UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended April 30, 2012

Or

¨	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 SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨

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

Large accelerated filer  þ	Accelerated filer  ¨
Non-accelerated filer  ¨    (Do not check if a smaller reporting company)	Smaller reporting company  ¨

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

At May 31, 2012, the number of shares outstanding of the registrant’s common stock, $0.01 par value was 107,822,685.

VERIFONE SYSTEMS, INC.

TABLE OF CONTENTS

INDEX

PART I — FINANCIAL INFORMATION
Item 1	Financial Statements (Unaudited):	3
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended April 30, 2012 and 2011	3
	Condensed Consolidated Balance Sheets as of April 30, 2012 and October 31, 2011	4
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended April 30, 2012 and 2011	5
	Notes to Condensed Consolidated Financial Statements (Unaudited)	6
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	39
Item 3	Quantitative and Qualitative Disclosures About Market Risk	55
Item 4	Controls and Procedures	57
PART II — OTHER INFORMATION
Item 1	Legal Proceedings	58
Item 1A	Risk Factors	58
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	76
Item 3	Defaults Upon Senior Securities	76
Item 4	Mine Safety Disclosures	76
Item 5	Other Information	76
Item 6	Exhibits	76
Signatures		78

2

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (Unaudited)

VERIFONE SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

	Three Months Ended						Six Months Ended
	April 30,						April 30,
	2012			2011			2012			2011
	(Unaudited) (In thousands, except per share data)
Net revenues:
System Solutions	$	340,443		$	235,334		$	653,084		$	461,041
Services	131,575			57,112			238,458			115,170
Total net revenues	472,018			292,446			891,542			576,211
Cost of net revenues:
System Solutions	202,273			137,596			401,025			277,736
Services	77,586			32,265			141,720			64,399
Total cost of net revenues	279,859			169,861			542,745			342,135
Gross profit	192,159			122,585			348,797			234,076
Operating expenses:
Research and development	37,849			25,402			72,928			47,044
Sales and marketing	46,141			31,139			86,127			59,445
General and administrative	48,696			27,041			94,734			51,057
Patent litigation loss contingency expense (Note 13)	17,632			—			17,632			—
Amortization of purchased intangible assets	23,757			1,665			37,372			3,981
Total operating expenses	174,075			85,247			308,793			161,527
Operating income	18,084			37,338			40,004			72,549
Interest expense	(18,636		)	(7,465		)	(33,270		)	(15,035		)
Interest income	1,143			287			2,150			570
Other expense, net	(1,780		)	(1,736		)	(22,629		)	(161		)
Income (loss) before income taxes	(1,189		)	28,424			(13,745		)	57,923
Provision for (benefit from) income taxes	(4,598		)	3,086			(14,381		)	630
Net income	3,409			25,338			636			57,293
(Income) loss attributable to noncontrolling interest in subsidiaries	68			(138		)	(282		)	(62		)
Net income attributable to VeriFone Systems, Inc. stockholders	$	3,477		$	25,200		$	354		$	57,231
Net income per share attributable to VeriFone Systems, Inc. stockholders:
Basic	$	0.03		$	0.29		$	—		$	0.65
Diluted	$	0.03		$	0.27		$	—		$	0.62
Weighted average shares used in computing net income per share attributable to VeriFone Systems, Inc. stockholders:
Basic	106,898			88,418			106,359			87,744
Diluted	111,148			93,434			110,349			92,368

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.

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VERIFONE SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	April 30, 2012			October 31, 2011*
	(Unaudited)
	(In thousands, except par value)
ASSETS
Current assets:
Cash and cash equivalents	$	361,037		$	594,562
Accounts receivable, net of reserves of $6,004 and $5,658	336,671			294,440
Inventories	162,107			144,316
Restricted cash	280,116			4
Deferred income tax assets	41,532			39,040
Prepaid expenses and other current assets	103,200			88,086
Total current assets	1,284,663			1,160,448
Property, plant and equipment, net	75,419			65,504
Purchased intangible assets, net	814,273			263,767
Goodwill	1,199,498			561,414
Deferred tax assets	222,331			205,496
Debt issuance costs, net	38,612			2,749
Other assets	110,877			54,183
Total assets	$	3,745,673		$	2,313,561
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	138,107		$	144,278
Income taxes payable	8,226			9,116
Accrued compensation	55,921			51,515
Accrued warranty	15,401			20,358
Deferred revenue, net	98,698			68,824
Deferred tax liabilities	9,168			4,960
Accrued expenses	76,066			74,775
Other current liabilities	98,189			57,399
Senior convertible notes	275,163			266,981
Short-term debt	54,313			5,074
Total current liabilities	829,252			703,280
Deferred revenue, net	31,446			31,467
Long-term debt	1,282,783			211,756
Deferred tax liabilities	244,483			92,594
Other long-term liabilities	76,277			78,971
Total liabilities	2,464,241			1,118,068
Commitments and contingencies (Note 13)
Temporary equity	2,997			855
Stockholders’ equity:
VeriFone Systems, Inc. stockholders’ equity:
Preferred Stock: 10,000 shares authorized as of April 30, 2012 and October 31, 2011; no shares issued and outstanding as of April 30, 2012 and October 31, 2011	—			—
Common stock: $0.01 par value, 200,000 shares authorized as of April 30, 2012 and October 31, 2011; 107,778 and 105,826 shares issued and 107,649 and 105,697 outstanding as of April 30, 2012 and October 31, 2011	1,078			1,058
Additional paid-in capital	1,513,767			1,468,862
Accumulated deficit	(268,702		)	(269,056		)
Accumulated other comprehensive loss	(3,598		)	(6,671		)
Total VeriFone Systems, Inc. stockholders’ equity	1,242,545			1,194,193
Noncontrolling interests in subsidiaries	35,890			445
Total stockholders' equity	1,278,435			1,194,638
Total liabilities and equity	$	3,745,673		$	2,313,561

* Derived from audited consolidated financial statements.

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.

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VERIFONE SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Six Months Ended April 30,
	2012			2011
	(Unaudited) (In thousands)
Cash flows from operating activities
Net income	$	636		$	57,293
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization, net	83,525			16,774
Stock-based compensation expense	21,726			16,757
Non-cash interest expense	10,652			7,579
Deferred income taxes	(13,321		)	1,271
Other non-cash items	1,043			(2,420		)
Net cash provided by operating activities before changes in operating assets and liabilities	104,261			97,254
Changes in operating assets and liabilities, net of effects from acquisitions:
Accounts receivable, net	(18,128		)	(56,836		)
Inventories, net	8,212			11,394
Prepaid expenses and other assets	(18,632		)	(17,736		)
Accounts payable	(25,098		)	21,377
Income taxes payable	(659		)	3,098
Accrued compensation	(9,305		)	1,415
Accrued warranty	(5,968		)	3,427
Deferred revenue, net	27,343			3,266
Accrued expenses	(6,190		)	1,088
Other liabilities	7,085			1,084
Net change in operating assets and liabilities	(41,340		)	(28,423		)
Net cash provided by operating activities	62,921			68,831
Cash flows from investing activities
Purchases of property, plant and equipment	(12,012		)	(5,302		)
Cash expenditures for revenue generating assets	(12,670		)	—
Acquisitions of businesses, net of cash and cash equivalents acquired	(1,069,762		)	(14,237		)
Other, net	(2,431		)	(510		)
Net cash used in investing activities	(1,096,875		)	(20,049		)
Cash flows from financing activities
Proceeds from debt, net of issuance costs	1,412,028			73
Repayments of debt	(339,873		)	(2,701		)
Proceeds from issuance of common stock through equity incentive plans	27,423			37,446
Cash placed in escrow for Convertible Notes	(279,159		)	—
Payments of acquisition related contingent consideration	(14,209		)	—
Distribution to non-controlling interest owners	(1,543		)	(142		)
Net cash provided by financing activities	804,667			34,676
Effect of exchange rate fluctuations on cash and cash equivalents	(4,238		)	2,947
Net change in cash and cash equivalents	(233,525		)	86,405
Beginning cash and cash equivalents	594,562			445,137
Ending cash and cash equivalents	$	361,037		$	531,542
Supplemental disclosures of cash flow information
Cash paid for interest	$	18,170		$	5,285
Cash paid for income taxes, net of refunds	$	23,907		$	9,177

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.

5

VERIFONE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Principles of Consolidation and Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of VeriFone Systems, Inc. (“we,” “us,” “our,” "VeriFone," and “the Company” refer to VeriFone Systems, Inc. and all of its subsidiaries) as of April 30, 2012 and October 31, 2011, and for the three and six months ended April 30, 2012 and 2011, have been prepared in accordance with generally accepted accounting principles ("GAAP") in the United States of America for interim financial information and with the instructions on Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). In accordance with those rules and regulations, we have omitted certain information and notes normally provided in our annual consolidated financial statements. In the opinion of management, the unaudited condensed consolidated financial statements contain all adjustments, consisting only of normal recurring items, except as otherwise noted, necessary for the fair presentation of our financial position and results of operations for the interim periods. These unaudited condensed consolidated financial statements should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K for the fiscal year ended October 31, 2011. The results of operations for the three and six months ended April 30, 2012 are not necessarily indicative of the results expected for the entire fiscal year. All significant intercompany accounts and transactions have been eliminated. Amounts pertaining to the noncontrolling ownership interests held by third parties in the operating results and financial position of our majority-owned subsidiaries are reported as noncontrolling interests.

