UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

CATALINA MARKETING CORPORATION

(727) 579-5000
(Registrant’s Telephone Number, Including Area Code)

     Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes  o   No  þ

     Indicate by checkmark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes  þ   No  o

     At August 31, 2004, the Registrant had outstanding 52,141,234 shares of Common Stock.

CATALINA MARKETING CORPORATION
INDEX

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Part I.   Financial Information

SPECIAL NOTE

     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. The Company was unable to file this report on a timely basis. See Note 1 for additional discussion. For the most part, we have included in this report information which would have been required, and related to the periods applicable, had we been able to file this report on a timely basis. Where specified, however, some information has been presented as of or with respect to a more recent date, in order to provide more useful information. For example, see Item 4, Part I (Controls and Procedures).

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Item 1.   Financial Statements

CATALINA MARKETING CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATION
(in thousands, except per share data)

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

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CATALINA MARKETING CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

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CATALINA MARKETING CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’
EQUITY AND COMPREHENSIVE LOSS
(in thousands)

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

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CATALINA MARKETING CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

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CATALINA MARKETING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 1.   Description of the Business and Basis for Presentation

     Description of the Business. Catalina Marketing Corporation, a Delaware corporation, and its subsidiaries (the “Company”), provides behavior-based communications, developed and distributed for consumer packaged goods manufacturers, pharmaceutical manufacturers and marketers, and retailers. The Company’s primary business initially was developed to provide consumers with in-store coupons delivered based upon purchase behavior and distributed primarily in supermarkets. Today, the Company offers 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, compliance mailings, pharmacy counter mats, attitudinal research programs, sampling, advertising, 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 promotion to print, manufacturers and retailers can deliver customized incentives and messages to only the consumers they wish to reach. The Company tracks actual purchase behavior and primarily uses Universal Product Code-based scanner technology to target consumers at the checkout counter and National Drug Code information to trigger delivery of a customized communication to consumers during pharmacy prescription checkout transactions.

     The Company is organized and managed by segments which include the following operations: Manufacturer Services, Catalina Health Resource (“CHR”), the international operations, which includes manufacturer services similar to those services provided in the United States (“International”), Retail Services, Japan Billboard, a billboard and outdoor media business operated in Japan (“Japan Billboard”), Direct Marketing Services (“DMS”) and Catalina Marketing Research Solutions (“CMRS”). The domestic operations of the Company include Manufacturer Services, CHR, Retail Services, DMS and CMRS. The international operations of the Company are organized and managed by country and include International and Japan Billboard. In November 2003, the Company announced its intent to divest of DMS, CMRS and Japan Billboard which were deemed not to be strategically aligned with the Company’s current core competencies. On August 31, 2004, the Company sold Japan Billboard. See Note 11, Subsequent Events. See further discussion regarding the intended divestitures in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2004, filed with the United States Securities and Exchange Commission (“SEC”) on July 15, 2004.

     Manufacturer Services serves the needs of domestic consumer product manufacturers, primarily within the consumer packaged goods 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 the Catalina Marketing Network® is the in-store delivery of promotions at the checkout lane of a retailer, typically a supermarket. Catalina Marketing links its proprietary software, computers, central databases and thermal printers with a retailer’s point-of-sale controllers and scanners. The network prints customized promotions at the point-of-sale based on product Universal Product Codes or other scanned information. The printed promotions are handed to consumers by the cashier at the end of the shopping transaction.

     CHR’s services allow pharmaceutical and consumer packaged goods manufacturers, as well as retail pharmacies, to provide consumers with condition-specific health information and direct-to-patient communications. CHR’s primary product offerings use an in-store, prescription-based targeting technology to provide targeted, direct-to-patient communications on behalf of the Company’s clients. These communication services include messages and educational information to healthcare patients at the pharmacy level 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 patients based on prescription medications purchased which are identified by a National Drug Code symbol. Clients are able to use these communications to provide information on a wide variety of products such as over-the-counter medicines, prescription medication and other healthcare remedies and merchandise. Communications provide clinically appropriate information while maintaining patient privacy.

     International operations include in-store electronic targeted marketing services for consumers in France, Italy, the United Kingdom, Germany and Japan. The Catalina Marketing Network® operates internationally in a similar manner as the domestic business. International offers a full range of targeted marketing solutions to consumer packaged goods manufacturers and enjoys relationships with major supermarket, hypermarket and other retailers. During the second quarter of fiscal year 2004, the Company expanded its behavior-based targeted marketing capabilities in Europe by launching a pilot test in Germany.

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     Japan Billboard is a wholly owned subsidiary of the Company that operates a billboard and outdoor media business in Japan. Japan Billboard primarily owns and rents billboards which are displayed on rooftops or faces of buildings in locations suitable for advertising. On August 31, 2004, the Company sold the stock of Japan Billboard. See Note 11, Subsequent Events.

     DMS provides services designed to reach consumers in their homes. DMS analyzes frequent shopper databases and identifies consumer lifestyle changes to develop strategic programs that meet multiple objectives for both brand manufacturers and retailers. These targeted direct mail programs are based on actual purchase behavior or consumer lifestyle changes. DMS provides services which enable manufacturers and retailers to influence the purchase patterns of targeted customers based on their actual purchase behavior and history. Clients use these services to support new product launches and line extensions, build loyalty to a brand and deliver timely messages to consumers.

     The Company’s Other segment includes Retail Services and CMRS. Retail Services provides innovative marketing solutions to retail chains nationwide and supports and maintains the Catalina Marketing Network® used by Manufacturer Services. CMRS provides a wide range of traditional marketing research services, including tracking studies and customer satisfaction surveys, as well as proprietary research products that take advantage of behavioral data gathered throughout the Catalina Marketing Network®.

     Previously Filed Financial Statements for Fiscal Years 2003, 2002 and 2001. We filed our Annual Report on Form 10-K for the fiscal year ended March 31, 2003 on May 17, 2004. In addition to our consolidated financial statements for the fiscal year ended March 31, 2003, the filing included audited restatements of our financial statements for the fiscal years ended March 31, 2002 and 2001 and unaudited restatements of information for the quarters ended June 30, 2002, September 30, 2002 and December 31, 2002. Please refer to such filing for additional information regarding the background of such restatements and the content and effect of the changes included in the restated financial statements. See Note 4 included herein.

     Delay in Filing Our Annual Report and Quarterly Financial Results for the Fiscal Year Ended March 31, 2004. In June 2004, we announced our intent to delay the filing of our Annual Report on Form 10-K for the fiscal year ended March 31, 2004. In addition, the Company was unable to file its Quarterly Report on Form 10-Q for the quarters ended June 30, 2003, September 30, 2003 and December 31, 2003, in a timely manner. As required, Catalina filed notifications of late filing with the SEC under Rule 12b-25 for these filings. The Company filed its Annual Report on Form 10-K for fiscal year 2004 on July 15, 2004. This filing was delayed because of the significant time and resources required to file the Company’s Annual Report on Form 10-K for fiscal year 2003, which was filed on May 17, 2004.

