Transition 10-K

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

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 x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

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

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

As of September 30, 2006, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the common stock held by non-affiliates of the registrant (based on the last sales price on that date of $27.50 as reported by the New York Stock Exchange, Inc.) was $990,958,430. The number of shares of registrant’s common stock, par value $0.01 per share, outstanding as of February 22, 2007, was 46,506,907

Certain portions of registrant’s Definitive Proxy Statement for 2007 are incorporated by reference in Parts II and III of this report.

In this Annual Report on Form 10-K references herein to “Catalina Marketing,” the “Company,” “we,” “us” or “our” refer to Catalina Marketing Corporation and its subsidiaries unless the context specifically states or implies otherwise. Words such as “today,” “current” or “currently,” or phrases such as “as of the date hereof” or “as of the date of this report,” refer to the date we are filing this Annual Report on Form 10-K with the Securities and Exchange Commission (“SEC”).

Certain information included in this Annual Report on Form 10-K, including Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements made in reliance upon the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements may be identified by the use of words such as “anticipate,” “estimates,” “should,” “expect,” “guidance,” “project,” “intend,” “plan,” “believe” and other words and terms of similar meaning, in connection with any discussion of our future business, results of operations, liquidity and operating or financial performance. Such forward-looking statements involve significant material known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. We cannot provide assurance that any future results, performance or achievements will be achieved.

Factors that may cause such differences include, but are not limited to, the changing market for promotional activities, especially as it relates to policies and programs of consumer packaged goods (“CPG”) and pharmaceutical products manufacturers, marketers and retailers; general business and economic conditions; acquisitions and investments; risks associated with our growth and finances; government and regulatory policies affecting us and our clients; potential adverse federal, state or local legislation or regulation or adverse determinations subjecting us to additional taxes; the pricing and availability of alternative forms of advertising; our ability to execute on our various business plans and to test, expand and install our networks in new markets and retail channels; the pace of installation of our networks including as it relates to the installation of color printers and our other networks in existing and future retail channels, the acceptance by our manufacturer clients and retailers of color printers and related new and additional terms and conditions, the success of new services and businesses and the pace of their implementation, risks associated with reliance on the performance and financial condition of manufacturers, marketers and retailers; technological developments; changes in the competitive and regulatory environments in which we and our clients operate including, without limitation, shifts in consumer purchase patterns and habits such as the channels through which consumers purchase certain types of products; seasonal variations; actual promotional activities and programs with our clients; the success of new services and businesses and the pace of their implementation; our ability to maintain favorable client relationships; our ability to avoid or mitigate material adverse judgments against, or other adverse results affecting, us in the existing shareholder and derivative litigation described in Item 3 — “Legal Proceedings,” or any additional regulatory action, litigation or other proceeding that may be commenced; our ability to maintain effective disclosure controls and procedures and internal control structure; our ability to attract, motivate and/or retain key employees. For a further discussion of certain of these risks, uncertainties and other factors, see Item 1A — “Risk Factors.”

We undertake no obligation to make public indication of changes in, update or revise any of our forward-looking statements, whether as a result of new information, future events or otherwise.

In August 2006, our Board of Directors approved a change in our fiscal year end from March 31st to December 31st. In conjunction with the change in our fiscal year-end, we eliminated the three-month reporting lag previously used for reporting the results of Catalina Marketing International (“CMI”). As of December 31, 2006, all of our consolidated subsidiaries had the same balance sheet date. The reported results of operations for the nine-months ended December 31, 2006 include the results of CMI for the period January 1, 2006 through September 30, 2006. The results of operations for CMI for the three-months ended December 31, 2006 are included as an adjustment to retained earnings and are not reflected in the consolidated income statement. Beginning January 1, 2007, all subsidiaries will have the same fiscal reporting period. The change in our fiscal year end better aligns our reported operating periods with the fiscal year of the majority of our CPG manufacturer and pharmaceutical manufacturer clients, while the elimination of the reporting lag for CMI allows us to report the results of our foreign subsidiaries in a more timely manner.

Catalina Marketing Corporation, a Delaware corporation, and its subsidiaries, provide behavior-based communications, developed and distributed for CPG manufacturers, pharmaceutical manufacturers and marketers and retailers. Our primary business was developed to provide consumers with in-store coupons delivered based upon purchase behavior and distributed primarily in supermarkets. Today, we offer behavior-based, targeted-marketing services and programs globally through a variety of distribution channels. These marketing solutions, including discount coupons, loyalty marketing programs, patient education newsletters, in-store instant-win games and other consumer communications, are delivered directly to shoppers by various means. By specifying how a particular consumer transaction will “trigger” a communication to print, manufacturers and retailers can deliver customized communications to only the consumers they wish to reach. We track actual purchase behavior and target consumers at the retail checkout counter and prescription medication users at the pharmacy checkout counters, primarily through the use of Universal Product Code-based scanner technology and National Drug Code information, to deliver customized communications to retail and pharmaceutical consumers.

As of December 31, 2006, we employed approximately 1,200 people in offices throughout the United States, Europe and Japan.

We are organized and managed by segments, which include the following operations: Catalina Marketing Services (“CMS”), Catalina Health Resource (“CHR”) and Catalina Marketing International (“CMI”).

As of December 31, 2006, the Catalina Marketing Network^{^®}, which supports CMS, was installed in over 22,000 retail stores in the United States, primarily supermarkets and retail drug stores, and reached approximately 251 million shoppers weekly. As of the same date, the Health Resource Network, which supports CHR, was installed in over 13,200 pharmacy outlets. CMI’s networks were installed in approximately 8,000 retail locations, primarily supermarkets and hypermarkets in Europe and Japan, and reached approximately 88 million shoppers weekly.

For a summary of the financial results of our reportable segments see Item 8 – “Consolidated Financial Statements and Supplementary Data – Note 18 – Segment and Geographic Disclosures”.

CMS services domestic retailers and consumer product manufacturers. Using the Catalina Marketing Network^{^®}, this operating segment specializes in behavior-based marketing communications. The primary service line of CMS is the in-store delivery of communications at the checkout counter of a retailer. We link our proprietary software, computers, central databases and printers with a retailer’s point-of-sale controller and scanning equipment. The network prints customized communications at the point-of-sale triggered based on product Universal Product Codes, historical purchase behavior or other scanned information. The printed communications are handed to consumers by the cashier at the end of the shopping transaction.

CMS generates revenues primarily by providing in-store, electronic marketing delivery services via the Catalina Marketing Network^{^®}. Our clients contract with CMS to deliver printed communications at the point-of-sale and typically pay us a fee for each communication delivered. In general, CMS recognizes revenue at the time a communication is delivered at the checkout counter of the retail store. The amount of revenue recognized is based on the total number of communications delivered multiplied by a per-print fee. We generally bill our clients a minimum category fee in advance of the actual delivery. Contracts for delivery include a minimum number of targeted communications for a specified category, or categories, within a four-week period referred to as a “cycle.” CMS divides the calendar year into thirteen cycles. The delivery of communications is based upon particular triggering transactions that are registered at the point-of-sale (i.e., the checkout counter of a retail store). The majority of our contracts cover multiple cycles.

The two primary programs of CMS are Checkout Coupon^® and Checkout Direct^®. Through our Checkout Coupon^® service, we deliver marketing communications to consumers at checkout, based on the products included in their current shopping basket. Through our Checkout Direct^® service, we deliver marketing communications to consumers at the checkout counter using historical purchase behavior, which is collected using “frequent shopper” or similar identification methods. In addition to Checkout Coupon^® and Checkout Direct^®, CMS offers Catalina Category Marketing (“CCM”), a behavior-based marketing program designed to drive more efficient volume for the manufacturer and increases loyalty to the retailer while providing increased value to the consumer. The typical four-week window for a CCM program provides a focal point for trade merchandising collaboration between the manufacturer and retailer. CCM enables consumers who purchase promoted products to receive incentives redeemable toward any purchase during their next shopping trip.

The services provided to retailers by CMS include in-store promotional prints and analytical services that enable retailers to focus on changing consumer shopping patterns with targeted communications, motivate consumers to visit a retailer more frequently, increase the size of purchase transactions, purchase specific products and develop retailer loyalty. We typically enter into agreements with retail chains to install our network in the retail stores of the chain for an initial specified term. In general, we pay retailer fees to, and exchange services with, the retailer based on the number of manufacturer sponsored communications printed. Because of the concentration of ownership in the retail grocery industry, we are dependent on a limited number of retailers that supply the primary points of distribution for the communications of our manufacturer clients. Approximately 57% of the printed in-store communications provided by CMS for our clients during the nine months ended December 31, 2006 were generated from within the stores belonging to five retail chains. If any of these retail chains were to decide to not renew their contract with us to provide our services, or if they materially reduce the number of point-of-sale locations included on our network, a material reduction in our revenues could result if we were unable to replace these locations or the number of transactions processed by these locations.

CMS is in the process of installing approximately 140,000 color inkjet printers, which will be supplied by Epson America, Inc. (“Epson”), in retailers within the Catalina Marketing Network^®. The installation of the new color printers and associated software is expected to be complete in the summer of 2007. When the color printer installation is complete, we estimate that color communications will account for approximately 85% of CMS distribution.

We own the equipment installed in each retail store, including a printer at each checkout lane linked by a computer on the retailer’s premises to the retailer’s point-of-sale controller and scanning equipment. We operate two data processing facilities in the United States that employ various technologies to transmit instructions to computers installed in retail stores and retrieve program data. All of the equipment and supplies, including computers, printers, paper and ink used in a retail installation are purchased by us from outside sources. The store equipment and supplies used by our network generally are managed, installed and maintained by our corporate support staff. We outsource certain aspects of the installation and maintenance of our network in retail locations to third- party contractors. We currently use a limited number of primary vendors for equipment and supplies, including one supplier for ink. With the exception of the new color printers which are supplied solely by Epson, we believe that alternate sources of supply for such materials are available without material interruption to our business.

CMS had a single client that accounted for approximately 14.9% of revenues generated by CMS for the nine months ended December 31, 2006. That client also accounted for 17.6% and 18.9% of revenues generated by CMS for the twelve months ended March 31, 2006 and 2005, respectively. We believe that if we lost that client it could have a material adverse effect on CMS as well as on the Company taken as a whole.

CHR provides services that assist pharmaceutical and CPG manufacturers, as well as retail pharmacies, in providing consumers with condition-specific health information and direct-to-patient communications. CHR’s programs and services enable our clients to inform, acquire and retain patients by providing educational information about their treatment along with the benefits of compliance, and by encouraging dialogue between patients and their healthcare professionals while preserving patient privacy.

CHR’s primary service offerings employ an in-store, prescription information-based technology to provide targeted, direct-to-patient communications on behalf of our pharmaceutical manufacturer and CPG clients. These communication services include messages and educational information delivered to healthcare patients at pharmacies participating in the Health Resource Network. Our Health Resource Network utilizes a proprietary software system that gives our clients the opportunity to effectively communicate with patients and assists patients in making more informed healthcare decisions.

CHR primarily generates revenues by printing messages for pharmaceutical and CPG manufacturers via PATIENTLink^™. Distribution of PATIENTLink^™ is generated by proprietary technology that can target the consumer based on a variety or combination of factors, including demographic data such as age and gender information, transactional data, primarily the National Drug Codes found on all prescription drugs, and de-identified patient prescription history and information. CHR does not receive or retain personally identifiable data or trigger distribution of PATIENTLink^™ based on a consumer’s name, address or other personally identifiable information. When a prescription is processed via the Health Resource Network, a customized PATIENTLink^™ print with prescription information, therapeutically relevant editorial content and product information is printed in the pharmacy and given to the consumer by their pharmacist along with that consumer’s medication. Approximately 25% of PATIENTLink^™ prints are sponsored by pharmaceutical or CPG manufacturers and generate revenues for CHR.

CHR enters into agreements with retail pharmacy chains to install the Health Resource Network in pharmacies within the chain. Upon installation, the retailer generally agrees to use the Health Resource Network in its pharmacy for a minimum period of time. CHR pays retailer fees to, and exchanges services with, the retail pharmacy based primarily on the number of PATIENTLink^™ prints.

Approximately 89% of the newsletters printed during the nine months ended December 31, 2006, were generated from stores belonging to three retail pharmacy chains. If any of these retail pharmacy chains did not renew their contract with us, or if they were to materially reduce the number of pharmacy locations participating in our network, a material reduction in CHR’s revenues could result if we were unable to either replace these pharmacy locations or the number of transactions processed by the retail pharmacy chain.

CHR operates the Health Resource Network through a data processing facility that communicates via various technologies with the computer systems of retail pharmacies or computers installed in the pharmacies to send programming instructions and retrieve program data. The Health Resource Network primarily uses software installed on a retail pharmacy’s point-of-sale system which eliminates the need for a separate CHR-operated, on-premises computer in each location. In certain installations CHR’s network and/or printer is connected to the retail pharmacy’s point-of-sale controller by an on-premise computer. In the majority of circumstances, the equipment is owned by the retail pharmacy. All of the equipment owned by us is generic and purchased from third-party vendors. Typically, pharmacies are contractually obligated to provide supplies, including toner and paper. We believe that alternate sources of equipment and supplies can be secured without significant interruption to CHR’s business.

CHR’s client base varies from year to year and as such a client may be significant in one year and not in another. CHR’s top five clients accounted for 58.0%, 58.1% and 51.8% of its revenues in the nine and twelve month periods ended December 31, 2006, March 31, 2006 and March 31, 2005, respectively.

The Catalina Marketing Network^® operates internationally in a manner similar to the domestic CMS business. CMI offers a full range of targeted marketing solutions to many of the top CPG manufacturers and maintains relationships with major supermarket, hypermarket and other retailers. In addition, in certain European markets, we work with clients using a business model we refer to as “retail centric” in that we derive revenue from the retailers for managing loyalty programs and in-store promotions.

As of December 31, 2006, we provided in-store electronic targeted marketing services for manufacturers and retailers in France, Italy, the United Kingdom, Germany, Japan, Belgium and the Netherlands. The network was installed in almost 8,000 retail locations in Europe and Japan and reached approximately 88 million consumers each week.

CMI had a single client that accounted for approximately 14.3% of revenues generated by this segment for the nine months ended December 31, 2006. These corresponding amounts were 13.0% and 19.8% of total CMI revenues for the twelve months March 31, 2006 and 2005, respectively. Additionally, CMI had a second client that accounted for approximately 12.8% of revenues generated by this segment for the nine months ended December 31, 2006. The amounts for this client were under 10.0% for the previous two fiscal years.

As previously disclosed, we were notified in the quarter ended September 30, 2006 by two of CMI’s retail clients that they did not intend to renew their contracts effective December 31, 2006 and March 31, 2007. For additional discussion related to these two clients, see Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

In the nine months ended December 31, 2006, CMI revenues accounted for approximately 20.0% of our consolidated revenues. Our international operations are subject to the normal risks of foreign operations, including: changes in local business and economic conditions, political uncertainties, adapting to different regulatory requirements and interest rate movements. Certain of these risks have affected our business in the past and may also have a material adverse effect on our business, results of operations and financial condition in the future. In addition, CMI sales are billed in foreign currencies and are subject to currency exchange fluctuations as are intercompany royalties, management fees and financing activities. Changes in the value of the U.S. dollar compared with foreign currencies may have an impact on our revenues and margins. We cannot predict the direction or magnitude of currency fluctuations. In general, we purchase goods and services in local currencies. In Japan, we borrow locally to meet our financing requirements, which provides certain natural and economic hedges, but otherwise have not engaged in currency hedge transactions.

In November 2003, we announced our intent to divest our outdoor billboard business in Japan, Direct Marketing Services and Catalina Marketing Research Solutions, which we refer to herein as Japan Billboard, DMS, and CMRS, respectively. These entities, which were deemed not to be strategically aligned with our core businesses, were subsequently sold in fiscal 2005. For a complete discussion of the operating results of our discontinued operations, see Item 8 — “Consolidated Financial Statements and Supplementary Data — Note 19 — Discontinued Operations”.

We compete for CPG and pharmaceutical manufacturer advertising, marketing and consumer promotion budgets with a wide range of alternative media, including television, radio, print and direct mail advertising, as well as several alternative in-store and point-of-sale programs. Our business segments compete with various traditional coupon delivery methods including free-standing inserts, newspapers, direct mail, magazines and in- or on-product packaging, as well as other in-store marketing companies and retail solution providers that use a variety of coupon, promotion or other advertising delivery methods. We could experience increased competition from changes and advances in technology. Furthermore, as sales of certain grocery products, particularly in certain specialized consumer product categories, shift from traditional grocery retailers to mass merchandisers and value-chains and other retail channels, our ability to reach shoppers through our existing retail network of traditional grocery stores and pharmacies may be impacted in certain consumer product categories.

We compete for advertising and promotional spending based on the efficiencies afforded by a unique kind of targeting based on consumer shopping behavior, called behavior-based marketing. Our method of behavior-based marketing requires an efficient network of retail point-of-sale systems, proprietary software and database systems that target individual consumers based on shopping behavior exhibited at the point-of-sale. Our competitive advantages in behavior-based marketing are achieved through the number of shoppers reached through our networks, the number of household IDs and associated purchase histories available in our database and our ability to deliver consumer insights and influence consumer buying behavior.

Our research and development efforts are generally for pilot-project execution to create, test and support new applications for the Catalina Marketing Network^{^®} and Health Resource Network, market research, software development and system upgrades. For the nine months ended December 31, 2006, expenditures for research and development were $0.4 million. These amounts were $0.9 million and $2.0 million for the twelve months ended March 31, 2006 and 2005, respectively.

We currently hold, and have applications pending for, numerous United States and foreign patents relating to our products and services including patents related to the delivery of targeted communications as well as improvements and additional inventions related to our current and contemplated businesses, programs and services. In addition, we regard certain computer software as proprietary and subject to copyright protection. We also hold, and have pending, numerous service marks and trademarks related to our entities, businesses, products and services that have associated goodwill in the relevant marketplace. We believe that certain intellectual property owned or licensed by us gives us a competitive advantage in certain geographic regions in which we operate. While we continue to pursue protection for intellectual property rights that we have developed, certain of our patents have and will expire and there is no guarantee that we will be able to secure additional patent rights. The expiration of a patent or loss of patent protection resulting from a legal challenge may result in significant competition from third parties with respect to the covered product or service in a short period of time. The actual protection afforded by a patent, which can vary from country to country, depends upon the type of patent, the scope of its coverage and the availability of legal remedies in the relevant country. Although we believe that our intellectual property provides us with a competitive advantage, we believe that we are not dependent upon a single patent, or a specific series of patents, the loss of which would have a material adverse effect on our business. In appropriate situations, we seek to vigorously protect our proprietary intellectual property rights.

Our operations are subject to regulation in the United States and in other countries in which we do business. We are subject to federal, state and foreign laws governing privacy and the use of consumer information collected by us. In the United States, various federal agencies including the Federal Trade Commission, the Department of Treasury’s Alcohol and Tobacco Tax and Trade Bureau and various state agencies have promulgated regulations that restrict the advertising of tobacco, dairy and alcohol beverage products. These regulations vary from state to state and can restrict a manufacturer and/or a retailer’s ability to issue coupons or print other messages and incentives for tobacco, dairy and alcohol beverage products. Other federal, state and foreign laws also restrict the content and sponsorship of regulated product coupons and messages.

CHR operates in a highly regulated business environment. In the United States, the Food and Drug Administration of the Department of Health and Human Services (“HHS”) regulates the form and content of prescription drug promotions, such as the messaging distributed in PATIENTLink™. In addition, federal privacy regulations, administered by the Office of Civil Rights of HHS, affect the ability of CHR and its retail pharmacy partners to use patient-specific pharmacy information to provide customized

PATIENTLink™ prints. Some states have adopted, or are considering adopting, state medical privacy requirements that could be interpreted more stringently than federal medical privacy requirements. Federal antikickback requirements, administered by the HHS Office of the Inspector General, could be interpreted as restricting drug manufacturer-sponsored programs such as PATIENTLink™. State antikickback and consumer protection statutes could also be interpreted to impose similar restrictions.

In all jurisdictions in which CMI operates, we are also subject to the laws and regulations that govern foreign investment, foreign trade and currency exchange transactions. These laws and regulations may limit our ability to repatriate cash as dividends or otherwise to the United States and may limit our ability to convert foreign currency cash flows into U.S. dollars. Furthermore, in foreign jurisdictions we are subject to laws and regulations which govern the type or design of programs that we can run on our network or the content of communications and the management of data captured by our networks.

We are subject to the information requirements of the Exchange Act. Therefore, we file periodic reports, proxy statements and other information with the SEC. Such reports, proxy statements and other information may be obtained by visiting the Public Reference Room of the SEC at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically.

Our website address is www.catalinamarketing.com. We make available, free of charge, on or through our website, our annual, quarterly and current reports and any amendments to those reports, as soon as reasonably practicable after electronically filing such reports with the SEC. Information posted on our website is not part of this Annual Report on Form 10-K or any other report filed with the SEC in satisfaction of the requirements of the Exchange Act.