The condensed consolidated balance sheet at October 31, 2011 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

Certain amounts reported in our Notes to the Condensed Financial Statements in previous periods have been reclassified to conform to the current period presentation.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The estimates and judgments affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities.

On an ongoing basis, we evaluate our estimates including those related to product returns, bad debts, inventories, goodwill and intangible assets, income taxes, warranty obligations, contingencies, share-based compensation and litigation, among others. We base our estimates on historical experience and information available to us at the time that these estimates are made. Actual results could differ materially from these estimates.

Summary of Significant Accounting Policies

There have been no changes to our significant accounting policies during the six months ended April 30, 2012 as compared to the significant accounting policies described in our audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended October 31, 2011, except for the two additions below.

Debt Issuance Costs

Debt issuance costs are stated at cost, net of accumulated amortization in Other assets on the Condensed Consolidated Balance Sheets. Amortization expense is calculated using the effective interest method over the period of the loans and is recorded in Interest expense in the accompanying Condensed Consolidated Statements of Operations. At April 30, 2012, interest amortization periods range from 5 to 7 years based upon the maturity date of outstanding debt.

Revenue generating assets, net

Revenue generating assets consist of long-term assets that we place with third parties in order to generate revenues, such as advertising fees, payment processing transaction revenues, or rental revenues. Revenue generating assets are stated at

6

cost, net of accumulated amortization, and are depreciated on a straight-line basis over the estimated useful lives of the assets, generally five years. Payments to acquire revenue generating assets are treated as a cash flow from investing activities on our Statements of Cash Flows.

Concentrations of Credit Risk

No customer accounted for more than 10% of net revenues in any of our reportable segments for the six months ended April 30, 2012. For the three months ended April 30, 2012, one customer, Redecard S/A, accounted for 10% of net revenues in the International segment. For the three and six months ended April 30, 2011, no customer accounted for more than 10% of net revenues in any of our reportable segments. As of April 30, 2012, no customer accounted for more than 10% of accounts receivable in any of our reportable segments. At October 31, 2011, one customer, Cielo S.A. and its affiliates, accounted for 10% of our total accounts receivable in the International segment.

Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update No. (“ASU”) 2011-05, Comprehensive Income (Topic 220)—Presentation of Comprehensive Income, which requires an entity to present the total comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of equity. This new guidance is effective for us in our first quarter of fiscal year 2013. The guidance will only affect our financial statement presentation.

In May 2011, ASU 2011-04, Fair Value Measurement (Topic 820)- Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, amended the fair value accounting standard to change fair value measurement principles and disclosure requirements. The key changes in measurement principles include limiting the concepts of highest and best use and valuation premise to non-financial assets, providing a framework for considering whether a premium or discount can be applied in a fair value measurement, and aligning the fair value measurement of instruments classified within an entity's shareholders' equity with the guidance for liabilities. Disclosures are required for all transfers between Levels 1 and 2 within the Valuation Hierarchy, the use of a non-financial asset measured at fair value if its use differs from its highest and best use, the level in the Valuation Hierarchy of assets and liabilities not recorded at fair value but for which fair value is required to be disclosed, and for Level 3 measurements, quantitative information about unobservable inputs used, a description of the valuation processes used, and qualitative discussion about the sensitivity of the measurements. We adopted the revised accounting standard effective February 1, 2012 via prospective adoption, as required. The adoption had no impact on our financial position or results of operations.

Note 2. Business Combinations

Point Acquisition

On December 30, 2011, we completed our acquisition of Electronic Transaction Group Nordic Holding AB, a Swedish company operating the Point International business (collectively, "Point"), Northern Europe's largest provider of payment and gateway services and solutions for retailers, for a purchase price of approximately €600.0 million plus repayment of Point's outstanding debt for a total purchase price of $1,024.5 million. The source of funds for the cash consideration was a new credit agreement provided by a syndicate of banks ("the 2011 Credit Agreement"). See Note 5. Financings in the Notes to Condensed Consolidated Financial Statements for information on the 2011 Credit Agreement.

As a result of the acquisition, Point became a wholly-owned subsidiary of VeriFone. The acquisition was accounted for using the acquisition method of accounting. One subsidiary of Point, Babs Paylink AB, is owned 51% by Point and 49% by a third party that has a noncontrolling interest. The results of operations for the acquired businesses have been included in our financial results since the acquisition date.

We acquired Point to, among other things, provide a broader set of product and service offerings to customers globally, especially in the Northern European markets. For the three and six months ended April 30, 2012, we estimate that our total net revenues increased by approximately $57.5 million and $72.0 million, respectively, due to the sale of products and services by Point entities. For the three and six months ended April 30, 2012, the acquisition of Point negatively impacted our earnings by approximately $16.0 million and $21.9 million, respectively, which included management's allocations and estimates of expenses that were not separately identifiable due to our integration activities, non-recurring charges associated with the step down in deferred revenue, amortization, and acquisition and integration

7

expenses.

The fair value of consideration transferred for Point was comprised of (in thousands):

Cash paid to Point stockholders	$	774,268
Cash for repayment of long-term debt	250,264
Total	$	1,024,532

Recording of Assets Acquired and Liabilities Assumed

The acquisition of Point was accounted for using the acquisition method of accounting under ASC 805, Business Combinations. The acquisition method of accounting requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. We recorded the net tangible and intangible assets acquired and liabilities assumed based upon their preliminary fair values as of December 30, 2011, the close date, as set forth below. The fair values were based upon a preliminary valuation, and our estimates and assumptions are subject to change within the measurement period (up to one year from the acquisition date). The primary areas of the preliminary purchase price allocation that are not yet finalized are the fair values of certain acquired tangible and intangible assets and liabilities, such as inventories and fixed assets, as well as pre-acquisition contingencies including acquisition and divestiture related claims, income and non-income based taxes and residual goodwill. We expect to continue to obtain information to assist us in determining the fair values assigned to the above assets acquired and liabilities assumed at the acquisition date during the measurement period.

The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the acquisition date. As described above, fair values assigned to certain assets acquired and liabilities assumed are preliminary and thus subject to change (in thousands):

Cash and cash equivalents	$	25,314
Accounts receivable (gross contractual value of $24.5 million, of which $1.7 million is not expected to be collected)	22,785
Inventories	25,543
Deferred tax assets	13,031
Prepaid expense and other assets	48,032
Property, plant and equipment	12,185
Intangible assets	567,007
Accounts payable and other liabilities	(51,126		)
Contingent consideration payable	(21,233		)
Deferred revenues	(1,855		)
Deferred tax liabilities	(157,411		)
Noncontrolling interests	(36,764		)
Total identifiable net assets	445,508
Goodwill	579,024
Total consideration transferred	$	1,024,532

During the three months ended April 30, 2012, new information was obtained about the acquisition date fair values of certain of the above assets acquired and liabilities assumed. We have increased our fair value estimates for acquired intangible assets by $16.5 million, decreased the fair value estimate of noncontrolling interests by $0.4 million, and decreased the fair value estimates of other net tangible assets acquired by $1.3 million. Goodwill decreased by $15.6 million due to these changes in fair value estimates.

Goodwill is calculated as the excess of the consideration transferred over the identifiable net assets and represents future benefits arising from other assets acquired that could not be individually identified and separately recognized. Specifically, the goodwill recorded as part of the acquisition of Point includes the expected synergies and other benefits that we believe will result from combining the operations of Point with the operations of VeriFone and the value of the going-concern element of Point's business (which represents the higher rate of return on the assembled collection of net assets versus if VeriFone acquired all of the net assets separately). We generally do not expect the goodwill recognized to be deductible for income tax purposes.

8

The estimated fair value of acquired contingent consideration owed by Point related to its prior acquisitions was $21.2 million as of the close date. This contingent consideration will be payable in cash if certain operating and financial targets are achieved in the two years following the dates of those acquisitions. The payout criteria for the contingent consideration contains provisions for prorated payouts of the contingent consideration if the target criteria are not met, provided that certain minimum thresholds are achieved. The USD equivalent maximum payout for this contingent consideration as of the date the Point acquisition closed was $24.4 million.

The fair value of the noncontrolling interest in a Point subsidiary of $36.8 million was estimated by employing an income approach. The fair value estimate was based on (i) an assumed discount rate of 17% and (ii) an assumed terminal value based on a range of terminal stabilized cash flow multiples between 8 to 9 times.

Valuations of Intangible Assets Acquired

The following table sets forth the components of intangible assets acquired in connection with the Point acquisition (in thousands, except for estimated useful life):

	Fair Value		Estimated Useful Life (Years)
Customer relationships	$	498,503	9.6
Developed software technology	54,783		4.4
Trade names	13,721		4.0
Total	$	567,007

Customer relationships represent the fair value of the underlying relationship and agreement with Point customers.

Developed software technology represents the fair values of Point's proprietary technologies, processes, patents and trade secrets related to the design of Point's products that have reached technological feasibility and are a part of Point's product lines.

Trade names represents the fair value of the Point and other trademarks owned by Point.

Some of the more significant estimates and assumptions inherent in the estimates of the fair values of identifiable intangible assets include all assumptions associated with forecasting product profitability from the perspective of a market participant. Specifically:

• Revenue - we use historical, forecast and industry or other sources of market data, including the number of units to be sold, selling prices, market penetration, market share and year-over-year growth rates over the product life cycles.