     The Company is filing this Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 and expects to file a Quarterly Report on Form 10-Q for the quarter ended December 31, 2003 soon thereafter. The Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 was filed on August 16, 2004. This Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 is delinquent and is being filed after the Company’s Annual Report on Form 10-K for its fiscal year ended March 31, 2004. This filing should not be confused with any report on Form 10-Q for a quarterly period of the Company’s fiscal year ending March 31, 2005. The unaudited condensed consolidated financial statements included herein should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2003, and the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2004.

     In this Form 10-Q for the quarterly period ended September 30, 2003, 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 this Quarterly Report on Form 10-Q is filed with the SEC.

     Basis of Presentation. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes as required by accounting principles generally accepted in the United States. In the opinion of management, all adjustments, consisting only of normal recurring accruals, except as disclosed herein, considered necessary for a fair presentation of the financial position of the Company as of September 30, 2003, the results of its operations for the three- and six-month periods ended September 30, 2003 and 2002, its cash flows for the six months ended September 30, 2003 and 2002, and the results of its changes in stockholders’ equity for the six-month period ended September 30, 2003 have been included.

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     The balance sheet at March 31, 2003 has been derived from the audited financial statements at that date but does not include all of the information or notes required by accounting principles generally accepted in the United States for complete financial statements. Operating results for the three- and six-month periods ended September 30, 2003 are not necessarily indicative of the results that were reported for the remainder of the year ended March 31, 2004.

     The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned and majority owned subsidiaries. The accounts of the wholly and majority owned foreign subsidiaries are included on a three-month lag, to facilitate the timing of the Company’s closing process. All significant intercompany transactions are eliminated in consolidation. In addition, the unaudited condensed consolidated financial statements include the accounts of a variable interest entity from which the Company leased its corporate headquarters facility in St. Petersburg, Florida. The Company has determined that, during the periods covered in this Form 10-Q, it was the primary beneficiary of this entity and, thus, has included the accounts of this entity in its unaudited condensed consolidated financial statements pursuant to the requirements of the Financial Accounting Standards Board’s (“FASB”) Interpretation (“FIN”) No. 46 (revised 2003), “Consolidation of Variable Interest Entities—An Interpretation of ARB No. 51.” On August 25, 2004, the Company’s relationship with this entity was terminated and, in connection with this termination, the Company purchased the headquarters facility. See Note 11, Subsequent Events.

Note 2.   Stock Based Compensation

     The Company applies the recognition and measurement principles of APB Opinion No. 25 and related interpretations in accounting for its stock-based employee compensation plans. Additionally, the Company has adopted the disclosure provisions of SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure,” which amends SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 148 allows for the continued use of the recognition and measurement principles of APB Opinion No. 25 and related interpretations in accounting for those plans. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions to stock-based employee compensation. Such disclosure is not necessarily indicative of the fair value of stock options that could be granted by the Company in future fiscal years or of the value of all options currently outstanding. The pro forma results were calculated with the use of the Black-Scholes option-pricing model. Had compensation expense for these plans been recognized in accordance with SFAS No. 123, the Company’s net income and earnings per share would have been reduced to the following pro forma amounts (in thousands, except per share data):

     During the six months ended September 30, 2003, certain of the Company’s executives left the Company prior to exercising their options and, as a result, any unexercised options have been forfeited. The pro forma compensation expense for the three and six months ended September 30, 2003 shown in the table above includes a reversal of previously reported pro forma compensation expense of $2.4 million, net of a tax benefit of $1.5 million, and $6.3 million, net of tax benefit of $3.8 million, respectively, related to these forfeited options.

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Note 3.   Accounting Standards Adopted During the Six Months Ended September 30, 2003

     SFAS No. 143. On April 1, 2003, the Company adopted Statement of Financial Accounting Standard (“SFAS”) No. 143, “Accounting for Asset Retirement Obligations,” which requires the recognition of the fair value of obligations associated with the retirement of tangible long-lived assets when there is a legal obligation to incur such costs. Upon initial recognition of a liability, the cost is capitalized as part of the related asset and depreciated over the corresponding asset’s useful life.

     Upon adoption, the Company recorded a net increase in property and equipment of $0.7 million and recognized an asset retirement obligation of $2.1 million for the six months ended September 30, 2003. This resulted in the recognition of a non-cash charge of $0.8 million, net of an income tax benefit of $0.6 million, which is reported as a cumulative effect of an accounting change in the accompanying unaudited condensed consolidated statements of income. The effect of the adoption of SFAS No. 143 is associated with Japan Billboard’s contractual obligation to remove certain billboards upon termination or cancellation of the related financing agreement.

     If SFAS No. 143 had been adopted on April 1, 2001, the liabilities recorded on the Company’s consolidated balance sheets would have been $2.0 million, $1.8 million and $2.0 million higher as of April 1, 2001, March 31, 2002 and March 31, 2003, respectively. The pro forma effect of the adoption of SFAS No. 143 on the results of operations for the three and six months ended September 30, 2002 was not material.

     Reconciliation of the beginning and ending amount of asset retirement obligation is as follows (in thousands):

Note 4.   Restatement of Quarterly Financial Statement Information

     As discussed in the Company’s Annual Report on Form 10-K for fiscal year 2003, in Notes 3 and 18 to the consolidated financial statements included therein, the Company restated its financial statements for each of the quarters of fiscal year 2003 to reflect corrections primarily related to the timing of the recognition of certain revenues and adjustments to costs and expenses. The following tables compare the restated results of operations of the Company for the three and six months ended September 30, 2002 with those amounts originally reported on Form 10-Q for that period (in thousands, except per share information).

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Note 5.   Net Income Per Common Share

     The following is a reconciliation of the denominator of basic earnings per share (EPS) to the denominator of diluted EPS (in thousands):

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     Due to the net loss for the three and six months ended September 30, 2003, the assumed net exercise of stock options were excluded in their entirety for those periods as the effect would have been anti-dilutive. Certain options to purchase shares of common stock were not included in the computation of diluted EPS for the three and six months ended September 30, 2002 because their exercise prices were greater than the average market price of common stock during the relevant periods.

     The following table presents the number of excluded options and related exercise price ranges for each of the periods presented:

Note 6.   Comprehensive Income (Loss) (in thousands):

Note 7.   Segment Information:

     The Company is organized and managed by segments, as described in following table:

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     Financial information for each of the Company’s reportable segments is presented in the following tables. Amounts for the three and six months ended September 30, 2002 are as restated (in thousands).

Note 8.   Stock Repurchases

     During the six months ended September 30, 2003, the Company repurchased 749,200 shares of its common stock for a total of $13.3 million. During the six months ended September 30, 2002, the Company repurchased 923,700 shares of its common stock for a total of $29.3 million.

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Note 9.    Impairment Charges and Goodwill

     In May 2003, the Company, through one of its wholly owned subsidiaries, exercised the call option provided in the Japan Billboard purchase agreement to acquire the remaining 49% ownership of Japan Billboard from the minority interest holders. The exercise of this call option resulted in a net cash payment of $22.9 million in July 2003, based on foreign exchange rates at the payment date. Using the purchase method of accounting, this transaction created additional goodwill of $22.9 million. The Company exercised the call option to reduce any additional adverse financial impact that would have resulted from the exercise of a put option available to the minority interest holders.

