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 July 31, 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 xNon-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 August 14, 2006, the number of shares outstanding of the registrant’s common stock, $0.01 par value was 68,029,493.

Table of Contents 

VeriFone Holdings, Inc.
INDEX

PART I—FINANCIAL INFORMATION
Item 1	Financial Statements (unaudited):
	Condensed Consolidated Balance Sheets—July 31, 2006 and October 31, 2005	3
	Condensed Consolidated Statements of Operations—Three and Nine Months Ended July 31, 2006 and 2005	4
	Condensed Consolidated Statements of Cash Flows—Nine Months Ended July 31, 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	34
Item 3	Quantitative and Qualitative Disclosures About Market Risk	61
Item 4	Controls and Procedures	62
PART II—OTHER INFORMATION
Item 1	Legal Proceedings	63
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	63
Item 3	Defaults Upon Senior Securities	63
Item 4	Submission of Matters to a Vote of Security Holders	63
Item 5	Other Information	63
Item 6	Exhibits	63
Signatures		64
Exhibit Index
Certifications

2

PART I—FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS

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

	July 31, 2006				October 31, 2005
	(unaudited)
Assets
Current assets:
Cash and cash equivalents		$	77,601			$	65,065
Marketable securities		14,544				16,769
Accounts receivable, net of allowances of $1,829 and $1,571		106,521				87,424
Inventories		73,870				33,501
Deferred tax assets		11,130				11,467
Prepaid expenses and other current assets		10,363				9,368
Total current assets		294,029				223,594
Equipment and improvements, net		6,496				5,873
Purchased intangible assets, net		11,352				18,912
Goodwill		47,260				47,260
Deferred tax assets		20,706				17,705
Debt issuance costs, net		6,643				7,462
Other assets		13,445				6,546
Total assets		$	399,931			$	327,352
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable		$	62,583			$	47,161
Income taxes payable		6,511				8,746
Accrued compensation		12,776				12,576
Accrued warranty		3,700				4,371
Deferred revenue, net		20,702				15,523
Deferred tax liabilities		137				137
Accrued expenses		6,691				6,826
Other current liabilities		15,293				13,819
Current portion of long-term debt		1,916				1,994
Total current liabilities		130,309				111,153
Accrued warranty		657				872
Deferred revenue		7,164				6,835
Long-term debt, less current portion		179,379				180,812
Other long-term liabilities		1,487				1,142
Commitments and contingencies
Stockholders’ equity:
Voting Common Stock: $0.01 par value, 100,000 shares authorized at July 31, 2006 and October 31, 2005; 68,013 and 67,646 shares issued and outstanding as of July 31, 2006 and October 31, 2005		680				676
Additional paid-in-capital		136,682				128,101
Accumulated deficit		(57,394		)		(102,979		)
Accumulated other comprehensive income		967				740
Total stockholders’ equity		80,935				26,538
Total liabilities and stockholders’ equity		$	399,931			$	327,352

See accompanying notes.

3

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

	Three Months Ended July 31,						Nine Months Ended July 31,
	2006			2005			2006			2005
	(unaudited)
Net revenues:
System Solutions	$	131,960		$	111,388		$	378,781		$	314,791
Services	15,657			14,313			45,656			40,086
Total net revenues	147,617			125,701			424,437			354,877
Cost of net revenues:
System Solutions	72,704			68,235			211,584			192,764
Services	8,452			6,361			23,391			20,954
Total cost of net revenues	81,156			74,596			234,975			213,718
Gross profit	66,461			51,105			189,462			141,159
Operating expenses:
Research and development	11,726			10,400			35,354			30,351
Sales and marketing	14,181			13,334			42,786			38,310
General and administrative	10,936			8,116			30,627			21,607
Amortization of purchased intangible assets	1,159			1,158			3,477			3,808
Total operating expenses	38,002			33,008			112,244			94,076
Operating income	28,459			18,097			77,218			47,083
Interest expense	(3,438		)	(3,084		)	(9,914		)	(11,958		)
Interest income	938			88			2,552			200
Other income (expense), net	(195		)	(6,142		)	71			(6,313		)
Income before income taxes	25,764			8,959			69,927			29,012
Provision for income taxes	9,009			2,424			24,342			7,833
Net income	$	16,755		$	6,535		$	45,585		$	21,179
Net income per share:
Basic	$	0.25		$	0.11		$	0.69		$	0.38
Diluted	$	0.24		$	0.10		$	0.66		$	0.36
Weighted average shares used in computing net income per share:
Basic	66,284			62,133			65,936			56,285
Diluted	69,079			65,423			68,906			59,630

See accompanying notes.