• Cost of sales, research and development expenses, sales and marketing expenses and general administrative expenses - we use historical, forecast, industry and other sources of market data, including any expected synergies that can be realized by a market participant.

• Estimated life of the asset - we assess the asset's life cycle by considering the impact of technology changes and applicable payment security compliance/regulatory requirements.

• Discount rates - we use a discount rate that is based on the weighted average cost of capital with adjustments to reflect the risks associated with the specific intangible assets, such as country risks and commercial risks.

• Customer attrition rates - we use historical and forecast data to determine the customer attrition rates and the expected customer life.

The discount rates used in the intangible asset valuations ranged from 14% to 20%. The customer attrition rates used in our valuation of customer relationship intangible assets ranged from zero to 7% depending on the geographic region. The estimated life of developed software technology intangible assets ranged from 2 years to 10 years. The royalty rate used in the valuation of the trade name intangible asset ranged from 1% to 2%. All of these judgments and estimates can materially impact the fair values of intangible assets.

Preliminary Pre-Acquisition Contingencies Assumed

9

We have evaluated and will continue to evaluate pre-acquisition contingencies relating to Point that existed as of the acquisition date. We have preliminarily determined that certain of these pre-acquisition contingencies are probable in nature and estimable as of the acquisition date and, accordingly, have preliminarily recorded our best estimates for these contingencies. If we make changes to the amounts recorded or identify additional pre-acquisition contingencies during the remainder of the measurement period, such amounts recorded will be included in the purchase price allocation during the measurement period and, subsequently, in our results of operations. The largest recorded contingent obligations relate to earn-out obligations associated with Point's prior acquisitions.

Other Fiscal Year 2012 Acquisitions

During the six months ended April 30, 2012, in addition to Point, we completed the acquisitions of other businesses for an aggregate purchase price of $81.5 million. The $81.5 million aggregate purchase price includes $6.4 million of holdback payments that will be paid out between 12 to 15 months from the date the acquisitions closed and also includes contingent consideration having a fair value of $4.4 million.

The holdback amounts will be paid out to selling shareholders unless the general representations and warranties made by the sellers at acquisition date were invalid. The contingent consideration will be payable in cash for the ChargeSmart (now known as VeriFone Commerce Solutions, Inc.) and LIFT acquisitions, if certain operating and financial targets are achieved in the first three years of operations post acquisition. The payout criteria for the contingent consideration contain provisions for prorated payouts of the contingent consideration if the target criteria are not met, provided that certain minimum thresholds are achieved. The contingent consideration was valued at $0.4 million and $4.0 million for the ChargeSmart and LIFT acquisitions, respectively. The maximum payouts for the contingent consideration under the purchase agreements are $11.0 million and $8.0 million for the ChargeSmart and LIFT acquisitions, respectively.

The acquisition of each company was accounted for using the acquisition method of accounting. No VeriFone equity interests were issued, and in each transaction 100% of the voting equity interests of the applicable business was acquired except for Show Media, which was structured as an acquisition of assets and assumption of certain liabilities. The results of operations for the acquired businesses have been included in our financial results since their respective acquisition dates.

The below table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date of each transaction. Certain fair values assigned are preliminary and thus subject to change. In particular, the estimated fair values of income and non-income based taxes, LIFT contingent consideration and residual goodwill are preliminary.

(in thousands)	LIFT			ChargeSmart			Show Media		Global Bay			Total
Acquisition date	March 1, 2012			January 3, 2012			November 1, 2011		November 1, 2011
Assets acquired (liabilities assumed), net	$	(10	)	$	(4,225	)	$	1,593	$	(5,028	)	$	(7,670	)
Intangible assets (1)	1,600			9,770			6,660		14,490			32,520
Goodwill (2)	4,904			13,829			19,871		18,050			56,654
Total purchase price	$	6,494		$	19,374		$	28,124	$	27,512		$	81,504

Explanatory notes:

(1) Intangible assets included developed technology, customer relationships, non-compete agreement, trademarks and in process research and development of $21.3 million, $6.5 million, $3.0 million, $0.9 million and $0.8 million, respectively, which are amortized over their estimated useful lives of 1 to 10 years.

(2) Goodwill is generally not expected to be tax deductible for LIFT, ChargeSmart and Global Bay, but is expected to be deductible for tax purposes for Show Media. The amount of goodwill resulted primarily from our expectation of increased value resulting from the integration of the acquired companies' product offerings with our product offerings.

Fiscal Year 2011 Acquisitions

Hypercom Corporation

On August 4, 2011, we completed our acquisition of Hypercom, a provider of electronic payment solutions and value-added services at the point of transaction, by means of a merger of one of our wholly-owned subsidiaries with and into

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Hypercom such that Hypercom became a wholly-owned subsidiary of VeriFone following the merger. We acquired Hypercom to, among other things, provide a broader set of product and service offerings to customers globally. We have included the financial results of Hypercom in our Consolidated Financial Statements from the date of acquisition. For the three and six months ended April 30, 2012, we estimate that our total net revenues increased by approximately $81.0 million and $154.5 million, respectively, due to the sale of Hypercom products and services. Other revenues and earnings contributions from Hypercom were not separately identifiable due to our integration activities. The total fair value of consideration transferred was $644.6 million which consisted of $557.1 million of VeriFone stock issued, $16.2 million for the fair value of stock options assumed and $71.2 million for the cash used to repay Hypercom's long-term debt. We recorded the preliminary fair value of assets acquired and liabilities assumed of approximately $362.1 million of goodwill, $210.7 million of intangible assets and $71.8 million of net tangible assets. During the six months ended April 30, 2012, we adjusted the preliminary valuation of the acquired net tangible assets of Hypercom based upon new information that was received about acquisition date fair values. The adjustments primarily related to finalizing the fair value assessment of sales-type lease receivables, which resulted in a $2.4 million increase in the value of those lease receivables, recording a tax receivable of $2.6 million for tax refunds related to pre-acquisition tax periods, reflecting a $2.1 million increase in the fair value estimate for pre-acquisition liabilities associated with Hypercom's divestiture of the UK and Spain operations, and reducing the fair value estimate for certain fixed assets by $1.1 million following completion of the fair value assessment and an increase in fair value of other liabilities of $0.4 million. As a result of these changes and other immaterial items, goodwill decreased by $1.4 million.

The primary areas of the preliminary fair values that are not yet finalized relate to the working capital adjustment receivable associated with Hypercom's divestiture of the UK and Spain operations as we are still finalizing the closing date net asset values with the buyers, certain legal matters, income and non-income taxes and residual goodwill. We expect to continue to obtain information to assist us in finalizing these preliminary valuations during the measurement period.

Pro Forma Financial Information

The supplemental pro forma financial information below was prepared using the acquisition method of accounting and is based on the historical financial information of VeriFone, Point, Hypercom and other acquired companies, reflecting results of operations for the three and six month periods ended April 30, 2012 and 2011 on a comparative basis as though the aforementioned companies were combined as of the beginning of fiscal year 2011. The pro forma financial information includes adjustments to reflect one time charges and amortization of fair value adjustments in the appropriate pro forma periods as though the companies were combined as of the beginning of fiscal year 2011. These adjustments include:

• Net adjustments to amortization expense related to the fair value of acquired identifiable intangible assets totaling $(1.0) million and $7.7 million for the three and six months ended April 30, 2012, respectively and $29.5 million and $58.0 million for three and six months ended April 30, 2011, respectively.

• Additional interest expense of $4.1 million for the period from November 2011 through December 2011, and $6.3 million and $8.1 million for the three and six months ended April 30, 2011, respectively, that would be incurred on additional borrowings made to fund the acquisitions, offset by elimination of acquired business interest expense on borrowings that were settled as part of the acquisitions. No adjustment is included for interest after December 2011 as the additional interest is reflected in our operating results following the date the borrowings actually occurred.

• Adjustments for other (charges)/benefits, such as deal costs, one time professional fees, foreign currency losses related to deal consideration, amortization of fair market value adjustments and net tax effect of all of these, totaling $12.2 million and $50.0 million for the three and six months ended April 30, 2012, respectively, and $(3.8) million and $(29.0) million for the three and six months ended April 30, 2011, respectively.

The supplemental pro forma financial information for the three and six months ended April 30, 2012 combined the historical results of VeriFone for the three and six months ended April 30, 2012, the historical results of Point and ChargeSmart for the two months ended December 31, 2011, the historical results of LIFT for the four months ended February 29, 2012, and the effects of the pro forma adjustments listed above. The results of each acquired company is included as part of VeriFone historical results following the closing date of the particular acquisition.

The supplemental pro forma financial information for the three and six months ended April 30, 2011 combined the historical results of VeriFone for three and six months ended April 30, 2011, the historical results of all fiscal year 2011

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and fiscal year 2012 acquired businesses for the three and six months ended April 30, 2011 based upon their respective previous reporting periods, the dates that these companies were acquired by us, and the effects of the pro forma adjustments listed above.