     The purchase price of the 49% minority interest of Japan Billboard was based on a pre-determined formula of enterprise value based on Japan Billboard’s performance during the previous four quarters. Subsequent to the purchase of the remaining interest of Japan Billboard, the Company determined that the carrying value of the Japan Billboard business had been impaired primarily because the factors required to be used in the predetermined purchase price formula resulted in a purchase price that exceeded the value of the business in view of the then current market conditions, as described further below. Furthermore, revenues for Japan Billboard continued to decline due to the reduction in tobacco advertising spending resulting from the adoption of the Voluntary Global Tobacco Marketing Initiative (the “Initiative”) in fiscal year 2002. Japan Billboard’s primary client, from which it derived approximately 75% of its revenues during fiscal year 2003, began to significantly reduce its advertising expenditures for billboards, as well as most other media and promotional spending. For a discussion of the Initiative, see the Company’s Annual Report on Form 10-K for the year ended March 31, 2003 as filed with the SEC on May 17, 2004. As a result of these factors, the carrying value of the Japan Billboard business exceeded the fair value, as determined using a discounted cash flow model, and, as such, the Company recognized an impairment charge of $28.0 pursuant to the requirements of SFAS No. 142 during the three months ended September 30, 2003, which is included in the accompanying unaudited condensed consolidated statements of operations as Impairment Charge. On August 31, 2004, the Company sold the stock of Japan Billboard. See Note 11, Subsequent Events.

     Changes in the carrying amount of goodwill through September 30, 2003, including the effect of the impairment charge, were as follows:

Note 10.    Provision for Income Taxes

     Consolidated income before income taxes was $1.5 million for the three months ended September 30, 2003. The provision for income taxes for the same period was $12.6 million. Consolidated income before income taxes was $9.7 million for the six months ended September 30, 2003, while the provision for income taxes for the same period was $15.8 million. The disproportion between income before income taxes and the provision for income taxes for these periods in fiscal year 2004 was due to the non-deductibility of the impairment charge of $28.0 million recognized during the three months ended September 30, 2003. Excluding this impairment charge, the effective tax rate for the three months ended September 30, 2003 was 42.7% as compared with 38.3% for the three months ended September 30, 2002. Excluding this impairment charge, the effective tax rate for the six months ended September 30, 2003 was 41.8% as compared with 38.3% for the six months ended September 30, 2002. The increase in the effective tax rate was primarily due to an increase in the valuation reserve against certain foreign deferred tax assets.

Note 11.   Subsequent Events

     The following events occurred subsequent to our most recent filing with the SEC on August 16, 2004. Such filing was the Company’s Form 10-Q for the quarterly period ended June 30, 2004.

     New Credit Facility. On August 27, 2004, the Company entered into a five-year, $125.0 million multi-currency revolving credit facility with lead arranger J. P. Morgan Securities Inc. Bank of America N.A. serving as the syndication agent, and Bank One, NA serving as the administrative agent. Under certain conditions, the Company may increase the revolving credit line up to $175.0 million. The facility is unsecured and may be used for general corporate purposes including, but not limited to, refinancing existing debt, share repurchases and capital expenditures.

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     In conjunction with the execution of the new revolving credit facility, the Company terminated its previous $30.0 million revolving credit facility that was due to expire on August 31, 2004, and also terminated the previous 3.5 billion yen Japanese credit facility. An advance of $32.0 million from the new revolving credit facility was used to repay the balances outstanding under the Japanese credit facility.

     Purchase of Corporate Headquarters Facility. On August 25, 2004, the Company purchased its corporate headquarters facility in St. Petersburg Florida for $30.5 million in cash and terminated the lease for its headquarters facility. The Company borrowed $30.0 million from the new revolving credit facility on September 1, 2004 to replenish the cash used to purchase the building.

     Sale of Japan Billboard. On August 31, 2004, the Company sold the stock of Japan Billboard. The decision to divest this business is part of the Company’s previously announced strategy to focus on proprietary applications at the point of sale. The Company has not yet determined the gain or loss on the sale of this business, but does not expect the effect of this transaction to be material to the operating results or financial position of the Company.

     Share Repurchase Authorization. On September 1, 2004, the Company announced that its Board of Directors authorized $100.0 million of funds to be available for the repurchase of the Company’s common stock. This authorization replaces the $44.0 million unused portion of the previous $100.0 million common stock repurchase program authorized by the Board of Directors in July 2002. The Company last purchased shares in June 2003. Subsequent to June 2003, the Company was precluded from stock repurchases under the terms of its previous bank credit facility. The credit facility was replaced on August 27, 2004, and the Company is no longer restricted from repurchases of its common stock.

     Cash Dividend. Also on September 1, 2004, the Company announced that the Board of Directors declared an annual cash dividend to common stockholders of $0.30 per share. The dividend will be paid on October 1, 2004 to stockholders of record as of September 15, 2004.

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Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

     The following table includes the revenues, operating profit (loss) and net income (loss) for each of the Company’s significant reportable segments for the three and six months ended September 30, 2003 compared with the three and six months ended September 30, 2002. Dollars are in thousands. The accounts of our wholly and majority owned foreign subsidiaries are included for the three and six months ended June 30, which is the end of their second fiscal quarter.

     In general, we expect our revenues to be higher during periods of increased promotional activity by manufacturers. The pattern of promotion distribution is 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 promotion, seasonal product advertising and annual budgeting processes affecting when our clients use promotional and consumer-related expenditure budgets. The seasonality of our international operations may be different than that of our domestic operations for many reasons, but the impact of seasonality on our reporting may also be affected by the difference in fiscal years. These factors, as well as the overall growth in the number of retailer and manufacturer contracts with the Company, the timing of growth of the installed store base and access to revenue producing transactions, may impact our revenues and profits in any particular period. See Note 7 to the unaudited condensed consolidated financial statements included herein, and our Annual Report on Form 10-K for the fiscal year ended March 31, 2003 for additional segment information. Results of operations are discussed for each of our significant operating segments.

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Three Months Ended September 31, 2003 Compared with the Three Months Ended September 30, 2002

Consolidated Results of Operations

     Consolidated revenues increased to $122.1 million for the three months ended September 30, 2003 compared with consolidated revenues of $113.5 million for the three months ended September 30, 2002. Consolidated operating profit was $1.8 million for the three months ended September 30, 2003 compared with operating profit of $22.5 million for the three months ended September 30, 2002. Net loss for the three months ended September 30, 2003 was $11.1 million, compared with net income of $12.8 million for the three months ended September 30, 2002. Operating results for the three months ended September 30, 2003 include an impairment charge of $28.0 million. See Note 9 to the unaudited condensed consolidated financial statements for a discussion of the impairment charge. Excluding the impairment charge, operating profit and net income for the three months ended September 30, 2003 would have been $29.8 million and $16.9 million, respectively. See Segment Results below for a discussion of the comparative period changes.

     Consolidated income before income taxes was $1.5 million for the three months ended September 30, 2003. The provision for income taxes for the same period was $12.6 million. The disproportion between income before income taxes and the provision for income taxes was due to the non-deductibility of the impairment charge of $28.0 million recognized during the three months ended September 30, 2003. Excluding this impairment charge, the effective tax rate for the three months ended September 30, 2003 was 42.7% as compared with 38.3% for the three months ended September 30, 2002. The increase in the effective tax rate was primarily due to an increase in the valuation reserve against certain foreign deferred tax assets.

