Verifone Systems 10-Q 2006 Q0 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended January 31, 2006

or

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

For the transition period from             to            

Commission file number: 001-32465

VERIFONE HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

Delaware	04-3692546
(State or other jurisdiction of 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 ý  NO o

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

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

At February 16, 2006, the number of shares outstanding of the registrant’s common stock, $0.01 par value was 67,774,194.

Table of Contents 

VeriFone Holdings, Inc.

INDEX

PART I – FINANCIAL INFORMATION
	Item 1	Financial Statements (unaudited):
		Condensed Consolidated Balance Sheets – January 31, 2006 and October 31, 2005	3
		Condensed Consolidated Statements of Operations – Three Months Ended January 31, 2006 and 2005	4
		Condensed Consolidated Statements of Cash Flows – Three Months Ended January 31, 2006 and 2005	5
		Notes to Condensed Consolidated Financial Statements	6
	Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
	Item 3	Quantitative and Qualitative Disclosures About Market Risk	46
	Item 4	Controls and Procedures	46
PART II – OTHER INFORMATION
	Item 1	Legal Proceedings	47
	Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	47
	Item 3	Defaults Upon Senior Securities	47
	Item 4	Submission of Matters to a Vote of Security Holders	47
	Item 5	Other Information	47
	Item 6	Exhibits	47
	Signatures		48
	Exhibit Index		49
	Certifications

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PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

VERIFONE HOLDINGS, INC.  AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS)

	January 31,			October 31,
	2006			2005
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	66,596		$	65,065
Marketable securities	21,600			16,769
Accounts receivable, net of allowances for doubtful accounts of $1,497 and $1,571	92,967			87,424
Inventories	39,024			35,520
Deferred tax assets	11,447			11,467
Prepaid expenses and other current assets	10,312			9,368
Total current assets	241,946			225,613
Equipment and improvements, net	5,821			5,873
Purchased intangible assets, net	16,160			18,912
Goodwill	47,260			47,260
Deferred tax assets	18,578			17,705
Debt issuance costs, net	7,196			7,462
Other assets	7,052			6,546
Total assets	$	344,013		$	329,371
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	41,863		$	47,161
Income taxes payable	12,511			8,746
Accrued compensation	11,064			12,576
Accrued warranty	4,155			4,371
Deferred revenue	20,417			17,542
Deferred tax liabilities	137			137
Accrued expenses	6,338			6,826
Other current liabilities	14,403			13,819
Current portion of long-term debt	1,956			1,994
Total current liabilities	112,844			113,172
Accrued warranty	755			872
Deferred revenue	6,509			6,835
Long-term debt, less current portion	180,333			180,812
Other long-term liabilities	959			1,142
Commitments and contingencies
Stockholders’ equity:
Voting Common Stock: $0.01 par value, 100,000 shares authorized at January 31, 2006 and October 31, 2005; 67,767 and 67,646 shares issued and outstanding as of January 31, 2006 and October 31, 2005	678			676
Additional paid-in-capital	130,265			128,101
Accumulated deficit	(89,185		)	(102,979		)
Accumulated other comprehensive income	855			740
Total stockholders’ equity	42,613			26,538
Total liabilities and stockholders’ equity	$	344,013		$	329,371

See accompanying notes.

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VERIFONE HOLDINGS, INC.  AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

	Three Months Ended January 31,
	2006			2005
Net revenues:
System Solutions	$	118,685		$	97,989
Services	15,945			13,294
Total net revenues	134,630			111,283
Cost of net revenues:
System Solutions	67,115			61,109
Services	7,913			7,550
Total cost of net revenues	75,028			68,659
Gross profit	59,602			42,624
Operating expenses:
Research and development	11,407			9,494
Sales and marketing	14,201			12,044
General and administrative	9,698			6,704
Amortization of purchased intangible assets	1,159			1,304
Total operating expenses	36,465			29,546
Operating income	23,137			13,078
Interest expense	(3,279		)	(4,305		)
Interest income	687			11
Other income (expense), net	201			(200		)
Income before income taxes	20,746			8,584
Provision for income taxes	6,952			2,747
Net income	$	13,794		$	5,837
Net income per share:
Basic	$	0.21		$	0.11
Diluted	$	0.20		$	0.10
Weighted-average shares used in computing net income per share:
Basic	65,705			53,397
Diluted	68,810			57,128

See accompanying notes.

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VERIFONE HOLDINGS, INC.  AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

	Three Months Ended January 31,
	2006			2005
	(unaudited)
Cash flows from operating activities
Net income	$	13,794		$	5,837
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of purchased intangibles	2,752			3,266
Depreciation and amortization of equipment and improvements	774			723
Amortization of capitalized software	275			267
Amortization of interest rate caps	56			26
Amortization of debt issuance costs	266			318
Stock-based compensation	923			15
Other	(47		)	—
Changes in operating assets and liabilities:
Accounts receivable, net	(5,543		)	13,839
Inventories	(3,503		)	(13,406		)
Deferred tax assets	(853		)	(541		)
Prepaid expenses and other current assets	(956		)	(2,175		)
Other assets	(190		)	6
Accounts payable	(5,298		)	8,703
Income taxes payable	3,765			3,035
Accrued compensation	(1,512		)	(886		)
Accrued warranty	(333		)	109
Deferred revenue	2,549			1,387
Deferred tax liabilities	—			312
Accrued expenses and other liabilities	(473		)	(3,870		)
Net cash provided by operating activities	6,446			16,965
Cash flows from investing activities
Software development costs capitalized	(428		)	(91		)
Purchase of equipment and improvements	(610		)	(396		)
Purchase of other assets	(276		)	—
Purchases of marketable securities	(55,950		)	—
Sales and maturities of marketable securities	51,150			—
Net cash used in investing activities	(6,114		)	(487		)
Cash flows from financing activities
Proceeds from revolving promissory notes payable and revolver	—			9,600
Repayments of revolving promissory notes payable and revolver	—			(9,600		)
Repayment of long-term debt	(462		)	(475		)
Tax benefit of stock-based compensation	874			—
Repayments of capital leases	(55		)	(122		)
Proceeds from exercises of stock options and other	369			24
Payment of IPO and follow-on financing costs	—			(583		)
Net cash provided by (used in) financing activities	726			(1,156		)
Effect of foreign currency exchange rate changes on cash	473			56
Net increase in cash and cash equivalents	1,531			15,378
Cash and cash equivalents, beginning of period	65,065			12,705
Cash and cash equivalents, end of period	$	66,596		$	28,083
Supplemental disclosures of cash flow information
Cash paid for interest	$	3,085		$	3,975
Cash paid for income taxes	$	3,434		$	658

See accompanying notes.

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VERIFONE HOLDINGS, INC.  AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1. Description of Business

VeriFone Holdings, Inc. (“VeriFone” or the “Company”) was incorporated in the state of Delaware on June 13, 2002 in order to acquire VeriFone, Inc. on July 1, 2002.  Prior to the completion of the Company’s initial public offering on May 4, 2005, VeriFone was majority owned by GTCR Fund VII, L.P., an equity fund managed by GTCR Golder Rauner, LLC (“GTCR”), a private equity firm. As of January 31, 2006, equity funds managed by GTCR owned approximately 33.1% of the outstanding common stock of the Company. VeriFone designs, markets, and services transaction automation systems that enable secure electronic payments among consumers, merchants, and financial institutions.

Note 2. Summary of Significant Accounting Policies

Principles of Consolidation

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

Unaudited Interim Financial Information

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

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

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We base our estimates on historical experience and other various assumptions that are believe to be reasonable under the circumstances. Actual results could differ from those estimates, and such differences may be material to the consolidated financial statements.

Revenue Recognition

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

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

Net revenues from System Solutions sales to end-users, resellers, value added resellers and distributors are predominately recognized upon shipment of the product. End-users, resellers, value added resellers and distributors generally have no rights of return, stock rotation rights or price protection.

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

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

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

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

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

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

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

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

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

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

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

Foreign Currency Translation

The assets and liabilities of foreign subsidiaries, where the local currency is the functional currency, are translated from their respective functional currencies into U.S. dollars at the rates in effect at the balance sheet date, with resulting foreign currency translation adjustments recorded as other comprehensive income in the accompanying consolidated statements of changes in stockholders’ deficit and comprehensive income (loss). Revenue and expense amounts are translated at average rates during the period. Where the U.S. dollar is the functional currency, translation adjustments are recorded in other income (expense), net in the accompanying consolidated statements of operations.

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

Concentrations of Credit Risk

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

The Company invests cash not required for use in operations in high credit quality securities based on its investment policy. The investment policy has limits based on credit quality, investment concentration, investment type and maturity that the Company believes will result in reduced risk of loss of capital. Investments are of a short-term nature and include investments in money market funds and auction rate and corporate debt securities. The Company has reflected the duration of auction rate securities based on their reset feature. Rates on these securities typically reset every 7, 28 or 35 days. The auction rate securities generally have a final maturity extending 15 to 30 years or more.

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

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

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

In the three months ended January 31, 2006 and 2005, one customer, First Data Corporation and its affiliates, accounted for 11% and 12% of net revenues, respectively. At January 31, 2006 and October 31, 2005, one customer, First Data Corporation and its affiliates, accounted for 14% and 13% of accounts receivable, respectively. No other customer accounted for 10% or more of net revenues for all periods presented or accounted for 10% or more of accounts receivable at January 31, 2006 and 2005.

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

Besides those noted above, the Company has no other off-balance-sheet concentrations of credit risk, such as option contracts or other derivative arrangements at January 31, 2006 and 2005.

Contract Manufacturing

The Company outsources the manufacturing of its products to contract manufacturers with facilities in China, Mexico, Singapore, and Brazil. The Company also utilizes a third-party service provider in the United States and Mexico for its equipment repair service.

Fair Value of Financial Instruments

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

Derivative Financial Instruments

The Company uses foreign currency forward contracts, to hedge certain existing and anticipated foreign currency denominated transactions. The terms of foreign currency forward contracts used are generally consistent with the timing of the foreign

8

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

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

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

The Company’s international sales are primarily denominated in U.S. dollars. For foreign currency denominated sales, however, the volatility of the foreign currency markets represents risk to the Company’s margins. The Company defines its exposure as the risk of changes in the functional-currency-equivalent cash flows (generally U.S. dollars) attributable to changes in the related foreign currency exchange rates. From time to time the Company enters into certain transactions with foreign currency contracts with critical terms designed to match those of the underlying exposure. The Company does not qualify these foreign forward currency contracts as hedging instruments and, as such, records the changes in the fair value of these derivatives immediately in other income (expense), net in the Company’s accompanying consolidated statements of operations. As of January 31, 2006, the Company did not have any outstanding foreign currency forward contracts. Effective February 1, 2006, the Company has entered into foreign currency forward contracts to sell Australian dollars and Euros with notional amounts of $2.0 million and $1.8 million, respectively. The Company’s foreign currency forward contracts have generally had original maturities of 35 days or less. The gains or losses on foreign currency forward contracts are recorded in other income (expense), net in the accompanying consolidated statements of operations.

The Company is exposed to interest rate risk related to its debt, which bears interest based upon the three-month LIBOR rate. On June 30, 2004, the Company entered into a secured credit facility (the “Credit Facility”) with a syndicate of financial institutions, led by Banc of America Securities and Credit Suisse (formerly Credit Suisse First Boston). Under the Credit Facility, the Company is required to fix the interest rate through swaps, rate caps, collars and similar agreements with respect to at least 30% of the outstanding principal amount of all loans and other indebtedness that have floating interest rates. This interest rate protection must extend through June 30, 2006. In July 2004, the Company purchased a two-year interest rate cap for $285,000 with a notional amount of $50 million under which the Company will receive interest payments if the three-month LIBOR rate exceeds 4%. In March 2005, the Company purchased a one-year interest rate cap for $29,000 with an effective date of July 2005 and a notional amount of $30 million, under which the Company will receive payments to the extent the three-month LIBOR rate exceeds 5%.

The two interest rate caps are recorded in prepaid expenses and other current assets in the consolidated balance sheet and are being amortized as interest expense over the life of the caps. For the three months ended January 31, 2006, the Company received interest of $31,000 as a result of the three-month LIBOR rate on its Term Loan B exceeding 4%, which is recorded as an offset of interest expense in the statements of operations.

The interest rate caps were designated as cash flow hedges and are recorded at fair value. The fair value of the interest rate caps as of January 31, 2006 was $197,000 which was recorded in prepaid expenses and other current assets in the consolidated balance sheet, with the related $17,000 unrealized gain recorded as a component of accumulated other comprehensive income, net of $7,000 tax benefit.