The following table presents supplemental pro forma financial information as if all fiscal 2012 and 2011 acquisitions occurred on November 1, 2010 (in thousands except per share data):

	For the Three Months Ended April 30,					For the Six Months Ended April 30,
(Unaudited)	2012		2011			2012		2011
Total revenues	$	478,437	$	434,785		$	938,859	$	882,446
Net income	$	16,636	$	(16,755	)	$	39,778	$	(46,655	)
Net income per share attributable to VeriFone Systems, Inc. stockholders - basic	$	0.16	$	(0.16	)	$	0.37	$	(0.45	)
Net income per share attributable to VeriFone Systems, Inc. stockholders - diluted	$	0.15	$	(0.16	)	$	0.36	$	(0.45	)

Acquisition-related Costs

Acquisition-related costs consist of (i) transaction costs, which represent external costs directly related to our acquisitions and primarily include expenditures for professional fees such as banking, legal, accounting and other directly related incremental costs incurred to close the acquisition and (ii) integration costs, which represent personnel related costs for transitional and certain other employees, integration related professional services, additional asset write offs and other integration activity related expenses. The following table presents a summary of acquisition-related costs for the three and six months ended April 30, 2012 as follows (in thousands):

	For the three months ended April 30, 2012						For the six months ended April 30, 2012
	Transaction Costs		Integration Costs		Total		Transaction Costs		Integration Costs		Total
Cost of net revenues	$	9	$	2,305	$	2,314	$	9	$	4,673	$	4,682
Research and development	—		1,043		1,043		—		2,902		2,902
Sales and marketing	65		263		328		183		1,040		1,223
General and administrative	655		7,497		8,152		7,589		13,065		20,654
	$	729	$	11,108	$	11,837	$	7,781	$	21,680	$	29,461

The following table presents a summary of acquisition related costs for the three and six months ended April 30, 2011 as follows (in thousands):

	For the three months ended April 30, 2011						For the six months ended April 30, 2011
	Transaction Costs		Integration Costs		Total		Transaction Costs		Integration Costs		Total
Cost of net revenues	$	128	$	178	$	306	$	128	$	199	$	327
Research and development	5		15		20		6		18		24
Sales and marketing	111		11		122		193		25		218
General and administrative	2,434		1,106		3,540		5,095		1,204		6,299
	$	2,678	$	1,310	$	3,988	$	5,422	$	1,446	$	6,868

Note 3. Goodwill and Purchased Intangible Assets

Goodwill

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

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	Six Months Ended			Year Ended
	April 30, 2012			October 31, 2011
Balance at beginning of period	$	561,414		$	169,322
Additions related to current period acquisitions	635,697			392,723
Adjustments related to prior fiscal year acquisitions	(1,405		)	622
Currency translation adjustments	3,792			(1,253		)
Balance at end of period	$	1,199,498		$	561,414

Based on our review for potential indicators of impairment performed during the six months ended April 30, 2012 and the fiscal year ended October 31, 2011, there were no indicators of impairment.

As of both April 30, 2012 and October 31, 2011, we had accumulated goodwill impairment losses of $372.4 million and $65.5 million in our International and North America segments, respectively.

Purchased Intangible Assets

Purchased intangible assets consisted of the following (in thousands, except weighted-average useful life):

	April 30, 2012
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Weighted-Average Useful Life
Customer relationships	$	702,937	$	(55,779	)	$	647,158	8.5
Developed and core technology	259,308		(129,175		)	130,133		4.2
In-process research and development	18,514		—			18,514		Indefinite
Trade name	18,021		(2,657		)	15,364		4.0
Internal use software	3,031		(2,777		)	254		3.6
Non-Compete	3,000		(150		)	2,850		10.0
	$	1,004,811	$	(190,538	)	$	814,273
	October 31, 2011
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Weighted-Average Useful Life
Customer relationships	$	185,872	$	(16,615	)	$	169,257	5.5
Developed and core technology	187,193		(114,112		)	73,081		4.0
In-process research and development	19,021		—			19,021		Indefinite
Trade name	2,692		(897		)	1,795		3.3
Internal use software	3,031		(2,418		)	613		3.6
Non-Compete	—		—			—
	$	397,809	$	(134,042	)	$	263,767

Amortization of purchased intangible assets for the three and six months ended April 30, 2012 and 2011 was allocated as follows (in thousands):

	Three Months Ended				Six Months Ended
	April 30,				April 30,
	2012		2011		2012		2011
Included in cost of net revenues	$	10,715	$	3,165	$	19,203	$	8,024
Included in general and administrative expenses	23,757		1,665		37,372		3,981
	$	34,472	$	4,830	$	56,575	$	12,005

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Total future amortization expense for purchased intangible assets that have finite lives, based on our existing intangible assets and their current estimated useful lives as of April 30, 2012, is estimated as follows (in thousands):

Fiscal Years Ending October 31:	Cost of Net Revenues		Operating Expenses		Total
Remainder of fiscal 2012	$	21,277	$	47,704	$	68,981
2013	39,736		93,082		132,818
2014	38,879		92,471		131,350
2015	18,264		91,195		109,459
2016	10,665		86,300		96,965
Thereafter	1,137		255,049		256,186
	$	129,958	$	665,801	$	795,759

Note 4. Balance Sheet and Statement of Income Details

Restricted Cash

The 2011 Credit Agreement required that we fund an escrow account to repay, at maturity, the principal and interest of our 1.375% Senior Convertible Notes due June 2012. As a result, during December 2011, $279.2 million was deposited in the escrow account. This amount is included in Restricted cash in the Condensed Consolidated Balance Sheets.

We had $15.0 million and $4.8 million of long-term restricted cash as of April 30, 2012 and October 31, 2011, respectively. The long-term restricted cash consists mainly of deposits pledged for bank guarantees, irrevocable standby letters of credit and borrowings. The long-term Restricted cash is included in Other assets in the Condensed Consolidated Balance Sheets.

Inventories

Inventories consisted of the following (in thousands):

	April 30, 2012		October 31, 2011
Raw materials	$	56,357	$	45,716
Work-in-process	885		859
Finished goods	104,865		97,741
Total inventories	$	162,107	$	144,316

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following (in thousands):

	April 30, 2012		October 31, 2011
Prepaid taxes	$	40,909	$	18,490
Prepaid expenses	39,118		34,115
Other receivables	14,887		27,020
Investments in equity securities and warrants	5,366		6,132
Other current assets	2,920		2,329
Total prepaid expenses and other current assets	$	103,200	$	88,086

Other Assets

Other assets consisted of the following (in thousands):

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	April 30, 2012		October 31, 2011
Revenue generating assets, net	$	62,332	$	18,130
Restricted cash	15,000		4,804
Other long-term receivables	10,110		8,275
Deposits	8,777		8,662
Capitalized software development costs, net	8,493		6,795
Other	6,165		7,517
Total other assets	$	110,877	$	54,183

Accrued Warranty

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

	Six Months Ended			Year Ended
	April 30, 2012			October 31, 2011
Balance at beginning of period	$	22,032		$	12,747
Warranty charged to cost of net revenues	6,018			17,888
Utilization of warranty accrual	(11,758		)	(16,573		)
Acquired warranty obligations	348			7,139
Change in estimates	(180		)	831
Balance at end of period	16,460			22,032
Less current portion	(15,401		)	(20,358		)
Long-term portion	$	1,059		$	1,674

Deferred Revenue, net

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

	April 30, 2012			October 31, 2011
Deferred revenue	$	144,552		$	113,154
Deferred cost of revenue	(14,408		)	(12,863		)
	130,144			100,291
Less current portion	(98,698		)	(68,824		)
Long-term portion	$	31,446		$	31,467

Other Current Liabilities

Other current liabilities consisted of the following (in thousands):

	April 30, 2012		October 31, 2011
Accrued liabilities for contingencies	$	24,122	$	30,561
Deferred acquisition consideration payable - current portion	20,203		5,681
Accrued patent litigation loss contingency	17,632		—
Sales and VAT taxes payable	16,326		6,725
Other current liabilities	19,906		14,432
Total other current liabilities	$	98,189	$	57,399

Other Long-Term Liabilities

Other long-term liabilities consisted of the following (in thousands):

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	April 30, 2012		October 31, 2011
Other tax liabilities	$	44,159	$	51,918
Statutory retirement and pension obligations	10,001		10,292
Deferred acquisition consideration payable - non-current portion	9,002		5,125
Other liabilities	13,115		11,636
Total other long-term liabilities	$	76,277	$	78,971

Noncontrolling Interests in Subsidiaries

Changes in our Noncontrolling interest in subsidiaries are set forth below (in thousands):

	Six Months Ended			Year Ended
	April 30, 2012			October 31, 2011
Noncontrolling interests in subsidiaries at beginning of period	$	445		$	572
Additions due to acquisitions	36,764			—
Distributions to non-controlling interest owners	(1,543		)	(418		)
Net income attributable to noncontrolling interests in subsidiaries, net	224			291
Noncontrolling interests in subsidiaries at end of period	$	35,890		$	445

Other Income (Expense), net

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

	Three Months Ended						Six Months Ended
	April 30,						April 30,
	2012			2011			2012			2011
Foreign currency exchange losses, net	$	(1,430	)	$	(2,719	)	$	(22,436	)	$	(2,978	)
Gain (loss) on adjustments to acquisition related liabilities	(111		)	700			(199		)	1,391
Gain on bargain purchase of a business, net	—			251			—			1,727
Other income (expense), net	(239		)	32			6			(301		)
Total other income (expense), net	$	(1,780	)	$	(1,736	)	$	(22,629	)	$	(161	)

We recorded a $22.5 million foreign currency loss during December 2011 related to the difference between the forward rate on contracts purchased to lock in the U.S. dollar equivalent purchase price for our Point acquisition, and the actual rate on the date of derivative settlement. This loss was partially offset by a $1.5 million gain on the currency we held from the date of the derivative settlement until the funds were transferred to purchase Point.

