UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)
x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended April 30, 2006
		or
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from to

Commission file number: 001-32465

VERIFONE HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

Delaware		04-3692546
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

2099 Gateway Place, Suite 600
San Jose, CA 95110

(Address of principal executive offices with zip code)

(408) 232-7800

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

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

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

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

At May 12, 2006, the number of shares outstanding of the registrant’s common stock, $0.01 par value was 67,899,421.

VeriFone Holdings, Inc.
INDEX

PART I—FINANCIAL INFORMATION
Item 1	Financial Statements (unaudited):
	Condensed Consolidated Balance Sheets—April 30, 2006 and October 31, 2005	3
	Condensed Consolidated Statements of Operations—Three and Six Months Ended April 30, 2006 and 2005	4
	Condensed Consolidated Statements of Cash Flows—Six Months Ended April 30, 2006 and 2005	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33
Item 3	Quantitative and Qualitative Disclosures About Market Risk	59
Item 4	Controls and Procedures	60
PART II—OTHER INFORMATION
Item 1	Legal Proceedings	61
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	61
Item 3	Defaults Upon Senior Securities	61
Item 4	Submission of Matters to a Vote of Security Holders	61
Item 5	Other Information	62
Item 6	Exhibits	62
Signatures		63
Exhibit Index		64
Certifications

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

VERIFONE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

	April 30,				October 31,
	2006				2005
	(unaudited)
Assets
Current assets:
Cash and cash equivalents		$	91,218			$	65,065
Marketable securities		12,711				16,769
Accounts receivable, net of allowances for doubtful accounts of $1,710 and $1,571		107,063				87,424
Inventories		47,951				33,501
Deferred tax assets		11,481				11,467
Prepaid expenses and other current assets		9,893				9,368
Total current assets		280,317				223,594
Equipment and improvements, net		6,623				5,873
Purchased intangible assets, net		13,582				18,912
Goodwill		47,260				47,260
Deferred tax assets		19,562				17,705
Debt issuance costs, net		6,924				7,462
Other assets		9,123				6,546
Total assets		$	383,391			$	327,352
Liabilities and stockholders' equity
Current liabilities:
Accounts payable		$	64,257			$	47,161
Income taxes payable		11,965				8,746
Accrued compensation		11,955				12,576
Accrued warranty		3,826				4,371
Deferred revenue, net		20,716				15,523
Deferred tax liabilities		137				137
Accrued expenses		5,737				6,826
Other current liabilities		14,852				13,819
Current portion of long-term debt		1,927				1,994
Total current liabilities		135,372				111,153
Accrued warranty		743				872
Deferred revenue		6,775				6,835
Long-term debt, less current portion		179,848				180,812
Other long-term liabilities		835				1,142
Commitments and contingencies
Stockholders’ equity:
Voting Common Stock: $0.01 par value, 100,000 shares authorized at April 30, 2006 and October 31, 2005; 67,834 and 67,646 shares issued and outstanding as of April 30, 2006 and October 31, 2005		678				676
Additional paid-in-capital		132,178				128,101
Accumulated deficit		(74,149		)		(102,979		)
Accumulated other comprehensive income		1,111				740
Total stockholders’ equity		59,818				26,538
Total liabilities and stockholders' equity		$	383,391			$	327,352

See accompanying notes.

VERIFONE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

	Three Months Ended April 30,						Six Months Ended April 30,
	2006			2005			2006			2005
Net revenues:
System Solutions	$	128,136		$	105,414		$	246,821		$	203,403
Services	14,054			12,479			29,999			25,773
Total net revenues	142,190			117,893			276,820			229,176
Cost of net revenues:
System Solutions	71,765			63,420			138,880			124,529
Services	7,026			7,043			14,939			14,593
Total cost of net revenues	78,791			70,463			153,819			139,122
Gross profit	63,399			47,430			123,001			90,054
Operating expenses:
Research and development	12,221			10,457			23,628			19,951
Sales and marketing	14,404			12,932			28,605			24,976
General and administrative	9,993			6,787			19,691			13,491
Amortization of purchased intangible assets	1,159			1,346			2,318			2,650
Total operating expenses	37,777			31,522			74,242			61,068
Operating income	25,622			15,908			48,759			28,986
Interest expense	(3,197		)	(4,568		)	(6,476		)	(8,873		)
Interest income	927			100			1,614			111
Other income (expense), net	65			29			266			(171		)
Income before income taxes	23,417			11,469			44,163			20,053
Provision for income taxes	8,381			2,662			15,333			5,409
Net income	$	15,036		$	8,807		$	28,830		$	14,644
Net income per share:
Basic	$	0.23		$	0.16		$	0.44		$	0.27
Diluted	$	0.22		$	0.15		$	0.42		$	0.26
Weighted average shares used in computing net income per share:
Basic	65,799			53,403			65,751			53,389
Diluted	68,959			57,084			68,887			57,022

See accompanying notes.

VERIFONE HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

	Six Months Ended
	April 30,
	2006			2005
	(unaudited)
Cash flows from operating activities
Net income	$	28,830		$	14,644
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of purchased intangibles	5,330			6,305
Depreciation and amortization of equipment and improvements	1,651			1,437
Amortization of capitalized software	598			523
Amortization of interest rate caps	139			47
Amortization of debt issuance costs	539			635
Stock-based compensation	2,112			52
Tax benefit from stock-based compensation	(1,374		)	—
Other	(81		)	—
Changes in operating assets and liabilities:
Accounts receivable, net	(19,639		)	9,604
Inventories	(14,450		)	(15,746		)
Deferred tax assets	(1,871		)	(2,974		)
Prepaid expenses and other current assets	(607		)	39
Other assets	42			(326		)
Accounts payable	17,096			(279		)
Income taxes payable	4,593			398
Accrued compensation	(621		)	(1,012		)
Accrued warranty	(674		)	402
Deferred revenue, net	5,133			3,645
Deferred tax liabilities	—			951
Accrued expenses and other liabilities	(2,083		)	(4,449		)
Net cash provided by operating activities	24,663			13,896
Cash flows from investing activities
Software development costs capitalized	(1,078		)	(235		)
Purchases of equipment and improvements	(2,161		)	(1,410		)
Purchases of other assets	(1,114		)	—
Purchases of marketable securities	(102,508		)	—
Sales and maturities of marketable securities	106,625			—
Acquisition of business, net of cash and cash equivalents acquired	—			(13,317		)
Net cash used in investing activities	(236		)	(14,962		)
Cash flows from financing activities
Proceeds from revolving promissory notes payable and revolver	—			19,100
Repayments of revolving promissory notes payable and revolver	—			(19,100		)
Repayments of long-term debt	(925		)	(950		)
Tax benefit of stock-based compensation	1,374			—
Repayments of capital leases	(106		)	(242		)
Proceeds from exercises of stock options and other	593			117
Payments of IPO and follow-on financing costs	—			(1,835		)
Net cash provided by (used in) financing activities	936			(2,910		)
Effect of foreign currency exchange rate changes on cash	790			13
Net increase (decrease) in cash and cash equivalents	26,153			(3,963		)
Cash and cash equivalents, beginning of period	65,065			12,705
Cash and cash equivalents, end of period	$	91,218		$	8,742
Supplemental disclosures of cash flow information
Cash paid for interest	$	5,875		$	8,102
Cash paid for income taxes	$	13,289		$	7,717

See accompanying notes.

VERIFONE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Note 1. Description of Business

VeriFone Holdings, Inc. (“VeriFone” or the “Company”) was incorporated in the state of Delaware on June 13, 2002 in order to acquire VeriFone, Inc. on July 1, 2002. Prior to the completion of the Company’s initial public offering on May 4, 2005, VeriFone was majority owned by GTCR Fund VII, L.P., an equity fund managed by GTCR Golder Rauner, LLC (“GTCR”), a private equity firm. As of April 30, 2006, equity funds managed by GTCR owned approximately 33.1% of the outstanding common stock of the Company. VeriFone designs, markets, and services transaction automation systems that enable secure electronic payments among consumers, merchants, and financial institutions.