Cash and Cash Equivalents

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

9

Marketable Securities

As of January 31, 2006, the Company classified its marketable securities as available-for-sale in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. Available-for-sale securities are carried at fair value, with unrealized holding gains and losses reported in accumulated other comprehensive income, which is a separate component of stockholders’ equity, net of tax, in the accompanying consolidated balance sheets. The amortization of premiums and discounts on the investments and realized gains and losses, determined by specific identification based on the trade date of the transactions, are recorded in interest income in the accompanying consolidated statements of operations.

Equity Earnings (Loss) in Affiliates

The Company has an investment in VeriFone Transportation Systems (“VTS”).  The investment in VTS is accounted for under the equity method and included in the Other Assets on the balance sheet.  The earnings (loss) are accounted for in “Other” in the Other Income (Expense) section of the income statement.  For the three months ended January 31, 2006 the investment and the activity have been insignificant.

Debt Issuance Costs

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

Inventories

Inventories are stated at the lower of standard cost or market. Standard costs approximate the first-in, first-out (“FIFO”) method. The Company regularly monitors inventory quantities on hand and records write-downs for excess and obsolete inventories based primarily on the Company’s estimated forecast of product demand and production requirements. Such write-downs establish a new cost-basis of accounting for the related inventory. Actual inventory losses may differ from management’s estimates.

Shipping and Handling Costs

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

Warranty Costs

The Company accrues for estimated warranty obligations when revenue is recognized based on an estimate of future warranty costs for delivered products. Such estimates are based on historical experience and expectations of future costs. The Company periodically evaluates and adjusts the accrued warranty costs to the extent actual warranty costs vary from the original estimates. The Company’s warranty period typically extends from 13 months to five years from the date of shipment. Costs associated with maintenance contracts, including extended warranty contracts, are expensed when they are incurred. Actual warranty costs may differ from management’s estimates.

Research and Development Costs

Research and development costs are expensed as incurred. Costs eligible for capitalization under SFAS No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed, were $0.4 million and $0.1 million for the three months ended January 31, 2006 and 2005, respectively. Capitalized software development costs of $5.9 million and $5.5 million at January 31, 2006 and October 31, 2005, respectively, are being amortized on a straight-line basis over the estimated life of the product to which the costs relate, ranging from three to five years. These costs, net of accumulated amortization of $2.3 million and $2.0 million as of January 31, 2006 and October 31, 2005, respectively, are recorded in other assets in the accompanying consolidated balance sheets.

Income Taxes

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

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Comprehensive Income

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

Equipment and Improvements

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

Goodwill and Other Purchased Intangible Assets

Goodwill and other purchased intangible assets have been recorded as a result of the Company’s acquisitions. Goodwill is not amortized for book purposes but is amortizable for tax purposes over 15 years. Goodwill is subject to an annual impairment test. Other intangible assets are amortized over their estimated useful lives, generally 1.5 to five years.

The Company is required to perform an annual impairment test of goodwill and indefinite-lived intangible assets. Should certain events or indicators of impairment occur between annual impairment tests, the Company performs the impairment test of goodwill and indefinite-lived intangible assets at that date. In the first step of the analysis, the Company’s assets and liabilities, including existing goodwill and other intangible assets, are assigned to these identified reporting units to determine their carrying value. Based on how the business is managed, the Company has five reporting units. Goodwill was allocated to the reporting units based on their relative contributions to the Company’s operating results. If the carrying value of a reporting unit is in excess of its fair value, an impairment may exist, and the Company must perform the second step of comparing the implied fair value of the goodwill to its carrying value to determine the impairment charge. Through January 31, 2006, no impairment charge has been required.

The fair value of the reporting units is determined using the income approach. The income approach focuses on the income-producing capability of an asset, measuring the current value of the asset by calculating the present value of its future economic benefits such as cash earnings, cost savings, tax deductions, and proceeds from disposition. Value indications are developed by discounting expected cash flows to their present value at a rate of return that incorporates the risk-free rate for the use of funds, the expected rate of inflation, and risks associated with the particular investment.

Accounting for Impairment of Long-Lived Assets

The Company periodically evaluates whether changes have occurred that would require revision of the remaining useful life of equipment and improvements and purchased intangible assets or render them not recoverable. If such circumstances arise, the Company uses an estimate of the undiscounted value of expected future operating cash flows to determine whether the long-lived assets are impaired. If the aggregate undiscounted cash flows are less than the carrying amount of the assets, the resulting impairment charge to be recorded is calculated based on the excess of the carrying value of the assets over the fair value of such assets, with the fair value determined based on an estimate of discounted future cash flows. For the three months ended January 31, 2006, no impairment charge has been necessary.

Stock-Based Compensation

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

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

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

Net Income Per Share

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

Segment Reporting

The Company maintains two operating segments, North America, consisting of U.S. and Canada, and International, as all other countries in which we have revenue.

Earnings Per Common Share

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

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

	Three Months Ended
	January 31,
	2006			2005
Basic and diluted net income per share:
Numerator:
Net income	$	13,794		$	5,837
Denominator:
Weighted-average shares of voting and non voting common stock outstanding	67,707			56,425
Less: weighted-average shares subject to repurchase	(2,002		)	(3,028		)
Weighted-average shares used in computing basic net income per share	65,705			53,397
Add dilutive securities:
Weighted-average shares subject to repurchase	2,002			3,028
Stock options	1,103			703
Weighted-average shares used in computing diluted net income per share	68,810			57,128
Net income per share:
Basic	$	0.21		$	0.11
Diluted	$	0.20		$	0.10

For the three months ended January 31, 2006 and 2005, 366,000 and 640,738 options, respectively, to purchase Common Stock were excluded from the calculation of weighted averages shares for diluted net income per share as they were antidilutive.

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Recent Accounting Pronouncements

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

In November 2005, FASB issued FASB Staff Position (“FSP”) FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“FSP 115-1”), which provides guidance on determining when investments in certain debt and equity securities are considered impaired, whether that impairment is other-than-temporary, and on measuring such impairment loss. FSP 115-1 also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. FSP 115-1 is effective for reporting periods beginning after December 15, 2005. The Company’s adoption of FSP 115-1 will not have a material impact on our results of operations or financial condition.

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

Note 3.  Balance Sheet and Statements of Operations Detail

Marketable Securities

Marketable securities at January 31, 2006 were as follows (in thousands):

				Gross		Gross
				Unrealized		Unrealized
	Cost			Gains		Losses		Fair Value
Auction rate securities (due in one year or less)	$		21,600	$	—	$	—	$	21,600
	$	21,600		$	—	$	—	$	21,600

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

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

In the table above, the Company has reflected the duration of auction rate securities based on their reset feature. Rates on these securities typically reset every 7, 28 or 35 days. The underlying securities in these investments have a final maturity extending 30 years or more.

Inventories

Inventories consisted of the following (in thousands):

	January 31, 2006		October 31, 2005
Raw materials	$	7,462	$		6,165
Work-in-process	2,838		1,133
Finished goods	28,724		28,222
	$	39,024	$	35,520

Equipment and Improvements

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

	January 31, 2006			October 31, 2005
Computer hardware and software	$	4,129		$	3,525
Office equipment, furniture and fixtures	1,474			1,407
Machinery and equipment	3,895			3,086
Leasehold improvement	3,379			3,257
Construction in progress	446			1,481
	13,323			12,756
Accumulated depreciation and amortization	(7,502		)	(6,883		)
	$	5,821		$	5,873

At January 31, 2006 and October 31, 2005, equipment amounting to $1.3 million was capitalized under capital leases. Related accumulated amortization at January 31, 2006 and October 31, 2005 amounted to $1.2 million and $1.1 million, respectively.

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Purchased Intangible Assets

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

	Gross Carrying
	Amount		Accumulated Amortization									Net
	January 31,		October 31,						January 31,			January 31,		October 31,
	2006		2005			Additions			2006			2006		2005
Developed technology	$	30,804	$	(25,879	)	$	(1,136	)	$	(27,015	)	$	3,789	$	4,925
Core technology	14,442		(9,629		)	(722		)	(10,351		)	4,091		4,813
Trade name	22,225		(16,402		)	(620		)	(17,022		)	5,203		5,823
Customer relationships	15,714		(12,363		)	(274		)	(12,637		)	3,077		3,351
	$	83,185	$	(64,273	)	$	(2,752	)	$	(67,025	)	$	16,160	$	18,912

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

	Three Months Ended January 31,
	2006		2005
Included in cost of net revenues	$	1,593	$	1,962
Included in operating expenses	1,159		1,304
	$	2,752	$	3,266

Estimated amortization expense as of January 31, 2006 is as follows (in thousands):

	Cost of Net		Operating
	Revenues		Expenses		Total
2006 (remaining nine months)	$	3,561	$	3.474	$	7,035
2007	3,217		3,370		6,587
2008	846		754		1,600
2009	526		312		838
2010	—		100		100
	$	8,150	$	8,010	$	16,160

Goodwill

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

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

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Warranty

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

	Three Months Ended January 31,
	2006			2005
Balance, beginning of period	$	5,243		$	3,795
Warranty charged to cost of net revenues	633			758
Utilization of warranty	(943		)	(685		)
Changes in estimates	(23		)	36
Balance, end of period	$	4,910		$	3,904

Other Income (Expense), net

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

	Three Months Ended January 31,
	2006			2005
Refund of foreign customs fees	$	288		$	—
Foreign currency transaction gains (losses)	(20		)	14
Foreign currency contract losses	(76		)	(220		)
Other	9			6
	$	201		$	(200	)

Note 4. Financing

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

	January 31, 2006			October 31, 2005
Secured credit facility
Revolver	$	—		$	—
Term B loan	182,091			182,553
Capital leases	198			253
	182,289			182,806
Less current portion	(1,956		)	(1,994		)
	$	180,333		$	180,812

Secured Credit Facility

On June 30, 2004, the Company entered into a secured credit facility (the “Credit Facility”) with a syndicate of financial institutions, led by Banc of America Securities and Credit Suisse (formerly Credit Suisse First Boston). The Credit Facility consisted of a Revolver permitting borrowings up to $30 million, a Term B Loan of $190 million, and a Second Lien Loan of $72 million. The Credit Facility is guaranteed by the Company and its subsidiaries and is secured by collateral including substantially all of the Company’s assets and stock of the Company’s subsidiaries.  As of January 31, 2006, the interest rate on the Term B Loan was 6.67%. For the three months ended January 31, 2006 the weighted average interest rate on the Credit Facility was 6.24%. The Company also pays a commitment fee on the unused portion of the Revolver under its Credit Facility at a rate that varies between 0.375% and 0.50% per annum depending upon its consolidated total leverage ratio.

On March 23, 2005, the Company executed the first amendment to its Credit Facility that became effective upon closing of the Company’s initial public offering on May 4, 2005. Prior to the amendment, borrowings on the Term B Loan bore interest at a rate of either 2.50% over the three-month LIBOR or 1.50% over the lender’s base rate. Subsequent to the amendment, at the Company’s option,

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borrowings on the Term B Loan bear interest at a rate of either 2.00% over the three-month LIBOR or 1.00% over the lender’s base rate. On September 7, 2005, the Company executed the second amendment to its Credit Facility.  Under the terms of the second amendment, the Company is no longer required to make a mandatory payment of 50% of the proceeds that it receives from a public equity offering. These amendments also relaxed certain of the financial and non-financial covenants.

At the Company’s option, the Revolver bears interest at a rate of 1.75% over the three-month LIBOR, which was 4.68% and 4.24% at January 31, 2006 and October 31, 2005, respectively, or 0.75% over the lender’s base rate, which was 7.50% and 6.75% at January 31, 2006 and October 31, 2005, respectively. The entire $30 million Revolver was available for borrowing to meet short-term working capital requirements at January 31, 2006 and October 31, 2005.  At the Company’s option, borrowings on the Term B Loan bear interest at a rate of either 2.0% (2.50% prior to May 4, 2005) over the three-month LIBOR or 1% (1.50% prior to May 4, 2005) over the lender’s base rate.

Interest payments are due monthly, bi-monthly, quarterly or bi-quarterly at the Company’s option. The lender’s base rate is the greater of the Fed Funds rate plus 50 basis points or the Bank of America prime rate. The respective maturity dates on the components of the Credit Facility are June 30, 2009 for the Revolver and June 30, 2011 for the Term B Loan. Payments on the Term B Loan are due in equal quarterly installments of $462,000 over the seven-year term on the last day of the second month of each quarter. During the first quarter of fiscal 2006, the Company paid $462,000 of the principal balance on the Term B Loan, resulting in an outstanding balance of $182.1 million as of January 31, 2006.

