Edgar Filing: MASTERCARD INC

Form 10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

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

For the fiscal year ended December 31, 2006

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

For the transition period from to

Commission file number: 001-32877

MasterCard Incorporated

(Exact name of registrant as specified in its charter)


Delaware		13-4172551
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

2000 Purchase Street, Purchase, New York		10577
(Address of Registrant’s principal executive offices)		(zip code)

Registrant’s telephone number, including area code (914) 249-2000

Securities registered pursuant to Section 12(b):


Title of each Class		Name of each exchange on which registered
Class A common stock, par value $.0001 per share		New York Stock Exchange
Class B common stock, par value $.0001 per share
Class M common stock, par value $.0001 per share

Securities registered pursuant to Section 12(g):

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ 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 þ

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-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, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated filer þ Accelerated filer ¨ Non-accelerated filer ¨

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

As of February 23, 2007, there were 79,745,652 shares outstanding of the registrant’s Class A common stock, par value $.0001 per share, 55,337,407 shares outstanding of the registrant’s Class B common stock, par value $.0001 per share, and 1,636 shares outstanding of the registrant’s Class M common stock, par value $.0001 per share.

MASTERCARD INCORPORATED

FISCAL YEAR 2006 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS


		Page

	PART I
Item 1.	Business	3
Item 1A.	Risk Factors	24
Item 1B.	Unresolved Staff Comments	40
Item 2.	Properties	40
Item 3.	Legal Proceedings	40
Item 4.	Submission of Matters to a Vote of Security Holders	40

	PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	40
Item 6.	Selected Financial Data	42
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	43
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	64
Item 8.	Financial Statements and Supplementary Data	67
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	122
Item 9A.	Controls and Procedures	122
Item 9B.	Other Information	123

	PART III
Item 10.	Directors and Executive Officers of the Registrant	124
Item 11.	Executive Compensation	124
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	124
Item 13.	Certain Relationships and Related Transactions	124
Item 14.	Principal Accountant Fees and Services	124

	PART IV
Item 15.	Exhibits and Financial Statement Schedules	124

Forward-Looking Statements

This Report on Form 10-K contains forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. When used in this Report, the words “believe,” “expect,” “could,” “may,” “would”, “will” and similar words are intended to identify forward-looking statements. These forward-looking statements relate to the Company’s future prospects, developments and business strategies and include, without limitation, the Company’s belief in its ability to drive growth by further penetrating its existing customer base and by expanding its role in targeted geographies and higher-growth segments of the global payments industry, enhancing its merchant relationships, maintaining unsurpassed acceptance and continuing to invest in its brands and increasing its volume of business with key customers over time. Many factors and uncertainties relating to our operations and business environment, all of which are difficult to predict and many of which are outside of our control, influence whether any forward-looking statements can or will be achieved. Any one of those factors could cause our actual results to differ materially from those expressed or implied in writing in any forward-looking statements made by MasterCard or on its behalf. We believe there are certain risk factors that are important to our business, and these could cause actual results to differ from our expectations. Please see a complete discussion of these risk factors in Item 1A—Risk Factors of this report.

In this Report, references to the “Company,” “MasterCard,” “we,” “us” or “our” refer to the MasterCard brand generally, and to the business conducted by MasterCard Incorporated and its consolidated subsidiaries, including our principal operating subsidiary, MasterCard International Incorporated (d/b/a MasterCard Worldwide).

Item 1. Business

Overview

MasterCard is a leading global payment solutions company that provides a variety of services in support of the credit, debit and related payment programs of nearly 25,000 financial institutions who are our customers. Through our three-tiered business model as franchisor, processor and advisor, we develop and market payment solutions, process payment transactions, and provide consulting services to our customers and merchants. We manage a family of well-known, widely accepted payment card brands, including MasterCard^®, MasterCard Electronic™, Maestro^® and Cirrus^®, which we license to our customers. As part of managing these brands, we also establish and enforce rules and standards surrounding the use of our payment card system. We generate revenues from the fees that we charge our customers for providing these transaction processing and other payment-related services (operations fees) and by assessing our customers based on the dollar volume of activity on the cards that carry our brands (assessments).

A typical transaction processed over our system involves four parties in addition to us: the cardholder, the merchant, the issuer (the cardholder’s bank) and the acquirer (the merchant’s bank). Consequently, the payment system we operate is often referred to as a “four-party” payment system. Our customers are the financial institutions that act as issuers and acquirers. Using our transaction processing services, issuers and acquirers facilitate payment transactions between cardholders and merchants throughout the world, providing merchants with an efficient and secure means of receiving payment, and consumers and businesses with a convenient payment method that is accepted worldwide. We guarantee the settlement of many of these transactions among our customer financial institutions to ensure the integrity of our payment system. In addition, we undertake a variety of marketing activities designed to maintain and enhance the value of our brands. However, cardholder and merchant relationships are managed principally by our customers. Accordingly, we do not issue cards, extend credit to cardholders, determine the interest rates (if applicable) or other fees charged to cardholders by issuers, or establish the merchant discount charged by acquirers in connection with the acceptance of cards that carry our brands.

Our business has a global reach and has experienced significant growth. Gross dollar volume (“GDV”) on cards carrying the MasterCard brand as reported by our customers was approximately $2 trillion in 2006,

a 15.7% increase in U.S. dollar terms over the GDV reported in 2005. In 2006, we processed 16.1 billion transactions (including 3.2 billion PIN-based online transactions), a 17.5% increase over the number of transactions processed in 2005.

We believe the trend within the global payments industry from paper-based forms of payment, such as cash and checks, toward electronic forms of payment, such as cards, creates significant opportunities for the continued growth of our business. Our strategy is to continue to grow by further penetrating our existing customer base and by expanding our role in targeted geographies and higher-growth segments of the global payments industry (such as premium/affluent and contactless cards, corporate payments, and debit), enhancing our merchant relationships, maintaining unsurpassed acceptance and continuing to invest in our brands. We also intend to pursue incremental payment processing opportunities in the European Union in connection with the implementation of the Single European Payment Area (“SEPA”) initiative and in certain other countries. We are committed to providing our key customers with coordinated services through integrated, dedicated account teams in a manner that allows us to capitalize on our expertise in payment programs, brand marketing, product development, technology, processing and consulting services for these customers. By investing in strong customer relationships over the long-term, we believe that we can increase our volume of business with key customers over time, and in support of this strategy, we are hiring additional resources and developing sales and other personnel.

We operate in a dynamic and rapidly evolving legal and regulatory environment. Accordingly, we have faced heightened regulatory scrutiny, particularly with respect to interchange fees, and legal challenges in recent years. Interchange fees, which represent a sharing of payment system costs among acquirers and issuers, have been the subject of increased regulatory scrutiny and litigation as card-based forms of payment have become relatively more important to local economies. Although we establish certain interchange rates and collect and remit interchange fees on behalf of our customers entitled to receive them, we do not earn revenues for interchange fees. However, if issuers cannot collect interchange fees or receive reduced interchange fees, this could reduce the number of financial institutions willing to participate in a four-party payment card system such as ours, lower card issuance, lower overall transaction volumes, and/or make proprietary end-to-end networks or other forms of payment more attractive. Issuers might also decide to charge higher fees to cardholders, thereby making our card programs less desirable and reducing our transaction volumes and profitability, or attempt to decrease the expense of their card programs by seeking a reduction in the fees that we charge. We are also exposed to a variety of significant lawsuits in addition to those relating to interchange fees, including federal antitrust claims, and claims under state unfair competition statutes. See “Risk Factors—Legal and Regulatory Risks” in Part I, Item 1A of this Report.

MasterCard Incorporated was incorporated as a Delaware stock corporation in May 2001. We conduct our business principally through MasterCard Incorporated’s principal operating subsidiary, MasterCard International Incorporated (“MasterCard International”), a Delaware membership corporation that was formed in November 1966. Our financial institution customers are generally principal members of MasterCard International, who participate directly in MasterCard International’s business, or affiliate members of MasterCard International, who participate indirectly in MasterCard International’s business through a principal member. In May 2006, we completed a plan for a new ownership and governance structure, including the appointment of a new Board of Directors comprised of a majority of directors who are independent from our financial institution customers and the establishment of a charitable foundation incorporated in Canada, The MasterCard Foundation (“the Foundation”). Part of this plan included the completion of an initial public offering of a new class of common stock (the “IPO”). Prior to our change in governance and ownership structure, the common stock of MasterCard Incorporated was owned by principal members of MasterCard International.

Under the new ownership and governance structure, our previous stockholders retained a 41% equity interest in the Company through ownership of a new non-voting Class B common stock. In addition, previous stockholders received a single share of Class M common stock that has no economic rights but provides certain voting rights, including the right to elect up to three of MasterCard’s directors (but not more than one quarter of the total number of directors) and to approve specified significant corporate actions.

We also issued 66,134,989 shares of a new voting Class A common stock to public investors through the IPO which closed in May 2006. These public investors hold shares representing approximately 49% of our equity and 83% of our general voting power. Additional shares of Class A common stock, representing approximately 10% of our equity and 17% of our voting rights, have been issued as a donation to the Foundation.

We used all but $650 million of our net proceeds from the IPO (including any proceeds received pursuant to the underwriters’ option to purchase additional shares) to redeem a number of shares of Class B common stock from our previous stockholders, which was equal to the aggregate number of shares of Class A common stock that we issued to investors in the IPO (including any shares sold pursuant to the underwriters’ option to purchase additional shares) and contributed to the Foundation. We intend to use the remaining proceeds to increase our capital, defend ourselves against legal and regulatory challenges, and expand our role in targeted geographies and higher growth segments of the global payments industry, and for other general corporate purposes. However, we have not determined the amounts of such remaining proceeds that are to be allocated to these purposes.

Our Industry

We operate in the global payments industry, which consists of all forms of payment including:

•

Paper—cash, personal checks, money orders, official checks, travelers cheques and other paper-based means of transferring value;

•

Cards—credit cards, charge cards, debit cards (including Automated Teller Machine (“ATM”) cards), stored value cards and other types of cards; and

•

Other Electronic—wire transfers, electronic benefits transfers and Automated Clearing House payments, among others.

The most common card-based forms of payment are general purpose cards, which are payment cards carrying logos that permit widespread usage of the cards within countries, regions or around the world. General purpose cards have different attributes depending on the type of accounts to which they are linked:

•

“pay later” cards, such as credit or charge cards, typically access a credit account that either requires payment of the full balance within a specified period (a charge card) or that permits the cardholder to carry a balance in a revolving credit account (a credit card);

•

“pay now” cards, such as debit cards, typically access a demand deposit or current account maintained by the cardholder; and

•

“pay before” cards, such as prepaid or electronic purse cards, typically access a pool of value previously funded.

The primary general purpose card brands include MasterCard, Visa, American Express, JCB, Diners Club and Discover. Historically, these brands—including MasterCard—were principally associated with “pay later” (credit or charge) cards in the United States and other major international markets. Today, MasterCard (and Visa) cards may be issued in any of the “pay later,” “pay now” or “pay before” categories.

“Pay Now” cards may be further categorized into several sub-segments:

•

Signature-based debit cards are cards where the primary means of cardholder validation at the point of sale (“POS”) is for the cardholder to sign a sales receipt and where transaction data is exchanged in two discrete messages (one for authorization and another for clearing). MasterCard and Visa-branded cards constitute the majority of signature-based debit cards.

•

PIN-based debit cards are cards for which cardholders generally enter a personal identification number (“PIN”) at a POS terminal for validation and transaction data is exchanged through a single message with the initial authorization. The primary PIN-based debit card brands are Maestro,

Electron and Interlink and various regional or country-specific PIN-based debit brands, such as Star, Pulse, NYCE and others in the United States, Interac in Canada and EFTPOS in Australia. The MasterCard brand also functions as a PIN-based debit brand in the United States.

•

Cash access cards, such as Cirrus-branded cards, are cards which permit cardholders to obtain cash principally at ATMs by entering a PIN. In addition to Cirrus, the primary cash access card brands are Plus and the PIN-based debit network brands referenced above.

Regional and domestic/local PIN-based debit brands are the primary brands in many countries. In these markets, issuers have historically relied on the Maestro and Cirrus brands (and the Plus and Interlink brands) to enable cross-border transactions, which typically constitute a small portion of overall volume.

In addition to general purpose cards, private label cards comprise a significant portion of all card-based forms of payment. Typically, private label cards are issued by a merchant (such as a department store or gasoline retailer), and can be used only at the issuing merchant’s locations.

Payment card transactions are generally characterized as “offline” or “online.” Offline transactions involve the exchange of transaction data in two discrete messages (one for authorization and another for clearing) and typically require the cardholder to sign a sales receipt. In contrast, online transactions only require the exchange of transaction data through a single message with the initial authorization and are typically initiated by entry of a PIN at the POS terminal or ATM.

Payment Services

We provide transaction processing and other payment-related services to our customers. In connection with these services we also deploy dedicated customer relationship management teams to our key customers to bring them customized solutions built upon our expertise in payment programs, brand marketing, product development, technology, processing and consulting services.

Processed Transactions and GDV

We generate revenues from the fees we charge our customers for providing transaction processing and other payment-related services. These fees are typically transaction-based and include fees for authorization, clearing and settlement. We also earn revenues by charging our customers assessments based on the GDV of activity on the cards that carry our brands. Accordingly, our revenues are impacted by the number of transactions that we process and the use of cards carrying our brands. The tables below provide some information regarding GDV, which is a key driver of our revenues.

The MasterCard-Branded GDV table below provides information regarding the GDV for all MasterCard-branded card programs (excluding Cirrus and Maestro) and MasterCard credit and charge card programs in each of our regions for the years ended December 31, 2006 and 2005. Growth rates are provided on both a U.S. dollar and local currency basis for the periods indicated. GDV represents the aggregate dollar amount of purchases made and cash disbursements obtained with MasterCard-branded cards and includes the impact of balance transfers and convenience checks.

MasterCard Branded GDV⁽¹⁾

($ in billions)


	Year Ended December 31, 2006		Year-over-Year Growth				Year Ended December 31, 2005
	Year Ended December 31, 2006		U.S. $		Local Currency⁽²⁾		Year Ended December 31, 2005
All MasterCard Branded Programs
Asia/Pacific	$	286	9.0	%	7.7	%	$	262
Canada		75	21.8		14.2			61
Europe		520	14.9		13.9			453
Latin America		126	28.3		26.1			98
South Asia/Middle East Africa		30	40.7		46.0			22
United States		919	15.7		15.7			795
Worldwide		1,956	15.7		14.9			1,690

All MasterCard Credit and Charge Programs⁽³⁾
Asia/Pacific	$	274	6.3	%	5.1	%	$	258
Canada		74	21.5		14.0			61
Europe		411	16.0		15.1			354
Latin America		62	34.8		29.5			46
South Asia/Middle East Africa		23	28.2		33.3			18
United States		610	6.0		6.0			576
Worldwide		1,455	10.8		9.9			1,314

Note that the figures in the preceding table may not sum due to rounding.

(1)

GDV generated by Maestro and Cirrus cards are not included. The data set forth for GDV is derived from information provided by MasterCard members and includes information with respect to MasterCard-branded transactions that are not processed by MasterCard and for which MasterCard does not earn significant revenues. All data is subject to revision and amendment by MasterCard’s members subsequent to the date of its release, which revisions and amendments may be material.

(2)	Local currency growth eliminates the impact of currency fluctuations and represents local market performance.

(3)	GDV generated by MasterCard-branded debit cards is not included.

Transaction Processing

Introduction. We operate a system that links issuers and acquirers around the globe for transaction processing services and, through them, permits MasterCard cardholders to use their cards at millions of merchants worldwide. A typical transaction processed over our system involves four participants in addition to us: issuers (the cardholders’ banks), acquirers (the merchants’ banks), merchants and cardholders. The following diagram depicts a typical point-of-sale card transaction.

LOGO

In a typical transaction, a cardholder (A) purchases goods or services from a merchant (B) using a card. After the transaction is authorized by the issuer (D) using our network, the acquirer (C) pays the amount of the purchase, net of a discount, to the merchant. This discount, which we refer to as the merchant discount, takes into consideration the amount of the interchange fee described below. The issuer pays the acquirer an amount equal to the value of the transaction minus any interchange fee and posts the transaction to the cardholder’s account. Our rules generally guarantee the payment of transactions using MasterCard-branded cards and certain transactions using Cirrus and Maestro-branded cards between issuers and acquirers.

For participants in a four-party payment system, the economics of a card transaction to our company vary widely depending on such factors as whether the transaction is domestic (and, if it is domestic, the country in which it takes place) or cross-border, whether it is a point-of-sale purchase transaction or cash withdrawal, and whether the transaction is processed over MasterCard’s network or is handled solely by a financial institution that is both the acquirer for the merchant and the issuer to the cardholder (an “on-us” transaction).

A significant portion of the merchant discount is generally paid from the acquirer to the issuer in the form of an interchange fee. The balance of the merchant discount is retained by the acquirer to cover its costs and profit margin. Acquirers may charge merchants processing and related fees in addition to the merchant discount. Issuers may also charge cardholders fees for the transaction, including, for example, fees for extending revolving credit. As described below, we charge issuers and acquirers operational fees and assessments for the services we provide them.

Interchange fees represent a sharing of a portion of payment system costs among the financial institutions participating in a four-party payment card system such as ours. Generally, interchange fees are collected from acquirers and passed to issuers to reimburse the issuers for a portion of the costs incurred by them in providing services which benefit all participants in the system, including acquirers and merchants. In some circumstances, such as cash withdrawal transactions, this situation is reversed and interchange fees are paid by issuers. We establish default interchange fees that apply when there are no other interchange fee arrangements in place between an issuer and an acquirer. We administer the collection and remittance of interchange fees through the settlement process; however, we do not earn revenues from them. As noted above, interchange fees are a significant component of the costs that merchants pay to accept payment cards and are subject to regulatory or legal challenges in a number of jurisdictions. We are devoting substantial management and financial resources to the defense of interchange fees and to the other legal and regulatory challenges we face. See “Risk Factors—Legal and Regulatory Risks” in Part 1, Item 1A of this Report.

MasterCard Revenue Sources. MasterCard generates revenues by charging transaction processing and related fees and GDV and card-based assessments to both issuers and acquirers. On an aggregate basis, we earned approximately 73.1% of our revenues in connection with operations fees and approximately 26.9% of our

revenues in connection with assessments in 2006. In 2005, on an aggregate basis, we earned approximately 66.1% of our revenues in connection with operations fees and approximately 33.9% of our revenues in connection with assessments. Operations fees are typically transaction-based and include core authorization, clearing and settlement fees, cross-border and currency conversion fees, switch fees, connectivity fees and other operations fees, such as acceptance development fees, warning bulletins, holograms, fees for compliance programs, and user-pay fees for a variety of transaction enhancement services. Rebates and incentives, which are paid to customers and merchants to encourage issuance and acceptance of our cards, are recorded as contra-revenues in accordance with Accounting Principles Generally Accepted in the United States of America (“GAAP”). See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Revenues” in Part II, Item 7 of this Report.

On a global basis, we generate a majority of our revenue from issuers; however, revenue growth can be attributed to both issuers and acquirers. The allocation of our revenues between operations fees and assessments and among issuers and acquirers varies across our regions. Issuers typically pay operations fees and assessments. Acquirers principally pay assessments on GDV or cards and, to a lesser extent, certain operations fees.

Generally, we process the majority of MasterCard-branded domestic transactions in the United States, the United Kingdom, Canada, Brazil and Australia. We process substantially all cross-border transactions using MasterCard, Maestro and Cirrus-branded cards. We charge relatively higher operations fees for settlement, authorization and switch fees on cross-border transactions and earn cross-border revenues as well as currency conversion revenues if the transactions require conversion between two different currencies. Operations fees for offline debit transactions, which are generally signature-based debit transactions, are priced similar to credit transactions. Operations fees for processing domestic online debit transactions are priced in a similar manner as domestic offline debit and credit transactions, while international offline debit and credit transactions are priced higher than international online debit transactions.

Assessments are calculated based on our customers’ GDV and rates vary by region. Most of our assessment rates are tiered and rates decrease when customers meet incremental volume hurdles. These rates also vary by the type of transaction. We generally assess at higher rates for cross-border volumes compared to domestic volumes. We also assess at higher rates for retail purchases versus cash withdrawals. Credit and offline debit transactions are assessed at higher rates than online debit transactions. In addition, from time to time we may introduce assessments for specific purposes such as market development programs. Assessments that are based on quarterly GDV are estimated utilizing aggregate transaction information and projected customer performance.

We generate a significant amount of revenue from processing cross-border transactions and currency conversion. On a global scale, we have the ability to process transactions denominated in more than 160 currencies. For example, we can process a transaction in a merchant’s local currency; however the charge for the transaction would appear on the cardholder’s statement in the cardholder’s home currency. MasterCard generally uses a wholesale rate increased by a certain percentage or a government-mandated rate to convert transactions in foreign currencies into U.S. dollars. Revenues from processing cross-border and currency conversion transactions fluctuate with cross-border travel. See “Risk factors—Business Risks—A significant portion of the revenue we earn outside the United States is generated from cross-border transactions and a decline in cross-border business and leisure travel could adversely affect our revenues and profitability.”

Authorization, Clearing and Settlement. We facilitate the authorization, clearing and settlement of the transactions described above and similar transactions through our proprietary, worldwide computer and telecommunications network.

Authorization refers to the process by which a transaction is approved by the issuer or, in certain circumstances such as when the issuer’s systems are unavailable or cannot be contacted, by MasterCard or others on behalf of the issuer in accordance with the issuer’s instructions. MasterCard’s network provides for the transmission of authorization requests and results among issuers, acquirers and other transaction processors or

networks. Our rules, which may vary across regions, establish the circumstances under which merchants and acquirers must seek authorization of transactions.

Clearing refers to the exchange of financial transaction information between issuers and acquirers after a transaction has been completed. MasterCard clears transactions among customers through our central processing systems.

Once transactions have been authorized and cleared, MasterCard provides services in connection with the settlement of the transactions—that is, the exchange of funds along with associated fees. Settlement is provided through our Settlement Account Management system. Once clearing is completed, a daily reconciliation is provided to each customer involved in settlement, detailing the net amounts by clearing cycle and a final settlement position. The actual exchange of funds takes place between a clearing bank chosen by the customer and approved by MasterCard, and a settlement bank chosen by MasterCard. Customer settlement occurs in U.S. dollars or in a limited number of other selected currencies, in accordance with MasterCard’s established rules.

Credit and Offline Debit Transaction Processing. Our transaction processing services are managed principally through our Global Technology and Operations center in O’Fallon, Missouri, a state-of-the-art worldwide network control facility with over 52,000 square feet of white computer room environment. Our core processing systems are large and highly scalable. We currently operate at 70% capacity at a peak day, and we can substantially scale this capacity upon demand. MasterCard processes transactions in more than 160 currencies from approximately 210 countries.

MasterCard-branded transactions (credit and offline debit transactions) are generally cleared through our centralized processing system, known as the Global Clearing Management System (“GCMS”), and the related information is typically routed among customers via our data transport network, which we refer to as Banknet^®. Both GCMS and Banknet have benefited from significant investments made during our five-year, $160 million system enhancement strategy. Since 1997, our virtual private network has significantly reduced transaction processing times and enhanced data security for our customers. In our systems, transactions flow between over 1,200 endpoints distributed throughout the world rather than through a central location. This approach enhances the reliability of MasterCard transactions by providing several levels of redundancy.

GCMS has helped us to improve our time-to-market in introducing new programs and services. More importantly, using GCMS, we can partner with our customers to provide value-added services to merchants and cardholders. For example, issuers can use GCMS to develop promotions for segments of their card portfolios without investing in their own systems development. We believe that GCMS and our other recent systems enhancements position us well to pursue incremental processing opportunities.

Our transaction processing services are available 24 hours per day, every day of the year. In the event that our main processing facility in O’Fallon, Missouri, becomes disabled, we have a co-processing facility in Kansas City, Missouri. Our transaction processing systems have redundant power supplies and back-up processes to ensure continued operation in the event of a fault. We have consistently maintained core systems availability for our global processing systems at a rate in excess of 99%.

Online Debit Transaction Processing. We also operate the MasterCard Debit Switch (“MDS”), which principally supports the processing of online debit transactions. The MDS switches financial messages, provides transaction and statistical reporting, and performs clearing and settlement between customers and other debit transaction processing networks. Unlike the authorization and clearing processes described above, which involve the exchange of transaction data in two discrete messages (one for authorization and again for clearing), the MDS generally operates as a “single message” system in which clearing occurs simultaneously with the initial authorization request.

In addition to continued investment in the MDS, MasterCard is enhancing its position in online debit transaction processing through a series of initiatives. Since 2004, MasterCard has worked with issuers and

acquirers to increase the routing priority of MasterCard’s systems for the processing of PIN point-of-sale transactions, and has begun to establish direct processing connections to major U.S. merchants. We continue to explore opportunities to further enhance our debit processing capabilities.

Regional Transaction Processing. We provide transaction processing (authorization, clearing and settlement) services for customers in our Europe region through our subsidiary, MasterCard Europe. These services allow European customers to facilitate payment transactions between cardholders and merchants throughout Europe. Recently, we substantially completed a multi-year technical convergence project to integrate our European systems into our global processing systems. In Australia, we also operate a separate regional processing facility for the Asia/Pacific region. This facility processes a majority of the MasterCard-branded transaction volumes for Australia and New Zealand.

Outside of the United States and a select number of other jurisdictions, most intra-country (as opposed to cross-border) transaction activity conducted with MasterCard, Maestro and Cirrus cards is authorized, cleared and/or settled by our customers or other processors without the involvement of our central processing systems. We do not earn transaction processing fees for such activity. Accordingly, we derive a significant portion of our non-U.S. revenues from processing cross-border transactions. As part of our strategy, we are developing and promoting domestic processing solutions for our customers that are designed to capitalize on our significant investments in our global and regional processing systems. For example, during 2003, MasterCard Europe began authorizing and clearing transactions for the members of S2 Limited, which operate an electronic domestic debit card network in the United Kingdom under the Switch^® brand, as part of an agreement to migrate Switch branding to Maestro by 2007. In Brazil, we acquired the local debit brand Redeshop^® in 2002. The Switch migration and Redeshop acquisition have resulted in significant increases in our local processing debit volume in the United Kingdom and Brazil, respectively.

Customer Relationship Management

We are committed to providing our key customers with coordinated services through integrated, dedicated account teams in a manner that allows us to take advantage of our expertise in payment programs, brand marketing, product development, technology, processing and consulting services for these customers. We have implemented an internal process to organize our relationships with our key customers on a global and regional basis to ensure that their priorities are consistently identified and incorporated into MasterCard’s project, brand, processing, technology and related strategies. To achieve this, we undertake an integrated customer planning process with key customers on an ongoing basis. Through this planning process, we seek to capture incremental business opportunities with our customers by enhancing our strategic insights into customer needs and by effectively creating tailored solutions using a variety of our key assets.

We also seek to enter into business agreements with key customers pursuant to which we offer financial incentives and other support benefits to our customers to issue and promote our cards. Such support may consist of a reduction in volume-based fees for certain customers based on the achievement of GDV targets or other performance metrics. We believe that our business agreements with key customers have contributed to our strong volume and revenue growth in recent years.

The pricing terms and duration of the agreements with our customers vary significantly. Most of our customer relationships are not exclusive, and may be terminated in a variety of circumstances. See “Risk Factors—Business Risks—We face increasingly intense competitive pressure on the prices we charge our customers, which may materially and adversely affect our revenue and profitability” and “—Our revenue would decline significantly if we lose one or more of our most significant customers, which could have a material adverse impact on our business” in Part I, Item 1A of this Report. In addition to our key customer agreements, we have standard licensing arrangements with all of our customers that permit them to use our trademarks and subject them to the rules governing our payment programs. Those customers with whom we do not have customized agreements are generally subject to standardized pricing arrangements.

MasterCard Programs

MasterCard offers a wide range of payment solutions to enable our customers to design, package and implement programs targeted to the specific needs of their customers. Our principal payment programs, which are facilitated through our brands, include consumer credit and debit programs, commercial payment solutions and stored value programs. Our issuer customers determine the competitive features for the cards issued under our programs, including interest rates and fees. We determine other aspects of our card programs—such as required services and marketing strategy—in order to ensure consistency in connection with these programs.

Consumer Programs—Credit and Charge

Overview. MasterCard offers a number of consumer credit and charge (“pay later”) programs that are designed to meet the needs of our customers. For the year ended December 31, 2006, our consumer credit and charge programs generated approximately $1.3 trillion in GDV globally, representing 66% of our total GDV for the year ended December 31, 2006. As of December 31, 2006, the MasterCard brand mark appeared on approximately 634.2 million consumer credit and charge cards worldwide, representing 7.9% growth from December 31, 2005.

United States. We offer customized programs to address specific consumer segments. Our consumer credit programs include Standard, Gold, Platinum, World and World Elite MasterCard™ cards. Standard MasterCard cards are general purpose credit cards targeted to consumers with basic needs for a credit card. Gold MasterCard cards are targeted to consumers typically requiring a higher line of credit or spending limit and one or more card enhancement services associated with a card. Platinum MasterCard cards are offered with still higher credit lines or spending limits and also provide a full range of card enhancement services, such as loyalty reward programs. World MasterCard^® cards, which are aimed at affluent consumers, have no preset spending limit and the option to revolve a designated portion of the charges made. In 2006, MasterCard launched the World Elite MasterCard card, a new card platform for high-income, high net worth consumers that offers a mix of travel benefits, rewards and global acceptance, including personalized travel agency benefits.