Note 2. Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

Unaudited Interim Financial Information

The accompanying condensed consolidated balance sheet as of April 30, 2006, the condensed consolidated statements of operations for the three and six months ended April 30, 2006 and 2005, and the condensed consolidated statements of cash flows for the six months ended April 30, 2006 and 2005 are unaudited. These unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information, Form 10-Q and Article 10 of Regulation S-X. In the opinion of the Company’s management, the unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements, except for the adoption of SFAS No. 123(R), Share-Based Payment which was adopted on May 1, 2005, using the modified-prospective-transition method, and include all adjustments of a normal recurring nature necessary for the fair presentation of the Company’s financial position as of April 30, 2006, its results of operations for the three and six months ended April 30, 2006 and 2005, and its cash flows for the six months ended April 30, 2006 and 2005. The results for the interim periods are not necessarily indicative of the results to be expected for any future period or for the fiscal year ending October 31, 2006. The condensed consolidated balance sheet as of October 31, 2005 has been derived from the audited consolidated balance sheet as of that date. Certain amounts reported in previous periods have been reclassified to conform to the current period presentation. The reclassifications did not impact previously reported revenues, total operating expense, operating income, net income, or stockholders’ equity.

These unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and related notes included in the Company’s 2005 Annual Report on Form 10-K filed with the SEC on December 20, 2005.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements,

and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and other various assumptions that are believe to be reasonable under the circumstances. Actual results could differ from those estimates, and such differences may be material to the consolidated financial statements.

Revenue Recognition

The Company’s revenue recognition policy is consistent with applicable revenue recognition guidance and interpretations, including the requirements of Emerging Issues Task Force Issue No. 00-21 (“EITF 00-21”), Revenue Arrangements with Multiple Deliverables, Statement of Position 97-2 (“SOP 97-2”), Software Revenue Recognition, Statement of Position 81-1 (“SOP 81-1”) Accounting for Performance of Construction-Type and Certain Production Type Contracts, Staff Accounting Bulletin No. 104 (“SAB 104”), Revenue Recognition, and other applicable revenue recognition guidance and interpretations.

The Company records revenue when all four of the following criteria are met: (i) persuasive evidence that an arrangement exists; (ii) delivery of the products and/or services has occurred; (iii) the selling price is fixed or determinable; and (iv) collectibility is reasonably assured. Cash received in advance of revenue recognition is recorded as deferred revenue, net.

Net revenues from System Solutions sales to end-users, resellers, value added resellers and distributors are recognized upon shipment of the product with the following exceptions:

· If product is shipped FOB destination, revenue is recognized when the shipment is delivered, or

· If an acceptance clause exists, revenue is recognized upon the earlier of receipt of the acceptance letter or when the clause lapse.

End-users, resellers, value added resellers and distributors generally have no rights of return, stock rotation rights or price protection.

The Company’s System Solutions sales include software that is incidental to the electronic payment devices and services included in its sales arrangements.

The Company enters into revenue arrangements for individual products or services. As a System Solutions provider, the Company’s sales arrangements often include support services in addition to electronic payment devices (“multiple deliverables”). These services may include installation, training, consulting, customer support and/or refurbishment arrangements.

Revenue arrangements with multiple deliverables are evaluated to determine if the deliverables (items) can be divided into more than one unit of accounting. An item can generally be considered a separate unit of accounting if all of the following criteria are met:

· The delivered item(s) has value to the customer on a standalone basis;

· There is objective and reliable evidence of the fair value of the undelivered item(s); and

· If the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the Company.

Items which do not meet these criteria are combined into a single unit of accounting. If there is objective and reliable evidence of fair value for all units of accounting, the arrangement consideration is allocated to the separate units of accounting based on their relative fair values. In cases where there is objective and reliable evidence of the fair value(s) of the undelivered item(s) in an arrangement but no such evidence for one or more of the delivered item(s), the residual method is used to allocate the arrangement consideration. In cases in which there is no objective and reliable evidence of the fair

value(s) of the undelivered item(s), the Company defers all revenue for the arrangement until the period in which the last item is delivered.

For revenue arrangements with multiple deliverables, upon shipment of its electronic payment devices, the Company allocates the fair value for all remaining undelivered elements and recognizes the residual amount within the arrangement as revenue for the delivered items as prescribed in EITF 00-21. Revenues for the Company’s arrangements that include multiple elements are allocated to each undelivered element based on the fair value of each element. Fair value is determined based on the price charged when each element is sold separately and/or the price charged by third parties for similar services.

Net revenues from services such as customer support are initially deferred and then recognized on a straight-line basis over the term of the contract. Net revenues from services such as installations, equipment repairs, refurbishment arrangements, training and consulting are recognized as the services are rendered.

For software development contracts, the Company recognizes revenue using the completed contracts method pursuant to SOP 81-1. During the period of performance of such contracts, billings and costs are accumulated on the balance sheet, but no profit is recorded before completion or substantial completion of the work. The Company uses customers’ acceptance of such products as the specific criteria to determine when such contracts are substantially completed. Provisions for losses on software development contracts are recorded in the period they become evident.

In addition, the Company sells products to leasing companies that, in turn, lease these products to end-users. In transactions where the leasing companies have no recourse to the Company in the event of default by the end-user, the Company recognizes revenue at the point of shipment or point of delivery, depending on the shipping terms and when all the other revenue recognition criteria have been met. In arrangements where the leasing companies have substantive recourse to the Company in the event of default by the end-user, the Company recognizes both the product revenue and the related cost of the product as the payments are made to the leasing company by the end-user, generally ratably over the lease term.

Foreign Currency Translation

The assets and liabilities of foreign subsidiaries, where the local currency is the functional currency, are translated from their respective functional currencies into U.S. dollars at the rates in effect at the balance sheet date, with resulting foreign currency translation adjustments recorded as a component of accumulated other comprehensive income in the accompanying consolidated balance sheet. Revenue and expense amounts are translated at average rates during the period.

Gains and losses realized from transactions, including intercompany balances not considered as permanent investment, and denominated in currencies other than an entity’s functional currency are included in other income (expense), net in the accompanying consolidated statements of operations.

Concentrations of Credit Risk

Cash is placed on deposit in major financial institutions in the United States and other countries. Such deposits may be in excess of insured limits. Management believes that the financial institutions that hold the Company’s cash are financially sound and, accordingly, minimal credit risk exists with respect to these balances.

The Company invests cash not required for use in operations in high credit quality securities based on its investment policy. The investment policy has limits based on credit quality, investment concentration, investment type and maturity that the Company believes will result in reduced risk of loss of capital. Investments are of a short-term nature and include investments in money market funds and auction rate

and corporate debt securities. The Company has reflected the duration of auction rate securities based on their reset feature. Rates on these securities typically reset every 7, 28 or 35 days. The auction rate securities generally have a final maturity extending 15 to 30 years or more.

The Company has not experienced any investment losses due to institutional failure or bankruptcy.

The Company’s accounts receivable are derived from sales to a large number of direct customers, resellers, and distributors in the Americas, Europe, and the Asia Pacific region. The Company performs ongoing evaluations of its customers’ financial condition and limits the amount of credit extended when deemed necessary, but generally requires no collateral.

An allowance for doubtful accounts is determined with respect to those amounts that the Company has determined to be doubtful of collection using specific identification of doubtful accounts and an aging of receivables analysis based on invoice due dates. Actual collection losses may differ from management’s estimates, and such differences could be material to the consolidated financial position, results of operations and cash flows. Uncollectible receivables are written off against the allowance for doubtful accounts when all efforts to collect them have been exhausted and recoveries are recognized when they are received. Generally, accounts receivable are past due after 30 days of an invoice date unless special payment terms are provided.

In each of the three and six months ended April 30, 2006, one customer, First Data Corporation and its affiliates, accounted for 12% of net revenues, compared to 16% and 14% for the comparable periods in fiscal 2005, respectively. At both April 30, 2006 and October 31, 2005, one customer, First Data Corporation and its affiliates, accounted for 13% of accounts receivable. No other customer accounted for 10% or more of net revenues for any period presented or accounted for 10% or more of accounts receivable at either April 30, 2006 or October 31, 2005.

The Company is exposed to credit loss in the event of nonperformance by counterparties on the foreign currency forward contracts used to mitigate the effect of exchange rate changes and interest rate caps used to mitigate the effect of interest rate changes. These counterparties are large international financial institutions and to date, no such counterparty has failed to meet its financial obligations to the Company. The Company does not anticipate nonperformance by these counterparties.

Besides those noted above, the Company had no other off-balance-sheet concentrations of credit risk, such as option contracts or other derivative arrangements as of April 30, 2006 or October 31, 2005.