Segment Results

Manufacturer Services

     Revenues for Manufacturer Services increased by $2.9 million to $65.3 million for the three months ended September 30, 2003, compared with revenues of $62.4 million for the three months ended September 30, 2002. The increase was primarily due to an increase in the volume of promotions printed as well as improved product pricing.

     Operating profit for Manufacturer Services increased by $0.5 million to $32.9 million for the three months ended September 30, 2003, compared with $32.4 million for the three months ended September 30, 2002. The increase in operating profit was primarily attributable to the increase in revenues, partially offset by an increase in direct operating costs during the period. The increase in direct operating costs during the period was primarily due to a change in the manner in which the Company allocates certain retailer costs among its segments. Beginning in fiscal year 2004, for the three months ended September 30, 2003, Manufacturer Services was charged approximately $1.4 million of costs from Retail Services as compensation for intersegment services provided.

     Net income for Manufacturer Services increased by $0.3 million to $19.6 million for the three months ended September 30, 2003, compared with a net income of $19.3 million for the three months ended September 30, 2002. This increase in net income was primarily due to the factors affecting operating income, discussed above.

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CHR

     Revenues for CHR increased $3.0 million to $19.1 million for the three months ended September 30, 2003, compared with revenues of $16.1 million for the three months ended September 30, 2002. The increase was primarily due to a quarter-over-quarter effect of $3.1 million from the recognition of revenues previously deferred because the necessary revenue recognition criteria had not been met.

     Operating profit for CHR increased to $3.6 million for the three months ended September 30, 2003, compared with an operating loss of $1.1 million for the three months ended September 30, 2002. The increase in operating profit was primarily due to (i) the effect of the recognition of revenues deferred from prior periods, (ii) a decrease in retailer fees, which was primarily due to the effect of a more favorable contract entered into with a retailer during the second quarter of fiscal year 2004, and (iii) a decrease in executive administrative costs, during the three months ended September 30, 2003.

     Net income for CHR for the three months ended September 30, 2003 increased to $2.1 million for the three months ended September 30, 2003, compared with a net loss of $0.6 million for the three months ended September 30, 2002, primarily due to the factors affecting operating results, discussed above.

International

     Revenues for International increased by $6.7 million to $13.6 million for the three months ended September 30, 2003, compared with revenues of $6.9 million for the three months ended September 30, 2002. The increase in International revenues primarily reflects additional manufacturer and retail promotions printed in France through a French retailer that was added to the Catalina Marketing Network during fiscal year 2003.

     International recognized operating profit of $2.8 million for the three months ended September 30, 2003, compared with an operating loss of $0.4 million for the three months ended September 30, 2002. The improvement in operating results was primarily attributable to the increase in revenues, net of related direct costs, administrative expenses and depreciation expense.

     Net income for International for the three months ended September 30, 2003 increased to $1.1 million, compared with a net loss of $0.6 million for the three months ended September 30, 2002, primarily due to the factors affecting operating results, discussed above.

DMS

     Revenues for DMS decreased $0.4 million to $10.8 million for the three months ended September 30, 2003, compared with revenues of $11.2 million for the three months ended September 30, 2002. The decrease in revenues was primarily attributable to a decline in sales of One-to-One Direct®. One-to-One Direct® delivered coupons from multiple consumer packaged goods manufacturers, using data provided by our retailers, to consumers in their home in a single mailing. The Company suspended the One-to-One Direct® service in December 2003.

     Although revenues decreased, operating loss and net loss for DMS were relatively unchanged at $0.2 million and $0.1 million, respectively, for the three months ended September 30, 2003 and 2002, primarily due to decreased variable direct costs.

Japan Billboard

     Revenues for Japan Billboard decreased $1.3 million to $3.6 million for the three months ended September 30, 2003, compared with revenues of $4.9 million for the three months ended September 30, 2002. The decrease in revenues was the result of the effect of the Initiative, which significantly limits the manner in which tobacco companies in Japan can market, promote and advertise their products. For a more detailed description of the Initiative and its effect on revenues for Japan Billboard, please see Note 9 to the unaudited condensed consolidated financial statements.

     Operating loss for Japan Billboard was $27.8 million for the three months ended September 30, 2003, compared with an operating profit of $0.2 million for the three months ended September 30, 2002. Net loss for Japan Billboard was $27.9 million for the three months ended September 30, 2003 compared with net income of $0.1 million for the three months ended September 30, 2002. The operating and net losses for Japan Billboard for the three months

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ended September 30, 2003 include an impairment charge of $28.0 million recognized during the period. See Note 9 to the unaudited condensed consolidated financial statements. Excluding this charge, operating results were comparable primarily due to the fact that decreased revenues were entirely offset by decreased direct costs.

     On August 31, 2004, the Company sold the stock of Japan Billboard. See Note 11 to the unaudited condensed consolidated financial statements.

Other Segments and Corporate

     Retail Services and CMRS comprise our Other operating segment. Revenues for this segment decreased $2.5 million to $9.5 million for the three months ended September 30, 2003, compared with revenues of $12.0 million for the three months ended September 30, 2002. Retail Services revenues declined by $2.4 million primarily due to a decrease in loyalty card revenues. On March 31, 2004, the loyalty card business was sold.

     Operating loss decreased to $1.0 million for the three months ended September 30, 2003, compared with an operating loss of $2.1 million for the three months ended September 30, 2002. The decrease in operating loss was primarily attributable to an intersegment allocation of certain costs from Retail Services to Manufacturer Services for services provided by Retail Services.

     Primarily as a result of the decrease in costs and expenses, net loss for the Other operating segment decreased to $0.6 million for the three months ended September 30, 2003, compared with a net loss of $1.2 million for the three months ended September 30, 2002.

     The increase in the operating loss for Corporate for the three months ended September 30, 2003 reflects a decrease in the percent of costs allocated to operating segments from 79.6% of Corporate’s operating costs for the three months ended September 30, 2002 to 72.9% of Corporate’s operating costs for the three months ended September 30, 2003. Before allocations, total Corporate operating costs for the three months ended September 30, 2003 were comparable with the three months ended September 30, 2002.

Foreign Currency Translation and Its Effect on Revenues

     Consolidated revenues for the three months ended September 30, 2003 were $122.1 million, which includes $17.2 million in revenues from 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 strengthened against the United States dollar during the three months ended September 30, 2003. Accordingly, revenues in United States dollars for our foreign operations would have been 15.7% lower for the period if translated using the weighted average currency translation rates for the comparable period in 2002.

Six Months Ended September 30, 2003 Compared with the Six Months Ended September 30, 2002

Consolidated Results of Operations

     Consolidated revenues increased to $224.3 million for the six months ended September 30, 2003, compared with consolidated revenues of $215.8 million for the six months ended September 30, 2002. Consolidated operating profit was $9.8 million for the six months ended September 30, 2003 compared with operating profit of $34.5 million for the six months ended September 30, 2002. Net loss for the six months ended September 30, 2003 was $6.8 million, compared with net income of $19.6 million for the six months ended September 30, 2002. Operating results for the six months ended September 30, 2003 includes an impairment charge of $28.0 million. See Note 9 to the unaudited condensed consolidated financial statements for a discussion of the impairment charge. Excluding the impairment charge, operating profit and net income for the six months ended September 30, 2003 would have been $37.8 million and $21.2 million, respectively. See Segment Results below for a discussion of the comparative period changes.