International. In addition to the programs offered in the United States, MasterCard also offers a variety of other consumer card programs in selected markets throughout the world. For example, MasterCard Electronic cards offer additional control and risk management features by requiring 100% issuer authorization. The MasterCard Electronic program is designed to curb fraud and control exposure in high risk markets. The MasterCard Unembossed program encourages merchants to submit transactions electronically for authorization while providing cardholders with a global acceptance network. MasterCard also offers cards for affluent consumers outside of the United States, such as the MasterCard Black™ card and MasterCard Blanc card in Latin America. MasterCard has also created innovative, alternate card forms to help our customers differentiate their programs.

General Services. The services provided in connection with all MasterCard credit cards and for which we charge issuers include lost/stolen card reporting, emergency card replacement and emergency cash advance. Optional services, such as emergency travel assistance, are also available to holders of many MasterCard cards. These services are generally provided through third-party service providers arranged by MasterCard, including a licensed insurance company retained by MasterCard to provide insurance services.

Consumer Programs—Deposit Access

Overview. MasterCard supports a range of payment solutions that allow our customers to provide consumers with convenient access to funds on deposit in checking, demand deposit and other accounts. Our deposit access (“pay now”) programs may be branded with the MasterCard, Maestro and/or Cirrus marks, and can be used to obtain cash in bank branches or at ATMs. In addition, MasterCard- and Maestro-branded debit cards may be used to make purchases at the point of sale. Like our consumer credit programs, we support debit

Gold MasterCard^® programs and debit Platinum MasterCard^® programs that issuers can offer as premium services to cardholders. Issuers may also provide enhancement services and loyalty rewards programs in connection with debit cards carrying our brands. In recent years we have increased the size of our debit programs in key countries through our acquisition of the Redeshop^® brand in Brazil in 2002 and through our agreement with S2 Limited to shift branding and processing from the Switch^® brand to Maestro in the United Kingdom by 2007.

MasterCard-branded Debit Card Programs. We offer MasterCard-branded debit card programs in the United States and other countries and we continue to explore opportunities to further enhance our debit processing capabilities.

As a result of the settlement agreement in the U.S. merchant lawsuit in 2003, MasterCard has taken a number of actions to modify its MasterCard-branded debit card programs in the United States. Among other things, MasterCard has adopted rules that allow merchants to reject MasterCard-branded debit cards issued in the United States, while still accepting other MasterCard-branded cards, and vice versa. However, U.S. merchants who choose to accept MasterCard-branded debit cards must accept all MasterCard-branded debit cards.

Maestro. Maestro is MasterCard’s global online debit program. Based on information from our customers, we estimate that, at December 31, 2006, the Maestro brand mark appeared on approximately 675 million cards worldwide, representing 13.0% growth from December 31, 2005. Based on the same information, we also believe that Maestro was accepted for purchases at more than 10 million merchant locations globally as of December 31, 2006. We believe that our Maestro brand has a leading position among online debit brands in many markets throughout the world, particularly in Europe. We believe that the strong presence of Maestro in Europe will position us well when the SEPA initiative, which will create a more integrated payment market in Europe, is implemented. We believe that the global acceptance of Maestro contributes to the growth of our debit business and adds value to the services that we provide to our customers. Maestro cards are issued, and Maestro transactions are processed, pursuant to a set of rules and procedures that are separate from the rules applicable to MasterCard credit and offline debit transactions.

Cirrus. We make the Cirrus brand available to customers to provide global cash access for our customers’ proprietary ATM cards. We believe the Cirrus brand provided cash access at more than 1 million participating ATMs and other locations where cash may be obtained around the globe as of December 31, 2006, making it one of the world’s largest cash access brands. Generally, cardholders with cards bearing the MasterCard, Maestro or Cirrus logo may use a network ATM to access funds on deposit in their accounts (if a debit card is used) or to obtain a cash advance (if a credit card is used). Typically, ATM cards contain multiple cash access logos and the Cirrus brand enables a transaction (which will then be processed by the MDS) only if there is no regional or domestic cash access brand that is capable of doing it.

Commercial Payment Solutions

MasterCard offers commercial payment solutions that help large corporations, mid-sized companies, small businesses and public sector organizations to streamline their payment processes, manage information and reduce administrative costs. In the year ended December 31, 2006, our commercial credit and charge programs generated approximately $157.2 billion in GDV globally, representing 8% of our total GDV for this period. GDV from commercial credit and charge programs grew globally by approximately 22.4%, on a U.S. dollar basis for the year ended December 31, 2006, compared to the same period in 2005.

We offer various corporate payment products, including corporate cards, corporate executive cards, corporate purchasing cards and fleet cards that allow corporations to manage travel and entertainment expenses and provide corporations with additional transactional detail. The MasterCard Corporate Multi Card^® is an integrated card program that combines the functionality of one or more of our MasterCard corporate programs—travel, purchasing and fleet—into a single card or account, thereby reducing the costs of managing multiple card

programs. Our Multinational Corporate Program allows issuers to manage and consolidate these corporate card programs for multinational organizations that require commercial cards in more than one country. We also offer a variety of payment programs for public sector entities that are similar to the travel, purchasing, fleet and Multi Card programs offered to corporations. The MasterCard BusinessCard^® and Executive BusinessCard are targeted at the small-business segment, offering business owners the ability to gain access to working capital, extend payments and separate business expenses from personal expenses.

MasterCard has also developed programs that offer benefits to organizations ranging from small businesses to large corporations by integrating payment transaction data into financial systems. Such programs, which aim to facilitate paperless end-to-end corporate purchasing for businesses, include MasterCard e-P3^® (accounts payable re-engineering), MasterCard ExpenSys™ (expense reporting), MasterCard Smart Data (management reporting) and MasterCard SmartLink^® (enterprise reporting systems).

Prepaid Programs

Prepaid (“pay before”) programs involve a balance account that is funded with monetary value prior to use. Holders can access funds in the account via a traditional magnetic stripe or chip-enabled payment card.

MasterCard’s customers may implement prepaid payment programs using any of the MasterCard family of brands (MasterCard, MasterCard Electronic, Maestro or Cirrus). MasterCard provides processing services, including authorization, clearing and settlement, in support of either magnetic stripe or chip-enabled prepaid card programs. Prepaid card programs can be customized to meet the needs of unique corporate and consumer segments and can be issued in connection with various programs such as gift, employee benefit, general purpose, payroll, travel, incentive and government disbursement programs.

Contactless Payment Solutions

MasterCard PayPass^® is a “contactless” payment solution that enables consumers simply to tap or wave their payment card or other payment device, such as a phone, key fob or wristband, on a specially equipped terminal. PayPass utilizes radio frequency technology to securely transmit payment details wirelessly to the payment card terminals for processing through our network. Our PayPass program targets purchases under $25 and is designed to help our customers further expand their businesses by capturing a portion of transactions that were previously cash-based, increasing card activity on underutilized card accounts. PayPass also reduces transaction times, which appeals to merchants in fast throughput businesses and allows us to expand the number of locations that accept our cards. PayPass programs include customers and merchants in 13 countries including the United States, Canada, United Kingdom, Japan, Korea, China, Thailand, Turkey, Lebanon, Malaysia, Australia, Taiwan and the Philippines. As of December 31, 2006, approximately 12.6 million PayPass cards and devices were issued globally with acceptance at over 46,000 merchant locations worldwide.

Consulting and Research Services

Our MasterCard Advisors group serves as a point of differentiation for MasterCard by providing our customers and other clients with a wide range of consulting and research services associated with their payments activities and programs. For example, SpendingPulse^®, a national retail data service that aggregates and analyzes MasterCard's transaction processing data in the United States, produces estimates of U.S. retail sales and can be accessed through Reuters. In 2006, we continued to expand existing services with the launch of the Commerce Intelligence analytic capability, which provides customers with marketing insights based on consumer behavior compiled from MasterCard’s proprietary data, and Commerce Coalition programs, direct marketing programs that use Commerce Intelligence™ to develop and deliver targeted merchant offers to cardholders on behalf of issuers. Also in 2006, we launched PortfolioAnalytics, a portal to the MasterCard data warehouse that provides customer-specific information about marketing, risk, MasterCard programs, operations and fraud. MasterCard

Advisors charges our customers and others consulting and research fees for its professional services or may offer these services as an incentive under business agreements with certain customers.

Emerging Technologies

MasterCard contributes to innovation in the payments industry through several initiatives, including developments in the areas of electronic commerce, smart cards, mobile commerce, wireless and emerging technologies. MasterCard encourages new initiatives in the area of electronic commerce by researching and developing a range of technologies designed to offer business opportunities to MasterCard and our customers. MasterCard manages smart card development by working with our customers to help them replace traditional payment cards relying solely on magnetic stripe technology with chip-enabled payment cards that offer additional point-of-sale functionality and the ability to capture more consumer data. As of December 31, 2006, approximately 284 million smart cards bearing our brands had been issued worldwide. We are also involved in a number of organizations that facilitate the development and use of smart cards globally, including a smart cards standards organization with other participants in the industry that maintains specifications designed to ensure interoperability and acceptance of chip-based payment applications on a worldwide basis. MasterCard also encourages new initiatives in the area of mobile commerce and wireless payment development by working with customers and leading technology companies. Finally, MasterCard is working to develop standards and programs that will allow consumers to conduct their financial transactions securely using a variety of new point of interaction devices.

Marketing

We manage and promote our brands for the benefit of all customers through brand advertising, promotional and interactive programs, and sponsorship initiatives. We strive to have our consumers associate the MasterCard brand with “The Best Way to Pay for Everything that Matters^®.” In 2006, we adopted a new corporate brand to reflect our three-tiered business model as franchisor, processor and advisor and a new corporate vision statement, The Heart of Commerce™, to represent our strategic vision of advancing commerce globally. Our marketing activities combine advertising, sponsorships, promotions, customer marketing, interactive media and public relations as part of an integrated package designed to increase consumer awareness of MasterCard and usage of MasterCard cards. We also seek to tailor our global marketing messages by customizing them in individual countries, while maintaining a common global theme. Our brand-building initiatives are conducted for our benefit as well as for the benefit of our customers.

Our advertising plays an important role in building brand visibility, usage and loyalty among cardholders globally. Our award-winning “Priceless^®” advertising campaign, launched in the United States in 1997, has run in 50 languages across 108 countries. The “Priceless” campaign promotes MasterCard’s acceptance and usage benefits that permit cardholders to pay for what they need, when they need it. It also provides MasterCard with a consistent, recognizable message that supports our brand positioning. In order to promote usage of our cards, we also sponsor frequent promotions on a regional and national basis, often in conjunction with merchants or our customers. To engage consumers directly and advance our presence in new digital media, we launched Priceless.com in 2006. Priceless.com allows consumers to participate in brand programs, including consumer generated Priceless experiences, promotions and merchant offers, and provides relevant content on MasterCard cards and services.

We also seek to increase MasterCard brand awareness and preference, and to encourage card usage and loyalty, by sponsoring a variety of sporting and entertainment properties that support the “Priceless” campaign, MasterCard brand positioning and customer marketing priorities. In soccer, we sponsor leading events, including the FIFA World Cup, the Union of European Football Associations (“UEFA”) European Championship and the UEFA Champions League in Europe. In golf, we are a sponsor and the preferred card of the PGA Tour, the Champions Tour, the PGA of America, the LPGA, the European PGA Tour and other events. In baseball, we are the exclusive payments brand sponsor of Major League Baseball and have also established separate marketing

and sponsorship arrangements with over half of the Major League Baseball teams during the 2006 season. In football, we have established sponsorship arrangements with the majority of the National Football League teams. MasterCard is also the official card and payment system for the National Hockey League. Finally, as part of our marketing strategy in family entertainment, we have a long-term sponsorship arrangement with certain business units of NBC Universal that entitles MasterCard to marketing and promotional programs with certain of Universal’s motion picture, theme park, music and video properties.

Merchant Acceptance Initiatives

We estimate that, at December 31, 2006, cards carrying the MasterCard brand were accepted at over 23.6 million merchant locations around the world. As of the same date, we believe that MasterCard branded cards were also accepted at approximately 1.7 million ATMs and other locations where cash may be obtained. Information on ATM and manual cash access locations is reported by our customers and is partly based on publicly-available reports of payment industry associations, government agencies and independent analysts in Canada and the United States.

Merchants are an important constituency in the MasterCard payment system and we are working to further develop our relationships with them. We believe that consolidation in the retail industry is producing a set of larger merchants with increasingly global scope. These merchants are having a significant impact on all participants in the global payments industry, including MasterCard. We believe that the growing role of merchants in the payments system represents both an opportunity and a challenge for MasterCard. On the one hand, large merchants are supporting many of the legal and regulatory challenges to interchange fees that MasterCard is now defending, since interchange fees represent a significant component of the costs that merchants pay to accept payment cards. See “Risk Factors—Legal and Regulatory Risks” and “Risk factors—Business Risks—Merchants are increasingly focused on the costs of accepting card-based forms of payment, which may lead to additional litigation and regulatory proceedings and may increase the costs of our incentive programs, which could materially and adversely affect our profitability” in Part I, Item 1A of this Report. In addition, we may be required to increase the amount and scope of incentives that we provide to merchants to encourage the acceptance and usage of our cards, which may adversely affect our business. On the other hand, we believe there are many opportunities to enhance our relationships with merchants and to continue to expand acceptance of our cards. For example, in 2004 we made available directly to merchants our rules that apply to card acceptance and related activities, thereby increasing the level of transparency and predictability of our payment system for merchants. As an additional example, in 2006 we published the interchange rates applicable to merchants in the U.S. and announced a cap on interchange fees on fuel purchases at petroleum retailers, effective in April 2007, in an effort to address the concerns of the merchant community and provide merchants with greater transparency into our rates. We also hold meetings with merchant advisory groups that have been established in key global markets including the United States, Canada and Australia.

We aim to maintain the unsurpassed acceptance of MasterCard-branded programs by focusing on three core initiatives. First, we seek to increase the categories of merchants that accept cards carrying our brands. We are presently focused on expanding acceptance in electronic commerce environments, in fast through-put businesses, such as fast food restaurants, in transportation and in public sector payments, such as those involving taxes, fees, fines and tolls, among other categories. Second, we seek to increase the number of payment channels where MasterCard programs are accepted, such as by introducing MasterCard acceptance in connection with recurring payment applications. We are working with customers to encourage consumers to make recurring bill payments in a variety of categories—including telephone, cable, utilities and insurance—on their MasterCard-branded cards. Third, we seek to increase usage of our programs at selected merchants by sponsoring a wide range of promotional programs on a global basis. We also enter into arrangements with selected merchants under which these merchants receive performance incentives for the increased use of MasterCard-branded programs or indicate a preference for MasterCard-branded programs when accepting payments from consumers.

We also support technical initiatives designed to make MasterCard card acceptance more attractive for specific merchants, such as our Quick Payment Service for fast food restaurants and other merchants where rapid

transactions are required. In addition, MasterCard PayPass appeals to merchants in fast through-put businesses because it reduces transaction times.

In addition, we provide research, marketing support and financial assistance to our customers and their marketing partners in connection with the launch and marketing of co-branded and affinity card programs. Co-branded cards are payment cards bearing the logos or other insignia of an issuer and a marketing partner, such as an airline or retail merchant. Affinity cards are similar to co-branded cards except that the issuer’s marketing partner is typically a charity, educational or similar organization.

Membership Standards

We establish and enforce rules and standards surrounding membership in MasterCard International and the use and acceptance of cards carrying our brands.

Rulemaking and Enforcement

Membership in MasterCard International and its affiliates is generally open only to banks and other regulated and supervised financial institutions. Applicants for membership must meet specified membership eligibility requirements, which may vary between regions.

In general, MasterCard grants licenses by territory to applicants able to perform all obligations required of members. Licenses provide members with certain rights, including access to the network and usage of our brands. Risk management reviews and anti-money laundering due diligence reviews are conducted on all new members prior to admission, as well as on existing members. All applicants and members must meet the requirements of MasterCard’s anti-money laundering program. As a condition of our licenses, members agree to comply with our bylaws, policies, rules and operating regulations (“Standards”). MasterCard International and certain of its affiliates are the governing bodies that establish and enforce the Standards, which relate to such matters as membership eligibility and financial soundness criteria; the standards, design and features of cards and card programs; the use of MasterCard trademarks; merchant acquiring activities (including acceptance standards applicable to merchants); and guaranteed settlement, member failures and allocation of losses.

To help ensure that members conform to the Standards, we run a number of compliance programs including reviewing card programs proposed by members and requiring members to undergo an annual audit by an independent certified public accountant (or similar examination by a regulatory authority). To tailor MasterCard’s programs and services to the needs of local markets, we have approved a number of variations to the Standards applicable to specific regions.

Customer Risk Management

As a guarantor of certain card obligations of principal members, we are exposed to member credit risk arising from the potential financial failure of any of our approximately 2,200 principal members of MasterCard, Maestro and Cirrus, and approximately 3,300 affiliate debit licensees. Our estimated gross legal settlement risk exposure for MasterCard-branded transactions, which is calculated using the average daily card charges made during the quarter multiplied by the estimated number of days to settle, was approximately $18.1 billion as of December 31, 2006. Principal members participate directly in MasterCard programs and are responsible for the settlement and other activities of their sponsored affiliate members (approximately 22,600).

To minimize the contingent risk to MasterCard of a failure, we monitor principal members’ and affiliate debit licensees’ financial health, economic and political operating environments and compliance with our rules and standards. If the financial condition of a member or the state of a national economy in which it operates indicates that it may not be able to satisfy its obligations to us or other MasterCard members or its payment obligations to MasterCard merchants, we may require the member to post collateral, typically in the form of

letters of credit and bank guarantees. As of December 31, 2006, we have required our members to post $1.6 billion in collateral held for legal settlement exposure for MasterCard-branded transactions. If a member becomes unable or unwilling to meet its obligations to us or other members, we are able to draw upon such member’s collateral, if provided, in order to minimize any potential loss to our members or ourselves. In addition to obtaining collateral from members, in situations where a member is potentially unable to meet its obligations to us or other members, we can block authorization and settlement of transactions and ultimately terminate membership. However, MasterCard has never terminated a member due to the member’s risk profile. In addition to these measures, we have also established a $2.5 billion committed credit facility, for liquidity protection in the event of member settlement failure. See “Risk Factors—Business Risks—As a guarantor of certain obligations of principal members and affiliate debit licensees, we are exposed to risk of loss or illiquidity if any of our members default on their MasterCard, Cirrus or Maestro settlement obligations” in Part I, Item 1A of this Report.

Payment System Integrity

The integrity of our payment system is affected by fraudulent activity and other illegal uses of our system. Fraud is most often committed in connection with lost, stolen or counterfeit cards or stolen account information, often resulting from security breaches of systems that store cardholder account data. See “Risk Factors—Business Risks—Account data breaches involving card data stored by us or third parties could adversely affect our reputation and revenue” in Part I, Item 1A of this Report. Fraud is also more likely to occur in transactions where the card is not present, such as electronic commerce, mail order and telephone order transactions. Security and cardholder authentication for these remote channels are particularly critical issues facing our customers and merchants who engage in these forms of commerce, where a signed cardholder sales receipt or the presence of the card or merchant agent is generally unavailable.

We monitor areas of risk exposure and enforce our rules and standards to combat fraudulent activity. We also operate several compliance programs to ensure that the integrity of our payment system is maintained by our customers and their agents. Key compliance programs include merchant audit (for high fraud, excessive chargebacks and processing of illegal transactions) and security compliance (including our Site Data Protection Program, which assists customers and merchants in protecting commercial sites from hacker intrusions and subsequent account data compromises). Our members are also required under our rules to report instances of fraud to us in a timely manner.

Our customers are responsible for fraud losses associated with the cards they issue or the merchants from whom they acquire transactions. However, we have implemented a series of programs and systems to aid them in detecting and preventing the fraudulent use of cards carrying our brands. We provide education programs and various risk management tools to help detect fraud including MasterCard SecureCode^®, a global Internet authentication solution that permits cardholders to authenticate themselves to their issuer using a unique, personal code, and Site Data Protection. In addition, we offer several fraud detection programs, including our Risk Finder^® and Expert Monitoring products. Generally, we charge our customers fees for these antifraud programs and services.

Enterprise Risk Management

MasterCard faces a number of risks in operating its business. For a description of material risks, see “Risk Factors” in Part 1, Item 1A of this Report. Managing risk is an integral component of our business activities and the degree to which we manage risk is vital to our financial condition and profitability.

We have an Enterprise Risk Management (“ERM”) program created to ensure appropriate and comprehensive oversight and management of risk. Our ERM program aims to: proactively manage and monitor key risks; improve corporate governance by providing an independent view of MasterCard’s risk profile; enhance decision-making processes and business performance through an understanding of our risk tolerance; and strengthen business by integrating ERM principles and creating a more risk aware culture within MasterCard.

Intellectual Property

We own a number of valuable trademarks that are essential to our business, including MasterCard^®, Maestro^® and Cirrus^®, through one or more affiliates. We also own numerous other trademarks covering various brands, programs and services offered by MasterCard to support our payment programs. Through license agreements with our customers, we authorize the use of our trademarks in connection with our customers’ card issuing and merchant acquiring businesses. In addition, we own a number of patents and patent applications relating to payments solutions, transaction processing, smart cards, security systems and other matters, some of which may be important to our business operations.

Competition

MasterCard programs compete against all forms of payment, including paper-based transactions (principally cash and checks), electronic transactions such as wire transfers and Automated Clearing House payments and other electronic forms of payment, including card-based payment systems. As a result of a global trend in which electronic forms of payment such as payment cards are increasingly displacing paper forms of payment, we have gained market share versus cash and checks in recent years. However, cash and checks still capture the largest overall percentage of worldwide payment volume.

Within the general purpose payment card industry, we face substantial and increasingly intense competition worldwide from systems such as Visa (including Plus, Electron and Interlink), American Express and JCB, among others. In specific countries, we face significant competition from other competitors such as Discover/Novus in the United States. Within the global general purpose card industry, Visa has significantly greater volume than we do. In certain countries, other competitors also have leading positions, such as JCB in Japan. Our deposit access programs also encounter substantial and increasingly intense competition from ATM and point-of-sale debit networks in various countries, such as Interlink, Star, NYCE and Pulse in the United States, Interac in Canada and EFTPOS in Australia. We also compete against businesses that issue their own payment cards such as retail stores and petroleum companies. New competitors may also enter our marketplace from time to time. For example, China Union Pay has been established as the predominant domestic card acceptance brand in the People’s Republic of China and is seeking to expand its acceptance and cash access network internationally. Our customers could also start their own networks and payment card brands.

Our competitors include operators of proprietary end-to-end payment networks that have direct acquiring relationships with merchants and direct issuing relationships with cardholders, such as American Express and Discover. These competitors have certain advantages that we do not enjoy. Among other things, these competitors do not require formal interchange fees to balance payment system costs among issuers and acquirers, because they typically have direct relationships with both merchants and cardholders. Interchange fees, which are a characteristic of four-party payments systems such as ours, are subject to increased regulatory scrutiny worldwide. See “Risk Factors—Legal and Regulatory Risks—Interchange fees are subject to increasingly intense legal and regulatory scrutiny worldwide, which may have a material adverse impact on our revenue, our prospects for future growth and our overall business” in Part 1, Item 1A of this Report. Because they do not utilize formal interchange fees, operators of end-to-end payment networks to date have generally avoided the same regulatory scrutiny and litigation challenges we face and, accordingly, may enjoy a competitive advantage over four-party payments systems.

Both Visa and Discover have recently announced plans to change their ownership structures, which could result in them becoming stronger and more efficient companies within the global payments industry. In October 2006, Visa announced its plan to restructure its organization through the creation of a new stock corporation owned by its current member financial institutions, to be followed by an initial public offering within 12 to 18 months. In December 2006, Morgan Stanley announced that it would spin-off its Discover card unit as a publicly-traded company in the third quarter of 2007. As publicly-owned companies, Visa and Discover would

have to operate their respective businesses more transparently, providing for more public scrutiny and additional disclosures.

In addition, ongoing litigation has and may continue to affect our ability to compete in the global payments industry. For example, under the settlement agreement in the U.S. merchant lawsuit, U.S. merchants now have the right to reject MasterCard-branded debit cards issued in the United States while still accepting other MasterCard-branded cards, which may adversely affect our ability to maintain and grow our debit business in the United States. In addition, as a result of the court’s decision in our litigation with the U.S. Department of Justice concerning our U.S. Competitive Programs Policy, our customers may now do business with American Express or Discover in the United States, which could adversely affect our business. A number of our large customers, including Bank of America, Citibank, HSBC, USAA and GE Finance have announced that they have begun to issue or will issue American Express or Discover-branded cards. See “Risk Factors—Risks Related to Our Business—Business Risks—We have repealed our Competitive Programs Policy (“CPP”) in the United States as a result of a final judgment in our litigation with the U.S. Department of Justice, and our business may suffer as a result” in Part I, Item 1A in this Report. Finally, we are being sued in several state and federal courts because of our currency conversion practices. Although we have settled these matters, if the settlements do not receive final approval, the outcome of these lawsuits could potentially have a material adverse effect on our business. We cannot predict what the final outcome will be of our various litigations and other regulatory proceedings. For a description of these and other matters, see Note 20 to the Consolidated Financial Statements included in Item 8 of this Report.

We compete intensely with other bankcard associations, principally Visa, for the loyalty of our customers. In most countries throughout the world, including the United States, financial institutions typically issue both MasterCard- and Visa-branded payment cards. As a result of this structure, known as “duality,” we compete with Visa for business on the basis of individual card portfolios or programs. In some countries, particularly Canada, card issuers are “non-dual,” meaning that they issue either MasterCard or Visa payment cards, but not both. Issuance of MasterCard and Visa debit cards is generally non-dual in the United States as well, due to Visa’s historical debit exclusivity rule. As a result of the litigation with the U.S. Department of Justice, Visa’s debit exclusivity rule is no longer enforceable. However, Visa enacted a bylaw that imposes a fee on its 100 largest issuers of debit cards in the United States if they reduce their Visa debit volume by more than 10% which, if enforced, may prevent us from acquiring business from current Visa customers. In non-dual countries, we compete with Visa for a customer’s entire business.

We face increasingly intense competitive pressure on the prices we charge our customers. In order to stay competitive, we may have to increase the amount of rebates and incentives we provide to our customers as we have over the past several years. We seek to enter into business agreements with customers through which we offer incentives and other support to issue and promote our cards. However, our customers can terminate their business agreements with us in a variety of circumstances. See “Risk Factors—Risks Related to Our Business—Business Risks—We face increasingly intense competitive pressure on the prices we charge our customers, which may materially and adversely affect our revenue and profitability” in Part I, Item 1A of this Report.

Over the last several years, the banking industry has undergone rapid consolidation, and we expect this trend to continue in the future. Consolidation represents a competitive threat for MasterCard because our business and pricing strategy is intended to enable MasterCard to achieve targeted financial performance by providing incentives to customers for incremental business. Furthermore, it contemplates entering into business agreements with our largest customers in exchange for significant business commitments to MasterCard. Significant ongoing consolidation in the banking industry may result in a financial institution with a substantial MasterCard portfolio being acquired by an institution that has a strong relationship with a competitor, which may result in a loss of business for MasterCard. The continued consolidation in the banking industry also produces a smaller number of large customers, which generally have a greater ability to negotiate pricing discounts with MasterCard. Consolidations could prompt our customers to renegotiate our business agreements to obtain more favorable terms. This pressure on the prices we charge our customers could materially and adversely affect our revenue and

profitability. See “Risk Factors—Risks Related to Our Business—Business Risks—Consolidation or other changes affecting the banking industry could result in a loss of business for MasterCard and may create pressure on the prices we charge our customers, which may materially and adversely affect our revenue and profitability” in Part I, Item 1A of this Report.

We face competition with respect to particular segments of the payment card industry. In the United States, for example, offline transactions on MasterCard-branded cards account for a smaller share of all offline, signature-based debit transactions than the share of all credit or charge transactions represented by MasterCard credit or charge cards. Some of our competitors process a greater number of online, PIN-based debit transactions at the point of sale than we do. See “Risk Factors—Risks Related to Our Business—Business Risks—If we are unable to grow our debit business, particularly in the United States, we may fail to maintain and increase our revenue growth” in Part I, Item 1A of this Report. In addition, our business and revenues could be impacted adversely by any tendency among U.S. consumers or financial institutions to migrate from offline, signature-based debit or credit transactions to online, PIN-based debit transactions, because the latter types of transactions are more likely to be processed by other domestic ATM/debit point-of-sale networks as opposed to us.