Contract Manufacturing

The Company outsources the manufacturing of its products to contract manufacturers with facilities in China, Mexico, Singapore, and Brazil. The Company also utilizes third-party service providers in the United States, Canada, United Kingdom, Poland, France, Italy, Spain, and Mexico for its equipment repair service.

Fair Value of Financial Instruments

Financial instruments consist principally of cash and cash equivalents, marketable securities, accounts receivable, accounts payable, long-term debt, foreign currency forward contracts and interest rate caps. Foreign currency forward contracts and interest rate caps are recorded at fair value. The estimated fair value of cash, accounts receivable and accounts payable approximates their carrying value due to the short period of time to their maturities. The estimated value of long-term debt approximates its carrying value since the rate of interest on the long-term debt adjusts to market rates on a quarterly basis. The fair value of cash equivalents, marketable securities, foreign currency forward contracts and interest rate caps are based on quotes from brokers using market prices for those or similar instruments.

Derivative Financial Instruments

The Company uses foreign currency forward contracts to hedge certain existing and anticipated foreign currency denominated transactions. The terms of foreign currency forward contracts used are generally consistent with the timing of the foreign currency transactions. Under its foreign currency risk management strategy, the Company utilizes derivative instruments to protect its interests from unanticipated fluctuations in earnings and cash flows caused by volatility in currency exchange rates. This financial exposure is monitored and managed by the Company as an integral part of its overall risk management program which focuses on the unpredictability of financial markets and seeks to reduce the potentially adverse effects that the volatility of these markets may have on its operating results. The Company also enters into interest rate caps in managing its interest rate risk on its variable rate secured credit facility.

The Company records derivatives, namely foreign currency forward contracts and interest rate caps, on the balance sheet at fair value. Changes in the fair value of derivatives which do not qualify or are not effective as hedges are recognized currently in earnings. The Company does not use derivative financial instruments for speculative or trading purposes, nor does it hold or issue leveraged derivative financial instruments.

The Company formally documents relationships between hedging instruments and associated hedged items. This documentation includes: identification of the specific foreign currency asset, liability or forecasted transaction being hedged; the nature of the risk being hedged; the hedge objective; and, the method of assessing hedge effectiveness. Hedge effectiveness is formally assessed, both at hedge inception and on an ongoing basis, to determine whether the derivatives used in hedging transactions are highly effective in offsetting changes in foreign currency denominated assets, liabilities and anticipated cash flow or hedged items. When an anticipated transaction is no longer likely to occur, the corresponding derivative instrument is ineffective as a hedge, and changes in fair value of the instrument are recognized in net income.

The Company’s international sales are primarily denominated in U.S. dollars. For foreign currency denominated sales, however, the volatility of the foreign currency markets represents risk to the Company’s margins. The Company defines its exposure as the risk of changes in the functional-currency-equivalent cash flows (generally U.S. dollars) attributable to changes in the related foreign currency exchange rates. From time to time the Company enters into certain transactions with foreign currency contracts with critical terms designed to match those of the underlying exposure. The Company does not qualify these foreign forward currency contracts as hedging instruments and, as such, records the changes in the fair value of these derivatives immediately in other income (expense), net in the accompanying consolidated statements of operations. As of April 30, 2006, the Company did not have any outstanding foreign currency forward contracts. Effective May 1, 2006, the Company had entered into foreign currency forward contracts to sell Australian dollars and Euros with notional amounts of $2.0 million and $1.8 million, respectively and to purchase Brazilian reais with a notional amount of $1.2 million. As of April 30, 2005, the Company had entered into foreign currency forward contracts to sell Brazilian reais and Australian dollars with notional amounts of $2.5 million and $2.2 million, respectively. The Company’s foreign currency forward contracts have generally had original maturities of 35 days or less. The gains or losses on foreign currency forward contracts are recorded in other income (expense), net in the accompanying consolidated statements of operations.

The Company is exposed to interest rate risk related to its debt, which bears interest based upon the three-month LIBOR rate. On June 30, 2004, the Company entered into a secured credit facility (the “Credit Facility”) with a syndicate of financial institutions, led by Banc of America Securities and Credit Suisse (formerly Credit Suisse First Boston). Under the Credit Facility, the Company is required to fix the interest rate through swaps, rate caps, collars and similar agreements with respect to at least 30% of the

outstanding principal amount of all loans and other indebtedness that have floating interest rates. This interest rate protection must extend through June 30, 2006. In July 2004, the Company purchased a two-year interest rate cap for $285,000 with a notional amount of $50 million under which the Company will receive interest payments if the three-month LIBOR rate exceeds 4%. In March 2005, the Company purchased a one-year interest rate cap for $29,000 with an effective date of July 2005 and a notional amount of $30 million, under which the Company will receive payments to the extent the three-month LIBOR rate exceeds 5%.

The two interest rate caps are recorded in prepaid expenses and other current assets in the consolidated balance sheet and are being amortized as interest expense over the life of the caps. For the three and six months ended April 30, 2006, the Company received interest of $81,000 and $112,000 as a result of the three-month LIBOR rate on its Term Loan B exceeding 4%, which is recorded as an offset of interest expense in the statements of operations.

The interest rate caps were designated as cash flow hedges and are recorded at fair value. The fair value of the interest rate caps as of April 30, 2006 was $155,000 which was recorded in prepaid expenses and other current assets in the consolidated balance sheet, with the related $57,000 unrealized gain recorded as a component of accumulated other comprehensive income, net of $22,000 tax benefit.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash, money market funds, and other highly liquid investments with maturities of three months or less when purchased.

Marketable Securities

The Company classifies its marketable securities as available-for-sale in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. Available-for-sale securities are carried at fair value, with unrealized holding gains and losses reported in accumulated other comprehensive income, which is a separate component of stockholders’ equity, net of tax, in the accompanying consolidated balance sheets. The amortization of premiums and discounts on the investments and realized gains and losses, determined by specific identification based on the trade date of the transactions, are recorded in interest income in the accompanying consolidated statements of operations.

Equity Earnings (Loss) in Affiliates

The Company has a minority investment in VeriFone Transportation Systems (“VTS”). The investment in VTS is accounted for under the equity method and included in the Other Assets in the accompanying consolidated balance sheets. The earnings (loss) are included in the Other Income (Expense), net in the accompanying consolidated statements of operations. For the three and six months ended April 30, 2006 the activity relating to this investment has been insignificant.

Debt Issuance Costs

Debt issuance costs are stated at cost, net of accumulated amortization. Amortization expense is calculated using the effective interest method and recorded in interest expense in the accompanying consolidated statements of operations.

Inventories

Inventories are stated at the lower of standard cost or market. Standard costs approximate the first-in, first-out (“FIFO”) method. The Company regularly monitors inventory quantities on hand and records

write-downs for excess and obsolete inventories based primarily on the Company’s estimated forecast of product demand and production requirements. Such write-downs establish a new cost-basis of accounting for the related inventory. Actual inventory losses may differ from management’s estimates.

Shipping and Handling Costs

Shipping and handling costs are expensed as incurred and are included in cost of net revenue in the accompanying consolidated statements of operations.

Warranty Costs

The Company accrues for estimated warranty obligations when revenue is recognized based on an estimate of future warranty costs for delivered products. Such estimates are based on historical experience and expectations of future costs. The Company periodically evaluates and adjusts the accrued warranty costs to the extent actual warranty costs vary from the original estimates. The Company’s warranty period typically extends from thirteen months to five years from the date of shipment. Costs associated with maintenance contracts, including extended warranty contracts, are expensed when they are incurred. Actual warranty costs may differ from management’s estimates.

Research and Development Costs

Research and development costs are expensed as incurred. Costs eligible for capitalization under SFAS No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed, were $0.7 million and $1.1 million for the three and six months ended April 30, 2006, respectively, compared to $0.1 million and $0.2 million for the comparable periods in fiscal 2005. Capitalized software development costs of $6.6 million and $5.5 million as of April 30, 2006 and October 31, 2005, respectively, are being amortized on a straight-line basis over the estimated life of the product to which the costs relate, ranging from three to five years. These costs, net of accumulated amortization of $2.6 million and $2.0 million as of April 30, 2006 and October 31, 2005, respectively, are recorded in other assets in the accompanying consolidated balance sheets.