Increased competition could reduce the demand for our services, which could have a material adverse effect on our business, financial condition, results of operations and business prospects.

Competition in the promotions and marketing services business is intense and includes many competitors. We compete for CPG and pharmaceutical manufacturer advertising, education and awareness, and consumer promotion budgets with a wide range of media including television, radio, print and direct mail advertising, as well as several alternative in-store and point-of-sale programs and new technologies. While we believe we provide unique, cost-effective targeted marketing services, there are many parameters on which a CPG manufacturer, pharmaceutical manufacturer or retailer may base its decision to allocate advertising or promotional expenditures, and there can be no assurance that our services will continue to compete effectively against other formats or that CPG and pharmaceutical manufacturers and retailers will continue to use our marketing services. We also expect our competitors to continue to improve the performance of their current products or services, to reduce sales prices of their existing products and services and to introduce new products, services or technologies that may offer greater performance and improved pricing. In addition, changes and advances in technology or product offering from competitors and other solutions providers may enable merchants and retail companies to implement or install their own proprietary point-of-sale systems or provide other solutions for the distribution of communications.

A shift in consumer purchasing trends for certain categories of products from traditional retail supermarkets may cause a decrease in the utilization of our services.

Significant retailers including mass marketers and value chains have not installed our networks and/or do not use us for their marketing services for the distribution of point-of-sale communications. Many retailers utilize our competitors and other solutions for such services and some conduct such services in-house or otherwise allocate their marketing dollars to other media outlets and marketing strategies. Mass marketers and value chains have significantly increased their presence in the grocery business and retail industry over the last several years. Many mass marketers and value chains, including Wal-Mart, have not installed our network or are not our clients. As mass marketers and value chains, such as Wal-Mart, increase their presence in the grocery business, the percentage of retail grocery purchases that occur in stores where our networks are installed may decrease. The impact of the increased presence of mass marketers and value chains is particularly pronounced in certain product categories. If consumers continue to shift to alternative shopping channels, like club stores, mass merchandisers and value chains, the ability and effectiveness of the Catalina Marketing Network^® to reach retail shoppers, particularly in certain product categories, may decline. Any such change in shopping behavior could have a material adverse effect on our results of operations or financial condition.

Our business is dependent on the promotional spending of our manufacturer and retail partners, which may be effected by seasonal, economic, regulatory and other factors over which we have no control.

In general, we expect our revenues to be greater during periods of increased promotional activity by manufacturers. As a result, the pattern of promotion distribution can be irregular and may change from period to period depending on various factors, including the economy, competition, the timing of new product introductions and the timing of manufacturers’ promotion planning and implementation. In addition, this pattern may be affected by seasonal factors such as holiday-related promotions and annual budgeting processes affecting when our clients use promotional and consumer-related expenditure budgets. With respect to CHR, spending by our pharmaceutical manufacturer clients may be impacted by a variety of factors over which we have no control including the rate of introduction of new drugs to the market, the timing of drugs coming off patent protection and other factors which limit the sale, distribution or application of certain pharmaceutical products. These factors, as well as the overall changes in the number of contracts we have with retailer and manufacturer clients, the timing of changes of the installed store base and access to revenue producing transactions, may impact our revenues and profits in any particular period.

Our success depends on our relationships with retailers and pharmacies that provide access to consumers in their retail locations and we rely on data provided from retailers and pharmacies to trigger and report on the delivery of our services.

We depend on retail stores and pharmacies to provide access to transactions with consumers and allow us to install the Catalina Marketing Network^® and Health Resource Network on their premises. We believe that our relationships with our current retail and pharmacy clients are strong; however, in the past, some retailers and pharmacies have required us to remove our network from their stores or negotiate significantly different or less advantageous terms in order for us to maintain networks in their stores. Should any of our significant retailers or pharmacy chains reduce in size, cease to exist, not renew our agreements, require us to remove our network equipment or negotiate terms with us which are less advantageous than our current agreements, the ability and effectiveness of the Catalina Marketing Network^® or Health Resource Network to reach retail shoppers and access transactions could be reduced and/or the profitability of our operations could be reduced.

Consolidations between our current retail and pharmacy network partners and companies that do not utilize our networks may decrease the installation base of our networks and reduce the utilization of our services or increase our operating costs. Internationally, certain value chains and mass marketers continue to make acquisitions in the retail industry. Further significant acquisitions and consolidations could have a material impact on our ability to maintain and expand our international operations.

In addition, we rely on data provided by our retailers and pharmacies to trigger and report on the delivery of our services on behalf of our manufacturer clients as well as provide a database to target transactions based on purchase history. Any change, interruption or inaccuracy of the data provided by our retailers and pharmacies could adversely impact the services we offer to our clients as well as the data we utilize to report on transactions.

We may not succeed in our effort to develop new services or enter new retail channels and achieve future growth.

A key element of our growth strategy is the development and sale of new products, services and technologies and entry into new retail channels. To retain and attract manufacturers, retailers and pharmacies, we believe that we must continue to introduce additional successful services; the development and deployment of which may require significant expenditures. While new products, services and technologies are currently under development, there can be no assurance that we will be able to successfully develop and market them to our clients and retailers. In addition, while we have dedicated significant resources to expanding our CMS business into new retail channels beyond our foundation in the grocery channel, including installations in drug stores and mass merchandisers and pilot tests in convenience stores, there is no guaranty that we will be able to successfully operate in these retail channels, or that we will achieve revenue growth from these channels. Our inability or failure to enter new retail channels, devise new marketing services or to complete the development or implementation of particular services for use on a large scale, or the failure of such services to achieve market acceptance, could adversely affect our ability to achieve a significant part of our growth strategy. The absence of such growth could have a material adverse effect on our business, results of operations and financial condition.

Our enhanced and expanded service offerings, including the deployment of color printers, have and will continue to require significant capital expenditures.

We have announced that we are currently working on the deployment of color ink jet printers in our existing retail grocery network in place of certain of our existing thermal black-and-white printers, and that we have and continue to pursue agreements to install our networks in new retail channels, including retail drug stores and mass merchandisers. In addition, we have and continue to pursue other opportunities in new and existing retail channels to deploy color printers. These efforts have and may continue to require significant capital expenditures. In addition, these efforts differ to some degree from our historical business and, as a result, carry additional risks.

The deployment of color ink jet printers in our existing retail network will require substantial expenditures to acquire and install such printers and, in some instances, will replace existing thermal black-and-white printers that may not have reached the end of their useful lives, which we plan to redeploy elsewhere. Color printers will require new and additional efforts and potential costs to be expended by our retailers, including the use and management of additional consumables, such as ink and non-thermal paper, changes in software, network and bandwidth requirements, hardware and wiring and other logistical steps not required by our current network of thermal black-and-white printers. While we are working with Epson and other vendors to try to simplify the use, servicing and supply of such printers and the required consumables, we cannot provide assurance that difficulties will not be encountered in installing, using and servicing such printers and the consumables. In addition, while we believe the design of the printers and consumables will operate effectively and efficiently when fully deployed and operated in the field, due to the fact that the printers are highly customized and have not been tested for an extended period of operation, there can be no assurance that the ongoing manufacture and delivery of the printers and consumables will move forward as currently planned, that the printers and consumables will operate in accordance with specifications, that we will experience operating reliability consistent with our current thermal black-and-white printers or that we will not experience a significant number of failures resulting from design, manufacture, operation or other causes. Furthermore, while we expect color printing to enhance the effectiveness of our clients’ marketing efforts or increase the redemption rates of incentives printed on our network over an extended period of time, a long term track record verifying such goal has not yet been established. Hence, the deployment of color printers will involve the use of a substantial amount of capital and other expenditures with a risk that difficulties will be encountered in installing and operating them and that they may not gain the acceptance we desire from retailers and our manufacturer clients. Such outcome could have a material adverse effect on our results of operations and financial condition.

The deployment and expansion of our existing networks in new retail channels and markets that we have not historically served, including the retail drug store market, will require a significant amount of capital and other expenditures. Manufacturer clients using our services for new retail channels may differ, to some extent, from our historical client base due to the nature and quantity of items carried in these retail channels. While we expect the deployment of our network in new retail channels to enhance the effectiveness of our clients’ marketing efforts, a track record verifying such goal has not yet been established. As a result, the deployment of our network in new retail channels will involve the use of a substantial amount of capital and other expenditures with a risk that it may not gain the acceptance we desire from our clients. Such result could have a material adverse effect on our results of operations and financial condition.

Significant anticipated new initiatives, including the deployment of color printers, will impact our resources and management.

We have announced that we are currently working on several significant initiatives including the deployment of color printers in our CMS grocery network, pursuit of new retail channels both domestically and internationally and further international expansion. As a result of these initiatives, subject to the timing and success of these initiatives, we will experience an increased demand on our resources and management.

We are subject to risks which can disrupt our operations, cause loss of data center capacity or interruption of telecommunication links that could adversely affect our business.

Our ability to protect our data centers against damage from fire, power loss, telecommunications failure, hurricanes or other disasters is critical to our future. We believe we have taken reasonable precautions to protect our data centers and telecommunication links from events that could interrupt our operations. Any damage to our data centers or any failure of our telecommunications links that causes interruptions in our operations could materially adversely affect our ability to meet our clients’ requirements, which could result in a material adverse effect on our results of operations and financial condition.

We are subject to risks associated with the selection, availability and cost of insurance.

We have recently observed rapidly changing conditions in certain areas of the traditional commercial insurance markets, in particular related to property and business interruption insurance for hazards related to severe storms, hurricanes and flooding. Such conditions have and may continue to result in higher premium costs, higher policy deductibles, lower coverage limits and may also result in certain policy exclusions. As a result of the conditions in the insurance markets and the cost and/or availability of insurance, we retain some portion or all of our insurable risks with respect to these hazards. Any unforeseen or catastrophic losses in excess of insured limits or risks and hazards for which we do not carry insurance may have a material adverse affect on our results of operations or financial condition.

A breach of our network security could result in liability to us and deter customers from using our services.

Our networks may be vulnerable to unauthorized access, computer viruses and other disruptive problems. Any of the foregoing problems could result in liability to us, decrease the confidence of our manufacturer and retail client base and deter customers from using our services. Unauthorized access could jeopardize the security of confidential information related to our Company stored in our computer systems. Eliminating computer viruses and alleviating other security problems may require interruptions, delays or cessation of service, cause us to incur significant costs to remedy the problem and divert management’s attention. We can provide no assurance that the security measures we have implemented will not be circumvented or that any failure of these measures will not have a material adverse effect on our ability to obtain and retain customers. Any of these factors could have a material adverse effect on our business.

Failure to defend our intellectual property rights may harm our competitive position, and litigation to protect our intellectual property rights could be costly.

We hold United States and foreign patents on various aspects of our business including the process of promotion and communication distribution, and have applied for additional patents. In addition, we regard certain computer software and each service application as proprietary and attempt to protect them through copyright and trade secret laws and internal non-disclosure agreements and similar safeguards. In addition, we are working to expand into certain foreign markets where we do not currently hold patent protection or where we have limited patent coverage which may subject us to increased competition in these markets. As a result of the foregoing, certain aspects of our services may not be adequately protected from infringement or copying. Further, there can be no assurance that our patents or trademarks would be upheld if challenged or that competitors might not develop similar or superior processes or services outside the protection of any patents issued to us.

Third parties may infringe or misappropriate our patents or other intellectual property rights, which could have a material adverse effect on our business, financial condition or operating results. The actions we take to protect our patents and other proprietary rights may not be adequate. Litigation may be necessary to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of the proprietary rights of others. We cannot provide assurance that we will be able to prevent infringement of our intellectual property rights or misappropriation of our proprietary information. In addition, litigation is time-consuming and expensive to defend and could result in the diversion of our time and resources. Any claims from third parties may also result in limitations on our ability to use the intellectual property subject to these claims.

Intellectual property litigation against us could be costly and could result in the loss of significant rights.

We expect that, as we continue to expand our service offerings and the number of competitors in targeted marketing grows, we may be increasingly subject to intellectual property infringement, unfair competition and related claims against us. Third parties may also seek to invalidate certain of our patents. In addition, competitors and third parties may, in the future, name our clients as defendants in lawsuits, which may cause these clients to terminate their relationships with us. Our efforts to defend these actions may not be successful. Our failure to prevail in this type of litigation could result in our paying monetary damages (which could be tripled if the infringement is found to have been willful); an injunction requiring us to stop offering our services in their current form; our having to redesign our technology and business methods, which could be costly and time-consuming, even where a redesign is feasible; or our having to pay fees to license intellectual property rights, which may result in unanticipated or higher operating costs. Any third-party claims, with or without merit, could be time consuming, result in costly litigation and damages, cause us to reduce or alter our services, delay or prevent service enhancements or require us to enter into royalty or licensing agreements.

Legislation relating to consumer privacy and changes in government regulations or the interpretation of such regulations could affect our ability to deliver targeted communications and collect data that we use in providing our marketing services, which could negatively affect our ability to satisfy our clients’ needs.

The enactment of legislation related to consumer privacy issues could have a material adverse impact on our marketing services. Any such legislation could place restrictions upon the collection and use of information that is currently legally available or the manner in which we collect, manage and store this data or could materially increase our cost of managing or collecting some data. Legislation or industry regulation could also prohibit us from collecting or disseminating certain types of data, coupons, promotions, messages or newsletters, which could adversely affect our ability to meet our clients’ requirements.

With respect to CHR’s Health Resource Network, our ability to provide consumers with condition-specific health information and direct-to-patient communications may be adversely affected by concerns over heath regulatory guidelines, interpretation by the Food and Drug Administration of regulations related to the promotion of pharmaceutical products and laws, regulations and publicity regarding a patient’s right to privacy. Regulatory changes in some jurisdictions have increased manufacturer and retailer sensitivity and selectiveness as to what types of messages they will distribute in these jurisdictions. In addition, changes in the laws and regulations or manner of enforcement of such laws and regulations could negatively impact our business and cause us to change our

services or systems. While we are currently working with our manufacturer and retailer clients to find an adequate solution to these concerns, there is no guarantee that we will be able to continue to distribute prints for these clients or that there will not be additional changes in the laws and regulations in these and other jurisdictions that will further impact our operations.

Due to inherent limitations, there can be no assurance that our system of disclosure and internal controls and procedures will be successful in preventing all errors or fraud, or in informing management of all material information in a timely manner.

Our management, including our CEO and CFO, does not expect that our disclosure controls and internal controls and procedures will prevent all error and all fraud. 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. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.

The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, a control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of these inherent limitations, misstatements due to error or fraud may occur and may not be detected.

There are inherent uncertainties involved in estimates, judgments and assumptions used in the preparation of financial statements in accordance with U. S. GAAP. Any changes in estimates, judgments and assumptions could have a material adverse effect on our business, financial position and results of operations.

The consolidated and condensed consolidated financial statements included in the periodic reports we file with the SEC are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of financial statements in accordance with U.S. GAAP involves making estimates, judgments and assumptions that affect reported amounts of assets, liabilities, revenues, expenses and income. Estimates, judgments and assumptions are inherently subject to change in the future, and any such changes could result in corresponding changes to the amounts of assets, liabilities, revenues, expenses and income. Any such changes could have a material adverse effect on our financial position and results of operations.

Changes to financial accounting standards may affect our reported results of operations.

A change in accounting standards could have a significant effect on our reported results and may affect our previously reported transactions. New pronouncements and varying interpretations of existing pronouncements have occurred and may occur in the future. Changes to existing accounting rules or the application of existing U. S. GAAP may adversely affect our reported financial results, which could result in a decrease in the value of our stock price.

The Company and certain of our current and former directors and former officers are defendants in several stockholder class action and derivative lawsuits.

The Company, and certain current and former directors and former officers of the Company and CHR, were named as defendants in numerous complaints purporting to be class actions which were consolidated in the United States District Court for the Middle District of Florida. The complaints seek unspecified compensatory damages and other relief. In addition, certain current and former directors and former officers of the Company and CHR, and Catalina Marketing, as a nominal defendant, have been named in two shareholder derivative actions. The plaintiffs seek unspecified compensatory damages, restitution of improper salaries, insider trading profits and payments from us, and disgorgement under the Sarbanes-Oxley Act of 2002.

In October 2006, the Company entered into a memorandum of understanding to settle the pending consolidated shareholder class action lawsuit for $8.5 million, $8.2 million of which was funded by our insurance carriers. Subsequently, in December 2006, the District Court granted preliminary approval to the settlement. In addition, we have agreed in principle to settle the derivative litigation actions and are currently working towards documenting the settlement. While the terms of the settlement in the stockholder class action contained in the memorandum of understanding and stipulation filed with the court and the agreement, in principle, to

settle the derivative actions are on terms that do not adversely affect the Company and involve no admission of liability by the Company or any of the current and former directors and former officers named in the lawsuit, the settlements are not final and are subject to various conditions including court approval and other customary conditions.

To the extent that we do not settle these lawsuits, we intend to vigorously defend against the consolidated shareholder class action lawsuit and the two shareholder derivative actions. Furthermore, to the extent we do not settle these lawsuits, we cannot currently predict the impact or resolution of these litigations or reasonably estimate a range of possible loss, which could be material, and the resolution of these lawsuits may harm our business and have a material adverse impact on our financial condition. In addition, securities lawsuits may result in substantial costs, divert management’s attention and other resources, and have a material and adverse effect on our financial condition and the results of our operations in the future.

Risks Related to The Company’s Receipt of Unsolicited Acquisition Proposal

The Company has received an unsolicited proposal to be acquired by merger.

On February 22, 2007, we announced that the Company had received an unsolicited proposal from ValueAct Capital Master Fund, L.P. (“ValueAct”) to acquire by merger 100% of the outstanding equity interests of the Company that ValueAct does not already own for $32.00 per share in cash. The receipt of ValueAct’s unsolicited proposal followed the Company’s prior announcement that the previously formed special committee of the Board of Directors had determined not to proceed with any of the interested parties that had submitted offers to acquire the Company. The Company has advised ValueAct that its proposal is under consideration by the Company’s Board of Directors in consultation with its advisors. The Company’s Board of Directors, in turn, has appointed a special committee to consider the appropriate response to the proposal from ValueAct. There can be no assurance that the consideration of the proposal from ValueAct or other proposals by the special committee of the Board of Directors will result in a binding agreement to acquire the Company or that the occurrence of any event, change or other circumstances will not result in the withdrawal or alteration of the proposal from ValueAct or any other interested party. In addition, to the extent the Company elects to negotiate or enter into any transaction, there can be no assurance that the negotiations will result in a definitive agreement or that any transaction contemplated by such agreement, if entered into, will close due to a variety of potential factors. Furthermore, the activities described above may divert management’s attention and increase the demand on the Company’s resources or otherwise have a negative effect on the Company’s business.

If the special committee of the Board of Directors determines not to enter into negotiations or enter into a transaction with ValueAct or another interested party, the share price of our common stock and future business and operations could be significantly negatively affected.

If the special committee of the Board of Directors determines not to enter into negotiations or enter into a transaction with ValueAct or another interested party or, to the extent the Company enters into an agreement and the transaction does not close for any reason, the share price of our common stock and future business and operations could be significantly negatively affected and may be subject to material risks, including, but not limited to the risk that the share price of our common stock may change to the extent that the current market price of our common stock reflects an assumption that a transaction will be completed or may be completed at a particular price. In addition, our costs related to the consideration and potential negotiation and closing of a transaction, such as legal, accounting and the fees of our financial and other advisors, must be paid even if a transaction is not consummated. The foregoing could have a material adverse impact on our business, operations and financial results.

Our headquarters is located in St. Petersburg, FL. This 143,000 square foot facility houses our principal administrative, marketing, information technology and product development offices.

As of December 31, 2006, we leased sales and support offices throughout the United States, consisting of approximately 186,000 square feet in aggregate, and offices for our foreign operations in five countries. We believe that the headquarters facility and the existing sales and support offices are adequate to meet our current requirements and that suitable additional space will be available as needed to accommodate growth of our operations and sales and support office requirements for the foreseeable future.

$8.5 million, $8.2 million of which was funded by our insurance carriers. Subsequently, in December 2006, the District Court granted preliminary approval to the settlement. While the terms of the settlement contained in the memorandum of understanding and stipulation filed with the court are on terms that do not adversely affect the Company and involve no admission of liability by the Company or any of the current and former directors and former officers named in the lawsuit, the settlement is not final as it is subject to various conditions including court approval and other customary conditions.