On February 1, 2006, Standard & Poor’s has raised its corporate credit and senior secured bank loan ratings on VeriFone to ‘BB-’ from ‘B+’. Effective this date, under the terms of the Company’s Term B Loan with its senior lenders, the interest rate spread, which in the first quarter carried an interest rate of 2.0% over the three-month Libor, will be reduced by 0.25% to 1.75% over the three-month Libor. The Company’s estimated annual interest savings from the reduction in rate is approximately $0.45 million on the $182.1 million outstanding on the Term B Loan as of January 31, 2006.

The terms of the Credit Facility require the Company to comply with financial covenants, including maintaining leverage, and fixed charge coverage ratios, obtaining protection against fluctuation in interest rates, and limits on capital expenditure levels at the end of each fiscal quarter. As of January 31, 2006, the Company was required to maintain a senior leverage ratio of not greater than 3.0 to 1.0, a maximum leverage ratio of not greater than 4.0 to 1.0 and a fixed charge ratio of at least 2.0 to 1.0. Some of the financial covenants become more restrictive over the term of the Credit Facility. Noncompliance with any of the financial covenants without cure or waiver would constitute an event of default under the Credit Facility. An event of default resulting from a breach of a financial covenant may result, at the option of lenders holding a majority of the loans, in an acceleration of repayment of the principal and interest outstanding and a termination of the revolving Credit Facility. The Credit Facility also contains nonfinancial covenants that restrict some of the Company’s activities, including, its ability to dispose of assets, incur additional debt, pay dividends, create liens, make investments, make capital expenditures and engage in specified transactions with affiliates. The terms of the Credit Facility permit prepayments of principal and require prepayments of principal upon the occurrence of certain events including among others, the receipt of proceeds from the sale of assets, the receipt of excess cash flow as defined, and the receipt of proceeds of certain debt issues. The Credit Facility also contains customary events of default, including defaults based on events of bankruptcy and insolvency, nonpayment of principal, interest or fees when due, subject to specified grace periods, breach of specified covenants change in control and material inaccuracy of representations and warranties. The Company was in compliance with its financial and nonfinancial covenants as of January 31, 2006 and October 31, 2005.

Note 5.  Restructuring Charges

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

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

	Facilities		Other	Total		Short Term Portion		Long Term Portion
Balance at October 31, 2005	1,200		60	1,260		765		495
Additions	—		—	—		—		—
Cash payments	(178	)	—	(178	)	(178	)	—
Balance at January 31, 2006	1,022		60	1,082		587		495

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In the first quarter of fiscal 2006, the Company implemented a restructuring plan to establish Singapore supply chain operations to leverage a favorable tax environment and manufacturing operations in the Asia Pacific region. The plan included reductions in workforce of fourteen employees in the United States and four employees in Taiwan with an expected cost of $753,000. During the three months ended January 31, 2006, the charge to cost of net revenues related to plan was $388,000 in severance related expenses for employees.  As of January 31, 2006, $22,000 of the severance costs had been paid.  Additional restructuring costs of $365,000 are expected to be incurred during the three months ended April 2006.  The remaining severance payments are expected to be paid by the end of fiscal 2006.

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

	Employee							Short Term			Long Term
	costs				Total			Portion			Portion
Balance at October 31, 2005	$		—		$	—		$	—		$	—
Additions	388				388			388			—
Cash payments	(22			)	(22		)	(22		)	—
Balance at January 31, 2006	$	366			$	366		$	366		$	—

In connection with acquisition of the of the assets of the GO Software business from Return on Investment Corporation on March 1, 2005, the Company accrued in the purchase price allocation $313,000 of restructuring costs related to the integration of GO Software’s Savannah helpdesk facility with the Company’s helpdesk facility in Clearwater, Florida, of which $231,000 has been paid as of January 31, 2006.

At January 31, 2006 and October 31, 2005, $1.5 million and $849,000 of the restructuring liability was included in other current liabilities and $318,000 and $495,000 was included in other long-term liabilities in the accompanying consolidated balance sheets.

Note 6.  Commitments and Contingencies

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

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

Certain leases require the Company to pay property taxes, insurance and routine maintenance, include rent escalation clauses and options to extend the term of certain leases. Rent expense was approximately $2.1 million and $1.9 million for the three months ended January 31, 2006 and 2005, respectively. Sublease rental income was approximately $71,000 and $152,000 for the three months ended January 31, 2006 and 2005, respectively.

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Manufacturing Agreements

The Company works on a purchase order basis with third-party contract manufacturers with facilities in China, Mexico, Singapore, and Brazil to manufacture substantially all of the Company’s inventories. The Company provides each manufacturer with a master purchase order on a monthly basis, which constitutes a binding commitment by the Company to purchase materials produced by the manufacturer as specified in the master purchase order. The total amount of purchase commitments as of January 31, 2006 and October 31, 2005 was approximately $55.4 million and $18.6 million, respectively, and are generally paid within one year. Of this amount, $2.5 million and $1.9 million has been recorded in other current liabilities in the accompanying condensed consolidated balance sheets as of January 31, 2006 and October 31, 2005, respectively, because the commitment may not have future value to the Company.

Employee Health and Dental Costs

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

Litigation

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

Brazilian State Tax Audit

The Company’s Brazilian subsidiary has been notified of a tax assessment regarding Brazilian state value added tax, or VAT, for the periods from January 2000 to December 2001 and related to products supplied to the Company by a contract manufacturer. The assessment relates to an asserted deficiency of 6.5 million Brazilian reals (approximately $2.9 million) including interest and penalties.  The tax assessment was based on a clerical error in which the Company’s Brazilian subsidiary omitted the required tax exemption number on its invoices.  Management does not expect that the Company will ultimately incur a material liability in respect of this assessment, because they believe, based in part on advice of the Company’s Brazilian tax counsel, that the Company will prevail in the proceedings relating to this assessment.  On May 25, 2005, the Company had an administrative hearing with respect to this audit.  Management expects to receive the decision of the administrative judges sometime in 2006. In the event the Company receives an adverse ruling from the administrative body, the Company will decide whether or not to appeal and would reexamine the determination as to whether an accrual is necessary.

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

Note 7. Comprehensive Income

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

	Three Months Ended
	January 31,
	2006		2005
Net Income	$	13,794	$	5,837
Foreign currency translation adjustments, net of tax	87		177
Unrecognized gain on interest rate hedges, net of tax	27		16
Unrealized gain on marketable securities, net of tax	1		—
Comprehensive income	$	13,909	$	6,030

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

	January 31, 2006			October 31, 2005
Foreign currency translation adjustments, net of tax of $948 and $834	$	846		$	759
Unrecognized gain (loss) on interest rate hedges, net of tax of $7 and $11	10			(17		)
Unrealized loss on marketable securities, net of tax	(1		)	(2		)
Accumulated other comprehensive income	$	855		$	740

Note 8. Stockholders’ Equity

Common and Preferred Stock

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

In conjunction with the May 4, 2005 amendment to the articles of incorporation, all shares of Nonvoting Common Stock were converted to shares of Common Stock on a one-for-one basis.  As a result of that modification, the Company recognized additional compensation expense of $56,000 that was determined pursuant to FAS 123(R), of which $12,000 and $35,000 was recognized as additional compensation expenses for the three months ended January 31, 2006 and the year ended October 31, 2005, respectively. Further, all options to purchase shares of Nonvoting Common Stock were converted to options to purchase Voting Common Stock on a one-for-one basis. At January 31, 2006 and October 31, 2005, there were 67,766,709 and 67,646,279 shares of Common Stock outstanding.

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

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

Restricted Common Stock

The Company has a right to repurchase any or all of 3,910,428 shares of Voting Common Stock sold to the CEO at the original sale price, $0.0333 per share, in the event the CEO ceases to be employed by the Company or any of its subsidiaries. This right lapses at a rate of 20% per year. Upon the sale of the Company, any remaining unvested shares will become vested. At January 31, 2006 and October 31, 2005, 1,564,171 shares of Voting Common Stock issued to the CEO remained subject to this lapsing repurchase right.

The Company has the right to repurchase any or all of 1,929,145 shares of Voting Common Stock sold to 11 executives of the Company pursuant to the Company’s 2002 Securities Purchase Plan at the lesser of the original sale price, $0.0333 per share, or the fair value on the date of separation in the event that the executives cease to be employed by the Company or any of its subsidiaries. This right lapses at a rate of 20% per year. Upon the sale of the Company, all remaining unvested shares will become vested. At January 31, 2006 and October 31, 2005, 437,969 shares of Voting Common Stock remained subject to this lapsing repurchase right.

Pursuant to APB No. 25 the Company recorded deferred stock-based compensation of $446,000 in connection with several sales of Voting Common Stock to the executives before October 31, 2003. The deferred stock-based compensation represents the difference between the fair value of the Company’s Voting Common Stock for accounting purposes and the original sale price. The Company amortized the deferred stock-based compensation to expense on a straight-line basis over the vesting period through April 30, 2005. The Company ceased amortization of this stock-based compensation pursuant to APB No. 25 on April 30, 2005 upon adoption of

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SFAS 123(R). During the first quarter of fiscal year 2005, the Company recorded $15,000 of stock compensation expense, which was included in general and administrative expenses in the accompanying consolidated statements of operations.

Stock Option Plans

As of January 31, 2006, the Company had a total of 3,444,160 stock options outstanding with a weighted average exercise price of $9.47 per share. The number of options that remained available for future grants was 1,141,390 as of January 31, 2006.

New Founders’ Stock Option Plan

On April 30, 2003, the Company adopted the New Founders’ Stock Option Plan (the “Option Plan”) for executives and employees of the Company. A total of 1,500,000 shares of the Company’s Nonvoting Common Stock had been reserved for issuance under the Option Plan. On May 4, 2005, in connection with the amendment and restatement of the Company’s Certificate of Incorporation, the Company converted all Nonvoting shares of Common Stock to Voting shares of Common Stock on a one-for-one basis, with a corresponding effective conversion of all outstanding options to purchase shares of Nonvoting Common Stock and shares reserved for issuance under the Option Plan.  The Company received no consideration as a result of this transaction. Option awards are generally granted with an exercise price equal to the market price of the Company’s stock at the day of grant.  Those option awards generally vest in equal annual amounts over a period of five years from the date of grant and have a maximum term of 10 years.

The following table summarizes option activity under the New Founder Plan during the three months ended January 31, 2006:

					Weighted
					Average
			Weighted		Remaining	Aggregate
			Average		Contractual	Intrinsic
			Exercise		Term	Value
	Shares		Price		(Years)	($000’s)
Balance at November 1, 2005	1,269,045		$	4.13
Granted	—		—
Exercised	(120,430	)	3.07
Cancelled	(32,155	)	9.64
Balance at January 31, 2006	1,116,460		$	4.09	8.07	$	23,930,000
Vested or expected to vest at January 31, 2006	983,601		$	4.09	8.07	$	21,082,000
Exercisable at January 31, 2006	374,470		$	3.10	7.67	$	2,829,000

The total intrinsic value of options exercised during the three months ended January 31, 2006 was $2.6 million.

As of January 31, 2006, pursuant to FAS 123(R) there was $1.6 million of total unrecognized compensation cost related to nonvested shared-based compensation arrangements granted under the Option Plan. The cost is expected to be recognized over a remaining weighted-average period of 3.07 years. The total fair value of shares vested during the three months ended January 31, 2006 was $72,000.

Directors’ Stock Option Plan

In January, 2005, the Company adopted the Outside Directors’ Stock Option Plan (the “Directors’ Plan”) for members of the Board of Directors of the Company who are not employees of the Company or representatives of major stockholders of the Company. A total of 225,000 shares of the Company’s Voting Common Stock have been reserved for issuance under the Directors’ Plan. The Directors’ Plan provides for a grant to each director, upon initial appointment to the board, options to purchase 30,000 shares of Voting Common Stock and, annual grants to purchase an additional 7,500 shares of Voting Common Stock. Stock options generally vest over a period of four years from the date of grant and have a maximum term of 7 years.

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The following table summarizes option activity under the Directors’ Plan during the three months ended January 31, 2006:

				Weighted
				Average
		Weighted		Remaining	Aggregate
		Average		Contractual	Intrinsic
		Exercise		Term	Value
	Shares	Price		(Years)	($000’s)
Balance at November 1, 2005	90,000	$	10.00
Granted	—	—
Exercised	—	0
Cancelled	—	0
Balance at January 31, 2006	90,000	$	10.00	5.97	$	1,397,000
Vested or expected to vest at January 31, 2006	90,000	$	10.00	5.97	$	1,397,000
Exercisable at January 31, 2006	15,000	$	10.00	5.93	$	109,000

As of January 31, 2006, pursuant to FAS 123(R) there was $412,000 of total unrecognized compensation cost related to nonvested shared-based compensation arrangements granted under the Option Plan. The cost is expected to be recognized over a remaining weighted-average period of 2.97 years. The total fair value of shares vested during the three months ended January 31, 2006 was $93,000.

