Verifone Systems 10-Q 2006 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended July 31, 2006

or

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

For the transition period from                to                

Commission file number: 001-32465

VERIFONE HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

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

2099 Gateway Place, Suite 600
San Jose, CA 95110

(Address of principal executive offices with zip code)

(408) 232-7800

(Registrant’s telephone number, including area code)

N/A

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

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

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

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

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

Table of Contents 

VeriFone Holdings, Inc.
INDEX

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

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PART I—FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS

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

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

See accompanying notes.

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

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

See accompanying notes.

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

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

See accompanying notes.

5

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

Note 1. Description of Business

VeriFone Holdings, Inc. (“VeriFone” or the “Company”) was incorporated in the state of Delaware on June 13, 2002 in order to acquire VeriFone, Inc. on July 1, 2002. Prior to the completion of the Company’s initial public offering on May 4, 2005, VeriFone was majority owned by GTCR Fund VII, L.P., an equity fund managed by GTCR Golder Rauner, LLC (“GTCR”), a private equity firm. As of July 31, 2006, equity funds managed by GTCR owned approximately 28.6% of the outstanding common stock of the Company. VeriFone designs, markets, and services transaction automation systems that enable secure electronic payments among consumers, merchants, and financial institutions.

Note 2. Summary of Significant Accounting Policies

Principles of Consolidation

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

Unaudited Interim Financial Information

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

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

Use of Estimates

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

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

Revenue Recognition

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

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

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

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

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

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

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

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

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

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

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

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

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

7

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

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

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

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

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

Foreign Currency Translation

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

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

Concentrations of Credit Risk

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

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

8

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

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

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

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

In the three and nine months ended July 31, 2006, one customer, First Data Corporation and its affiliates, accounted for 16% and 13%, respectively, of net revenues, compared to 9% and 12% of net revenues for the comparable periods in fiscal 2005, respectively. At July 31, 2006 and October 31, 2005, one customer, First Data Corporation and its affiliates, accounted for 17% and 13%, respectively, of accounts receivable. The increase in accounts receivable was due to increased sales to First Data of $8.5 million, or 58%, to $23.1 million in the quarter ended July 31, 2006, from $14.6 million in the quarter ended October 31, 2005 primarily related to demand for a check processing system which is still winding down and expected to terminate early next year. No other customer accounted for 10% or more of net revenues for any period presented or accounted for 10% or more of accounts receivable at either July 31, 2006 or October 31, 2005.

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

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

Contract Manufacturing

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

Fair Value of Financial Instruments

Financial instruments consist principally of cash and cash equivalents, marketable securities, accounts receivable, accounts payable, long-term debt, foreign currency forward contracts and interest rate caps. Foreign currency forward contracts and interest rate caps are recorded at fair value. The estimated fair value of cash, accounts receivable and accounts payable approximates their carrying value due to the short period of time to their maturities. The estimated value of long-term debt approximates its carrying value

9

since the rate of interest on the long-term debt adjusts to market rates on a quarterly basis. The fair value of cash equivalents, marketable securities, foreign currency forward contracts and interest rate caps are based on quotes from brokers using market prices for those or similar instruments.

Derivative Financial Instruments

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

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

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

The Company’s international sales are primarily denominated in U.S. dollars. For foreign currency denominated sales, however, the volatility of the foreign currency markets represents risk to the Company’s margins. The Company defines its exposure as the risk of changes in the functional-currency-equivalent cash flows (generally U.S. dollars) attributable to changes in the related foreign currency exchange rates. From time to time the Company enters into certain transactions with foreign currency forward contracts with substantial terms designed to match those of the underlying exposure. The Company does not qualify these foreign currency forward contracts as hedging instruments and, as such, records the changes in the fair value of these derivatives immediately in other income (expense), net in the accompanying consolidated statements of operations. As of July 31, 2006 and October 31, 2005, the Company did not have any outstanding foreign currency forward contracts. On August 1, 2006 the Company entered into foreign currency forward contracts to sell Australian dollars, British pounds, Mexican pesos and Euros with notional amounts of $2.4 million, $3.3 million, $4.4 million and $2.2 million, respectively. The Company’s foreign currency forward contracts have typically had original maturities of 35 days or less. The gains or losses on foreign currency forward contracts are recorded in other income (expense), net in the accompanying consolidated statements of operations.