Certain current and former directors and former officers of the Company and CHR, and Catalina Marketing, as a nominal defendant, have been named in two shareholder derivative actions captioned The Booth Family Trust v. Frank H. Barker, et al., Case No. 20510-NC, pending in the Court of Chancery for the State of Delaware in and for New Castle County, and Craig Deeds v. Frank H. Barker, et al., Case No. 04-000862 pending in the Circuit Court of the Sixth Judicial Circuit in and for Pinellas County, Florida. These shareholder derivative lawsuits allege that the defendants breached various fiduciary duties based upon the same general set of alleged facts and circumstances as the federal shareholder suits. The plaintiffs seek unspecified compensatory damages, restitution of improper salaries, insider trading profits and payments from us, and disgorgement under the Sarbanes-Oxley Act of 2002. We have agreed in principle to settle the derivative litigation actions and are currently working towards documenting the settlement. The settlement is not final and, when executed, will be subject to various conditions including court approval and other customary conditions.

In the event we are unable to settle the consolidated class action and derivative actions, we intend to continue to vigorously defend against these lawsuits. Furthermore, to the extent we do not settle these lawsuits pursuant to the terms of the pending settlements, we cannot currently predict the impact or resolution of this litigation or reasonably estimate a range of possible loss, which could be material and the resolution of these lawsuits may harm our business and have a material adverse impact on our financial condition.

No matters were submitted to a vote of security holders during the quarter ended December 31, 2006 or through the date of the filing of this Annual Report on Form 10-K.

Market Information. Our common stock, par value $0.01 per share (“common stock”), is traded on the New York Stock Exchange (“NYSE”) under the symbol “POS”. The following table sets forth, for each quarter of the last two fiscal years, the high and low closing prices as reported by the NYSE for the common stock, and dividends declared per share of common stock, for the quarters ended as follows:

Holders. As of February 22, 2007, there were approximately 760 registered holders of our common stock.

Dividends. During the nine months ended December 31, 2006 and the twelve months ended March 31, 2006, we paid an annual dividend of $0.30 per share. We expect to pay similar dividends in the future. However, the payment and rate of dividends on our common stock are subject to several factors including operating results, availability of cash and our financial requirements.

Securities Authorized for Issuance Under Equity Compensation Plans. The information required by Item 5 will be contained in our definitive Proxy Statement for the Annual Meeting of Stockholders under the caption Equity Compensation Plan Information and is incorporated herein by reference. The definitive Proxy Statement will be filed with the SEC no later than 120 days after December 31, 2006.

The following table sets forth information relating to our purchase of our equity securities during the nine months ended December 31, 2006:

The information set forth below should be read in conjunction with Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 8 — “Consolidated Financial Statements and Supplementary Data”. The following selected consolidated financial data for each fiscal period presented is derived from our audited Consolidated Financial Statements. Previously reported amounts for fiscal years ended March 31, 2003 through March 31, 2005 have been adjusted to reflect the reclassification of the results of certain discontinued operations that were sold during the fiscal year ended March 31, 2005.

The nine months ended December 31, 2006 was a successful period for Catalina Marketing Corporation in all reporting segments. CMS revenue increased by 13.8% over the same period in the prior year substantially as a result of our channel expansion and category penetration efforts as well as revenues associated with the roll out of our color printer initiative. CHR revenues increased 14.5% compared to the same nine month period of the prior year driven primarily by a favorable shift in program mix which resulted in a higher average price per message. Finally, CMI experienced revenue growth of 29.0% over the same period in the prior year due to growth in manufacturer and retailer revenue.

During the nine months ended December 31, 2006, CMS grew the installation base of the Catalina Marketing Network^{^®} to include over 22,000 stores and achieved strong manufacturer renewals. Additionally, as of December 31, 2006, we had completed the installation of over 95,000 color printers, representing over 65% of the planned grocery store installations across our domestic network. We will continue to make investments in our channel expansion, new product development, and color printing initiatives, which we believe will provide long-term revenue and income growth. The expansion of the Catalina Marketing Network^{^®} into retail drug stores provides us the opportunity to more effectively market our services to new and existing CPG manufacturer clients, such as manufacturers of health and beauty products, personal care products, and over-the-counter medications.

CHR continued to show significant growth in profitability as well as revenues. Net income increased 29.6% in the nine months ended December 31, 2006 compared to the same period in the prior year. CHR’s business model continued to exhibit strong operating leverage, as evidenced by operating income growth greater than the corresponding growth in revenues. We continue to explore opportunities with new prescription drug and pharmaceutical companies, and will consider expanding the CHR network into new retail drug chains when those opportunities are consistent with our business model and provide the ability to maintain solid operating leverage.

CMI increased its retailer base and was installed in almost 8,000 stores across seven countries as of December 31, 2006. Net income increased 75.8% over the prior nine month period as a result of both manufacturer and retailer revenue increases. As previously disclosed, we were notified by two of CMI’s retail customers in the quarter ended September 30, 2006 that they did not intend to renew their contracts effective December 31, 2006 and March 31, 2007. On a combined basis, the retailer and manufacturer revenue generated by these two clients accounted for approximately 29% of CMI’s revenue for the nine months ended December 31, 2006. During 2007, we expect to partially recover the manufacturer revenue associated with these two clients through the growth of the Catalina Marketing Network and other initiatives.

Nine Months Ended December 31, 2006 Compared with the Nine Months Ended December 31, 2005

In August 2006, the Board of Directors approved a change in our fiscal year end from March 31st to December 31st. In conjunction with the change in year-end, we eliminated the three-month reporting lag previously used for reporting the results of CMI. As of December 31, 2006, all of our consolidated subsidiaries had the same balance sheet date. Beginning January 1, 2007 all subsidiaries will have the same fiscal reporting period. We believe the change in year-end better aligns our reported operating periods with the fiscal year of the majority of our CPG manufacturer and pharmaceutical manufacturer clients, while the elimination of the reporting lag for CMI allows us to report the results of our foreign subsidiaries in a more timely manner. As a result of these changes, the following discussion compares our results of operations for the nine months ended December 31, 2006 (the transition period) to our results of operations for the nine months ended December 31, 2005.

In the consolidated financial statements for the nine months ended December 31, 2006, the results for CMI are not shown in our income statement for the three month period ended December 31, 2006, and are reflected only as an addition to retained earnings in the consolidated statements of stockholders’ equity and comprehensive income.

Throughout this discussion, data for all periods except as of and for the nine months ended December 31, 2005, are derived from our audited consolidated financial statements, which appear in Item 8 – “Consolidated financial Statements and Supplementary Data” of this annual report on form 10-K. All data as of and for the nine months ended December 31, 2005, are derived from our unaudited consolidated financial information, which is presented in Item 8 – “Consolidated Financial Statements and Supplementary Data – Note 22 – Change in Fiscal Year End and Elimination of Reporting Lag for Foreign Subsidiaries”.

We adopted the provisions of Statement of Financial Accounting Standard No. 123R, Share-Based Payment, (“SFAS 123R”) on

April 1, 2006 for our domestic operations and on January 1, 2006 for CMI. The adoption of SFAS 123R resulted in a pretax expense for stock-based compensation of $10.8 million in the nine months ended December 31, 2006 for which there was no corresponding expense in the prior year.

Due to the diversity of our business operations, we do not rely on any single or series of overriding metrics to measure or manage the performance of our businesses in the aggregate. While we do not use overriding metrics, we do monitor certain metrics specific or unique to the nature of each business segment’s operations. For example, we analyze and manage the performance of CMS and CMI based on a series of metrics including, but not limited to, store installation base and shopper reach. We analyze the performance of CHR using similar metrics such as pharmacy installation base and revenue producing communications as a percent of total communications; however, due to numerous factors, including the complexity and limited predictability of product mix at CHR, store/pharmacy installation base and revenue producing communications as a percent of total communications can not be viewed as reliable indicators of our performance in the aggregate. Please refer to “Segment Reporting-Continuing Operations” for a discussion of the metrics used by management to evaluate each of its segments.

The following tables include the revenues, income (loss) from operations, and net income (loss) for each of our reportable segments for the nine months ended December 31, 2006 and 2005. The results of operations of CMI are included for the nine months ended September 30th, as the results for the three months ended December 31, 2006 were recorded directly to retained earnings in conjunction with the elimination of the reporting lag.

CMS generates revenues primarily by providing in-store communications on behalf of its manufacturer and retailer clients via the Catalina Marketing Network^{^®}. The amount of revenue recognized is generally based on the total communications delivered multiplied by a per-print fee. The delivery of communications is based upon particular triggering transactions that occur at the point-of-sale (i.e., the checkout counter of a retail store). The success of CMS depends upon, among other factors, the store installation base, the number of transactions accessed by the Catalina Marketing Network^{^®}, the number of communications printed, and the ability to attract and retain CPG manufacturers to use the targeted communication capabilities offered by our network.

The following table presents the number of stores in which the Catalina Marketing Network^® was installed, the average weekly number of shoppers reached, and the number of communications printed as of and for the nine months ended December 31, 2006 and 2005:

Revenues at CMS increased by $24.3 million to $200.5 million in the nine months ended December 31, 2006 from $176.3 million in the nine months ended December 31, 2005 due primarily to increases in revenue from CPG manufacturer and retailer clients of $20.4 million and $3.6 million, respectively. The 12.3% increase in manufacturer revenue was attributable primarily to a 9.9% increase in the volume of communications printed as well as a 2.4% increase in the revenue per print. The increased retailer revenue was the result of increased spending by several major clients.

As part of the color printer initiative, we have implemented a standard price increase of $0.02 for each manufacturer communication that is printed on our new color printers. We currently expect that approximately 75% to 85% of all communications printed in 2007 will be printed in color, resulting in a corresponding increase in the average price that we generate for each manufacturer communication.

Direct operating expenses increased by $14.0 million in the nine months ended December 31, 2006 compared with the same period in the prior year. The increase was partially attributable to $2.5 million in one time costs associated with the installation of color printers. We also recognized ink expense for the first time during the nine-months ended December 31, 2006 due to the installation and use of color printers. We expect ink expense to continue to increase as more clients move to color printing. There was no corresponding expense during the prior year period as during that time we only used black and white thermal printers. Additionally, the increased revenue resulted in increased commission expense and retailer fees. Finally, we incurred an expense of approximately $0.8 million due to the impairment of two office leases.

SG&A expenses increased $10.1 million for the nine month period ended December 31, 2006 as compared with the same period in the prior year including $2.5 million associated with stock-based compensation expense. The remaining $7.6 million increase was driven primarily by increases in sales force and analytic personnel and related expenses to support our channel expansion and color printer initiatives. Additionally, incentive compensation increased due to the improved sales performance during the current year period.

Depreciation and amortization expense increased by $2.8 million primarily due to the increased capital spending associated with the installation of the Catalina Marketing Network^{^®} in Walgreens and K-Mart Corporation (“K-Mart”), as well as the roll out of our color printer initiative. We expect increased depreciation and amortization expense in future periods as we continue the installation of color printers.

Net income for CMS decreased by $1.4 million, or 3.2%, due to the factors described above.

CHR’s primary service offerings use in-store, prescription-based technology to provide targeted, direct-to-patient communications on behalf of its clients. These communication services include the delivery of messages and educational information to healthcare patients at retail pharmacies participating in the Health Resource Network. CHR primarily generates revenues by printing messages for pharmaceutical and CPG manufacturers.

Management analyzes the performance of CHR through a review of the pharmacy installation base and revenue producing communications as a percent of total communications. These metrics provide a framework for evaluating current performance, as well as acting as a measure of the reach of the network, which is important in attracting additional pharmaceutical and CPG manufacturers to utilize the services of CHR.

The following table presents the pharmacy installation base and the percent of revenue producing patient communications as of and for the nine months ended December 31, 2006 and 2005:

Revenues for CHR increased by $9.1 million, or 14.5%, for the nine months ended December 31, 2006, compared with the nine months ended December 31, 2005. The increase is primarily the result of the growth of the network, while maintaining the percent of revenue producing communications and a favorable shift in program mix which resulted in an increase in the average price per revenue-producing communications.

Direct operating expenses increased $2.8 million for the nine months ended December 31, 2006 as compared with the same period in the prior year and included $0.1 million of stock-based compensation expense. The remaining increase was principally due to higher retailer fees as well as slightly higher commission expense in the current year period.

SG&A expenses increased $0.8 million in the nine months ended December 31, 2006 as compared with the same period in the prior year. Excluding stock-based compensation expense of $0.8 million, SG&A expenses were relatively unchanged from the prior year.

Net income for CHR increased by $3.2 million, or 29.6%, due to the factors described above.

CMI provides services for clients that operate in France, Italy, the United Kingdom, Germany, Japan, Belgium and the Netherlands, in a similar manner to the services provided by the domestic CMS business.

The following table presents CMI’s retail installation base and the average weekly shoppers reached as of and for the nine months ended December 31, 2006 and 2005:

Revenues, as reported, for CMI increased by $15.4 million, or 29.0%, for the nine months ended December 31, 2006, compared with the nine months ended December 31, 2005. The increase was attributable to growth in revenue from retailers and manufacturers of $11.4 million and $4.0 million, respectively. The increases were primarily in France, which benefited from revenues associated with the expansion of the network and increased penetration of existing clients.

Direct operating expenses increased $3.1 million for the nine months ended December 31, 2006 as compared with the same period in the prior year and included $0.3 million of stock-based compensation expense. The increase was primarily due to the growth of the business and the increased volume of communications printed in the current year period.

SG&A expenses increased $5.9 million for the nine months ended December 31, 2006 as compared with the same period in the prior year including $1.2 million of stock-based compensation expense. The remaining $4.7 million increase was due primarily to an increase in sales and analytics personnel to support business growth opportunities, as well as an expanded senior management team and higher facilities cost.

Net income, as reported, for CMI increased $3.8 million to $8.8 million for the nine months ended December 31, 2006 as compared with the same period in the prior year. The increase was due primarily to the factors described above as well as foreign exchange transaction gains in the current year versus losses in the prior year.

Expenses for our corporate group (“Corporate”) include costs for retail store support, information technology, corporate accounting, client services, new business development, marketing, human resources, procurement, and executive management. These costs are included in direct operating costs, SG&A expenses, and depreciation and amortization expense in the accompanying Consolidated Statements of Operations included in Item 8 — “Consolidated Financial Statements and Supplementary Data” for the nine months ended December 31, 2006 and the fiscal years ended March 31, 2006 and 2005. For purposes of segment reporting, these Corporate costs are allocated to the CMS and CHR business segments using methods considered reasonable by management and which provide management with a measure of utilization of corporate services by the respective business segments. Costs that can be directly attributed to the business segments are allocated to that business segment. Costs that are indirectly attributed to the business segments are allocated proportionately based on the business segment’s revenues, number of printed communications, square feet of space used, headcount, or other relevant statistics, depending on the type of cost. For example, the cost to maintain our corporate headquarters is allocated to the domestic business segments based on the estimated square footage each business unit occupies; paper and store maintenance costs are allocated to the domestic business segments based upon the number of printed communications; and data communications costs are allocated based upon revenues. Of the total Corporate operating expenses, 61.5% were allocated to the operating segments during the nine months ended December 31, 2006. These amounts were 63.2% and 63.8% for the twelve month periods ended March 31, 2006 and 2005, respectively.

For the nine months ended December 31, 2006 the Corporate loss from operations increased $14.3 million as compared with the nine months ended December 31, 2005, including $5.8 million associated with the implementation of SFAS 123R and $1.5 million of severance expense. The remaining increase was driven primarily by increased executive administrative expense which was partially offset by increased intercompany royalty revenue and non-affiliated licensing revenues. Net loss for Corporate increased by $10.4 million for the period ended December 31, 2006 compared with the period ended December 31, 2005 primarily due to the factors affecting loss from operations, increased interest expense associated with our higher debt level and a higher consolidated effective tax rate driven by the implementation of SFAS 123R in the current year.

As previously disclosed, we have recently been investigating the potential sale of the company as a result of an unsolicited expression of interest in the acquisition of the Company, as well as an additional unsolicited offer from ValueAct to acquire by merger 100% of the remaining outstanding shares of the Company that ValueAct does not already own. In the first quarter of 2007, Corporate will be negatively impacted by the one time costs associated with the investigation into the potential sale of the Company.

Our consolidated revenues for the nine months ended December 31, 2006 were $340.9 million, which included $68.4 million from our foreign operations. The local currencies of the countries in which we maintain foreign operations are the euro, British pound sterling and Japanese yen. These currencies were relatively stable in aggregate against the United States dollar during the nine months ended December 31, 2006. Revenue growth assuming a constant currency rate was 30.9% versus the prior year period, while the reported revenues of our foreign operations, which take into account the effect of changes in foreign currency exchange rates, grew by 29.0% compared to the prior year period.

In conjunction with the change in fiscal year end, we eliminated the three-month reporting lag previously used by CMI. Reported income for the nine-month transition year included the results of CMI for the nine-months ended September 30, 2006. Results of CMI for the three months ended December 31, 2006, which represent the reporting lag, were not reflected in the reported income and were only recorded as an addition to retained earnings.

Revenues for CMI for the three months ended December 31, 2006 were $24.2 million and income from operations was $2.5 million. Net income was $.07 million and included $0.6 million of stock-based compensation net of taxes. See Item 8 – “Consolidated Financial Statements and Supplementary Data – Note 22 – Change in Fiscal Year End and Elimination of Reporting Lag for Foreign Subsidiaries” for additional discussion of CMI’s quarter ended December 31, 2006.

The following tables include the revenues and income (loss) from operations for each of our reportable segments included in continuing operations for the fiscal years ended March 31, 2006 and 2005. Net income (loss) is presented for the same periods for our reportable segments and discontinued operations. Discontinued operations include the operating results of Japan Billboard, DMS and CMRS through the date each entity was divested. The accounts of CMI are included for the twelve months ended December 31, which was their fiscal year end.

Revenues at CMS declined by $15.2 million to $254.4 million in fiscal year 2006 from $269.6 million in fiscal year 2005 due to declines in revenue from CPG manufacturer and retailer clients of $12.7 million and $2.5 million, respectively. The decrease in manufacturer revenue was attributable primarily to a 7.2% decrease in the volume of communications printed, principally due to a general reduction in spending by our CPG clients during the second and third quarters of the fiscal year, as well as the discontinuance of specific product lines by certain of our CPG clients. The reduction in the volume of printed communications was partially offset by a 2.3% increase in the average price per communication printed, a function of a favorable shift in mix to higher-priced services. The decline in retailer revenue was primarily attributable to transitional sales in the first quarter of fiscal year 2005 related to the loyalty card business, which was sold on March 31, 2004.

Direct operating expenses declined by $0.5 million primarily due to declines in paper expense and costs associated with the loyalty card business of $2.0 million and $2.2 million, respectively. The decrease in paper expense was principally attributable to an unfavorable adjustment to paper expense in the prior year of $1.2 million combined with fewer communications printed and lower contractual cost for paper in the current year. Partially offsetting these decreases, retailer fees increased $3.8 million in the current year, a result of changes in certain retailer contracts. The majority of these contracts were renegotiated in fiscal year 2005 and resulted in increased retailer fees on a per print basis.

SG&A expenses increased $1.3 million for fiscal 2006 as compared with fiscal 2005. The increase was driven primarily by increases in sales force personnel and consulting expenses due primarily to our increased focus on new business development opportunities and channel expansion.

Depreciation and amortization expense declined by $5.5 million primarily due to the reduction in capital spending over the previous two years which resulted in lower depreciation and amortization expense as compared with the prior fiscal year. With the installation of the Catalina Marketing Network^® in Walgreens and K-Mart Corporation (“K-Mart”), as well as the investment in the color printer initiative, we have increased, and will continue to increase, our level of capital expenditures, which will result in increased depreciation and amortization expense in future periods.

Net income for CMS decreased by $6.2 million, or 8.3%, due to the factors affecting operating results described above.

Revenues for CHR increased by $13.4 million for the fiscal year ended March 31, 2006, compared with the fiscal year ended March 31, 2005. The increase was attributable to a 29.4% increase in the number of revenue-producing communications, which was primarily attributable to certain client programs that triggered a high volume of revenue-producing communications during the current fiscal year. These programs, which generated lower revenue per communication, contributed to an overall shift in program mix that resulted in a 7.7% decline in the average price per revenue-producing communication. Because the increase in revenue producing communications in the current year was the result of certain specific client programs, this increase is not indicative of expected future growth rates in the volume of revenue producing communications.

Direct operating expenses were relatively unchanged from the prior year at $43.5 million. Within direct operating expenses, retailer fees increased by $1.1 million, a result of increased volume of communications printed, but were offset by declines in bad debt expense and sales commissions. Commission expense decreased due to current year changes in individual performance measures. As a percentage of revenue, direct operating expenses declined from 57.0% for fiscal year 2005 to 48.5% for fiscal year 2006, exhibiting the operating leverage within this segment.

SG&A expenses increased by $2.7 million for the fiscal year ended March 31, 2006 as compared with fiscal year ended March 31, 2005. This increase was primarily due to increased marketing expense, a result of our focus on growing the CHR business and the PATIENTLink^TM brand, and higher personnel and incentive compensation cost, due to the current year financial performance.

Depreciation and amortization expense decreased by $1.3 million for the fiscal year, a result of current equipment, primarily printers installed in pharmacies, reaching the end of its depreciable life and not requiring replacement. As this equipment primarily became fully depreciated during fiscal 2005, we do not expect this trend to continue.

