costs required to maintain the Company’s current corporate infrastructure that will enable the Board of Directors to pursue various alternative courses of action going forward. These costs primarily consist of the salaries and benefits of executive management and corporate finance staff, professional fees, Board of Director fees, and space and facility costs. The Company’s continuing operations and discontinued operations will be discussed separately, based on the respective financial results contained in the accompanying condensed consolidated financial statements and related notes.

RESULTS OF CONTINUING OPERATIONS

Three Months Ended September 30, 2006, Compared to Three Months Ended September 30, 2005

The Company generated no sales or gross profits during the three months ended September 30, 2006 and 2005.

General and administrative expenses totaled $.7 million during the three months ended September 30, 2006, compared to $.8 million during the same period in the prior year. The decrease was primarily due to a reduction in labor costs resulting from the former Co-Chief Executive Officer’s termination of his services to the Company in the second quarter of 2006.

Nine Months Ended September 30, 2006, Compared to Nine Months Ended September 30, 2005

The Company generated no sales or gross profits during the nine months ended September 30, 2006 and 2005.

General and administrative expenses totaled $2.8 million during the nine months ended September 30, 2006, compared to $2.3 million during the same period in the prior year. The increase was primarily due to lump sum payments totaling $.6 million made to certain directors upon termination of their services to the Company in accordance with their Executive Services Agreements, partially offset by a decrease in insurance costs and labor costs, resulting from the former Co-Chief Executive Officer’s termination of his services to the Company in the second quarter of 2006.

RESULTS OF DISCONTINUED OPERATIONS

Three Months Ended September 30, 2006, Compared to Three Months Ended September 30, 2005

The Company generated no sales or gross profits during the three months ended September 30, 2006 and 2005.

General and administrative expenses totaled $0 during the three months ended September 30, 2006, compared to $.1 million during the same period in the prior year. The decrease was primarily to due the completion of the liquidation of the Company’s subsidiaries in Europe and Hong Kong, during the first quarter of 2006.

Nine Months Ended September 30, 2006, Compared to Nine Months Ended September 30, 2005

The Company generated no sales or gross profits during the nine months ended September 30, 2006 and 2005.

General and administrative expenses totaled $0 during the nine months ended September 30, 2006, compared to $.2 million during the same period in the prior year. The decrease was primarily to due the completion of the liquidation of the Company’s subsidiaries in Europe and Hong Kong during the first quarter of 2006.

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LIQUIDITY AND CAPITAL RESOURCES

The matters discussed in the section “Absence of Operating Business; Going Concern” in Note 2 of the “Notes to Condensed Consolidated Financial Statements” have had and will continue to have a substantial adverse impact on the Company’s cash position. As a result of the stockholders’ deficit at December 31, 2005, significant losses from operations, lack of operating revenue, and pending legal actions, the Company’s independent registered public accounting firm has expressed substantial doubt about the Company’s ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

The Company continues to incur operating losses in 2006 within its continuing operations for the general and administrative expenses incurred to manage the affairs of the Company and resolve outstanding legal matters. Inasmuch as the Company no longer generates operating income and is unable to borrow funds, the source of current and future working capital is expected to be cash on hand, the recovery of certain long-term investments and any future proceeds from litigation. By utilizing cash received pursuant to the settlement with McDonald’s in 2004, management believes it has sufficient capital resources and liquidity to operate the Company for the foreseeable future.

The Board of Directors of the Company continues to consider various alternative courses of action for the Company going forward, including possibly acquiring or combining with one or more operating businesses. The Board of Directors has reviewed and analyzed a number of proposed transactions and will continue to do so until it can determine a course of action going forward to best benefit all shareholders, including the holder of the Company’s outstanding preferred stock. The Company cannot predict when the Directors will have developed a proposed course of action or whether any such course of action will be successful.

Continuing Operations

Working capital from continuing operations at September 30, 2006, was $17.2 million compared to $18.7 million at December 31, 2005.