Equity Incentive Option Plan

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

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

					Weighted
					Average
			Weighted		Remaining	Aggregate
			Average		Contractual	Intrinsic
			Exercise		Term	Value
	Shares		Price		(Years)	($000’s)
Balance at November 1, 2005	2,119,200		$	11.21
Granted	180,000		24.81
Exercised	—		—
Cancelled	(61,500	)	17.60
Balance at January 31, 2006	2,237,700		$	12.13	6.32	$	29,960,000
Vested or expected to vest at January 31, 2006	2,016,168		$	12.13	6.32	$	26,994,000
Exercisable at January 31, 2006	—		$	—	—	$	—

The weighted-average grant-date fair value of options granted during the three months ended January 31, 2006 was $12.07.

As of January 31, 2006, pursuant to FAS 123(R) there was $11.5 million of total unrecognized compensation cost related to nonvested shared-based compensation arrangements granted under the Option Plan. The cost is expected to be recognized over a remaining weighted-average period of 3.30 years.

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The total cash received from employees as a result of employee stock option exercises under all plans for three months ended January 31, 2006 was approximately $369,000.  In connection with these exercises, the tax benefits realized by the Company for the first quarter of fiscal 2006 were $874,000.

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

The following table presents the stock compensation expense recognized in accordance with SFAS 123(R) during the three months ended January 31, 2006 and in accordance with APB 25 during the three months ended January 31, 2005:

	Three Months Ended January 31,
	2006		2005
Cost of net revenues	$	153	$	—
Research and development	180		—
Sales and marketing	331		—
General and administrative	259		15
	$	923	$	15

Pro forma information regarding net income and earnings per share has been determined as if the Company had applied the fair value recognition provisions of SFAS 123 to options granted under the Company’s stock option plans in all periods presented prior to the Company adopting SFAS 123(R) on May 1, 2005. The fair value of each stock option and stock purchase right for the periods prior to adoption was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

	Three Months Ended
	January 31,
	2006		2005
Expected term of the options	4 years		4 years
Risk-free interest rate	4.3	%	3.2	%
Expected stock price volatility	58	%	61	%
Expected dividend yield	0.0	%	0.0	%

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

	Three Months Ended
	January 31, 2005
Net income as reported:	$	5,837
Plus: stock-based employee compensation expense included in reported net income	15
Less: total stock-based employee compensation expense determined under fair value based method for all awards	(112		)
Net income	$	5,740
Basic net income per share - as reported	$	0.11
Basic net income per share - pro forma	$	0.11
Diluted net income per share - as reported	$	0.10
Diluted net income per share - pro forma	$	0.10

At January 31, 2006, the Company had four share-based compensation plans. The compensation cost that has been charged to operations for those plans pursuant to SFAS 123(R) was $923,000 for the three months ended January 31, 2006. The total deferred tax benefit recognized in the statement of operations for share-based compensation arrangements pursuant to SFAS 123(R) was $317,000 for the three months ended January 31, 2006.

Note 9.  Segment and Geographic Information

Segment Information

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

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

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

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

	Three Months Ended
	January 31,
	2006			2005
Revenues:
North America	$	77,175		$	64,808
International	57,657			46,583
Corporate	(202		)	(108		)
Total revenues	$	134,630		$	111,283
Operating income:
North America	$	30,503		$	20,746
International	14,167			7,940
Corporate	(21,533		)	(15,608		)
Total operating income	$	23,137		$	13,078

The Company’s long-lived assets which consist primarily of equipment and improvements, net by segment were as follows (in thousands):

	January 31, 2006		October 31, 2005
North America	$	4,850	$	5,110
International	2,086		1,715
	$	6,936	$	6,825

The Company’s goodwill by segment was as follows (in thousands):

	January 31, 2006		October 31, 2005
North America	$	34,973	$	34,973
International	12,287		12,287
	$	47,260	$	47,260

The Company’s total assets by segment were as follows (in thousands):

	January 31, 2006		October 31, 2005
North America	$	292,665	$	274,746
International	51,348		54,625
	$	344,013	$	329,371

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Geographic Information

The net revenues by geographic area were as follows (in thousands):

	Three Months Ended January 31,
	2006		2005
United States	$	75,037	$	63,075
Canada	1,936		1,625
Latin America	23,916		15,913
Europe	23,049		19,469
Asia	10,692		11,201
	$	134,630	$	111,283

Revenues are allocated to the geographic areas based on the shipping destination of customer orders. Corporate revenues are included in the United States geographic area revenues.

The Company’s long-lived assets exclusive of inter-company accounts were as follows (in thousands):

	January 31, 2006		October 31, 2005
United States	$	4,850	$	5,110
Latin America	623		633
Europe	1,231		1,074
Asia	232		8
	$	6,936	$	6,825

Note 10. Related-Party Transactions

For the three months ended January 31, 2005, the Company recorded $63,000 of management fees payable to GTCR Golder Rauner, L.L.C., an affiliate of a significant stockholder. These fees are included in general and administrative expenses in the accompanying consolidated statements of operations. Upon the closing of the Company’s initial public offering, the management fees ceased.

In June 2004, the Company paid a placement fee of $2,920,000 to GTCR Golder Rauner, L.L.C., for services related to the new Credit Facility described in Note 4. The debt issuance costs are being amortized over the term of the related debt. The Company recorded amortization of debt issuance costs related to these costs of $65,000 and $78,000, respectively, for the three months ended January 31, 2006 and 2005, which is included in interest expense, net in the accompanying consolidated statements of operations. As of January 31, 2006, the balance of unamortized debt issuance costs related to the placement fee is $1.8 million.

For the three months ended January 31, 2005, the Company recorded $34,000, of expenses paid to affiliates in connection with services they provided or arranged, which are included in general and administrative expenses in the accompanying statements of operations.

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Note 11. Income Taxes

The Company recorded provisions for income taxes of $7.0 million for the three months ended January 31, 2006 compared to $2.7 million for the three months ended January 31, 2005. The increase in the provision for income taxes for the three months ended January 31, 2006, is primarily attributable to increases in the Company’s pre-tax income and secondarily to an increase in the Company’s effective tax rate. The Company’s effective tax rate was 33.5% for the three months ended January 31, 2006 as compared to 32% for the comparable period of fiscal 2005. The estimated annual effective tax rate for fiscal year 2006 is 34% excluding discrete items.

Note 12.   Employee Benefit Plans

The Company maintains a defined contribution 401(k) plan that allows eligible employees to contribute up to 20% of their pretax salary up to the maximum allowed under Internal Revenue Service regulations. Discretionary employer matching contributions of $0.5 million were made to the plan during the three months ended January 31, 2006 and 2005.

Note 13. Acquisition of Business

On March 1, 2005, the Company acquired the assets of the GO Software business from Return on Investment Corporation for approximately $13.4 million in consideration, consisting of cash and transaction costs. The Company paid $13.0 million in cash and will pay up to $2.0 million in contingent consideration, based on the future business performance of GO Software through June 2006. GO Software provides PC-based point of sale payment processing software to more than 150,000 businesses.  The Company acquired the assets of GO Software to broaden the Company’s presence at the point of sale beyond its core solutions.  The Company’s condensed consolidated financial statements include the operating results of the business acquired from the date of acquisition. Pro forma results of operations have not been presented because the effect of the acquisition was not material. In accordance with SFAS No. 141, Business Combinations, this transaction was accounted for as a purchase business combination.

  The total purchase price of $13.4 million was allocated as follows: $4.7 million to goodwill, $8.6 million to intangible assets comprised of developed technology of $4.5 million and customer relationships of $4.1 million and $0.1 million to net tangible assets acquired. The purchase price allocation is preliminary and may be adjusted in the future as the Company finalizes its restructuring plan for reorganization under EITF 95-3 Recognition of Liabilities In Connection With a Purchase Business Combination.  The Company accrued $313,000 of restructuring costs related to the integration of GO Software’s Savannah helpdesk facility with the Company’s helpdesk facility in Clearwater, Florida, of which $231,000 has been paid as of January 31, 2006.

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ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This section and other parts of this Form 10-Q contain forward-looking statements that involve risks and uncertainties. In some cases, forward-looking statements can be identified by words such as “anticipates,” “expects,” “believes,” “plans,” “predicts,” and similar terms. Such forward-looking statements are based on current expectations, estimates and projections about our industry, management’s beliefs and assumptions made by management. Forward-looking statements are not guarantees of future performance and our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in the subsection entitled “Factors That May Affect Future Results and Financial Condition” below. The following discussion should be read in conjunction with the Company’s consolidated financial statements and related notes included in the Company’s 2005 Annual Report on Form 10-K filed with the SEC on December 20, 2005, and the consolidated financial statements and notes thereto included elsewhere in this Form 10-Q. Unless required by law, we undertake no obligation to update publicly any forward-looking statements, whether as result of new information, future events or otherwise.

Overview

We are a leading global provider of technology that enables electronic payment transactions and value-added services at the point of sale. We have one of the leading electronic payment solutions brands and are one of the largest providers of electronic payment systems worldwide. We believe that we benefit from a number of competitive advantages gained through our 24-year history and success in our industry. These advantages include our globally trusted brand name, large installed base, history of significant involvement in the development of industry standards, global operating scale, customizable platform and investment in research and development. We believe that these advantages position us well to capitalize on the continuing global shift toward electronic payment transactions as well as other long-term industry trends.

Our industry’s growth continues to be driven by the long term shift towards electronic payment transactions and away from cash and checks in addition to the need for improved security standards. Internationally, growth rates have been higher because of the relatively low penetration rates of electronic payment transactions in many countries and interest by governments in modernizing their economies and using electronic payments as a means of improving VAT collection. Recently, additional factors have driven growth, including the shift from dial up to IP based and wireless communications, growth of PIN based debit transactions, and advances in computing technology which enable vertical solutions and non-payment applications to reside at the point of sale.

We operate in two business segments: 1) North America and 2) International. We define North America as the United States and Canada, and International as all other countries in which we have revenue.

We believe that the shift towards IP communication and electronic PIN based debit transactions will continue in North America. Increasing intelligence at the point of sale will continue as a short-term driver of growth, with growth rates based on the stage of adoption and size of vertical segments that purchase these solutions. We continue to expand our Value Added Partner program, which, as of January 31, 2006, included 33 partners, as well as to invest in internal development, with the objective of introducing new solutions to address the specific various needs of markets and fueling incremental revenue growth.

In Europe, tightening EMV security standards continue to drive growth. In Eastern Europe, Latin America, and Asia, the market has benefited from strong demand for low end dial-up solutions among price sensitive customers. We have been focusing on addressing this market segment with the new Vx Solutions, which by virtue of a superior, uni-processor design, generates a gross profit percentage in excess of the solution that was previously sold. We expect the shift towards the Vx Solutions and the shift towards direct and away from indirect channels in certain countries to contribute towards an improvement in international gross profit percentage over time.

Worldwide, we expect that the demand for wireless solutions to accommodate mobility needs of merchants and consumers.  Examples include pay-at-the-table, pay-at-the-car, home delivery, fans at sports stadiums and systems for taxicabs.

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Results of Operations

Net Revenues

We generate revenues through the sale of our electronic payment systems and solutions that enable electronic payments, which we identify as System Solutions, and to a lesser extent, warranty and support services and customer specific application development, which we identify as Services.

Net revenues, which include System Solutions and Services, are summarized in the following table (in thousands, except percentages):

	Three Months Ended January 31,
	2006		2005		Change In Dollars		Change In Percent
Systems Solutions	$	118,685	$	97,989	$	20,696	21.1	%
Services	15,945		13,294		2,651		19.9	%
Total	$	134,630	$	111,283	$	23,347	21.0	%

System Solutions. System Solutions net revenues increased $20.7 million, or 21.1%, to $118.7 million in the quarter ended January 31, 2006, from $98.0 million in the quarter ended January 31, 2005.  System Solutions net revenues comprised 88.2% of total net revenues in the quarter ended January 31, 2006, which was essentially unchanged from the quarter ended January 31, 2005. International System Solutions net revenues for the quarter ended January 31, 2006 increased $11.1 million, or 24.9% to $55.6 million. Factors driving this increase included the desire of emerging market countries to modernize their economies and improve collection of VAT, the need for customers to comply with EMV requirements, and our Vx System Solutions, including wireless, which allowed us to compete in new market segments. North America System Solutions net revenues for the quarter ended January 31, 2006 increased $9.6 million, or 18.0%, to $63.1 million. This increase was primarily attributable to the ongoing replacement of the installed base with System Solutions that have IP communication and PIN-based debit capabilities, introduction of a low priced single application financial system solution, and strong demand from petroleum companies and convenience stores.   Partially offsetting this growth was a decline in rollouts to quick service restaurant, or QSR, customers. We expect that International System Solutions net revenues will continue to grow at faster rate than North America System Solutions net revenues at least for the next year, though we may experience periodic variations in sales to our international markets.