For the fiscal year ended March 31, 2006, net income for CHR increased by $7.1 million, or 75.6%. The increase was due to those factors described above.

Revenues, as reported, for CMI increased by $9.7 million for the fiscal year ended March 31, 2006, compared with the fiscal year ended March 31, 2005. The increase was primarily attributable to increased manufacturer and retailer revenue of $2.6 million and $7.5 million, respectively. Manufacturer revenue increased principally due to growth in Italy. Retailer revenue was up primarily due to operations in France, which increased due to the completion of the installation of the network in two significant retailers.

Direct operating expense, as reported, increased $2.7 million for fiscal year 2006 as compared with fiscal year 2005. The increase was due primarily to the growth of the business and costs associated with the increased volume of communications printed in the current year.

SG&A expenses, as reported, increased $5.3 million for fiscal year 2006. The increase was due primarily to the addition of sales force personnel, facility expenses, primarily in France, increased information technology expense, and compensation costs associated with the strengthening of the management team for CMI.

Depreciation expense, as reported, increased $0.6 million due to the acquisition of additional store equipment resulting from continued store growth in the current fiscal year.

Net income, as reported, for CMI decreased $0.5 million to $6.9 million for the fiscal year ended March 31, 2006 as compared with the fiscal year ended March 31, 2005. The decrease was primarily due to increased foreign exchange transaction losses due to the unfavorable movement in exchange rates during the current year partially offset by the factors described above.

For the fiscal year ended March 31, 2006 the Corporate loss from operations decreased $2.9 million as compared with the fiscal year ended March 31, 2005. The decrease was driven primarily by lower consulting and legal fees of $3.4 million and $2.2 million, respectively, combined with a decline in incentive compensation of approximately $1.0 million. These decreases were partially offset by the reversal into income of a $4.4 million sales tax accrual in fiscal 2005. Net loss for Corporate decreased by $2.6 million for the year ended March 31, 2006 compared with the year ended March 31, 2005 primarily due to the factors affecting loss from operations combined with an increase in royalty income from CMI and a lower consolidated effective tax rate.

As noted above and in previous filings, in November 2003, we announced our intent to divest DMS, Japan Billboard and CMRS because they were deemed not to be strategically aligned with our current core businesses. There was no activity associated with DMS, Japan Billboard and CMRS in the period ended December 31, 2006. These businesses accounted for 5.1% of our total revenues and generated an aggregate net loss of $4.2 million for the fiscal year ended March 31, 2005. Partially offsetting the net loss from discontinued operations, we incurred a $1.1 million gain on the disposition of those operations. See further discussion in Item 8 — “Consolidated Financial Statements and Supplementary Data — Note 19”.

Our primary sources of liquidity have been cash flows generated from operations and a credit agreement with a syndicate of commercial banks that provides for borrowings in both U.S. dollars and Japanese yen. Our primary liquidity requirements will be driven by our color printer initiative, working capital and the repayment of debt. Our sources of liquidity may also be used for cash dividends and repurchases of our common stock. We plan to continue to invest in new business development, sales and marketing, our Catalina Marketing Network^{^®} and other support technology, employee development and retention and enhanced systems of reporting and controls.

Cash flows from operations combined with borrowings on our credit facilities in the period ended December 31, 2006 and through the current date have been sufficient to meet our liquidity needs and should be sufficient to meet our projected cash requirements for at least the next twelve months. Cash on hand as of December 31, 2006 was $62.9 million, of which approximately $54.6 million was held by our subsidiaries in Europe.

Our long-term debt outstanding as of December 31, 2006 was $127.7 million. See Capital Requirements – Contractual Obligations for a discussion of our contractual commitments, which include our bank indebtedness as well as contractual obligations related to our operations.

We believe that our policy regarding the availability of sufficient amounts of cash gives us the opportunity to invest in our business as we believe is necessary for items including our color printer initiative, research and development, creation and expansion of markets, share repurchases, acquisitions, investments, legal risks and challenges to our business model. In addition, we believe our existing cash and cash equivalents, combined with cash generated from operations and available borrowings under our credit facility, should be sufficient to fund our operating activities as well as other opportunities for the short term and over our forecasted long-range plan of three years. If during that period, or thereafter, we are not successful in generating sufficient cash flows from operations, raising additional capital when required or being able to borrow in sufficient amounts, our business could suffer.

Nine Months Ended December 31, 2006 Compared with the Nine Months Ended December 31, 2005

Net cash provided by operating activities increased $5.3 million to $67.3 million for the nine months ended December 31, 2006 from $62.0 million for the nine months ended December 31, 2005. The increase in net cash provided by operating activities, was primarily due to higher net income adjusted for non-cash impacting items of $9.4 million. Partially offsetting this increase, changes in operating assets and liabilities resulted in a use of cash of $4.1 million. The increase in net income for non-cash impacting items was the result of lower net income of $4.8 million which was more than offset by adjustments for non-cash impacting items including stock-based compensation of $10.8 million and depreciation and amortization of $3.3 million. Cash used by increased accounts receivable of $31.7 million was offset by an increase in cash provided by changes in accrued expenses of $28.2 million.

Net cash used in investing activities increased $54.2 million to $97.2 million for the nine months ended December 31, 2006 compared with $43.0 million for the nine months ended December 31, 2005. Capital expenditures increased $58.0 million to $97.5

million and were consistent with anticipated increases associated with the roll out of color printers and the installation of Catalina Marketing Network^® in Walgreens and K-Mart. This was offset slightly by expenditures of $3.5 million for the purchase of the remaining common stock of CHR in nine months ended December 31, 2005.

Net cash provided by financing activities was $42.1 million for the nine months ended December 31, 2006 compared with net cash used in financing activities of $100.6 million in the nine months ended December 31, 2005. The $142.7 increase is primarily the result of increases in net borrowing of $77.8 million, lower repurchases of common stock of $60.2 million and higher proceeds from issuance of common stock of $3.9 million. The increased borrowing was related to the capital expenditures associated with the color printer rollout.

Cash and cash equivalents was $62.9 million as of December 31, 2006 versus $32.6 million as of December 31, 2005 and included amounts associated with the elimination of the reporting lag of our foreign subsidiaries.

Fiscal Year Ended March 31, 2006 Compared with the Fiscal Year Ended March 31, 2005

Net cash provided by operating activities decreased $16.3 million to $101.7 million for the fiscal year ended March 31, 2006 from $118.0 million for the fiscal year ended March 31, 2005. The decrease in net cash provided by operating activities, was primarily due to higher net income more than offset by adjustments for non-cash impacting items including depreciation and amortization, impairment charges and deferred income taxes. Net income adjusted for non-cash impacting items decreased $12.6 million to $106.9 million in fiscal 2006 from $119.5 million in fiscal 2005. Net income increased $6.2 million in fiscal 2006, but was offset by reductions in depreciation and amortization of $7.7 million, impairment charges of $4.9 million and deferred income tax activity of $5.7 million. The lower depreciation in fiscal 2006 was associated with an increase in fully depreciated assets. The $4.9 million reduction attributed to impairment charges was the result of 2005 impairments with no corresponding activity in fiscal 2006. Cash used by changes in operating assets and liabilities increased by $3.7 million in fiscal 2006 versus fiscal 2005. The increased use of cash was associated with changes in accounts receivable, prepaid and other assets and taxes payable which were partially offset by changes in accounts payable, other accrued expenses and deferred revenues.

Net cash used in investing activities increased $46.2 million to $63.8 million for fiscal year 2006 compared with $17.6 million for fiscal year 2005. Capital expenditures increased $37.8 million to $60.3 for fiscal year and was consistent with anticipated increases associated with the installation of the Catalina Marketing Network^{^®} in Walgreens. Additional expenditures of $3.5 million for the purchase of the remaining common stock of CHR in fiscal 2006 and $5.4 of proceeds from the sale of DMS in fiscal 2005 added to the year over year increase.

Net cash used in financing activities increased $65.6 million to $124.0 million for fiscal year 2006 compared with $58.4 million used in financing activities for fiscal year 2005. Cash used for the repurchase of common stock increased $70.1 million in fiscal 2006 to $114.3 million versus $44.2 million in fiscal 2005. In fiscal 2006 we paid dividends of $14.5 million versus $15.7 million in fiscal 2005. The decrease was attributable to a lower number of shares outstanding in the current year. Our total debt decreased by $2.7 million from $64.6 million in fiscal 2005 to $61.9 million in fiscal 2006 due to slight increases in borrowings offset by foreign currency translation.

Cash and cash equivalents decreased by $88.1 million to $28.1 million for the year ended March 31, 2006.

In addition to our cash flows generated from operations, bank borrowings provide an additional source of liquidity. For a discussion of our amended credit facilities, see Item 8 — “Consolidated Financial Statements and Supplementary Data — Note 8”.

Contractual Obligations. We have contractual obligations associated with ongoing business and financing activities, which will result in cash payments in future periods. Some of these obligations, such as long-term debt and related interest payments, are reflected in our Consolidated Financial Statements. In addition, we have entered into long-term contracts to acquire goods or services in the future which are not currently reflected in our Consolidated Financial Statements and will be reflected in future periods as the goods are received or services are rendered. A summary of our contractual cash obligations and commitments at December 31, 2006 follows (in thousands):

Purchase Obligations. We have a purchase commitment to Epson for the purchase of color printers by our CMS and CMI business segments. The commitment provides for the purchase of printers over a period of approximately six years for a minimum of $88.2 million. As of December 31, 2006, we have purchased over 95,000 printers and plan to complete the initial installation of our color printer initiative in the summer of 2007.

Capital Expenditures. Our primary capital expenditures have been for the purchase of color printers associated with our Epson agreement and channel expansion. Total store equipment and third-party store installation costs for the Catalina Marketing Network^{^®} range from $3,000 to $19,000 per store, depending primarily on the number of lanes in each store. Capital expenditures were $97.5 million for the nine months ended December 31, 2006 compared with $60.3 million for twelve months ended March 31, 2006. We expect that our cash flow from operations combined with borrowings under our existing revolving credit facility will be sufficient to finance these capital investments.

Stock Repurchases. On July 24, 2006, our Board of Directors authorized an additional $100 million of funds to be available for the repurchase of our common stock. This authorization increased the remaining balance under the $100 million the Board of Directors authorized in August 2005. We repurchased 0.5 million shares of our common stock during the nine months ended December 31, 2006 for a total of $15.0 million. During the twelve months ended March 31, 2006 and 2005, we repurchased 4.8 million and 1.7 million shares of our common stock for $114.3 million and $44.2 million respectively.

As of December 31, 2006, there was $126.5 million remaining under the July 24, 2006 authorization to repurchase shares. Factors governing the future repurchase of our common stock will include consideration of the market price of the common stock at the time of the contemplated repurchase. This authorization will expire when the total dollar amount authorized by our Board of Directors has been expended.

We have identified certain financial areas that require estimates and judgments such that, if these estimates and judgments were to change, results of operations could materially differ. Management makes these estimates and judgments in the normal course of business as required pursuant to U.S. GAAP. The impact and any associated risks related to these estimates on our results of operations are discussed throughout Management’s Discussion and Analysis and Results of Operations where such changes in estimates affected our reported financial results. A detailed discussion of the related accounting policies, and other significant accounting policies, can be found in Item 8 — “Consolidated Financial Statements and Supplementary Data — Note 2.”

Impairment Testing of Goodwill. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”, we are required to test goodwill for impairment annually. Changes in management’s judgments and estimates could affect our analysis of the impairment of goodwill. To test goodwill for impairment, we are required to estimate the fair value of each of our reporting units. Since quoted market prices in an active market are not available for our reporting units, we use other valuation techniques. We have developed a model to estimate the fair value of the reporting units, primarily incorporating a discounted cash flow valuation technique. This model incorporates our estimates of future cash flows, allocations of certain assets and cash flows among reporting units, future growth rates

and management’s judgment regarding the applicable discount rates to use to discount those estimated cash flows. We estimate a corporate-wide weighted average cost of capital to use as the discount rate. Changes to these judgments and estimates could result in a significantly different estimate of the fair value of the reporting units which could result in an impairment of goodwill. Goodwill assigned to the operating segments of CMS, CHR and CMI is not highly sensitive to changes in assumptions due to the fact that the estimated fair value of the reporting units in these operating segments significantly exceeds the amount of goodwill attributed to the reporting units. We believe a sensitivity analysis was not warranted in this situation, because even a significant fluctuation in the discount rate would not have a material impact to the financial statements.

Impairment Testing of Long-Lived Assets. In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, we review our long-lived assets for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When testing for impairment, we are required to estimate the specific cash inflows and outflows expected to be generated from the long-lived asset during its remaining useful life. Changes to management’s judgments and estimates used in determining the timing of testing, the specific net cash flows related to the asset, the asset’s remaining useful life or the projected amount of future net cash flows could materially affect the outcome of the impairment analysis. In addition, if the undiscounted cash flows are less than the asset’s net book value, then management must determine the fair market value of the asset. Generally, quoted market prices in active markets are not available for our significant long-lived assets. As such, management generally uses a discounted cash flow technique to determine the fair value. Management’s assumptions regarding the discount rate used to apply to the forecasted future net cash flows can also materially affect the outcome of the impairment analysis. During the nine months ended December 31, 2006, there were no long-lived asset groups for which we identified a triggering event requiring impairment testing.

Stock-based compensation expense. In accordance with the provisions of SFAS 123R, we began recognizing stock-based compensation expense in our consolidated financial statements on April 1, 2006 for our domestic operations. We value our options and SARs using the Black-Scholes pricing model. Option pricing models require the input of subjective assumptions, including the expected life of the option or SAR and the price volatility of the underlying stock. These estimates are based largely on historical data and have not changed significantly in the past three years. Additionally, we have begun to issue restricted stock in place of options for certain employees. There are fewer estimates and assumptions associated with restricted stock as the compensation expense is based on the actual price of the stock versus a value derived from a pricing model. For all types of awards, judgment is still required in estimating the number of stock awards that are expected to vest as a result of forfeitures by employees prior to the satisfaction of time-based vesting schedules. If actual results or future changes in forfeiture rate estimates differ significantly from our current estimates, stock-based compensation could change accordingly. A 10% increase or decrease in the current forfeiture rate estimates would not have a material impact on our results of operations. For further discussion of our stock-based compensation as well as changes in historical assumptions, refer to Item 8 – “Consolidated Financial Statements and Supplementary Data – Note 2 – Stock-Based Compensation”.

Tax Assets and Liabilities. We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities. We regularly review our deferred tax assets for recoverability and, if necessary, establish a valuation allowance based on historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences and the implementation of tax-planning strategies. If we are unable to generate sufficient future taxable income in certain tax jurisdictions, or if there is a material change in the actual effective tax rates or time period within which the underlying temporary differences become taxable or deductible, we may be required to increase our valuation allowance against our deferred tax assets resulting in an increase in our effective tax rate and an adverse impact on operating results.

Despite our belief that our positions regarding tax contingencies are consistent with applicable tax laws, we believe that certain positions are likely to be challenged by taxing authorities. Settlement of any challenge can result in no change, a complete disallowance or some partial adjustment reached through negotiations or litigation. Significant judgment is required in evaluating our tax contingencies. Our contingencies are adjusted in light of changing facts and circumstances, such as the progress of our tax audits as well as evolving case law. Our income statement includes the impact of contingency provisions and changes to our contingencies that we consider appropriate. Unfavorable settlement of any particular issue may require use of our cash. Favorable resolution would be recognized in the income statement at the time of resolution. We have incorporated historical experience and the previously mentioned factors into the determination of each of these estimates. While we believe that our judgments and interpretations regarding income taxes are appropriate, significant differences in actual experience may materially affect our future financial results.

Legal Contingencies. The assessment of legal contingencies involves the use of critical estimates, assumptions and judgments, including our ability to reasonably estimate a range of probable loss. Given the inherent unpredictability of these matters, it is difficult to estimate the impact on our consolidated financial position. Liabilities are established when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. With respect to liabilities related to certain lawsuits and legal actions where we do not have a history of loss or where there is limited available data and uncertainty regarding numerous variables used to determine the potential liability, it may be difficult for us to estimate the potential liability or range of probable loss. While we believe that our judgments and interpretations regarding our legal contingencies are appropriate, significant differences in actual experience may materially affect our future financial results.

See Item 8 – Note 2 – “Summary of Significant Accounting Policies – Accounting Standards Not Yet Adopted” for a discussion of recent accounting pronouncements.

Certain information included in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements made in reliance upon the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements may be identified by the use of words, such as “anticipate,” “estimates,” “should,” “expect,” “guidance,” “project,” “intend,” “plan,” “believe” and other words and terms of similar meaning, in connection with any discussion of our future business, results of operations, liquidity and operating or financial performance. Such forward-looking statements involve significant material known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These risk factors should be considered in connection with any written or oral forward-looking statement that we or any person acting on our behalf may issue in this document or otherwise, now or in the future. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. We cannot assure you that any future results, performance or achievements will be achieved. For a discussion of certain of these risks, uncertainties and other factors, see Part I — “Special Note Regarding Forward-Looking Statements” and Item 1A – “Risk Factors.” Further, certain information contained in this document is a reflection of our intention as of the date of this filing and is based upon, among other things, the existing regulatory environment, industry conditions, market conditions and prices, the economy in general and our assumptions as of such date. We may change our intentions based upon any changes in such factors, in our assumptions or otherwise.

Our principal market risks are interest rates on various debt instruments and foreign exchange rates in our international operations.

We centrally manage our domestic debt and consider investment opportunities and risks, tax consequences and overall financing strategies. This domestic debt consists of a recently amended line of credit with interest rates based on the Prime Rate, the Eurodollar Rate or the Federal Funds Rate. International debt relates to our Japan subsidiary and is used to fund purchases of equipment and for ongoing operations. A 100 basis point change in interest rates, based on the average outstanding indebtedness for the nine month period ended December 31, 2006, would have resulted in a corresponding change in interest expense of approximately $0.9 million.

Our operations outside of the United States expose us to movements in currency exchange rates, which can be volatile at times. The economic impact of currency exchange rate movements is complex because such changes are often linked to variances in real growth, inflation, interest rates, governmental actions and other factors. These changes, if material, could cause us to change our financing and operating strategies.

The aggregate foreign currency exchange transaction effects included in determining consolidated results of operations include a $0.4 million gain in our consolidated net income for the nine months ended December 31, 2006, a loss of $1.4 million in our consolidated net income in twelve months ended March 31, 2006 and a $1.1 million gain in the twelve months ended March 31, 2005. We have not utilized derivative financial instruments to reduce the effect of fluctuating foreign currencies. We estimate that, based upon our net income over the previous two years in local currency, a 10% change in foreign currency exchange rates would not have resulted in a material impact to net income in either of those years. We believe that this quantitative measure has inherent limitations because it does not take into account the impact of macroeconomic factors or changes in either results of operations or our financing and operating strategies.

Our revenues from continuing foreign operations represented approximately 20.0% of our total revenues from continuing operations in the nine months ended December 31, 2006 and 17.7% and 15.6% in the twelve months ended March 31, 2006 and 2005 respectively. For a discussion on the effect of changes in foreign currency exchange rates on our revenues for the period ended December 31, 2006, see in Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Foreign Currency Translation and Its Effect on Revenues.”

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on its assessment and those criteria, management concluded that we maintained effective internal control over financial reporting as of December 31, 2006.

Management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2006, has been audited by PricewaterhouseCoopers LLP, an independent registered certified public accounting firm, as stated in its report which appears herein.

We have completed integrated audits of Catalina Marketing Corporation’s consolidated financial statements and of its internal control over financial reporting as of December 31, 2006 in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Catalina Marketing Corporation and its subsidiaries at December 31, 2006 and March 31, 2006, and the results of their operations and their cash flows for the nine months ended December 31, 2006 and each of the two years in the period ended March 31, 2006 in conformity with accounting principles generally accepted in the United States of America. 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 of these statements 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 of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 2, the Company has changed its methods of accounting for share-based compensation and retirement assets and obligations.

Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 8, that the Company maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control- Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting 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 effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Description of the Business. Catalina Marketing Corporation, a Delaware corporation, and its subsidiaries (the “Company”), provide behavior-based communications, developed and distributed for CPG manufacturers, pharmaceutical manufacturers and marketers and retailers. Our primary business was developed to provide consumers with in-store coupons delivered based upon purchase behavior and distributed primarily in supermarkets. Today, we offer behavior-based, targeted-marketing services and programs globally through a variety of distribution channels. These marketing solutions, including discount coupons, loyalty marketing programs, pharmacist and patient education newsletters, in-store instant-win games and other consumer communications, are delivered directly to shoppers by various means. By specifying how a particular consumer transaction will “trigger” a communication to print, manufacturers and retailers can deliver customized communications to only the consumers they wish to reach. We track actual purchase behavior and use Universal Product Code-based scanner technology to target consumers at the retail checkout counter and National Drug Code information to trigger delivery of customized communications to consumers during pharmacy prescription checkout transactions.