Note 5. Financings

Borrowings under our financing arrangements as of April 30, 2012 and October 31, 2011 consisted of the following (in thousands):

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	April 30, 2012			October 31, 2011
2011 Credit Agreement
Term A loan	$	907,019		$	—
Term B loan	230,921			—
Revolving loan	190,000			—
2006 Credit Agreement - Term B loan	—			216,250
Senior Convertible Notes	275,163			266,981
Point overdraft facility	5,812			—
Other	3,344			580
Total borrowings	1,612,259			483,811
Short-term debt	(329,476		)	(272,055		)
Long-term debt	$	1,282,783		$	211,756

2011 Credit Agreement

On December 28, 2011 (the "Effective Date"), VeriFone entered into the 2011 Credit Agreement, which initially consisted of a $918.5 million Term A loan, $231.5 million Term B loan, and $350.0 million Revolving loan, of which $300.0 million was initially funded. At April 30, 2012, our outstanding borrowings under the 2011 Credit Agreement consisted of a $907.0 million Term A loan, $230.9 million Term B loan and $350.0 million Revolving loan, of which $190.0 million was drawn and outstanding.

The key terms of the 2011 Credit Agreement are as follows:

• At VeriFone, Inc.'s option, the Term A loan, Term B loan and Revolving loan bear interest at a “Base Rate” or “Eurodollar Rate” plus an applicable margin, as described below. Base Rate loans bear interest at a per annum rate equal to a margin over the greater of the Federal Funds rate plus 0.50% or the JP Morgan prime rate or the one-, two-, three- or six-month (or, in certain circumstances, nine-, twelve- or less than one month) LIBOR rate plus 1.00%. For the Base Rate Term A loan and Revolving loan, the margin varies between 1.00% to 2.00% depending upon our consolidated leverage ratio. For the Base Rate Term B loan, the margin varies between 2.00% to 2.25% depending upon our consolidated leverage ratio with a minimum floor rate of 1.00%. Eurodollar Rate loans bear interest at a margin over the one-, two-, three- or six-month LIBOR rate. For the Eurodollar Term A Loan and Revolving loan, the margin varies between 2.00% to 3.00% depending upon our consolidated leverage ratio. The margin for the Eurodollar Rate Term B loan varies between 3.00% to 3.25% depending upon our consolidated leverage ratio with a minimum LIBOR floor rate of 1.00%.

• The terms of the 2011 Credit Agreement require VeriFone, Inc. to comply with financial maintenance covenants starting April 30, 2012. VeriFone, Inc. may not permit its total Leverage Ratio to exceed (i) 4.25 to 1.00, in the case of any fiscal quarter ending on or after November 1, 2012, but prior to November 1, 2012, (ii) 3.75 to 1.00 in the case of any fiscal quarter ending prior to November 1, 2013 and (iii) 3.50 to 1.00, in the case of any fiscal quarter ending on or after November 1, 2013. In addition, VeriFone, Inc. must maintain an interest coverage ratio of at least (i) 3.50 to 1.00, in the case of any fiscal quarter ending prior to November 1, 2012 and (ii) 4.00 to 1.00, in the case of any fiscal quarter ending thereafter. Noncompliance with any of the financial covenants without cure or waiver would constitute an event of default under the 2011 Credit Agreement. The 2011 Credit Agreement also contains customary events of default that include, among others, non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations and warranties, bankruptcy and insolvency events, material judgments, cross defaults to material indebtedness and events constituting a change of control. The occurrence of an event of default could result in the termination of commitments under the 2011 Credit Agreement, the declaration that all outstanding loans are immediately due and payable in whole or in part and the requirement of cash collateral deposits in respect of outstanding letters of credit.

• The 2011 Credit Agreement contains certain representations and warranties, certain affirmative covenants, certain negative covenants, certain financial covenants and certain conditions that are customarily required for similar financings. These covenants include, among others:

▪ A restriction on incurring additional indebtedness, subject to specified permitted debt;

▪ A restriction on creating certain liens;

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▪ A restriction on mergers and consolidations, subject to specified exceptions;

▪ A restriction on certain investments, subject to certain exceptions and a suspension if VeriFone, Inc. achieves certain credit ratings; and

▪ A restriction on entering into certain transactions with affiliates.

• Pursuant to a Guaranty, dated as of December 28, 2011 (the "Guaranty"), among certain wholly-owned domestic subsidiaries of VeriFone, Inc. identified therein (the "Guarantors"), obligations under the 2011 Credit Agreement are guaranteed by the Guarantors. Pursuant to a Security Agreement and a Pledge Agreement, each dated as of December 28, 2011 (the "Collateral Agreements") among VeriFone, Inc. and the Guarantors on the one hand and JPMorgan, as collateral agent, on the other hand, obligations under the 2011 Credit Agreement, and the guarantees of such obligations are also secured by a first priority lien and security interest, subject to customary exceptions, in certain assets of VeriFone, Inc. and the Guarantors and equity interests owned by VeriFone, Inc. and the Guarantors in certain of their respective domestic and foreign subsidiaries (limited, in the case of foreign subsidiaries, to 65% of the voting stock of such subsidiaries). Certain equity interests owned by existing and subsequently acquired subsidiaries may also be pledged in the future. Other existing and subsequently acquired or newly-formed domestic subsidiaries of VeriFone, Inc. and the Guarantors, may become Guarantors in the future.

• VeriFone, Inc. will pay an undrawn commitment fee ranging from 0.25% to 0.50% per annum (depending on VeriFone, Inc.'s leverage ratio) on the unused portion of the Revolving loan. For letters of credit issued under the Revolving loan, VeriFone, Inc. will pay upon the aggregate face amount of each letter of credit a fronting fee to be agreed to the issuer of the letter of credit together with a fee on all outstanding letters of credit at a per annum rate equal to the margin then in effect with respect to LIBOR-based loans under the Revolving loan.

• The outstanding principal balance of the Term A loan is required to be repaid in quarterly installments of the following percentages of the original balance outstanding under the Term A loan: 1.25% for each of the first eight calendar quarters after the Effective Date through the quarter ending December 31, 2013; 2.50% for each of the next eight calendar quarters through the quarter ending December 31, 2015 and 5.00% for each of the calendar quarters ending March 31, 2016, June 30, 2016 and September 30, 2016 with the balance being due at maturity on December 28, 2016. The outstanding principal balance of the Term B loan is required to be repaid in equal quarterly installments of 0.25% with the balance being due at maturity on December 28, 2018. The Revolving loan will terminate on December 28, 2016. Outstanding amounts may also be subject to mandatory prepayment with the proceeds of certain asset sales and debt issuances and, in the case of the Term B loan only, from a portion of annual excess cash flows (as determined under the 2011 Credit Agreement) depending on VeriFone, Inc.'s leverage ratio.

On December 28, 2011, VeriFone, Inc. utilized a portion of the proceeds from the 2011 Credit Agreement to repay in full all of its previously outstanding loans, together with accrued interest and all other amounts due in connection with such repayment, under the credit agreement entered into on October 31, 2006. The amount of this repayment totaled $216.8 million and following such repayment this credit agreement was terminated. No penalties were due in connection with such repayments.

In addition, the 2011 Credit Agreement required that we fund an escrow account to repay at maturity, or upon earlier conversion at the option of the holders thereof, our 1.375% Senior Convertible Notes due June 15, 2012. As a result, during December 2011, $279.2 million was deposited in the escrow account. This amount, which includes interest payable at maturity, is reported as short-term Restricted Cash in our Condensed Consolidated Balance Sheets.

We incurred $41.6 million of issuance costs in connection with the 2011 Credit Agreement. These costs were capitalized in Other assets on the Condensed Consolidated Balance Sheets, and the costs are being amortized to interest expense using the effective interest method over the term of the credit facilities, which is 5 or 7 years.

As of April 30, 2012, VeriFone has elected the "Eurodollar Rate" margin option under our borrowings under the 2011 Credit Agreement. As such, the interest rate on the Term A and Revolving loan was 2.74%, which was one month LIBOR plus 2.50% margin, and the interest rate on the Term B loan was 4.25%, which was the higher of one month LIBOR or 1.00% plus 3.25% margin. The unused revolving loan facility's commitment fee was 0.375% and the amount available to draw under the Revolving loan was $160.0 million.

As of April 30, 2012 interest margins are 2.50% for the Term A loan and the Revolving loan, and 3.25% for the Term B loan.

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We were in compliance with all financial covenants as of April 30, 2012.

On March 23, 2012, we entered into a number of interest rate swap agreements to effectively convert $500.0 million of the Term Loan A from a floating rate to a 0.71% fixed rate plus applicable margin. The interest rate swaps qualify for hedge accounting treatment as cash flow hedges. The interest rate swaps are effective for the period from March 30, 2012 to March 31, 2015 or 36 months.