4

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

	Nine Months Ended July 31,
	2006			2005
	(unaudited)
Cash flows from operating activities
Net income	$	45,585		$	21,179
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of purchased intangibles	7,560			9,063
Depreciation and amortization of equipment and improvements	2,532			2,292
Amortization of capitalized software	892			780
Amortization of interest rate caps	236			80
Amortization of debt issuance costs	819			891
Stock-based compensation	3,798			915
Non-cash portion of loss on debt extinguishment	—			2,898
Other	(75		)	—
Net cash provided by operating activities before changes in working capital	61,347			38,098
Changes in operating assets and liabilities:
Accounts receivable, net	(19,097		)	4,302
Inventories	(40,369		)	(414		)
Deferred tax assets	(2,663		)	(4,148		)
Prepaid expenses and other current assets	(1,204		)	1,120
Other assets	(924		)	1
Accounts payable	15,421			(8,472		)
Income taxes payable	431			(5,343		)
Tax benefit from stock-based compensation	(2,666		)	—
Accrued compensation	200			(812		)
Accrued warranty	(886		)	1,592
Deferred revenue, net	5,509			1,966
Deferred tax liabilities	—			970
Accrued expenses and other liabilities	(1,460		)	(3,208		)
Net cash provided by operating activities	13,639			25,652
Cash flows from investing activities
Software development costs capitalized	(1,731		)	(691		)
Purchases of equipment and improvements	(2,780		)	(2,166		)
Purchases of other assets	(673		)	(618		)
Purchases of marketable securities	(125,034		)	—
Sales and maturities of marketable securities	127,325			—
Transaction costs, pending acquistions	(2,497		)	—
Acquisition of business, net of cash and cash equivalents acquired	—			(13,456		)
Net cash used in investing activities	(5,390		)	(16,931		)
Cash flows from financing activities
Proceeds from revolving promissory notes payable and revolver	—			19,680
Repayments of revolving promissory notes payable and revolver	—			(19,680		)
Repayments of long-term debt	(1,386		)	(78,507		)
Tax benefit of stock-based compensation	2,666			—
Repayments of capital leases	(125		)	(356		)
Proceeds from issuance of common stock	—			85,000
Proceeds from exercises of stock options	2,120			129
Payments of IPO and follow-on financing costs	—			(7,342		)
Net cash provided by (used in) financing activities	3,275			(1,076		)
Effect of foreign currency exchange rate changes on cash	1,011			(259		)
Net increase in cash and cash equivalents	12,536			7,386
Cash and cash equivalents, beginning of period	65,065			12,705
Cash and cash equivalents, end of period	$	77,601		$	20,091
Supplemental disclosures of cash flow information
Cash paid for interest	$	9,013		$	10,984
Cash paid for income taxes	$	26,881		$	16,045

See accompanying notes.

5

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 July 31, 2006, equity funds managed by GTCR owned approximately 28.6% 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 July 31, 2006, the condensed consolidated statements of operations for the three and nine months ended July 31, 2006 and 2005, and the condensed consolidated statements of cash flows for the nine months ended July 31, 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 effective 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 July 31, 2006, its results of operations for the three and nine months ended July 31, 2006 and 2005, and its cash flows for the nine months ended July 31, 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,

6

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 a 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

7

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 inter-company 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