We are organized and managed by segments which include the following operations: Catalina Marketing Services (“CMS”), Catalina Health Resource (“CHR”) and Catalina Marketing International (“CMI”).

In November 2003, we announced our intent to divest Japan Billboard, Direct Marketing Services (“DMS”) and Catalina Marketing Research Solutions (“CMRS”) which were deemed not to be strategically aligned with our current core businesses. Japan Billboard operated a billboard and outdoor media business in Japan. DMS provided targeted direct mail programs designed to market to consumers in their homes. CMRS provided a range of traditional marketing research services. These three business units were sold during fiscal year 2005. Their results of operations are shown as discontinued operations in the Consolidated Statements of Operations. For further information regarding our discontinued operations see Note 19.

CMS services domestic retailers and consumer product manufacturers, primarily within the CPG industry. Using the Catalina Marketing Network^{^®}, this operating segment specializes in behavior-based marketing communications that are delivered at the point-of-sale. The primary service line of CMS is the in-store delivery of communications at the checkout lane of a retailer. CMS links its proprietary software, computers, central databases and printers with a retailer’s point-of-sale controllers and scanners. The network prints customized communications at the point-of-sale based on product Universal Product Codes or other scanned information. The printed communications are handed to consumers by the cashier at the end of the shopping transaction.

CHR services allow pharmaceutical and CPG manufacturers, as well as retail pharmacies, to provide consumers with condition-specific health information and direct-to-patient communications. CHR’s primary service offerings use an in-store, prescription-based targeting technology to provide targeted, direct-to-patient communications on behalf of our clients. These communication services include messages and educational information provided to healthcare patients at the pharmacy throughout the Health Resource Network. The Health Resource Network is a proprietary software system with built-in targeted response capabilities. Communications are primarily delivered to consumers based on a variety or combination of factors including demographic data such as age and gender information, transactional data, the National Drug Codes found on all prescription drugs and de-identified prescription history and information. CHR clients are able to use these communications to provide information on a wide variety of products such as over-the-counter medicines, prescription medications and other healthcare remedies and merchandise.

CMI operations include in-store electronic targeted marketing services for consumers in France, Italy, the United Kingdom, Germany, Japan, Belgium and the Netherlands. The Catalina Marketing Network^{^®} operates internationally in a similar manner as the domestic CMS business in offering a full range of targeted marketing solutions to many of the top CPG manufacturers and maintains relationships with major supermarket, hypermarket and other retailers. In addition, in certain European markets, we work with clients using a business model we refer to as “retail centric” in that we derive revenue from the retailers for managing loyalty programs and in-store promotions.

Basis of Presentation. These Consolidated Financial Statements were prepared in conformity with Accounting Principles Generally Accepted in the United States of America (“U.S. GAAP”). The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying Notes. Actual results could differ from those estimates. Estimates and assumptions which, in the opinion of management, were significant to the underlying amounts included in the consolidated financial statements and for which it would be reasonably possible that future events or information could change those estimates include impairment of goodwill, impairment of long-lived assets, accounting for stock-based compensation, the realization of deferred income tax assets and the resolution of tax and legal contingencies.

The Consolidated Financial Statements include our accounts, as well as the accounts of our wholly-owned subsidiaries. All intercompany transactions were eliminated in consolidation. We changed our fiscal year end from March 31st to December 31st, effective December 31, 2006. In conjunction with the change in year-end, we eliminated the three-month reporting lag previously used for reporting the results of Catalina Marketing International (“CMI”). As of December 31, 2006, all of our consolidated subsidiaries had the same balance sheet date. Beginning January 1, 2007, all subsidiaries will have the same fiscal reporting period. The change in year-end better aligns our reported operating periods with the fiscal year of the majority of our CPG manufacturer and pharmaceutical manufacturer clients, while the elimination of the reporting lag for CMI allows us to report the results of our foreign subsidiaries in a more timely manner.

The results of operations from our divested business units and the related net gain on disposition were reflected in the accompanying statement of operations as discontinued operations.

Revenue Recognition and Deferred Revenue. We deliver targeted marketing services through various channels. The following revenue recognition policies are followed for our significant revenue-generating segments:

Our CMS and CMI segments generate revenue primarily by providing in-store, electronic marketing delivery services via the Catalina Marketing Network^{^®}. The amount of revenue recognized is generally based on the total communications delivered multiplied by a per-print fee. Delivered communications include targeted promotions, messages and sweepstakes. We generally bill clients a minimum category fee in advance of the actual delivery. Contracts for delivery include a minimum number of targeted communications or messages for a specified category, or categories, within a specified period of time referred to as a “cycle.” The delivery is based upon particular triggering transactions that are registered at the point-of-sale (i.e., the checkout counter of a retail store). The majority of CMS contracts cover multiple cycles. The client is given the exclusive right to have communications delivered for a particular product category during the applicable cycle.

We have concluded that recognizing revenue as the communications are delivered is a systematic and rational method that represents the pattern over which the revenue is earned and our obligations to clients are fulfilled. Furthermore, we believe that the exclusivity feature is not a separate deliverable apart from the delivery of the targeted communication. Therefore, we recognize in-store electronic marketing service revenue as the communications are delivered, provided collection of the resulting receivable is reasonably assured. Amounts collected prior to delivery are reflected as deferred revenue and subsequently recognized when (1) the communications are delivered or (2) in full in the eighteenth month after the end of the last cycle if the minimum number of communications have not been delivered by the end of the last cycle specified in the contract. Occasionally, if the minimum number of program communications is not delivered within the applicable cycles, the remaining allotment of communications may be transferred to future cycles in order to permit the client to reach the contracted minimums.

In certain fixed-fee program arrangements where a fixed number of targeted communications are not required, revenue is deferred and recognized ratably over the particular cycle or cycles, regardless of the number of incentives delivered.

We engage in certain barter transactions with some of our retail clients, exchanging primarily in-store, electronic marketing delivery services (“retail communications”) for access to the retail client’s shoppers at the checkout. Access to the retail client occurs when a manufacturer communication is delivered. The barter transactions do not result in revenue recognition because the fair value of the consideration received and the value of the retail marketing services delivered are not determinable within the criteria established under U.S. GAAP. The retailers can defer the delivery of our retail communications up to eighteen months after the initial exchange of consumer access. However, we estimate and accrue the projected costs to be expended for the delivery of the retail communications when access to the retail shopper is provided.

CHR generates revenues by providing targeted direct-to-patient communications, referred to as PATIENTLink™, in retail pharmacies via the Health Resource Network. PATIENTLink™ includes prescription information, therapeutically relevant editorial content and product information. We generally bill clients a fee in advance of the delivery of a fixed number of customized prints or “messages” within specified time periods, typically 6 to 12 months. Delivery is triggered by transactions that are registered at the retail pharmacy’s point-of-sale. For particular triggers, the client is given the exclusive right to have its messages delivered based upon a particular product category trigger during the applicable time period.

We have concluded that recognizing revenue as a PATIENTLink™ print is delivered is a systematic and rational method that represents the pattern over which the revenue is earned and obligations to clients are fulfilled. Furthermore, we believe that the exclusivity feature is not a separate deliverable apart from the delivery of the customized print. CHR recognizes revenue when the print is delivered, provided collection of the resulting receivable is reasonably assured. Amounts collected prior to delivery are deferred and recognized as revenue when delivery occurs or in full in the twelfth month after the end of the last cycle specified in the contract. Occasionally, if the minimum number of customized newsletters is not printed, the remaining allotment of messages may be refunded, extended or transferred to future periods in order to permit the client to reach the contracted print minimums.

In certain fixed-fee program arrangements where a fixed number of messages is not required, revenue is recognized ratably over the particular period of the related contract, regardless of the number of customized prints delivered.

Research and Development. Our research and development efforts are generally for pilot-project execution to create, test and support new applications for the Catalina Marketing Network^{^®}, Health Resource Network, market research, software development, and system upgrades. For the nine months ended December 31, 2006, and the twelve months ended March 31, 2006 and 2005, expenditures for research and development, which are included in selling, general and administrative expenses, were $0.4 million, $0.9 million and $2.0 million, respectively. These expenditures include internal and external labor primarily for the development of our software and networks.

Advertising Costs. Advertising costs are expensed as incurred and amounted to $0.9 million for the nine months ended December 31, 2006, $1.6 million and $0.6 million in the twelve months ended, March 31, 2006 and 2005, respectively.

Foreign Currency Translation. Balance sheet accounts are translated at exchange rates in effect at the end of the foreign subsidiaries’ fiscal year and income statement accounts are translated at weighted average exchange rates for the year. Translation adjustments are included as a separate component of stockholders’ equity in accumulated other comprehensive income (loss).

Foreign Currency Transactions. Net realized and unrealized gains and losses from foreign currency transactions are included in Other income, net in our Consolidated Statements of Operations, and were a $0.4 million gain in the nine months ended December 31, 2006, a $1.4 million loss and a $1.1 million gain for the twelve months ended March 31, 2006 and 2005, respectively.

Net Income Per Common Share. For purposes of calculating the basic and diluted earnings per share, no adjustments have been made to the reported amounts of net income. The following is a reconciliation of the denominator of basic and diluted earnings per share (“EPS”) computations shown on the face of the accompanying Consolidated Financial Statements (in thousands):

We repurchased 0.5 million, 4.8 million and 1.7 million shares of our common stock during the nine and twelve month periods ended December 31, 2006 and March 31, 2006 and 2005, respectively.

The following outstanding options were not included in the computation of diluted EPS because their effect would have been anti-dilutive (in thousands except price per share data):

In accordance with the contingently issuable shares provision of Statement of Financial Accounting Standard No. 128, Earnings

per Share, (“SFAS 128”), 369,981 shares of performance-based restricted stock were not included in the calculation of earnings per share for the nine months ended December 31, 2006 because the necessary conditions for vesting have not been satisfied.

Cash and Cash Equivalents. Cash and cash equivalents consist of cash and short-term investments. The short-term investments can be immediately converted to cash and are recorded at fair value. Of the total amount of cash and cash equivalents as of December 31, 2006 and March 31, 2006, $54.6 million and $24.2 million, respectively, was held by our subsidiaries in Europe.

Accounts Receivable. Accounts receivable are recorded on a gross basis less the allowance for doubtful accounts. We estimate the allowance for doubtful accounts based on existing economic factors, known information about the financial condition of our clients and the amount and age of the accounts. The accounts are generally written off after all collection attempts have been exhausted. We record a provision for estimated doubtful accounts as part of direct operating expenses. The following is a detail of the activity in our allowance for doubtful accounts for the years indicated (in thousands):

Inventory. Inventory consists primarily of paper used for printing communications and is located at clients’ locations, primarily in supermarkets and retailers’ warehouses. We record paper usage primarily based on actual print length at the time the communication is delivered and use the first-in, first-out method of costing. The paper inventory balance is adjusted periodically based on our physical inventory observation. Inventory is stated at the lower of cost or market.

Property and Equipment. Property and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method based on the estimated useful lives of the related assets, as follows: store equipment — color printers — seven years, thermal printers — five years; furniture and office equipment — five to ten years; building — thirty-nine and one-half years; building and other improvements — generally seven to ten years, but not to exceed the lease period; and purchased software — amortized over the length of the software agreement, not to exceed five years. Prior to the sale of our Japan Billboard business, billboards were depreciated using the straight-line method over an estimated useful life of eight years. Third-party installation costs for store equipment, net of amounts reimbursed by the retailer, are capitalized and amortized using the straight-line method over the estimated useful lives of the related store equipment. Maintenance and repair costs are expensed as incurred.

Capitalized Software Development Costs. Costs for software developed for internal use are capitalized in accordance with AICPA Statement of Position 98-1 (“SOP 98-1”), “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use,” and are amortized over five years. Computer software is internally developed to meet our internal requirements, and no substantive plan exists or is being developed to externally market internally developed software. Computer software costs that are incurred by us in the preliminary project stage are expensed as incurred. Certain other costs that meet the criteria of SOP 98-1 are capitalized. These costs include external direct costs of materials, external services consumed in developing internal-use computer software, and specifically identifiable payroll and payroll-related costs for employees who are directly associated with the development of internal-use computer software. Training costs and data conversion costs are expensed as incurred.

Goodwill. Goodwill represents the excess of the purchase price paid over the fair value of the tangible and identifiable intangible assets, net of the fair value of liabilities assumed in a business combination. Goodwill is subject to impairment tests to be performed at least annually, and more frequently if events and circumstances indicate that impairment is likely. Impairment is indicated when the implied fair market value is less than the carrying value of the reporting unit. Asset values determined to be impaired are expensed in the period when impairment is determined. To determine fair market value, we use a discounted cash flow approach, using the same assumptions as those used to develop our three-year, long-range plan, updated as necessary based on our internally-generated monthly forecasts. We incorporate a terminal value cash flow based upon an estimated future growth rate. See additional discussion in Note 3.

Patents, Net. The amount capitalized as patents includes only those patents acquired from others. Patents are amortized over their estimated useful lives which range from five to twenty years, using the straight-line method.

Impairment Testing of Long-Lived Assets. We review for the impairment of long-lived assets whenever events or changes in

circumstances indicate that the carrying amount of an asset may not be recoverable. If this review indicates that the carrying value of the long-lived assets will not be recoverable, as determined based on the expected undiscounted future cash flows of the long-lived assets, our carrying value of the long-lived assets is reduced by the amount by which the carrying value exceeds fair value. We use a discounted cash flow approach to determine fair value. Cash flows utilized in these analyses include the same assumptions as those used in our three-year, long-range plan, updated as necessary based on our internally-generated monthly forecasts. See additional discussion in Note 5.

Stock Based Compensation. Effective April 1, 2006, we adopted the provisions of Statement of Financial Accounting Standards No. 123R, Share-Based Payment, (“SFAS 123R”) for share-based compensation plans. We previously accounted for these plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, (“APB 25”) and related interpretations and disclosure requirements established by Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, (“SFAS 123”), as amended by Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure.

Under APB 25, no compensation expense was recorded in earnings for our stock options and awards granted under our employee stock purchase plan. The pro forma effects on net income and earnings per share for stock options and employee stock purchase plan awards were disclosed in a note to the financial statements. We adopted SFAS 123R using the “modified prospective application” method. Under this transition method, compensation cost recognized in the current fiscal year results of operations includes expense for share-based awards granted prior to, but not yet vested, as of April 1, 2006. This expense is based on the grant-date fair value estimated in accordance with the original provisions of SFAS 123. The cost for all share-based awards granted subsequent to April 1, 2006, represents the grant-date fair value that was estimated in accordance with the provisions of SFAS 123R. The results for prior periods have not been restated.

Fair Value of Financial Instruments. At December 31, 2006 and March 31, 2006, the carrying value of cash, accounts receivable, accounts payable and accrued expenses approximate fair value due to the short-term nature of these financial instruments. The carrying value of our short-term borrowings and long-term debt approximate fair value and are based on current interest rate and credit spread assumptions.

Concentration of Risk. Financial instruments, which potentially subject us to concentration of credit risk, consist principally of trade accounts receivable. Our revenue and related trade receivables are derived primarily from the sale of in-store electronic marketing and direct-to-patient communications. Accounts receivable are due primarily from companies located throughout the United States, Europe and Japan. Credit is extended based on an evaluation of the client’s financial condition and, generally, collateral is not required. At December 31, 2006, approximately 24.4% of Accounts receivable, net related to three clients. These three clients accounted for approximately 20.2% of consolidated revenue for the nine months ended December 31, 2006.

We rely on retail stores and pharmacies to provide access to their premises and consumers for the Catalina Marketing Network^{^®} and Health Resource Network to be successful. We believe the impact to the networks with respect to a loss of a single retail chain or pharmacy chain may be limited due to the diversity of participation. However, approximately 57% of the delivered in-store communications provided by CMS for its clients during the nine months ended December 31, 2006, were generated from within the stores belonging to five CMS retail chains. Also, over 89% of the communications we delivered on behalf of our pharmaceutical clients during the nine months ended December 31, 2006 were generated from within the pharmacies belonging to three CHR retail pharmacy chains. If any of these five retail chains or three pharmacy chains were to decide not to renew their contract with us, or if they reduce the number of locations where our systems are installed, a material reduction in revenues could result if these point-of-sale locations, or the transactions accessed at these locations, were not replaced.

As previously disclosed, we were notified by two of CMI’s retail clients that they did not intend to renew their contracts. On a combined basis, the retailer and manufacturer revenue generated by these two customers accounted for approximately 29% of CMI’s revenue for the nine months ended December 31, 2006. During 2007, we expect to partially recover the manufacturer revenue associated with these two clients through the growth of the Catalina Marketing Network and other initiatives.

SFAS No. 123R. We adopted the provisions of Statement of Financial Accounting Standard No. 123R, Share-Based Payment, (“SFAS 123R”) on April 1, 2006 for our domestic operations and on January 1, 2006 for our international subsidiaries. The adoption of SFAS 123R resulted in a pretax expense for stock-based compensation of $10.8 million in the nine months ended December 31, 2006 for which there was no corresponding expense in the prior year. For a complete discussion of the impact associated with the adoption of SFAS 123R, see Item 8 – “Consolidated financial Statements and Supplementary Data – Note 10 – Stock Based Compensation”.

SFAS No. 158. In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106 and 132(R).” This standard requires an employer to

recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur as a component of comprehensive income. The standard also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position. The requirement to recognize the funded status of a defined benefit postretirement plan is effective for the fiscal year ending after December 15, 2006. The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position is effective for the fiscal years ending after December 15, 2008. The adoption of these provisions did not have any material impact on our results of operations or financial position.

In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” SAB 108 provides guidance on the consideration of effects of the prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. The SEC staff believes registrants must quantify errors using both a balance sheet and income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. SAB 108 is effective for the first annual period ending after November 15, 2006 with early application encouraged. The adoption of this provision did not have any material impact on our results of operations or financial position.

In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We must determine whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation process, based on the technical merits of the position. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are currently reviewing this new standard to determine its effects, if any, on our results of operations or financial position.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. This standard establishes a standard definition for fair value, establishes a framework under generally accepted accounting principles for measuring fair value and expands disclosure requirements for fair value measurements. This standard is effective for financial statements issued for fiscal years beginning after November 15, 2007. We are currently reviewing this new standard to determine its effects, if any, on our results of operations or financial position.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities Including an amendment of FASB Statement No. 115”. This Statement permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. This Statement also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. This Statement does not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value. This Statement does not establish requirements for recognizing and measuring dividend income, interest income, or interest expense. We are currently reviewing this new standard to determine its effects, if any, on our results of operations or financial position.

We have historically made acquisitions based on various factors including client relationships, service offerings, competitive position, reputation, experience and specialized know-how. Our acquisition strategy was to build upon the capabilities of our various strategic business platforms through the expansion of service capabilities. In executing our acquisition strategy, one of the primary drivers in identifying and executing a specific transaction is the existence of, or the ability to, expand our existing client relationships. Due to the nature of our business, the companies we acquired frequently had minimal tangible net assets or identifiable intangible assets. The acquisition price was frequently determined by the future projected revenue and cash flow of the entity being acquired. Accordingly, a substantial portion of the purchase price was allocated to goodwill. On at least an annual basis, we perform an impairment test to assess whether the fair value of goodwill has been impaired.

The following tables present the changes in the carrying amount of goodwill during nine months ended December 31, 2006 and the fiscal years ended March 31, 2006 and March 31, 2005 (in thousands):

During the nine months ended December 31, 2006 we did not enter into any transactions that resulted in the acquisition of additional goodwill. Further, we did not incur any goodwill impairments based on our annual impairment testing as the estimated fair value of the applicable reporting units significantly exceeded the amount of goodwill attributed to those reporting units.

On September 15, 2004, we notified holders of common stock and options to purchase common stock of CHR that we were tendering an offer to purchase the shares of CHR not held by us. The tender offer period began on January 3, 2005 and closed on March 31, 2005. All remaining outstanding shares of CHR not held by us were tendered by March 31, 2005. Generally, CHR stockholders that owned their shares for a period of at least six months and one day prior to the day the shares were purchased by us were eligible to tender their shares under this offer. We paid $12.50 per share for 279,786 shares tendered by CHR shareholders, or $3.5 million, on April 8, 2005. In accordance with the purchase method of accounting, the $3.5 million was allocated to goodwill.

We tested the goodwill at CMRS for impairment during fiscal year 2005 due to a decline in CMRS’ forecasted cash flows. Based upon this testing, we determined that an impairment of goodwill had occurred and recorded an impairment charge of $2.6 million within discontinued operations, thereby eliminating the goodwill attributable to this business unit.

Goodwill related to DMS of $1.6 million was also eliminated during fiscal year 2005 due to a decline in DMS’ forecasted cash flows. We did not expect to recover this goodwill. However, subsequent to the write-off of goodwill within discontinued operations, we sold the business for an amount in excess of the net book value of the remaining net assets, resulting in a gain on the sale.