     Consolidated income before income taxes was $9.7 million for the six months ended September 30, 2003. The provision for income taxes for the same period was $15.8 million. The disproportion between income before income taxes and the provision for income taxes was due to the non-deductibility of the impairment charge of $28.0 million recognized during the period. Excluding this impairment charge, the effective tax rate for the six months

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ended September 30, 2003 was 41.8% as compared with 38.3% for the six months ended September 30, 2002. The increase in the effective tax rate was primarily due to an increase in the valuation reserve against certain foreign deferred tax assets during the second quarter of fiscal year 2004.

Segment Results

Manufacturer Services

     Revenues for Manufacturer Services increased by $2.2 million to $118.7 million for the six months ended September 30, 2003, compared with revenues of $116.5 million for the six months ended September 30, 2002. The increase was primarily attributable to higher average revenues per promotion due to improved product pricing and a shift in mix to higher margin products, partially offset by a decline in the volume of promotions.

     Operating profit for Manufacturer Services decreased by $1.9 million to $56.2 million for the six months ended September 30, 2003, compared with $58.1 million for the six months ended September 30, 2002. The decrease in operating profit was primarily attributable to an increase in direct costs resulting from a change in the manner in which the Company allocates certain retailer costs. Beginning in fiscal year 2004, for the six months ended September 30, 2003, Manufacturer Services was charged with approximately $3.0 million of costs from Retail Services as compensation for intersegment services provided. The decrease in operating profit due to this additional expense was somewhat offset by the effect of increased revenues during the six months ended September 30, 2003 as compared with the six months ended September 30, 2002.

     Net income for Manufacturer Services decreased by $1.2 million to $33.4 million for the six months ended September 30, 2003, compared with a net income of $34.6 million for the six months ended September 30, 2002. This decrease in net income was primarily due to the factors affecting operating profit, discussed above.

CHR

     Revenues for CHR increased $0.7 million to $33.6 million for the six months ended September 30, 2003, compared with revenues of $32.9 million for the six months ended September 30, 2002. The increase in revenues was primarily due to a year-over-year effect of approximately $6.2 million due to the recognition of revenues deferred from prior years. Such revenue was not recognized by CHR prior to the first half of fiscal year 2004 because it did not meet the necessary revenue recognition criteria. The increase in revenues was partially offset by lower revenues due to a shift in mix to lower-priced programs.

     Operating profit for CHR increased to $0.2 million for the six months ended September 30, 2003, compared with an operating loss of $2.2 million for the six months ended September 30, 2002. The improvement in operating results was primarily due to (i) the effect of the recognition of revenues deferred from prior periods, (ii) a decrease in sales commission expense and (iii) a decrease in retailer fees, which, in turn, was primarily due to the effect of a more favorable contract entered into with a retailer during the three months ended September 30, 2003.

     Net income for CHR for the six months ended September 30, 2003 increased by $1.4 million to $0.1 million for the six months ended September 30, 2003, compared with a net loss of $1.3 million for the six months ended September 30, 2002, primarily due to the factors affecting operating profit, discussed above.

International

     Revenues for International increased by $10.8 million to $22.7 million for the six months ended September 30, 2003, compared with revenues of $11.9 million for the six months ended September 30, 2002. The increase in International revenues reflects additional manufacturer and retail promotions printed in France through a French retailer that was added to the Catalina Marketing Network during fiscal year 2003.

     Operating income for International was $2.3 million for the six months ended September 30, 2003, compared with an operating loss of $2.2 million for the six months ended September 30, 2002. The improvement was primarily attributable to the increase in revenues, net of related increases in direct costs, administrative expenses and depreciation expense.

     Net loss for International for the six months ended September 30, 2003 decreased to $0.1 million, compared with a net loss of $2.1 million for the six months ended September 30, 2002, primarily due to the factors affecting operating results, discussed above.

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DMS

     Revenues for DMS increased $1.1 million to $22.7 million for the six months ended September 30, 2003, compared with revenues of $21.6 million for the six months ended September 30, 2002. The increase in revenues was primarily attributable to increases in sales of Sample Logic®.

     Operating loss for DMS was $1.0 million for the six months ended September 30, 2003, compared with an operating loss of $1.9 million for the six months ended September 30, 2002. The decrease in operating loss was primarily due to increased revenues.

     Net loss for DMS was $0.6 million for the six months ended September 30, 2003, compared with a net loss of $1.1 million for the six months ended September 30, 2002. Net loss decreased primarily due to the factors discussed in operating loss, discussed above.

Japan Billboard

     Revenues for Japan Billboard decreased $3.1 million to $7.3 million for the six months ended September 30, 2003, compared with revenues of $10.4 million for the six months ended September 30, 2002. The decrease in revenues was the result of the effect of the Initiative, which significantly limits the manner in which tobacco companies in Japan can market, promote and advertise their products.

     Operating loss for Japan Billboard was $28.1 million for the six months ended September 30, 2003, compared with an operating profit of $0.7 million for the six months ended September 30, 2002. The operating loss for Japan Billboard for the six months ended September 30, 2003 includes an impairment charge of $28.0 million recognized during the period. See Note 9 to the unaudited condensed consolidated financial statements. Excluding this impairment charge, the decline in operating results for the six months ended September 30, 2003 as compared with the six months ended September 30, 2002 is primarily attributable to the decline in revenues and related direct costs.

     Net loss for Japan Billboard was $29.0 million for the six months ended September 30, 2003 compared with net income of $0.3 million for the six months ended September 30, 2002. In addition to the impairment charge of $28.0 million, the net loss for the six months ended September 30, 2003 includes a charge in the amount of $0.8 million for the cumulative effect of an accounting change upon the adoption of SFAS No. 143 and its application in recognition of asset retirement costs expected to be incurred for the retirement of billboards. See Note 3 to the unaudited condensed consolidated financial statements.

     On August 31, 2004, the Company sold the stock of Japan Billboard. See Note 11 to the unaudited condensed consolidated financial statements.

Other Segments and Corporate

     Revenues for our Other segment decreased $3.3 million to $19.5 million for the six months ended September 30, 2003, compared with revenues of $22.8 million for the six months ended September 30, 2002. Retail Services revenues declined by $4.0 million primarily due to a decrease in loyalty card revenues. On March 31, 2004, the loyalty card business was sold.

     Operating loss decreased to $2.3 million for the six months ended September 30, 2003, compared with an operating loss of $5.0 million for the six months ended September 30, 2002. The decrease in operating loss was primarily attributable to an intersegment allocation of certain costs from Retail Services to Manufacturer Services for services provided by Retail Services.

     Primarily as a result of the decrease in costs and expenses, net loss for the Other operating segment decreased to $1.4 million for the six months ended September 30, 2003, compared with a net loss of $3.0 million for the six months ended September 30, 2002.

     The increase in the operating loss for Corporate for the six months ended September 30, 2003 reflects a decrease in the percentage of costs allocated to operating segments from 79.4% of Corporate’s operating costs for the six months ended September 30, 2002 to 72.8% of Corporate’s operating costs for the six months ended September 30, 2003. Before allocations, total Corporate operating costs for the six months ended September 30, 2003 were comparable with the six months ended September 30, 2002.