8

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 the three and nine months ended July 31, 2006, one customer, First Data Corporation and its affiliates, accounted for 16% and 13%, respectively, of net revenues, compared to 9% and 12% of net revenues for the comparable periods in fiscal 2005, respectively. At July 31, 2006 and October 31, 2005, one customer, First Data Corporation and its affiliates, accounted for 17% and 13%, respectively, of accounts receivable. The increase in accounts receivable was due to increased sales to First Data of $8.5 million, or 58%, to $23.1 million in the quarter ended July 31, 2006, from $14.6 million in the quarter ended October 31, 2005 primarily related to demand for a check processing system which is still winding down and expected to terminate early next year. 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 July 31, 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 July 31, 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

9

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 forward contracts with substantial terms designed to match those of the underlying exposure. The Company does not qualify these foreign currency forward 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 July 31, 2006 and October 31, 2005, the Company did not have any outstanding foreign currency forward contracts. On August 1, 2006 the Company entered into foreign currency forward contracts to sell Australian dollars, British pounds, Mexican pesos and Euros with notional amounts of $2.4 million, $3.3 million, $4.4 million and $2.2 million, respectively. The Company’s foreign currency forward contracts have typically 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

10

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. 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 requirement expired on 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 that the Company purchased in July 2004 and March 2005 both expired in July 2006.

For the three and nine months ended July 31, 2006, the Company received interest of $157,000  and $269,000, respectively,  as a result of the three-month LIBOR rate on its Term B Loan exceeding 4% and 5%, which is recorded as an offset of interest expense in the statements of operations.

In May 2006, the Company purchased a two-year interest rate cap for $88,000 with an initial notional amount of $100 million declining to $75 million after one year with an effective date of November 2006 under which the Company will receive interest payments if the three-month LIBOR rate exceeds 6.5%.

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 Affiliate

The Company made a minority investment in VeriFone Transportation Systems (“VTS”) in October 2005. 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 nine months ended July 31, 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.

11

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 $0.6 million and $1.7 million for the three and nine months ended July 31, 2006, respectively, compared to $0.5 million and $0.7 million, respectively, for the comparable periods in fiscal 2005. Capitalized software development costs of $7.2 million and $5.5 million as of July 31, 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, which is generally three years. These costs, net of accumulated amortization of $2.9 million and $2.0 million as of July 31, 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 $106,000 and $167,000 for the three and nine months ended July 31, 2006, respectively, compared to $61,000 and $106,000 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.

12

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 one-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, if any.

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. For the three and nine months ended July 31, 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. For the three and nine months ended July 31, 2006, no impairment charges have been recorded.

13

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 non-employee 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 common 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 anti-dilutive.

14

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

	Three Months Ended						Nine Months Ended
	July 31,						July 31,
	2006			2005			2006			2005
Basic and diluted net income per share:
Numerator:
Net income	$	16,755		$	6,535		$	45,585		$	21,179
Denominator:
Weighted average shares of voting and non voting common stock outstanding	67,956			64,806			67,822			59,185
Less: weighted average shares subject to repurchase	(1,672		)	(2,673		)	(1,886		)	(2,900		)
Weighted average shares used in computing basic net income per share	66,284			62,133			65,936			56,285
Add dilutive securities:
Weighted average shares subject to repurchase	1,672			2,673			1,886			2,900
Stock options and restricted stock units	1,123			617			1,084			445
Weighted average shares used in computing diluted net income per share	69,079			65,423			68,906			59,630
Net income per share:
Basic	$	0.25		$	0.11		$	0.69		$	0.38
Diluted	$	0.24		$	0.10		$	0.66		$	0.36

For the three and nine months ended July 31, 2006, options to purchase 2,356,220 and 2,496,220 common shares, respectively, were excluded from the calculation of weighted average shares for diluted net income per share as they were anti-dilutive. For the three and nine months ended July 31, 2005, options to purchase 34,500 common shares were excluded from the calculation of weighted average shares for diluted net income per share as they were anti-dilutive.

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

15

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.