Senior Convertible Notes

On June 22, 2007, we issued and sold $316.2 million aggregate principal amount of 1.375% Senior Convertible Notes due in June 2012 (the "Notes".) The net proceeds from the offering, after deducting transaction costs, were approximately $307.9 million. We incurred approximately $8.3 million of debt issuance costs. The transaction costs, consisting of the initial purchasers' discounts and offering expenses, were primarily recorded in debt issuance costs, net and are being amortized to interest expense using the effective interest method over five years. The Notes are effectively subordinated to any secured indebtedness to the extent of the value of the related collateral and structurally subordinated to indebtedness and other liabilities of our subsidiaries including any secured indebtedness of such subsidiaries.

Each $1,000 of principal of the Notes is initially convertible into 22.719 shares of our common stock, which is equivalent to a conversion price of approximately $44.02 per share, subject to adjustment upon the occurrence of specified events. Upon conversion, we would pay the holder an amount in cash up to the principal amount of the Notes. The value of the applicable number of shares of our common stock that are issuable on conversion of the Notes, if any, that exceeds the principal amount will be paid in shares of stock.

We separately account for the liability and equity components of the Notes. The principal amount of the liability components of the Notes was $236.0 million as of the date of issuance, which was recognized at the present value of its cash flows using a discount rate of 7.6%, our approximate borrowing rate at the date of the issuance for a similar debt instrument without the conversion feature. The carrying value of the equity component was $80.2 million.

Through April 30, 2012, we had repurchased and extinguished $38.9 million in aggregate principal amount of our outstanding Notes. As of April 30, 2012, the remaining principal amount of the outstanding Notes was $277.2 million.

The following table presents the carrying value of the Notes (in thousands):

	April 30, 2012			October 31, 2011
Accounting amount of the equity component	$	77,903		$	77,903
Principal amount of the Notes	$	277,250		$	277,250
Unamortized debt discount (1)	(2,087		)	(10,269		)
Net carrying value of the liability component	$	275,163		$	266,981

(1) As of April 30, 2012, the remaining period over which the unamortized debt discount will be amortized is 2 months.

Holders of the Notes may convert their Notes prior to maturity at any time on or after March 15, 2012. There were no conversions as of April 30, 2012.

The Notes were convertible as of April 30, 2012 at the option of the holders and our stock price on that date was $47.64. Hence, the if-converted value of the Notes as of April 30, 2012 was $300.0 million. The principal amount that would be paid in cash would have been $277.2 million and the if-converted value above the principal was $22.8 million, which would have been settled in shares of our common stock. Our note hedge would reduce the share amount by 50% to $11.4 million or 239,292 shares. Accordingly, the total cash and value of our stock that would be required to be paid to holders upon conversion at the balance sheet date was $288.6 million.

In accordance with ASC 480-10-S99-3A, we determine the amount that would be payable in cash assuming a conversion as of the relevant balance sheet date and record such amount as temporary equity on our Condensed Consolidated Balance Sheets. As of April 30, 2012, the amount of cash payable was determined using the market price of our stock as of April 30, 2012 for the shares subject to conversion less the net carrying value of the liability component of the Notes as of that same date. At April 30, 2012, the $2.1 million of cash principal that would be required to be paid to holders upon conversion in excess of the net carrying value of the liability component of the Notes was recorded as Temporary equity in the accompanying

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Condensed Consolidated Balance Sheets.

If a fundamental change, as defined in the indenture, occurs prior to the maturity date, holders of the Notes may require us to repurchase all or a portion of their Notes for cash at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus any accrued and unpaid interest (including additional interest, if any) up to, but excluding, the repurchase date.

We pay 1.375% interest per annum on the principal amount of the Notes, semi-annually in arrears on June 15 and December 15 of each year, subject to increase in certain circumstances.

A summary of interest expense and interest rate on the liability component related to the Notes for the three and six months ended April 30, 2012 and 2011 is as follows (in thousands, except percentages):

	Three Months Ended						Six Months Ended
	April 30,						April 30,
	2012			2011			2012			2011
Interest rate on the liability component	7.6		%	7.6		%	7.6		%	7.6		%
Interest expense related to contractual interest coupon	$	953		$	953		$	1,906		$	1,906
Interest expense related to amortization of debt discount	4,083			3,748			8,182			7,554
Total interest expense recognized	$	5,036		$	4,701		$	10,088		$	9,460

In connection with the offering of the Notes, we entered into note hedge transactions with affiliates of the initial purchasers (the "counterparties"), consisting of Lehman Brothers OTC Derivatives ("Lehman Derivatives") and JPMorgan Chase Bank, National Association, London Branch. These note hedge transactions serve to reduce the potential dilution upon conversion of the outstanding Notes in the event that the volume weighted average price of our common stock on each trading day of the relevant conversion period or other relevant valuation period for the Notes is greater than $44.02 per share. We terminated the note hedge transaction with Lehman Derivatives during June 2011. The remaining note hedge transactions, which reduce the potential dilution by one half upon conversion of the outstanding Notes in the event certain conditions are met, are set to expire on the earlier of the last day on which any Notes remain outstanding and June 14, 2012.

In addition, we sold warrants to the counterparties whereby they have the option to purchase up to approximately 7.2 million shares of our common stock at a price of $62.356 per share. The warrants expire in equal amounts on each trading day from December 19, 2013 to February 3, 2014.

The cost incurred in connection with the note hedge transactions and the proceeds from the sale of the warrants are included as a net reduction in Additional paid-in capital in the accompanying Condensed Consolidated Balance Sheets as of April 30, 2012 and October 31, 2011.

Point Overdraft Facility

The 51% majority owned subsidiary of Point, Babs Paylink AB, has an unsecured overdraft facility with Swedbank, the 49% shareholder of Babs Paylink AB, that terminates in December 2012. The overdraft facility limit is Swedish Krona ("SEK") 60.0 million (approximately $8.9 million). The interest rate is the bank's published rate plus a margin of 2.55%. At April 30, 2012, the interest rate was 4.67%. There is a 0.25% commitment fee payable annually in advance, and the overdraft facility is renewable annually on December 31. As of April 30, 2012, SEK 39.0 million (approximately $5.8 million) was outstanding and SEK 21.0 million (approximately $3.1 million) was available.

Other

In July 2011 we entered into an agreement with a bank in Mexico whereby we jointly operate certain automated teller machines (“ATMs”) in Mexico. In connection with this agreement, we agreed to install and maintain these ATMs at third party locations and the bank agreed to provide interest-free cash funding for those ATMs. The total funding, which is reflected on our Condensed Consolidated Balance Sheets as restricted cash and other long-term liabilities, was $2.5 million as of April 30, 2012 and zero as of October 31, 2011. Also, in connection with this agreement, we were required to provide an irrevocable standby letter of credit in favor of the bank to guarantee our performance under the agreement. During the quarter ended January 31, 2012, we deposited $2.0 million as collateral for this letter of credit, which is reflected as restricted cash on our Condensed Consolidated Balance Sheets as of April 30, 2012. The initial term of the agreement expires on July 14, 2012.

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Thereafter, this agreement automatically renews for successive one year periods unless either party gives notice of its intent not to renew as required under the agreement.

Principal Payments

Principal payments due for financings as of April 30, 2012 over the next five years are as follows (in thousands):

Fiscal Years Ending October 31:
2012 (Remainder of the fiscal year)	$	301,904
2013	54,252
2014	82,788
2015	94,192
2016	163,071
Thereafter	916,052
	$	1,612,259

Note 6. Fair Value Measurements

For assets and liabilities measured at fair value such amounts are based on an expected exit price, representing the amount that would be received on the sale of an asset or paid to transfer a liability, as the case may be, in an orderly transaction between market participants. As such, fair value may be based on assumptions that market participants would use in pricing an asset or liability. The authoritative guidance on fair value measurements establishes a consistent framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level. The following are the hierarchical levels of inputs to measure fair value:

Level 1 -	Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 -	Observable inputs that reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 -	Unobservable inputs reflecting our own assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.

Assets Measured and Recorded at Fair Value on a Recurring Basis

There have been no transfers between fair value measurement levels during the six months ended April 30, 2012. The following table presents our assets and liabilities that were measured at fair value on a recurring basis as of April 30, 2012 and October 31, 2011, classified by the level within the fair value hierarchy (in thousands):

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	April 30, 2012
	Carrying Value		Quoted Price in Active Market for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Money market funds (1)	$	2,271	$	2,271	$	—	$	—
Marketable equity investment (2)	4,831		4,831		—		—
Israeli severance funds (3)	2,008		—		2,008		—
Equity warrants (4)	535		—		535		—
Foreign exchange forward contracts (5)	58				58		—
Total assets measured and recorded at fair value	$	9,703	$	7,102	$	2,601	$	—
Liabilities
Acquisition related earn-out payables (6)	$	20,828	$	—	$	—	$	20,828
Interest rate swaps (7)	3,102		—		3,102		—
Foreign exchange forward contracts (5)	196		—		196		—
Total liabilities measured and recorded at fair value	$	24,126	$	—	$	3,298	$	20,828
	October 31, 2011
	Carrying Value		Quoted Price in Active Market for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
Money market funds (1)	$	186,530	$	186,530	$	—	$	—
Marketable equity investment (2)	5,450		5,450		—		—
Israeli severance funds (3)	2,097		—		2,097		—
Equity warrants (4)	682		—		682		—
Foreign exchange forward contracts (5)	58		—		58		—
Total assets measured and recorded at fair value	$	194,817	$	191,980	$	2,837	$	—
Liabilities
Acquisition related earn-out payables (6)	$	6,728	$	—	$	—	$	6,728
Foreign exchange forward contracts (5)	314		—		314		—
Total liabilities measured and recorded at fair value	$	7,042	$	—	$	314	$	6,728

Explanatory footnotes:

1.Money market funds are classified as Level 1 because the funds are valued using quoted market prices in markets that are active.