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Foreign Currency Translation and Its Effect on Revenues

     Consolidated revenues for the six months ended September 30, 2003 were $224.3 million, which includes $30.0 million in revenues from 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 strengthened against the United States dollar during the six months ended September 30, 2003. Accordingly, revenues in United States dollars for our foreign operations would have been 15.1% lower for the period if translated using the weighted average currency translation rates for the comparable period in 2002.

Liquidity and Capital Resources

     Our primary sources of liquidity have been cash flows generated from operations, a credit agreement with a syndicate of commercial banks with a revolving loan credit facility, various credit agreements and installment loans payable entered into by our Japan subsidiaries and the indebtedness under a lease arrangement in the amount of $29.6 million. On August 27, 2004, we entered into a new credit agreement with a syndicate of commercial banks (the “August 2004 Credit Facility” or “Credit Facility”), which was used to repay certain amounts outstanding under credit agreements entered into by our Japan subsidiaries and to purchase our headquarters building. See “Other Sources of Liquidity” for further details.

     Our primary liquidity requirements continue to be for working capital, capital expenditures in the ordinary course of business and the repayment of debt and lease obligations. Cash flows from operations for the six months ended September 30, 2003 and through the current date were sufficient to meet our liquidity needs. We believe that cash flows generated from operations, along with existing credit facilities, will be sufficient to meet our projected cash requirements for at least the next twelve months.

     Our long-term debt primarily consists of amounts due under the new August 2004 Credit Facility, discussed below. We will continue to invest in sales and marketing, in our Catalina Marketing Network® and in other support technology and enhanced systems of reporting and controls. We believe that our ability to generate sufficient amounts of cash gives us the opportunity to invest in our business as we believe is necessary for items such as research and development, development and expansion of markets, investments, acquisitions, share repurchases, legal risks and challenges to our business model. 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.

Cash Flow Analysis

     Cash provided by operating activities was $54.4 million for the six months ended September 30, 2003, compared with $52.2 million for the comparable period in 2002. The increase was primarily attributable to improved net income after adjustment for the $28.0 million non-cash impairment charge recognized during the six months ended September 30, 2003, partially offset by a use of cash due to a change in operating assets.

     Net cash used in investing activities increased by $0.7 million to $39.0 million for the six months ended September 30, 2003, compared with $38.3 million used in investing activities for the six months ended September 30, 2002. The increase in cash used for investing activities was primarily attributable to an increase in capital expenditures, partially offset by lower business acquisition payments. See Capital Requirements — Business Acquisition Payments.

     Net cash used in financing activities decreased to $7.2 million for the six months ended September 30, 2003, compared with $22.1 million used in financing activities during the six months ended September 30, 2002. The decrease of $14.9 million is primarily attributable to lower payments for purchases of the Company’s common stock combined with an increase in bank borrowings, somewhat offset by a decrease in proceeds from the issuance of the Company’s common stock.

     Cash and cash equivalents increased by $7.5 million for the six months ended September 30, 2003, compared with a decrease in cash and cash equivalents of $8.7 million for the six months ended September 30, 2002.

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Other Sources of Liquidity

     In addition to our cash flows generated from operations, bank borrowings provide additional sources of liquidity.

     The August 2004 Credit Facility. On August 27, 2004, the Company entered into a new, five-year revolving credit facility with a group of lenders, led by Bank One, NA, as Agent (the “August 2004 Credit Facility” or the “Credit Facility”). The Credit Facility provides available borrowings up to $125.0 million, but has a feature that allows the Company to increase the revolving credit line up to $175.0 million, under certain conditions. 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 Credit Facility is to be used for general corporate purposes including, but not limited to, refinancing of existing indebtedness, share repurchases, capital expenditures and acquisitions, as defined.

     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 0.625% to 1.125% and determined based upon the Company’s Leverage Ratio, as that ratio is defined in the Credit Facility, is added to the Eurocurrency Base Rate.

     The Company will pay a quarterly commitment fee ranging from 0.15% to 0.25% of the unused portion of the Credit Facility and determined based upon the Company’s 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. The Company may, at its 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 material U.S. subsidiaries of the Company.

     The Company provides customary, ongoing representations, warranties and covenants, and is 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.

     The Company repaid the amounts outstanding under the Japan Credit Facilities with proceeds from the August 2004 Credit Facility on the date the agreement was executed. The total amount borrowed to repay the Japan Credit Facilities was approximately $32.0 million.

     In addition, on August 25, 2004, the Company purchased its corporate headquarters facility located in St. Petersburg, Florida and terminated the related “synthetic” lease financing agreement that it had entered into in 1999. The purchase price of the building was $30.5 million and was paid in cash. The Company borrowed $30.0 million on the Credit Facility on September 1, 2004, and used the proceeds to replenish the cash used to purchase the building.

     The total amount outstanding under the August 2004 Credit Facility after repayment of the Japan Credit Facilities and the purchase of the headquarters building, as of September 1, 2004, was approximately $62.0 million.

     The Corporate Facility. The August 2004 Credit Facility replaced the Company’s previously existing $30.0 million revolving line of credit (the “Prior Facility”). The balance outstanding under the Prior Facility as of September 30, 2003 was $11.0 million. Please refer to the Company’s Annual Report on Form 10-K for the fiscal year 2004, for a discussion of the significant terms of the Prior Facility, including information regarding the extensions of the expiration date and financing fees paid in conjunction with the extensions. The Prior Facility was repaid in full on November 25, 2003 and no additional amounts were borrowed from that date through the date it was replaced by the August 2004 Credit Facility.

     We believe that cash generated from operations under economic conditions similar to those currently existing and amounts available under the August 2004 Credit Facility will be sufficient to meet our liquidity requirements.

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However, we cannot assure you that our cash generated from operations or the proceeds from the new Credit Facility will provide sufficient cash to fund our operations if unfavorable economic or other events occur that affect us. See our Annual Report on Form 10-K for our fiscal year ended March 31, 2004 for a discussion of risk factors relating to our business.

     The Japan Credit Facilities. The Japan Credit Facilities were replaced with the August 2004 Credit Facility. The Japan Credit Facilities were available to finance capital expenditures and current operating requirements of our operations in Japan. The balance outstanding under the Japan Credit Facilities as of September 30, 2003 was $32.9 million. Please refer to the Company’s Annual Report on Form 10-K for the fiscal year 2004 for a discussion of the significant changes to the Japan Credit Facilities during fiscal year 2004. Certain short-term amounts due under the Japan Credit Facilities were paid using proceeds from the August 2004 Credit Facility.

     The Lease Agreement. The lease agreement governed the $29.6 million of indebtedness related to our corporate headquarters, in St. Petersburg, Florida, and was guaranteed by a lien on the building. The initial lease term was set to expire in October 2005. Subsequent to September 30, 2003, the building was purchased for $30.5 million and refinanced with proceeds from the August 2004 Credit Facility. As a result, the lease was terminated.

     Our unaudited condensed consolidated balance sheets as of September 30, 2003 include the accounts of the variable interest entity which owned our headquarters building in St. Petersburg, Florida until August 25, 2004, when the building was purchased.