We also face competition from transaction processors such as First Data Corporation and Total Systems, some of which are seeking to build networks that link issuers directly with point-of-sale devices for payment card transaction authorization and processing services. Certain of these transaction processors have significantly greater scale than we do, which may provide them with a cost advantage. If these processors grow their transaction volumes more quickly than we do, their scale advantages over us may accelerate and they could capture some of our core processing business. Similarly, some of our competitors provide currency conversion services at the point-of-sale through dynamic currency conversion. Dynamic currency conversion occurs when a transaction is converted at the individual merchant location in real time from the currency of the merchant into the cardholder’s billing currency, thereby bypassing MasterCard’s currency conversion processes. When MasterCard performs currency conversion centrally, the transaction is submitted to MasterCard in the currency of the merchant and is converted by MasterCard into the cardholder’s billing currency. The growth of dynamic currency conversion services could reduce the transactions on which we perform currency conversion services, which could adversely affect our revenues.

We also compete against new entrants that have developed alternative payment systems and payments across mobile devices. Among other things, these competitors provide Internet currencies that can be used to buy and sell goods online, “virtual checking” programs that permit the direct debit of consumer checking accounts for online payments, and services that support payments to and from proprietary accounts for Internet, mobile commerce and other applications. A number of these new entrants rely principally on the Internet to support their services, and may enjoy lower costs than we do. In mobile commerce, we also face competition from established network operators. Whereas the MasterCard approach to mobile commerce centers on the use of the consumer’s payment account as established by their card issuer, network operators may apply mobile consumer payments directly to the customer’s monthly bill.

We believe that the principal factors affecting our competitive position in the global payments industry are:

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pricing;

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customer relationships;

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the impact of existing litigations, legislation and government regulation;

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the impact of globalization and consolidation of financial institutions and merchants;

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the acceptance base, reputation and brand recognition of payment cards;

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the quality, security and integrity of transaction processing;

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the relative value of services and products offered;

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the success and scope of marketing and promotional campaigns; and

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the ability to develop and implement new card programs, systems and technologies in both physical and virtual environments.

Government Regulation

Government regulation impacts key aspects of our business. We are subject to regulations that affect the payment industry in the many countries in which our cards are used. In recent years the regulatory environment in which we operate has become increasingly stringent. In particular, interchange fees associated with four-party payment systems like ours are being reviewed or challenged in various jurisdictions. See Note 20 to the Consolidated Financial Statements included in Item 8 of this Report.

Furthermore, MasterCard customers are subject to numerous regulations applicable to banks and other financial institutions in the United States and elsewhere, and as a consequence MasterCard is impacted by such regulations. Certain of our operations are periodically reviewed by the U.S. Federal Financial Institutions Examination Council (“FFIEC”) under its authority to examine financial institutions’ technology service providers. Examinations by the FFIEC cover areas such as data integrity and data security. In recent years, the U.S. federal banking regulators have adopted a series of regulatory measures affecting credit card payment terms and requiring more conservative accounting, greater risk management and in some cases higher capital requirements for bank credit card activities, particularly in the case of banks that focus on subprime cardholders. In addition, MasterCard Europe operates a retail payment system in Europe and is subject to oversight by the National Bank of Belgium pursuant to standards published by the European Central Bank that are principally targeted at managing financial, legal and operations risk.

In addition, aspects of our operations or business are subject to privacy regulation in the United States, the European Union and elsewhere, as well as regulations imposed by the U.S. Treasury’s Office of Foreign Assets Control (“OFAC”). For example, in the United States, we and our customers are respectively subject to the Federal Trade Commission’s and the federal banking agency information safeguarding requirements under the Gramm-Leach-Bliley Act. The Federal Trade Commission’s information safeguarding rules require us to develop, implement and maintain a written, comprehensive information security program containing safeguards that are appropriate for our size and complexity, the nature and scope of our activities, and the sensitivity of any customer information at issue. Our customers in the U.S. are subject to similar requirements under the guidelines issued by the federal banking agencies. As part of their compliance with the requirements, each of our U.S. customers is expected to have a program in place for responding to unauthorized access to, or use of, customer information that could result in substantial harm or inconvenience to customers.

In the United States, during 2005 and 2006, a number of bills were considered by Congress and there were several congressional hearings to address information safeguarding and data breach issues. Congress will likely consider these issues again in 2007 which could result in legislation that would have an adverse impact on us and our customers. In addition, a number of U.S. states have enacted security breach legislation, requiring varying levels of consumer notification in the event of a security breach, and several other states are considering similar legislation. In Europe, the European Parliament and Council passed the European Directive 95/46/EC (the “Directive”) on the protection of individuals with regard to the processing of personal data and on the free movement of such data, which obligates the controller of an individual’s personal data to take the necessary technical and organizational measures to protect personal data. The Directive has been implemented through local laws regulating data protection in European Union member states to which we and our customers are subject. The Directive establishes general principles with regard to the processing of personal data, including the legal grounds for processing, the rights of individuals with regard to their personal data, restrictions on transfers of the personal data outside the European Economic Area, and the obligation of the controller of that information to take the necessary technical and organizational measures to protect personal data.

MasterCard and other participants in the payment industry are also subject to the regulatory requirements of Section 352 of the USA Patriot Act, which applies to certain types of financial institutions, including operators of

credit card systems. Section 352 of the USA Patriot Act requires MasterCard to maintain a comprehensive anti-money laundering program and imposed similar requirements on some of our customers. Our anti-money laundering program must be reasonably designed to prevent our system from being used to facilitate money laundering and the financing of terrorist activities. The program must, at a minimum, include the designation of a compliance officer, provide for the training of appropriate personnel regarding anti-money laundering responsibilities, as well as incorporate policies, procedures, and controls to mitigate money laundering risks, and be independently audited.

We are also subject to regulations imposed by OFAC. While MasterCard has no business operations, subsidiaries or affiliated entities in Syria, Iran, Sudan, North Korea or Cuba, a limited number of financial institutions are licensed by MasterCard to issue cards or acquire merchant transactions in certain of these countries, which have each been identified by the U.S. State Department as terrorist-sponsoring states and are subject to OFAC restrictions. Our reputation may suffer due to our association with these countries, which in turn could have a material adverse effect on the value of our stock. Further, certain U.S. states have recently enacted legislation regarding investments by pension funds and other retirement systems in companies that have business activities or contacts with countries that have been identified as terrorist-sponsoring states and similar legislation may be pending in other states. As a result, pension funds and other retirement systems may be subject to reporting requirements with respect to investments in companies such as ours or may be subject to limits or prohibitions with respect to those investments that may materially and adversely affect our stock price.

In the U.S. Congress, there has been increasing scrutiny of interchange fees. For example, in February 2006, the House Energy and Commerce Committee held a hearing on interchange fees. A similar hearing was held in the Senate Judiciary Committee in July 2006. In addition, the U.S. Senate Permanent Subcommittee on Investigations recently initiated an investigation of credit card practices that will include consideration of interchange fees. The topic of interchange fees has also been raised in other congressional hearings and in other forums, including conferences held by a number of Federal Reserve Banks. Additionally, several state legislatures in the U.S. have considered or proposed interchange legislation.

There is also increasing scrutiny of a number of other credit card practices, from which many of our customers derive significant revenue, by Congress and governmental agencies. For example, in addition to interchange fees, the Senate Permanent Subcommittee on Investigations will also consider the methods used to calculate finance charges and allocate payments received from cardholders and the methods by which default interest rates, late fees and over-the-credit-limit fees are determined, imposed and disclosed. These investigative efforts and other congressional activity could lead to legislation and/or regulation that could have a material impact on our customers’ businesses and our business if implemented. Any such legislative or regulatory restrictions on our customers’ ability to operate their credit card programs or to price credit freely could result in reduced revenue and increased costs for our customers, reduced amounts of credit available to consumers and, therefore, a potential reduction of our transaction volume and revenue.

The U.S. Congress recently enacted legislation requiring the coding and blocking of payments for certain types of internet gambling transactions. The legislation applies to payment system participants, including MasterCard and our U.S. customers, and will be implemented through a federal rulemaking process that is expected to be completed in 2007. These federal rules could require us and our customers to implement new compliance programs that would increase our costs and/or decrease our transaction volumes. In addition, it is expected that the U.S. Congress will renew consideration of regulatory initiatives in the areas of Internet prescription drug purchases, copyright and trademark infringement, and privacy, among others, that could impose additional compliance burdens on us or our customers. Most U.S. states are considering a variety of

similar legislation. If implemented, these initiatives could require us or our customers to monitor, filter, restrict, or otherwise oversee various categories of payment card transactions, thereby increasing our costs or decreasing our transaction volumes. Various regulatory agencies are also considering regulations covering identity theft, account management guidelines, privacy, disclosure rules, security and marketing that would impact our customers directly. The implementation of recently enacted bankruptcy reform legislation in the United States may also directly affect our customers’ business models for their payment cards business. These new requirements and developments may affect our customers’ ability to extend credit through the use of payment cards, which could decrease our transaction volumes. In some circumstances, new regulations could have the effect of limiting our customers’ ability to offer new types of payment programs or restricting their ability to offer our existing programs such as stored value cards, which could materially and adversely reduce our revenue and revenue growth.

Outside of the United States, a number of jurisdictions have implemented legal frameworks to regulate their domestic payments systems. For example, regulators in Mexico, Colombia, Singapore and Malaysia have been given statutory authority to regulate certain aspects of their respective payments systems. In the case of Singapore and Malaysia, one of the main policies behind the regulations is to protect the stability of the financial systems of those countries. In Malaysia, there is presently no further requirement other than registration and the supply of information. In Singapore, MasterCard does not fall into the ambit of active regulation at present but we may be required to supply information to the regulators in the future.

Employees

As of December 31, 2006, we employed approximately 4,600 persons, of which approximately 1,500 were employed outside of the United States. We consider our relationship with employees to be good.

SEC Reports

Our periodic reports filed with the U.S. Securities and Exchange Commission are available for review on our website at www.mastercard.com. The information contained on our website is not incorporated by reference into this Report.

Item 1A. Risk Factors

Legal and Regulatory Risks

Interchange fees are subject to increasingly intense legal and regulatory scrutiny worldwide, which may have a material adverse impact on our revenue, our prospects for future growth and our overall business.

Interchange fees, which represent a sharing of payment system costs among the financial institutions participating in a four-party payment card system such as ours, are generally the largest component of the costs that acquirers charge merchants in connection with the acceptance of payment cards. Typically, interchange fees are paid by the merchant bank (the acquirer) to the cardholder bank (the issuer) in connection with transactions initiated with our payment system’s cards. Interchange fees, including MasterCard’s default interchange fees, are subject to increasingly intense regulatory scrutiny worldwide as card-based forms of payment have become relatively more important to local economies. Certain regulators are seeking to reduce these costs through regulatory action. For example:

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In the European Union, the European Commission has issued a supplemental Statement of Objections challenging MasterCard’s cross-border interchange fees for credit, debit and commercial cards under European Union competition rules. If we do not obtain a favorable ruling, the European Commission could order us to change the manner in which MasterCard calculates its cross-border interchange fees.

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In the United Kingdom, the Office of Fair Trading (OFT) issued a decision in September 2005 concluding that MasterCard’s U.K. interchange fees contravene U.K. and European Union competition

laws. This decision was set aside by the U.K. Competition Appeals Tribunal in June 2006. However, the OFT has commenced a new investigation of MasterCard’s current U.K. interchange fees and announced on February 9, 2007 that the investigation would also cover so-called “immediate debit” cards. If the OFT determines that any of MasterCard’s U.K. interchange fees contravene U.K. and European Union competition law, it may issue a new decision and possibly levy fines accruing from the date of its first decision. This new investigation will examine whether the new methodology for setting U.K. interchange fees adopted by MasterCard in November 2004—in connection with which MasterCard withdrew the authority of the U.K. members to set domestic interchange fees and conferred such authority exclusively on MasterCard’s President and Chief Executive Officer or his designee—contravenes applicable law. A negative decision could have a significant adverse impact on the revenues of MasterCard’s U.K. members and on MasterCard’s competitive position and overall business in the U.K.

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In April 2001, in response to merchant complaints, the Polish Office for Protection of Competition and Consumers (the “PCA”) initiated an investigation of MasterCard’s (and Visa’s) domestic credit and debit card interchange fees. In January 2007, the PCA issued a decision that MasterCard’s (and Visa’s) interchange fees are unlawful under Polish competition law, and imposed fines on MasterCard’s (and Visa’s) licensed financial institutions. MasterCard and the financial institutions have appealed the decision. If the appeals are unsuccessful and the PCA’s decision is allowed to stand, it could have a significant adverse impact on the revenues of MasterCard’s Polish members and on MasterCard’s overall business in Poland.

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In early 2004, the New Zealand Competition Commission (the “NZCC”) commenced an investigation of MasterCard’s domestic interchange fees. In November 2006, the NZCC filed a lawsuit alleging that MasterCard’s (and Visa’s) domestic interchange fees do not comply with New Zealand competition law, and are seeking penalties. Several large merchants subsequently filed similar lawsuits seeking damages. A negative decision in these lawsuits could have a significant adverse impact on the revenues of MasterCard’s New Zealand members and on MasterCard’s overall business in New Zealand.

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In January 2006, a German retailers association filed a complaint with the Federal Cartel Office in Germany concerning MasterCard’s (and Visa’s) domestic interchange fees. The complaint alleges that MasterCard’s (and Visa’s) German domestic interchange fees are not transparent to merchants and include so-called “extraneous costs.”

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In Australia, the Reserve Bank of Australia has enacted regulations controlling the costs that can be considered in setting interchange fees for four-party payment card systems such as ours, that do not regulate the merchant discount charged by proprietary end-to-end networks (such as those offered by American Express or Discover), which have already benefited from these regulations.

Interchange fees are also being reviewed in a number of other jurisdictions, including Brazil, Colombia, Mexico, South Africa, Singapore, Hungary, Portugal and Switzerland. We believe that regulators are increasingly adopting a coordinated approach to interchange matters and, as a result, developments in any one jurisdiction may influence regulators’ approach to interchange fees in other jurisdictions. In the United States, interchange fees have also been the topic of increased congressional and regulatory interest. In February 2006, the Energy and Commerce Committee of the U.S. House of Representatives held a hearing on interchange fees. A similar hearing was held in the U.S. Senate Judiciary Committee in July 2006 and additional hearings are expected in 2007. In addition, the U.S. Senate Permanent Subcommittee on Investigations recently initiated an investigation of credit card practices that will include consideration of interchange fees. Also, the general topic of interchange fees has been raised in other congressional hearings and other forums, including conferences held by a number of Federal Reserve banks. Several state legislatures in the United States have considered or proposed interchange legislation. Finally, the Merchants Payment Coalition, a coalition representing businesses that accept credit and debit cards, is mounting a challenge to interchange fees in the United States by seeking legislative and regulatory intervention.

In addition, merchants are seeking to reduce interchange fees through litigation. In the United States, merchants have filed approximately fifty class-action or individual suits alleging that our interchange fees violate federal antitrust laws. These suits allege, among other things, that MasterCard’s purported setting of interchange fees constitutes horizontal price-fixing between and among MasterCard, Visa and their member banks in violation of Section 1 of the Sherman Act, which prohibits contracts, combinations or conspiracies that unreasonably restrain trade. The suits seek treble damages in an unspecified amount, attorney’s fees and injunctive relief. See Note 20 to the Consolidated Financial Statements included in this Report for more details regarding the allegations contained in these complaints and the status of these proceedings. We are devoting substantial management and financial resources to the defense of interchange fees and to the other legal and regulatory challenges we face.

If issuers cannot collect or are forced to reduce interchange fees, they may be unable to recoup a portion of the costs incurred for their services. This could reduce the number of financial institutions willing to participate in a four-party payment card system, lower overall transaction volumes, and/or make proprietary end-to-end networks or other forms of payment more attractive. Issuers could also charge higher fees to consumers, thereby making our card programs less desirable and reducing our transaction volumes and profitability, or attempt to decrease the expense of their card programs by seeking a reduction in the fees that we charge. If we are less successful than Visa in defending interchange fees, we could also be competitively disadvantaged against Visa. If we are ultimately unsuccessful in our defense of interchange fees, such regulation may have a material adverse impact on our revenue, our prospects for future growth and our overall business. In addition, this could result in MasterCard being fined and/or having to pay civil damages.

If we are found liable in any of the cases brought by American Express or Discover, we may be forced to pay substantial damages.

In 1998, the U.S. Department of Justice filed suit against MasterCard International, Visa U.S.A. Inc. and Visa International Corp. in the U.S. District Court for the Southern District of New York alleging that certain aspects of the governance of MasterCard and Visa were unlawful, and that MasterCard’s Competitive Programs Policy (“CPP”) and a similar Visa bylaw provision that prohibited financial institutions participating in the respective systems from issuing competing proprietary payment cards (such as American Express or Discover) acted to restrain competition. Although we were successful in defending the relevant aspects of our governance structure at trial, the Second Circuit Court of Appeals affirmed the trial court judge’s ruling that our CPP and Visa’s bylaw constituted unlawful restraints of trade under U.S. federal antitrust laws. Based on the final judgment in this matter, our CPP became unenforceable in October 2004 and was subsequently repealed. Thereafter, Discover and American Express each filed suit against us, Visa U.S.A. Inc. and Visa International Services Association alleging that the CPP and Visa’s bylaw provision caused each injury by unlawfully restraining trade under U.S. federal antitrust laws. Discover also alleges that it suffered injury by reason of our rules, which required merchants in the United States to accept our debit cards if they accepted other MasterCard-branded cards, before these rules were modified as part of the U.S. merchant lawsuit described below. The American Express complaint names a number of member banks as co-defendants. In connection with their respective claims, American Express and Discover each requested that the district court give collateral estoppel effect to its findings in its judgment in the Department of Justice litigation. Although the district court has denied that request at this stage in the litigation, the court indicated that American Express and Discover may refile a motion for collateral estoppel after further proceedings. If the court were to give effect to collateral estoppel on one or more issues in the future, then significant elements of plaintiffs’ claims would be established, thereby making it more likely that we would be found liable and making the possibility of an award of damages that much more likely. In the event all issues are subsequently decided against MasterCard in dispositive motions during the course of the litigation then there is the possibility that the sole issue remaining at trial will be whether a damage award is appropriate and, if so, what the amount of damages should be.

Neither American Express nor Discover has specified the amount of damages sought and, due to the considerable uncertainty associated with these proceedings, it is currently not reasonably possible to estimate the

amount or range of any potential liability. Each of American Express and Discover has conveyed their belief that these damages are substantial. Moreover, because these actions have been brought under U.S. federal antitrust laws, any actual damages will be trebled and we may be subject to joint and several liability among the defendants if liability is established, which could significantly magnify the adverse effect upon us of any adverse judgment. If we are unsuccessful in defending against either or both of these lawsuits, the ultimate liability for MasterCard could have a material adverse effect on our results of operations, financial position and cash flows in the quarterly and annual period when such losses are recognized. Such liability could also have a material adverse effect on our overall financial position and, in certain circumstances, even cause us to become insolvent. Similarly, if we decide to settle either or both lawsuits or if we establish provisions in connection with them (which will depend on our continuing reconsideration of the progress of the litigation), such a settlement or the establishment of such provisions could also have such a material adverse effect. See “Risk Factors—Legal and Regulatory Risks—If we determine in the future that we are required to establish reserves or we incur liabilities for any litigation that has been or may be brought against us, our results of operations, cash flow and financial condition could be materially and adversely affected” and Note 20 to the Consolidated Financial Statements included in this Report.

If the settlements of our currency conversion cases are not ultimately approved and we are unsuccessful in any of our various lawsuits relating to our currency conversion practices, our business may be materially and adversely affected.

We generate significant revenue from processing cross-border currency transactions for members. However, we are defendants in several state and federal lawsuits alleging that our currency conversion practices are deceptive, anti-competitive or otherwise unlawful. In particular, a trial judge in California found that our currency conversion practice is deceptive under California state law, and ordered us to mandate that members disclose the currency conversion process to cardholders in cardholder agreements, applications, solicitations and monthly billing statements. The judge also ordered unspecified restitution to California cardholders. The decision was reversed on appeal on grounds that plaintiff lacked standing to pursue his claims. In addition, we have been served with similar complaints in several state courts seeking to, in effect, extend the judge’s decision to MasterCard cardholders outside of California. We have succeeded in having several of these cases dismissed or transferred to the U.S. District Court for the Southern District of New York and combined with putative federal class actions. The class actions allege that our currency conversion practices violate federal antitrust laws. On July 20, 2006, MasterCard and the other defendants in the federal class actions entered into agreements settling those cases and related matters, as well as the California state case. Pursuant to the settlement agreements, MasterCard has paid $72 million to be used for defendants’ settlement fund to settle the federal actions and $13 million, which is expected to be paid in 2007, to settle the California case. The settlement agreements are subject to final approval by the court and resolution of all appeals. If final approval of the settlement agreements is not granted and we are unsuccessful in defending against these lawsuits or the state currency conversion cases, we may have to pay restitution to cardholders who make claims that they used their cards in another country, or may be required to modify our currency conversion practices. See Note 20 to the Consolidated Financial Statements included in this Report.

If we are found liable in any of the other litigations that have been brought against us or in any other litigation to which we may be subject in the future, we may be forced to pay damages and/or change our business practices or pricing structure, any of which could have a material adverse effect on our revenue and profitability.

There are currently actions against MasterCard International in a number of state courts and the District of Columbia. In a number of these state courts, there are multiple complaints against MasterCard International brought under state unfair competition statutes on behalf of putative classes of consumers. The claims in these actions mirror the allegations made in the U.S. merchant lawsuit, which was brought on behalf of a class of U.S. merchants against MasterCard International and Visa and alleged, among other things, that our “Honor All Cards” rule (and a similar Visa rule), which required merchants who accept MasterCard cards to accept for

payment every validly presented MasterCard card, constituted an illegal tying arrangement in violation of Section 1 of the Sherman Act. The plaintiffs also asserted that we and Visa conspired to monopolize what they characterized as the point-of-sale debit card market. In June 2003, MasterCard International entered into a settlement agreement that resolved the U.S. merchant lawsuit and contract disputes with certain customers. The settlement agreement required, among other things, that we pay $125 million in 2003 and $100 million annually each December from 2004 through 2012. See Note 18 to the Consolidated Financial Statements included in this Report for a description of the settlement agreement. The putative consumer class actions are not covered by the terms of the June 2003 settlement agreement. These actions assert that merchants, faced with excessive merchant discount fees, have passed these overcharges to consumers in the form of higher prices on goods and services sold.

None of the putative consumer class actions specifies the amount of damages sought. See Note 20 to the Consolidated Financial Statements included in this Report. We may also be sued in the future in the United States or in other jurisdictions by our customers, merchants or consumers for substantial damages or injunctive relief in connection with our business practices. If we are unsuccessful in our defense against the consumer class actions, or any other litigation, we may be forced to pay damages and/or change our business practices and pricing structure, any of which could have a material adverse effect on our revenue and profitability.

If we determine in the future that we are required to establish reserves or we incur liabilities for any litigation that has been or may be brought against us, our results of operations, cash flow and financial condition could be materially and adversely affected.

Except with respect to currency conversion litigations, we have not established reserves for any of the material legal proceedings in which we are currently involved and we are unable to estimate at this time the amount of charges, if any, that may be required to provide reserves for these matters in the future. We may determine in the future that a charge for all or a portion of any of our legal proceedings is required, including charges related to legal fees. In addition, we may be required to record an additional charge if we incur liabilities in excess of reserves that we have previously recorded. Such charges, particularly in the event we may be found liable in a large class-action lawsuit or on the basis of an antitrust claim entitling the plaintiff to treble damages or under which we were jointly and severally liable, could be significant and could materially and adversely affect our results of operations, cash flow and financial condition, or, in certain circumstances, even cause us to become insolvent. A plaintiff in one of our antitrust litigations has asserted in a written communication that the damages it believes it is likely to recover in its lawsuit will exceed our capital and ability to pay and that the damages in such lawsuit and in our other pending litigations are likely to be in the billions of dollars before trebling. See Note 20 to the Consolidated Financial Statements included in this Report.

Limitations on our business and other penalties resulting from litigation or litigation settlements may materially and adversely affect our revenue and profitability.

As a result of the settlement agreement in connection with the U.S. merchant lawsuit, merchants have the right to reject our debit cards in the United States while still accepting other MasterCard-branded cards, and vice versa. See Note 20 to the Consolidated Financial Statements included in this Report. These limitations and any future limitations on our business resulting from litigation or litigation settlements could reduce the volume of business that we do with our customers, which may materially and adversely affect our revenue and profitability.

The payments industry is generally the subject of increasing global regulatory focus, which may impose costly new compliance burdens on us and our customers and lead to decreased transaction volumes through our systems.

We are subject to regulations that affect the payment industry in the many countries in which our cards are used. In particular, our customers are subject to numerous regulations applicable to banks and other financial institutions in the United States and abroad, and, consequently, MasterCard is at times affected by such

regulations. Regulation of the payments industry, including regulations applicable to us and our customers, has increased significantly in recent years. For example, in 2002 MasterCard became subject to the regulatory requirements of Section 352(a) of the USA Patriot Act, which has required our customers and us to create and implement comprehensive anti-money laundering programs. Increased regulatory focus in this area could result in additional obligations or restrictions with respect to the types of products that we may offer to consumers, the countries in which our cards may be used and the types of cardholders and merchants who can obtain or accept our cards.

We are also subject to regulations imposed by the U.S. Treasury Office of Foreign Assets Control (“OFAC”). While MasterCard has no business operations, subsidiaries or affiliated entities in Syria, Iran, Sudan, North Korea or Cuba, a limited number of financial institutions are licensed by MasterCard to issue cards or acquire merchant transactions in certain of these countries, which have each been identified by the U.S. State Department as terrorist-sponsoring states and are subject to OFAC restrictions. Our reputation may suffer due to our association with these countries, which in turn could have a material adverse effect on the value of our stock. Further, certain U.S. states have recently enacted legislation regarding investments by pension funds and other retirement systems in companies that have business activities or contacts with countries that have been identified as terrorist-sponsoring states and similar legislation may be pending in other states. As a result, pension funds and other retirement systems may be subject to reporting requirements with respect to investments in companies such as ours or may be subject to limits or prohibitions with respect to those investments that may materially and adversely affect our stock price.

In addition, the Federal Trade Commission and the federal banking agencies are in the process of developing a number of regulations implementing the Fair and Accurate Credit Transactions Act that could have a material impact on our customers’ businesses by increasing costs of issuance and/or decreasing the ability of card issuers to set the price of credit. Regulators and the U.S. Congress have also increased their scrutiny of our customers’ pricing of credit and their underwriting standards. Any legislative or regulatory restrictions on our customers’ ability to operate their credit card programs or price credit freely could result in reduced amounts of credit available to consumers, which could materially and adversely affect our transaction volume and revenues.

There is also increasing scrutiny of a number of other credit card practices, from which many of our customers derive significant revenue, by Congress and governmental agencies. For example, in addition to interchange fees, the Senate Permanent Subcommittee on Investigations will also consider the methods used to calculate finance charges and allocate payments received from cardholders, and the methods by which default interest rates, late fees and over-the-credit-limit fees are determined, imposed, and disclosed. These investigative efforts and other congressional activity could lead to legislation and/or regulation that could have a material impact on our customers’ businesses and our business if implemented. Any such legislative or regulatory restrictions on our customers’ ability to operate their credit card programs or to price credit freely could result in reduced revenue and increased costs for our customers, reduced amounts of credit available to consumers and, therefore, a potential reduction of our transaction volume and revenues.

The U.S. Congress recently enacted legislation requiring the coding and blocking of payments for certain types of Internet gambling transactions. The legislation applies to payment system participants, including MasterCard and our U.S. customers, and will be implemented through a federal rulemaking process that is expected to be completed in 2007. These federal rules could require us and our customers to implement new compliance programs that would increase our costs and/or decrease our transaction volumes. In addition, it is expected that the U.S. Congress will renew consideration of regulatory initiatives in the areas of Internet prescription drug purchases, copyright and trademark infringement, and privacy, among others, that could impose additional compliance burdens on us and/or our customers. Most U.S. states are considering a variety of similar legislation. If implemented, these initiatives could require us or our customers to monitor, filter, restrict, or otherwise oversee various categories of payment card transactions, thereby increasing our costs or decreasing our transaction volumes. Various regulatory agencies are also considering regulations covering identity theft, account management guidelines, privacy, disclosure rules, security, and marketing that would impact our

customers directly. The implementation of recently enacted bankruptcy reform legislation in the United States may also directly affect our customers’ business models for their payment cards business. These new requirements and developments may affect our customers’ ability to extend credit through the use of payment cards, which could decrease our transaction volumes. In some circumstances, new regulations could have the effect of limiting our customers’ ability to offer new types of payment programs or restricting their ability to offer our existing programs such as stored value cards, which could materially and adversely reduce our revenues and revenue growth.

Increased regulatory focus on us, such as in connection with the matters discussed above, may increase our costs, which could materially and adversely impact our financial performance. Similarly, increased regulatory focus on our customers may cause them to reduce the volume of transactions processed through our systems, which would reduce our revenues materially and adversely impact our financial performance.

Existing and proposed regulation in the areas of consumer privacy, data use and/or security could decrease the number of payment cards issued and could increase our costs.