Services. Services net revenues increased $2.7 million, or 19.9%, to $15.9 million in the quarter ended January 31, 2006, from $13.3 million in the quarter ended January 31, 2005.  The growth was entirely due to an increase in North America Services. Approximately $1.2 million of growth was primarily related to custom software application projects for Petroleum customers, $1.0 million was attributable to the acquisition of GO Software, and the remainder was due to increased maintenance and repair services associated with a larger installed base.

Gross Profit

The following table shows the gross profit for System Solutions and Services (in thousands, except percentages):

	Three Months Ended January 31,
	Amount				Gross Profit Percentage
	2006		2005		2006		2005
Systems Solutions	$	51,570	$	36,880	43.5	%	37.6	%
Services	8,032		5,744		50.4	%	43.2	%
Total	$	59,602	$	42,624	44.3	%	38.3	%

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Gross profit on System Solutions, including amortization of purchased core and developed technology assets, increased $14.7 million, or 39.8%, to $51.6 million in the quarter ended January 31, 2006, from $36.9 million in the quarter ended January 31, 2005.  Gross profit on System Solutions represented 43.5% of System Solutions net revenues in the quarter ended January 31, 2006, up from 37.6% in the quarter ended January 31, 2005.  Amortization of purchased core and developed technology assets was 1.3% of Systems Solutions net revenues in the quarter ended January 31, 2006 compared to 2.0% in the quarter ended January 31, 2005, as several purchased core and developed technology assets became fully amortized and System Solutions revenue grew. The inclusion of revenues from GO software was the primary reason for the gross profit percentage improvement. In addition, the increase in gross profit percentage on System Solutions was partially due to a 0.7 percentage point improvement in gross profit from the reduction in amortization of purchase core and developed technology assets. In North America, sales of software licenses primarily related to our acquisition of GO Software and petroleum solutions, with higher than average gross profit percentages, increased while lower gross profit percentage dial up and QSR solutions declined. Internationally, demand for wireless and landline Vx System Solutions, designed with a lower manufacturing cost than the previous generation System Solutions, resulted in an improved gross profit percentage. Partially offsetting this favorable mix was a 1.9 percentage point unfavorable impact due to establishment of the Singapore international headquarters and freight expedite charges incurred to meet demand.

Gross profit on Services increased $2.3 million, or 39.8% to $8.0 million in the quarter ended January 31, 2006, from $5.7 million in the quarter ended January 31, 2005. Gross profit on Services represented 50.4% of Services net revenues in the quarter ended January 31, 2006, as compared to 43.2% in the quarter ended January 31, 2005.   This improvement was due to a favorable shift in mix towards North American helpdesk and deployment services.  International gross profit percentage was effectively unchanged from the comparable period.

We expect gross profit from International business, both System Solutions and Services, to continue to be below the gross profit of North America business.

Research and Development Expense

Research and development (“R&D”) expenses are summarized in the following table (in thousands, except percentages):

	Three Months Ended January 31,
	2006			2005			Change In Dollars		Change In Percent
Research and development	$	11,407		$	9,494		$	1,913	20.1	%
Percentage of net revenues	8.5		%	8.5		%

R&D expenses in the quarter ended January 31, 2006, increased compared to the quarter ended January 31, 2005,  due to $0.7 million of expenses from the inclusion of GO Software, $0.4 million of increased international expenses to support wireless introductions, and $0.6 million of expenses to develop applications for financial and petroleum customers.  In addition, $0.2 million of increased expenses was due to stock-based compensation. We expect R&D expenses to remain, over time, in a range between 8% and 9% of net revenues for the foreseeable future.

Sales and Marketing Expense

Sales and marketing expenses are summarized in the following table (in thousands, except percentages):

	Three Months Ended January 31,
	2006			2005			Change In Dollars		Change In Percent
Sales and marketing	$	14,201		$	12,044		$	2,157	17.9	%
Percentage of net revenues	10.5		%	10.8		%

Sales and marketing expenses increased for the quarter ended January 31, 2006, compared to the quarter ended January 31, 2005 due primarily to $0.5 million of increased expenses from the inclusion of GO Software, $0.5 million of increased expenses to address opportunities with independent sales organization, or ISOs and multilane retail, and $0.5 million of additional Corporate sales incentive programs and promotional expenses pertaining to the Mx870 and Visual Payments launch.  In addition, $0.3 million of

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increased expenses was due to stock-based compensation. We expect sales and marketing expenses to decline as a percentage of net revenues over time.

General and Administrative Expense

General and administrative expenses are summarized in the following table (in thousands, except percentages):

	Three Months Ended January 31,
	2006			2005			Change In Dollars		Change In Percent
General and administrative	$	9,698		$	6,704		$	2,994	44.7	%
Percentage of net revenues	7.2		%	6.0		%

General and administrative expenses in the quarter ended January 31, 2006 increased, compared with the quarter ended January 31, 2005, primarily due to $1.2 million of expenses related to the requirements of operating as a public company, $0.5 million of expenses as a result of higher executive bonuses, $0.3 million of expenses as a result of higher travel costs and $0.2 million of expenses from the inclusion of GO Software. In addition, $0.3 million of increased expenses was due to stock-based compensation. We expect general and administrative expenses to decrease as a percentage of net revenues over time.

Amortization of Purchased Intangible Assets

Amortization of purchased intangible assets decreased $0.1 million to $1.2 million in the first quarter of fiscal 2006 compared with $1.3 million in the first quarter of fiscal 2005. The decrease for the period is due to several purchased intangible assets having been fully amortized during the fiscal year ended October 31, 2005, offset in part by the amortization of intangible assets relating to the acquisition of GO Software, which was completed on March 1, 2005.

Interest Expense

Interest expense of $3.3 million in the first quarter of fiscal 2006 decreased from $4.3 million in the first quarter of fiscal 2005. The decrease in the three-month period was attributable to the repricing of our Term B Loan and the repayment of our Second Lien Loan in May 2005 with the proceeds that we received from our initial public offering. We expect interest expense to decrease due to a decrease in interest rate for the Term B Loan as a result of Standard & Poor’s decision to raise its corporate credit and senior secured bank loan ratings on us to ‘BB-’ from ‘B+’ effective February 1, 2006.

Interest Income

Interest income of $687,000 in the first quarter of fiscal 2006 increased from $11,000 in the first quarter of fiscal 2005. The increase in the three-month period was attributable to investing a portion of the proceeds that we received from our initial public offering.

Other Income (Expense), Net

Other income, net in the first quarter of fiscal 2006 was $201,000 resulting primarily from a refund of $288,000 associated with an Indian customs appeal resolution. This was partially offset by foreign currency transaction losses of $20,000 and foreign currency contract losses of $76,000 related to fluctuations in the value of the US dollar as compared to foreign currency. Other expense, net in the first quarter of fiscal 2005 of $200,000 resulted primarily from foreign currency contract losses of $220,000 related to fluctuations in the value of the US dollar as compared to foreign currency.

Provision for Income Tax

We recorded a provision for income taxes of $7.0 million for the first quarter compared to an income tax expense of $2.7 million for the comparable period in fiscal 2005. The increase in the provision for both periods is primarily attributable to increases in the Company’s pre-tax income and secondarily to an increase in the Company’s effective tax rate. For the first quarter of fiscal 2006 our effective tax rate was 33.5% as compared to 32% for the first quarter of 2005. The increase in the tax rates is primarily attributable to the net effect of increases in pre-tax income, a reduction in the Company’s valuation allowance for deferred tax assets, expiration of the federal research credit and increases in the amount of income considered permanently reinvested in foreign operations and subject to lower foreign tax rates.

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As of January 31, 2006, we have recorded $29.9 million of net deferred tax assets, the realization of which is dependent on future domestic and certain foreign taxable income.  Although realization is not assured, management believes that it is more likely than not that these deferred tax assets will be realized.  The amount of deferred tax assets considered realizable may increase or decrease in subsequent quarters when we reevaluate the underlying basis for our estimates of future domestic and certain foreign taxable income.

Our plan for a tax structure to reduce our average worldwide statutory tax rate is proceeding towards implementation.  We have implemented key elements of our tax structure in the first quarter of the current fiscal year and expect to be substantially complete with all aspects of the implementation by the end of July 2006. We continue to expect that our long-term average worldwide statutory tax rate will be in the low thirty percent range.  We have changed the form of the transfer of intangible assets to a non-U.S. subsidiary from a sale to a license.  We no longer expect to have a one-time tax payment in connection with the transfer of intangible property rights in connection with the implementation of the tax structure.

Segment Information

The following table reconciles segmented net revenues and operating income to totals for the three months ended January 31, 2006 and 2005. Corporate net revenues and operating income (loss) reflect amortization of purchased intangible assets, stock-based compensation, in-process research and development expense, and amortization of step ups in the fair value of inventories, equipment and improvements and deferred net revenues resulting from acquisitions. Corporate income (loss) also reflects the difference between the actual and standard cost of System Solutions net revenues and shared operating costs that benefit both segments, predominately research and development expenses and supply chain management.

	Three Months Ended January 31,
	2006			2005			Change In Dollars			Change In Percent
Revenues
North America	$	77,175		$	64,808		$	12,367		19.1	%
International	57,657			46,583			11,074			23.8	%
Corporate	(202		)	(108		)	(94		)	87.0	%
Total revenues	$	134,630		$	111,283		$	23,347		21.0	%
Operating income:
North America	$	30,503		$	20,746		$	9,757		47.0	%
International	14,167			7,940			6,227			78.4	%
Corporate	(21,533		)	(15,608		)	(5,925		)	(38.0	)%
Total operating income	$	23,137		$	13,078		$	10,059		76.9	%

Net revenues growth in North America for the quarter ended January 31, 2006 as compared to the quarter ended January 31, 2006 was primarily driven by an increase of approximately $9.6 million in System Solutions and $2.8 million in Services net revenues. See “Results of Operations – Net Revenues.”

System Solutions net revenues in International grew approximately $11.1 million.  Services net revenues were unchanged.  See “Results of Operations – Net Revenues.”

The increase in operating income for North America for the quarter ended January 31, 2006 as compared to the quarter ended January 31, 2005 was mainly due to higher net revenues and a higher gross profit percentage as a result of favorable product mix in both System Solutions and Services, which was partially offset by higher operating expenses.

The increase in International operating income for the quarter ended January 31, 2006 compared to the quarter ended January 31, 2005 was mainly due to increased net revenues and a higher gross profit percentage as a result of the introduction of the higher margin Vx Solutions, partially offset by higher operating expenses.

Liquidity and Capital Resources

Our primary liquidity and capital resource needs are to service our debt, finance working capital, and make capital expenditures and investments. At January 31, 2006 our primary sources of liquidity were cash and cash equivalents of $66.6 million, marketable

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securities of $21.6 million, our $30 million unused revolving credit facility, which is not currently used and cash generated from operations.

Our operations provided cash of $6.5 million in the first quarter of fiscal 2006, which was attributable to net income of $13.8 million, depreciation, amortization and other non-cash charges of $5.1 million, offset by $12.4 million used by net operating assets and liabilities. The principal uses of net operating assets and liabilities in the first quarter of fiscal 2006 were largely attributable to an increase in accounts receivable of $5.5 million, an increase in inventories of $3.5 million, an increase in prepaid expenses and other current assets of $1.0 million, an increase in deferred tax assets of $0.9 million, a decrease in accounts payable of $5.3 million and a decrease in accrued compensation of $1.5 million. This was partially offset by an increase in income tax payable of $3.8 million and an increase in deferred revenue of $2.6 million.

We used $6.1million of net cash for investing activities during the first quarter of fiscal 2005, $56.0 million of which was used to invest in marketable securities, partially offset by sale of marketable securities of $51.2 million.

Our financing provided cash of $726,000 for the first quarter of fiscal 2006, primarily due to a tax benefits related to exercise of stock options of $874,000 and proceeds from stock options exercises of $369,000 partially offset by principal payments of $462,000 on the Term B loan.

We plan to increase our inventory levels in excess of $10.0 million in the next quarter to meet anticipated demand.   This need will decrease cash provided by operating activities in the second and third fiscal quarters.

We believe that we have the financial resources to meet our business requirements for the next twelve months, including capital expenditures, working capital requirements and future strategic investments and to comply with our financial covenants.