2.The marketable equity investment is classified as Level 1 because it is valued using quoted market prices in markets that are active.

3.The Israeli severance funds are classified as Level 2 because there are no quoted market prices, but the fund managers provide a daily redemption value for each of the investments that make up the funds.

4.The equity warrants are classified as Level 2 because they are valued using the Black-Scholes valuation model considering quoted market prices for the underlying shares, the treasury risk free interest rate, historic volatility and the remaining contractual term of the warrant. 

5.The foreign exchange forward contracts are classified as Level 2 because they are valued using quoted market prices and other observable data for similar instruments in an active market.

6.The acquisition related earn-out payables are classified as Level 3 because we use a probability-weighted expected payout model to determine the expected payout and an appropriate discount rate to calculate the fair value. The key assumptions in applying the approach are the internally forecasted sales and contributions for the acquired businesses, the probability of achieving the sales and contribution targets and an appropriate discount rate. Significant increases in the probability of achieving sales and contribution targets in isolation would result in a significantly higher fair value measurement while significant decreases in the probability of success in isolation would result in a significantly lower fair value measurement. Similarly, significant increases in the discount rate in isolation would result in a significantly lower

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fair value measurement while significant decreases in the discount rate in isolation would result in a significantly higher fair value measurement. We evaluate changes in each of the assumptions used to calculate fair values of our earn-out payable at the end of each period.

7. Interest rate swaps are classified as Level 2 because the fair value of interest rate swaps is determined using observable market inputs, such as the one month LIBOR forward pricing curve, as well as credit default spreads reflecting nonperformance risks of VeriFone and that of its counterparties.

Fair Value of Acquisition-Related Earn-out Payables

The following table presents a reconciliation for our earn-out payables measured and recorded at fair value on a recurring basis, using Level 3 significant unobservable inputs (in thousands):

	Six Months Ended			Fiscal Year Ended
	April 30, 2012			October 31, 2011
Balance at beginning of period	$	6,728		$	2,960
Increase due to business acquisitions	25,651			7,334
Changes in estimates and interest accretion, included in Other income (expense), net and interest expense	332			(2,443		)
Other, including the impact of fluctuations in foreign currency exchange rates	437			(623		)
Earn-out paid	(12,320		)	(500		)
Balance at end of period	$	20,828		$	6,728

As of April 30, 2012, the total gross earn-out payable, if all the financial performance targets were met as of April 30, 2012 would have been $39.3 million.

Note 7. Investment in Equity Securities

On February 9, 2010, we invested in Trunkbow International Holdings Ltd. (“Trunkbow”), a Jinan, People’s Republic of China-based mobile payments and value-added service applications company. We paid $5.0 million for 2.5 million shares of common stock and warrants to purchase 500,000 shares of common stock. The warrants have a strike price of $2.00 per share and are exercisable anytime up to 5 years from the closing date. The investment was originally accounted for using the cost-method and reflected in Other assets in our Condensed Consolidated Balance Sheets. The allocated costs of the shares and warrants were approximately $4.7 million and $0.3 million, respectively.

On February 3, 2011, Trunkbow's shares began trading on the NASDAQ Global Market. As a result, our investment in Trunkbow shares became marketable, and we reclassified this investment as available-for-sale. Accordingly, our investment in the Trunkbow shares is recorded at fair value which is the quoted market price of the shares. Any unrealized gains on the shares are included in Accumulated other comprehensive income, a component of Stockholders' equity. Realized gains (losses) on the sale of available-for-sale securities, which will be calculated based on the specific identification method, and declines in value below cost judged to be other-than-temporary, if any, will be recorded in Other income (expense), net as incurred.

Trunkbow Shares: The fair value of our Trunkbow shares as of April 30, 2012 and October 31, 2011 was estimated at $4.8 million and $5.5 million, respectively. The net unrealized gain as of April 30, 2012 was $0.2 million. We reduced the unrealized gain in accumulated other comprehensive income by $0.5 million and $0.6 million during the three and six months ended April 30, 2012, respectively.

Trunkbow Warrants:The Trunkbow warrants are derivatives. Accordingly, the warrants are recorded at fair value. We estimated the fair value of the warrants using the Black-Scholes valuation model. The changes in fair value are recorded as Other income (expense), net, in our Condensed Consolidated Statements of Operations. The fair value of our Trunkbow warrants as of April 30, 2012 and October 31, 2011 was estimated at $0.5 million and $0.7 million, respectively. We reflected a $0.1 million and $0.2 million mark-to-market loss in other income (expense), net in our Condensed Consolidated Statements of Operations for the three and six months ended April 30, 2012, respectively.

Note 8. Derivative Financial Instruments

We use derivative financial instruments, primarily forward contracts and swaps, to manage our exposure to foreign currency exchange rate and interest rate risks. Our primary objective in holding derivatives is to reduce the volatility of

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earnings and cash flows associated with changes in foreign currency exchange rates and interest rates.

Our derivatives expose us to credit risk to the extent that the counterparties may be unable to meet the terms of the agreement. However, we do seek to mitigate such risks by limiting our counterparties to major financial institutions. We do not expect losses as a result of defaults by counterparties. We do not use derivative financial instruments for speculative or trading purposes, nor do we hold or issue leveraged derivative financial instruments.

As discussed above, we hold warrants to purchase equity securities of Trunkbow. These warrants are derivative financial instruments, and are included in Prepaid expenses and other current assets in our Condensed Consolidated Balance Sheets. Accordingly, gains or losses resulting from changes in the fair value of these warrants are recorded as Other income (expense), net, in the Condensed Consolidated Statements of Income.

The fair value of the outstanding derivative instruments as of April 30, 2012 and October 31, 2011 is as follows (in thousands):

		As of April 30,		As of October 31,
	Balance Sheet Location	2012		2011
Derivative Assets
Derivatives not designated as hedging instruments:
Foreign exchange forward contracts	Prepaid expenses and other current assets	$	58	$	58
Equity warrants	Prepaid expenses and other current assets	535		682
Total		$	593	$	740
Derivative Liabilities
Derivatives designated as hedging instruments:
Interest rate swap contracts	Other current liabilities	$	2,141	$	—
Interest rate swap contracts	Other liabilities	961		—
Total		$	3,102	$	—
Derivatives not designated as hedging instruments:
Foreign exchange forward contracts	Other current liabilities	$	196	$	314
Total		$	196	$	314

Foreign Currency Exchange Risk

Foreign exchange forward contracts, both designated and not designated as hedging instruments pursuant to ASC 815Derivatives and Hedging, are recognized either as assets or liabilities on the Condensed Consolidated Balance Sheets at fair value at the end of each reporting period. We primarily utilize foreign exchange forward contracts to offset the risks associated with certain foreign currency balance sheet exposures. Under this program, foreign exchange forward contracts are arranged and maintained so as to yield gains or losses to offset changes in foreign currency denominated assets or liabilities due to movements in foreign exchange rates, thus mitigating the volatility associated with foreign currency transaction gains or losses. Our foreign currency exposures are predominantly intercompany receivables and payables arising from product sales from one of our entities to another. Foreign exchange forward contracts generally settle within 90 days. We do not use these foreign exchange forward contracts for trading purposes. We have not entered into any foreign currency derivative financial instruments which qualify as hedging instruments since November 1, 2009.

Interest Rate Risk

Interest rate swap agreements, both designated and not designated as hedging instruments pursuant to ASC 815Derivatives and Hedging, are recognized either as assets or liabilities on the Condensed Consolidated Balance Sheets at fair value at the end of each reporting period. We use interest rate swaps to hedge the variability in cash flows related to interest rate payments. On March 23, 2012, we entered into a number of interest rate swap agreements to effectively convert $500.0 million of the Term Loan A from a floating rate to a 0.71% fixed rate plus applicable margin. The interest rate swaps qualify for hedge accounting treatment as cash flow hedges. The interest rate swaps are effective for the period

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from March 30, 2012 to March 31, 2015 or 36 months.

Derivatives Designated as Hedging Instruments

The effective portion of changes in the fair value of interest rate swaps that are designated and qualify as cash flow hedges is recorded in accumulated other comprehensive income (loss) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings.

The aggregate unrealized net loss for interest rate swaps, recorded as a component of comprehensive income, for the three and six months ended April 30, 2012 was $3.1 million. There were no interest rate swaps for the three and six months ended April 30, 2011.

There was no gain (loss) reclassified from accumulated other comprehensive income into interest expense for the three and six months ended April 30, 2012 and 2011.

During the three months ended April 30, 2012 and 2011, we recorded no hedge ineffectiveness in earnings, which would have been included in interest expense on the consolidated statements of operations.

Amounts reported in accumulated other comprehensive loss related to derivatives will be reclassified to interest expense as interest payments are made on the associated variable-rate debt. Over the next twelve months, we estimate that an additional $2.1 million will be reclassified as an increase to interest expense. We are hedging our exposure to the variability in future cash flows for forecasted transactions over a maximum period of 36 months.