The gross and accumulated amortization balances relating to patents were as follows (in thousands):

Estimated five year amortization of patents was as follows as of December 31, 2006 (in thousands):

We recognized amortization expense of $1.3 million for the nine months ended December 31, 2006 and $1.8 million and $1.9 million for the twelve months ended March 31, 2006 and 2005, respectively, which is included on the Consolidated Statements of Operations within Depreciation and Amortization.

There were no impairment charges during the nine months ended December 31, 2006 or during the fiscal year ended March 31, 2006. In fiscal year 2005, we recorded impairment charges of $0.4 million and $0.3 million at CMRS and Corporate, respectively, because the estimated fair value of certain depreciable assets exceeded their carrying value. The impairment charge related to those assets of CMRS was included in Income (loss) from discontinued operations. The impairment charge related to those assets of Corporate was included in selling, general and administrative expenses.

The following table summarizes the impairment charges related to goodwill (as described in note 3) and other long-lived assets that we recorded during the fiscal year ended March 31, 2005 (in thousands):

The components of income before income taxes and the income tax provision consisted of the following (in thousands):

The reconciliation of the provision for income taxes based on the U.S. federal statutory income tax rate to our provision for income taxes was as follows (in thousands):

Deferred income tax assets or liabilities are computed based on the temporary differences between the financial statement and income tax basis of assets and liabilities using the enacted marginal income tax rate in effect for the year in which the differences are expected to reverse. Deferred income tax expenses or credits are based on the changes in the deferred income tax assets or liabilities from period to period.

Temporary differences for financial statement and income tax purposes result primarily from charges to operations for financial statement reporting purposes which are not currently tax deductible and from revenues deferred for financial statement reporting purposes which are currently taxable. The components of the deferred tax asset and liability were as follows (in thousands):

We periodically review the need for a valuation allowance against deferred tax assets and recognize these deferred

tax assets to the extent that realization is more likely than not. Based upon a review of earnings history and trends, forecasted earnings and the relevant expiration of carryforwards, we believe that the valuation allowances provided are appropriate. The valuation allowance decreased by $1.0 million during the nine months ended December 31, 2006 and decreased $1.3 million during the twelve months ended March 31, 2006. The decrease in the valuation allowance for both periods was primarily due to a decrease in foreign tax assets and utilization of a portion of the capital loss carryforward.

As of December 31, 2006, we had cumulative aggregate foreign taxable NOL carryforwards of $37.0 million. Approximately $11.9 million of the foreign NOLs can be carried forward indefinitely, while the remaining $25.1 million expire between 2007 and 2012. Foreign pre-tax losses represented by NOLs of approximately $33.1 million have already been deducted in the consolidated U.S. Corporation income tax return.

We do not provide for deferred taxes on certain unremitted foreign earnings, as we believe that earnings of our foreign subsidiaries have been and will be indefinitely reinvested in foreign operations and, therefore, the recording of deferred tax liabilities for unremitted foreign earnings is not required. As of December 31, 2006, the cumulative unremitted foreign earnings of our foreign subsidiaries are $44.6 million. It is impractical to determine the amount of unrecognized deferred taxes with respect to these earnings; however, a foreign tax credit may be available to partially reduce U.S. income taxes in the event of a distribution.

Our short-term borrowings and long-term debt consisted of the following (in thousands):

Maturities of long-term debt were as follows as of December 31, 2006 (in thousands):

On October 24, 2006, we amended and restated our August 2004 Credit Facility into a five-year, $175.0 million multi-currency revolving credit facility (“Credit Facility”) with J. P. Morgan Securities Inc. as the sole lead arranger and JP Morgan Chase, National Association serving as the administrative agent. Under certain conditions, we may increase the revolving credit line up to $275.0 million. The facility is unsecured and may be used for general corporate purposes including share repurchases, capital expenditures and dividend payments.

The Credit Facility also provides, within the maximum commitment, up to the U.S. dollar equivalent of $50.0 million in available borrowings in Japanese yen by Catalina Marketing Japan K.K., $25.0 million for U.S. dollar-only commercial and standby letters of credit, and a maximum U.S. dollar-only “Swing Line” (i.e., an overnight facility), as that term is defined in the agreement, of $10.0 million.

The interest rate on advances under the Credit Facility is based on (a) the greater of the Prime Rate or the Federal Funds Effective Rate plus one-half percent or, (b) the Eurocurrency Base Rate, as those terms are defined in the Credit Facility. A percentage margin, ranging from 0.45% to 1.125% and determined based upon our Leverage Ratio, as that ratio is defined in the Credit Facility, is added to the Eurocurrency Base Rate.

We will pay a quarterly commitment fee ranging from 0.09% to 0.225% of the unused portion of the Credit Facility and determined based upon our Leverage Ratio, as that ratio is defined in the Credit Facility. Usual and customary fees are payable for letters of credit that are issued under the agreement. We may, at our option, reduce the maximum commitment amount of the Credit Facility and generally may prepay any amounts outstanding without penalty. The Credit Facility is unsecured, with a negative pledge on all material assets, and is guaranteed by all of our material U.S. subsidiaries.

We provide customary, ongoing representations, warranties and covenants, and are subject to quarterly financial covenant compliance. These representations, warranties and covenants include timely submission of financial statements, compliance with

income tax, pension and other laws, limitations on liens and incurrence of debt, investments, mergers, consolidations and sales of assets, and limitations on transactions with affiliates. Financial compliance covenants include Interest Expense Coverage and Leverage Ratios, as those terms are defined in the agreement. Events of default under the Credit Facility include, but are not limited to, failure to make payments of principal, interest or fees within a cure period, violation of covenants, or a change in control of the Company, as those terms or events of default are defined in the Credit Facility agreement.

Lease Commitments. We lease certain office space and equipment under noncancellable operating leases that expire at various dates through fiscal year 2012. Rental expense under operating leases was $4.6 million in the nine months ended December 31, 2006 and $4.5 million and $5.8 million in the twelve months ended March 31, 2006 and 2005 respectively. Future minimum operating lease commitments as of December 31, 2006, were as follows (in thousands):

Contingent Earnout Payment. As part of the Restructuring and Amendment Agreement executed in 1999 between us and the former joint venture partners in our Japanese operations (the “Restructuring Agreement”), we have a contingent obligation to pay these former joint venture partners a final deferred earnout payment based on the future operating results of Japan. The Restructuring Agreement stipulates a potential earnout payment based on a predetermined formula calculated using financial results during a consecutive four quarter period ending between June 30, 2006 and June 30, 2007. The determination of the applicable four quarter period is contingent upon Japan achieving financial results on certain financial measurements as specified in the Restructuring Agreement. Based on our current estimates, we do not expect the earnout payment to be material; however, due to the fact that the earnout payment is measured based on the actual future financial results of Japan, a change in the results of operations or financial condition of Japan could cause the earnout payment to vary significantly.

Purchase Commitments. We have a purchase commitment to Epson America, Inc. for the purchase of color printers for use by our CMS and CMI business segments. The commitment provides for the purchase of printers over a period of approximately six years for a minimum of $88.2 million.

Our annual obligation for purchases of color printers as of December 31, 2006, was as follows (dollars in thousands):

Tax Contingency. Despite our belief that our income tax return positions are consistent with applicable tax laws, we believe that certain positions are likely to be challenged by taxing authorities. We are party to various claims and matters of litigation and tax assessments incidental to the normal course of our business. We record contingencies for these potential losses once they are deemed probable and estimable. We believe that the final resolution of these tax matters will not have a material adverse effect on our financial position, results of operations or cash flows.

Other Legal Matters. In addition, we are involved in claims and litigation arising out of our business, including claims and litigation brought against us, and litigation initiated by us to protect our intellectual property. We record accruals for potential losses arising from these claims and litigation once they are deemed probable and estimable.

We, and certain current and former directors and former officers of the Company and CHR, were named as defendants in numerous complaints purporting to be class actions which were filed in the United States District Court for the Middle District of Florida, Tampa Division, alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended and Rule 10b-5 thereunder. The actions were originally brought on behalf of those who purchased our common stock between January 17, 2002 and August 25, 2003, inclusive. The complaints contain various allegations, including that, during the alleged class period, the defendants issued false and misleading statements concerning our business and operations with the result of artificially inflating our share price and maintained inadequate internal controls. The complaints seek unspecified compensatory damages and other relief. In October 2003, the complaints were consolidated in the United States District Court for the Middle District of Florida and given the caption In re Catalina Marketing Corporation Securities Litigation, Case No. 8:03-CV-1582-T-27TBM. In October 2006, the Company entered into a memorandum of understanding to settle the pending consolidated shareholder class action lawsuit for $8.5 million, $8.2 million of which was funded by our insurance carriers and is reflected in our consolidated balance sheet as “Insurance Recovery Receivable”. The Company funded the remaining $300,000 of the settlement. Subsequently, in December 2006, the District Court granted preliminary approval to the settlement. While the terms of the settlement contained in the memorandum of understanding and stipulation filed with the court are on terms that do not adversely affect the Company and involve no admission of liability by the Company or any of the current and former directors and former officers named in the lawsuit, the settlement is not final as it is subject to various conditions including court approval and other customary conditions. In the event we are unable to settle the consolidated class action, we intend to continue to vigorously defend against these lawsuits. Furthermore, to the extent we are unable to settle these lawsuits pursuant to the terms of the pending settlement, we cannot currently predict the impact or resolution of this litigation or reasonably estimate a range of possible loss, which could be material. The resolution of these lawsuits may harm our business and have a material adverse impact on our financial condition and results of operations.

We calculate the fair value of options and stock appreciation rights (“SARs”) using the Black-Scholes pricing model and calculate the fair value of restricted stock based on the fair value of the stock on the date of grant. We use the straight-line attribution method which recognizes the compensation expense equally over the service period of the award. We estimate the impact of forfeitures that may occur prior to vesting and consider the amount of such forfeitures in the expense recognized over the requisite service period. In addition, the realization of tax benefits in excess of amounts recognized for financial reporting purposes is now recognized as a financing activity in the statement of cash flows rather than as an operating activity as previously required.

We make certain assumptions when valuing options and SARs including the expected life which is based on historical data as well as expected future behavior. During the nine months ended December 31, 2006 and the twelve months ended March 31, 2006 and March 31, 2005, we used the following weighted average assumptions in our fair value calculations for those grants issued in the respective years:

The per share weighted average fair values of options and SARs granted, including those shares issued under the employee stock purchase plan, in the nine months ended December 31, 2006 and the twelve months ended March 31, 2006 and March 31, 2005 were $8.75, $9.51 and $9.56, respectively.

Had compensation expense for these plans been recognized in accordance with SFAS No. 123, our net income and earnings per share would have been reduced to the following pro forma amounts (in thousands, except per share data):

For the year ended March 31, 2006, we reduced pro forma stock compensation expense by $19.3 million, net of income taxes, due to the reversal of expense related to forfeited options and changes to the estimated number of shares expected to vest for certain performance-based options. Conversely, our pro forma stock compensation expense for fiscal 2006 was increased by approximately $8.2 million, net of income taxes, due to the accelerated vesting of certain options. Effective February 23, 2006, our Board of Directors approved the acceleration of vesting of all unvested options held by certain employees and having an exercise price of $26.31 or greater. Options with respect to 836,618 shares of our common stock were subject to the acceleration.

For the year ended March 31, 2005, we reduced pro forma stock compensation expense by $5.6 million, net of income taxes, due to the reversal of expense related to forfeited options and changes to the estimated number of shares expected to vest for certain performance-based options. Conversely, our pro forma stock compensation expense for fiscal 2005 was increased by approximately $4.6 million, net of income taxes, due to the accelerated vesting of certain options. Effective March 31, 2005, our Board of Directors approved the acceleration of vesting of all unvested options held by employees to purchase our common stock and having an exercise price of $33.46 or greater. Options with respect to 316,220 shares of our common stock were subject to the acceleration.

With regard to the acceleration of options in years ended March 31, 2006 and 2005, those options that were accelerated had exercise prices in excess of the market value of our common stock on the date of the approval of the acceleration. The Board of Directors determined that the acceleration would serve the best interests of the shareholders by reducing our future compensation expense. As a result of the accelerated vesting of these options, we expect to avoid total compensation expense of approximately $12.8 million, net of income taxes, that we would otherwise have to recognize as an expense under SFAS No. 123 (Revised 2004), “Share-Based Payment,” (“SFAS No. 123R”), which we adopted effective April 1, 2006.

We administer the following plans that were approved by our Board of Directors and stockholders: the 1989 Stock Option Plan (the “1989 Plan”), which expired on April 26, 1999 and was replaced with the Amended and Restated 1999 Stock Award Plan (the

“1999 Plan,” previously known as the 1999 Stock Option Plan); a stock grant plan, the Catalina Marketing Corporation 1992 Director Stock Grant Plan (the “1992 Grant Plan”), which expired on October 27, 2002 and was replaced with the Catalina Marketing Corporation 2002 Director Stock Grant Plan (the “2002 Grant Plan”); and an employee stock purchase plan, the 2004 Employee Payroll Deduction Stock Purchase Plan (the “2004 Purchase Plan”), which replaced the Catalina Marketing Corporation Employee Payroll Deduction Stock Purchase Plan that expired on April 19, 2004.

In accordance with these stock based compensation plans, directors, officers and other eligible individuals receive SARs, restricted stock and other stock unit awards. Under the provisions of the 2004 Purchase Plan, participants are allowed to purchase shares at 85% of the lower of the market price on the first or last day of an offering period.

We have historically granted stock options to eligible employees on a discretionary basis. Beginning in April 2006, we began issuing restricted stock and SARs instead of stock options. We may continue to award stock options to a limited number of employees when appropriate.

1989 Stock Option Plan. Pursuant to the 1989 Plan, 17,250,000 shares of our common stock were reserved for issuance upon the exercise of options granted under the 1989 Plan. Through December 31, 2006, options to purchase an aggregate of 12,405,774 shares were granted, net of cancellations, of which options to purchase 146,752 shares were outstanding as of December 31, 2006.

The 1989 Plan provided for grants of Incentive Stock Options (“ISOs”) to employees (including employee directors). Options granted under the 1989 Plan generally became exercisable at a rate of 25% per year (20% per year for initial grants to new employees), commencing one year after the date of grant and generally had granted options to up to ten years. Certain options under the 1989 Plan, which were granted to certain of our executives, and which, vested after eight years but had an accelerated vesting schedule if we reach specified earnings per share targets, have all been cancelled. The exercise price of all ISOs granted under the 1989 Plan was required to be at least equal to the fair market value of the shares on the date of grant.

1999 Stock Award Plan. Pursuant to the 1999 Plan, 12,900,000 shares of our common stock are reserved for issuance. The 1999 Plan provides for the grant of stock options, SARs, restricted stock and other stock unit awards. Options and SARs granted under the 1999 Plan generally vest over four years. Restricted stock generally vest over three or four years and may be service based or performance based and usually vest in their entirety upon completion of the service or performance requirements. All awards expire ten years after grant date. As of December 31, 2006, 8,199,046 options / SARs and 571,804 restricted stock, net of cancellations have been issued. Under the 1999 Plan, 4,130,799 shares remained available for future grants.

Aggregate Stock Option Activity. As of December 31, 2006, options to purchase an aggregate of 13,040,073 shares had been exercised, including options to purchase 60,000 shares granted outside of any plan; options to purchase an aggregate of 7,624,747 shares were outstanding; and 4,130,799 shares remained available for future grants under the 1999 Plan. Of the options outstanding as of December 31, 2006, and March 31, 2006 and 2005, options to purchase 4,465,793, 4,152,727 and 2,707,717 shares, respectively, were immediately exercisable, with weighted average exercise prices of $28.20, $28.61, and $30.32, respectively. The following table summarizes options and SARs activity from April 1, 2004 through December 31, 2006:

The aggregate intrinsic value of options / SARs outstanding as of December 31, 2006 and March 31, 2006 was $20,246 and $4,704, respectively. These amounts were $7,526 and $2,365 for options / SARs exercisable as of December 31, 2006 and March 31, 2006, respectively. Of the unvested outstanding options and SARs, we expect 2.8 million to vest with a weighted average exercise price of $23.46, a weighted average remaining contractual life of 8.4 years and an intrinsic value of $12.7 million. The weighted average remaining contractual life of exercisable options / SARs was 5.9 years.

The following table summarizes restricted stock activity from April 1, 2006 through December 31, 2006:

1992 Director Stock Grant Plan. The 1992 Grant Plan provides for grants of common stock to non-employee members of the Board of Directors. A total of 300,000 shares of our common stock were authorized for issuance under the 1992 Grant Plan. As of

December 31, 2006, 137,930 shares had been granted, net of cancellations. Stock granted under the 1992 Grant Plan vests ratably in annual installments over each director’s remaining term. The 1992 Grant Plan expired on October 27, 2002; therefore, no shares are available for future grants under the 1992 Grant Plan.

2002 Director Stock Grant Plan. The 2002 Grant Plan, which replaced the 1992 Grant Plan, provides for grants of common stock to non-employee members of the Board of Directors. A total of 250,000 shares of our common stock were authorized for issuance under the 2002 Grant Plan. As of December 31, 2006, 57,886 have been granted from the 2002 Grant Plan leaving 192,114 shares available for future grants under the 2002 Grant Plan. Stock granted under the 2002 Grant Plan vests ratably in annual installments over each director’s remaining term.

Employee Stock Purchase Plan. Pursuant to the 2004 Purchase Plan, 1,300,000 shares of our common stock were reserved for issuance. During the nine months ended December 31, 2006, we issued 38,102 shares with a weighted average fair market values of $26.34. During the twelve months ended March 31, 2006 and 2005, we issued 34,776 and 5,150 shares with a weighted average fair market values of $25.38 and $29.63, respectively. Shares available for future grant total 1,221,972 as of December 31, 2006.

Under the 2004 Purchase Plan, employees may purchase our common stock at 85% of the lower of the market price on the first or last day of an offering period. The maximum each employee may purchase in an offering period is $12,500 in market value of our common stock. We will typically have two, six-month offering periods each year. The 2004 Purchase Plan qualifies under Section 423 of the Internal Revenue Code of 1986.

The effect of adoption of SFAS 123R on our financial results for the nine months ended December 31, 2006 was as follows (in thousands, except per share data):

The weighted average grant date fair value of options and SARs granted during the nine months ended December 31, 2006 and the twelve months ended March 31, 2006 and 2005, was $8.75, $9.51 and $9.56, respectively. In the nine months ended December 31, 2006 and twelve months ended March 31, 2006, 634,977 and 12,491 shares of restricted stock were granted with a weighted-average grant-date fair value of $23.00 and $24.02, respectively. There were no restricted stock grants in the twelve months ended March 31, 2005. The total intrinsic value of options exercised during the nine months ended December 31, 2006 and the twelve months ended March 31, 2006 and 2005 was $1,115,575, $700,476 and $1,262,997 respectively. We received cash from options exercised and shares purchased of $6.1 million for the nine months ended December 31, 2006 and $2.9 million and $4.7 million for the twelve months ended March 31, 2006 and 2005, respectively. We expect to satisfy all future share based awards with registered shares available to be issued.

As of December 31, 2006, there was $32.1 million of unrecognized compensation expense related to unvested awards that is expected to be recognized over a weighted average period of 1.7 years. The total fair value of awards vested was $6.3 million during the nine months ended December 31, 2006 and $21.6 million and $22.3 million during twelve months ended March 31, 2006 and 2005, respectively.

We have adopted a Stockholder Protection Plan (the “Protection Plan”). To implement this Protection Plan, we declared a dividend of one Preferred Share Purchase Right on each outstanding share of our common stock. The dividend distribution was payable to stockholders of record on May 12, 1997. The rights will be exercisable for fractions of a share of our Series X Junior Participating Preferred Stock only if a person or group acquires 15% or more of our common stock or announces or commences a tender offer for 15% or more of the common stock, except for certain instances defined in the Protection Plan.

We maintain a 401(k) Savings Plan, which provides benefits for substantially all of our employees who meet minimum age and length-of-service requirements. Amounts charged to expense for this plan totaled $1.3 million in the nine months ended December 31, 2006 and $1.0 and $1.1 million in the twelve month periods ended March 31, 2006 and 2005, respectively.

We maintain a non-qualified deferred compensation plan (the “Deferred Compensation Plan”). The Deferred Compensation Plan is designed to permit certain of our employees and directors to defer a portion of their compensation. The Deferred Compensation Plan allows participants to elect deferral of certain types of compensation, including directors fees, stock grants under the 1992 and 2002 Grant Plans and shares issuable upon the exercise of stock options, into stock units in the Deferred Compensation Plan, each of which represents a share of our common stock, and creates the Catalina Marketing Corporation Deferred Compensation Trust (the “Trust”). Amounts deposited in stock unit accounts are distributed in the form of shares of our common stock upon a payment event. Through the Trust, investment options such as mutual funds and money market funds are available to participants.