The Company is exposed to interest rate risk related to its debt, which bears interest based upon the three-month LIBOR rate. On June 30, 2004, the Company entered into a secured credit facility (the “Credit Facility”) with a syndicate of financial institutions, led by Banc of America Securities and Credit

10

Suisse (formerly Credit Suisse First Boston). The Credit Facility consisted of a Revolver permitting borrowings of up to $30 million, a Term B Loan of $190 million, and a Second Lien Loan of $72 million. Under the Credit Facility, the Company is required to fix the interest rate through swaps, rate caps, collars and similar agreements with respect to at least 30% of the outstanding principal amount of all loans and other indebtedness that have floating interest rates. This interest rate protection requirement expired on June 30, 2006. In July 2004, the Company purchased a two-year interest rate cap for $285,000 with a notional amount of $50 million under which the Company will receive interest payments if the three-month LIBOR rate exceeds 4%. In March 2005, the Company purchased a one-year interest rate cap for $29,000 with an effective date of July 2005 and a notional amount of $30 million, under which the Company will receive payments to the extent the three-month LIBOR rate exceeds 5%. The two interest rate caps that the Company purchased in July 2004 and March 2005 both expired in July 2006.

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

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

Cash and Cash Equivalents

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

Marketable Securities

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

Equity Earnings (Loss) in Affiliate

The Company made a minority investment in VeriFone Transportation Systems (“VTS”) in October 2005. The investment in VTS is accounted for under the equity method and included in the Other Assets in the accompanying consolidated balance sheets. The earnings (loss) are included in the Other Income (Expense), net in the accompanying consolidated statements of operations. For the three and nine months ended July 31, 2006 the activity relating to this investment has been insignificant.

Debt Issuance Costs

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

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Inventories

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

Shipping and Handling Costs

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

Warranty Costs

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

Research and Development Costs

Research and development costs are expensed as incurred. Costs eligible for capitalization under SFAS No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed”, were $0.6 million and $1.7 million for the three and nine months ended July 31, 2006, respectively, compared to $0.5 million and $0.7 million, respectively, for the comparable periods in fiscal 2005. Capitalized software development costs of $7.2 million and $5.5 million as of July 31, 2006 and October 31, 2005, respectively, are being amortized on a straight-line basis over the estimated life of the product to which the costs relate, which is generally three years. These costs, net of accumulated amortization of $2.9 million and $2.0 million as of July 31, 2006 and October 31, 2005, respectively, are recorded in other assets in the accompanying consolidated balance sheets.

Advertising Costs

Advertising costs are expensed as incurred and totaled approximately $106,000 and $167,000 for the three and nine months ended July 31, 2006, respectively, compared to $61,000 and $106,000 for the comparable periods in fiscal 2005, respectively.

Income Taxes

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

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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 balance sheets.

Equipment and Improvements

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

Goodwill and Other Purchased Intangible Assets

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

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

The fair value of the reporting units is determined using the income approach. The income approach focuses on the income-producing capability of an asset, measuring the current value of the asset by calculating the present value of its future economic benefits such as cash earnings, cost savings, tax deductions, and proceeds from disposition. Value indications are developed by discounting expected cash flows to their present value at a rate of return that incorporates the risk-free rate for the use of funds, the expected rate of inflation, and risks associated with the particular investment. For the three and nine months ended July 31, 2006, no impairment charges have been recorded.

Accounting for Impairment of Long-Lived Assets

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

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Stock Based Compensation

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

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

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

Segment Reporting

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

Net Income Per Share

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

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

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

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

Recent Accounting Pronouncements

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

In November 2005, FASB issued FASB Staff Position (“FSP”) FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“FSP 115-1”), which provides guidance on determining when investments in certain debt and equity securities are considered impaired, whether that impairment is other-than-temporary, and on measuring such impairment loss. FSP 115-1 also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not

15

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

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

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

Note 3. Balance Sheet and Statements of Operations Detail

Marketable Securities

Marketable securities as of July 31, 2006 were as follows (in thousands):

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

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

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

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

Inventories

Inventories consisted of the following (in thousands):