Derivatives Not Designated as Hedging Instruments

Gains or losses resulting from changes in the fair value of these foreign exchange forward contracts are not designated as hedging instruments and are recorded as Other income (expense), net, in the Condensed Consolidated Statements of Operations.

As of April 30, 2012, the notional amount of the forward contracts we held to purchase U.S. dollars in exchange for other major international currencies was $167.2 million. As of October 31, 2011, the notional amount of the forward contracts we held to purchase U.S. dollars in exchange for other major international currencies was $87.3 million.

We incurred a net loss on foreign exchange forward contracts, not designated as hedging instruments, of $1.2 million and $24.4 million for the three and six months ended April 30, 2012, respectively. The net loss on foreign exchange forward contracts for the six months ended April 30, 2012 includes a $22.5 million loss for the difference between the forward rate and the actual rate on the date of settlement of foreign exchange forward contracts to lock in the U.S. dollar equivalent purchase price for our Point acquisition. For the comparable periods last year, we incurred a $2.7 million and a $3.2 million net loss on foreign exchange contracts, not designated as hedging instruments, in the three and six months ended April 30, 2011, respectively. These losses are included in Other income (expense), net in our Condensed Consolidated Statements of Income.

Fair Value of Other Financial Instruments

Other financial instruments consist principally of cash, accounts receivable, accounts payable and long-term debt. The estimated fair value of cash, accounts receivable, and accounts payable approximates their carrying value. The estimated fair value of long-term debt related to the Term A, Term B, and Revolving loan approximates the carrying value since the rate of interest on the long-term debt adjusts to market rates on a periodic basis. The fair value of the Notes, using level one inputs of the closing trading price as of April 30, 2012 and October 31, 2011 was $306.2 million and $304.6 million, respectively.

Note 9. Comprehensive Income/(Loss)

The components of comprehensive income/(loss), consisted of the following (in thousands):

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	Three Months Ended					Six Months Ended
	April 30,					April 30,
	2012			2011		2012			2011
Net income attributable to VeriFone Systems, Inc. stockholders	$	3,477		$	25,200	$	354		$	57,231
Other comprehensive income (loss):
Foreign currency translation adjustments, net of tax	(1,520		)	8,026		5,437			10,064
Cash flow interest rate hedge loss, net of tax	(1,937		)	—		(1,937		)	—
Unrealized gain (loss) on marketable equity investment, net of tax	(501		)	5,750		(601		)	5,750
Benefit plan adjustments	31			—		174			—
Total comprehensive income (loss) before allocation to noncontrolling interests	$	(450	)	$	38,976	$	3,427		$	73,045
Less: comprehensive income attributable to noncontrolling interest	888			94		1,024			84
Other comprehensive income (loss) attributable to VeriFone Systems, Inc. stockholders	$	(1,338	)	$	38,882	$	2,403		$	72,961

Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive loss, net of tax, consisted of the following (in thousands):

	April 30,			October 31,
	2012			2011
Foreign currency translation adjustments	$	(513	)	$	(5,950	)
Unrealized gain on marketable equity investment	149			750
Unrealized gain (loss) on cash flow hedge	(1,924		)	13
Unfunded portion of pension plan obligations	(1,310		)	(1,484		)
Accumulated other comprehensive loss	$	(3,598	)	$	(6,671	)

Note 10. Income Taxes

We recorded income tax benefits of $4.6 million and $14.4 million for the three and six months ended April 30, 2012, respectively. We recorded income tax provision of $3.1 million and $0.6 million for the three and six months ended April 30, 2011, respectively. The effective tax rates for the three and six months ended April 30, 2012 and 2011 are lower than the U.S. statutory tax rate due to earnings in countries where we are taxed at lower rates compared to the U.S. federal and state statutory rates and reversal of uncertain tax position liabilities as statutes of limitations expired. The income tax benefit for the six months ended April 30, 2012 includes the discrete tax benefit of $8.5 million related to the foreign exchange loss on futures contracts which was incurred during the first three months of the period and $6.6 million related to a patent litigation loss contingency expense which was incurred during June 2012.

During January 2012, the Company entered into a formal settlement with the Israeli tax authorities for the calendar year 2006 audit and, accordingly, has released $2.6 million of excess accrued tax liabilities associated with this audit.

As of April 30, 2012, we remain in a net deferred tax asset position. The realization of our deferred tax assets depends primarily on our ability to generate sufficient U.S. and foreign taxable income in future periods. The amount of deferred tax assets considered realizable may increase or decrease in subsequent quarters as we reevaluate the underlying basis for our estimates of future domestic and certain foreign taxable income.

We have recorded our uncertain tax position liability as a long-term liability as we do not expect significant payments to occur over the next twelve months. The amount of unrecognized tax positions could be reduced upon closure of tax examinations or if the statute of limitations on certain tax filings expire without assessment from the tax authorities. We believe that it is reasonably possible that there could be a reduction in unrecognized tax benefits due to statute of limitation expirations in multiple tax jurisdictions during the next twelve months of approximately $1.6 million. Interest and penalties accrued on these uncertain tax positions will also be released upon the expiration of statutes of limitations.

Note 11. Stock-based Compensation

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We grant stock awards, including stock options, restricted stock units (“RSUs”) and restricted stock awards (“RSAs”) pursuant to stockholder approved equity incentive plans. These equity incentive plans are described in further detail in Note 12. Stockholders’ Equity of Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended October 31, 2011. All stock awards granted during the six months ended April 30, 2012 were granted under the 2006 Equity Incentive Plan, as amended.

Valuation Assumptions

The grant-date fair value of RSUs is equal to the market value of our common stock on the date of grant. The grant-date fair value of stock options is estimated using the Black-Scholes valuation model. We used the following weighted-average assumptions for the three and six months ended April 30, 2012 and 2011:

	Three Months Ended				Six Months Ended
	April 30,				April 30,
	2012		2011		2012		2011
Expected term of the options (in years)	3.6		4.0		3.6		4.0
Risk-free interest rate	0.8	%	1.8	%	0.7	%	1.7	%
Expected stock price volatility	66.7	%	69.6	%	67.3	%	70.9	%
Expected dividend rate	0.0	%	0.0	%	0.0	%	0.0	%

The Black-Scholes valuation model incorporates several subjective assumptions including expected term and expected volatility. The expected term of options granted is derived from the historical actual term of option grants and an estimate of future exercises during the remaining contractual period of the option. In determining expected volatility for options, we include the elements listed below at the weighted percentages presented:

	Three Months Ended				Six Months Ended
	April 30,				April 30,
	2012		2011		2012		2011
Historical volatility of our common stock	75.0	%	60.0	%	75.0	%	60.0	%
Historical volatility of comparable companies' common stock	20.0	%	35.0	%	20.0	%	35.0	%
Implied volatility of our traded common stock options	5.0	%	5.0	%	5.0	%	5.0	%

We placed the greatest weighting on the historic volatility of our common stock because we believe that, in general, it is representative of our expected volatility. However, our stock price during the second half of calendar year 2007 and most of calendar year 2008 was significantly impacted by our announcement on December 3, 2007 of a restatement of certain of our financial statements. Our restated financial statements were filed on August 19, 2008. Given that our historic volatility includes the volatility during this period, which we do not believe is representative of our expected volatility, we also used peer group data and implied volatility. We included peer group data in an effort to capture a broader view of the marketplace over the last four years. We included the implied volatility of our traded options to capture market expectations regarding our stock price. In determining the weighting between our peer group data and implied volatility, we accorded less weighting to our implied volatility because there is a relatively low volume of trades and the terms of the traded options are shorter than the expected term of our share options. Beginning with our fiscal quarter ending July 31, 2012, we have historical volatility data for our stock for a period of time that covers the length of our expected term of 3.6 years, and that we believe provides a reasonable basis for an estimation of our expected volatility. Accordingly, we will no longer use historic volatility of comparable companies' common stock in our weighting percentages. For the fiscal quarter ending July 31, 2012, we will increase the weighting of the historical volatility of our common stock from 75.0% to 95.0%, with the remaining 5.0% based on the implied volatility of our traded stock options.

Stock-based Compensation Expense

The following table presents the stock-based compensation expense recognized during the three and six months ended April 30, 2012 and 2011 (in thousands):

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	Three Months Ended				Six Months Ended
	April 30,				April 30,
	2012		2011		2012		2011
Cost of net revenues	$	463	$	394	$	942	$	791
Research and development	1,201		939		2,454		1,814
Sales and marketing	4,405		3,550		8,667		6,579
General and administrative	4,954		4,435		9,664		7,573
Total stock-based compensation	$	11,023	$	9,318	$	21,727	$	16,757

As of April 30, 2012, total unrecognized compensation expense adjusted for estimated forfeitures related to unvested stock options, and RSUs and RSAs was $44.3 million and $31.1 million, respectively, which is expected to be recognized over the remaining weighted-average vesting periods of 2.0 years for stock options and 2.6 years for RSUs and RSAs.

Stock Option Activity

The following table provides a summary of stock option activity under our equity incentive plans for the six months ended April 30, 2012:

	Number of Shares (in thousands)	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)
Balance at October 31, 2011	8,201	$	18.38
Granted	1,239	$	37.52