We followed the accounting guidance in EITF Issue No. 97-14, “Accounting for Deferred Compensation Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested.” As such, the accounts of the rabbi trust have been included in our Consolidated Financial Statements. The investment in assets other than our stock units and the related liability in the Deferred Compensation Plan were included in Prepaid Expenses and Other Current Assets and Accrued Expenses in our Consolidated Balance Sheets, respectively. We determined that all of our Deferred Compensation Plan investments currently held in mutual funds and money market funds are trading securities and as such are reported at fair value. Realized and unrealized holding gains and losses related to these investments, as well as the offsetting compensation expense, recognized in net income during the nine months ended December 31, 2006 was $0.1 million. This amount was $0.7 and $0.3 million during the twelve month periods ended March 31, 2006 and 2005, respectively. Participants’ elections to invest in our stock units are irrevocable. These stock units were initially recorded at fair value in the Statement of Stockholders’ Equity and were not subsequently marked to market.

CHR administered the Health Resource Publishing Company 1995 Stock Option Plan (the “1995 Plan”), which was approved by the Board of Directors and stockholders of CHR. The 1995 Plan expired on March 31, 2005.

Pursuant to the 1995 Plan, 1,250,000 shares of CHR’s common stock were reserved for issuance upon the exercise of options granted under the 1995 Plan. As of December 31, 2006, options to purchase an aggregate of 1,057,860 shares had been granted, net of cancellations, all of which have been exercised. No options were outstanding as of December 31, 2006. In 2005, options to purchase 500 shares were immediately exercisable, at weighted average exercise prices of $6.53 per share.

The 1995 Plan provided for grants of ISOs to employees (including employee directors) and non-qualified options to non-employee directors. Options granted under the 1995 Plan generally became exercisable at a rate of 25% per year or 20% per year for initial grants to new employees, commencing one year after the date of grant. Generally, options had terms of up to six years. Certain options under the 1995 Plan vested at a rate of 33% per year for the first two years and then vested 33% after six months, commencing one year after the date of grant. The exercise price of all ISOs granted under the 1995 Plan were at least equal to the fair market value of the shares on the date of grant.

Stock option activity for the twelve months ended March 31, 2006 and 2005 was as follows. There was no activity for the nine months ended December 31, 2006. See Note 14 for information about the tender offer to purchase CHR shares.

We account for gains and losses on the issuances of our subsidiaries’ stock as changes to paid-in capital. Our subsidiary, CHR, issued stock to employees and non-employee directors during the fiscal years ended March 31, 2005 and 2004.

Information on CHR stock issuances, shares repurchased by the company and the resulting change in our ownership of this subsidiary is included in the following table. There was no activity for the nine-months ended December 31, 2006. (Amounts in thousands, except per share and percentage data.)

In July 2006, our Board of Directors authorized an additional $100 million of funds to be available for the repurchase of our common stock. This authorization increased the $100 million the Board of Directors authorized in August 2005. We repurchased 0.5 million shares of our common stock during the nine months ended December 31, 2006 for a total of $15.0 million. During the twelve months ended March 31, 2006 and 2005, we repurchased 4.8 million and 1.7 million shares of our common stock for $114.3 million and $44.2 million respectively.

As of December 31, 2006, there was $126.5 million remaining under the July 24, 2006 authorization to repurchase shares. This authorization will expire when the total dollar amount authorized by our Board of Directors has been expended.

On August 14, 2006 we announced that the Board of Directors declared an annual cash dividend of $0.30 per share to common stockholders of record as of August 31, 2006, which was paid to such stockholders on September 15, 2006, and totaled approximately $13.9 million. In the prior year we also declared an annual cash dividend of $0.30 per share which was paid in October and totaled approximately $14.5 million.

In fiscal year 2002, we implemented a plan to provide healthcare benefits to certain eligible retirees and active employees and their eligible dependents. The plan contains no assets, and we do not anticipate making contributions to the plan, other than for current benefit payments. Benefits are funded from our assets on a current basis. Plan benefits are subject to co-payments, deductibles and other limits as defined. The funding of the cost of healthcare benefits is at the discretion of management. A detail of the net periodic expense was as follows (in thousands):

The following table represented our accumulated postretirement benefit obligation and funded status as of December 31, 2006 and March 31, 2006. The amounts as of December 31, 2006 reflect the adoption of SFAS 158:

The impact of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 was a $0.2 million reduction of the accumulated postretirement benefit obligation for the period ended December 31, 2006.

We use a December 31 measurement date. For the nine months ended December 31, 2006, a weighted average discount rate of 5.85% and annual rate of increase in the per capita cost of healthcare benefits of 12.0% was assumed. The per capita cost of healthcare benefits rate was assumed to decrease gradually to 6.0% for the year ending December 31, 2015 and remain at that level thereafter. For the year ended March 31, 2006, a weighted average discount rate of 5.75% and an annual rate of increase in the per capita cost of healthcare benefits of 12.0% was assumed, and the per capita cost of healthcare benefits rate was assumed to decrease gradually to 6.0% for the fiscal year ending March 31, 2015 and remain at that level thereafter. For the year ended March 31, 2005, a weighted average discount rate of 5.75% and an annual rate of increase in the per capital cost of healthcare benefits of 12.0% was assumed, and the per capita cost of healthcare benefits rate was assumed to decrease gradually to 6.0% for the fiscal year ending March 31, 2018 and remain at that level thereafter.

Assumed healthcare cost trend rates may have a significant effect on the amounts reported for healthcare plans. A one-percentage-point change in the assumed healthcare cost trend rate would have the following effects (in thousands):

The gross benefits expected to be paid and gross subsidies expected to be received in each of the next five fiscal years and the aggregate amounts for the five years thereafter as of December 31, 2006, were as follows (in thousands):

Description of Segments. See the discussion of our segments in Note 1. Summarized information related to the reportable segments for Catalina Marketing Corporation is shown below. These segments were reported in a manner consistent with the way management evaluates the businesses.

Basis for Presentation. In general, results of the operating segments were reported based on U.S. GAAP and the accounting policies were consistent with those described in Note 2. Certain costs generated by the Corporate group (“Corporate”) were allocated to the operating segments as discussed below. Furthermore, all of the significant domestic property and equipment was recorded by Corporate, but the associated depreciation and amortization was allocated to the domestic operating segments.

Allocation of Corporate Group Operating Expenses. Our Corporate group’s operating expenses include costs for retail store support, information technology, corporate accounting, client services, marketing, human resources, procurement, and new business development and executive management. These costs are included in direct operating expenses, selling, general and administrative costs and depreciation and amortization expense in the accompanying Consolidated Statements of Operations for the nine months ended December 31, 2006 and twelve months ended March 31, 2006 and 2005, respectively. For purposes of segment reporting, these Corporate costs are allocated to the CMS and CHR business segments using methods considered reasonable by management and which provide management with a realistic measure of utilization of Corporate services by the respective business segments. Costs that can be directly attributed to the business unit are allocated to that business unit. Costs that are indirectly attributed to the business units are allocated proportionately based on the business unit’s revenues, number of printed communications, square feet of space used, headcount or other relevant statistics, depending on the type of cost. For example, the cost to maintain our corporate headquarters is allocated to the domestic business segments based on the estimated square footage each business unit occupies; paper and store maintenance costs are allocated to the domestic business segments based upon the number of printed communications; data communications costs are allocated based upon revenues. Of the total Corporate group operating expenses, 61.5% was allocated to operating segments during the nine months ended December 31, 2006. These amounts were 63.2% and 63.8% for the twelve month periods ended March 31, 2006 and 2005, respectively. Because general corporate overhead cannot be allocated to discontinued operations, Corporate expenses previously allocated to the segments now classified as discontinued operations were re-allocated to Corporate.

Segment Financial Data. A disaggregation of our consolidated data for the nine months ended December 31, 2006 and the twelve months ended March 31, 2006 and 2005 is presented in the following tables (in thousands).

Revenues from a single client represented approximately 9.7% of consolidated revenues for the nine months ended December 31, 2006. These amounts were approximately 11.8% and 13.7% for the twelve months ended March 31, 2006 and 2005, respectively. Revenues from this client were included in CMS and CMI.

Capital expenditures for the domestic segments are generally made by Corporate. Depreciation expense is allocated to the domestic segments from Corporate.

In November 2003, we announced our intent to divest Japan Billboard, DMS and CMRS, which were deemed not to be strategically aligned with our current core businesses. These businesses were sold during fiscal year 2005. As such, their results of operations have been reflected as discontinued operations in the accompanying Consolidated Financial Statements.

On August 31, 2004, we sold the stock of Japan Billboard for 100 Japanese yen to an employee who was acting as the local General Manager of Japan Billboard until the date of the sale. The transaction was effective as of July 31, 2004. The loss on the disposition of Japan Billboard of $0.5 million includes a gain of $0.5 million relating to the recognition of foreign currency translation effects previously recorded in the cumulative translation adjustment in the balance sheet.

Discontinued operations information related to Japan Billboard was as follows (in thousands):

On September 17, 2004, we sold DMS and received cash proceeds of $5.5 million. Discontinued operations information related to DMS was as follows (in thousands):

We sold CMRS on November 29, 2004. Certain assets and liabilities of this business were not transferred to the buyer, including a lease obligation for CMRS’ main office facility in Kentucky. We vacated this office facility during the fourth quarter of fiscal year 2005.

Discontinued operations information related to CMRS was as follows (in thousands):

Combined discontinued operations information for Japan Billboard, DMS and CMRS was as follows (in thousands):

The following table presents certain unaudited quarterly results for 2006 and 2005 as reported (in thousands, except per share amounts):

In the nine months ended December 31, 2006 and the twelve months ended March 31, 2006 and 2005, we made or committed to make donations totaling $0.8 million, $0.4 million and $0.8 million, respectively, to the Catalina Marketing Charitable Foundation (“Foundation”), a not-for-profit charitable organization. The board of directors of the Foundation is comprised of certain of members of our management.

During the fiscal year ended March 31, 2005 we made lease payments of $0.4 million to a lessor for the use of an office building. The lessor was an affiliate of the former president of CMRS, who resigned during 2003. The lease for this office building was terminated in fiscal year 2005, prior to its contractual expiration date in 2009. We paid $1.0 million in fiscal year 2005 for the early termination of the lease.

Note 22. Change in Fiscal Year End and Elimination of Reporting Lag for Foreign Subsidiaries

We changed our fiscal year end from March 31st to December 31st, effective December 31, 2006. In conjunction with the change in year-end, we eliminated the three-month reporting lag previously used for reporting the results of Catalina Marketing International (“CMI”). As of December 31, 2006, all of our consolidated subsidiaries had the same balance sheet date. Beginning January 1, 2007, all subsidiaries will have the same fiscal reporting period. The change in year-end better aligns our reported operating periods with the fiscal year of the majority of our CPG manufacturer and pharmaceutical manufacturer clients, while the elimination of the reporting lag for CMI allows us to report the results of our foreign subsidiaries in a more timely manner.

The consolidated statements of operations, cash flows, and changes in shareholders’ equity reflect results for the nine-month transition period ended December 31, 2006 and the fiscal years ended March 31, 2006 and 2005. The consolidated balance sheets reflect the financial position of the Company at December 31, 2006, and March 31, 2006. In conjunction with the elimination of the reporting lag, we adjusted certain intercompany balances, which had previously been reported on the three-month lag, resulting in an addition to retained earnings. Net income of CMI for the three-month period ended December 31, 2006 is also reflected as an addition to retained earnings in the consolidated statement of changes in stockholders’ equity and comprehensive income. Finally, the net change in cash and cash equivalents of our foreign subsidiaries for this three-month period is reported on a separate line in the consolidated statement of cash flows.

The consolidated statement of operations and cash flows are provided below with comparative information for the nine months ended December 31, 2006 and 2005. The financial information provided for the nine months ended December 31, 2005 is unaudited since it represented an interim period of fiscal year 2006. Both periods reflect financial results before the elimination of the CMI reporting lag. The unaudited financial information for the nine-month period ended December 31, 2005, include all normal recurring adjustments necessary for a fair statement of the results for that period.

Results of Foreign Subsidiaries for the Three Months Ended December 31, 2006

Net income of CMI for the three months ended December 31, 2006 was $0.7 million and is reflected as an addition to retained earnings in the consolidated statement of changes in shareholders’ equity and comprehensive income. The components of this net income, which includes all intercompany expenses necessary to reflect the operations of CMI on a stand-alone basis, are as follows:

Consolidated retained earnings includes the net income of CMI for the three months ended December 31, 2006, as well as the elimination of intercompany expenses between CMI and our domestic business. The following table provides the summary of all adjustments to retained earnings as a result of the elimination of the three month reporting lag.

On February 20, 2007, we received an unsolicited proposal from ValueAct Capital Master Fund, L.P. (“ValueAct”) to acquire by merger 100% of the outstanding equity interests of the company that ValueAct does not already own for $32.00 per share in cash. The receipt of ValueAct’s unsolicited proposal followed the Company’s prior announcement that the previously formed special committee of the Board of Directors had determined not to proceed with any of the interested parties that had submitted offers to acquire the Company. The Company has advised ValueAct that its proposal is under consideration by the Company’s Board of Directors in consultation with its advisors. The Company’s Board of Directors, in turn, has appointed a special committee to consider the appropriate response to the proposal from ValueAct.

Conclusion regarding the effectiveness of disclosure controls and procedures. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2006. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of December 31, 2006, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective.

Changes in internal control over financial reporting. During our most recent fiscal quarter, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Management’s report on internal control over financial reporting and attestation of public accounting firm. The report of management on the effectiveness of our internal control over financial reporting and the associated attestation report of our independent registered certified public accounting firm are set forth in Item 8 – “Consolidated Financial Statements and Supplementary Data”.

The information called for by Items 10, 11, 12, 13 and 14 will be contained in our definitive Proxy Statement for the 2007 Annual Meeting of Stockholders under the captions Compensation of Executive Officers and Non–Employee Directors, Compensation Committee Interlocks and Insider Participation, Report of the Compensation Committee, Share Ownership of Certain Beneficial Owners and Management, Nomination and Election of Directors, and Audit Compensation Information and is incorporated herein by reference. The definitive Proxy Statement will be filed with the SEC within 120 days of the period ended December 31, 2006.

(a)(1). Financial Statements. The following is a list of the Consolidated Financial Statements included in Item 8 of this Form 10-K.

(a)(2). Financial Statement Schedules (EDGAR only). All other schedules are omitted because they are not applicable or not required or because the required information is included in the Consolidated Financial Statements or Notes thereto.

Pursuant to the requirements of Section 13 or 15(d) 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, on February 28, 2007.


		CATALINA MARKETING CORPORATION (Registrant)

By:		/s/ Rick P. Frier
		Rick P. Frier
		Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated.


200 Carillon Parkway, St. Petersburg, FL		33716-2325
*(Address of principal executive offices)*		*(Zip Code)*


Title of Each Class		Name of Each Exchange on Which Registered
Common Stock, $0.01 Par Value		New York Stock Exchange


		Page No.

	PART I
Item 1.	Business	3
Item 1A.	Risk Factors	8
Item 1B.	Unresolved Staff Comments	13
Item 2.	Properties	13
Item 3.	Legal Proceedings	13
Item 4.	Submission of Matters to a Vote of Security Holders	14
	PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	14
Item 6.	Selected Financial Data	16
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	28
Item 8.	Consolidated Financial Statements and Supplementary Data	29
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	63
Item 9A.	Controls and Procedures	64
Item 9B.	Other Information	64
	PART III
Item 10.	Directors, Executive Officers and Corporate Governance	64
Item 11.	Executive Compensation	64
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	64
Item 13.	Certain Relationships and Related Transactions and Director Independence	64
Item 14.	Principal Accounting Fees and Services	64
	PART IV
Item 15.	Exhibits, Financial Statement Schedules	64


	High		Low		Dividends Declared per share of Common stock
Fiscal Year Ended March 31, 2006:
June 30, 2005	$	26.33	$	22.85	$	—
September 30, 2005		26.97		22.52		0.30
December 31, 2005		27.54		22.36		—
March 31, 2006		26.28		21.71		—

Nine Months Ended December 31, 2006:

June 30, 2006	$	29.77	$	22.52	$	—
September 30, 2006		29.49		26.73		0.30
December 31, 2006		29.11		24.23		—


Period (Month of)	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs⁽¹⁾
					(in thousands)
Nine Months Ended December 31, 2006
April 2006	—		NA	—	$	41,507
May 2006	—		NA	—	$	41,507
June 2006	—		NA	—	$	41,507
July 2006	—		NA	—	$	141,507
August 2006	60,500	$	28.35	60,500	$	139,792
September 2006	227,251	$	27.61	227,251	$	133,517
October 2006	249,193	$	28.13	249,193	$	126,507
November 2006	—		NA	—	$	126,507
December 2006	—		NA	—	$	126,507


	As of and for the Nine Months Ended December 31, 2006		As of and for the Fiscal Years Ended March 31,
	As of and for the Nine Months Ended December 31, 2006		2006		2005			2004			2003
	(In thousands, except per share amounts)
Statement of operations data:
Revenues	$	340,874	$	417,746	$	410,062		$	408,632		$	383,849
Income from continuing operations		42,799		71,616		68,596			60,397			51,564
Income (loss) from discontinued operations ⁽¹⁾		—		—		(3,144	)		(78,900	)		3,534
Cumulative effect of accounting change, net-of-tax⁽²⁾		—		—		—			(770	)		—
Net income (loss) ⁽³⁾		42,799		71,616		65,452			(19,273	)		55,098
Diluted income (loss) per common share:
From continuing operations	$	0.92	$	1.46	$	1.31		$	1.15		$	0.94
From discontinued operations ⁽¹⁾		—		—		(0.06	)		(1.50	)		0.06
Cumulative effect of accounting change, net-of-tax⁽²⁾		—		—		—			(0.02	)		—

Net income (loss)	$	0.92	$	1.46	$	1.25		$	(0.37	)	$	1.00

Diluted weighted average common shares outstanding		46,633		48,925		52,356			52,324			54,885
Balance sheet data:
Cash and cash equivalents	$	62,882	$	28,117	$	116,191		$	72,704		$	1,715
Total assets		468,492		337,095		392,738			386,809			422,421
Long-term debt		127,710		61,803		34,324			29,908			49,926
Total stockholders’ equity		184,171		143,157		196,374			184,662			215,995
Cash dividend declared per common share	$	0.30	$	0.30	$	0.30		$	—		$	—
Other data:
Installed retail store base at end of period – CMS		22,072		21,048		17,609			17,604			17,498
Installed pharmacy base at end of period – CHR		13,206		12,780		12,423			11,929			17,827
Installed retail store base at end of period – CMI		7,994		7,316		5,907			5,545			4,069
Capital expenditures	$	97,491	$	60,254	$	22,527		$	26,427		$	42,555
Payments for repurchases of common stock	$	15,000	$	114,317	$	44,174		$	13,307		$	71,973


	Nine Months Ended
	December 31, 2006			December 31, 2005			Dollar Change			Percentage Change
Revenues
CMS	$	200,546		$	176,279		$	24,267		13.8	%
CHR		71,565			62,500			9,065		14.5
CMI		68,426			53,045			15,381		29.0
Corporate		3,717			2,633			1,084		41.2
Eliminations		(3,380	)		(2,624	)		(756	)	(28.8	)

Total Revenues	$	340,874		$	291,833		$	49,041		16.8	%


	Nine Months Ended
	December 31, 2006			December 31, 2005			Dollar Change			Percentage Change
Income (Loss) from Operations
CMS	$	73,065		$	75,783		$	(2,718	)	(3.6	)%
CHR		23,722			18,309			5,413		29.6
CMI		18,617			12,917			5,700		44.1
Corporate		(44,100	)		(29,778	)		(14,322	)	(48.1	)

Total Income from Operations	$	71,304		$	77,231		$	(5,927	)	(7.7	)%


	Nine Months Ended
	December 31, 2006			December 31, 2005			Dollar Change			Percentage Change
Net Income (Loss)
CMS	$	43,653		$	45,090		$	(1,437	)	(3.2	)%
CHR		14,114			10,894			3,220		29.6
CMI		8,804			5,008			3,796		75.8
Corporate		(23,772	)		(13,388	)		(10,384	)	(77.6	)

Net Income	$	42,799		$	47,604		$	(4,805	)	(10.1	)%


	December 31,
	2006	2005
Retailer stores installed	22,072	17,788
Average weekly shoppers reached (in millions)	251	223
Number of communications printed (in millions)	2,441	2,164


	Year Ended
	March 31, 2006			March 31, 2005			Dollar Change			Percentage Change
Revenues
CMS	$	254,393		$	269,612		$	(15,219	)	(5.6	)%
CHR		89,527			76,167			13,360		17.5
CMI		73,817			64,116			9,701		15.1
Corporate		3,667			3,613			54		1.5
Eliminations		(3,658	)		(3,446	)		(212	)	(6.2	)