Advertising Costs

Advertising costs are expensed as incurred and totaled approximately $40,000 and $61,000 for the three and six months ended April 30, 2006, respectively, compared to $38,000 and $45,000 for the comparable periods in fiscal 2005, respectively.

Income Taxes

Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts using enacted tax rates in effect for the year the differences are expected to reverse. The Company records a valuation allowance to reduce deferred tax assets to the amount that is expected to be realized on a more likely than not basis.

Comprehensive Income

Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes certain changes in equity that are excluded from results of operations. Specifically, foreign currency translation adjustments, changes in the fair value of derivatives designated as hedges and unrealized gains and losses on available-for-sale marketable securities are included in accumulated other comprehensive income in the accompanying consolidated balance sheets.

Equipment and Improvements

Equipment and improvements are stated at cost, net of accumulated depreciation and amortization. Equipment and improvements are depreciated on a straight-line basis over the estimated useful lives of the assets, generally two to ten years. The cost of equipment under capital leases is recorded at the lower of the present value of the minimum lease payments or the fair value of the assets and is amortized on a straight-line basis over the shorter of the term of the related lease or the estimated useful life of the asset. Amortization of assets under capital leases is included with depreciation expense.

Goodwill and Other Purchased Intangible Assets

Goodwill and other purchased intangible assets have been recorded as a result of the Company’s acquisitions. Goodwill is not amortized for book purposes but is amortizable for tax purposes over 15 years. Goodwill is subject to an annual impairment test. Other intangible assets are amortized over their estimated useful lives, generally one and a half to five years.

The Company is required to perform an annual impairment test of goodwill and indefinite-lived intangible assets. Should certain events or indicators of impairment occur between annual impairment tests, the Company performs the impairment test of goodwill and indefinite-lived intangible assets at that date. In the first step of the analysis, the Company’s assets and liabilities, including existing goodwill and other intangible assets, are assigned to these identified reporting units to determine their carrying value. The Company currently has five reporting units. Goodwill is allocated to a reporting unit based on its relative contribution to the Company’s operating results. If the carrying value of a reporting unit is in excess of its fair value, an impairment may exist, and the Company must perform the second step of comparing the implied fair value of the goodwill to its carrying value to determine the impairment charge.

The fair value of the reporting units is determined using the income approach. The income approach focuses on the income-producing capability of an asset, measuring the current value of the asset by calculating the present value of its future economic benefits such as cash earnings, cost savings, tax deductions, and proceeds from disposition. Value indications are developed by discounting expected cash flows to their present value at a rate of return that incorporates the risk-free rate for the use of funds, the expected rate of inflation, and risks associated with the particular investment. Through April 30, 2006, no impairment charges have been recorded.

Accounting for Impairment of Long-Lived Assets

The Company periodically evaluates whether changes have occurred that would require revision of the remaining useful life of equipment and improvements and purchased intangible assets or render them not recoverable. If such circumstances arise, the Company uses an estimate of the undiscounted value of expected future operating cash flows to determine whether the long-lived assets are impaired. If the aggregate undiscounted cash flows are less than the carrying amount of the assets, the resulting impairment charge to be recorded is calculated based on the excess of the carrying value of the assets over the fair value of such assets, with the fair value determined based on an estimate of discounted future cash flows. Through April 30, 2006, no impairment charges have been recorded.

Stock Based Compensation

Prior to May 1, 2005, the Company accounted for stock based employee compensation plans under the intrinsic value recognition and measurement provisions of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees and related Interpretations as permitted by Statement of Financial Accounting Standard (“SFAS”) No. 123, Accounting for Stock-Based Compensation (“SFAS 123”).

Effective May 1, 2005, the Company adopted the fair value recognition and measurement provisions of SFAS No. 123(R), Share-Based Payment (“SFAS 123(R)”). SFAS 123(R) is applicable for stock-based awards exchanged for employee services and in certain circumstances for nonemployee directors. Pursuant to SFAS 123(R), stock-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense over the requisite service period. The Company elected to adopt the modified-prospective-transition method, as provided by SFAS 123(R). Accordingly, prior period amounts have not been restated. Under this transitional method, the Company is required to record compensation expense for all awards granted after the date of adoption using grant-date fair value estimated in accordance with the provisions of SFAS 123(R) and for the unvested portion of previously granted awards as of May 1, 2005 using the grant-date fair value estimated in accordance with the provisions of SFAS 123.

Prior to the adoption of SFAS 123(R), the Company presented all tax benefits of deductions resulting from the exercise of stock options as operating cash flows in the accompanying consolidated statements of cash flows. SFAS 123(R) requires the cash flows resulting from the tax benefits due to tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows.

Segment Reporting

The Company maintains two reportable segments, North America, consisting of the United States and Canada, and International, consisting of all other countries in which the Company makes sales outside of the United States and Canada.

Net Income Per Share

Basic net income per common share is computed by dividing income attributable to common stockholders by the weighted average number of common shares outstanding for the period, less the weighted average number of shares subject to repurchase. Diluted net income per common share is computed using the weighted average number of common shares outstanding plus the effect of common stock equivalents, unless the common stock equivalents are antidilutive.

The following table sets forth the computation of basic and diluted net income per share (in thousands, except share amounts):

	Three Months Ended April 30,						Six Months Ended April 30,
	2006			2005			2006			2005
Basic and diluted net income per share:
Numerator:
Net income	$	15,036		$	8,807		$	28,830		$	14,644
Denominator:
Weighted average shares of voting and non voting common stock outstanding	67,801			56,423			67,753			56,424
Less: weighted average shares subject to repurchase	(2,002		)	(3,020		)	(2,002		)	(3,035		)
Weighted average shares used in computing basic net income per share	65,799			53,403			65,751			53,389
Add dilutive securities:
Weighted average shares subject to repurchase	2,002			3,020			2,002			3,035
Stock options and restricted stock units	1,158			661			1,134			598
Weighted average shares used in computing diluted net income per share	68,959			57,084			68,887			57,022
Net income per share:
Basic	$	0.23		$	0.16		$	0.44		$	0.27
Diluted	$	0.22		$	0.15		$	0.42		$	0.26

For the three and six months ended April 30, 2006, 1,009,825 options to purchase Common Stock were excluded from the calculation of weighted average shares for diluted net income per share as they were antidilutive. For the three months ended April 30, 2005, all options to purchase Common Stock were included in the calculation of weighted average shares for diluted net income per share. For the six months ended April 30, 2005, 2,247,700 options to purchase Common Stock were excluded from the calculation of weighted average shares for diluted net income per share as they were antidilutive.

Recent Accounting Pronouncements

In May 2005, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 154, “Accounting Changes and Error Corrections”—a replacement of APB Opinion No. 20 and FASB Statement No. 3 (“SFAS 154”). SFAS 154 requires retrospective application to prior periods’ financial statements for changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 also requires that a change in depreciation, amortization, or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate effected by a change in accounting principle. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The implementation of SFAS 154 is not expected to have a material impact on the Company’s consolidated results of operations, financial position or cash flows.

In November 2005, FASB issued FASB Staff Position (“FSP”) FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“FSP 115-1”), which provides guidance on determining when investments in certain debt and equity securities are considered impaired, whether that impairment is other-than-temporary, and on measuring such impairment loss. FSP 115-1 also includes accounting considerations subsequent to the recognition of an

other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. FSP 115-1 is effective for reporting periods beginning after December 15, 2005. The Company’s adoption of FSP 115-1 in the second quarter of fiscal 2006 did not have a material impact on the Company’s consolidated results of operations, financial position or cash flows.

In February 2006, FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments”—an amendment of FASB Statements No. 133 and 140 (“SFAS 155”). SFAS 155 permits fair value measurement for any hybrid financial instrument that contains an embedded derivative, clarifies which interest-only strips and principal-only strips are not subject to the requirement of SFAS 133, establishes a requirement to evaluate interests in securitized financial assets, clarifies the concentrations of credit risk, and eliminates the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument. SFAS 155 improves financial reporting by eliminating the exemption from applying SFAS 133 to interest in securitized financial assets and allowing to elect fair value measurement at acquisition, at issuance, or when a previously recognized financial instrument is subject to a measurement. SFAS 155 is effective for all financial instruments acquired or issued in fiscal years beginning after September 15, 2006. The implementation of SFAS 155 is not expected to have a material impact on the Company’s consolidated results of operations, financial position or cash flows.