Contractual Obligations

The following table summarizes our contractual obligations as of January 31, 2006 (in thousands):

	Total		Less than 1 year		1-3 years		4-5 years
Term B loan	$	247,087	$	13,943	$	27,518	$	205,626
Capital lease obligation	210		118		89		3
Operating leases	15,672		6,877		7,366		1,429
Minimum purchase obligations	55,419		55,419		—		—
	$	318,388	$	76,357	$	34,973	$	207,058

Earnings before Interest, Taxes, Depreciation and Amortization, (EBITDA, as adjusted)

We define earnings before interest, taxes, depreciation and amortization, or EBITDA, as adjusted, as the sum of (1) net income (excluding extraordinary items of gain or loss and any gain or loss from discontinued operations), (2) interest expense, (3) income taxes, (4) depreciation, amortization, goodwill impairment and other non-recurring charges, (5) non-cash charges, including non-cash stock-based compensation expense and purchase accounting items and (6) management fees to our principal stockholder. EBITDA, as adjusted, is a primary component of the financial covenants to which we are subject under our credit agreement. If we fail to maintain required levels of EBITDA, as adjusted, we could have a default under our credit agreement, potentially resulting in an acceleration of all of our outstanding indebtedness. In addition, our management uses EBITDA, as adjusted, as a primary measure to review and assess our operating performance and to compare our current results with those for prior periods as well as with the results of other companies in our industry. These competitors may, due to differences in capital structure and investment history, have interest, tax, depreciation, amortization and other non-cash expenses that differ significantly from ours. The term EBITDA, as adjusted, is not defined under U.S. generally accepted accounting principles, or U.S. GAAP, and EBITDA, as adjusted, is not a measure of operating income, operating performance or liquidity presented in accordance with U.S. GAAP. When assessing our operating performance, you should not consider these data in isolation or as a substitute for our net income calculated in accordance with U.S. GAAP. Our EBITDA, as adjusted, has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for net income or other consolidated income statement data prepared in accordance with U.S. GAAP. Some of these limitations are:

•it does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments;

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•it does not reflect changes in, or cash requirements for, our working capital needs;

•it does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;

•it does not reflect income taxes or the cash requirements for any tax payments;

•although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA, as adjusted, does not reflect any cash requirements for such replacements;

•restructuring and impairment charges, as well as losses from discontinued operations, reflect costs associated with strategic decisions about resource allocations made in prior periods; we may incur similar charges and losses in the future; and

•other companies may calculate EBITDA and EBITDA, as adjusted, differently than we do, limiting its usefulness as a comparative measure.

A reconciliation of net income, the most directly comparable U.S. GAAP measure, to EBITDA, as adjusted, for the first quarter of fiscal 2006 and 2005 is as follows (in thousands):

	Three Months Ended January 31
	2006			2005
U.S. GAAP net income	$	13,794		$	5,837
Provision for income taxes	6,952			2,747
Interest expense	3,279			4,305
Interest income	(687		)	(11		)
Depreciation and amortization of equipment and improvements	774			723
Amortization of capitalized software	275			267
Amortization of purchased intangible assets	2,752			3,266
Amortization of step-up in deferred revenue on acquisition	202			108
Stock-based compensation	923			15
Management fees to majority stockholder	—			63
EBITDA, as adjusted	$	28,264		$	17,320

Off-Balance Sheet Arrangements

Our only off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of the SEC’s Regulation S-K, consist of interest rate cap agreements and forward foreign currency exchange agreements described under “Quantitative and Qualitative Disclosures about Market Risk.” See Item 3.

Recent Accounting Pronouncements

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

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

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temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. FSP 115-1 is effective for reporting periods beginning after December 15, 2005. The Company’s adoption of FSP 115-1 will not have a material impact on our results of operations or financial condition.

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

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of assets and liabilities. On an on-going basis, we evaluate our critical accounting policies and estimates, including those related to revenue recognition, bad debts, income taxes and intangible assets. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. For further information on the critical accounting policies of VeriFone, see the discussion of critical accounting policies in VeriFone’s Annual Report on Form 10-K for the fiscal year ended October 31, 2005.

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FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION

The risks set forth below may adversely affect our business, financial condition and operating results.  In addition to the risks set forth below and the factors affecting specific business operations identified with the description of these operations elsewhere in this report, there may also be risks of which we are currently aware, or that we currently regard as immaterial based on the information available to us that later prove to be material.

Risks Related to Our Business

We depend upon third parties to manufacture our products and to supply the components necessary to manufacture our products.

We do not manufacture the physical devices that we design which form part of our system solutions; rather, we arrange for a limited number of third parties to manufacture these devices for us. Similarly, components such as application-specific integrated circuits, or ASICs, payment processors, wireless modules, modems and printer mechanisms that are necessary to manufacture and assemble our devices are sourced either directly by us or on our behalf by our contract manufacturers from a variety of component suppliers. We generally do not have long-term agreements with our manufacturers or component suppliers. If our suppliers become unwilling or unable to provide us with adequate supplies of parts or products when we need them, or if they increase their prices, we might not be able to find alternative sources in a timely manner and could be faced with a critical shortage. This could harm our relationships with our customers and cause our revenues to decline. Even if we are able to secure alternative sources in a timely manner, our costs could increase. In the quarter ended January 31, 2006, over half of our component spending was for components we sourced from a single supplier or a small number of suppliers.

Periodically, constraints in the supply of certain components cause short-term production disruptions or adversely affect our operating results, either because we seek to fill customer orders with less than normal lead times or because of supply/demand imbalances in the component marketplace.

We depend on a limited number of customers, including distributors and resellers, for sales of a large percentage of our System Solutions. If we do not effectively manage our relationships with them, our net revenues and operating results will suffer.

We sell a significant portion of our solutions through third parties such as independent distributors, ISOs, value-added resellers and payment processors. We depend on their active marketing and sales efforts. These third parties also provide after-sales support and related services to end user customers. When we introduce new applications and solutions, they also provide critical support for developing and porting the custom software applications to run on our various electronic payment systems and, internationally, in obtaining requisite certifications in the markets in which they are active. Accordingly, the pace at which we are able to introduce new solutions in markets in which these parties are active depends on the resources they dedicate to these tasks. Moreover, our arrangements with these third parties typically do not prevent them from selling products of other companies, including our competitors, and they may elect to market our competitors’ products and services in preference to our system solutions. If one or more of our major resellers terminates or otherwise adversely changes its relationship with us, we may be unsuccessful in replacing it. The loss of one of our major resellers could impair our ability to sell our solutions and result in lower revenues and income. It could also be time consuming and expensive to replicate, either directly or through other resellers, the certifications and the custom applications owned by these third parties.

A significant percentage of our net revenues is attributable to a limited number of customers, including distributors and ISOs. In the three months ended January 31, 2006, our ten largest customers accounted for approximately 38% of our net revenues and sales to First Data Corporation and its affiliates represented 11% of our net revenues in that period. Our sales of system solutions to First Data and its affiliates include sales to its TASQ Technology division, which distributes payment devices to ISOs and financial institutions such as Wells Fargo & Company and Chase Merchant Services. If any of our large customers significantly reduces or delays purchases from us or if we are required to sell products to them at reduced prices or on other terms less favorable to us, our revenues and income could be materially adversely affected.

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A significant portion of our net revenues are generated outside of the United States and we intend to continue to expand our operations internationally. Our results of operations could suffer if we are unable to manage our international expansion and operations effectively.

During the three months ended January 31, 2006, 42.8% of our net revenues were generated outside of the United States. Part of our strategy is to expand our penetration in existing foreign markets and to enter new foreign markets. Our ability to penetrate some international markets may be limited due to different technical standards, protocols or product requirements. Expansion of our International business will require significant management attention and financial resources. Our International net revenues will depend on our continued success in the following areas:

•securing commercial relationships to help establish our presence in international markets;

•hiring and training personnel capable of marketing, installing and integrating our solutions, supporting customers and managing operations in foreign countries;

•localizing our solutions to target the specific needs and preferences of foreign customers, which may differ from our traditional customer base in the United States;

•building our brand name and awareness of our services among foreign customers; and

•implementing new systems, procedures and controls to monitor our operations in new markets.

In addition, we are subject to risks associated with operating in foreign countries, including:

•multiple, changing and often inconsistent enforcement of laws and regulations;

•satisfying local regulatory or industry imposed security or other certification requirements;

•competition from existing market participants that may have a longer history in and greater familiarity with the foreign markets we enter;

•tariffs and trade barriers;

•laws and business practices that favor local competitors;

•fluctuations in currency exchange rates;

•extended payment terms and the ability to collect account receivables;

•greater difficulty in safe guarding intellectual property in emerging markets;

•imposition of limitations on conversion of foreign currencies into U.S. dollars or remittance of dividends and other payments by foreign subsidiaries; and

•changes in a specific country’s or region’s political or economic conditions.

If we fail to address the challenges and risks associated with international expansion, we may encounter difficulties implementing our strategy, which could impede our growth or harm our operating results.

Our quarterly operating results may fluctuate significantly as a result of factors outside of our control, which could cause the market price of our common stock to decline.

We expect our revenues and operating results to vary from quarter to quarter. As a consequence, our operating results in any single quarter may fall below the expectations of securities analysts and investors, which could cause the price of our common stock to decline. Factors that may affect our operating results include:

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•the type, timing and size of orders and shipments;

•demand for and acceptance of our new product offerings;

•delays in the implementation and delivery of our products and services, which may impact the timing of our recognition of revenue;

•variations in product mix and cost during any period;

•development of new relationships and maintenance and enhancement of existing relationships with customers and strategic partners;

•component supplies, manufacturing or distribution difficulties;

•deferral of customer contracts in anticipation of product or service enhancements;

•timing of commencement, implementation or completion of major implementations projects;

•the relative mix of North America and International net revenues;

•fluctuations in currency exchange rates;

•the fixed nature of many of our expenses; and

•industry and economic conditions, including competitive pressures and inventory obsolescence.

In particular, differences in relative growth rates between our North America and International segments may have a significant effect on our operating results, particularly our reported gross profit percentage, in any individual quarter, because International sales carry lower gross margins.

In addition, we have in the past and may continue to experience periodic variations in sales to our key vertical and international markets. These periodic variations occur throughout the year and may lead to fluctuations in our quarterly operating results depending on the impact of any given market during that quarter and could lead to volatility in our stock price.

Our North American and International operations are not equally profitable, which may promote volatility in our earnings and may adversely impact future growth in our earnings.

Our International sales tend to carry lower prices and therefore have lower gross margins than our sales in North America. As a result, if we successfully expand our International sales, any improvement in our results of operations will likely not be as favorable as an expansion of similar magnitude in the United States and Canada. Although it is impossible to predict for any future period our proportion of revenues that will result from International sales versus sales in North America, in recent quarters the percentage of our revenues generated outside of North America has increased. Variations in this proportion from period to period may lead to volatility in our results of operations which, in turn, may depress the trading price of our common stock.

Fluctuations in currency exchange rates may adversely affect our results of operations.

A substantial part of our business consists of sales made to customers outside the United States. A portion of the net revenues we receive from such sales is denominated in currencies other than the U.S. dollar. Additionally, portions of our cost of net revenues and our other operating expenses are incurred by our International operations and denominated in local currencies. While fluctuations in the value of these net revenues, costs and expenses as measured in U.S. dollars have not materially affected our results of operations historically, we cannot assure you that adverse currency exchange rate fluctuations will not have a material impact in the future. In addition, our balance sheet reflects non-U.S. dollar denominated assets and liabilities, primarily inter-company balances, which can be adversely affected by fluctuations in currency exchange rates. We have entered into foreign currency forward contracts and other arrangements intended to hedge our exposure to adverse fluctuations in exchange rates. Nevertheless, these hedging arrangements may not always be effective, particularly in the event of imprecise forecasts of non-U.S. denominated assets and liabilities. Accordingly, if there is an adverse movement in exchange rates, we might suffer significant losses. For instance, in the three months ended January 31, 2006, we incurred foreign currency contract losses of $0.1 million, net of foreign currency transaction gains primarily as a result of

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our hedging activities. Additionally, hedging programs expose us to risks that could adversely affect our operating results, including the following:

•We may be unable to hedge currency risk for some transactions because of a high level of uncertainty or the inability to reasonably estimate our foreign exchange exposures.

•We may be unable to acquire foreign exchange hedging instruments in some of the geographic areas where we do business, or, where these derivatives are available, we may not be able to acquire enough of them to fully offset our exposure.

Security is vital to our customers and end users and therefore breaches in the security of our solutions could adversely affect our reputation and results of operations.