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

Equipment and Improvements, net

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

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

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

Purchased Intangible Assets, net

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

	Gross Carrying
	Amount			Accumulated Amortization											Net
	July 31,			October 31,								July 31,			July 31,		October 31,
	2006			2005				Additions				2006			2006		2005
Developed technology		$	30,804		$	(25,879	)		$	(1,917	)	$	(27,796	)	$	3,008		$	4,925
Core technology		14,442			(9,629		)		(2,166		)	(11,795		)	2,647			4,813
Trade name		22,225			(16,402		)		(2,655		)	(19,057		)	3,168			5,823
Customer relationships		15,714			(12,363		)		(822		)	(13,185		)	2,529			3,351
		$	83,185		$	(64,273	)		$	(7,560	)	$	(71,833	)	$	11,352		$	18,912

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

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

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

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

Goodwill

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

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

Warranty

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

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

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Deferred revenue, net

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

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

Other Income (Expense), net

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

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

Note 4. Financing

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

	July 31, 2006				October 31, 2005
Secured credit facility
Revolver		$	—			$	—
Term B loan		181,167				182,553
Capital leases		128				253
		181,295				182,806
Less current portion		(1,916		)		(1,994		)
Long term portion		$	179,379			$	180,812

Secured Credit Facility

On June 30, 2004, the Company entered into a secured credit facility (the “Credit Facility”) with a syndicate of financial institutions, led by Banc of America Securities and Credit Suisse (formerly Credit Suisse First Boston). The Credit Facility consisted of a Revolver permitting borrowings of up to $30 million, a Term B Loan of $190 million, and a Second Lien Loan of $72 million. The Credit Facility is guaranteed by the Company and its subsidiaries and is secured by collateral including substantially all of the Company’s assets and stock of the Company’s subsidiaries. As of July 31, 2006, the interest rate on the Term B Loan was 7.24%. For the three and nine months ended July 31, 2006 the weighted average interest rate on the Credit Facility was 6.88% and 6.52%, respectively. The Company also pays a commitment fee on the unused portion of the Revolver under its Credit Facility at a rate that varies between 0.375% and 0.50% per annum depending upon its consolidated total leverage ratio. As of July 31, 2006, the Company was paying a commitment fee at a rate of 0.375% per annum.

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

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

At the Company’s option, the Revolver bears interest at a rate of 1.75% over the three-month LIBOR, which was 5.49% and 4.24% as of July 31, 2006 and October 31, 2005, respectively, or 0.75% over the lender’s base rate, which was 8.25% and 6.75% as of July 31, 2006 and October 31, 2005, respectively. As of July 31, 2006 and October 31, 2005, the entire $30 million Revolver was available for borrowing to meet short-term working capital requirements. At the Company’s option, borrowings on the Term B Loan bear interest at a rate of either 1.75% (2.0% from May 4, 2005 to February 1, 2006 and 2.50% prior to May 4, 2005) over the three-month LIBOR or 0.75% (1.0% from May 4, 2005 to February 1, 2006 and 1.50% prior to May 4, 2005) over the lender’s base rate.

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

The terms of the Credit Facility require the Company to comply with financial covenants, including maintaining leverage, and fixed charge coverage ratios, obtaining protection against fluctuation in interest rates, and limits on capital expenditure levels at the end of each fiscal quarter. As of July 31, 2006, the Company was required to maintain a senior secured leverage ratio of not greater than 2.75 to 1.0, a maximum senior leverage ratio of not greater than 4.25 to 1.0 and a fixed charge ratio of at least 2.0 to 1.0. Some of the financial covenants become more restrictive over the term of the Credit Facility. Noncompliance with any of the financial covenants without cure or waiver would constitute an event of default under the Credit Facility. An event of default resulting from a breach of a financial covenant may result, at the option of lenders holding a majority of the loans, in an acceleration of repayment of the principal and interest outstanding and a termination of the revolving Credit Facility. The Credit Facility also contains non-financial covenants that restrict some of the Company’s activities, including, its ability to dispose of assets, incur additional debt, pay dividends, create liens, make investments, make capital expenditures and engage in specified transactions with affiliates. The terms of the Credit Facility permit prepayments of principal and require prepayments of principal upon the occurrence of certain events including among others, the receipt of proceeds from the sale of assets, the receipt of excess cash flow as defined, and the receipt of proceeds of certain debt issues. The Credit Facility also contains customary events of default, including defaults based on events of bankruptcy and insolvency, nonpayment of principal, interest or fees when due, subject to specified grace periods, breach of specified covenants

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

Note 5. Restructuring Charges

In connection with the acquisition of VeriFone Inc. by the Company on July 1, 2002, the Company assumed the liability for a restructuring plan (fiscal 2002 restructuring plan). The remaining accrued restructuring balance represents primarily future facilities lease obligations, net of estimated future sublease income, which are expected to be paid through 2007. The Company incurred additional restructuring costs of $1,000 and $8,000 in the International segment for the three months and the nine months ended July 31, 2006. The payment of the restructuring costs for the International segment was zero and $8,000 for the three months and the nine months ended July 31, 2006. The Company paid restructuring costs of $180,000 and $533,000 for the three months and the nine months ended July 31, 2006 in the North America segment. As of July 31, 2006, the Company has a liability of $667,000 and $60,000 for the North America segment and International segment, respectively.