We and our customers are also subject to regulations related to privacy and data use and security in the jurisdictions in which we do business, and we and our customers could be negatively impacted by these regulations. For example, in the United States, we and our customers are respectively subject to the Federal Trade Commission’s and the banking agency information safeguarding requirements under the Gramm-Leach-Bliley Act. The Federal Trade Commission’s information safeguards rules require us to develop, implement and maintain a written, comprehensive information security program containing safeguards that are appropriate to our size and complexity, the nature and scope of our activities and the sensitivity of any customer information at issue. In the United States, a number of bills were considered by Congress and there have been several congressional hearings to address information safeguarding and data breach issues. Congress will likely consider these issues again in 2007 which could result in legislation that would have an adverse impact on us and our customers. In addition, a number of states have enacted security breach legislation, requiring varying levels of consumer notification in the event of a security breach, and several other states are considering similar legislation.

In Europe, the European Parliament and Council have passed the European Directive 95/46/EC on the protection of individuals with regard to the processing of personal data and on the free movement of such data, which obligates the controller of an individual’s personal data to take the necessary technical and organizational measures to protect personal data. The Directive has been implemented through local laws regulating data protection in European Union member states to which we and our customers are subject.

Regulation of privacy and data use and security in these and other jurisdictions may increase the costs of our customers to issue payment cards, which may decrease the number of our cards that they issue. Any additional regulations in these areas may also increase our costs to comply with such regulations, which could materially and adversely affect our profitability. Finally, failure to comply with the privacy and data use and security laws and regulations to which we are subject could result in fines, sanctions or other penalties, which could materially and adversely affect our results of operations and overall business.

Business Risks

We face increasingly intense competitive pressure on the prices we charge our customers, which may materially and adversely affect our revenue and profitability.

We generate revenue from the fees that we charge our customers for providing transaction processing and other payment-related services and from assessments on the dollar volume of activity on cards carrying our brands. In order to increase transaction volumes, we seek to enter into business agreements with customers through which we offer incentives, pricing discounts and other support to issue and promote our cards. In order

to stay competitive, we may have to increase the amount of these incentives and pricing discounts. Over the past several years, we experienced continued pricing pressure. The demand from our customers for better pricing arrangements and greater rebates and incentives moderates our growth. We may not be able to continue our expansion strategy to process additional transaction volumes or to provide additional services to our customers at levels sufficient to compensate for such lower fees or increased costs in the future, which could materially and adversely affect our revenue and profitability. In addition, increased pressure on prices enhances the importance of cost containment and productivity initiatives in areas other than those relating to customer incentives. We may not succeed in these efforts.

Our strategy is to grow our business by, among other things, focusing on our key customers and entering into customized business agreements with key customers around the globe. In the future, we may not be able to enter into such agreements on terms that we consider favorable, and we may be required to modify existing agreements in order to maintain relationships and to compete with others in the industry. Some of our competitors are larger and have greater financial resources than we do and accordingly, may be able to charge lower prices to our customers. In addition, to the extent that we offer discounts or incentives under such agreements, we will need to further increase transaction volumes or the amount of services provided thereunder in order to benefit incrementally from such agreements and to increase revenue and profit. Furthermore, a number of customers from which we earn substantial revenue are principally aligned with one of our competitors. A significant loss of revenue or transaction volumes from these customers could have a material adverse impact on our business.

Consolidation or other changes affecting the banking industry could result in a loss of business for MasterCard and may create pressure on the prices we charge our customers, which may materially and adversely affect our revenue and profitability.

Over the last several years, the banking industry has undergone rapid consolidation, and we expect this trend to continue in the future. Consolidation represents a competitive threat to us because our strategy contemplates entering into business agreements with our largest customers in exchange for significant business commitments. Significant ongoing consolidation in the banking industry may result in a financial institution with a substantial MasterCard portfolio being acquired by an institution that has a strong relationship with a competitor, resulting in the loss of business for MasterCard. In addition, one or more of our customers could seek to merge with, or acquire, one of our competitors, and any such transaction could have a material adverse impact on our business and prospects.

The continued consolidation in the banking industry also produces a smaller number of large customers, which generally have a greater ability to negotiate pricing discounts with MasterCard. In addition, consolidations could prompt our customers to renegotiate our business agreements to obtain more favorable terms. This pressure on the prices we charge our customers could materially and adversely affect our revenue and profitability.

In addition, changing regulatory environments in certain regions may lead us to change our pricing arrangements and could reduce our overall revenues.

Our revenue would decline significantly if we lose one or more of our most significant customers, which could have a material adverse impact on our business.

Most of our customer relationships are not exclusive and in certain circumstances may be terminated by our customers. Our customers can reassess their commitments to us at any time in the future and/or develop their own competitive services. Accordingly, our business agreements with customers may not reduce the risk inherent in our business that customers may terminate their relationships with us in favor of our competitors, or for other reasons, or might not meet their contractual obligations to us.

In addition, a significant portion of our revenue is concentrated among our five largest customers. In 2006, the net revenues from these customers represented an aggregate of approximately $1.1 billion, or 34%, of total

revenue. One of our large customers, JPMorgan Chase Bank and its affiliates, generated 11% of our consolidated revenue in 2006. JPMorgan Chase Bank also acts as our U.S. settlement bank and has a significant commitment under our revolving credit facility. Loss of business from JPMorgan Chase Bank or any of our other large customers could have a material adverse impact on our business.

Merchants are increasingly focused on the costs of accepting card-based forms of payment, which may lead to additional litigation and regulatory proceedings and may increase the costs of our incentive programs, which could materially and adversely affect our profitability.

We rely on merchants and their relationships with our customers to expand the acceptance of our cards. Consolidation in the retail industry is producing a set of larger merchants with increasingly global scope. We believe that these merchants are having a significant impact on all participants in the global payments industry, including MasterCard. For instance, as a result of the settlement agreement in connection with the U.S. merchant lawsuit, merchants have the right to reject our debit cards in the United States while still accepting other MasterCard-branded cards, and vice versa. See Note 18 to the Consolidated Financial Statements included in this Report. In addition, some large merchants are supporting many of the legal and regulatory challenges to interchange fees that MasterCard is now defending, since interchange fees represent a significant component of the costs that merchants pay to accept payment cards. See “—Interchange fees are subject to increasingly intense legal and regulatory scrutiny worldwide, which may have a material adverse impact on our revenue, our prospects for future growth and our overall business.” The increasing focus of merchants on the costs of accepting various forms of payment may lead to additional litigation and regulatory proceedings. Large merchants are also able to negotiate pricing discounts and other incentives from us and our customers as a condition to accepting our payment cards. As merchants consolidate and become even larger, we may have to increase the amount of incentives that we provide to certain merchants, which could materially and adversely affect our revenues and profitability.

Our operating results may suffer because of substantial and increasingly intense competition worldwide in the global payments industry.

The global payments industry is highly competitive. Our payment programs compete against all forms of payment, including paper-based transactions (principally cash and checks), electronic transactions such as wire transfers and Automated Clearing House payments and other electronic forms of payment, including card-based payment systems. See “Business—Competition” in Part I, Item 1 of this Report. Some of our competitors have developed, or may develop, substantially greater financial and other resources than we have, may offer a wider range of programs and services than we offer or may use more effective advertising and marketing strategies to achieve broader brand recognition or merchant acceptance than we have. We may not be able to compete effectively against these threats. In addition, our competitors may be more efficient than we are in introducing innovative programs and service. As a result, our revenue or profitability could decline.

A significant portion of the revenue we earn outside the United States is generated from cross-border transactions and a decline in cross-border business and leisure travel could adversely affect our revenues and profitability.

We process substantially all cross-border transactions using MasterCard, Maestro and Cirrus-branded cards and generate a significant amount of revenue from fees for processing cross-border and currency conversion transactions. In addition, we charge relatively higher operations fees for settlement, authorization and switch fees on cross-border transactions. Revenue from processing cross-border and currency conversion transactions for our customers fluctuates with cross border travel and our customers’ need for transactions to be converted into their base currency. In particular, international geopolitical, economic and other conditions, including the threat of terrorism and outbreak of diseases such as avian influenza, could cause a decline in cross-border business and leisure travel, which could adversely affect our revenues and profitability.

We have repealed our Competitive Programs Policy (“CPP”) in the United States as a result of a final judgment in our litigation with the U.S. Department of Justice, and our business may suffer as a result.

Based on a final judgment of our litigation with the U.S. Department of Justice, in October 2004, our CPP in the United States, which prohibited financial institutions participating in our system from issuing competing proprietary payment cards, became unenforceable and was subsequently repealed. See Note 20 to the Consolidated Financial Statements included in this Report. As a result, our issuers are now permitted to issue general purpose credit or debit cards in the United States on any other general purpose card network (such as American Express or Discover). This may cause our members to issue fewer cards with our brand and to enter into arrangements with our competitors to issue cards, thereby reducing the volume of transactions that we process, decreasing our revenues. A number of our large customers, including Bank of America, Citibank, HSBC, USAA and GE Finance, have begun to issue or have announced that they will issue American Express or Discover-branded cards. Accordingly, the repeal of the CPP may have a material adverse affect on our business, revenue and profitability.

We depend significantly on our relationships with our customers to manage our payment system. If we are unable to maintain those relationships, or if our customers are unable to maintain their relationships with cardholders or merchants that accept our cards for payment, our business may be materially and adversely affected.

We are, and will continue to be, significantly dependent on our relationships with our issuers and acquirers and their further relationships with cardholders and merchants to support our programs and services. We do not issue cards, extend credit to cardholders or determine the interest rates (if applicable) or other fees charged to cardholders using cards that carry our brands. Each issuer determines these and most other competitive card features. In addition, we do not establish the discount rate that merchants are charged for card acceptance, which is the responsibility of our acquirers. As a result, our business significantly depends on the continued success and competitiveness of our issuer and acquirer customers. In turn, our customers’ success depends on a variety of factors over which we have little or no influence. If our customers become financially unstable, we may lose revenue or we may be exposed to settlement risk as described below.

With the exception of the United States and a select number of other jurisdictions, most in-country (as opposed to cross-border) transactions conducted using MasterCard, Maestro and Cirrus cards are authorized, cleared and settled by our customers or other processors without involving our central processing systems. Because we do not provide domestic processing services in these countries and do not, as described above, have direct relationships with cardholders or merchants, we depend on our close working relationships with our customers to effectively manage our brands, and the perception of our payment system among regulators, merchants and consumers in these countries. From time to time, our customers may take actions that we do not believe to be in the best interests of our payment system overall, which may materially and adversely impact our business. If our customers’ actions cause significant negative perception of the global payments industry or our brands, cardholders may reduce the usage of our programs, which could reduce our revenues and profitability.

In addition, our competitors may process a greater percentage of domestic transactions in jurisdictions outside the United States than we do. As a result, our inability to control the end-to-end processing on cards carrying our brands in many markets may put us at a competitive disadvantage by limiting our ability to introduce value-added programs and services that are dependent upon us processing the underlying transactions.

We rely on the continuing expansion of merchant acceptance of our brands and programs. Although our business strategy is to invest in strengthening our brands and expanding our acceptance network, there can be no guarantee that our efforts in these areas will continue to be successful. If the rate of merchant acceptance growth slows or reverses itself, our business could suffer.

If we are unable to grow our debit business, particularly in the United States, we may fail to maintain and increase our revenue growth.

In recent years, we believe that industry-wide offline and online debit transactions have grown more rapidly than credit or charge transactions. However, in the United States, we believe that transactions involving our brands account for a smaller share of all offline, signature-based debit transactions than they do credit or charge transactions. In addition, many of our competitors process a greater number of online, PIN-based debit transactions at the point of sale than we do, since our Maestro brand has relatively low penetration in the United States. We may not be able to increase our penetration for debit transactions in the United States since many of our competitors have long-standing and strong positions. We may also be impacted adversely by any tendency among U.S. consumers or financial institutions to migrate from offline, signature-based debit transactions to online, PIN-based transactions, because the latter types of transactions are more likely to be processed by other ATM/debit point-of-sale networks. In addition, we generally earn higher revenues on point-of-sale purchase transactions than on cash access transactions, and on domestic credit and offline debit transactions than on comparable online debit transactions.

Furthermore, in June 2003, following the settlement of the U.S. merchant lawsuit, Visa enacted a bylaw requiring its 100 largest issuers of debit cards in the United States to pay a so-called “settlement service fee” if these issuers reduce their debit Visa volume by more than 10%. This bylaw was later modified to clarify that the settlement service fee would only be imposed if an issuer shifted its portfolio of debit cards to MasterCard. See Note 20 to the Consolidated Financial Statements included in this Report for a description of our response to this bylaw provision. If Visa is permitted to impose this settlement service fee on issuers of debit cards according to this bylaw, it would penalize Visa members seeking to do debit business with MasterCard and would effectively prohibit them from converting their debit card programs to our programs.

Any of these factors may inhibit the growth of our debit business, which could materially and adversely affect our revenues and overall prospects for future growth.

Global economic, political and other conditions may adversely affect trends in consumer spending, which may materially and adversely impact our revenue and profitability.

The global payments industry depends heavily upon the overall level of consumer, business and government spending. A sustained deterioration in general economic conditions, particularly in the United States or Europe, or increases in interest rates in key countries in which we operate may adversely affect our financial performance by reducing the number or average purchase amount of transactions involving payment cards carrying our brands. Also, as we are principally domiciled in the United States, a negative perception of the United States could impact the perception of our company, which could adversely affect our business prospects and growth.

As a guarantor of certain obligations of principal members and affiliate debit licensees, we are exposed to risk of loss or illiquidity if any of our members default on their MasterCard, Cirrus or Maestro settlement obligations.

We may incur liability in connection with transaction settlements if an issuer or acquirer fails to fund its daily settlement obligations due to technical problems, liquidity shortfall, insolvency or other reasons. If a principal member or affiliate debit licensee is unable to fulfill its settlement obligations to other members, we may bear the loss even if we do not process the transaction. In addition, although we are not contractually obligated to do so, we may elect to keep merchants whole if an acquirer defaults on its merchant payment obligations, in order to maintain the integrity and acceptance of our brands. Our estimated gross legal settlement exposure, which is calculated using the average daily card charges made during the quarter multiplied by the estimated number of days to settle, was approximately $18.1 billion as of December 31, 2006. We have a revolving credit facility in the amount of $2.5 billion which could be used to provide liquidity in the event of one or more settlement failures by our members. While we believe that we have sufficient liquidity to cover a

settlement failure by any of our largest customers on their peak day, concurrent settlement failures of more than one of our largest customers or of several of our smaller customers may exceed our available resources and could materially and adversely affect our business and financial condition. In addition, even if we have sufficient liquidity to cover a settlement failure, we may not be able to recover the cost of such a payment and may therefore be exposed to significant losses, which could materially and adversely affect our results of operations, cash flow and financial condition. For more information on our settlement exposure as of December 31, 2006, see Note 21 to the Consolidated Financial Statements included in this Report.

Following our ownership and governance change, we no longer have the right to impose special assessments for extraordinary events upon the members of MasterCard International, which could leave us exposed to significant losses that could materially and adversely affect our results of operations, cash flow and financial condition, or, in certain circumstances, even cause us to become insolvent.

In connection with our ownership and governance change, the certificate of incorporation and the bylaws of MasterCard International were amended to eliminate the right of MasterCard International to impose special assessments for extraordinary events upon its members. This special assessment right previously allowed MasterCard International to recover from its members all or a portion of its expenses and liabilities arising out of extraordinary events, such as settlements or judgments in major litigations and catastrophic occurrences that may cause significant risk or damage to MasterCard. We now bear the expenses and liabilities associated with extraordinary events without recourse to members of MasterCard International through a right of assessment. Accordingly, the loss of this special assessment right for extraordinary events leaves us exposed to significant risks and losses from these types of extraordinary events, which could materially and adversely affect our results of operations, cash flow and financial condition, or, in certain circumstances, even cause us to become insolvent.

If our transaction processing systems are disrupted or we are unable to process transactions efficiently or at all, our revenue or profitability would be materially reduced.

Our transaction processing systems may experience service interruptions as a result of fire, natural disasters, power loss, disruptions in long distance or local telecommunications access, fraud, terrorism, accident or other catastrophic events. Most of our transaction processing systems are controlled by a single facility, supported by a separate smaller co-processing facility. A disaster or other problem at our primary and/or back-up facilities or our other owned or leased facilities could interrupt our services. Additionally, we rely on third-party service providers, such as AT&T, for the timely transmission of information across our global data transportation network. If one of our service providers fails to provide the communications capacity or services we require, as a result of natural disaster, operational disruption, terrorism or any other reason, the failure could interrupt our services, adversely affect the perception of our brands’ reliability and materially reduce our revenue or profitability.

Account data breaches involving card data stored by us or third parties could adversely affect our reputation and revenue.

We, our customers, and other third parties store cardholder account information in connection with payment cards bearing our brands. In addition, our customers may sponsor third-party processors to process transactions generated by cards carrying our brands. A breach of the systems on which sensitive cardholder data and account information are stored could lead to fraudulent activity involving our cards, damage the reputation of our brands and lead to claims against us. In 2005 and 2006, there were several high-profile account data compromise events potentially affecting millions of cardholders. In addition, in 2007, TJX Companies Inc., which owns several retailers, including T.J. Maxx, Marshalls, HomeGoods and A.J.Wright stores, announced that it suffered an unauthorized intrusion into its computer systems that process and store information related to credit and debit card transactions, which could affect millions of MasterCard, Visa, Discover and American Express cardholders. As a result, we may be subject to lawsuits in connection with data security breaches involving payment cards carrying our brands. If we are unsuccessful in defending lawsuits involving such data security breaches, we may

be forced to pay damages, which could materially and adversely affect our profitability. In addition, any damage to our reputation or that of our brands resulting from an account data breach could decrease the use and acceptance of our cards, which could have a material adverse impact on our transaction volumes, revenue and future growth prospects, or increase our costs by leading to additional regulatory burdens being imposed upon us.

An increase in fraudulent activity using our cards could lead to reputational damage to our brands and could reduce the use and acceptance of our cards.

Criminals are using increasingly sophisticated methods to capture cardholder account information to engage in illegal activities such as fraud and identity theft. As outsourcing and specialization become a more acceptable way of doing business in the payments industry, there are more third parties involved in processing transactions using our cards. Increased fraud levels involving our cards could lead to regulatory intervention, such as mandatory card re-issuance or enhanced security requirements, and damage to our reputation and financial damage to our brands, which could reduce the use and acceptance of our cards or increase our compliance costs, and thereby have a material adverse impact on our business.

If we are not able to keep pace with the rapid technological developments in our industry to provide customers, merchants and cardholders with new and innovative payment programs and services, the use of our cards could decline, which would reduce our revenue and income.

The payment card industry is subject to rapid and significant technological changes, including continuing developments of technologies in the areas of smart cards, radio frequency and proximity payment devices (such as contactless cards), electronic commerce and mobile commerce, among others. We cannot predict the effect of technological changes on our business. We rely in part on third parties, including some of our competitors and potential competitors, for the development of and access to new technologies. We expect that new services and technologies applicable to the payments industry will continue to emerge, and these new services and technologies may be superior to, or render obsolete, the technologies we currently use in our card programs and services. In addition, our ability to adopt new services and technologies that we develop may be inhibited by a need for industry-wide standards, by resistance from customers or merchants to such changes or by intellectual property rights of third parties. Our future success will depend, in part, on our ability to develop or adapt to technological changes and evolving industry standards.

We may face increased competition resulting from a change in ownership of our competitors, which could have an adverse impact our revenue.

Both Visa and Discover have recently announced plans to change their ownership structures, which could result in them becoming stronger and more efficient companies within the global payments industry. In October 2006, Visa announced its plan to restructure its organization through the creation of a new stock corporation owned by its current member financial institutions, to be followed by an initial public offering within 12 to 18 months. In December 2006, Morgan Stanley announced that it would spin-off its Discover card unit as a publicly-traded company in the third quarter of 2007. If we are unable to compete effectively with Visa and Discover, then use of our programs and products could decline, which would have an adverse impact on our revenues.

Adverse currency fluctuations and foreign exchange controls could decrease revenue we receive from our international operations.

During 2006, approximately 47.7% of our revenue was generated from activities outside the United States. Some of the revenue we generate outside the United States is subject to unpredictable and indeterminate fluctuations if the values of other currencies change relative to the U.S. dollar. Resulting exchange gains and losses are included in our net income. Our risk management activities provide protection with respect to adverse changes in the value of only a limited number of currencies. Furthermore, we may become subject to exchange

control regulations that might restrict or prohibit the conversion of our other revenue currencies into U.S. dollars. The occurrence of any of these factors could decrease the value of revenues we receive from our international operations and have a material adverse impact on our business.

Any acquisitions that we make could disrupt our business and harm our financial condition.

We may evaluate or make strategic acquisitions of complementary businesses, products or technologies. We may not be able to successfully finance or integrate any such acquired businesses, products or technologies. Furthermore, the integration of any acquisition may divert management’s time and resources from our core business and disrupt our operations. We may spend time and money on projects that do not increase our revenue. To the extent we pay the purchase price of any acquisition in cash, it would reduce our cash reserves available to us for other uses, and to the extent the purchase price is paid with our stock, it could be dilutive to our stockholders. While we from time to time evaluate potential acquisitions of businesses, products and technologies, and anticipate continuing to make these evaluations, we have no present understandings, commitments or agreements with respect to any material acquisitions.

Changes in the regulatory environment may adversely affect our benefit plans.

We provide certain retirement benefits to our U.S. employees through the MasterCard Accumulation Plan (MAP), a qualified cash balance benefit plan. While two U.S. federal circuit courts of appeal have ruled that cash balance pension plans do not violate the age discrimination provisions of ERISA, various other courts have ruled that such plans are age discriminatory. When this issue is resolved definitely, we may be required to amend the MAP and, like other U.S. companies with cash balance plans, may be exposed to claims from plan participants. These developments could have a material adverse impact on our results of operations.

Risks Related to our Class A Common Stock and Governance Structure

Future sales of our shares of Class A common stock could depress the market price of our Class A common stock.

The market price of our Class A common stock could decline as a result of sales of a large number of shares in the market or the perception that such sales could occur. These sales, or the possibility that these sales may occur, also might make it more difficult for us or our stockholders to sell equity securities in the future. We currently have 79,631,983 outstanding shares of Class A common stock of which 13,496,933 shares were donated by MasterCard to the Foundation. Under the terms of the donation, the Foundation may sell its shares of our Class A common stock commencing on the fourth anniversary of the consummation of the IPO to the extent necessary to comply with charitable disbursement requirements. Under Canadian tax law, the Foundation is generally required each year to disburse at least 3.5% of its assets not used in administration of the Foundation in qualified charitable disbursements. However, the Foundation has obtained permission from the Canadian tax authorities to defer its annual disbursement requirement for up to ten years and meet its total deferred disbursement obligations at the end of the ten-year period. Despite this permission to defer annual disbursements, the Foundation may decide to meet its disbursement obligations on an annual basis or to settle previously accumulated obligations during any given year. In addition, the Foundation will be permitted to sell all of the remaining shares held by it starting twenty years and eleven months after the consummation of the IPO.

In addition, holders of our Class B common stock will, commencing on the fourth anniversary of the consummation of the IPO, have the option to convert their shares of Class B common stock into shares of our Class A common stock on a one-for-one basis, subject to certain rights of first refusal by the other holders of Class B common stock, in connection with sale of such stock to an eligible holder. All of the shares of Class A common stock issuable upon conversion of such shares will be freely tradable without restriction or registration under the Securities Act by persons other than our affiliates. These future sales, or the perception that such sales may occur, could depress the market price of our Class A common stock.

The trading market for our Class A common stock could be adversely affected because provisions of our certificate of incorporation will make it in many cases difficult for broker-dealers that are members or affiliates of members of MasterCard International to make a market in our Class A common stock.

Our amended and restated certificate of incorporation provides that no person who is a member or affiliated with a member of MasterCard International, which we refer to collectively as “member affiliates,” as well as the broker-dealer affiliates of such members, will be permitted to beneficially own any shares of Class A common stock or certain other voting stock (or securities convertible or exchangeable into such stock) at any time, subject to a limited number of exceptions. Those exceptions include (1) an underwriter participating in an offering of such securities may beneficially own such securities, but only to the extent necessary to facilitate that offering and (2) such a person may beneficially own such securities if those securities are held for the benefit of third parties or in customer or fiduciary accounts in the ordinary course of such person’s business and are held by such person without the purpose or effect of changing or influencing control of MasterCard. Accordingly, no member affiliate is able to trade as a principal in our Class A common stock and is restricted in its ability to act as a market-maker in our Class A common stock, although member affiliates are able to execute trades as agents for third parties. These restrictions on the ability of the member affiliates to engage in market-making may adversely affect the trading market for the Class A common stock.

Anti-takeover provisions in our charter documents and Delaware law could delay or prevent entirely a takeover attempt or a change in control.

Provisions contained in our amended and restated certificate of incorporation and bylaws and Delaware law could delay or prevent entirely a merger or acquisition that our stockholders consider favorable. These provisions may also discourage acquisition proposals or have the effect of delaying or preventing entirely a change in control, which could harm our stock price. For example, subject to limited exceptions, our amended and restated certificate of incorporation prohibits any person from beneficially owning more than 15% of any of the Class A common stock, the Class B common stock or any other class or series of our stock with general voting power, or more than 15% of our total voting power. Further, no member or former member of MasterCard International, or any operator, member or licensee of any competing general purpose payment card system, or any affiliate of any such person, may beneficially own any share of Class A common stock or any other class or series of our stock entitled to vote generally in the election of directors. In addition,

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our board of directors is divided into three classes, with approximately one-third of our directors elected each year;

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up to three of our directors (but no more than one-quarter of all directors) are elected by the holders of our Class M common stock;

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any representative of a competitor of MasterCard or of the Foundation is disqualified from service on our board of directors;

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our directors, other than the directors elected by the holders of our Class M common stock (who may be removed without cause by the holders of the Class M common stock), may be removed only for cause and only upon the affirmative vote of at least 80% in voting power of all the shares of stock then entitled to vote at an election of directors, voting together as a single class;

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our stockholders are not entitled to the right to cumulate votes in the election of directors;

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holders of our Class A common stock are not entitled to act by written consent;

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our stockholders must provide timely notice for any stockholder proposals and director nominations;

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we have adopted limited liability provisions that eliminate the personal liability of directors and the members of our European Board for monetary damages for actions taken as a director or member, with certain exceptions; and

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a vote of 80% or more of all of the outstanding shares of our stock then entitled to vote is required to amend certain sections of our amended and restated certificate of incorporation and for stockholders to amend any provision of our bylaws.

A substantial portion of our voting power is held by the Foundation, which is restricted from selling shares for an extended period of time and therefore may not have the same incentive to approve a corporate action that may be favorable to the other public stockholders. In addition, the ownership of Class A common stock by the Foundation and the restrictions on transfer could discourage or make more difficult acquisition proposals favored by the other holders of the Class A common stock.

The Foundation owns 13,496,933 shares of Class A common stock, representing approximately 17% of our general voting power. The Foundation may not sell or otherwise transfer its shares of Class A common stock prior to the date which is twenty years and eleven months following the IPO, except to the extent necessary to satisfy its charitable disbursement requirements starting on the fourth anniversary of the IPO. The directors of the Foundation are required to be independent of us and our members. The ownership of Class A common stock by the Foundation, together with the restrictions on transfer, could discourage or make more difficult acquisition proposals favored by the other holders of the Class A common stock. In addition, because the Foundation is restricted from selling its shares for an extended period of time, it may not have the same interest in short or medium-term movements in our stock price as, or incentive to approve a corporate action that may be favorable to, our other stockholders.

The holders of our Class M common stock have the right to elect up to three of our directors and to approve significant corporate transactions, and their interests in our business may be different than our other shareholders.

Our amended and restated certificate of incorporation requires us to obtain the approval of the holders of our Class M common stock, voting separately as a class, for a variety of enumerated actions. For example, the approval of the holders of our Class M common stock is required to make certain amendments to our certificate of incorporation, to approve the sale, lease or exchange of all or substantially all of our assets, to approve the consummation of mergers or consolidations of MasterCard or for us to cease to engage in the business of providing core network authorization, clearing and settlement services for branded payment card transactions. In addition, the holders of our Class M common stock have the right to elect up to three of our directors. Because shares of the Class M common stock do not have any economic rights, the holders of the Class M common stock may not have the same incentive to approve a corporate action that may be favorable for the holders of Class A common stock, or their interests may otherwise conflict with those of the holders of Class A common stock.

Certain aspects of our European operations are managed by the European Board which has been elected by the European holders of Class M common stock and which may reach different decisions than our Global Board of Directors.

Certain aspects of our European operations, including review of membership applications, levying of fines and certain assessments and fees applicable to European members, establishment of intraregional operating rules, approval of the European annual expense budget, disbursing surplus funds, and implementation of certain intraregional product and enhancement developments and affinity and co-branding rules are managed by or under the direction of our European Board. The European Board is elected by holders of our Class M common stock who have their principal operations in Europe, and consists of representatives of our European members. Although our board of directors may, through a majority or a two-thirds vote depending on the circumstances, override decisions or temporarily assume any authority granted to the European Board, the European Board may reach different decisions than our board of directors would have reached on the same matter.