In July 2006, FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”—an interpretation of FASB Statement No. 109 (“FIN 48”), which clarifies the accounting for uncertainty in income taxes recognized in accordance with SFAS 109, “Accounting for Income Taxes”. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position. FIN 48 indicates that an enterprise shall initially recognize the financial statement effects of a tax position when it is more likely than not of being sustained on examination, based on the technical merits of the position. In addition, FIN 48 indicates that the measurement of a tax position that meets the more likely than not threshold shall consider the amounts and probabilities of the outcomes that could be realized upon ultimate settlement. This interpretation is effective for reporting periods beginning after December 15, 2006. The Company is in the process of evaluating the impact of adopting FIN 48 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 July 31, 2006 were as follows (in thousands):

			Gross			Gross
			Unrealized			Unrealized
	Cost		Gains			Losses			Fair Value
Brazil certificate of deposit	$	44		$	—		$	—		$	44
Auction rate securities	14,500			—			—			14,500
	$	14,544		$	—		$	—		$	14,544

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

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

16

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):

	July 31, 2006			October 31, 2005
Raw materials		$	5,017		$	2,745
Work-in-process		—			1,133
Finished goods		68,853			29,623
		$	73,870		$	33,501

Equipment and Improvements, net

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

	July 31, 2006				October 31, 2005
Computer hardware and software		$	4,698			$	3,525
Office equipment, furniture and fixtures		2,123				1,407
Machinery and equipment		4,115				3,086
Leasehold improvement		3,639				3,257
Construction in progress		935				1,481
		15,510				12,756
Accumulated depreciation and amortization		(9,014		)		(6,883		)
		$	6,496			$	5,873

As of July 31, 2006 and October 31, 2005, equipment amounting to $1.3 million was capitalized under capital leases. Related accumulated amortization as of July 31, 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
	July 31,			October 31,								July 31,			July 31,		October 31,
	2006			2005				Additions				2006			2006		2005
Developed technology		$	30,804		$	(25,879	)		$	(1,917	)	$	(27,796	)	$	3,008		$	4,925
Core technology		14,442			(9,629		)		(2,166		)	(11,795		)	2,647			4,813
Trade name		22,225			(16,402		)		(2,655		)	(19,057		)	3,168			5,823
Customer relationships		15,714			(12,363		)		(822		)	(13,185		)	2,529			3,351
		$	83,185		$	(64,273	)		$	(7,560	)	$	(71,833	)	$	11,352		$	18,912

17

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

	Three Months Ended						Nine Months Ended
	July 31,						July 31,
	2006			2005			2006			2005
Included in cost of net revenues		$	1,071		$	1,600		$	4,083		$	5,255
Included in operating expenses		1,159			1,158			3,477			3,808
		$	2,230		$	2,758		$	7,560		$	9,063

Estimated future amortization expense of intangible assets recorded as of July 31, 2006 was as follows (in thousands):

	Cost of			Operating
	Revenues			Expenses			Total
2006 (remaining three months)		$	1,071		$	1,154	$	2,225
2007		3,217			3,372		6,589
2008		846			754		1,600
2009		526			312		838
2010		—			100		100
		$	5,660		$	5,692	$	11,352

Goodwill

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

	Nine Months Ended			Year Ended
	July 31, 2006			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):

	Nine Months Ended
	July 31,
	2006			2005
Balance, beginning of period	$	5,243		$	3,795
Warranty charged to cost of net revenues	2,547			2,700
Utilization of warranty	(3,276		)	(2,611		)
Changes in estimates	(157		)	1,504
Balance, end of period	4,357			5,388
Less current portion	(3,700		)	(4,437		)
Long term portion	$	657		$	951

18

Deferred revenue, net

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

	July 31, 2006				October 31, 2005
Deferred revenue		$	32,925			$	24,377
Deferred cost of revenue		(5,059		)		(2,019		)
		27,866				22,358
Less current portion		20,702				15,523
Long term portion		$	7,164			$	6,835

Other Income (Expense), net

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

	Three Months Ended								Nine Months Ended
	July 31,								July 31,
	2006				2005				2006				2005
Loss on debt extinguishment and debt repricing fee		$	—			$	(5,530	)		$	—		$	(5,530	)
Refund of foreign customs fees		—				—				288			—
Foreign currency transaction gains (losses)		137				(10		)		309			523
Foreign currency contract losses		(354		)		(299		)		(543		)	(1,037		)
Other		22				(303		)		17			(269		)
		$	(195	)		$	(6,142	)		$	71		$	(6,313	)

Note 4. Financing

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

	July 31, 2006				October 31, 2005
Secured credit facility
Revolver		$	—			$	—
Term B loan		181,167				182,553
Capital leases		128				253
		181,295				182,806
Less current portion		(1,916		)		(1,994		)
Long term portion		$	179,379			$	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 July 31, 2006, the interest rate on the Term B Loan was 7.24%. For the three and nine months ended July 31, 2006 the weighted average interest rate on the Credit Facility was 6.88% and 6.52%, 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 July 31, 2006, the Company was paying a commitment fee at a rate of 0.375% per annum.