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

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

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

In the first quarter of fiscal 2006, the Company implemented a restructuring plan that established Singapore supply chain operations to leverage a favorable tax environment and manufacturing operations in the Asia Pacific region (fiscal 2006 restructuring plan). The plan included reductions in workforce of employees in the United States, Taiwan, Australia and Hong Kong with an expected cost of $599,000. As of July 31, 2006, $575,000 of the severance costs had been paid. The remaining severance payments are expected to be paid by the end of fiscal 2006. The Company incurred and paid restructuring costs of $345,000 and $58,000 in the International segment for the three months and nine months ended July 31, 2006. For the three months ended July 31, 2006, the Company reduced the restructuring costs by $5,000 and paid $128,000 in the North America segment. For the nine months ended July 31, 2006, the Company incurred restructuring costs of $254,000 and paid $230,000 in the North America segment. As of July 31, 2006, the Company has a liability of $24,000 for the North America segment.

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

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

21

In connection with acquisition of the assets of the GO Software business from Return on Investment Corporation on March 1, 2005, the Company accrued in the purchase price allocation $313,000 of restructuring costs related to the integration of GO Software’s Savannah helpdesk facility with the Company’s helpdesk facility in Clearwater, Florida, of which $261,000 has been paid as of July 31, 2006 (See Note 13).

As of July 31, 2006 and October 31, 2005, $756,000 and $849,000, respectively, of the restructuring liability was included in other current liabilities and $48,000 and $495,000, respectively, was included in other long-term liabilities in the accompanying consolidated balance sheets.

Note 6. Commitments and Contingencies

The Company leases certain real and personal property under non-cancelable operating leases. Additionally, the Company subleases certain real property to third parties. Future minimum lease payments and sublease rental income under these leases as of July 31, 2006 were as follows (in thousands):

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

Certain leases require the Company to pay property taxes, insurance and routine maintenance, and include rent escalation clauses and options to extend the term of certain leases. Rent expense was approximately $2.3 million and $6.7 million, respectively, for the three and nine months ended July 31, 2006, respectively, compared to $2.0 million and $5.9 million, respectively, for the comparable periods in fiscal 2005. Sublease rental income was approximately $73,000 and $217,000 for the three and nine months ended July 31, 2006, respectively, compared to $19,000 and $128,000, respectively, for the comparable periods in fiscal 2005.

Manufacturing Agreements

The Company works on a purchase order basis with third party contract manufacturers with facilities in China, Mexico, Singapore, and Brazil to manufacture substantially all of the Company’s inventories. The Company provides each manufacturer with a master purchase order on a monthly basis, which constitutes a binding commitment by the Company to purchase materials produced by the manufacturer as specified in the master purchase order. The total amount of purchase commitments as of July 31, 2006 and October 31, 2005 was approximately $46.3 million and $18.6 million, respectively, and are generally paid within one year. Of this amount, $1.6 million and $1.9 million has been recorded in other current liabilities in the accompanying condensed consolidated balance sheets as of July 31, 2006 and October 31, 2005, respectively.

Employee Health and Dental Costs

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

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Litigation

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

Brazilian State Tax Audit

The Company’s Brazilian subsidiary has been notified of a tax assessment regarding Brazilian state value added tax (“VAT”), for the periods from January 2000 to December 2001 that relates to products supplied to the Company by a contract manufacturer. The assessment relates to an asserted deficiency of 6.8 million Brazilian reais (approximately $3.1 million) including interest and penalties. The tax assessment was based on a clerical error in which the Company’s Brazilian subsidiary omitted the required tax exemption number on its invoices. Management does not expect that the Company will ultimately incur a material liability in respect of this assessment, because they believe, based in part on advice of the Company’s Brazilian tax counsel, that the Company is likely to prevail in the proceedings relating to this assessment. On May 25, 2005, the Company had an administrative hearing with respect to this audit. Management expects to receive the decision of the administrative body sometime in 2006. In the event the Company receives an adverse ruling from the administrative body, the Company will decide whether or not to appeal and would reexamine the determination as to whether an accrual is necessary.