Our ability to pay regular dividends to our holders of Class A common stock and Class B common stock is subject to the discretion of our board of directors and will be limited by our ability to generate sufficient earnings and cash flows.

MasterCard intends to pay cash dividends on a quarterly basis on our shares of Class A common stock and Class B common stock. Our board of directors may, in its discretion, decrease the level of dividends or discontinue the payment of dividends entirely. The payment of dividends is dependent upon our ability to generate earnings and cash flows so that we may pay our obligations and expenses and pay dividends to our stockholders. However, sufficient cash may not be available to pay such dividends. Payment of future dividends, if any, will be at the discretion of our board of directors after taking into account various factors, including our financial condition, settlement guarantees, operating results, available cash and current and anticipated cash needs. If, as a consequence of these various factors, we are unable to generate sufficient earnings and cash flows from our business, we may not be able to make or may have to reduce or eliminate the payment of dividends on our shares of Class A common stock and Class B common stock.

Item 1B. Unresolved Staff Comments

Not applicable.

Item 2. Properties

As of December 31, 2006, MasterCard and its subsidiaries owned or leased 64 commercial properties. We own our corporate headquarters, a three-story, 472,600 square foot building located in Purchase, New York. There is no outstanding debt on this building. Our principal technology and operations center is a 528,000 square foot leased facility located in O’Fallon, Missouri, known as “Winghaven”. The term of the lease on this facility is 10 years, which commenced on August 31, 1999. See Note 17 to the Consolidated Financial Statements included in Item 8. Our leased properties in the United States are located in 10 states and in the District of Columbia. We also lease properties in 40 other countries. These facilities primarily consist of corporate and regional offices, as well as our operations centers.

We believe that our facilities are suitable and adequate for the business that we currently conduct. However, we periodically review our space requirements and may acquire new space to meet the needs of our business, or consolidate and dispose of facilities that are no longer required.

Item 3. Legal Proceedings

Refer to Notes 18 and 20 to the Consolidated Financial Statements included in Item 8.

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

Not applicable.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Price Range of Common Stock

Our Class A common stock commenced trading on the New York Stock Exchange under the symbol “MA” on May 25, 2006. The following table sets forth the intra-day high and low sale prices for our Class A common stock from May 25, 2006 and for the two full quarterly periods in 2006 following the Company’s IPO, as

reported by the New York Stock Exchange. At December 31, 2006, the Company had 32 stockholders of record for its Class A common stock. We believe that the number of beneficial owners is substantially greater than the number of record holders, because a large portion of our Class A common stock is held in “street name” by brokers.


2006	High		Low
Second Quarter (from May 25, 2006)	$	50.63	$	40.20
Third Quarter		70.45		43.67
Fourth Quarter		108.60		68.28

There is currently no established public trading market for our Class B common stock or Class M common stock. There were approximately 1,454 and 1,600 holders of record of our Class B common stock and Class M common stock, respectively, as of December 31, 2006.

Dividend Declaration and Policy

On November 10, 2006 and February 9, 2007, we paid quarterly cash dividends of $0.09 per share on our Class A common stock and Class B common stock for the fourth quarter of 2006 and the first quarter of 2007, respectively. In addition, on February 6, 2007, our Board of Directors declared a quarterly cash dividend of $0.15 per share payable on May 10, 2007 to holders of record on April 9, 2007 of our Class A common stock and Class B common stock. Subject to legally available funds, we intend to pay a quarterly cash dividend on our outstanding Class A common stock and Class B common stock. However, the declaration and payment of future dividends is at the sole discretion of our Board of Directors after taking into account various factors, including our financial condition, settlement guarantees, operating results, available cash and current and anticipated cash needs. Prior to the IPO, we did not pay any cash dividends on our shares of outstanding common stock.

Pursuant to our amended and restated certificate of incorporation, holders of our Class M common stock are not entitled to receive dividends.

Equity Compensation Plans

The table below presents information as of December 31, 2006 for the MasterCard Incorporated 2006 Long Term Incentive Plan (the “Long Term Plan”) and the 2006 Non-employee Director Equity Compensation Plan (the “Director Plan”) both of which have been approved by stockholders. MasterCard does not have any equity compensation plans that have not been approved by stockholders. For a description of the Long Term Plan and the Director Plan, see Note 16 to the Consolidated Financial Statements included in Item 8 of this Report.


Plan category	Number of shares of Class A common stock to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights		Number of shares of Class A common stock remaining available for future issuance under equity compensation plans (excluding shares reflected in the first column)
Equity compensation plans approved by stockholders	552,692	$	39	4,847,247	¹
Equity compensation plans not approved by stockholders	—	$	—	—

Total	552,692			4,847,247

In addition to options, the Long Term Plan authorizes the issuance of restricted stock, restricted stock units, performance units and other stock-based awards and the Director Plan authorizes the issuance of deferred stock units. Of these shares, 2,861,118 and 22,936 shares may be issued pursuant to outstanding restricted stock units and deferred stock units, respectively.

Use of Proceeds from the IPO

In the second quarter of 2006, we used all but $650 million of our net proceeds from the IPO (including any proceeds received pursuant to the underwriters’ option to purchase additional shares) to redeem a number of shares of Class B common stock from our previous stockholders, which was equal to the aggregate number of shares of Class A common stock that we issued to investors in the IPO (including any shares sold pursuant to the underwriters’ option to purchase additional shares) and contributed to the Foundation. We intend to use the remaining proceeds to increase our capital, defend ourselves against legal and regulatory challenges, expand our role in targeted geographies and higher growth segments of the global payments industry and for other general corporate purposes. However, we have not determined the amounts of such remaining proceeds that are to be allocated to these purposes.

Item 6. Selected Financial Data

The statement of operations data presented below for the years ended December 31, 2006, 2005 and 2004, and the balance sheet data as of December 31, 2006 and 2005, were derived from the audited consolidated financial statements of MasterCard Incorporated included in Item 8 in this Report. The statement of operations data presented below for the years ended December 31, 2003 and 2002, and the balance sheet data as of December 31, 2004, 2003 and 2002, were derived from the audited consolidated financial statements not included in this Report. As explained in footnote 2 below, the results of the operations of MasterCard Europe S.A. (“MasterCard Europe”) have been included in our consolidated statements of operations from June 28, 2002 to present. The data set forth below should be read in conjunction with, and are qualified by reference to, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements and Notes thereto included in Item 8 in this Report.


	Year Ended December 31,
	2006		2005		2004		2003			2002²
	(In thousands, except per share data)
Statement of Operations Data:
Revenue	$	3,326,074	$	2,937,628	$	2,593,330	$	2,230,851		$	1,891,811
Operating Income (Loss)		229,495		393,184		346,672		(601,862	)		141,997
Income (Loss) before cumulative effect of accounting change		50,190		266,719		238,060		(390,742	)		116,429
Net Income (Loss)		50,190		266,719		238,060		(385,793	)		116,429
Net Income (Loss) Per Share before cumulative effect of accounting change (Basic and Diluted)¹		.37		1.98		1.76		(2.90	)		.86
Net Income (Loss) Per Share (Basic and Diluted)¹		.37		1.98		1.76		(2.86	)		.86
Balance Sheet Data:
Total Assets	$	5,082,470	$	3,700,544	$	3,264,670	$	2,900,905		$	2,260,875
Long-Term Debt		229,668		229,489		229,569		229,574			80,107
Obligations under U.S. Merchant Lawsuit, Long-term		359,640		415,620		468,547		516,686			—
Stockholders’/Members’ Equity		2,364,359		1,169,148		974,952		698,721			1,023,406
Cash dividends declared per share		.18		—		—		—			—

As more fully described in Note 2 to the Consolidated Financial Statements included in Item 8, in connection with the ownership and governance transactions, we reclassified all of our 100,000 outstanding shares of existing Class A redeemable common stock so that our previous stockholders received 1.35 shares of our Class B common stock for each share of Class A redeemable common stock that they held prior to the reclassification and a single share of our Class M common stock. Accordingly, shares and per share data were retroactively restated in the financial statements subsequent to the reclassification to reflect the

reclassification as if it were effective at the start of the first period being presented in the financial statements.

On June 28, 2002, we converted from a membership to a stock company through the creation of MasterCard Incorporated, a new holding company. Also on June 28, 2002, MasterCard Incorporated directly and indirectly acquired all of the outstanding stock of Europay International S.A. (“EPI”) in a transaction that we refer to as the “Integration”. On July 16, 2002, EPI was renamed MasterCard Europe S.A. On September 30, 2002, MasterCard Europe was reorganized in Belgium as MasterCard Europe sprl.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the consolidated financial statements and notes of MasterCard Incorporated and its consolidated subsidiaries, including MasterCard International Incorporated (“MasterCard International”) and MasterCard Europe sprl (“MasterCard Europe”) (together, “MasterCard” or the “Company”) included elsewhere in this Report.

Non-GAAP Financial Information

Non-GAAP financial information is defined as a numerical measure of a company’s performance that excludes or includes amounts so as to be different than the most comparable measure calculated and presented in accordance with accounting principles generally accepted in the United States (“GAAP"). Pursuant to the requirements of Regulation G, portions of this "Management's Discussion and Analysis of Financial Condition and Results of Operations" include a comparison of certain non-GAAP financial measures to the most directly comparable GAAP financial measures. The presentation of non-GAAP financial measures should not be considered in isolation or as a substitute for the Company's related financial results prepared in accordance with GAAP. Specifically, we are presenting information regarding changes in operating expenses in the year ended December 31, 2006 compared to the same period in 2005 that exclude a non-cash charge associated with the donation of shares of Class A common stock to the MasterCard Foundation (the “Foundation”), charges associated with litigation settlements and a catch-up adjustment relating to cash award executive incentive plans (“EIP”) (collectively, the “special items”) as well as gross assessments excluding certain pricing modifications, because the Company's management believes that exclusion of this information facilitates understanding of our results of operations and provides meaningful comparison of results between periods. See “–Operating Expenses” for a table which provides a reconciliation of operating expenses excluding special items to the most directly comparable GAAP measure. In addition, the paragraph under the table provides operating expenses in 2004 excluding litigation settlements to provide a meaningful comparison between 2005 and 2004. Similarly, we present the effective tax rate with and without the impact of the stock donation to the MasterCard Foundation for the year ended December 31, 2006 because the stock donation to the Foundation is a non-cash and non-recurring item that was completed in conjunction with our change in governance and ownership structure implemented during the second quarter of 2006. The effective tax rate without the impact of the stock donation to the Foundation is more meaningful to investors in understanding our financial results, including comparability to the same periods in 2005.

Overview

We are a global payment solutions company that provides a variety of services in support of our customers’ credit, debit and related payment programs. We manage a family of well-known, widely accepted payment card brands including MasterCard^®, MasterCard Electronic^™, Maestro^® and Cirrus^®, which we license to our customers. As part of managing these brands, we also establish and enforce rules and standards surrounding the use of our payment card system. Cardholder and merchant relationships are managed principally by our customers. Accordingly, we do not issue cards, extend credit to cardholders, determine the interest rates (if applicable) or other fees charged to cardholders by issuers, or establish the merchant discount charged by acquirers in connection with the acceptance of cards that carry our brands.

We successfully completed our initial public offering (“IPO”) and implemented a new governance and ownership structure during the second quarter of 2006 (see “Impact of the IPO” below). We donated $395 million of our Class A common stock and $20 million in cash to the Foundation during 2006. We recorded net income of $50 million, or $.37 per basic and diluted share, for the year ended December 31, 2006 versus $267 million or $1.98 per basic and diluted share in 2005.

We achieved double-digit revenue growth of 13.2% in 2006. Our revenue growth was moderated by a $341 million or 42.1% increase in rebates and incentives to our customers and merchants in the year ended December 31, 2006. The growth in revenues was principally due to increased transactions and volumes and restructuring of currency conversion pricing. In April 2006, we restructured our currency conversion pricing by initiating a charge to our issuers and acquirers for all cross-border transactions regardless of whether we perform the currency conversion or it is performed by a third party at the point of sale. We also generally decreased the price we charge our issuers for performing currency conversion. The restructuring of the currency conversion pricing and other less significant pricing modifications in 2006 accounted for approximately 3% of our revenue growth for the year ended December 31, 2006. Revenue growth was also impacted during the first three months of 2006 by certain other pricing changes that went into effect in April 2005. There was a negligible impact on revenues relating to a slightly unfavorable foreign currency fluctuation of the euro against the dollar.

Operating expenses increased 21.7% in 2006. Excluding the impact of special items specifically identified in the reconciliation table included in “—Operating Expenses”, operating expenses increased 9.2% in the year ended December 31, 2006. Our operating expenses as a percentage of total revenues were 93.1% in 2006 versus 86.6% in 2005. Excluding the impact of special items, our operating expenses as a percentage of total revenues improved to 80.5% in 2006 from 83.4% in 2005. The increase in operating expenses, excluding the impact of special items in 2006, was primarily due to an increase in general and administrative expenses to support our customer focused strategy and to a lesser extent an increase in advertising and marketing expenses to support our brand.

Our liquidity and capital position were strong, as we had $2.5 billion in cash, cash equivalents and available-for-sale securities, and $2.4 billion in stockholders’ equity as of December 31, 2006.

We believe that the trend within the global payments industry from paper-based forms of payment such as cash and checks toward electronic forms of payment such as cards creates significant opportunities for the continued growth of our business. Our strategy is to continue our growth by further penetrating our existing customer base and by expanding our role in targeted geographies and higher-growth segments of the global payments industry (such as corporate, premium and debit payments), enhancing our merchant relationships, maintaining unsurpassed acceptance and continuing to invest in our brands. We are committed to providing our key customers with coordinated services through integrated, dedicated account teams in a manner that allows us to capitalize on our expertise in payment programs, brand marketing, product development, technology, processing and consulting services for these customers. By investing in strong customer relationships over the long-term, we believe that we can increase our volume of business with key customers over time, and in support of this strategy, we are continuing to hire additional resources and developing sales and other personnel. We intend to expand our role in targeted geographies by, among other things, pursuing incremental payment processing opportunities in the European region, Latin American and Asia/Pacific countries.

There is increased regulatory scrutiny of interchange fees and other aspects of the payments industry which could have an adverse impact on our business. In addition, we face exposure to antitrust and other types of litigation. Competition and pricing pressure within the global payments industry is increasing, due in part to consolidation within the banking sector and the growing power of merchants. Regulatory actions, litigation, and pricing pressure may lead us to change our pricing arrangements and could reduce our overall revenues. See “Item 1A – Risk Factors” of this Report for these and other risks facing our business.

Impact of the IPO

We completed a plan for a new ownership and governance structure in the second quarter 2006, including the election of a new Board of Directors comprised of a majority of independent directors, establishment of an independent charitable foundation and completion of the IPO.

Under the new ownership and governance structure, our previous stockholders retained a 41% equity interest in the company through ownership of new non-voting Class B common stock. In addition, previous stockholders received a single share of Class M common stock that has no economic rights but provides certain voting rights, including the right to approve specified significant corporate actions and to elect up to three members of the MasterCard Board of Directors (but not more than one quarter of the total number of directors).

We used all but $650 million of our net proceeds from the IPO (including any proceeds received pursuant to the underwriters’ option to purchase additional shares) to redeem a number of shares of Class B common stock from our previous stockholders that was equal to the aggregate number of shares of Class A common stock that we issued to investors in the IPO (including any shares sold pursuant to the underwriters’ option to purchase additional shares) and contributed to the Foundation. We intend to use the remaining proceeds to increase our capital, defend ourselves against legal and regulatory challenges, expand our role in targeted geographies and higher growth segments of the global payments industry and for other general corporate purposes. We have not yet determined the specific amounts of all such remaining proceeds that are to be allocated to each of these purposes.

In addition, in connection with our new ownership and governance structure, we have adopted equity-based compensation plans. We have converted certain of our existing long-term incentive cash awards into equity-based compensation awards under this plan. Due to this conversion, we are recognizing approximately $10 million of additional personnel expense, of which $8 million was recognized in 2006. The remaining personnel expense will be amortized based on the vesting within the plans. The Human Resources and Compensation Committee of our Board of Directors also approved 2006 awards under the equity-based long-term incentive plan. Additionally, we granted a one-time restricted stock unit award to non-executive management employees of approximately 440 thousand shares in total, which resulted in deferred stock-based compensation equal to the fair value of the restricted stock units issued of approximately $17 million, which is being amortized over a three-year vesting period. During 2006, we expensed $3 million. The remainder of the fair value, net of assumed forfeitures, is being amortized over the remaining vesting period of the awards.

Impact of Foreign Currency Rates

Our operations are impacted by changes in foreign exchange rates. In most regions except Europe, assessments are calculated based on local currency volume converted to U.S. dollar volume using average exchange rates for the related assessment period. In Europe, the local currency volumes are converted to the euro. As a result, assessment revenues are impacted by the overall strengthening or weakening of the U.S. dollar or euro compared to the foreign currencies of the related local volumes in each period. In 2006 and 2005, the U.S. dollar weakened as evidenced by a 15.7% and 14.3% increase in gross dollar volume (“GDV”) on a U.S. dollar converted basis, respectively, exceeded local currency GDV growth of 14.9% and 13.0%, compared to the same periods in the prior year.

We are especially impacted by the movements of the euro relative to the U.S. dollar since the functional currency of MasterCard Europe, our principal European operating subsidiary, is the euro. The strengthening or devaluation of the U.S. dollar against the euro impacts the translation of MasterCard Europe’s operating results into U.S. dollar amounts and is summarized as follows:


	2006			2005			2004
Euro to U.S. dollar average exchange rate	$	1.26		$	1.25		$	1.24
Devaluation of U.S. dollar to euro from prior year		(1	)%		(1	)%		(10	)%
Revenue growth attributable to translation of MasterCard Europe revenues to U.S. dollars		—			—			2	%
Operating expense growth attributable to translation of MasterCard Europe expenses to U.S. dollars		—			—			2	%

Revenues

We generate revenues from the fees that we charge our customers for providing transaction processing and other payment-related services (operations fees) and by charging assessments to our customers based on the GDV of activity on the cards that carry our brands (assessments). GDV includes the aggregated dollar amount of usage (purchases, cash disbursements, balance transfers and convenience checks) on MasterCard-branded cards. Our pricing for transactions and services is complex. Each category of revenue has numerous fee components depending on the types of transactions or services provided. In addition, standard pricing varies among our regional businesses, and such pricing can be customized further for our customers through incentive and rebate agreements. Our revenues are based upon transactional information accumulated by our systems or reported by our customers. We earned approximately 73.1%, 66.1% and 63.1% of our net revenues from net operations fees and approximately 26.9%, 33.9% and 36.9% of our net revenues from net assessments in 2006, 2005 and 2004, respectively. Approximately 3.3% of the shift to operation fees from assessments was due to the restructuring of the currency conversion pricing in 2006.

Operations fees are typically transaction-based for facilitating the processing of payment transactions and information management among our customers. MasterCard’s system for transaction processing involves four participants in addition to us: issuers (the cardholders’ banks), acquirers (the merchants’ banks), merchants and cardholders. Operations fees are charged to issuers, acquirers or their delegated processors for transaction processing services, specific programs to promote MasterCard-branded card acceptance and additional services to assist our customers in managing their businesses. The significant components of operations fees are as follows:

•

Authorization occurs when a merchant requests approval for a cardholder’s transaction. We charge a fee for routing the authorization for approval to or from the issuer or, in certain circumstances, such as when the issuer’s systems are unavailable, for approval by us or others on behalf of the issuer in accordance with the issuer’s instructions. Our rules, which vary across regions, establish the circumstances under which merchants and acquirers must seek authorization of transactions. These fees are primarily paid by issuers.

•

Settlement refers to the process in which we determine the amounts due between issuers and acquirers for payment transactions and associated fees. First, we clear a transaction by transferring the financial transaction details among issuers, acquirers or their designated third-party processors. Then we settle or exchange the related funds among the issuers and acquirers. We charge a fee for these settlement and clearing services. These fees are primarily paid by issuers.

•

Switch fees are charges for the use of the MasterCard Debit Switch (“MDS”), our debit processing system. The MDS transmits financial messages between acquirers and issuers and provides transaction and statistical reporting and performs settlement between members and other debit transaction processing networks. These fees are primarily paid by issuers.

•

Currency conversion and cross-border are volume-based revenues. Cross-border volumes are generated by transactions in which the cardholder and merchant geography are different. We process transactions denominated in more than 160 currencies through our global system, providing cardholders the ability to utilize, and merchants to accept, MasterCard cards across multiple country borders for transactions. We can also perform currency conversion services by processing transactions in a merchant’s local currency and converting the amount to the currency of the issuer, who in turn may add foreign exchange charges and post the transaction on the cardholder’s statement in their own home currency. In April 2006, we restructured our currency conversion by initiating a charge to our issuers and acquirers for all cross-border transaction volumes regardless of whether we perform the currency conversion or it is performed by a third party at the point-of-sale. We also generally decreased the price we charge our issuers for performing currency conversion.

•

Acceptance development fees are charged to issuers based on components of GDV and support our focus on developing merchant relationships and promoting acceptance at the point of sale. These fees are primarily U.S. based.

•

Warning bulletin fees are charged to issuers and acquirers for listing invalid or fraudulent accounts either electronically or in paper form and for distributing this listing to merchants.

•

Connectivity fees are charged to issuers and acquirers for network access, equipment, and the transmission of authorization and settlement messages. The methodology for calculating the transmission fees was changed in April 2005 so that they are based on the volume of information being transmitted through our systems and the number of connections to our systems. Prior to April 2005, these transmission fees were calculated solely based on the number and type of connections.

•

Consulting and research fees as well as outsourcing services fees are primarily generated by MasterCard Advisors, our professional advisory services group. We provide a wide range of consulting, information and outsourcing services associated with our customers’ payment activities and programs. Research includes revenues from subscription-based services, access to research inquiry, and peer networking services generated by our independent financial and payments industry research group. We do not anticipate research becoming a significant percentage of our business. MasterCard Advisors’ revenues, of which consulting and research fees are components, were less than 10% of our consolidated revenues.

•

Other operations fees are primarily user-pay services including the sale of manuals, publications, holograms, information and reports, as well as compliance programs and penalties, to assist our customers in managing their businesses. In addition, other operations fees include fees for cardholder services in connection with the benefits provided with MasterCard-branded cards, such as insurance, telecommunications assistance for lost cards and locating automated teller machines.

Generally, we process the majority of MasterCard-branded domestic transactions in the United States, United Kingdom, Canada, Brazil and Australia. We process substantially all cross-border transactions using MasterCard, Maestro and Cirrus-branded cards. We charge relatively higher operations fees for settlement, authorization and switch fees on cross-border transactions and earn cross-border revenues as well as currency conversion revenues if the transactions require conversion between two different currencies. Operations fees for offline debit transactions, which are generally signature-based debit transactions, are priced similar to credit transactions. Operations fees for processing domestic online debit transactions are priced in a similar manner as domestic offline debit and credit transactions, while international offline debit and credit transactions are priced higher than international online debit transactions.

Assessments are primarily based on GDV for a specific time period and the rates vary depending on the nature of the transactions that generate GDV. Assessment rates vary by region. Most of our assessment rates are tiered and rates decrease when customers meet incremental volume hurdles. These assessment rates also vary by the type of transaction. We generally assess at higher rates for cross-border volumes compared to domestic volumes. We also assess at higher rates for retail purchases versus cash withdrawals. Credit and offline debit

transactions are assessed at higher rates than online debit transactions. In addition, from time to time the Company may introduce assessments for specific purposes such as market development programs. Assessments that are based on quarterly GDV are estimated utilizing aggregate transaction information and projected customer performance.

In 2006 and 2005, gross revenues grew 19.5% and 21.1%, respectively. A component of our revenue growth for the year ended December 31, 2006 was the result of restructuring currency conversion pricing in April 2006. Revenue growth was also impacted during the first three months of 2006 by certain other pricing changes that went into effect in April 2005. Our overall revenue growth is being moderated by the demand from our customers for better pricing arrangements and greater rebates and incentives. Accordingly, we have entered into business agreements with certain customers and merchants to provide GDV and other performance-based support incentives. Rebates and incentives as a percentage of gross revenues were approximately 25.7%, 21.6% and 16.2% in 2006, 2005 and 2004, respectively. These pricing arrangements reflect enhanced competition in the global payments industry, the continued consolidation and globalization of our key customers, the growing power of merchants and the impact of restructured pricing. The rebates and incentives are calculated on a monthly basis based upon estimated performance and the terms of the related business agreements. Rebates and incentives are recorded as a reduction of gross revenue in the same period that performance occurs.

The U.S. remains our largest geographic market based on revenues. Revenue generated in the U.S. was approximately 52.3%, 54.8% and 58.5% of total revenues in 2006, 2005 and 2004, respectively. No individual country, other than the U.S., generated more than 10% of total revenues in any period. Certain non-U.S. economies have experienced more growth than the U.S. economy. Accordingly, some non-U.S. revenues grew at a faster rate than U.S. revenues in 2006 and 2005. The growth was not specifically related to any one region in which we do business.

Our business is dependent on certain world economies and consumer behaviors. In the past, our revenues have been impacted by specific events such as the war in Iraq, the SARS outbreak and the September 11, 2001 terrorist attack because these events impact travel patterns and related cross border transaction volumes. Our revenues can also be impacted by a number of factors related to consumer behavior, including consumers’ confidence in the MasterCard brand.

Results of Operations


	For the Years Ended December 31,									Percent Increase (Decrease)
	2006			2005			2004			2006 vs. 2005		2005 vs. 2004
	(In millions, except per share, percent and GDV amounts)
Net operations fees	$	2,430		$	1,941		$	1,637		25.2	%	18.6	%
Net assessments		896			997			956		(10.1	)%	4.3	%

Total revenue		3,326			2,938			2,593		13.2	%	13.3	%
General and administrative		1,505			1,352			1,186		11.4	%	13.9	%
Advertising and marketing		1,052			1,008			916		4.3	%	10.1	%
Litigation settlements		25			75			22		(66.8	)%	247.1	%
Charitable contributions to the MasterCard Foundation		415			—			—			**	—
Depreciation and amortization		100			110			122		(9.2	)%	(10.9	)%

Total operating expenses		3,097			2,545			2,246		21.7	%	13.3	%
Operating income		229			393			347		(41.6	)%	13.4	%
Total other income (loss)		65			14			(23	)	357.0	%	161.6	%

Income before income tax expense		294			407			324		(27.8	)%	25.8	%
Income tax expense		244			140			86		73.5	%	64.2	%

Net income	$	50		$	267		$	238		(81.2	)%	12.0	%

Net income per share (basic)¹	$	.37		$	1.98		$	1.76		(81.3	)%	12.5	%
Weighted average shares outstanding (basic)¹		135			135			135		—		—
Net income per share (diluted)¹	$	.37		$	1.98		$	1.76		(81.3	)%	12.5	%
Weighted average shares outstanding (diluted)¹		136			135			135		—		—
Effective income tax rate		82.9	%³		34.5	%		26.5	%		**		**
Gross dollar volume (“GDV”) on a US dollar converted basis (in billions)		1,956			1,690			1,478		15.7	%	14.3	%
Processed transactions²		16,137			13,733			12,152		17.5	%	13.0	%

**	Not Meaningful, See “ —Operating Expenses” and “—Income Taxes” for more information.

As more fully described in Note 2 to the Consolidated Financial Statements included in Item 8, in connection with the ownership and governance transactions, we reclassified all of our approximately 100 outstanding shares of existing Class A redeemable common stock so that our previous stockholders received 1.35 shares of our Class B common stock for each share of Class A redeemable common stock that they held prior to the reclassification and a single share of our Class M common stock. Accordingly, shares and per share data were retroactively restated in the financial statements subsequent to the reclassification to reflect the reclassification as if it were effective at the start of the first period being presented in the financial statements.

The data set forth for processed transactions represents all transactions processed by MasterCard, including PIN-based online debit transactions. Prior to 2005, processed transactions reported by MasterCard included certain MasterCard branded (excluding Maestro and Cirrus) transactions for which we received transaction details from our customers but which were not processed by our systems. In the first quarter of 2006, we updated our transaction detail to remove online balance inquiry transactions as well as online transactions which were declined for various reasons. Management determined that it would be more appropriate to exclude such transactions from the processed transactions calculation. The processed transactions for the years ended December 31, 2005 and 2004 have been restated to be consistent with the calculation of processed transactions in 2006. Revenue has not been impacted by this change.

3	The effective tax rate includes the impact of a $395 million stock charitable contribution which is not deductible for tax purposes. See “—Income Taxes” for more information.