Note 3. Balance Sheet and Statements of Operations Detail

Marketable Securities

Marketable securities as of April 30, 2006 were as follows (in thousands):

	Cost		Gross Unrealized Gains			Gross Unrealized Losses				Fair Value
U.S. corporate securities	$	4,968		$	—		$	(1	)		$	4,967
Brazil certificate of deposit	$	44		$	—		$	—			$	44
Auction rate securities (due in one year or less)	7,700			—			—				7,700
	$	12,712		$	—		$	(1	)		$	12,711

Marketable securities as of October 31, 2005 were as follows (in thousands):

	Cost		Gross Unrealized Gains			Gross Unrealized Losses				Fair Value
U.S. corporate securities	$	4,771		$	—		$	(2	)		$	4,769
Auction rate securities	12,000			—			—				12,000
	$	16,771		$	—		$	(2	)		$	16,769

Investments with original maturities greater than 90 days that mature less than one year from the consolidated balance sheet date are classified as marketable securities. In the table above, the Company has reflected the duration of auction rate securities based on their reset feature. Rates on these securities typically reset every 7, 28 or 35 days. The underlying securities in these investments have a final maturity extending 30 years or more.

Inventories

Inventories consisted of the following (in thousands):

	April 30, 2006			October 31, 2005
Raw materials		$	3,955		$	2,745
Work-in-process		2,627			1,133
Finished goods		41,369			29,623
		$	47,951		$	33,501

Equipment and Improvements, net

Equipment and improvements, net consisted of the following (in thousands):

	April 30, 2006				October 31, 2005
Computer hardware and software		$	4,448			$	3,525
Office equipment, furniture and fixtures		1,386				1,407
Machinery and equipment		3,974				3,086
Leasehold improvement		3,582				3,257
Construction in progress		1,504				1,481
		14,894				12,756
Accumulated depreciation and amortization		(8,271		)		(6,883		)
		$	6,623			$	5,873

As of April 30, 2006 and October 31, 2005, equipment amounting to $1.3 million was capitalized under capital leases. Related accumulated amortization as of April 30, 2006 and October 31, 2005 amounted to $1.2 million and $1.1 million, respectively.

Purchased Intangible Assets, net

Purchased intangible assets subject to amortization consisted of the following (in thousands):

	Gross Carrying Amount			Accumulated Amortization											Net
	April 30, 2006			October 31, 2005				Additions				April 30, 2006			April 30, 2006		October 31, 2005
Developed technology		$	30,804		$	(25,879	)		$	(1,568	)	$	(27,447	)	$	3,357		$	4,925
Core technology		14,442			(9,629		)		(1,444		)	(11,073		)	3,369			4,813
Trade name		22,225			(16,402		)		(1,770		)	(18,172		)	4,053			5,823
Customer relationships		15,714			(12,363		)		(548		)	(12,911		)	2,803			3,351
		$	83,185		$	(64,273	)		$	(5,330	)	$	(69,603	)	$	13,582		$	18,912

Amortization of purchased intangibles was allocated as follows (in thousands):

	Three Months Ended April 30,				Six Months Ended April 30,
	2006		2005		2006		2005
Included in cost of net revenues	$	1,419	$	1,693	$	3,012	$	3,655
Included in operating expenses	1,159		1,346		2,318		2,650
	$	2,578	$	3,039	$	5,330	$	6,305

Estimated future amortization expense of intangible assets recorded as of April 30, 2006 was as follows (in thousands):

	Cost of Revenues			Operating Expenses			Total
2006 (remaining six months)		$	2,142		$	2,313	$	4,455
2007		3,217			3,372		6,589
2008		846			754		1,600
2009		526			312		838
2010		—			100		100
		$	6,731		$	6,851	$	13,582

Goodwill

Activity related to goodwill consisted of the following (in thousands):

	Six Months Ended April 30, 2006			Year Ended October 31, 2005
Balance, beginning of period		$	47,260		$	53,224
Additions related to the asset acqusition of GO Software		—			4,705
Resolution of tax contingencies and adjustments to tax reserves and valuation allowances established in purchase accounting		—			(10,669		)
Balance, end of period		$	47,260		$	47,260

Warranty

Activity related to warranty consisted of the following (in thousands):

	Six Months Ended April 30,
	2006			2005
Balance, beginning of period	$	5,243		$	3,795
Warranty charged to cost of net revenues	1,767			1,572
Utilization of warranty	(2,394		)	(1,577		)
Changes in estimates	(47		)	407
Balance, end of period	4,569			4,197
Less current portion	(3,826		)	(3,356		)
	$	743		$	841

Deferred revenue, net

Deferred revenue, net consisted of the following (in thousands):

	April 30, 2006				October 31, 2005
Deferred revenue		$	25,791			$	17,542
Deferred cost of net revenues		(5,075		)		(2,019		)
		$	20,716			$	15,523

Other Income (Expense), net

Other income (expense), net consisted of the following (in thousands):

	Three Months Ended April 30,						Six Months Ended April 30,
	2006			2005			2006			2005
Refund of foreign customs fees	$	—		$	—		$	288		$	—
Foreign currency transaction gains (losses)	192			228			172			534
Foreign currency contract gains (losses)	(113		)	(227		)	(189		)	(739		)
Other	(14		)	28			(5		)	34
	$	65		$	29		$	266		$	(171	)

Note 4. Financing

The Company’s financings consisted of the following (in thousands):

	April 30, 2006				October 31, 2005
Secured credit facility
Revolver		$	—			$	—
Term B loan		181,628				182,553
Capital leases		147				253
		181,775				182,806
Less current portion		(1,927		)		(1,994		)
		$	179,848			$	180,812

Secured Credit Facility

On June 30, 2004, the Company entered into a secured credit facility (the “Credit Facility”) with a syndicate of financial institutions, led by Banc of America Securities and Credit Suisse (formerly Credit Suisse First Boston). The Credit Facility consisted of a Revolver permitting borrowings of up to $30 million, a Term B Loan of $190 million, and a Second Lien Loan of $72 million. The Credit Facility is guaranteed by the Company and its subsidiaries and is secured by collateral including substantially all of the Company’s assets and stock of the Company’s subsidiaries. As of April 30, 2006, the interest rate on the Term B Loan was 6.88%. For the three and six months ended April 30, 2006 the weighted average interest rate on the Credit Facility was 6.43% and 6.34%, respectively. The Company also pays a commitment fee on the unused portion of the Revolver under its Credit Facility at a rate that varies between 0.375% and 0.50% per annum depending upon its consolidated total leverage ratio. As of April 30, 2006, the Company was paying a commitment fee at a rate of 0.375% per annum.

On March 23, 2005, the Company executed the first amendment to its Credit Facility that became effective upon closing of the Company’s initial public offering on May 4, 2005. Prior to the amendment, borrowings on the Term B Loan bore interest at a rate of either 2.50% over the three-month LIBOR or 1.50% over the lender’s base rate. Subsequent to the amendment, at the Company’s option, borrowings on the Term B Loan bear interest at a rate of either 2.00% (1.75% after April 28, 2006) over the three-month LIBOR or 1.00% over the lender’s base rate. On September 7, 2005, the Company executed the second amendment to its Credit Facility. Under the terms of the second amendment, the Company is no longer required to make a mandatory payment of 50% of the proceeds that it receives from a public equity offering. These amendments also relaxed certain of the financial and non-financial covenants.

At the Company’s option, the Revolver bears interest at a rate of 1.75% over the three-month LIBOR, which was 5.13% and 4.24% as of April 30, 2006 and October 31, 2005, respectively, or 0.75% over the lender’s base rate, which was 7.75% and 6.75% as of April 30, 2006 and October 31, 2005, respectively. The entire $30 million Revolver was available for borrowing to meet short-term working capital requirements as of April 30, 2006 and October 31, 2005. At the Company’s option, borrowings on the Term B Loan bear interest at a rate of either 1.75% (2.0% from May 4, 2005 to April 28, 2006 and 2.50% prior to May 4, 2005) over the three-month LIBOR or 1.00% (1.50% prior to May 4, 2005) over the lender’s base rate.