Capital Requirements

     There were no significant changes to the Company’s contractual cash obligations or commercial commitments during the quarter ended September 30, 2003 as compared with the amounts reported in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2003, filed with the SEC on May 17, 2004. Net borrowings under the Corporate and Japan credit facilities increased by $5.3 million during the six months ended September 30, 2003 as compared with net borrowings at March 31, 2003.

     Our Annual Report on Form 10-K for the fiscal year ended March 31, 2004, included the following table, which presents the summary of our contractual cash obligations and commitments as of March 31, 2004. Refer to the Form 10-K for a description of each of the obligations:

     The following table presents our contractual obligations on a pro forma basis as of March 31, 2004, assuming the August 2004 Credit Facility had been closed on that date, and proceeds available under the August 2004 Credit Facility were used to pay certain short-term amounts due under the Japan Agreement and to purchase our headquarters facility.

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     In addition to the above contractual commitments, on September 1, 2004, the Company announced that the Board of Directors declared an annual cash dividend to common stockholders of $0.30 per share. The dividend will be paid on October 1, 2004 to stockholders of record as of September 15, 2004. This is expected to result in a use of cash of approximately $15.6 million.

     Also on September 1, 2004, the Company announced that its Board of Directors authorized $100.0 million of funds to be available for the repurchase of the Company’s common stock. This authorization replaces the $44.0 million unused portion of the previous $100.0 million common stock repurchase program authorized by the Board of Directors in July 2002. The Company last purchased shares in June 2003. Subsequent to June 2003, the Company was precluded from stock repurchases under the terms of its previous bank credit facility. The credit facility was replaced on August 27, 2004, and the Company is no longer restricted from repurchases of its common stock. The Company intends to use cash flows from operations and funds available under the August 2004 Credit Facility to finance repurchases of its common stock.

     Capital Expenditures. The Company’s primary capital expenditures are for store equipment and third-party store installation and upgrade costs, as well as data processing equipment for the Company’s central data processing facilities. Total store equipment and third-party store installation costs for the Catalina Marketing Network® typically range from $3,000 to $13,000 per store. The pace of installations varies depending on the timing of contracts entered into with retailers and the scheduling of store installations by mutual agreement. We typically finance our capital expenditures for in-store equipment with cash generated from operations. Because in-store installations do not follow a pattern that necessarily coincides with our operating cash flows, we may finance our capital expenditures for this equipment with proceeds from our August 2004 Credit Facility.

     Business Acquisition Payments. In May 2003, the Company, through one of its wholly owned subsidiaries, exercised the call option provided in the Japan Billboard purchase agreement to acquire the remaining 49% ownership of Japan Billboard from the minority interest holders. The exercise of this call option resulted in a net cash payment of $22.9 million in July 2003, based on foreign exchange rates at the payment date.

     Contingent Earnout Payment. In 1999, the Company, through one of its wholly owned subsidiaries, executed a final deferred contingency earnout agreement, as amended in November 2003, with the former minority partners of the Catalina Marketing Japan coupon business. The agreement stipulates a potential earn out payment based on a predetermined formula over the applicable four consecutive quarters of earnings during a time period ending between 2006 and 2007. We are not able to estimate the amount of this contingent payment which is based on future earnings; however, the ultimate amount of this payment, if any, could be material.

Sales Tax Assessment

     A sales and use tax audit for the period January 1, 1991 to June 30, 1993 was conducted by a state taxing authority resulting in an assessment of sales tax on the Company’s revenue generated from its electronic marketing delivery service conducted within that state. We subsequently appealed this assessment to the relevant state tax tribunal. The tax tribunal held that our electronic marketing delivery activities were taxable in their entirety. In March 2002, the state’s intermediate court of appeals affirmed the decision of the tax tribunal. We appealed the case to the state’s supreme court and, in May 2004, the state supreme court vacated the prior decision, remanded the case back to the tax tribunal and directed the tax tribunal to apply a different legal test. In July 2004, the state’s tax tribunal ruled in favor of the Company; however, the decision of the state’s tax tribunal is subject to review by the state supreme court and is not final. As of the current date, the Company does not yet know the final outcome of the case. A favorable decision could result in the reversal of a liability of approximately $4.4 million, which is the amount of the liability the Company has recognized as of the current date. If an adverse decision is reached in this case, we do not believe that the tax assessment will result in a material charge to the Company’s financial statements; however, we may become subject to similar proceedings in other jurisdictions, and additional tax assessments resulting from those proceedings could be material to the Company.

Critical Accounting Estimates

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     Please refer to the discussion of the Company’s Critical Accounting Estimates as disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2003.

Forward Looking Statements

     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 (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 the Company’s 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 “Risk Factors” and Part I—“Special Note Regarding Forward-Looking Statements” included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2004. 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.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

     The Company’s principal market risks are interest rates on various debt instruments and foreign exchange rates at the Company’s international subsidiaries. Please refer to the discussion of the Company’s Quantitative and Qualitative Disclosure About Market Risk as disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2003. There have been no material changes to the Company’s market risk exposure since March 31, 2003.

Item 4. Controls and Procedures

     The Company performed an evaluation of the effectiveness of the design and operation of our “disclosure controls and procedures” (as defined in Rule 13a-14(c) under the Exchange Act) as of March 31, 2004. A discussion of the findings of these evaluations is included in our Annual Report on Form 10-K for our fiscal year ended March 31, 2004 (filed July 15, 2004). We performed an additional assessment of the effectiveness of our disclosure controls and procedures as of June 30, 2004, the end of our first fiscal quarter of 2005, and reported on such assessment in our Quarterly Report on Form 10-Q filed on August 16, 2004, with respect to such period.

     The evaluations as of March 31, 2004 and June 30, 2004 were made under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based upon these evaluations, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of March 31, 2004 and June 30, 2004 were effective to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is timely recorded, processed, summarized and reported and include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. These conclusions are as of March 31, 2004 and as of June 30, 2004 and are subject to our subsequent evaluation, actions and conclusions discussed below. In addition, we made a number of significant changes in our “internal control over financial reporting” that occurred during our fiscal years 2003 and 2004 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting. These changes are summarized below. Other than as described below, we made no changes in our internal controls over financial reporting during the three months ended June 30, 2004 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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     We have continued to evaluate the effectiveness and design of our disclosure controls and procedures in light of subsequent developments with respect to our financial reporting as further discussed below and the matters described in Item 9 — “Changes in and Disagreements with Accountants on Accounting and Financial Disclosure,” in our Annual Report on Form 10-K for our fiscal year ended March 31, 2004. As part of our ongoing evaluation, in June 2003, our accounting and finance personnel began an extensive effort to analyze our financial information and related accounting records for our fiscal years ended March 31, 2003, 2002 and 2001. These efforts, along with efforts undertaken to position our Chief Executive Officer and our Chief Financial Officer to satisfy their certification requirements under the Sarbanes-Oxley Act of 2002 and related rules, identified a number of the items for review, as described below. In addition, our independent registered certified public accounting firm, PricewaterhouseCoopers LLP (“PwC”), in connection with its audit and review of the Company’s internal controls, has communicated to the Audit Committee of the Company’s Board of Directors (the “Audit Committee”) and senior management its findings with respect to the Company’s internal control over financial reporting, including certain “material weaknesses” and “reportable conditions,” as defined under standards established by the American Institute of Certified Public Accountants. Management, in performing its evaluation, also considered PwC’s findings. This evaluation allowed us and our Chief Executive Officer and our Chief Financial Officer to make conclusions, as of July 2004, regarding the state of our disclosure controls and procedures. The evaluation is ongoing and, accordingly, the Company and our certifying officers may make additional conclusions and take additional actions, from time to time, as we may deem necessary or desirable.