Operations Fees

The significant components in operations fees are as follows:


	For the Years Ended December 31,									Dollar Increase (Decrease)						Percent Increase (Decrease)
	2006			2005			2004			2006			2005			2006		2005
	(In millions, except percents)
Authorization, settlement and switch	$	1,169		$	1,055		$	913		$	114		$	142		10.8	%	15.6	%
Currency conversion and cross border		622			317			281			305			36		96.2	%	12.8	%
Acceptance development fees		217			171			85			46			86		26.9	%	101.2	%
Warning bulletin fees		70			70			66			—			4		—		6.1	%
Connectivity		84			63			35			21			28		33.3	%	80.0	%
Consulting and research fees		76			63			38			13			25		20.6	%	65.8	%
Other operations fees		449			378			337			71			41		18.8	%	12.2	%

Gross operations fees		2,687			2,117			1,755			570			362		26.9	%	20.6	%
Rebates		(257	)		(176	)		(118	)		(81	)		(58	)	46.0	%	49.2	%

Net operations fees	$	2,430		$	1,941		$	1,637		$	489		$	304		25.2	%	18.6	%

•

Authorization, settlement and switch revenues increased due to the number of transactions processed through our systems, increasing 17.5% and 13.0% in 2006 and 2005, respectively. Offsetting the 2006 increase in growth was a 3.0% reduction of revenues due to the implementation of price changes in April 2006 to make our pricing compliant with the Single European Payment Area (“SEPA”) initiative. The SEPA price changes are slightly positive on a total gross revenue basis; however, these changes impact individual revenue categories, in particular authorization, settlement and switch, currency conversion and cross-border revenues and assessments. In 2006 and 2005, a portion of the revenue increases were also due to the pricing of a component of these revenues being restructured in April 2005. In addition, settlement revenue declined $15 million in 2006 and $2 million in 2005 relating to a decline in foreign exchange gains on settlement activities. MasterCard trading against the U.S. dollar instead of the euro beginning in May 2005 coupled with exchange rate volatility resulted in this impact to settlement revenue.

•

Currency conversion and cross-border revenues increased $305 million, or 96.2%, in 2006. This increase was primarily due to the restructuring of currency conversion pricing in April 2006. We restructured our currency conversion pricing by initiating a charge to our issuers, and in most regions, acquirers for all cross-border transactions regardless of whether we perform the currency conversion or it is performed by a third party at the point of sale. We also generally decreased the price we charge our issuers for currency conversion. Of the increase in 2006, $108 million was due to the reclassification of certain assessment revenues in our Europe region to cross-border volume revenue. In addition to the restructuring of these revenues, there was an increase in cross-border transaction volumes of 14.7% in 2006.

•

Acceptance development fees increased in 2006 due to increased volumes and to a lesser extent the impact of the implementation of new fees and increases on the pricing of existing fees which occurred in April 2005. The increase in 2005 was primarily due to the pricing change in April 2005.

•

Warning bulletin fees fluctuate with our customer requests for distribution of invalid account information.

•

Connectivity revenues increased in 2006 due to increased volumes and to a lesser extent the impact of the implementation of new fees and increases on the pricing of existing fees which occurred in April 2005. The increase in 2005 was primarily due to the pricing change in April 2005.

•

Consulting and research fees increased primarily due to new engagements with our customers in 2006 and 2005. Our business agreements with certain customers may include consulting services as an incentive. Approximately 36.9% of consulting and research fees in 2006 was generated by new engagements which were provided to customers as a component of incentive agreements compared to 14.2% in 2005. This type of incentive increases consulting fees and reduces assessments.

•

Other operations fees relate to various revenue streams including cardholder services (emergency services and card enhancements), compliance and penalty fees, holograms, user pay for a variety of transaction enhancement services, and manuals and publications. Of the increase in 2006, $13 million was due to increased revenues from cardholder services due to account growth, $8 million was due to an increase in fees from transactions accepted by U.S. acquirers from cardholders with non-U.S. issuers and $7 million for fees due to increased usage of our electronic image processing program which routes document images between customers. The change in any other individual revenue component was not material in 2006 and 2005.

•

Rebates relating to operations fees are primarily based on transactions and volumes and, accordingly, increase as these variables increase. Rebates have been increasing due to renewals of customer agreements, ongoing consolidation of our customers and the impact of restructured pricing. Rebates as a percentage of gross operations fees were 9.6%, 8.3% and 6.7% in 2006, 2005 and 2004, respectively.

Assessments

Assessments are revenues that are calculated based on our customers’ GDV. The components of assessments are as follows:


	For the Years Ended December 31,									Dollar Increase (Decrease)						Percent Increase (Decrease)
	2006			2005			2004			2006 vs. 2005			2005 vs. 2004			2006 vs. 2005		2005 vs. 2004
	(In millions, except percents)
Gross assessments	$	1,790		$	1,631		$	1,341		$	159		$	290		9.7	%	21.6	%
Rebates and incentives		(894	)		(634	)		(385	)		(260	)		(249	)	41.0	%	64.7	%

Net assessments	$	896		$	997		$	956		$	(101	)	$	41		(10.1	)%	4.3	%

GDV growth was 14.9% and 13.0% in 2006 and 2005, respectively, when measured in local currency terms, and 15.7% and 14.3% when measured on a U.S. dollar converted basis. A portion of our GDV growth relates to an increase in online debit transactions which are priced at a lower assessment rate compared to credit and offline debit transactions. Accordingly, assessments are increasing at a lower rate than GDV. Rebates and incentives provided to customers and merchants reduce assessments growth. Rebates and incentives as a percentage of gross assessments were 49.9%, 38.9% and 28.7% in 2006, 2005 and 2004, respectively. Rebates and incentives are primarily based on GDV, and may also contain fixed components for the issuance of new cards, launch of marketing programs or consulting services. In 2006, 2005 and 2004, the increase in the percentage of rebates and incentives compared to gross assessments was the result of new or revised pricing arrangements with certain large customers and merchants. In addition, during 2006 we provided significant incentives to support the conversion of a large payment card program to MasterCard.

Assessments were also impacted in 2006 by a reclassification of $108 million from assessments to currency conversion and cross-border revenues, offset by $33 million in pricing increases related to our SEPA pricing changes. Our gross assessments would have increased 14.3% in 2006 if these pricing modifications were not made in April 2006.

In 2005 and 2004, assessments grew due to an increase in assessments for marketing programs and other specific purposes. We introduced new or increased assessments for market development programs in specific countries or regions within Europe and Latin America. In 2005, offsetting a portion of the increase in assessments was the elimination of an assessment for the promotion of soccer events in the European region, which became a component of the core assessment rates in 2005.

Operating Expenses

Our operating expenses are comprised of general and administrative, advertising and market development, U.S. merchant lawsuit and other litigation settlements, contributions to the Foundation and depreciation and

amortization expenses. In 2006, there was an increase in operating expenses of $552 million, or 21.7% compared to 2005. As described above, the following table shows a reconciliation of operating expenses excluding special items and as adjusted to the most directly comparable GAAP measure, which management believes creates a more meaningful comparison of results between periods:


	For the twelve months ended December 31, 2006									For the twelve months ended December 31, 2005
	Actual			Special Items			As Adjusted			Actual			Special Items		As Adjusted		Percent Increase (Decrease) Actual		Percent Increase (Decrease) As Adjusted
	(In millions, except percents)
General and administrative	$	1,505		$	—		$	1,505		$	1,352		19	^a	1,333		11.4	%	13.0	%
Advertising and marketing		1,052			—			1,052			1,008		—		1,008		4.3	%	4.3	%
Litigation settlements		25			25			—			75		75		—		(66.8	)%	—
Charitable contributions		415			395	^b		20			—		—		—		—		—
Depreciation and amortization		100			—			100			110		—		110		(9.2	)%	(9.2	)%

Total operating expenses	$	3,097		$	420		$	2,677		$	2,545		94		2,451		21.7	%	9.2	%

Total operating expenses as a percentage of total revenues		93.1	%					80.5	%		86.6	%			83.4	%

^a	Adjustment to reflect accounting methodology change for cash-based executive incentive plans

^b	Contribution of stock to the MasterCard Foundation

In 2005, there was an increase in operating expenses of $298 million, or 13.3% compared to 2004. During 2004, operating expenses as a percentage of total revenues was 86.6% including one special item for litigation settlements of $22 million. Excluding the impact of litigation settlements in 2004, operating expenses as a percentage of total revenues was 85.8% and the as adjusted increase in operating expenses was $225 million or 10.1% in 2005 from 2004.

General and Administrative

General and administrative expenses consist primarily of personnel, professional fees, data processing, telecommunications and travel. The major components of general and administrative expenses were as follows:


	For the years ended December 31,						Dollar Increase (Decrease)						Percent Increase (Decrease)
	2006		2005		2004		2006 vs. 2005			2005 vs. 2004			2006		2005
	(In millions, except percents)
Personnel	$	966	$	890	$	741	$	76		$	149		8.5	%	20.1	%
Professional fees		180		135		130		45			5		33.3	%	3.8	%
Telecommunications		70		71		74		(1	)		(3	)	(1.4	)%	(4.1	)%
Data processing		59		62		59		(3	)		3		(4.8	)%	5.1	%
Travel		97		84		66		13			18		15.5	%	27.3	%
Other		133		110		116		23			(6	)	20.9	%	(5.2	)%

General and administrative expenses	$	1,505	$	1,352	$	1,186	$	153		$	166		11.3	%	14.0	%

•

Personnel consists of employee compensation, benefits, training, recruiting and severance costs, as well as contractor and temporary personnel costs. Personnel increased in 2006 and 2005 primarily due to hiring additional staff to support our strategic initiatives. As we continue to expand our customer-focused approach and expand our relationships with merchants, additional personnel are required. In addition, we provided higher performance awards, as a result of the additional staff and better than anticipated performance against company objectives. In 2005, the following two items increased personnel expense and therefore, partially offset the increase in 2006:

Changing our methodology of recognizing the cost of executive incentive cash award plans, which resulted in a catch-up adjustment of $19 million.

Updating the assumptions for our actuarial determined severance plan accrual which resulted in higher severance costs of $20 million. This increase was partially offset by a $7 million reduction versus 2004 in the expense for actual severed employees.

•

Professional fees consist of expenses for consulting, legal, accounting and tax services. Professional fees increased in 2006 and 2005 primarily due to legal costs to defend our outstanding litigation and consulting services used to execute our strategy. Additionally, in 2005, consulting services and audit fees also increased relating to compliance with the Sarbanes-Oxley Act.

•

Telecommunications expense consists of costs to support our global payments system infrastructure as well as our other telecommunication needs.

•

Data processing consists of expenses to operate and maintain MasterCard’s computer systems. These expenses vary with system changes, maintenance and usage.

•

Travel and entertainment expenses are incurred primarily for travel to customer and regional meetings and accordingly have increased with the corresponding increase in our business activity as well as due to increased travel around 2006 World Cup soccer related activities.

•

Other includes rental expense for our facilities, foreign exchange gains and losses and other miscellaneous administrative expenses.

Advertising and Marketing

Advertising and marketing consists of expenses associated with advertising, marketing, promotions and sponsorships, which promote our brand and assist our customers in achieving their goals by raising consumer awareness and usage of cards carrying our brands. Advertising and market development expenses increased $44 million or 4.3% in 2006 and increased $92 million or 10.1% in 2005. MasterCard was a sponsor of the 2006 World Cup soccer events. To fully capitalize on this valuable sponsorship, we devoted a significant amount of resources for the sponsorship fee, special programming, promotions and event marketing during 2006.

Our brands, principally MasterCard, are valuable strategic assets that drive card acceptance and usage and facilitate our ability to successfully introduce new service offerings and access new markets. Our approach to marketing activities combines advertising, sponsorships, promotions, interactive media and public relations as part of an integrated package designed to increase MasterCard brand awareness, as well as preference and usage of MasterCard cards. We are committed to maintaining and enhancing our brands and image through advertising and marketing efforts on a global scale.

Merchant Lawsuit and Other Litigation Settlements

In the first quarter of 2003, we recorded a pre-tax charge of $721 million ($469 million after-tax) consisting of (i) the monetary amount of the U.S. merchant lawsuit settlement (discounted at 8 percent over the payment term), (ii) certain additional costs in connection with, and in order to comply with, other requirements of the U.S. merchant lawsuit settlement, and (iii) costs to address the merchants who opted not to participate in the plaintiff class in the U.S. merchant lawsuit. The $721 million pre-tax charge amount was an estimate, which was

subsequently revised based on the approval of the U.S. merchant lawsuit settlement agreement by the court and other factors. We are also a party to a number of currency conversion litigations. Based upon litigation developments and settlement negotiations in these currency conversion cases and pursuant to Statement of Financial Standards No. 5, “Accounting for Contingencies”, we have recorded reserves in the aggregate amount of $89 million of which $73 million was paid in 2006. In connection with the settlement of certain other litigations, we recorded additional reserves of $25 million of which $23 million was paid in 2006.

Total liabilities for the U.S. merchant lawsuit and other litigation settlements changed as follows (in millions):


Balance as of December 31, 2004	$	598
Litigation reserve for potential settlement of currency conversion litigations		75
Interest accretion on U.S. merchant lawsuit		47
Payments		(115	)

Balance as of December 31, 2005		605
Reserve for litigation settlements		25
Interest accretion on U.S. merchant lawsuit		43
Payments		(196	)

Balance as of December 31, 2006	$	477

Contribution Expense—Foundation

At the time of the IPO, we issued 13,496,933 shares of our Class A common stock as a donation to the Foundation that is incorporated in Canada and controlled by directors who are independent of us and our members. The Foundation will build on MasterCard’s existing charitable giving commitments by continuing to support programs and initiatives that help children and youth to access education, understand and utilize technology, and develop the skills necessary to succeed in a diverse and global work force. In addition, the Foundation will support organizations that provide microfinance programs and services to financially disadvantaged persons and communities in order to enhance local economies and develop entrepreneurs. In connection with the donation of the Class A common stock, we recorded an expense of $395 million which was equal to the aggregate value of the shares we donated. The value of the shares of Class A common stock we donated was determined based on the IPO price per share of Class A common stock in the IPO less a marketability discount of 25%. This marketability discount and the methodology used to quantify it were determined by management in consultation with independent valuation consultants retained by MasterCard. This discount was calculated based on analyses of prices paid in transactions of restricted stock of publicly held companies and on income based analyses. At the time of the IPO, we expected to donate approximately $40 million in cash to the Foundation over a period of up to four years in support of its operating expenses and charitable disbursements for the first four years of its operations, and we may make additional cash contributions to the Foundation during and after this period. In 2006, we recorded a $20 million expense for cash donations we made to the Foundation. Under the terms of the contributions to the Foundation, these donations are generally not deductible by MasterCard for tax purposes. As a result of this difference between the financial statement and tax treatments of the donations, there was a significant increase in our effective income tax rate for the year ended December 31, 2006 compared to the same period in 2005. We also expect to record an expense equal to the value of any cash we donate in the period or periods in which any such donations are made.

Depreciation and Amortization

Depreciation and amortization expenses decreased $10 million and $13 million in 2006 and 2005, respectively. These decreases were primarily related to certain assets becoming fully depreciated.

Other Income (Expense)

Other income (expense) is comprised primarily of investment income, interest expense and other gains and losses. Investment income increased $64 million in 2006 and $12 million in 2005. The increase in 2006 is primarily driven by interest income from higher cash and short-term investment balances principally relating to the proceeds received from the IPO, increases in interest rates and dividends received. The interest earned on the IPO proceeds ultimately used for the stock redemption was approximately $7 million in the year ended December 31, 2006. The increase in 2005 is primarily due to an increase in interest income from higher cash balances and interest rates.

Interest expense decreased $9 million in 2006 and remained unchanged in 2005 from 2004. During the year ended December 31, 2006, $4 million of the reduction in expense was due to a refund of interest assessed in an audit of the Company’s federal income tax return, as well as the reduction of interest reserve requirements related to the Company’s tax reserves, resulting from the reassessment of such reserves. In addition, $4 million was due to lower interest accretion relating to the U.S. merchant lawsuit settlement.

Other gains and losses decreased in 2006 primarily due to a $17 million settlement the Company received in resolution of a dispute of a customer business agreement and $9 million in gains relating to the sale of two affiliated investments in 2005.

Income Taxes

Our effective tax rate for the year ended December 31, 2006 includes the impact of the $395 charitable contribution of MasterCard Class A common stock to the Foundation. This contribution was recorded as an expense in the income statement, however, it is not deductible for tax purposes. This resulted in a significant impact on our effective tax rate as follows:


	GAAP Actual		GAAP Effective Tax Rate		Stock Donation		Non-GAAP Adjusted		Non-GAAP Effective Tax Rate
	(In millions, except percents)
Twelve months ended December 31, 2006:

Income before income taxes	$	294	82.9	%	$	395	$	689	35.4	%
Income tax expense¹		244						244

Net Income	$	50					$	445

¹	Income tax expense has been calculated with and without the impact of the stock contribution to the Foundation.

The effective income tax rate for the years ended December 31, 2006, 2005 and 2004 was 82.9%, 34.5% and 26.5%, respectively. The rate in 2006 was higher than 2005 primarily due to the nondeductible charitable contribution of MasterCard Class A common stock to the Foundation during the second quarter of 2006. MasterCard recorded a significant expense equal to the value of Class A common stock we donated to the Foundation. Under the terms of the contribution to the Foundation, this contribution is generally not deductible by MasterCard for tax purposes. This transaction is discussed in more detail in the section under the heading “Impact of the IPO”. Accordingly, as a result of the significant difference between the financial statement and tax treatments of the donation, the calculation of an effective tax rate for the 2006 period is not meaningful. The increase in the effective tax rate for 2005 as compared to 2004 was attributable to the settlement and reassessment, during 2004, of various tax audit issues discussed below.

The components impacting the effective tax rates as compared to the U.S. federal statutory tax rate of 35% are as follows:


	For the Years Ended December 31,
	2006					2005					2004
	Dollar Amount			Percent		Dollar Amount			Percent		Dollar Amount			Percent
	(In millions, except percents)
Income before income tax expense	$	294				$	407				$	324

Federal statutory tax	$	103		35.0	%	$	143		35.0	%	$	113		35.0	%
State tax effect, net of federal benefit		6		1.8	%		4		0.9	%		4		1.3	%
Foreign tax effect, net of federal benefit		(6	)	(1.9	)%		5		1.1	%		4		1.2	%
Non-deductible charitable stock contribution		138		47.0	%
Non-deductible expenses and other differences		13		4.4	%		(2	)	(0.3	)%		4		1.0	%
Tax exempt income		(10	)	(3.4	)%		(8	)	(2.0	)%		(7	)	(2.1	)%
Adjustment to deferred tax for change in U.S. state tax rate		—		—			—		—			(8	)	(2.6	)%
Refund claims and settlement of audit matters:
United States		—		—			1		0.3	%		(11	)	(3.4	)%
Foreign		—		—			(2	)	(0.5	)%		(13	)	(3.9	)%

Income tax expense	$	244		82.9	%	$	141		34.5	%	$	86		26.5	%

Liquidity

We need capital resources and liquidity to fund our global development, to provide for credit and settlement risk, to finance capital expenditures and any future acquisitions and to service the payments of principal and interest on our outstanding debt and the settlement of the U.S. merchant lawsuit. At December 31, 2006 and 2005, we had $2.5 billion and $1.3 billion, respectively, of cash, cash equivalents and available-for-sale securities with which to manage operations. We expect that the cash generated from operations and our borrowing capacity will be sufficient to meet our operating, working capital and capital needs for the next twelve months. However, our liquidity could be negatively impacted by the adverse outcome of any of the legal or regulatory proceedings to which we are a party. See Item 1A—“Risk Factors—Legal and Regulatory Risks” in Part I, Item 1A of this Report. See also Note 20 to the Consolidated Financial Statements included in Item 8.


										Percent Increase (Decrease)
	2006			2005			2004			2006 vs. 2005		2005 vs. 2004
	(In millions, except percents)
Cash Flow Data:
Net cash provided by operating activities	$	650		$	273		$	344		138.3	%	(20.6	)%
Net cash used in investing activities		(676	)		(34	)		(275	)	(1,909.3	)%	87.7	%
Net cash provided by financing activities		638			—			—		—		—
Balance Sheet Data:
Current assets	$	3,577		$	2,228		$	1,903		60.6	%	17.1	%
Current liabilities		1,812			1,557			1,301		16.4	%	19.6	%
Long-term liabilities		902			970			984		(7.0	)%	(1.4	)%
Equity		2,364			1,169			975		102.2	%	19.9	%

Net cash provided by operating activities for the year ended December 31, 2006 was $650 million compared to $273 million in 2005 and $344 million in 2004. In 2006, the increase in cash from operations was due to stronger operating performance, higher accounts payable and customer and merchant incentive accruals, partially offset by higher payments for litigation and customer and merchant incentive prepayments. In 2005, the decrease

in cash provided by operating activities was due to a $40 million voluntary contribution to our qualified pension plan as well as higher income tax payments and prepayments made in accordance with new customer incentive agreements. These cash outflows in 2005 were offset by stronger operating performance versus 2004 and an increase in accruals for personnel costs associated with the Company’s employee incentive and severance plans.

The use of cash from investing activities for the years ended December 31, 2006 and 2005 was primarily due to net purchases of available-for-sale-securities and our investment on the internal development of capitalized software to support our business. Additionally, in 2005, we acquired certain businesses and invested in the internal development of capitalized software and purchases of fixed assets to support our business. The net cash provided by financing activities increased in 2006 as a result of the proceeds received from the sale of Class A common stock to investors in the IPO (including the proceeds received pursuant to the underwriters’ option to purchase additional shares) of approximately $2.5 billion, which was offset by $1.8 billion for the redemption of Class B common stock and a $12 million dividend payment.

Under the terms of the U.S. merchant lawsuit settlement agreement, we are required to pay $100 million annually each December through the year 2012. In addition, for the years ended December 31, 2006 and 2005, we made payments of $96 million and $15 million for currency conversion litigation and other litigation settlements.

On April 28, 2006, we entered into a committed 3-year unsecured $2.5 billion revolving credit facility (the “Credit Facility”) with certain financial institutions. The Credit Facility, which expires on April 28, 2009, replaced our prior $2.25 billion credit facility, which was to expire on June 16, 2006. Borrowings under the Credit Facility are available to provide liquidity in the event of one or more settlement failures by our customers and, subject to a limit of $500 million, for general corporate purposes. The facility fee and borrowing cost are contingent upon our credit rating. At our current rating, we pay a facility fee of 8 basis points on the total commitment, or $2 million annually. Interest on borrowings under the Credit Facility would be charged at the London Interbank Offered Rate (LIBOR) plus an applicable margin of 37 basis points (the LIBOR margin) or an alternative base rate. A utilization fee of 10 basis points would be charged if outstanding borrowings under the facility exceed 50% of commitments. We were in compliance with the covenants of the Credit Facility as of December 31, 2006. There were no borrowings under the Credit Facility at December 31, 2006 or the previous facility at December 31, 2005. The majority of the Credit Facility lenders are customers or affiliates of customers of MasterCard International.

Following the announcement of our planned ownership and governance changes, Standard & Poor’s placed our credit ratings on credit watch with negative implications and announced the intention to lower our long-term counterparty credit rating from A- to BBB+ and our subordinated debt rating from BBB+ to BBB, both with stable outlook, upon completion of the IPO. On May 25, 2006 these rating changes took effect. The change in our long-term counterparty rating resulted in an increase in the facility fee on the Credit Facility from 7 to 8 basis points, or $250 thousand annually. Additionally, the LIBOR margin increased from 28 to 37 basis points. We do not expect these rating changes to materially impact our liquidity or access to capital.

MasterCard Europe and European Payment System Services sprl, a subsidiary of MasterCard, have a 1 million euro overdraft facility. There is also a 1 million euro guarantee facility for MasterCard Europe. Interest on borrowings under the overdraft facility is charged at 50 basis points over the relevant market index and interest for the guarantee facility is paid at a rate of 1.5% per annum on outstanding guarantees. There were no borrowings under these facilities at December 31, 2006 and 2005. However, the euro guarantee facility supported bank-issued guarantees for a total of 849 thousand euros and 810 thousand euros, for the respective periods, which reduced the amount of funds available under this facility. Deutsche Bank AG is the lender of these facilities and is a customer and member of MasterCard International.

MasterCard Europe has one additional uncommitted credit agreement totaling 100 million euros. The interest rate under this facility is Euro LIBOR plus 50 basis points per annum for amounts below 100 million

euros and Euro LIBOR plus 250 basis points for amounts over the 100 million euro limit. For drawings in currencies other than the euro, interest will be charged at the above margins over the relevant currency base rate. There were no material borrowings under this agreement at December 31, 2006 and 2005. HSBC Bank plc is the lender of this facility and is a customer and member of MasterCard International.

In September and December 2006, MasterCard’s Board of Directors declared quarterly dividends, each at $0.09 per share of Class A common stock and Class B common stock. The September dividend was paid on November 10, 2006 and was for an aggregate amount of $12 million. The December dividend was paid on February 9, 2007 and was for an aggregate amount of $12 million. On February 6, 2007, our Board of Directors declared a quarterly cash dividend of $0.15 per share payable on May 10, 2007 to holders of record on April 9, 2007of our Class A common stock and Class B common stock. The aggregate amount payable for this dividend is estimated to be approximately $21 million. The declaration and payment of any future dividends will be at the sole discretion of our Board of Directors after taking into account various factors, including our financial condition, settlement guarantees, operating results, available cash and current and anticipated cash needs.

Future Obligations

The following table summarizes our obligations as of December 31, 2006 that are expected to impact liquidity and cash flow in future periods. We believe we will be able to fund these obligations through cash generated from operations and our existing cash balances.


	Payments Due by Period
	Total		2007		2008-2009		2010-2011		2012 and thereafter
	(In millions)
Capital leases¹	$	62	$	9	$	10	$	4	$	39
Operating leases²		96		32		47		8		9
Sponsorship³, licensing & other⁴		913		413		297		113		90
Litigation settlements⁵		617		117		200		200		100
Debt⁶		237		5		232		—		—
Executive incentive plan benefit⁷		36		36		—		—		—

Total	$	1,961	$	612	$	786	$	325	$	238

¹	Most capital leases relate to certain property, plant and equipment used in our business. Our largest capital lease relates to our Kansas City, Missouri co-processing facility.

We enter into operating leases in the normal course of business, including the lease on our facility in St. Louis, Missouri. Substantially all lease agreements have fixed payment terms based on the passage of time. Some lease agreements provide us with the option to renew the lease or purchase the leased property. Our future operating lease obligations would change if we exercised these renewal options and if we entered into additional lease agreements.

³	Includes $180 million as of December 31, 2006 relating to a sponsorship agreement which is the subject of a legal dispute and which we may not be obligated to pay.

⁴

Amounts primarily relate to sponsorships with certain organizations to promote the MasterCard brand. The amounts included are fixed and non-cancelable. In addition, these amounts include amounts due in accordance with merchant agreements for future marketing, computer hardware maintenance, software licenses and other service agreements. Future cash payments that will become due to our customers under agreements which provide pricing rebates on our standard fees and other incentives in exchange for increased transaction volumes are not included in the table because the amounts due are indeterminable and contingent until such time as performance has occurred. MasterCard has accrued $387 million as of December 31, 2006 related to customer and merchant agreements.

⁵	Represents amounts due in accordance with the settlement agreement in the U.S. merchant lawsuit and other litigation settlements.

⁶

Debt primarily represents principal and interest owed on our subordinated notes due June 2008 and the principal owed on our Series A Senior Secured Notes due September 2009. We also have various credit facilities for which there were no outstanding balances at December 31, 2006 that, among other things, would provide liquidity in the event of settlement failures by our members. Our debt obligations would change if one or more of our members failed and we borrowed under these credit facilities to settle on our members’ behalf or for other reasons.

⁷	Represents Executive Incentive Plan and the Senior Executive Incentive Plan cash payments due to employees should they terminate employment.

Related Parties

A significant portion of our revenue is concentrated among our five largest customers. In 2006, the net revenues from these customers were approximately $1.1 billion, or 34% of total net revenue. The loss of any of these customers could adversely impact our revenues and net income. See “Risk Factors—Business Risks—Consolidation or other changes affecting the banking industry could result in a loss of business for MasterCard and may create pressure on the prices we charge our customers, which may materially and adversely affect our revenue and profitability” in Part I, Item 1A of this Report. In addition, as part of our business strategy, MasterCard, among other efforts, enters into business agreements with customers. These agreements can be terminated in a variety of circumstances. See “Risk Factors—Business Risks—We face increasingly intense competitive pressure on the prices we charge our customers, which may materially and adversely affect our revenue and profitability” in Part I, Item 1A of this Report.

Seasonality

Portions of our business are seasonal. Our gross revenue is favorably affected by progressively increased card purchasing volume throughout the year, particularly in the fourth quarter during the holiday shopping period. However, customer and merchant incentives, which are recorded as contra-revenue, and advertising, holiday promotions and incentives also increase generally causing our profitability to decline in the fourth quarter.

Critical Accounting Estimates

Our accounting policies are integral to understanding our results of operations and financial condition. We are required to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. We have established detailed policies and control procedures to ensure that the methods used to make estimates and assumptions are well controlled and are applied consistently from period to period. The following is a brief description of our current accounting policies involving significant management judgments.