Interest payments are due monthly, bi-monthly, quarterly or bi-quarterly at the Company’s option. The lender’s base rate is the greater of the Fed Funds rate plus 50 basis points or the Bank of America prime rate. The respective maturity dates on the components of the Credit Facility are June 30, 2009 for the Revolver and June 30, 2011 for the Term B Loan. Payments on the Term B Loan are due in equal quarterly installments of $462,000 over the seven-year term on the last day of the second month of each quarter.

The terms of the Credit Facility require the Company to comply with financial covenants, including maintaining leverage, and fixed charge coverage ratios, obtaining protection against fluctuation in interest rates, and limits on capital expenditure levels at the end of each fiscal quarter. As of April 30, 2006, the Company was required to maintain a senior secured leverage ratio of not greater than 2.75 to 1.0, a maximum senior leverage ratio of not greater than 4.25 to 1.0 and a fixed charge ratio of at least 2.0 to 1.0. Some of the financial covenants become more restrictive over the term of the Credit Facility. Noncompliance with any of the financial covenants without cure or waiver would constitute an event of default under the Credit Facility. An event of default resulting from a breach of a financial covenant may result, at the option of lenders holding a majority of the loans, in an acceleration of repayment of the principal and interest outstanding and a termination of the revolving Credit Facility. The Credit Facility also contains nonfinancial covenants that restrict some of the Company’s activities, including, its ability to dispose of assets, incur additional debt, pay dividends, create liens, make investments, make capital expenditures and engage in specified transactions with affiliates. The terms of the Credit Facility permit prepayments of principal and require prepayments of principal upon the occurrence of certain events including among others, the receipt of proceeds from the sale of assets, the receipt of excess cash flow as defined, and the receipt of proceeds of certain debt issues. The Credit Facility also contains customary events of default, including defaults based on events of bankruptcy and insolvency, nonpayment of principal, interest or fees when due, subject to specified grace periods, breach of specified covenants change in control and material inaccuracy of representations and warranties. The Company was in compliance with its financial and nonfinancial covenants as of April 30, 2006.

The Company intends to replace its existing credit facility with a new credit facility in the event that the merger agreement with Lipman Electronics Engineering, Ltd. (“Lipman”) is approved (See Note 13). It is expected that the new credit facility will have a new term loan component of approximately $500 million and a revolving credit component of approximately $40 million. It is expected that the new credit facility will have terms and covenants substantially similar to the existing credit facility.

Note 5. Restructuring Charges

In connection with the acquisition of VeriFone Inc. by the Company on July 1, 2002, the Company assumed the liability for a restructuring plan (fiscal 2002 restructuring plan). The remaining accrued restructuring balance represents primarily future facilities lease obligations, net of estimated future sublease income, which are expected to be paid through 2007.

Activities related to the fiscal 2002 restructuring plan are as follows (in thousands):

	Facilities				Other				Total			Short Term portion				Long Term portion
Balance at October 31, 2005		$	1,200			$	60		$	1,260			$	765			$	495
Additions		—				7			7				360				(353		)
Cash payments		(353		)		(8		)	(361		)		(361		)		—
Balance at April 30, 2006		$	847			$	59		$	906			$	764			$	142

	Facilities				Other				Total			Short Term portion				Long Term portion
Balance at October 31, 2004		$	2,035			$	78		$	2,113			$	1,326			$	787
Additions		95				—			95				501				(406		)
Cash payments		(577		)		(6		)	(583		)		(583		)		—
Balance at April 30, 2005		$	1,553			$	72		$	1,625			$	1,244			$	381

In the first quarter of fiscal 2006, the Company implemented a restructuring plan to establish Singapore supply chain operations to leverage a favorable tax environment and manufacturing operations in the Asia Pacific region (fiscal 2006 restructuring plan). The plan included reductions in workforce of employees in the United States, Taiwan, Australia and Hong Kong with an expected cost of $623,000. For the six months ended April 30, 2006, the charge to cost of net revenues related to plan was $546,000 in severance related expenses for employees. As of April 30, 2006, $389,000 of the severance costs had been paid. Additional restructuring costs of $77,000 are expected to be incurred during the three months ended July 30, 2006. The remaining severance payments are expected to be paid by the end of fiscal 2006.

Activities related to the fiscal 2006 restructuring plan are as follows (in thousands):

	Employee costs				Total			Short Term Portion				Long Term Portion
Balance at October 31, 2005		$	—		$	—			$	—			$	—
Additions		546			546				546				—
Cash payments		(389		)	(389		)		(389		)		—
Balance at April 30, 2006		$	157		$	157			$	157			$	—

In connection with acquisition of the assets of the GO Software business from Return on Investment Corporation on March 1, 2005, the Company accrued in the purchase price allocation $313,000 of restructuring costs related to the integration of GO Software’s Savannah helpdesk facility with the Company’s helpdesk facility in Clearwater, Florida, of which $248,000 has been paid as of April 30, 2006 (See Note 13).

As of April 30, 2006 and October 31, 2005, $922,000 and $849,000 of the restructuring liability was included in other current liabilities and $142,000 and $495,000 was included in other long-term liabilities in the accompanying consolidated balance sheets.

Note 6. Commitments and Contingencies

The Company leases certain real and personal property under noncancelable operating leases. Additionally, the Company subleases certain real property to third parties. Future minimum lease payments and sublease rental income under these leases as of October 31, 2005 were as follows (in thousands):

Twelve months ending October 31	Minimum Lease Payments			Sublease Rental Income				Net Minimum Lease Payments
2006		$	6,203		$	(379	)		$	5,824
2007		4,045			(248		)		3,797
2008		3,176			(214		)		2,962
2009		1,752			(222		)		1,530
2010		694			(19		)		675
Thereafter		84			—				84
		$	15,954		$	(1,082	)		$	14,872

Certain leases require the Company to pay property taxes, insurance and routine maintenance, include rent escalation clauses and options to extend the term of certain leases. Rent expense was approximately $2.3 million and $4.4 million for the three and six months ended April 30, 2006, respectively, compared to $2.1 million and $3.9 million for the comparable periods in fiscal 2005. Sublease rental income was approximately $73,000 and $144,000 for the three and six months ended April 30, 2006, respectively, compared to $19,000 and $109,000 for the comparable periods in fiscal 2005.

Manufacturing Agreements

The Company works on a purchase order basis with third party contract manufacturers with facilities in China, Mexico, Singapore, and Brazil to manufacture substantially all of the Company’s inventories. The Company provides each manufacturer with a master purchase order on a monthly basis, which constitutes a binding commitment by the Company to purchase materials produced by the manufacturer as specified in the master purchase order. The total amount of purchase commitments as of April 30, 2006 and October 31, 2005 was approximately $60.0 million and $18.6 million, respectively, and are generally paid within one year. Of this amount, $2.1 million and $1.9 million has been recorded in other current liabilities in the accompanying condensed consolidated balance sheets as of April 30, 2006 and October 31, 2005, respectively, because the commitment may not have future value to the Company.

Employee Health and Dental Costs

The Company is primarily self-insured for employee health and dental costs and has stop-loss insurance coverage to limit per-incident liability for health costs. The Company believes that adequate accruals are maintained to cover the retained liability. The accrual for self-insurance is determined based on claims filed and an estimate of claims incurred but not yet reported.

Litigation

The Company is subject to various legal proceedings related to patent, commercial, customer, and employment matters that have arisen during the ordinary course of its business. Although there can be no assurance as to the ultimate disposition of these matters, the Company’s management has determined, based upon the information available at the date of these financial statements, that the expected outcome of these matters, individually or in the aggregate, will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

Brazilian State Tax Audit

The Company’s Brazilian subsidiary has been notified of a tax assessment regarding Brazilian state value added tax (“VAT”), for the periods from January 2000 to December 2001 and related to products supplied to the Company by a contract manufacturer. The assessment relates to an asserted deficiency of 6.5 million Brazilian reais (approximately $3.2 million) including interest and penalties. The tax assessment was based on a clerical error in which the Company’s Brazilian subsidiary omitted the required tax exemption number on its invoices. Management does not expect that the Company will ultimately incur a material liability in respect of this assessment, because they believe, based in part on advice of the Company’s Brazilian tax counsel, that the Company will prevail in the proceedings relating to this assessment. On May 25, 2005, the Company had an administrative hearing with respect to this audit. Management expects to receive the decision of the administrative judges sometime in 2006. In the event the Company receives an adverse ruling from the administrative body, the Company will decide whether or not to appeal and would reexamine the determination as to whether an accrual is necessary.