19

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.

On May 4, 2005, the Company used a portion of the net proceeds that it received from its initial public offering to repay in full the Second Lien Loan and to pay a prepayment premium of $2.2 million. During the year ended October 31, 2005, the Company also prepaid $5.0 million of the principal balance on the Term B Loan. The Company recorded a loss on debt extinguishment of $5.1 million, including the $2.2 million prepayment premium and $2.9 million of unamortized debt issuance costs, in other income (expense), net on the condensed consolidated statements of operations in the year ended October 31, 2005.

At the Company’s option, the Revolver bears interest at a rate of 1.75% over the three-month LIBOR, which was 5.49% and 4.24% as of July 31, 2006 and October 31, 2005, respectively, or 0.75% over the lender’s base rate, which was 8.25% and 6.75% as of July 31, 2006 and October 31, 2005, respectively. As of July 31, 2006 and October 31, 2005, the entire $30 million Revolver was available for borrowing to meet short-term working capital requirements. 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 February 1, 2006 and 2.50% prior to May 4, 2005) over the three-month LIBOR or 0.75% (1.0% from May 4, 2005 to February 1, 2006 and 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 July 31, 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 non-financial 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

20

change in control and material inaccuracy of representations and warranties. The Company was in compliance with its financial and non-financial covenants as of July 31, 2006.

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. The Company incurred additional restructuring costs of $1,000 and $8,000 in the International segment for the three months and the nine months ended July 31, 2006. The payment of the restructuring costs for the International segment was zero and $8,000 for the three months and the nine months ended July 31, 2006. The Company paid restructuring costs of $180,000 and $533,000 for the three months and the nine months ended July 31, 2006 in the North America segment. As of July 31, 2006, the Company has a liability of $667,000 and $60,000 for the North America segment and International segment, respectively.

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

												Short Term				Long Term
	Facilities				Other				Total			portion				portion
Balance at October 31, 2005		$	1,200			$	60		$	1,260			$	765			$	495
Additions		—				8			8				455				(447		)
Cash payments		(533		)		(8		)	(541		)		(541		)		—
Balance at July 31, 2006		$	667			$	60		$	727			$	679			$	48

												Short Term				Long Term
	Facilities				Other				Total			portion				portion
Balance at October 31, 2004		$	2,035			$	78		$	2,113			$	1,326			$	787
Additions		95				—			95				681				(586		)
Cash payments		(754		)		(11		)	(765		)		(765		)		—
Balance at July 31, 2005		$	1,376			$	67		$	1,443			$	1,242			$	201

In the first quarter of fiscal 2006, the Company implemented a restructuring plan that established 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 $599,000. As of July 31, 2006, $575,000 of the severance costs had been paid. The remaining severance payments are expected to be paid by the end of fiscal 2006. The Company incurred and paid restructuring costs of $345,000 and $58,000 in the International segment for the three months and nine months ended July 31, 2006. For the three months ended July 31, 2006, the Company reduced the restructuring costs by $5,000 and paid $128,000 in the North America segment. For the nine months ended July 31, 2006, the Company incurred restructuring costs of $254,000 and paid $230,000 in the North America segment. As of July 31, 2006, the Company has a liability of $24,000 for the North America segment.

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

	Employee				Short Term				Long Term
	costs				Portion				Portion
Balance at October 31, 2005		$	—			$	—			$	—
Additions		599				599				—
Cash payments		(575		)		(575		)		—
Balance at July 31, 2006		$	24			$	24			$	—

21

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 $261,000 has been paid as of July 31, 2006 (See Note 13).