Financial Statement Caption/ Critical Accounting Estimate	Assumptions/Approach Used	Effect if Actual Results Differ from Assumptions
*Revenue Recognition*
Our assessment revenues that are based on quarterly GDV are recorded utilizing an estimate of our customers’ performance. Total assessment revenues included an estimate as of the end of the period for 26%, 15% and 11% of those assessment revenues, representing 7%, 5% and 4% of total revenues for the years ended December 31, 2006, 2005 and 2004, respectively. Our revenue recognition policies are fully described in our Consolidated Financial Statements in Item 8.	Our assessment revenues that are based on quarterly GDV are recorded utilizing an estimate of our customers’ performance. Such estimates are subsequently validated against performance reported by our customers. Differences are adjusted in the period the customer reports. Customers’ performance is estimated by using historical performance, member reported information, transactional information accumulated from our systems and discussions with our customers.	If our customers’ actual performance is not consistent with our estimates of their performance, revenues may be materially different than initially recorded. Historically, our estimates have differed from the actual performance by less than 5% of the estimates on a quarterly basis.
Rebates and incentives are estimated.	Rebates and incentives are generally recorded as contra-revenue based on our estimate of each customer’s performance in a given period and according to the terms of the related customer agreements.	If our customers’ actual performance is not consistent with our estimates of their performance, contra-revenues may be materially different than initially recorded.

*Legal and Regulatory Matters*
We are party to legal and regulatory proceedings with respect to a variety of matters. Except as described in Notes 18 and 20 to the Consolidated Financial Statements herein, MasterCard does not believe that any legal or regulatory proceedings to which it is a party would have a material adverse impact on its business or prospects.	We evaluate the likelihood of an unfavorable outcome of the legal or regulatory proceedings to which we are party in accordance with SFAS No. 5, “Accounting for Contingencies” (“SFAS No. 5”). Our judgments are subjective based on the status of the legal or regulatory proceedings, the merits of our defenses and consultation with in-house and outside legal counsel.	Due to the inherent uncertainties of the legal and regulatory process in the multiple jurisdictions in which we operate, our judgments may be materially different than the actual outcomes.


Financial Statement Caption/ Critical Accounting Estimate	Assumptions/Approach Used	Effect if Actual Results Differ from Assumptions
*Discount Rate for Merchant Lawsuit Settlement*
We have entered into a settlement agreement in connection with the U.S. merchant lawsuit. This settlement was discounted over the ten year payment term of the settlement.	We estimated the discount rate we used to calculate the present value of our obligations under the Settlement Agreement in 2003 to be 8%. The discount rate used was a matter of management judgment at the time of the settlement, which considered our expected post-settlement credit rating and rates for sources of credit that could be used to finance the payment of such obligations with similar terms.	A one percent increase in the discount rate would increase annual interest expense by approximately $4 million in 2006, and declining amounts thereafter. The reverse impact would be experienced for a one percent decrease in the discount rate.

*Goodwill and Intangible Assets (except Capitalized Software)*
We perform analyses of goodwill and intangible assets on an annual basis or sooner if indicators of impairment exist. This evaluation utilizes a two-step approach. The first step is to identify a potential impairment and the second step measures the amount of the impairment loss, if any. Impairment is measured as the excess of the carrying amount over fair value.	The test methods employed in performing the analyses involve assumptions concerning interest and discount rates, growth projections and other assumptions of future business conditions. The assumptions employed are based on management’s judgment using internal and external data. We utilize independent valuation experts, if needed.	If actual results are not consistent with our assumptions and estimates, we may be exposed to an additional impairment charge associated with goodwill and/or intangible assets. The carrying value of goodwill and intangible assets, excluding capitalized software, was $414 million, including $192 million of unamortizable customer relationships, as of December 31, 2006.

We determined customer relationships, an intangible asset, have an indefinite life. In addition to the impairment testing noted above, we assess the appropriateness of that indefinite life annually.	We completed our annual impairment testing for all other goodwill and intangibles using the methodology described herein, and no significant impairment charges were recorded for the year ended December 31, 2006.

*Income Taxes*
In calculating our effective tax rate we need to make decisions regarding certain tax positions, including the timing and amount of deductions and allocation of income among various tax jurisdictions.	We have various tax filing positions, including the timing and amount of deductions, establishment of reserves for credits and audit matters and the allocation of income among various tax jurisdictions.	Although we believe that our estimates and judgments discussed herein are reasonable, actual results may differ by a material amount.


Financial Statement Caption/ Critical Accounting Estimate	Assumptions/Approach Used	Effect if Actual Results Differ from Assumptions
We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized.	We considered projected future taxable income and ongoing tax planning strategies in assessing the need for the valuation allowance.	If we realize a deferred tax asset in excess of the net deferred tax asset or if we were unable to realize a net deferred tax asset; an adjustment to the deferred tax asset would increase or decrease earnings, respectively, in the period.

*Capitalized Software*
Our capitalized software, which includes internal and external costs incurred in developing or obtaining computer software for internal use, is included in other intangible assets.	We are required to make judgments to determine if each project will satisfy its intended use. In addition, we estimate the average internal costs incurred for payroll and payroll related expenses by department for the employees who directly devote time relating to the design, development and testing phases of the project.	If actual results are not consistent with our judgments, we may be exposed to an impairment charge. The net carrying value of capitalized software as of December 31, 2006 was $75 million.

	On a quarterly basis, we perform impairment analyses on various technologies. If the carrying value of the various technologies exceeds the fair value, impairment charges are recorded. During the year ended December 31, 2006, no significant impairment charges were recorded.


Financial Statement Caption/ Critical Accounting Estimate	Assumptions/Approach Used	Effect if Actual Results Differ from Assumptions
*Pensions and Postretirement Benefit Plans*
The Company maintains a noncontributory defined benefit pension plan with a cash balance feature covering substantially all of its U.S. employees. This pension plan credits participants annually with an amount equal to a percentage of eligible pay based on age and service, as well as providing earnings credits based on each participant’s account balance. Additionally, the Company has an unfunded nonqualified supplemental executive retirement plan that provides certain key employees with supplemental retirement benefits in excess of limits imposed on qualified plans by U.S. tax laws. The Company also maintains a postretirement plan providing health coverage and life insurance benefits for substantially all of its U.S. employees and retirees. Certain assumptions are used in the determination of the annual costs for our pension and postretirement plans and the disclosure of the funded position of our plans. Key assumptions include the discount rate used to measure the plans’ projected benefit obligation for pension and postretirement, the expected rate of return on pension plan assets and the health care cost trend rate for our postretirement plan.	The discount rate for the Company’s pension and postretirement plans is subject to change each year, consistent with changes in high-quality, long-term corporate bond markets. To select a discount rate, we performed an analysis which matched the plans expected cash flows (determined on PBO basis) with spot rates developed from a yield curve comprised of high-grade non-callable corporate bonds and arithmetically rounded this result. Our discount rate of 5.75% as of December 31, 2006 is 25 basis points greater than the 5.50% rate used in calculating the net periodic benefit costs for 2005. Net actuarial gains and/or losses in our benefit plans are amortized on straight-line basis over the expected average remaining service of active participants expected to benefit under the plans. We determine the expected return on plan assets primarily based on long-term historical returns in equity and fixed income markets. The expected rate of our pension plan assets is 8.5% for the years ended December 31, 2006, 2005 and 2004. The Company reviews external data and its own historical trends to determine the health care trend rates for postretirement medical costs.	A quarter of a percentage point decrease in our discount rate would increase our pension projected benefit obligation by $1.6 million, and increase our postretirement projected benefit obligation by $2.0 million. These decreases would have a negligible effect on our annual pension and postretirement expense. An equal but opposite effect would be experienced for a quarter of a percentage point increase in the discount rate. A quarter of a percentage point increase or decrease in the expected rate of return on plan assets would decrease or increase the annual pension costs by $0.5 million. A complete analysis of the cost impact resulting from a change in this assumption is fully described in Note 12 to the Consolidated Financial Statements in Item 8 in this Report.


Financial Statement Caption/ Critical Accounting Estimate	Assumptions/Approach Used	Effect if Actual Results Differ from Assumptions
*Postemployment Benefit Plan*
We have a formal severance plan which sets forth the guidelines with respect to severance payments to salaried employees whose normal assignment is within the United States. Approximately 3,100 of our employees are covered by the Plan. Severance benefits are determined primarily by years of service and career level in accordance with either a standard or enhanced payment schedule, which is determined by the cause of the severance action. Certain assumptions are used in the determination of the liability for expected future severance obligations. Key assumptions include the number of severed participants, number of severed individuals by career level, benefit package and discount rate.	The assumption for the number of severed participants used in the calculation was 120 for 2006 and 100 for 2005. The career levels for these individuals was estimated using historical experience as a base, adjusted for a number of strategic and human resource initiatives implemented in 2006 and 2005. We review historical trends and future expectations when determining the type of benefits to be offered to the severed participants. The discount rate for our postemployment plan is subject to change each year, consistent with changes in high-quality, long-term corporate bond markets. To select a discount rate, we performed an analysis which matched the plans expected cash flows with spot rates developed from a yield curve comprised of high-grade non-callable corporate bonds and arithmetically rounded this result. Our discount rate of 5.50% as of December 31, 2006 is 25 basis points less than the 5.75% rate used in calculating the severance obligations for 2005.	A 5% increase in the number of severed participants would increase our severance obligations by $1.7 million. An equal but opposite effect would be experienced for a 5% decrease in the number of participants. A quarter of a percentage point decrease or increase in our discount rate would have an impact of approximately $0.4 million on our severance obligations.

Recent Accounting Pronouncements

In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement 109” (“FIN 48”). FIN 48 prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements the benefits associated with uncertain tax positions that the company has taken or expects to take on a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. FIN 48 is effective for annual periods beginning after December 15, 2006. We expect the adoption of FIN 48 will increase other liabilities by approximately $5 million to $10 million and decrease retained earnings by the same amount.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market risk is the potential for economic losses to be incurred on market risk sensitive instruments arising from adverse changes in market factors such as interest rates, foreign currency exchange rates and equity price risk. We have limited exposure to market risk from changes in interest rates, foreign exchange rates and equity price risk. Management establishes and oversees the implementation of policies, which have been approved by

the board of directors, governing our funding, investments and use of derivative financial instruments. We monitor risk exposures on an ongoing basis. There have been no material changes in our market risk exposures at December 31, 2006 as compared to December 31, 2005.

Foreign Exchange Risk

We enter into forward exchange contracts to minimize risk associated with anticipated receipts and disbursements which are either transacted in a non-functional currency or valued based on a currency other than our functional currencies. We also enter into contracts to offset possible changes in value due to foreign exchange fluctuations of assets and liabilities denominated in foreign currencies. The objective of this activity is to reduce our exposure to transaction gains and losses resulting from fluctuations of foreign currencies against our functional currencies, principally the U.S. dollar and euro. The terms of the forward currency contracts are generally less than 18 months.

At December 31, 2006 and 2005, forward currency contracts against the U.S. dollar were both purchased (with notional amounts of $35 million and $78 million, respectively) and sold (with notional amounts of $17 million and $33 million, respectively). Based on the year end 2006 and 2005 foreign exchange positions, the effect of a hypothetical 10 percent strengthening of the U.S. dollar is estimated to create a loss valued at $2 million and $4 million at December 31, 2006 and 2005, respectively.

At December 31, 2006 and 2005, forward currency contracts against the euro were purchased (with notional amounts of $121 million and $218 million, respectively) and sold (with notional amounts of $45 million and $39 million, respectively). Based on the year end 2006 and 2005 foreign exchange positions, the effect of a hypothetical 10 percent strengthening of the euro is estimated to create a loss valued at $7 million and $16 million at December 31, 2006 and 2005, respectively.

At December 31, 2006, forward currency contracts against the Brazilian real were purchased (with notional amounts of $11 million). Based on the year end 2006 foreign exchange positions, the effect of a hypothetical 10 percent strengthening of the Brazilian real is estimated to create a loss valued at $1 million.

Our settlement activities are subject to foreign exchange risk resulting from foreign exchange rate fluctuations. This risk is limited to the extent that the timeframe between setting the foreign exchange rates and clearing the financial transactions is typically one business day and by limiting the supported settlement currencies to the U.S. dollar or one of nineteen other stable transaction currencies. The remaining 145 transaction currencies are settled in one of the supported settlement currencies or require local settlement netting arrangements that minimize our foreign exchange exposure.

Interest Rate Risk

Our interest rate sensitive assets are our debt instruments, which we hold as available-for-sale investments. With respect to fixed maturities, our general policy is to invest in high quality securities, while providing adequate liquidity and maintaining diversification to avoid significant exposure. Based on the net present value of expected future cash flows, a 100 basis point increase in interest rates, assuming a parallel shift of the yield curve, would result in fair value changes and an unrealized loss recorded in other comprehensive income of $22 million and $19 million for 2006 and 2005, respectively. Our held-to-maturity investments are not subject to interest rate movements.

Our interest rate sensitive liabilities consist of subordinated debt securities. A 100 basis point decrease in rates, assuming a parallel shift of the yield curve, would result in a fair value loss of $2 million and $5 million for December 31, 2006 and 2005, respectively. See Note 14 to the Consolidated Financial Statements in Item 8 in this Report.

At December 31, 2006 and 2005, we had various credit facilities to provide liquidity in the event of material member settlement failures, settlement service operations and other operational needs. These credit facilities have variable rates, which are applied to the borrowing based on terms and conditions set forth in each agreement. There were 3 million euros and 5 million euros outstanding at December 31, 2006 and 2005, respectively, under these credit facilities. See Note 14 to the Consolidated Financial Statements in Item 8 in this Report.

Equity Price Risk

We own trading securities, which are comprised of equity securities selected to offset obligations in connection with an executive compensation plan. The effect of a hypothetical 10 percent decline in market value would result in a loss of $1 million and $2 million in the years ended December 31, 2006 and 2005, respectively. To the extent the executive compensation plan remains in a net appreciation position, an offsetting gain would be recorded in general and administrative expense.

Item 8. Financial Statements and Supplementary Data

MASTERCARD INCORPORATED

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


		Page
MasterCard Incorporated
As of December 31, 2006 and 2005 and for the years ended December 31, 2006, 2005 and 2004
Management’s Report on Internal Control Over Financial Reporting		68
Report of Independent Registered Public Accounting Firm		69
Consolidated Balance Sheets		71
Consolidated Statements of Operations		72
Consolidated Statements of Cash Flows		73
Consolidated Statements of Changes in Stockholders’ Equity		74
Consolidated Statements of Comprehensive Income		75
Notes to Consolidated Financial Statements		76

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of MasterCard Incorporated is responsible for establishing and maintaining adequate internal control over financial reporting. 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 reporting purposes in accordance with accounting principles generally accepted in the United States of America. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. As required by Section 404 of the Sarbanes-Oxley Act of 2002, management has assessed the effectiveness of MasterCard’s internal control over financial reporting as of December 31, 2006. In making its assessment management has utilized the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in its report entitled Internal Control—Integrated Framework. Management has concluded that, based on its assessment, MasterCard’s internal control over financial reporting was effective as of December 31, 2006. Our management’s assessment of the effectiveness of MasterCard’s internal control over financial reporting as of December 31, 2006 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears on the next page.

[PRICEWATERHOUSECOOPERS letterhead]

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders

of MasterCard Incorporated:

We have completed integrated audits of MasterCard Incorporated’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.

Consolidated financial statements

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of MasterCard Incorporated and its subsidiaries at December 31, 2006 and December 31, 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 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.

Internal control over financial reporting

Also, in our opinion, management’s assessment, included in Management's Report on Internal Control Over Financial Reporting appearing in this Item, 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.

PRICEWATERHOUSECOOPERS LLP

New York, New York

February 28, 2007

MASTERCARD INCORPORATED

CONSOLIDATED BALANCE SHEETS


	December 31, 2006			December 31, 2005
	(In thousands, except share data)
ASSETS
Cash and cash equivalents	$	1,185,080		$	545,273
Investment securities, at fair value:
Trading		12,261			22,472
Available-for-sale		1,286,580			714,147
Accounts receivable		451,261			347,754
Settlement due from members		311,953			211,775
Restricted security deposits held for members		109,897			97,942
Prepaid expenses		130,849			167,209
Other current assets		89,348			121,326

Total Current Assets		3,577,229			2,227,898
Property, plant and equipment, at cost (less accumulated depreciation of $220,720 and $373,319)		252,731			230,614
Deferred income taxes		216,782			225,034
Goodwill		217,013			196,701
Other intangible assets (less accumulated amortization of $309,110 and $272,913)		271,373			273,854
Municipal bonds held-to-maturity		193,477			194,403
Prepaid expenses		235,654			201,132
Other assets		118,211			150,908

Total Assets	$	5,082,470		$	3,700,544

LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable	$	278,656		$	185,021
Settlement due to members		286,059			175,021
Restricted security deposits held for members		109,897			97,942
Obligations under U.S. merchant lawsuit and other litigation settlements—current (Notes 18 and 20)		117,275			189,380
Accrued expenses		936,427			850,657
Other current liabilities		83,276			58,682

Total Current Liabilities		1,811,590			1,556,703
Deferred income taxes		66,198			61,188
Obligations under U.S. merchant lawsuit and other litigation settlements (Notes 18 and 20)		359,640			415,620
Long-term debt		229,668			229,489
Other liabilities		246,395			263,776

Total Liabilities		2,713,491			2,526,776
Commitments and Contingencies (Notes 17 and 20)
Minority interest		4,620			4,620
Stockholders’ Equity
Class A common stock, $.0001 par value; authorized 3,000,000,000 shares, 79,631,983 and no shares issued and outstanding, respectively		8			—
Class B common stock, $.0001 par value; authorized 1,200,000,000 shares, 55,337,407 and 134,969,329 shares issued and outstanding, respectively		6			14
Class M common stock, $.0001 par value, authorized 1,000,000 shares, 1,600 and no shares issued and outstanding, respectively		—			—
Additional paid-in capital		3,289,879			974,605
Retained earnings (accumulated deficit)		(1,029,196	)		145,515
Accumulated other comprehensive income, net of tax:
Cumulative foreign currency translation adjustments		96,851			50,818
Defined benefit pension and other postretirement plans		11,402			—
Investment securities available-for-sale		(3,065	)		(2,543	)
Derivatives accounted for as hedges		(1,526	)		739

Total accumulated other comprehensive income, net of tax		103,662			49,014

Total Stockholders’ Equity		2,364,359			1,169,148

Total Liabilities and Stockholders’ Equity	$	5,082,470		$	3,700,544

The accompanying notes are an integral part of these consolidated financial statements.

MASTERCARD INCORPORATED

CONSOLIDATED STATEMENTS OF OPERATIONS


	For the Years Ended December 31,
	2006			2005			2004
	(In thousands, except per share data)
Revenues, net	$	3,326,074		$	2,937,628		$	2,593,330
Operating Expenses
General and administrative		1,505,185			1,351,082			1,185,837
Advertising and marketing		1,051,870			1,008,268			915,851
Litigation settlements		24,957			75,158			21,653
Charitable contributions to the MasterCard Foundation		414,785			—			—
Depreciation and amortization		99,782			109,936			123,317

Total operating expenses		3,096,579			2,544,444			2,246,658

Operating income		229,495			393,184			346,672
Other Income (Expense)
Investment income, net		124,994			60,867			48,701
Interest expense		(61,151	)		(70,158	)		(69,722	)
Other income (expense), net		834			23,445			(1,951	)

Total other income (expense)		64,677			14,154			(22,972	)

Income before income taxes		294,172			407,338			323,700
Income tax expense		243,982			140,619			85,640

Net Income	$	50,190		$	266,719		$	238,060

Basic Net Income per Share (Note 3)	$	.37		$	1.98		$	1.76

Basic Weighted average shares outstanding (Note 3)		135,411			134,969			134,969

Diluted Net Income per Share (Note 3)	$	.37		$	1.98		$	1.76

Diluted Weighted average shares outstanding (Note 3)		135,779			134,969			134,969

The accompanying notes are an integral part of these consolidated financial statements.

MASTERCARD INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS


	For the Years Ended December 31,
	2006			2005			2004
	(In thousands)
Operating Activities
Net income	$	50,190		$	266,719		$	238,060
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		99,782			109,936			123,317
Charitable contribution of common stock to the MasterCard Foundation		394,785			—			—
Share based payments (Note 16)		19,181			—			—
Deferred income taxes		32,267			(54,036	)		40,845
Other		9,746			12,182			11,967
Changes in operating assets and liabilities:
Trading securities		10,211			4,935			3,354
Accounts receivable		(93,428	)		(64,189	)		(22,446	)
Settlement due from members		(75,553	)		(15,496	)		2,768
Prepaid expenses		42,623			(52,170	)		(24,261	)
Other current assets		7,813			(17,123	)		(6,476	)
Prepaid expenses, non-current		(30,555	)		(123,692	)		(21,332	)
Accounts payable		89,382			4,111			(20,275	)
Settlement due to members		89,739			11,471			(3,356	)
Litigation settlement accruals, including accretion of imputed interest		(128,085	)		7,406			(74,872	)
Accrued expenses		86,859			220,789			82,403
Net change in other assets and liabilities		45,204			(37,995	)		14,099

Net cash provided by operating activities		650,161			272,848			343,795

Investing Activities
Purchases of property, plant and equipment		(61,204	)		(43,866	)		(30,525	)
Capitalized software		(33,264	)		(38,137	)		(47,630	)
Purchases of investment securities available-for-sale		(3,815,115	)		(2,834,321	)		(2,194,931	)
Proceeds from sales and maturities of investment securities available-for-sale		3,233,725			2,883,709			2,032,275
Acquisition of businesses, net of cash acquired		—			—			(29,861	)
Other investing activities		(368	)		(1,040	)		(3,842	)

Net cash used in investing activities		(676,226	)		(33,655	)		(274,514	)

Financing Activities
Cash received from sale of common stock, net of issuance costs		2,449,910			—			—
Cash payment for redemption of common stock		(1,799,937	)		—			—
Dividends paid		(12,373	)		—			—

Net cash provided by financing activities		637,600			—			—

Effect of exchange rate changes on cash and cash equivalents		28,272			(22,916	)		11,596

Net increase in cash and cash equivalents		639,807			216,277			80,877
Cash and cash equivalents—beginning of year		545,273			328,996			248,119

Cash and cash equivalents—end of year	$	1,185,080		$	545,273		$	328,996

The accompanying notes are an integral part of these consolidated financial statements.

MASTERCARD INCORPORATED

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY


	Total			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income, net of tax			Common Shares					Additional Paid-In Capital
	Total			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income, net of tax			Class A		Class B			Additional Paid-In Capital
	(In thousands)
Balance at December 31, 2003	$	698,721		$	(359,264	)	$	89,617		$	—	$	14		$	968,354
Net income		238,060			238,060			—			—		—			—
Other comprehensive income, net of tax		38,171			—			38,171			—		—			—

Balance at December 31, 2004		974,952			(121,204	)		127,788			—		14			968,354
Net income		266,719			266,719			—			—		—			—
Other comprehensive loss, net of tax		(78,774	)		—			(78,774	)		—		—			—
Purchase price adjustment for the acquisition of MasterCard Europe		6,251			—			—			—		—			6,251

Balance at December 31, 2005		1,169,148			145,515			49,014			—		14			974,605
Net income		50,190			50,190			—			—		—			—
Other comprehensive income, net of tax		43,246			—			43,246			—		—			—
Adoption of new pension and postretirement standard, net of tax		11,402			—			11,402			—		—			—
Proceeds from issuance of common stock (net of offering expenses of $129,354)		2,449,910			—			—			7		—			2,449,903
Redemption of stock Class B shares		(1,799,937	)		(1,224,901	)		—			—		(8	)		(575,028	)
Charitable stock contribution to the MasterCard Foundation		394,785			—			—			1		—			394,784
Reclassification of cash-based performance awards to stock-based compensation		51,209			—			—			—		—			51,209
Cash dividends declared on Class A and Class B common stock, $.18 per share		(24,775	)		—			—			—		—			(24,775	)
Share based payments (Note 16)		19,181			—			—			—		—			19,181

Balance at December 31, 2006	$	2,364,359		$	(1,029,196	)	$	103,662		$	8	$	6		$	3,289,879

MASTERCARD INCORPORATED

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


	For the years ended December 31,
	2006			2005			2004
	(In thousands)
Net Income	$	50,190		$	266,719		$	238,060
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments		46,033			(76,663	)		44,271

Investment securities available-for-sale		(1,786	)		(10,522	)		(5,977	)
Income tax effect		526			3,777			2,068

		(1,260	)		(6,745	)		(3,909	)

Reclassification adjustment for investment securities available-for-sale		1,046			621			(2,695	)
Income tax effect		(308	)		(223	)		932

		738			398			(1,763	)

Derivatives accounted for as hedges		(10,562	)		5,592			(4,262	)
Income tax effect		3,606			(1,839	)		957

		(6,956	)		3,753			(3,305	)

Reclassification adjustment for derivatives accounted for as hedges		7,123			719			3,710
Income tax effect		(2,432	)		(236	)		(833	)

		4,691			483			2,877

Other comprehensive income (loss), net of tax		43,246			(78,774	)		38,171

Comprehensive Income	$	93,436		$	187,945		$	276,231

The accompanying notes are an integral part of these consolidated financial statements.

MASTERCARD INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

Note 1. Summary of Significant Accounting Policies

Organization—MasterCard Incorporated and its consolidated subsidiaries, including MasterCard International Incorporated (“MasterCard International”) and MasterCard Europe sprl (“MasterCard Europe”) (together, “MasterCard” or the “Company”), provide transaction processing and related services to customers principally in support of their credit, deposit access (debit), electronic cash and Automated Teller Machine (“ATM”) payment card programs, and travelers cheque programs.

As more fully described in Note 2, on May 31, 2006 MasterCard transitioned to a new ownership and governance structure, which involved an initial public offering (the “IPO”) of a new class of the Company’s common stock.

Consolidation and basis of presentation—The consolidated financial statements include the accounts of MasterCard and its majority-owned and controlled entities, including the Company’s variable interest entity. The Company’s variable interest entity was established for the purpose of constructing the Company’s global technology and operations center; it is not an operating entity and has no employees. Intercompany transactions and balances are eliminated in consolidation. The Company follows accounting principles generally accepted in the United States of America.

The Company consolidates majority-owned and controlled entities, including specific consideration of variable interest entities which are required to be consolidated in accordance with the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 46(R), “Consolidation of Variable Interest Entities” (“FIN 46R”). Minority interest is recorded for consolidated entities in which the Company owns less than 100% of the interest. Minority interest represents the equity interest not owned by the Company.

The Company accounts for investments in entities under the equity method of accounting when it holds between 20% and 50% ownership in the entity and when it exercises significant influence. The equity method of accounting is also utilized for limited partnerships and limited liability companies if the investment ownership percentage is greater than 3% of outstanding ownership interests or common stock, respectively, regardless of whether MasterCard has significant influence over the investees. MasterCard’s share of net earnings or losses of entities accounted for under the equity method of accounting is included in other income (expense), net on the consolidated statements of operations.

The Company accounts for investments in affiliates under the historical cost method of accounting when it holds less than 20% ownership in the entity and when it does not exercise significant influence.

Investments in entities for which the equity method and historical cost method of accounting are appropriate are recorded in other assets on the consolidated balance sheets.

Certain prior period amounts have been reclassified to conform to 2006 classifications. Prior to the IPO, the Company reclassified all of its approximately 100,000 outstanding shares of existing Class A redeemable common stock so that the Company’s existing stockholders received 1.35 shares of the Company’s new Class B common stock for each share of Class A redeemable common stock that they held and a single share of new Class M common stock. Shares and per share data have been retroactively restated in the financial statements subsequent to the common stock reclassification to reflect the reclassification as if it was effective at the start of the first period being presented in the financial statements.

MASTERCARD INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

Use of estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Management has established detailed policies and control procedures to ensure the methods used to make estimates are well controlled and applied consistently from period to period. Actual results may differ from these estimates.

Cash and cash equivalents—Cash and cash equivalents include certain highly liquid investments with a maturity of three months or less from the date of purchase. Cash equivalents are recorded at cost, which approximates fair value.

Investment securities—The Company classifies debt securities as held-to-maturity or available-for-sale and classifies equity securities as trading.

Debt securities are classified as held-to-maturity when the Company has the intent and ability to hold the debt securities to maturity. Held-to-maturity debt securities are stated at amortized cost. Debt securities that are not held-to-maturity are classified as available-for-sale. Available-for-sale debt securities are carried at fair value, with the unrealized gains and losses, net of applicable taxes, recorded as a separate component of other comprehensive income on the consolidated statements of comprehensive income (loss). Net realized gains and losses on debt securities are recognized in investment income on the consolidated statements of operations. Quoted market values, when available, are used to determine the fair value of debt securities. The specific identification method is used to determine gains and losses.

Equity securities bought and held primarily for sale in the near term are classified as trading and are reported at fair value. Quoted market values are used to determine the fair value of trading securities. The Company’s trading securities are publicly traded and are related to an executive compensation plan. Net realized and unrealized gains and losses on trading securities are recognized in investment income on the consolidated statements of operations. The specific identification method is used to determine realized gains and losses. To the extent these securities appreciate over their original cost, a corresponding offset would be recorded in general and administrative expense in connection with the executive compensation plan.

Held-to-maturity and available-for-sale investments are evaluated for other than temporary impairment on an ongoing basis in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities”. Available-for-sale securities are available to meet the Company’s current operational needs and accordingly are classified as short-term.

Settlement due from/due to members—The Company operates systems for clearing and settling payment transactions among MasterCard International members. Net settlements are generally cleared daily among members through settlement cash accounts by wire transfer or other bank clearing means. However, some transactions may not settle until subsequent business days, resulting in amounts due from and due to MasterCard International members.