It is currently uncertain what impact this state tax examination may have with respect to the Company’s use of a corresponding exemption to reduce the Brazilian state VAT.

Note 7. Comprehensive Income

The components of comprehensive income were as follows (in thousands):

	Three Months Ended April 30,					Six Months Ended April 30,
	2006		2005			2006		2005
Net income	$	15,036	$	8,807		$	28,830	$	14,644
Foreign currency translation adjustments, net of tax	231		(67		)	318		111
Unrecognized gain on interest rate hedges, net of tax	25		10			52		27
Unrealized gain on marketable securities, net of tax	—		—			1		—
Comprehensive income	$	15,292	$	8,750		$	29,201	$	14,782

The components of accumulated other comprehensive income consisted of the following (in thousands):

	April 30, 2006			October 31, 2005
Foreign currency translation adjustments, net of tax of $1,097 and $834		$	1,076		$	759
Unrecognized gain (loss) on interest rate hedges, net of tax of $22 and $11		35			(17		)
Unrealized loss on marketable securities, net of tax		—			(2		)
Accumulated other comprehensive income		$	1,111		$	740

Note 8. Stockholders’ Equity

Common and Preferred Stock

On May 4, 2005, the Company amended and restated its certificate of incorporation to authorize 100,000,000 shares of Common Stock, par value $0.01 per share, and 10,000,000 shares of Preferred Stock, par value $0.01 per share. The board of directors has the authority to issue the undesignated Preferred Stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof. The holder of each share of Common Stock has the right to one vote. As of April 30, 2006 and October 31, 2005, there were no shares of Preferred Stock outstanding.

In conjunction with the May 4, 2005 amendment and restatement of the Company’s certificate of incorporation, all shares of Nonvoting Common Stock were converted to shares of Common Stock on a one-for-one basis. Further, all options to purchase shares of Nonvoting Common Stock were converted to options to purchase Common Stock on a one-for-one basis. As a result of that modification, the Company recognized additional compensation expense of $12,000 and $24,000 for the three and six months ended April 30, 2006 that was determined pursuant to FAS123(R).

On May 4, 2005, the Company completed an initial public offering of 17.7 million shares of its Common Stock at a price of $10.00 per share. Of the shares sold, 8.5 million shares, with an aggregate offering price of $85.0 million, were sold by the Company and 9.2 million shares, with an aggregate offering price of $92.1 million were sold by selling stockholders, including the underwriters’ over-allotment of 2.3 million shares. The Company received $76.8 million in net proceeds from the offering, of which $72.0 million was used to repay the outstanding principal owed on the second lien loan under the Secured Credit Facility and $2.2 million was used to pay a prepayment premium under the Secured Credit Facility.

On September 23, 2005, the Company completed a follow-on public offering of approximately 13.1 million shares of its Common Stock at a price of $20.78 per share. Of the shares sold, 2.5 million shares, with an aggregate offering price of $51.9 million, were sold by the Company and approximately 10.6 million shares, with an aggregate offering price of $219.8 million were sold by selling stockholders. The Company received approximately $48.7 million in net proceeds from this offering.

Restricted Common Stock

The Company has a right to repurchase any or all of 3,910,428 shares of Common Stock sold to the Company’s Chief Executive Officer (the “CEO”) at the original sale price, $0.0333 per share, in the event the CEO ceases to be employed by the Company or any of its subsidiaries. This right lapses at a rate of 20% per year. Upon the sale of the Company, any remaining unvested shares will become vested. As of April 30, 2006, 1,564,171 shares of Common Stock issued to the CEO remained subject to this lapsing repurchase right.

The Company has the right to repurchase any or all of 1,929,145 shares of Common Stock sold to certain executives of the Company pursuant to the Company’s 2002 Securities Purchase Plan at the lesser of the original sale price, $0.0333 per share, or the fair value on the date of separation in the event that the executives cease to be employed by the Company or any of its subsidiaries. This right lapses at a rate of 20% per year. Upon the sale of the Company, all remaining unvested shares will become vested. As of April 30, 2006, 437,969 shares of Common Stock remained subject to this lapsing repurchase right.

Pursuant to APB No. 25 the Company recorded deferred stock-based compensation of $446,000 in connection with several sales of Common Stock to the executives before October 31, 2003. The deferred stock-based compensation represents the difference between the fair value of the Company’s Common Stock for accounting purposes and the original sale price. The Company amortized the deferred stock-based compensation to expense on a straight-line basis over the vesting period through April 30, 2005. The Company ceased amortization of this stock-based compensation pursuant to APB No. 25 on April 30, 2005 upon adoption of SFAS 123(R). During the three and six months of fiscal year 2005, the Company recorded $37,000 and $52,000 of stock compensation expense, which was included in general and administrative expenses in the accompanying consolidated statements of operations.

Stock Option Plans

As of April 30, 2006, the Company had a total of 3,976,155 stock options outstanding with a weighted average exercise price of $12.73 per share. The number of shares that remained available for future grants was 8,290,175 as of April 30, 2006.

New Founders’ Stock Option Plan

On April 30, 2003, the Company adopted the New Founders’ Stock Option Plan (the “Option Plan”) for executives and employees of the Company. A total of 1,500,000 shares of the Company’s Common Stock had been reserved for issuance under the Option Plan. Option awards under the Option Plan are generally granted with an exercise price equal to the market price of the Company’s stock on the date of grant. Those option awards generally vest in equal annual amounts over a period of five years from the date of grant and have a maximum term of 10 years.

The following table summarizes option activity under the Option Plan during the six months ended April 30, 2006:

	Shares		Weighted Average Exercise Price			Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value (thousands)
Balance at November 1, 2005	1,269,045			$	4.13
Granted	—			—
Exercised	(187,430	)		3.16
Cancelled	(46,485	)		9.11
Balance at April 30, 2006	1,035,130			$	4.08		7.85		$	27,822
Vested or expected to vest at April 30, 2006	852,637			$	4.08		7.85		$	22,917
Exercisable at April 30, 2006	392,105			$	4.08		7.55		$	2,959

The expected to vest options are the result of applying the pre-vesting forfeiture rate assumptions to total outstanding options.

The total intrinsic value of options exercised during the three and six months ended April 30, 2006 was $1.7 million and $4.3 million, respectively.

As of April 30, 2006, pursuant to FAS 123(R) there was $1.4 million of total unrecognized compensation cost related to nonvested shared based compensation arrangements granted under the Option Plan. The cost is expected to be recognized over a remaining weighted average period of 2.85 years. The total fair value of shares vested during the six months ended April 30, 2006 was $187,000.

The Company will no longer grant options under the Option Plan and retired 158,420 shares available for future grant under the Option Plan on March 22, 2006.

Directors’ Stock Option Plan

In January 2005, the Company adopted the Outside Directors’ Stock Option Plan (the “Directors’ Plan”) for members of the Board of Directors of the Company who are not employees of the Company or representatives of major stockholders of the Company. A total of 225,000 shares of the Company’s Common Stock had been reserved for issuance under the Directors’ Plan. Stock options under the Directors’ Plan generally vest over a period of four years from the date of grant and have a maximum term of 7 years.

The following table summarizes option activity under the Directors’ Plan during the six months ended April 30, 2006:

	Shares	Weighted Average Exercise Price			Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value (thousands)
Balance at November 1, 2005	90,000		$	10.00
Granted	—		—
Exercised	—		—
Cancelled	—		—
Balance at April 30, 2006	90,000		$	10.00		5.73		$	1,886
Vested or expected to vest at April 30, 2006	90,000		$	10.00		5.73		$	1,886
Exercisable at April 30, 2006	26,250		$	10.00		5.72		$	150

The expected to vest options are the result of applying the pre-vesting forfeiture rate assumptions to total outstanding options.

As of April 30, 2006, pursuant to FAS 123(R) there was $378,000 of total unrecognized compensation cost related to nonvested shared-based compensation arrangements granted under the Directors’ Plan. The cost is expected to be recognized over a remaining weighted average period of 2.73 years. The total fair value of shares vested during the six months ended April 30, 2006 was $162,000.

The Company will no longer grant options under Directors’ Plan and retired 135,000 shares available for future grant under the Directors’ Plan on March 22, 2006. Option grant for members of the Board of Directors of the Company who are not employees of the Company or representatives of major stockholders of the Company will be covered under 2006 Equity Incentive Option Plan.