As of July 31, 2006 and October 31, 2005, $756,000 and $849,000, respectively, of the restructuring liability was included in other current liabilities and $48,000 and $495,000, respectively, 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 non-cancelable 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 July 31, 2006 were as follows (in thousands):

	Minimum Lease			Sublease Rental				Net Minimum
Fiscal Year	Payments			Income				Lease Payments
Remainder of 2006		$	1,957		$	(67	)		$	1,890
2007		6,046			(148		)		5,898
2008		4,309			(109		)		4,200
2009		3,923			(82		)		3,841
2010		3,581			(5		)		3,576
Thereafter		14,570			—				14,570
		$	34,386		$	(411	)		$	33,975

Certain leases require the Company to pay property taxes, insurance and routine maintenance, and include rent escalation clauses and options to extend the term of certain leases. Rent expense was approximately $2.3 million and $6.7 million, respectively, for the three and nine months ended July 31, 2006, respectively, compared to $2.0 million and $5.9 million, respectively, for the comparable periods in fiscal 2005. Sublease rental income was approximately $73,000 and $217,000 for the three and nine months ended July 31, 2006, respectively, compared to $19,000 and $128,000, respectively, 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 July 31, 2006 and October 31, 2005 was approximately $46.3 million and $18.6 million, respectively, and are generally paid within one year. Of this amount, $1.6 million and $1.9 million has been recorded in other current liabilities in the accompanying condensed consolidated balance sheets as of July 31, 2006 and October 31, 2005, respectively.

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.

22

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 that relates to products supplied to the Company by a contract manufacturer. The assessment relates to an asserted deficiency of 6.8 million Brazilian reais (approximately $3.1 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 is likely to 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 body 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 federal VAT.

Note 7. Comprehensive Income

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

	Three Months Ended					Nine Months Ended
	July 31,					July 31,
	2006			2005		2006		2005
Net income	$	16,755		$	6,535	$	45,585	$	21,179
Foreign currency translation adjustments, net of tax	(110		)	77		208		188
Unrecognized gain (loss) in on interest rate hedges, net of tax	(35		)	37		17		64
Unrealized gain on marketable securities, net of tax	1			—		2		—
Comprehensive income	$	16,611		$	6,649	$	45,812	$	21,431

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

	July 31, 2006			October 31, 2005
Foreign currency translation adjustments, net of tax of $1,034 and $834		$	967		$	759
Unrecognized gain (loss) on interest rate hedges, net of tax of $11		—			(17		)
Unrealized loss on marketable securities, net of tax of $1		—			(2		)
Accumulated other comprehensive income		$	967		$	740

23

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 July 31, 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 $11,000 and $35,000 for the three and nine months ended July 31, 2006 that was determined pursuant to SFAS 123(R). For the three and nine months ended July 31, 2005, the Company recognized additional compensation expense of $11,000.

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 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% of the original 3,910,428 shares per year. Upon the sale of the Company, any remaining unvested shares will become vested. As of July 31, 2006, 782,086 shares of Common Stock issued to the CEO remained subject to this lapsing repurchase right.

The Company had a right to repurchase 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 executive ceases to be employed by the Company or any of its subsidiaries. This right lapses at a rate of 20% of the original 1,929,145 shares per year. Upon the sale of the Company, all remaining unvested shares will become vested. As of July 31, 2006, 239,840 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

24

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 first nine months of fiscal year 2006 and 2005, the Company recorded zero and $52,000 of stock-based compensation expense under APB No. 25, which was included in general and administrative expenses in the accompanying consolidated statements of operations.

Stock Option Plans

As of July 31, 2006, the Company had a total of 5,325,323 stock options outstanding with a weighted average exercise price of $17.85 per share. The number of shares that remained available for future grants was 6,706,280 as of July 31, 2006.