Restricted security deposits held for MasterCard International members — MasterCard requires and holds cash deposits from certain members of MasterCard International in order to maintain collateral for settlement of their transactions. These assets are fully offset by corresponding liabilities included on the consolidated balance sheets. However, the majority of collateral for settlement is typically in the form of letters of credit and bank guarantees.

MASTERCARD INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

Property, plant and equipment—Property, plant and equipment are stated at cost less accumulated depreciation and amortization. Depreciation of equipment and furniture and fixtures is computed using the straight-line method over the related estimated useful lives of the assets, generally ranging from two to five years. Amortization of leasehold improvements is generally computed using the straight-line method over the lesser of the estimated useful lives of the improvements or the terms of the related leases. Capital leases are amortized using the straight-line method over the lives of the leases. Depreciation on buildings is calculated using the straight-line method over an estimated useful life of 30 years. Amortization of leasehold improvements and capital leases is included in depreciation expense.

The Company evaluates the recoverability of all long-lived assets whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. If the carrying value of the asset cannot be recovered from estimated future cash flows, undiscounted and without interest, the fair value of the asset is calculated using the present value of estimated net future cash flows. If the carrying amount of the asset exceeds its fair value, a loss is recorded.

Leases—The Company accounts for operating and capital leases in accordance with SFAS No. 13, “Accounting for Leases”.

Goodwill—Goodwill represents the excess of cost over net assets acquired in connection with the acquisition of certain businesses. The Company tests its goodwill for impairment at least annually. In 2004, the company recorded an impairment charge; see Note 9 herein.

Intangible assets—Intangible assets consist of capitalized software costs, trademarks, tradenames and other intangible assets, which have finite lives, and customer relationships, which have indefinite lives. Intangible assets with finite useful lives are amortized over their estimated useful lives under the straight-line method. MasterCard capitalizes average internal costs incurred for payroll and payroll related expenses by department for the employees who directly devote time to the design, development and testing phases of each capitalized software project.

The Company reviews intangible assets with finite lives for impairment when events or changes in circumstances indicate that their carrying amount may not be recoverable. During 2006, 2005 and 2004, the Company recorded impairment charges for finite lived intangible assets; see Note 10 herein. Intangible assets with indefinite lives, customer relationships, are tested for impairment at least annually. No impairment charges were recorded in 2006, 2005 or 2004.

Litigation accrual—The Company is party to certain legal and regulatory proceedings with respect to a variety of matters. Except as described in Notes 18 and 20 herein, MasterCard does not believe that any legal or regulatory proceedings to which it is a party would have a material adverse impact on its business or prospects. The Company evaluates the likelihood of an unfavorable outcome of the legal or regulatory proceedings to which it is a party in accordance with SFAS No. 5, “Accounting for Contingencies” (“SFAS No. 5”). These judgments are subjective based on the status of the legal or regulatory proceedings, the merits of its defenses and consultation with in-house and external legal counsel. The actual outcomes of these proceedings may materially differ from the Company’s judgments.

Settlement and travelers cheque risk—MasterCard has global risk management policies and procedures, which include risk standards to provide a framework for managing the Company’s settlement exposure. Settlement risk is the legal exposure due to the difference in timing between the payment transaction date and subsequent settlement. MasterCard International’s rules generally guarantee the payment of MasterCard

MASTERCARD INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

transactions and certain Cirrus and Maestro transactions between principal members. In the event that MasterCard International effects a payment on behalf of a failed member, MasterCard International may seek an assignment of the underlying receivables. Subject to approval by the Board of Directors, members may be charged for the amount of any settlement losses incurred during the ordinary activities of the Company. MasterCard has also guaranteed the payment of MasterCard-branded travelers cheques in the event of issuer default. The term and amount of these guarantees are unlimited.

Derivative financial instruments—The Company accounts for derivative financial instruments in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”). SFAS 133, as amended and interpreted, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS 133 requires that all derivatives, whether designated in hedging relationships or not, be recorded on the balance sheet at fair value in other assets and other liabilities, regardless of the purpose or intent for holding them.

Changes in the fair value of a derivative that is highly effective and that is designated and qualifies as a foreign-currency cash flow hedge are recorded in other comprehensive income (loss) until earnings are affected by the variability of cash flows of the hedged transaction (e.g., until periodic settlements of a variable-rate asset or liability are recorded in earnings). Any hedge ineffectiveness (which represents the amount by which the changes in the fair value of the derivative exceeds the variability in the cash flows of the forecasted transaction) is recorded in current-period earnings. Changes in the fair value of derivative instruments which are foreign currency fair value hedges or which do not qualify or are not designated for hedge accounting under SFAS 133 are reported in current-period earnings.

The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions for all derivatives that qualify for hedge accounting under SFAS 133. This process includes linking all derivatives that are designated as foreign-currency cash flow hedges to forecasted transactions. The Company also formally assesses (both at the hedge’s inception and on an ongoing basis) whether the derivatives that are used in hedging transactions have been highly effective in offsetting changes in the fair value or cash flows of hedged items and whether those derivatives may be expected to remain highly effective in future periods. If and when it is determined that a derivative is no longer expected to be highly effective, hedge accounting is discontinued.

Income taxes—The Company provides for income taxes under the provisions of SFAS No. 109 “Accounting for Income Taxes” (“SFAS 109”). SFAS 109 requires an asset and liability based approach in accounting for income taxes.

Deferred income tax assets and liabilities are recorded to reflect the tax consequences on future years of temporary differences between the financial statement carrying amounts and income tax bases of assets and liabilities. Valuation allowances are provided against assets which are not likely to be realized.

Revenue recognition—The Company’s revenue is comprised principally of operations fees and assessments. Revenues are generated from the fees charged to customers for providing transaction processing and other payment services, and from assessments calculated on the dollar volume of activity on cards carrying our brands. Revenues are generally based upon transactional information accumulated by our systems or reported by our customers. Certain revenues are estimated based upon aggregate transaction information and historical and projected customer performance. Revenues are recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, and collectibility is reasonably assured.

MASTERCARD INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

Operations fees represent fees for authorization, clearing, settlement and other products and services that facilitate transaction and information management among the Company’s customers on a global basis. These fees are recognized as revenue in the same period as the related transactions occur or services are rendered. Other revenues included within operations fees include currency conversion and cross border revenues, acceptance development fees, warning bulletins, connectivity revenues, consulting and research fees, cardholder services, fees for compliance programs, holograms, user pay for a variety of transaction enhancement services, and manuals and publications.

Assessments are based principally upon daily, monthly or quarterly gross dollar volumes (“GDV”) and the rates vary depending on the nature of the transactions that generate GDV. Assessments are recorded as revenue in the period they are earned, which is when the related GDV is generated on the cards. Assessments are based on management’s estimate of the customers’ performance in a given period, and actual results may differ from these estimates.

MasterCard has business agreements with certain customers that provide for fee rebates when the customers meet certain hurdles. Such rebates are calculated on a monthly basis based upon estimated performance and the contracted discount rates for the services provided. MasterCard also enters into agreements with certain customers to provide volume-based and performance support incentives. MasterCard may incur costs directly related to the acquisition of the contract, which are deferred and amortized over the life of the contract. Rebates and incentives are recorded as a reduction of revenue in the same period as the revenue is earned or performance has occurred, in accordance with Emerging Issues Task Force (“EITF”) Issue No. 01-9, “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products)” (“EITF 01-9”). Rebates and incentives are calculated on a monthly basis based upon estimated performance and the terms of the related business agreements, actual results may differ from these estimates.

In addition, certain rebate and incentive agreements provide for free or discounted services, which are recorded in accordance with EITF Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables”. The discount from the fair value of the services is recorded as a reduction of revenue related to other elements of the contract using the residual method.

Pension and other postretirement plans—Compensation cost of an employee’s pension benefit is recognized on the projected unit credit method over the employee’s approximate service period. The unit credit cost method is utilized for funding purposes.

MASTERCARD INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Plans and Other Postretirement Plans” (“FAS 158”). FAS 158 requires the employer to recognize the overfunded or underfunded status of a single-employer defined benefit plan or postretirement plan as an asset or liability in its balance sheet and to recognize changes in the funded status in the year in which the changes occur through comprehensive income. An employer is also required to measure the funded status of a plan as of the date of its year-end balance sheet. FAS 158 is effective for fiscal years ending after December 15, 2006. Based on MasterCard’s overfunded status of its defined benefit pension plan and unfunded status of its supplemental executive retirement plan and postretirement plan, the adoption of FAS 158 had the incremental impact on the following line items in the Company’s December 31, 2006 balance sheet:


	Before Application of FAS 158		Adjustment			After Application of FAS 158
Prepaid expenses, long-term	$	249,645	$	(13,991	)	$	235,654
Deferred tax asset, long-term		210,284		6,498			216,782
Total assets		5,089,963		(7,493	)		5,082,470

Accrued expenses		929,285		7,142			936,427
Other liabilities		249,628		(3,233	)		246,395
Stockholders’ equity		2,375,761		(11,402	)		2,364,359
Total liabilities and stockholders’ equity		5,089,963		(7,493	)		5,082,470

Share based payments—In December 2004, the FASB issued SFAS 123 (revised 2004) (“SFAS 123R”), “Share-Based Payment.” SFAS 123R provides guidance on accounting for transactions in which an entity obtains employee services in exchange for share-based payments. SFAS 123R requires the fair value of all share-based payments to employees to be recognized in the financial statements. In May 2006, the Company adopted SFAS 123R upon the granting of equity awards.

Advertising expense—Cost of media advertising is expensed when the advertising takes place. Production costs are expensed as costs are incurred. Promotional items are expensed at the time the promotional event occurs.

Foreign currency translation—The U.S. dollar is the functional currency for the majority of the Company’s businesses except for MasterCard Europe’s operations, for which the functional currency is the euro and MasterCard’s operations in Brazil for which the functional currency is the real. Where the U.S. dollar is considered the functional currency, monetary assets and liabilities are re-measured to U.S. dollars using current exchange rates in effect at the balance sheet date; non-monetary assets and liabilities are re-measured at historical exchange rates; and revenue and expense accounts are re-measured at a weighted average exchange rate for the period. Resulting exchange gains and losses are included in net income (loss). Where local currency is the functional currency, translation from the local currency to U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using a weighted average exchange rate for the period. Resulting translation adjustments are reported as a component of other comprehensive income (loss).

Net income per share—In accordance with SFAS No. 128, “Earnings per Share”, MasterCard calculates basic net income per common share by dividing net income by the weighted average number of common shares outstanding. MasterCard calculates diluted net income per share consistent with that of basic net income per share but gives effect to all potential common shares (i.e., options and unvested restricted stock units) that were outstanding during the period, unless the effect is antidilutive.

MASTERCARD INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

Note 2. Stockholders’ Equity

Prior to the IPO, the Company’s capital stock was privately held by certain of its customers that are principal members of MasterCard International. All stockholders held shares of Class A redeemable common stock.

In April 2006, MasterCard cancelled approximately 23 shares of Class A redeemable common stock primarily due to stockholders who had disclaimed ownership of these shares.

Initial Public Offering

Immediately prior to the closing of the IPO, MasterCard Incorporated filed an amended and restated certificate of incorporation (the “certificate of incorporation”). The certificate of incorporation authorized 4,501,000 shares, consisting of the following new classes of capital stock:


Class	Par Value	Authorized Shares (in millions)	Dividend and Voting Rights
A	$.0001 per share	3,000	• One vote per share • Dividend rights
B	$.0001 per share	1,200	• Non-voting • Dividend rights
M	$.0001 per share	1	• Generally non-voting, but can elect up to three, but not more than one-quarter, of the members of the Company’s Board of Directors and approve specified significant corporate actions (e.g., the sale of all of the assets of the Company) • No dividend rights
Preferred	$.0001 per share	300	• No shares issued or outstanding. Dividend and voting rights are to be determined by the Board of Directors of the Company upon issuance.

The certificate of incorporation also provided for the immediate reclassification of all of the Company’s 99,978 outstanding shares of existing Class A redeemable common stock, causing each of its existing stockholders to receive 1.35 shares of the Company’s newly issued Class B common stock for each share of common stock that they held prior to the reclassification as well as a single share of Class M common stock. The Company paid stockholders an aggregate of $27 in lieu of issuing fractional shares that resulted from the reclassification. This resulted in the issuance of 134,969 shares of Class B common stock and 2 shares of Class M common stock.

On May 31, 2006, the Company closed its IPO. The Company issued 66,135 newly authorized shares of Class A common stock in the IPO, including 4,614 shares sold to the underwriters pursuant to an option to purchase additional shares, at a price of $39 per share. The Company received net proceeds from the IPO of approximately $2,449,910.

The MasterCard Foundation

In connection and simultaneous with the IPO, the Company issued as a donation 13,497 newly authorized shares of Class A common stock to The MasterCard Foundation (the “Foundation”). The Foundation is a private charitable foundation incorporated in Canada that is controlled by directors who are independent of the Company

MASTERCARD INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

and its principal members. In connection with the donation, the Company recorded an expense of $394,785 in the second quarter of 2006, which was determined based on the IPO price per share, less a marketability discount of 25%. Under the terms of the donation, the Foundation can only resell the donated shares beginning on the fourth anniversary of the IPO to the extent necessary to meet charitable disbursement requirements dictated by Canadian tax law. Under Canadian tax law, the Foundation is generally required to disburse at least 3.5% of its assets not used in administration each year for qualified charitable disbursements. However, the Foundation obtained permission from the Canadian tax authorities to defer the giving requirements for up to ten years. The Foundation, at its discretion, may decide to meet its disbursement obligations on an annual basis or to settle previously accumulated obligations during any given year. The Foundation will be permitted to sell all of its remaining shares beginning twenty years and eleven months after the consummation of the IPO. Additionally, during the year ended December 31, 2006, the Company donated $20,000 in cash to the Foundation.

Redemption of Shares

On June 30, 2006, in accordance with the certificate of incorporation, the Company used all but $650,000 of the net proceeds from the IPO, or $1,799,910, to redeem 79,632 shares of Class B common stock from the Class B shareholders, the customers and principal members of MasterCard International. This number of redeemed shares equaled the aggregate number of shares of Class A common stock issued to investors in the IPO and donated to the Foundation. The redemption amount paid to Class B shareholders was allocated primarily between additional paid-in capital and retained earnings. Since 59% of the Class B shares were redeemed, 59% of the additional paid-in capital balance which existed prior to the IPO and was associated with Class B shares, or $575,001, was reduced against additional paid-in capital. The remaining $1,224,901 was charged to retained earnings since this amount was in excess of the original additional paid-in capital attributed to the Class B shares.

New Governance Structure

As of December 31, 2006, ownership of the Company was divided into the following:


	Equity Ownership		General Voting Power
Public Investors (Class A shareholders)	49	%	83	%
Principal or Affiliate Members (Class B shareholders)	41	%	—
Foundation (Class A shareholder)	10	%	17	%

Commencing on the fourth anniversary of the IPO, each share of Class B common stock will be convertible, at the holder’s option, into a share of Class A common stock on a one-for-one basis, subject to rights of first refusal by the other holders of Class B common stock. These rights of first refusal will be applicable for as long as outstanding shares of Class B common stock represent 15% or more of the aggregate outstanding shares of Class A and Class B common stock. Additionally, if at any time, the number of shares of Class B common stock outstanding is less than 41% of the aggregate number of shares of Class A common stock and Class B common stock outstanding, Class B stockholders will in certain circumstances be permitted to acquire an aggregate number of shares of Class A common stock in the open market or otherwise, with acquired shares thereupon converting into an equal number of shares of Class B common stock so that holders of Class B common stock will own approximately 41% of the aggregate number of shares of Class A common stock and Class B common stock outstanding at that time. Shares of Class B common stock are non-registered securities that may be bought and sold among eligible holders of Class B common stock subject to certain limitations.

MASTERCARD INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

On November 10, 2006, the Company paid a cash dividend of $.09 per share, or an aggregate of $12,373. On December 14, 2006, the Company declared a cash dividend of $.09 per share, or an aggregate of $12,402, on shares of Class A common stock and Class B common stock. The dividend was paid on February 9, 2007 to holders of record as of January 12, 2007.

Note 3. Earnings Per Share (“EPS”)

The components of basic and diluted earnings per share are as follows:


	2006		2005		2004
Numerator:
Net income	$	50,190	$	266,719	$	238,060

Denominator:
Basic EPS weighted-average shares outstanding		135,411		134,969		134,969
Dilutive stock options and restricted stock units		368		—		—

Diluted EPS weighted-average shares outstanding		135,779		134,969		134,969

Earnings per Share:
Basic	$	.37	$	1.98	$	1.76

Diluted	$	.37	$	1.98	$	1.76

No stock options or restricted stock units were outstanding during the years ended December 31, 2005 and 2004.

Note 4. Supplemental Cash Flows

The following table includes supplemental cash flow disclosures for the years ended December 31:


	2006		2005		2004
Cash paid for income taxes	$	186,961	$	203,390	$	43,594
Cash paid for interest		17,034		16,805		16,732
Cash paid for settlement of U.S. merchant lawsuit and other legal settlements (Note 18 and 20)		195,840		114,935		149,948
Non-cash investing and financing activities:
Shares donated to the MasterCard Foundation (Note 2)		394,785		—		—
Conversion of cash-based to stock-based compensation (Note 16)		51,209		—		—
Dividend declaration (Note 2)		12,402		—		—
Purchase price adjustment for the acquisition of MasterCard Europe		—		6,251		—

MASTERCARD INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

Note 5. Investment Securities

Available-for-sale investment securities consist of municipal bonds and taxable bond funds. The amortized cost, gross unrealized gains and losses and fair value of available-for-sale securities are as follows:


	December 31, 2006			December 31, 2005
Amortized cost	$	1,291,175		$	718,072
Gross unrealized gains		1,162			1,321
Gross unrealized losses		(5,757	)		(5,246	)

Fair value	$	1,286,580		$	714,147

The held-to-maturity investment securities primarily consist of two municipal bonds, one for $154,000 at 7.4% per annum and another for $36,382 at 5.0% per annum. These bonds relate to two of the Company’s U.S. facilities, see Note 15 and Note 17 for additional information. The carrying value, gross unrecorded gains and fair value of held-to-maturity securities are as follows:


	December 31, 2006		December 31, 2005
Carrying value	$	193,477	$	194,403
Gross unrecorded gains		8,747		12,687

Fair value	$	202,224	$	207,090

At December 31, 2006, there were no significant investment securities in continuous gross unrealized loss positions for greater than twelve months. Due to the high credit quality of the Company’s investment securities and the intent and ability to hold until maturity, no investment securities are considered to be other-than-temporarily impaired as of December 31, 2006.

In December 2006, the Company invested in short duration bond funds which generally have a duration of less than one year. The cost and fair value of these bond funds are $400,000 and $399,440, respectively, at December 31, 2006.

The maturity distribution based on contractual terms of municipal bond investment securities at December 31, 2006 is as follows:


	Available-for-Sale				Held-to-Maturity
	Amortized Cost		Fair Value		Carrying Value		Fair Value
Due within 1 year	$	16,841	$	16,794	$	—	$	—
Due after 1 year through 5 years		432,678		428,580		157,095		164,057
Due after 5 years through 10 years		96,306		96,416		36,382		38,167
Due after 10 years		345,350		345,350		—		—

	$	891,175	$	887,140	$	193,477	$	202,224

Included in the available-for-sale amounts above are auction rate securities of $345,350 and $194,725 as of December 31, 2006 and 2005, respectively. These securities are reset to current interest rates typically every 35 days and no later than every 90 days, but are included in this table based on their stated maturities. All securities with maturities beyond ten years are auction rate securities.

MASTERCARD INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

Components of net investment income are as follows for each of the years ended December 31:


	2006			2005			2004
Interest income	$	100,106		$	50,409		$	37,051
Dividend income		22,867			7,872			6,240
Investment securities available-for-sale:
Gross realized gains		187			504			3,169
Gross realized losses		(1,233	)		(1,125	)		(474	)
Trading securities:
Unrealized gains (losses), net		477			1,403			(712	)
Realized gains, net		2,590			1,804			3,427

Total investment income, net	$	124,994		$	60,867		$	48,701

Interest income is generated from cash, cash equivalents, available-for-sale investment securities and municipal bonds held-to-maturity. Dividend income primarily consists of a distribution of earnings from an investment in an affiliate, which can fluctuate with the results of this affiliate. Additionally, in 2006, the Company received a dividend of approximately $5,000 from an investment in another affiliate. This dividend was the result of a gain on sale of an investment held by that affiliate.

Note 6. Prepaid Expenses

Prepaid expenses consist of the following at December 31:


	2006			2005
Customer and merchant incentives	$	293,289		$	229,318
Advertising		33,321			69,756
Pension		8,363			35,280
Other		31,530			33,987

Total prepaid expenses		366,503			368,341
Prepaid expenses, current		(130,849	)		(167,209	)

Prepaid expenses, long-term	$	235,654		$	201,132

Prepaid customer and merchant incentives represent payments made to customers and merchants under business agreements.

Note 7. Other Assets

Other assets consist of the following at December 31:


	2006			2005
Customer and merchant business agreements	$	76,351		$	119,655
Deferred taxes		65,241			90,941
Investment in Affiliates		26,828			25,425
Cash surrender value of keyman life insurance		25,860			22,673
Other		13,279			13,540

Total other assets		207,559			272,234
Other assets, current		(89,348	)		(121,326	)

Other assets, long-term	$	118,211		$	150,908

MASTERCARD INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

Certain customer and merchant business agreements provide a bonus for agreeing to enter into the agreement. As of December 31, 2006 and 2005, other assets include payments to be made for these bonuses and the related liability is included in accrued expenses. The bonus is amortized over the life of the agreement. Once the payment is made, the liability is relieved and the other asset is reclassified as a prepaid expense.

Note 8. Property, Plant and Equipment

Property, plant and equipment consist of the following at December 31:


	2006			2005
Equipment	$	198,793		$	359,140
Building and land		195,207			180,944
Furniture and fixtures		41,197			36,766
Leasehold improvements		38,254			27,083

		473,451			603,933
Less accumulated depreciation and amortization		(220,720	)		(373,319	)

	$	252,731		$	230,614

As of December 31, 2006 and 2005, capital leases of $44,000 and $26,143, respectively, are included in equipment. Accumulated amortization of capital leases was $25,892 and $13,955 as of December 31, 2006 and 2005, respectively.

Depreciation expense for the above property, plant and equipment was $43,445, $46,304 and $51,277 for the years ended December 31, 2006, 2005 and 2004, respectively.

During 2006, MasterCard performed a detailed review of its fixed assets to determine whether fully depreciated assets recorded on the Company’s balance sheet at zero value were still being utilized by the Company. As a result of this review, it was determined that fully depreciated property, plant and equipment with an original cost of $199,513 were no longer in use by the Company. Accordingly, gross property, plant and equipment and the related accumulated depreciation were reduced by this amount.

Note 9. Goodwill

The changes in the carrying amount of goodwill for the years ended December 31, 2006 and 2005 are as follows:


Balance as of December 31, 2004	$	217,654
Purchase price adjustment for the acquisition of MasterCard Europe		6,251
Sale of investment in affiliate		(500	)
Change in estimate of exit costs relating to the Integration		(327	)
Foreign currency translation		(26,377	)

Balance as of December 31, 2005		196,701
Foreign currency translation		20,312

Balance as of December 31, 2006	$	217,013

MASTERCARD INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

On June 28, 2002, MasterCard acquired, directly and indirectly, 100% of the shares of Europay International S.A. (“EPI”), not previously owned by MasterCard International by issuing 23,760 shares to the shareholders of EPI and MasterCard Europay U.K. Limited (“MEPUK”). However, of the 23,760 shares issued, only 17,610 were issued unconditionally and 6,150 were issued conditionally. EPI, now MasterCard Europe, is the Company’s principal operating subsidiary in Europe. In calculating the purchase price of EPI initially, the Company considered only the unconditional shares issued since the 6,150 conditional shares would potentially increase or decrease at the end of a three-year transition period. At the end of the transition period in 2005, 180 conditional shares were issued to the former EPI and MEPUK stockholders. These conditional shares constituted a part of the purchase price and the Company recorded an increase in goodwill and additional paid-in capital of $6,251. The balance in goodwill relating to the acquisition of EPI was $195,971 and $175,659 as of December 31, 2006 and 2005, respectively. All foreign currency translation changes in goodwill relate to the EPI goodwill.

In February 2004, the Company acquired a research and advisory firm focused exclusively on the global financial services industry. In May 2004, the Company acquired a consulting firm specializing in the optimization of customer relationships. For one of the acquisitions noted above, the Company identified certain indicators of potential impairment, including lower than anticipated revenues during 2004 and loss of key customers negatively impacting future revenue growth. Accordingly, the Company recorded impairment losses of $6,560 (goodwill of $5,454 and other intangible assets of $1,106) in 2004, which are reflected within general and administrative expenses on the consolidated statements of operations herein.

Note 10. Other Intangible Assets

The following table sets forth net intangible assets, other than goodwill:


	December 31, 2006							December 31, 2005
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Amortized intangible assets:
Capitalized software	$	358,337	$	(283,755	)	$	74,582	$	345,290	$	(251,105	)	$	94,185
Trademarks and tradenames		23,593		(19,860	)		3,733		22,098		(17,063	)		5,035
Other		6,304		(5,495	)		809		7,055		(4,745	)		2,310

Total		388,234		(309,110	)		79,124		374,443		(272,913	)		101,530
Unamortized intangible assets:
Customer relationships		192,249		—			192,249		172,324		—			172,324

Total	$	580,483	$	(309,110	)	$	271,373	$	546,767	$	(272,913	)	$	273,854

Additions to capitalized software primarily relate to internal projects associated with system enhancements or infrastructure improvements adjusted for the translation of capitalized software denominated in foreign currency.

Amortizable trademarks and tradenames and unamortizable customer relationships include assets which are denominated in foreign currency. As such, a component of the net change in these intangible assets is attributable to foreign currency translation. In particular, customer relationships increased $19,925 and trademarks increased $1,495 in 2006 for the portion of these assets assumed in the acquisition of Europay International S.A. on June 28, 2002.

MASTERCARD INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

Amortization and impairment expense on the assets above amounted to the following:


	For the Years Ended December 31,
	2006		2005		2004
Amortization	$	56,337	$	63,632	$	72,040
Impairment	$	614	$	1,978	$	1,973

During the years 2006, 2005 and 2004, impairment charges of $614, $1,786 and $867, respectively, were recorded primarily in connection with decisions to discontinue the use of various technologies included in capitalized software. The Company performed an impairment analysis on the related technology and concluded that fair value was estimated as zero due to discontinued future use of the underlying technology. Additionally, during the year 2005 an impairment charge of $192 was recorded in connection with customer lists and during the year 2004 an impairment charge of $1,106 was recorded in connection with an acquisition. Impairment charges are recorded in general and administrative expense on the consolidated statements of operations.

During 2006, MasterCard performed a detailed review of its intangible assets to determine whether fully amortized intangible assets recorded on the Company’s balance sheet at zero value were still being utilized by the Company. As a result of this review, it was determined that fully amortized intangible assets with an original cost of $30,787 were no longer in use by the Company. Accordingly, gross intangible assets and the related accumulated amortization were reduced by this amount.

The following table sets forth the estimated future amortization expense on amortizable intangible assets for the years ending December 31:


2007	$	44,680
2008		23,712
2009		9,034
2010		503
2011 and thereafter		1,195

Note 11. Accrued Expenses

Accrued expenses consist of the following at December 31:


	2006		2005
Customer and merchant incentives	$	386,582	$	303,899
Personnel costs		248,262		243,859
Advertising		141,864		162,661
Taxes		83,509		58,610
Other		76,210		81,628

	$	936,427	$	850,657

Note 12. Pension, Savings Plan and Other Benefits

The Company maintains a noncontributory defined benefit pension plan with a cash balance feature covering substantially all of its U.S. employees. This pension plan credits participants annually with an amount equal to a percentage of eligible pay based on age and service, as well as providing earnings credits based on each participant’s account balance. Additionally, the Company has an unfunded nonqualified supplemental executive retirement plan that provides certain key employees with supplemental retirement benefits in excess of limits imposed on qualified plans by U.S. tax laws. The plans include both the qualified and the nonqualified pension plans.

MASTERCARD INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(In thousands, except per share data)

The following table sets forth the pension plans’ funded status, key assumptions and amounts recognized in the Company’s Consolidated Balance Sheets at December 31, 2006 and 2005. The Company uses a December 31 measurement date for its pension plans.


	2006			2005
Change in benefit obligation
Benefit obligation at beginning of year	$	187,412		$	171,471
Service cost		18,599			18,318
Interest cost		10,869			10,335
Actuarial gain		(5,728	)		(3,637	)
Benefits paid		(9,782	)		(9,075	)

Benefit obligation at end of year	$	201,370		$	187,412

Change in plan assets
Fair value of plan assets at beginning of year	$	185,986		$	145,067
Actual return on plan assets		21,929			8,283
Employer contributions		—			41,711
Benefits paid		(9,782	)		(9,075	)