Protection against fraud is of key importance to the purchasers and end users of our solutions. We incorporate security features, such as encryption software and secure hardware, into our solutions to protect against fraud in electronic payment transactions and to ensure the privacy and integrity of consumer data. Our solutions may be vulnerable to breaches in security due to defects in the security mechanisms, the operating system and applications or the hardware platform. Security vulnerabilities could jeopardize the security of information transmitted or stored using our solutions. In general, liability associated with security breaches of a certified electronic payment system belongs to the institution that acquires the financial transaction. However, if the security of our solutions is compromised, our reputation and marketplace acceptance of our solutions will be adversely affected, which would cause our business to suffer, and we may become subject to damage claims. We have not experienced any material security breaches affecting our business.

Our solutions may have defects that could result in sales delays, delays in our collection of receivables and claims against us.

We offer complex solutions that are susceptible to undetected hardware and software errors or failures. Solutions may experience failures when first introduced, as new versions are released or at any time during their lifecycle. Any product recall as a result of errors or failures could result in the loss of or delay in market acceptance of our solutions and adversely affect our business and reputation. Any significant returns or warranty claims could result in significant additional costs to us and could adversely affect our results of operations. Our customers may also run third-party software applications on our electronic payment systems. Errors in third-party applications could adversely affect the performance of our solutions.

The existence of defects and delays in correcting them could result in negative consequences, including the following: harm to our brand; delays in shipping solutions; loss of market acceptance for our solutions; additional warranty expenses; diversion of resources from product development; and loss of credibility with distributors and customers. Correcting defects can be time consuming and in some circumstances extremely difficult. Software errors may take several months to correct, and hardware defects may take even longer to correct.

We may accumulate excess or obsolete inventory that could result in unanticipated price reductions and write-downs and adversely affect our financial condition.

In formulating our solutions, we have focused our efforts on providing to our customers solutions with higher levels of functionality, which requires us to develop and incorporate cutting edge and evolving technologies. This approach tends to increase the risk of obsolescence for products and components we hold in inventory and may compound the difficulties posed by other factors that affect our inventory levels, including the following:

•the need to maintain significant inventory of components that are in limited supply;

•buying components in bulk for the best pricing;

•responding to the unpredictable demand for products;

•cancellation of customer orders; and

•responding to customer requests for quick delivery schedules.

As a result of these factors, we regularly run the risk of maintaining excess inventory levels. This risk may be enhanced to the extent we increase inventory levels in response to expected customer requirements. The accumulation of excess or obsolete inventory may result in price reductions and inventory write-downs, which could adversely affect our business and financial condition. We have

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incurred an obsolescence cost of $1.1 million in the three months ended January 31, 2006, primarily as a result of the customers shifting to our new Vx Solutions, our latest generation of system solutions, employing a 32-bit ARM9 System-on-Chip running our Verix operating system which provides a consistent user interface and secure multi-application platform across several payment systems.

Our proprietary technology is difficult to protect and unauthorized use of our proprietary technology by third parties may impair our ability to compete effectively.

We may not be able to protect our proprietary technology, which could enable competitors to develop services that compete with our own. We rely on copyright, trademark and trade secret laws, as well as confidentiality, licensing and other contractual arrangements to establish and protect the proprietary aspects of our solutions. We do not own any patents that protect important aspects of our current solutions. The laws of some countries in which we sell our solutions and services may not protect software and intellectual property rights to the same extent as the laws in the United States. If we are unable to prevent misappropriation of our technology, competitors may be able to use and adapt our technology. Our failure to protect our technology could diminish our competitive advantage and cause us to lose customers to competitors.

Our business may suffer if we are sued for infringing the intellectual property rights of third parties, or if we are unable to obtain rights to third party intellectual property on which we depend.

Third parties have in the past asserted and may in the future assert claims that we are infringing their proprietary rights. Such infringement claims may cause us to incur significant costs in defending those claims. We may be required to discontinue using and selling any infringing technology and services, to expend resources to develop non-infringing technology or to purchase licenses or pay royalties for other technology. Similarly, we depend on our ability to license intellectual property from third parties. These or other third parties may become unwilling to license to us on acceptable terms intellectual property that is necessary to our business. In either case, we may be unable to acquire licenses for other technology on reasonable commercial terms or at all. As a result, we may find that we are unable to continue to offer the solutions and services upon which our business depends.

We have received, and have currently pending, third-party claims and may receive additional notices of such claims of infringement in the future. To date, such activities have not had a material adverse effect on our business and we have either prevailed in all litigation, obtained a license on commercially acceptable terms or otherwise been able to modify any affected products or technology. However, there can be no assurance that we will continue to prevail in any such actions or that any license required under any such patent or other intellectual property would be made available on commercially acceptable terms, if at all.

We are exposed to various risks related to legal proceedings or claims that may harm our operating results or financial condition.

In the ordinary course of our business, we are subject to periodic lawsuits, investigations and claims. Although we cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against us, we do not believe that any currently pending legal proceeding to which we are a party is likely to have a material adverse effect on our business, results of operations, cash flows or financial condition.

Our Brazilian subsidiary has been notified of a tax assessment regarding Brazilian state value added tax, or VAT, for the periods from January 2000 to December 2001 and related to products supplied to us by a contract manufacturer. The assessment relates to an asserted deficiency of 6.5 million Brazilian reals (approximately $2.9 million) including interest and penalties.  The tax assessment was based on a clerical error in which our Brazilian subsidiary omitted the required tax exemption number on its invoices.  Management does not expect that we will ultimately incur a material liability in respect of this assessment, because they believe, based in part on advice of our Brazilian tax counsel, that we will prevail in the proceedings relating to this assessment.  On May 25, 2005, we had an administrative hearing with respect to this audit.  Management expects to receive the decision of the administrative judges sometime in 2006. In the event we receive an adverse ruling from the administrative body, we will decide whether or not to appeal and would reexamine the determination as to whether an accrual is necessary.

We depend on a limited number of key members of senior management who would be difficult to replace. If we lose the services of these individuals or are unable to attract new talent, our business will be adversely affected.

We depend upon the ability and experience of a number of our key members of senior management who have substantial experience with our operations, the rapidly changing electronic payment transaction industry and the selected markets in which we offer our solutions. The loss of the services of one or a combination of our senior executives or key managers could have a material adverse effect on our results of operations. Our success also depends on our ability to continue to attract, manage and retain other qualified middle management and technical and clerical personnel as we grow. We may not be able to continue to attract or retain such personnel in the future.

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We intend to make acquisitions and strategic investments, which will involve numerous risks. We may not be able to address these risks without substantial expense, delay or other operational or financial problems.

Although we have a limited history of making acquisitions or strategic investments, a part of our strategy will be to acquire or make investments in related businesses, technologies or products in the future. Acquisitions or investments involve various risks, such as:

•the difficulty of integrating the technologies, operations and personnel of the acquired business, technology or product;

•the potential disruption of our ongoing business, including the diversion of management attention;

•the possible inability to obtain the desired financial and strategic benefits from the acquisition or investment;

•loss of customers;

•assumption of unanticipated liabilities;

•the loss of key employees of an acquired business; and

•the possibility of our entering markets in which we have limited prior experience.

Future acquisitions and investments could also result in substantial cash expenditures, potentially dilutive issuance of our equity securities, our incurring of additional debt and contingent liabilities, and amortization expenses related to other intangible assets that could adversely affect our business, operating results and financial condition. We depend on the retention and performance of existing management and employees of acquired businesses for the day-to-day management and future operating results of these businesses.

Shipments of electronic payment systems may be delayed by factors outside of our control, which can harm our reputation and our relationships with our customers.

The shipment of payment systems requires us or our manufacturers, distributors or other agents to obtain customs or other government certifications and approvals, and, on occasion, to submit to physical inspection of our systems in transit. Failure to satisfy these requirements, and the very process of trying to satisfy them, can lead to lengthy delays in the delivery of our solutions to our direct or indirect customers. Delays and unreliable delivery by us may harm our reputation in the industry and our relationships with our customers.

Force majeure events, such as terrorist attacks, other acts of violence or war, political instability and health epidemics may adversely affect us.

Terrorist attacks, war, and international political instability, along with health epidemics may disrupt our ability to generate revenues. Such events may negatively affect our ability to maintain sales revenue and to develop new business relationships. Because a substantial and growing part of our revenues is derived from sales and services to customers outside of the United States and we have our electronic payment systems manufactured outside the U.S., terrorist attacks, war and international political instability anywhere may decrease international demand for our products and inhibit customer development opportunities abroad, disrupt our supply chain and impair our ability to deliver our electronic payment systems, which could materially adversely affect our net revenues or results of operations. Any of these events may also disrupt global financial markets and precipitate a decline in the price of our common stock.

Our internal control over financial reporting may not be effective and our independent registered public accounting firm may not be able to certify as to its effectiveness, which could have a significant and adverse effect on our business and reputation.

We are evaluating our internal control over financial reporting in order to allow management to report on, and our independent registered public accounting firm to attest to, our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002 and rules and regulations of the SEC thereunder, which we refer to as Section 404. We are currently performing the system and process evaluation and testing required (and any necessary remediation) in an effort to comply with management certification and auditor attestation requirements of Section 404. The management certification and auditor attestation requirements of Section 404 will initially apply to our Annual Report on Form 10-K for our fiscal year ended October 31, 2006. However, as we are still in the evaluation process, we may identify conditions that may result in significant deficiencies or material weaknesses in the future. A material weakness is a significant deficiency, as defined in Public Accounting Oversight Board Auditing Standard No. 2 or a combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the Company’s annual or interim

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financial statements would not be prevented or detected by company personnel in the normal course of performing their assigned functions.

We cannot be certain as to the timing of completion of our evaluation, testing and any remediation actions or the impact of the same on our internal controls over financial reporting. If we are not able to complete our evaluation or remediate deficiencies in a timely manner, our internal controls would be considered ineffective for purposes of Section 404 and our independent auditors may not be able to certify as to the effectiveness of our internal control over financial reporting. As a result, there could be a negative reaction in the financial markets due to a loss of confidence in the reliability of our financial statements. In addition, we may be required to incur costs in improving our internal control system and the hiring of additional personnel. Any such action could negatively affect our results.

If we are unable to improve and maintain the quality of our internal controls, any weaknesses could materially and adversely affect our ability to provide timely and accurate information about us, which could harm our reputation and share price

On several occasions since our separation from Hewlett-Packard, our independent registered public accounting firm has identified deficiencies in our internal controls which rose to the level of material weakness. We have worked diligently to correct these deficiencies. We are not aware of, nor did our independent registered public accounting firm inform us of, any matters involving internal controls that we consider to be material weaknesses relating to the years ended October 31, 2005 and October 31, 2004 and the three months ended January 31, 2006. Nevertheless, we cannot be certain that the measures we have taken will ensure that we will maintain adequate controls over our financial processes and reporting in the future. Any failure to maintain adequate controls or to adequately implement required new or improved controls could harm our operating results or cause us to fail to meet our reporting obligations. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could adversely affect the trading price of our common stock.

We are investing for RoHS but there can be no assurance that we will be in compliance in every respect.

We are subject to other legal and regulatory requirements, including a European Union directive that places restrictions on the use of hazardous substances (RoHS) in electronic equipment. RoHS sets a framework for producers’ obligations in relation to manufacturing (including the amounts of named hazardous substances contained in products sold), labeling, and treatment, recovery and recycling of electronic products in the European Union which may require us to alter the manufacturing of the physical devices that include our solutions and/or require active steps to promote recycling of materials and components. Although the directive has been adopted by the European Commission, national legislation to implement the directive is still pending in the member states of the European Union. In addition, similar legislation could be enacted in other jurisdictions, including in the United States.  If we do not comply with the RoHS directive, we may suffer a loss of revenue, be unable to sell in certain markets and/or countries, be subject to penalties and enforced fees and/or suffer a competitive disadvantage. Furthermore, we cannot assure you that the costs to comply with RoHS, or with current and future environmental and worker health and safety laws will not have a material adverse effect on our results of operation, expenses and financial condition.

Risks Related to Our Industry

Our markets are highly competitive and subject to price erosion.

The markets for our system solutions and services are highly competitive, and we have been subject to price pressures. Competition from manufacturers, distributors or providers of products similar to or competitive with our system solutions or services could result in price reductions, reduced margins and a loss of market share or could render our solutions obsolete.

We expect to continue to experience significant and increasing levels of competition in the future. We compete with suppliers of cash registers that provide built in electronic payment capabilities and producers of software that facilitates electronic payment over the internet, as well as other manufacturers or distributors of electronic payment systems. We must also compete with smaller companies that have been able to develop strong local or regional customer bases. In certain foreign countries, some competitors are more established, benefit from greater name recognition and have greater resources within those countries than we do.

If we do not continually enhance our existing solutions and develop and market new solutions and enhancements, our net revenues and income will be adversely affected.

The market for electronic payment systems is characterized by:

•rapid technological change;

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•frequent product introductions and enhancements;

•evolving industry and government performance and security standards; and

•changes in customer and end-user requirements.