New Founders’ Stock Option Plan

On April 30, 2003, the Company adopted the New Founders’ Stock Option Plan (the “New Founders’ 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 New Founders’ Plan. Option awards under the New Founders’ 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 New Founders’ Plan during the nine months ended July 31, 2006:

						Weighted
						Average
			Weighted			Remaining		Aggregate
			Average			Contractual		Intrinsic
			Exercise			Term		Value
	Shares		Price			(Years)		(thousands)
Balance at November 1, 2005	1,269,045			$	4.13
Granted	—			—
Exercised	(231,510	)		3.17
Cancelled	(63,985	)		7.49
Balance at July 31, 2006	973,550			$	4.14		7.62		$	23,474
Vested or expected to vest at July 31, 2006	801,913			$	4.14		7.62		$	19,336
Exercisable at July 31, 2006	407,495			$	3.68		7.34		$	10,013

The options expected to vest 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 nine months ended July 31, 2006 was $1.2 million and $5.5 million, respectively.

As of July 31, 2006, pursuant to SFAS 123(R) there was $1.2 million of total unrecognized compensation cost related to non-vested shared based compensation arrangements granted under the New Founders’ Plan. The cost is expected to be recognized over a remaining weighted average period of 2.6 years. The total fair value of shares vested during the nine months ended July 31, 2006 was $299,000.

The Company will no longer grant options under the New Founders’ Plan and retired 158,420 shares available for future grant under the New Founders’ Plan on March 22, 2006. From March 22, 2006 through July 31, 2006. we retired additional 17,500 options.

25

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 nine months ended July 31, 2006:

					Weighted
					Average
		Weighted			Remaining		Aggregate
		Average			Contractual		Intrinsic
		Exercise			Term		Value
	Shares	Price			(Years)		(thousands)
Balance at November 1, 2005	90,000		$	10.00
Granted	—		—
Exercised	—		—
Cancelled	—		—
Balance at July 31, 2006	90,000		$	10.00		5.47		$	1,643
Vested or expected to vest at July 31, 2006	90,000		$	10.00		5.47		$	1,643
Exercisable at July 31, 2006	31,875		$	10.00		5.47		$	582

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

As of July 31, 2006, pursuant to SFAS 123(R) there was $342,000 of total unrecognized compensation cost related to non-vested shared-based compensation arrangements granted under the Directors’ Plan. The cost is expected to be recognized over a remaining weighted average period of 2.5 years. The total fair value of shares vested during the nine months ended July 31, 2006 was $197,000.

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 grants 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.

26

The following table summarizes option activity under the EIP Plan during the nine months ended July 31, 2006:

						Weighted
						Average
			Weighted			Remaining		Aggregate
			Average			Contractual		Intrinsic
			Exercise			Term		Value
	Shares		Price			(Years)		(thousands)
Balance at November 1, 2005	2,119,200			$	11.21
Granted	180,000			24.81
Exercised	(135,272	)		10.06
Cancelled	(128,375	)		14.33
Balance at July 31, 2006	2,035,553			$	12.30		5.83		$	32,476
Vested or expected to vest at July 31, 2006	1,888,993			$	12.30		5.83		$	30,138
Exercisable at July 31, 2006	325,027			$	10.14		5.75		$	5,886

The options expected to vest 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 nine months ended July 31, 2006 was $2.8 million.

The weighted average grant date fair value of options granted during the nine months ended July 31, 2006 was $12.07 per share.

As of July 31, 2006, pursuant to SFAS 123(R) there was $9.7 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the EIP Plan. The cost is expected to be recognized over a remaining weighted average period of 2.8 years. The total fair value of shares vested during the nine months ended July 31, 2006 was $2.2 million.

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. From March 22, 2006 through July 31, 2006. we retired additional 30,375 options.

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, directors, employees and consultants 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 90,000 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 and 1/16th vest quarterly thereafter. The fair value of the restricted stock units granted is the stock price on the date of grant of $28.86. As of July 31, 2006, there were 90,000 restricted stock units outstanding, with an aggregate intrinsic value of $2.5 million and the weighted average remaining contractual term of 6.85 years. As of July 31, 2006, 83,250 restricted stock units are vested or are expected to vest, with an aggregate intrinsic value of $2.4 million. Pursuant to SFAS123(R), there was $2.4 million of total unrecognized

27

compensation cost related to non-vested restricted stock units. The cost is expected to be recognized over remaining service period of 3.6 years.

The following table summarizes option activity under the 2006 Plan during the nine months ended July 31, 2006:

Weighted