     As a result of the recent audit procedures and our continuing efforts to evaluate the effectiveness of the design and operation of our disclosure controls and procedures and our internal controls over financial reporting, we have concluded that the following internal control deficiencies constituted material weaknesses or significant deficiencies, during the fiscal years ended and as of March 31, 2004, 2003 and 2002. In addition, we have identified opportunities to correct these weaknesses and deficiencies. While a number of these weaknesses and deficiencies were found to exist in CHR, certain of the accounting principles addressed in our recent audit activities and other efforts apply to other segments of the Company’s business. We outline these below.

•		Deficiencies related to the structure and design of certain financial information reporting processes. We identified deficiencies in our accounting processes for the timing of recognition of revenue in CHR. Specifically, we discovered that in certain instances (i) we recognized revenue for services in periods prior to the periods in which such services were performed and (ii) we did not account for certain oral and written modifications to written agreements in determining the proper recognition of revenues under such agreements, which resulted in revenues being recognized during incorrect periods.
•		Deficiencies related to inadequate or ineffective policies for documenting transactions. We identified deficiencies in documenting and accounting for transactions and in connection with our related policies and practices. Specifically, we identified various transactions in which we applied policies or procedures in a manner that resulted in us prematurely recognizing revenue. We discovered instances where some of our employees failed to follow policies, processes and procedures that were in place for transactions involving the execution of written agreements. In addition, we discovered practices of our employees with respect to which we had not adopted adequate procedures.
•		Deficiencies related to design of policies and execution of processes related to accounting for transactions. We identified deficiencies in accounting for certain aspects of our operations. We discovered deficiencies in our policies and processes for supporting our accounting practices relating to transfer pricing and fair value calculations, verifying account balances and foreign currency translation adjustments; accounting for property and equipment, goodwill, patents, capitalization of software development costs, accruals and minority interests; and determining and disclosing the fair value of stock-based compensation.
•		Deficiencies related to the internal control environment. As a result of the deficiencies described above, we concluded that there were deficiencies in the internal control environment (relating to accounting, financial reporting and internal controls) during the fiscal years ended March 31, 2004, 2003 and 2002 which constituted, at times, material weaknesses and, at other times, significant deficiencies. Under the supervision of the Audit Committee, we have taken steps to address these material weaknesses and significant deficiencies as described below. We continue to emphasize the importance of establishing the appropriate environment in relation to accounting, financial reporting and internal control over financial reporting and being vigilant to identify areas of improvement and to create and implement new policies and procedures where material weaknesses or significant deficiencies exist.

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     Since May 2003, we have taken a number of steps that we believe will impact the effectiveness of our internal control over financial reporting including the following:

•		In May 2003, we assigned one of our senior executives to assume principal oversight responsibility for CHR and its operations for an interim period, specifically in connection with developing and implementing appropriate disclosure controls and procedures and internal controls over financial reporting.
•		In September 2003, we appointed a new corporate controller of CHR.
•		In November 2003, we adopted the Catalina Health Resource Selling Policies and Procedures. These policies and procedures, as well as other policies adopted by the Company, provide the following:

	•		We required all participants in CHR programs to execute written contracts, including amendments to existing contracts, in each case, in form and substance approved by the Company’s Executive Counsel for Legal Affairs or authorized CHR officers.
	•		We restricted CHR employees from commencing or changing a program prior to the Company receiving a signed contract or amendment to an existing contract.
	•		We limited the duration of programs and printing amounts to limits set forth in signed contracts or amendments to existing contracts.
	•		We limited deviations from CHR standard contract clauses without prior approval by CHR authorized officers.

•		In November 2003, we established compliance training programs for the Company’s employees related to the policies described above and contained in the Catalina Health Resource Selling Policies and Procedures.
•		In February 2004, we appointed a new president of CHR.
•		In March 2004, we completed the relocation of our CHR operations related to finance, database operations, contract administration, procurement and human resources from our offices located in St. Louis, Missouri, to our headquarters in St. Petersburg, Florida, in order to monitor these operations more closely.
•		We have engaged outside resources to supplement our finance and accounting departments to support the preparation of financial statements and reports that are to be filed with the SEC.
•		We are re-evaluating prior policies and procedures and have established new policies and procedures for transactions, account reconciliation procedures and contract management procedures.
•		In July 2004, we added a financial expert to our Board of Directors and the Audit Committee as required by the Sarbanes-Oxley Act of 2002.

     We believe that the steps taken to date have addressed the material weaknesses and significant deficiencies that affected our disclosure controls and procedures in fiscal years 2004, 2003 and 2002. We will continue with our ongoing evaluation and will improve our disclosure controls and procedures as necessary to assure their effectiveness.

     The effectiveness of our or any system of disclosure controls and procedures is subject to certain limitations, including the exercise of judgment in designing, implementing and evaluating the controls and procedures, the assumptions used in identifying the likelihood of future events, and the inability to eliminate misconduct completely. As a result, there can be no assurance that our disclosure controls and procedures will prevent all errors or ensure that all material information will be made known to appropriate management in a timely fashion. In addition, our ability to report our financial condition could be adversely affected if we are unsuccessful in our efforts to permanently and effectively remedy weaknesses or deficiencies in our internal control over financial reporting.

     The statements contained in paragraph 4(a) of Exhibit 31.1 and Exhibit 31.2 should be considered in light of, and read together with, the information set forth in this Item 4.

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Part II — Other Information

Item 5. Other Information

     Ernst and Young LLP resigned as the Company’s independent certified public accountants on August 20, 2003, and were subsequently replaced by PricewaterhouseCoopers LLP. See Item 9, Changes in and Disagreements with Accountants on Accounting and Financial Disclosure, in our Annual Report on Form 10-K for the fiscal year ended March 31, 2003.

Item 6. Exhibits and Reports on Form 8-K

	(a)		Exhibits. See Exhibit index on page 32 of this Quarterly Report on Form 10-Q
	(b)		Reports on Form 8-K
			During the three months ended September 30, 2003, we filed the following Current Reports on Form 8-K:
			Current Report filed with the Commission on August 14, 2003 (Item 5). Current Report filed with the Commission on August 26, 2003 (Item 4). Current Report filed with the Commission on September 15, 2003 (Item 5). Amendment to Current Report filed with the Commission on September 16, 2003 (Item 4). Current Report filed with the Commission on September 30, 2003 (Item 5).

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CATALINA MARKETING CORPORATION

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, Registrant’s principal financial officer, thereunto duly authorized.

September 14, 2004	CATALINA MARKETING CORPORATION (Registrant)
	/s/ Christopher W. Wolf
	Christopher W. Wolf
	Executive Vice President and Chief Financial Officer (Authorized officer of Registrant and principal financial  officer)

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