Because of these factors, we must continually enhance our existing solutions and develop and market new solutions.

We cannot be sure that we will successfully complete the development and introduction of new solutions or enhancements or that our new solutions will be accepted in the marketplace. We may also fail to develop and deploy new solutions and enhancements on a timely basis. In either case, we may lose market share to our competitors, and our net revenues and income could suffer.

We must adhere to industry and government regulations and standards and therefore sales will suffer if we cannot comply with them.

Our system solutions must meet industry standards imposed by EMVCo, Visa, MasterCard and other credit card associations and standard setting organizations. New standards are continually being adopted or proposed as a result of worldwide anti-fraud initiatives, the increasing need for system compatibility and technology developments such as wireless and wireline IP communication. Our solutions also must comply with government regulations, including those imposed by telecommunications authorities and independent standards groups worldwide regarding emissions, radiation and connections with telecommunications and radio networks. We cannot be sure that we will be able to design our solutions to comply with future standards or regulations on a timely basis, if at all. Compliance with these standards could increase the cost of developing or producing our solutions. If we are unable to comply with new industry standards, or we cannot obtain or retain necessary regulatory approval or certifications in a timely fashion, or if compliance increases the cost of our solutions, our results of operations may be adversely affected.

Risks Related to Our Capital Structure

Our secured credit facility contains restrictive and financial covenants and, if we are unable to comply with these covenants, we will be in default. A default could result in the acceleration of our outstanding indebtedness, which would have an adverse effect on our business and stock price.

In June 2004, our principal operating subsidiary, VeriFone, Inc., and another subsidiary entered into a secured credit facility under which, as of January 31, 2006, VeriFone, Inc. had outstanding indebtedness, excluding capital leases, of approximately $182.1 million.

Our secured credit facility contains customary covenants that require our subsidiaries to maintain certain specified financial ratios and restrict their ability to make certain distributions with respect to their capital stock, prepay other debt, encumber their assets, incur additional indebtedness, make capital expenditures above specified levels, engage in certain business combinations, or undertake various other corporate activities. Therefore, as a practical matter, these covenants restrict our ability to engage in or benefit from such activities. In addition, we have, in order to secure repayment of our secured credit facility, pledged substantially all of our assets and properties. This pledge may reduce our operating flexibility because it restricts our ability to dispose of these assets or engage in other transactions that may be beneficial to us.

If we are unable to comply with any of these covenants, we will be in default, which could result in the acceleration of our outstanding indebtedness. If acceleration occurred, we would not be able to repay our debt and it is unlikely that we would be able to borrow sufficient additional funds to refinance our debt. Even if new financing is made available to us, it may not be available on acceptable terms.

We had negative stockholders’ equity in the past, which could limit our ability to obtain additional financing.

As of January 31, 2006, we had stockholders’ equity of $42.6 million primarily due to the capital we received in our initial public and follow-on offerings and our earnings in fiscal 2005. This may make lenders and other potential investors less likely to provide us with additional debt or equity financing. If we require additional financing, there is no guarantee that we can obtain it on acceptable terms, or at all. If we are unable to obtain additional, needed financing, our financial condition and results of operations may be adversely affected.

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GTCR has substantial influence over our operations, which will limit our other stockholders’ ability to influence corporate activities and may adversely affect the market price of our common stock.

GTCR owns or controls shares representing, in the aggregate, an approximately 33.1% voting interest in our company and has three of the seven members on our board of directors. Accordingly, GTCR may exercise substantial influence over our operations and business strategy. In addition, GTCR will have substantial influence over the outcome of votes on all matters requiring approval by our stockholders, including the election of directors and approval of significant corporate transactions.

GTCR may also exercise substantial influence with respect to mergers or other business combinations that involve a change in control of us, under a stockholders agreement among us, GTCR and certain other stockholders. Subject to specified conditions, that agreement requires the stockholders who are parties to it to consent to a sale of VeriFone Holdings, Inc. to a non-affiliate of GTCR if the sale is approved by the holders of a majority of the shares subject to the agreement. This provision is described in more detail under the caption “Certain Relationships and Related Transactions” in our 2006 Proxy Statement which is incorporated herein by reference. Currently, shares will be released from the stockholders agreement as they are sold.

GTCR’s ownership of a substantial portion of our outstanding equity may have the effect of delaying or preventing a change in control of us or discouraging others from making tender offers for our shares, which could prevent stockholders from receiving a premium for their shares. These actions may be taken even if other stockholders oppose them.

Our Chief Executive Officer owns a significant stake in us and may be difficult to remove.

Our Chief Executive Officer, Douglas Bergeron, beneficially owns shares representing, in the aggregate, approximately a 6.9% voting interest in our company. Moreover, Mr. Bergeron and several senior managers have a long professional history together at SunGard Data Systems Inc. Mr. Bergeron’s significant ownership stake in our company and his history with other senior management may also make it difficult for the board of directors to remove Mr. Bergeron or other members of senior management.

Conflicts of interest may arise because some of our directors are principals of our significant stockholder.

Three principals of GTCR serve on our board of directors, which currently has seven members. GTCR and its affiliates may invest in entities that directly or indirectly compete with us or companies in which they currently invest may begin competing with us. As a result of these relationships, when conflicts between the interests of GTCR and the interests of our other stockholders arise, these directors may not be disinterested. Although our directors and officers have a duty of loyalty to us, under Delaware law and our amended and restated certificate of incorporation that was adopted in connection with the closing of our initial public offering on May 4, 2005, transactions that we enter into in which a director or officer that is a representative of GTCR has a conflict of interest are generally permissible so long as (1) the material facts relating to the director’s or officer’s relationship or interest as to the transaction are disclosed to our board of directors and a majority of our disinterested directors approves the transaction, (2) the material facts relating to the director’s or officer’s relationship or interest as to the transaction are disclosed to our stockholders and a majority of our disinterested stockholders approves the transaction, or (3) the transaction is otherwise fair to us. GTCR’s representatives will not be required to offer to us any transaction opportunity of which they become aware and could take any such opportunity for themselves or offer it to other companies in which they have an investment, unless such opportunity is expressly offered to them solely in their capacity as a director of us.

Some provisions of our certificate of incorporation and bylaws may delay or prevent transactions that many stockholders may favor.

Some provisions of our amended and restated certificate of incorporation and amended and restated bylaws that became effective upon the completion of our initial public offering on May 4, 2005, may have the effect of delaying, discouraging, or preventing a merger or acquisition that our stockholders may consider favorable, including transactions in which stockholders might receive a premium for their shares. These provisions include:

•authorization of the issuance of “blank check” preferred stock without the need for action by stockholders;

•the removal of directors or amendment of our organizational documents only by the affirmative vote of the holders of two-thirds of the shares of our capital stock entitled to vote;

•provision that any vacancy on the board of directors, however occurring, including a vacancy resulting from an enlargement of the board, may only be filled by vote of the directors then in office;

•inability of stockholders to call special meetings of stockholders; and

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•advance notice requirements for board nominations and proposing matters to be acted on by stockholders at stockholder meetings.

Our common stock has only been publicly traded since April 29, 2005 and we expect that the price of our common stock will fluctuate substantially.

There has only been a public market for our common stock since April 29, 2005. Broad market and industry factors may adversely affect the market price of our common stock, regardless of our actual operating performance. Factors that could cause fluctuations in our stock price may include, among other things:

•actual or anticipated variations in quarterly operating results;

•changes in financial estimates by us or by any securities analysts who might cover our stock, or our failure to meet the estimates made by securities analysts;

•changes in the market valuations of other companies operating in our industry;

•announcements by us or our competitors of significant acquisitions, strategic partnerships or divestitures;

•additions or departures of key personnel; and

•sales of our common stock, including sales of our common stock by our directors and officers or by GTCR or our other principal stockholders.

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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk related to changes in interest rates and foreign currency exchange rates. To mitigate some of these risks, we utilize derivative financial instruments to hedge these exposures. We do not use derivative financial instruments for speculative or trading purposes.

Interest Rates

We are exposed to interest rate risk related to our debt, which bears interest based upon the three-month LIBOR rate. In July 2004, the Company purchased a two-year interest rate cap for $285,000 with a notional amount of $50 million, under which the Company will receive interest payments if the three-month LIBOR rate exceeds 4%. In March 2005, the Company purchased a one-year interest rate cap for $29,000 with an effective date of July 2005 and a notional amount of $30 million, under which the Company will receive interest payments if the three-month LIBOR rate exceeds 5%.

The cost of the two remaining interest rate caps that total $314,000 were recorded in prepaid expenses and other current assets in the condensed consolidated balance sheet and are being amortized as interest expense over the life of the caps. For the three months ended January 31, 2006, the Company received interest of $31,000 as a result of the three months LIBOR rate on its Term Loan B exceeding 4%. A 1% increase in the variable rate of interest on the currently outstanding debt under our secured credit facility would increase annual interest expense by approximately $1.5 million.

Foreign Currency Risk

A substantial part of our business consists of sales made to customers outside the United States. A portion of the net revenues we receive from such sales is denominated in currencies other than the U.S. dollar. Additionally, portions of our costs of net revenues and our other operating expenses are incurred by our International operations and denominated in local currencies. While fluctuations in the value of these net revenues, costs and expenses as measured in U.S. dollars have not materially affected our results of operations historically, we cannot assure you that adverse currency exchange rate fluctuations will not have a material impact in the future. In addition, our balance sheet reflects non-U.S. dollar denominated assets and liabilities, primarily inter-company balances which can be adversely affected by fluctuations in currency exchange rates. In certain periods, we have not hedged our exposure to these fluctuations. We have entered into foreign currency forward contracts and other arrangements intended to hedge our exposure to adverse fluctuations in exchange rates. As of January 31, 2006, we had no foreign currency forward contracts outstanding. Effective February 1, 2006, we have entered into foreign currency forward contracts to sell Australian dollars and Euros with notional amounts of $2.0 million and $1.8 million, respectively.  If we chose not to enter into foreign currency forward contracts to hedge against these exposures and if the Euro and Australian dollar both were to devalue 5% to 10% against the U.S. dollar, results of operations would include a foreign exchange loss of $0.2 million to $0.4 million.

Hedging arrangements of this sort may not always be effective to protect our results of operations against currency exchange rate fluctuations, particularly in the event of imprecise forecasts of non-U.S. denominated assets and liabilities. Accordingly, if there is an adverse movement in exchange rates, we might suffer significant losses. For instance, in the three months ended January 31, 2006, we suffered foreign currency contract losses of $0.1 million, net of foreign currency transaction gains despite our hedging activities.

ITEM 4. CONTROLS AND PROCEDURES

 (a) Evaluation of disclosure controls and procedures.

With the participation of our Chief Executive Officer and Chief Financial Officer, management has carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

(b) Changes in internal control over financial reporting.

No change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during the first quarter of our fiscal year ended January 31, 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In the ordinary course of our business, we are subject to periodic lawsuits, investigations and claims. Although we cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against us, we do not believe that any currently pending legal proceeding to which we are a party is likely to have a material adverse effect on our business, results of operations, cash flows or financial condition.

Our Brazilian subsidiary has been notified of a tax assessment regarding Brazilian state value added tax, or VAT, for the periods from January 2000 to December 2001 and related to products supplied to us by a contract manufacturer. The assessment relates to an asserted deficiency of 6.5 million Brazilian reals (approximately $2.9 million) including interest and penalties.  The tax assessment was based on a clerical error in which our Brazilian subsidiary omitted the required tax exemption number on its invoices.  Management does not expect that we will ultimately incur a material liability in respect of this assessment, because they believe, based in part on advice of our Brazilian tax counsel, that we will prevail in the proceedings relating to this assessment.  On May 25, 2005, we had an administrative hearing with respect to this audit.  Management expects to receive the decision of the administrative judges sometime in 2006. In the event we receive an adverse ruling from the administrative body, we will decide whether or not to appeal and would reexamine the determination as to whether an accrual is necessary.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

Exhibits

The Following documents are filed as Exhibits to this report:

Exhibit Number	Description
31.1	Certification of the Chief Executive Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of the Chief Financial Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of the Chief Executive Officer and the Chief Financial Officer as required by Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	VERIFONE HOLDINGS, INC
Date: March 3, 2006		By:	/s/Douglas G. Bergeron
			Douglas G. Bergeron
			Chairman and Chief Executive Officer
		By:	/s/Barry Zwarenstein
			Barry Zwarenstein
			Senior Vice President and Chief Financial Officer

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EXHIBIT INDEX

Exhibit Number	Description
31.1	Certification of the Chief Executive Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of the Chief Financial Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of the Chief Executive Officer and the Chief Financial Officer as required by Section 906 of the Sarbanes-Oxley Act of 2002.

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