2005 Equity Incentive Option Plan

On April 29, 2005, the Company adopted the 2005 Equity Incentive Option Plan (the “EIP Plan”) for executives and employees of the Company. A total of 3,100,000 shares of the Company’s Common Stock have been reserved for issuance under the EIP Plan. Option awards are generally granted with an exercise price equal to the market price of the Company’s stock at the date of grant. Those options generally vest over a period of four years from the date of grant and have a maximum term of 7 years.

The following table summarizes option activity under the EIP Plan during the six months ended April 30, 2006:

	Shares		Weighted Average Exercise Price			Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value (thousands)
Balance at November 1, 2005	2,119,200			$	11.21
Granted	180,000			24.81
Exercised	—			—
Cancelled	(98,000	)		15.67
Balance at April 30, 2006	2,201,200			$	12.13		6.08		$	41,456
Vested or expected to vest at April 30, 2006	2,042,714			$	12.13		6.08		$	38,471
Exercisable at April 30, 2006	—			$	—		—		$	—

The expected to vest options are the result of applying the pre-vesting forfeiture rate assumptions to total outstanding options.

The weighted average grant date fair value of options granted during the six months ended April 30, 2006 was $12.07 per share.

As of April 30, 2006, pursuant to FAS 123(R) there was $10.9 million of total unrecognized compensation cost related to nonvested shared based compensation arrangements granted under the EIP Plan. The cost is expected to be recognized over a remaining weighted average period of 3.06 years.

The Company will no longer grant options under the EIP Plan and retired 898,800 shares available for future grant under the EIP Plan on March 22, 2006.

2006 Equity Incentive Option Plan

On March 22, 2006, the stockholders of VeriFone approved the 2006 Equity Incentive Option Plan (the “2006 Plan”) for executives and employees of the Company. A total of 9,000,000 shares of the Company’s Common Stock have been reserved for issuance under the 2006 Plan. Awards are generally granted with an exercise price equal to the market price of the Company’s Common Stock at the date of grant. Those awards generally vest over a period of four years from the date of grant and have a maximum term of 7 years. Any shares granted as stock options and stock appreciation rights shall be counted as one share for every share granted. Any shares granted as awards other than stock options or stock appreciation rights shall be counted as 1.75 shares for every share granted.

In March 2006, the Company issued 80,000 restricted stock units (RSU) to its executive officers with zero value exercise price. Twenty-five percent of the award shall vest one year from the date of grant date and 3/48th vest quarterly thereafter. The fair value of the restricted stock units granted is the stock price on the date of grant of $28.86.

The following table summarizes option activity under the 2006 Plan during the six months ended April 30, 2006 including restricted stock units:

	Shares	Weighted Average Exercise Price			Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value (thousands)
Balance at November 1, 2005	—		$	—
Granted	649,825		28.94
Exercised	—		—
Cancelled	—		—
Balance at April 30, 2006	649,825		$	28.94		6.90		$	3,622
Vested or expected to vest at April 30, 2006	603,038		$	28.94		6.90		$	3,361
Exercisable at April 30, 2006	—		$	—		—		$	—

The expected to vest options are the result of applying the pre-vesting forfeiture rate assumptions to total outstanding options.

The weighted average grant date fair value of options granted during the six months ended April 30, 2006 was $9.54 per share.

As of April 30, 2006, pursuant to FAS 123(R) there was $7.5 million of total unrecognized compensation cost related to nonvested shared based compensation arrangements granted under the 2006 Plan. The cost is expected to be recognized over remaining service period of 3.9 years.

The total tax benefit recognized for share based compensation arrangements pursuant to SFAS123(R) was $411,000 and $728,000 for the three and six months ended April 30, 2006, respectively.

The total cash received from employees as a result of employee stock option exercises under all plans for six months ended April 30, 2006 was approximately $593,000. In connection with these exercises, the windfall tax benefits realized by the Company and credited to equity for the six months ended April 30, 2006 were $1.4 million.

The Company estimates the grant-date fair value of stock options using a Black-Scholes valuation model, consistent with the provisions of SFAS 123(R) and Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 107, Share-Based Payment, using the weighted average assumptions noted in the table below. Expected volatility of the stock is based on the Company’s peer group in the industry in which it does business because the Company does not have sufficient historical volatility data for its own stock. The expected term of options granted is estimated by the Company considering vesting periods and historical trends within the Company’s equity plans and represents the period of time that options granted are expected to be outstanding. The risk-free rate is based on the U.S. Treasury zero-coupon issues with a remaining term equal to the expected term of the options used in the Black-Scholes valuation model. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by employees who receive equity awards, and subsequent events are not indicative of the reasonableness of the original estimates of fair value made by the Company under SFAS 123(R).

The following table presents the stock compensation expense recognized in accordance with SFAS 123(R) during the three and six months ended April 30, 2006 and in accordance with APB 25 during the three and six months ended April 30, 2005 (in thousands):

	Three Months Ended April 30,					Six Months Ended April 30,
	2006		2005			2006		2005
Cost of net revenues	$	162		$	—	$	315		$	—
Research and development	210			—		390			—
Sales and marketing	409			—		740			—
General and administrative	408			37		667			52
	$	1,189		$	37	$	2,112		$	52

The fair value of each stock option and stock purchase right was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:

	Three Months Ended April 30,				Six Months Ended April 30,
	2006		2005		2006		2005
Expected term of the options	3 years		4 years		3.2 years		4 years
Risk-free interest rate	4.8	%	3.8	%	4.7	%	3.7	%
Expected stock price volatility	41	%	58	%	45	%	61	%
Expected dividend rate	0.0	%	0.0	%	0.0	%	0.0	%

The Company analyzes its SFAS 123(R) assumptions on a bi-annual basis or more frequently if necessary. In the second quarter of fiscal 2006 the Company analyzed the assumptions and concluded that, due to Company specific plan experience the term should be adjusted to three years from four years. Volatility was also reassessed based on the three year term for the Company’s peer group.

Pro forma information regarding net income and net income per share has been determined as if the Company had applied the fair value recognition provisions of SFAS 123 to options granted under the Company’s stock option plans in all periods presented prior to the Company adopting SFAS 123(R) on May 1, 2005. For the purposes of pro forma disclosure, the estimated fair value of the options is amortized

to expense over the options’ vesting period using the straight-line method. The Company’s pro forma information is as follows (in thousands, except per share data):

	Three Months Ended April 30, 2005				Six Months Ended April 30, 2005
Net income as reported:		$	8,807			$	14,644
Plus: stock-based employee compensation expense included in reported net income		37				52
Less: total stock-based employee compensation expense determined under fair value based method for all awards		(188		)		(300		)
Pro forma Net income		$	8,656			$	14,396
Basic net income per share—as reported		$	0.16			$	0.27
Basic net income per share—pro forma		$	0.16			$	0.27
Diluted net income per share—as reported		$	0.15			$	0.26
Diluted net income per share—pro forma		$	0.15			$	0.25

Note 9. Segment and Geographic Information

Segment Information

The Company is primarily structured in a geographic manner. The Company’s Chief Executive Officer is identified as the Chief Operating Decision Maker (“CODM”) as defined by SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information. The CODM reviews consolidated financial information on revenues and gross profit percentage for System Solutions and Services. The CODM also reviews operating expenses, certain of which are allocated to the Company’s two segments described below.

The Company operates in two business segments: 1) North America and 2) International. The Company defines North America as the United States and Canada, and International as the countries in which it makes sales outside the United States and Canada.

Net revenues and operating income of each business segment reflect net revenues generated within the segment, standard cost of System Solutions net revenues, actual cost of Services net revenues and expenses that directly benefit only that segment. Corporate revenues and operating income reflect amortization of intangible assets, stock-based compensation, in-process research and development expense, and amortization of the step-up in the fair value of inventories, equipment and improvements and deferred revenue resulting from acquisitions. Corporate income also reflects the difference between the actual and standard cost of System Solutions net revenues and shared operating costs that benefit both segments, predominately research and development expenses and centralized supply chain management.

The following table sets forth net revenues and operating income for the Company’s segments (in thousands):

	Three Months Ended April 30,				Six Months Ended April 30,
	2006		2005		2006		2005
Net revenues:
North America	$	80,466	$	73,282	$	157,641	$	138,090
International	61,845		44,790		119,502		91,373
Corporate