Total Revenues	$	417,746		$	410,062		$	7,684		1.9	%


	Year Ended
	March 31, 2006			March 31, 2005			Dollar Change			Percentage Change
Income (Loss) from Operations
CMS	$	113,802		$	124,283		$	(10,481	)	(8.4	)%
CHR		27,609			15,729			11,880		75.5
CMI		16,588			15,503			1,085		7.0
Corporate		(43,812	)		(46,713	)		2,901		6.2

Total Income from Operations	$	114,187		$	108,802		$	5,385		4.9	%


	Year Ended
	March 31, 2006			March 31, 2005			Dollar Change			Percentage Change
Net Income (Loss)
CMS	$	67,712		$	73,879		$	(6,167	)	(8.3	)%
CHR		16,427			9,356			7,071		75.6
CMI		6,896			7,395			(499	)	(6.7	)
Corporate		(19,419	)		(22,034	)		2,615		11.9

Net Income from Continuing Operations	$	71,616		$	68,596		$	3,020		4.4

Discontinued Operation		—			(3,144	)		3,144		NM

Net Income	$	71,616		$	65,452		$	6,164		9.4	%


			Payments Due by Period
	Total		2007		2008 - 2009		2010 - 2011		After 2011
Long term debt ⁽¹⁾	$	154,982	$	5,669	$	11,337	$	137,976	$	—
Postretirement medical benefit costs		1,216		105		230		248		633
Operating leases		18,013		5,277		9,121		3,104		511
Purchase obligations for in-store equipment		33,767		867		24,900		8,000		—
Miscellaneous contracts		1,427		219		592		616		—

Total	$	209,405	$	12,137	$	46,180	$	149,944	$	1,144


		Page
Management’s Report on Internal Control Over Financial Reporting		29
Report of Independent Registered Certified Public Accounting Firm		30
Consolidated Statements of Operations, Nine Months ended December 31, 2006 and Fiscal Years Ended March 31, 2006 and 2005		31
Consolidated Balance Sheets at December 31, 2006 and March 31, 2006		32
Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss), Nine Months ended December 31, 2006 and Fiscal Years Ended March 31, 2006 and 2005		33
Consolidated Statements of Cash Flows, Nine Months ended December 31, 2006 and Fiscal Years Ended March 31, 2006 and 2005		34
Notes to the Consolidated Financial Statements		35


	Nine Months Ended December 31,			Fiscal Years Ended March 31,
	2006			2006			2005
	(In thousands except per share data)
Revenues	$	340,874		$	417,746		$	410,062

Costs and expenses:
Direct operating expenses (exclusive of depreciation and amortization shown below)		116,392			135,475			129,449
Selling, general and administrative expenses		123,189			132,098			129,365
Depreciation and amortization		29,989			35,986			42,446

Total costs and expenses		269,570			303,559			301,260

Income from operations		71,304			114,187			108,802

Interest (expense)		(2,817	)		(1,006	)		(1,490	)
Other income, net		1,389			495			2,940

Income from continuing operations before income taxes		69,876			113,676			110,252
Provision for income taxes		27,077			42,060			41,656

Income from continuing operations		42,799			71,616			68,596

Discontinued operations:
Loss from discontinued operations		—			—			(4,272	)
Gain on dispositions of discontinued operations, net		—			—			1,128

Loss from discontinued operations		—			—			(3,144	)

Net income	$	42,799		$	71,616		$	65,452

Earnings per share – basic:
Income per common share from continuing operations	$	0.93		$	1.47		$	1.31
Loss per common share from discontinued operations		—			—			(0.06	)

Net income per common share	$	0.93		$	1.47		$	1.25

Weighted average common shares outstanding		46,189			48,629			52,167

Earnings per share – diluted:
Income per common share from continuing operations	$	0.92		$	1.46		$	1.31
Loss per common share from discontinued operations		—			—			(0.06	)

Net income per common share	$	0.92		$	1.46		$	1.25

Weighted average common shares outstanding		46,633			48,925			52,356


	December 31, 2006			March 31, 2006
ASSETS	(In thousands except share data)

Current Assets:
Cash and cash equivalents	$	62,882		$	28,117
Accounts receivable, net		81,586			63,092
Insurance recovery receivable		8,200			—
Inventory		5,615			4,579
Deferred tax asset		9,367			6,386
Prepaid expenses and other current assets		10,950			10,978

Total current assets		178,600			113,152
Property and equipment:
Store equipment		322,106			248,621
Furniture and office equipment		57,652			55,469
Building		22,296			22,296
Building and other improvements		9,160			8,983
Software		43,826			36,655
Land		4,110			4,110

		459,150			376,134
Less - accumulated depreciation and amortization		(263,824	)		(247,633	)

Property and equipment, net		195,326			128,501
Patents, net		8,717			9,977
Goodwill		83,992			83,992
Other assets		1,857			1,473

Total assets	$	468,492		$	337,095

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities:
Accounts payable	$	24,967		$	29,245
Income taxes payable		9,720			4,988
Accrued litigation settlement		8,200			—
Accrued expenses		67,874			58,421
Deferred revenue		36,678			28,989
Current portion of long-term debt		—			53

Total current liabilities		147,439			121,696
Long-term deferred tax liability		5,605			6,817
Long-term debt		127,710			61,803
Other long-term liabilities		3,567			3,622

Total liabilities		284,321			193,938
Commitments and contingencies
Stockholders’ Equity:
Preferred stock; $0.01 par value; 5,000,000 authorized shares; none issued and outstanding		—			—
Common stock; $0.01 par value; 150,000,000 authorized shares and 46,463,762 and 46,138,208 shares issued and outstanding at December 31, 2006 and March 31, 2006, respectively		464			461
Additional paid-in capital		11,535			14
Accumulated other comprehensive income		5,610			509
Retained earnings		166,562			142,173

Total stockholders’ equity		184,171			143,157

Total liabilities and stockholders’ equity	$	468,492		$	337,095


	Comprehensive Income		Number of Shares		Par Value of Common Stock			Additional Paid-in Capital			Accumulated Other Comprehensive Income / (Loss)			Retained Earnings			Total Stockholders’ Equity
	(In thousands)
BALANCE AT MARCH 31, 2004			52,134		$	521		$	2,485		$	(312	)	$	181,968		$	184,662

Issuance of common stock			230			2			4,682			—			—			4,684
Increase in investment in subsidiary, net of tax			—			—			238			—			—			238
Tax benefit from exercise of non-qualified stock options and disqualified dispositions			—			—			258			—			—			258
Repurchase, retirement and cancellation of common stock			(1,652	)		(16	)		(8,023	)		—			(36,135	)		(44,174	)
Deferred compensation plan common stock unit and Directors’ common stock grants			49			1			343			—			—			344
Dividends on common stock			—			—			17			—			(15,670	)		(15,653	)
Net income	$	65,452	—			—			—			—			65,452			65,452
Foreign currency translation adjustment		563	—			—			—			563			—			563

Comprehensive income	$	66,015

BALANCE AT MARCH 31, 2005			50,761		$	508		$	—		$	251		$	195,615		$	196,374

Issuance of common stock			139			1			2,771			—			—			2,772
Tax benefit from exercise of non-qualified stock options and disqualified dispositions			—			—			345			—			—			345
Repurchase, retirement and cancellation of common stock			(4,780	)		(48	)		(3,689	)		—			(110,580	)		(114,317	)
Deferred compensation plan common stock unit and Directors’ common stock grants			18			—			560			—			—			560
Dividends			—			—			27			—			(14,478	)		(14,451	)
Net income	$	71,616	—			—			—			—			71,616			71,616
Foreign currency translation adjustment		258	—			—			—			258			—			258

Comprehensive income	$	71,874

BALANCE AT MARCH 31, 2006			46,138		$	461		$	14		$	509		$	142,173		$	143,157

Issuance of common stock			852			8			6,116			—			—			6,124
Tax benefit from exercise of non-qualified stock options and disqualified dispositions			—			—			362			—			—			362
Repurchase, retirement and cancellation of common stock			(537	)		(6	)		(7,088	)		—			(7,906	)		(15,000	)
Deferred compensation plan common stock unit and Directors’ common stock grants			11			1			565			—			—			566
Stock based compensation			—			—			11,535			—			—			11,535
Effect of change in foreign subsidiaries’ reporting lag			—			—			—			—			3,410			3,410
Dividends			—			—			31			—			(13,914	)		(13,883	)
Net income	$	42,799	—			—			—			—			42,799			42,799
Actuarial gain associated with post retirement benefits		61	—			—			—			61			—			61
Foreign currency translation adjustment		5,040	—			—			—			5,040			—			5,040

Comprehensive income	$	47,900

BALANCE AT DECEMBER 31, 2006			46,464		$	464		$	11,535		$	5,610		$	166,562		$	184,171


	Nine Months Ended December 31,			Fiscal Years Ended March 31,
	2006			2006			2005
				(In thousands)
Cash Flows from Operating Activities:
Net income	$	42,799		$	71,616		$	65,452
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		29,989			35,986			43,689
Provision for (recoveries of) doubtful accounts		180			181			(297	)
Amortization of deferred financing fees		102			144			276
Impairment charges		—			—			4,907
Stock-based compensation expense		10,761			—			—
Loss on sale of equipment and businesses		844			1,275			1,994
Deferred income taxes		(3,523	)		(3,303	)		2,394
Other non-cash operating activities		132			995			1,058
Changes in operating assets and liabilities:
Receivables		(35,186	)		(7,158	)		(4,101	)
Inventory, prepaid expenses and other assets		(2,166	)		(1,560	)		3,786
Accounts payable		(6,081	)		8,747			6,226
Taxes payable		4,741			(1,765	)		4,602
Accrued liabilities		12,305			(5,075	)		(7,375	)
Deferred revenue		12,401			1,591			(4,620	)

Net cash provided by operating activities		67,298			101,674			117,991

Cash Flows from Investing Activities:
Capital expenditures		(97,491	)		(60,254	)		(22,527	)
Proceeds from sale of property, equipment and businesses		—			—			5,850
Business acquisition payments		—			(3,497	)		(914	)
Other		279			—			—

Net cash used in investing activities		(97,212	)		(63,751	)		(17,591	)

Cash Flows from Financing Activities:
Proceeds from the Corporate Facility		138,000			75,000			30,000
Payments on the Corporate Facility		(76,000	)		(76,000	)		—
Payments on VIE indebtedness		—			—			(29,565	)
Proceeds from Japan borrowings		2,593			3,273			33,831
Payments on Japan borrowings		(54	)		(278	)		(37,042	)
Repurchase of Company common stock		(15,000	)		(114,317	)		(44,174	)
Excess tax benefit on exercise of stock options		362			—			—
Proceeds from issuance of common and subsidiary stock		6,155			2,772			4,922
Cash dividends paid		(13,883	)		(14,451	)		(15,653	)
Financing fees paid		—			—			(714	)

Net cash provided by (used in) financing activities		42,173			(124,001	)		(58,395	)

Effect of exchange rate changes on cash and cash equivalents		1,451			(1,996	)		1,482

Net change in cash and cash equivalents before elimination of reporting lag		13,710			(88,074	)		43,487
Effect of change in foreign subsidiaries’ reporting lag:
Net cash provided by operating activities		19,969			—			—
Net cash used in investing activities		(1,842	)		—			—
Net cash provided by financing activities		1,699			—			—
Effect of exchange rate changes on cash and cash equivalents		1,229			—			—

Net change in cash and cash equivalents due to elimination of reporting lag		21,055			—			—

Cash and cash equivalents at beginning of year		28,117			116,191			72,704

Cash and cash equivalents at end of year	$	62,882		$	28,117		$	116,191

Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for
Interest	$	2,707		$	774		$	1,827
Income taxes	$	27,193		$	46,780		$	31,666


	Nine Months Ended December 31, 2006			Fiscal Years Ended March 31,
	Nine Months Ended December 31, 2006			2006			2005
Allowance for Doubtful Accounts
Beginning balance	$	1,795		$	2,443		$	3,674
Increase (decrease) in provision		180			181			(297	)
Account write-offs, net of recoveries		(195	)		(829	)		(934	)

Ending balance	$	1,780		$	1,795		$	2,443


	Nine Months Ended December 31, 2006
	CMS		CHR		CMI		DMS			CMRS			Total Consolidated
	CMS		CHR		CMI		DMS			CMRS			Total Consolidated
Beginning Balance	$	20,210	$	39,629	$	24,153	$	—		$	—		$	83,992
Goodwill acquired		—		—		—		—			—			—

Ending Balance	$	20,210	$	39,629	$	24,153	$	—		$	—		$	83,992


	Fiscal Year Ended March 31, 2006
	CMS		CHR		CMI		DMS			CMRS			Total Consolidated
	CMS		CHR		CMI		DMS			CMRS			Total Consolidated
Beginning Balance	$	20,210	$	36,132	$	24,153	$	—		$	—		$	80,495
Goodwill acquired		—		3,497		—		—			—			3,497

Ending Balance	$	20,210	$	39,629	$	24,153	$	—		$	—		$	83,992


	Fiscal Year Ended March 31, 2005
	CMS		CHR		CMI		DMS			CMRS			Total Consolidated
	CMS		CHR		CMI		DMS			CMRS			Total Consolidated
Beginning Balance	$	20,210	$	36,132	$	24,153	$	1,609			2639		$	84,743
Goodwill acquired		—		—		—		(1,609	)		(2,639	)		(4,248	)

Ending Balance	$	20,210	$	36,132	$	24,153	$	—		$	—		$	80,495


	Weighted Avg. Useful Life As of December 31, 2006 (In years)	As of December 31, 2006			As of March 31, 2006
Purchased Patents	5.37	$	23,744		$	23,679
Accumulated amortization			(15,027	)		(13,702	)

Patents, net		$	8,717		$	9,977


Year	Estimated Amortization
2007	$	1,699
2008		1,641
2009		1,630
2010		1,629
2011		1,247


DMS	$	1,609
CMRS		3,010
Japan Billboard		—

Total for discontinued operations	$	4,619
Corporate		288

	$	4,907


	As of December 31, 2006		As of March 31, 2006
Payroll related	$	29,907	$	23,375
Accrued retailer fees		9,229		9,811
Deferred compensation plans		4,740		5,096
Sales commissions		8,498		9,882
Accrued operating expenses		4,490		2,693
Business taxes		7,799		4,199
Other		3,211		3,365

Total accrued expenses	$	67,874	$	58,421


	Nine Months Ended December 31, 2006			Fiscal Years Ended March 31,
	Nine Months Ended December 31, 2006			2006			2005
Income before income taxes:
Domestic	$	49,607		$	97,374		$	93,335
Foreign		20,269			16,302			16,917

	$	69,876		$	113,676		$	110,252

Income tax provision
Current taxes:
Federal	$	21,484		$	36,186		$	34,437
State		2,152			3,791			5,255
Foreign		7,633			5,282			5,790

		31,269			45,259			45,482

Deferred taxes:
Federal		(3,118	)		(2,960	)		(3,442	)
State		(356	)		(338	)		(377	)
Foreign		(718	)		99			(7	)

		(4,192	)		(3,199	)		(3,826	)

Provision for income taxes	$	27,077		$	42,060		$	41,656


	December 31, 2006			March 31, 2006
Deferred Tax Assets:
Payroll related items	$	3,982		$	1,273
Deferred revenue		2,528			2,205
Provision for doubtful accounts		516			581
Accrued expenses		2,342			2,328
Net operating loss carryforwards		14,004			14,872
Capital loss carryforward		990			990
Investments in unconsolidated equity securities		11,375			11,464
Other		1,389			22

		37,126			33,735
Valuation allowance		(28,772	)		(29,789	)

Net deferred tax assets	$	8,354		$	3,946


Deferred Tax Liabilities:

Depreciation and amortization		(4,592	)		(4,377	)

Net deferred tax assets (liabilities)	$	3,762		$	(431	)


	December 31, 2006			March 31, 2006
Net deferred tax assets (liabilities) consisted of:
Deferred tax asset current	$	9,367		$	6,386
Long-term deferred tax liability		(5,605	)		(6,817	)

Net deferred tax assets (liabilities)	$	3,762		$	(431	)


	As of December 31, 2006		As of March 31, 2006
Credit Facility, interest from 1.000% to 5.825%, as of December 31, 2006 and from 0.715% to 5.419%, as of March 31, 2006	$	127,710	$	61,803

Long-term installment debt in Japan, interest from 4.65% to 5.68% as of March 31, 2006 matured in August 2006 (payable in yen)		—		53

Total debt obligations		127,710		61,856
Less current portion of long-term debt		—		(53	)

Long-term debt	$	127,710	$	61,803


	Amount
2007	$	—
2008		—
2009		—
2010		—
2011		127,710
2012 and after		—

Total long-term debt	$	127,710


Fiscal Year Ended December 31,	Amount
2007	$	5,277
2008		4,776
2009		4,345
2010		2,070
2011		1,034
Thereafter		511

Total minimum lease payments	$	18,013


	Nine Months Ended December 31, 2006		Fiscal Years Ended March 31,


			2006		2005
Volatility	40.6	%	42.9	%	45.1	%
Risk-free rate (based on date of grant)	4.9	%	4.3	%	3.6	%
Expected dividend yield ⁽¹⁾	1.3	%	1.2	%	1.3	%
Expected life	5 years		5 years		5 years


	Number of Shares		Weighted Average Exercise Prices
Options outstanding as of March 31, 2004	4,573,340		$	30.44
Option activity:
Granted	3,961,903			24.03
Exercised	(224,312	)		20.38
Canceled or expired	(1,218,190	)		28.36

Options outstanding as of March 31, 2005	7,092,741			27.50
Option activity:
Granted	2,143,769			24.28
Exercised	(107,240	)		19.05
Canceled or expired	(1,571,414	)		28.63

Options outstanding as of March 31, 2006	7,557,856			26.48
Option / SARs activity:
Granted	733,276			22.97
Exercised	(243,898	)		24.01
Canceled or expired	(422,487	)		26.06

Options / SARs outstanding as of December 31, 2006	7,624,747		$	26.25

Options / SARs available for future issuance as of December 31, 2006	4,130,799


Options / SARs Outstanding					Options / SARs Exercisable
Range of Exercise Prices	Outstanding as of December 31, 2006	Weighted Average Remaining Contractual Life (in years)	Weighted Average Exercise Price		Exercisable as of December 31, 2006	Weighted Average Exercise Price
$16.00-$25.00	3,813,524	8.2	$	22.38	1,188,930	$	21.60
$25.01-$33.00	3,111,343	6.1	$	28.79	2,576,983	$	29.11
$33.01-$44.00	699,880	4.1	$	36.06	699,880	$	36.06

	7,624,747				4,465,793


	Shares		Weighted Average Grant Date Fair Value
	Shares		Weighted Average Grant Date Fair Value
Nonvested balance at March 31, 2006	12,491		$	24.02

Granted	634,977			23.00
Vested	(6,245	)		24.02
Dividend	5,942			22.95
Forfeited / Cancelled	(61,018	)		22.85

Nonvested balance at December 31, 2006	586,147		$	23.03


	Nine Months Ended December 31, 2006
Decrease in income from operations before income taxes	$	10,761
Tax benefit		2,786
Decrease in net income		7,975
Excess tax benefit reclassed to financing from operating activities		362
Decrease in basic and diluted earnings per share	$	0.17


	1% Increase		1% Decrease
Effect on service and interest cost for the nine months ended December 31, 2006	$	13	$	(10	)

Effect on accumulated postretirement benefit obligation at December 31, 2006	$	302	$	(246	)


Year	Benefit		Subsidy
2007	$	105	$	2
2008		113		3
2009		117		4
2010		119		5
2011		129		6
2012-2016		633		50


Segment		Business Activity
Catalina Marketing Services		Provides point-of-sale, printed communications to consumers for CPG manufacturers and retailers.
Catalina Health Resource		Provides point-of-sale, direct-to-patient communications for pharmaceutical and CPG manufacturers and retailers.
Catalina Marketing International		Provides services similar to Catalina Marketing Services in France, Italy, United Kingdom, Germany, Japan, Belgium, and the Netherlands.
Corporate		Provides executive and administrative oversight and centralized functions such as information technology, accounting, client services and store systems support.
Discontinued operations		Includes Japan Billboard, DMS and CMRS.


	Revenue from External Customers						Intersegment Revenues
	Nine Months Ended December 31, 2006		Fiscal Years Ended March 31,				Nine Months Ended December 31, 2006			Fiscal Years Ended March 31,
	Nine Months Ended December 31, 2006		2006		2005		Nine Months Ended December 31, 2006			2006			2005
CMS	$	200,546	$	254,393	$	269,608	$	—		$	—		$	4
CHR		71,565		89,527		76,167		—			—			—
CMI		68,426		73,817		64,116		—			—			—

	$	340,537	$	417,737	$	409,891	$	—		$	—		$	4
Reconciliation of segments to consolidated amount
Corporate		337		9		171		3,380			3,658			3,442
Eliminations		—		—		—		(3,380	)		(3,658	)		(3,446	)

	$	340,874	$	417,746	$	410,062	$	—		$	—		$	—