Net cash used in operating activities from continuing operations during the nine months ended September 30, 2006, totaled $2.0 million primarily due to a loss from continuing operations of $2.1 million, partially offset by an increase in working capital items of $.1 million. Net cash used in operating activities from continuing operations during the nine months ended September 30, 2005, totaled $1.6 million primarily due to a loss from continuing operation of $1.8 million partially offset by an increase in working capital items of $.2 million.

Net cash provided by investing activities from continuing operations during the nine months ended September 30, 2006, totaled $2.8 million primarily due to the Company’s Indemnification Trust expiring by its own terms without any claims having been made and all funds held by the Trust plus accrued interest, less Trustee fees, totaling approximately $2.8 million being returned to the Company (see Note 7). Net cash provided by investing activities from continuing operations during the nine months ended September 30, 2005, totaled $.9 million due to a decrease in restricted cash.

Cash flows from financing activities during the nine months ended September 30, 2006, totaled $2,000 due to the exercise of 20,000 stock options at $.10 per share. There were no cash flows from financing activities during the nine months ended September 30, 2005.

Restricted cash included within continuing operations totaled $0 at September 30, 2006, and $2.8 million at December 31, 2005, which primarily consisted of amounts deposited into an irrevocable trust, totaling $2.7 million.

Discontinued Operations

Working capital from discontinued operations was a deficit of $(.2) million at September 30, 2006, compared to $(.3) million December 31, 2005.

Net cash provided by operating activities of discontinued operations during the nine months ended September 30, 2006, totaled $.5 million, primarily due to income from discontinued operations resulting from the gain associated with payments received on the New Subordinated Note from Cyrk (see Note 9). Net cash used in operating activities of discontinued operations during the nine months ended September 30, 2005, totaled $.4 million, primarily due to a loss from discontinued operations of $.5 million, partially offset by an increase in working capital items.

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Net cash provided by investing activities within discontinued operations during the nine months ended September 30, 2006, totaled $.1 million compared to net cash provided of $36,000 during the same period of the prior year. Both amounts were primarily due to a decrease in restricted cash which was transferred to continuing operations as discontinued operations already had sufficient assets from discontinued operations to be disposed of to cover liabilities from discontinued operations.

There were no financing activities within discontinued operations during the nine months ended September 30, 2006 and 2005.

Restricted cash included within discontinued operations at September 30, 2006, and December 31, 2005, totaled $.3 million and $.4 million, respectively, and primarily consisted of amounts deposited with lenders to satisfy the Company’s obligations pursuant to its outstanding standby letters of credit. These amounts are in addition to the restricted cash amounts, if any, included within continuing operations noted above.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The disclosure required by this Item is not material to the Company because the Company does not currently have any exposure to market rate sensitive instruments, as defined in this Item. Part of the Company’s discontinued operations consisted of certain consolidated subsidiaries that were denominated in foreign currencies. However, because the liquidation of these subsidiaries is complete, the Company is no longer exposed to foreign currency exchange risk.

ITEM 4. CONTROLS AND PROCEDURES

DISCLOSURE CONTROLS AND PROCEDURES: At September 30, 2006, the Company evaluated the effectiveness and design and operation of its disclosure controls and procedures. The Company’s disclosure controls and procedures are the controls and other procedures that the Company designed to ensure that it records, processes, summarizes and reports in a timely manner the information that it must disclose in reports that the Company files with or submits to the Securities and Exchange Commission. Anthony Kouba, the Chief Executive Officer of the Company, and Greg Mays, the Chief Financial Officer, reviewed and participated in this evaluation. Based on this evaluation, the Principal Executive and Financial Officers of the Company concluded that the Company’s disclosure controls and procedures were effective.

INTERNAL CONTROLS: Since the date of the evaluation described above, there have not been any significant changes in the Company’s internal controls or in other factors that could significantly affect those controls.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

Not applicable.

Item 1A. Risk Factors

Not applicable.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

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

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

        (a) Exhibits filed herewith:

31.1	Certification of J. Anthony Kouba pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
31.2	Certification of Greg Mays pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
32	Certification of J. Anthony Kouba and Greg Mays pursuant to Section 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: November 13, 2006	SIMON WORLDWIDE, INC.
	/s/ J. ANTHONY KOUBA
	J. Anthony Kouba
	Chief Executive Officer (duly authorized signatory)