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

Note 7. Comprehensive Income

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

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

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

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

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Note 8. Stockholders’ Equity

Common and Preferred Stock

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

In conjunction with the May 4, 2005 amendment and restatement of the Company’s certificate of incorporation, all shares of Nonvoting Common Stock were converted to shares of Common Stock on a one-for-one basis. Further, all options to purchase shares of Nonvoting Common Stock were converted to options to purchase Common Stock on a one-for-one basis. As a result of that modification, the Company recognized additional compensation expense of $11,000 and $35,000 for the three and nine months ended July 31, 2006 that was determined pursuant to SFAS 123(R). For the three and nine months ended July 31, 2005, the Company recognized additional compensation expense of $11,000.

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

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

Restricted Common Stock

The Company has a right to repurchase shares of  Common Stock sold to the Company’s Chief Executive Officer (the “CEO”) at the original sale price, $0.0333 per share, in the event the CEO ceases to be employed by the Company or any of its subsidiaries. This right lapses at a rate of 20% of the original 3,910,428 shares per year. Upon the sale of the Company, any remaining unvested shares will become vested. As of July 31, 2006, 782,086 shares of Common Stock issued to the CEO remained subject to this lapsing repurchase right.

The Company had a right to repurchase shares of Common Stock sold to certain executives of the Company pursuant to the Company’s 2002 Securities Purchase Plan at the lesser of the original sale price, $0.0333 per share, or the fair value on the date of separation in the event that the executive ceases to be employed by the Company or any of its subsidiaries. This right lapses at a rate of 20% of the original 1,929,145 shares per year. Upon the sale of the Company, all remaining unvested shares will become vested. As of July 31, 2006, 239,840 shares of Common Stock remained subject to this lapsing repurchase right.

Pursuant to APB No. 25 the Company recorded deferred stock-based compensation of $446,000 in connection with several sales of Common Stock to the executives before October 31, 2003. The deferred stock-based compensation represents the difference between the fair value of the Company’s Common Stock for accounting purposes and the original sale price. The Company amortized the deferred

24

stock-based compensation to expense on a straight-line basis over the vesting period through April 30, 2005. The Company ceased amortization of this stock-based compensation pursuant to APB No. 25 on April 30, 2005 upon adoption of SFAS 123(R). During the first nine months of fiscal year 2006 and 2005, the Company recorded zero and $52,000 of stock-based compensation expense under APB No. 25, which was included in general and administrative expenses in the accompanying consolidated statements of operations.

Stock Option Plans

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

New Founders’ Stock Option Plan

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

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

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

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

The total intrinsic value of options exercised during the three and nine months ended July 31, 2006 was $1.2 million and $5.5 million, respectively.

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

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

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Directors’ Stock Option Plan

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

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

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

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

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

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

2005 Equity Incentive Option Plan

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

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

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

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

The total intrinsic value of options exercised during the three and nine months ended July 31, 2006 was $2.8 million.

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

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

The Company will no longer grant options under the EIP Plan and retired 898,800 shares available for future grant under the EIP Plan on March 22, 2006. From March 22, 2006 through July 31, 2006. we retired additional 30,375 options.

2006 Equity Incentive Option Plan

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

In March 2006, the Company issued 90,000 restricted stock units (RSU) to its executive officers with zero value exercise price. Twenty-five percent of the award shall vest one year from the date of grant and 1/16th vest quarterly thereafter. The fair value of the restricted stock units granted is the stock price on the date of grant of $28.86. As of July 31, 2006, there were 90,000 restricted stock units outstanding, with an aggregate intrinsic value of $2.5 million and the weighted average remaining contractual term of 6.85 years. As of July 31, 2006, 83,250 restricted stock units are vested or are expected to vest, with an aggregate intrinsic value of $2.4 million. Pursuant to SFAS123(R), there was $2.4 million of total unrecognized

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

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

						Weighted
						Average
			Weighted			Remaining		Aggregate
			Average			Contractual		Intrinsic
			Exercise			Term		Value
	Shares		Price			(Years)		(thousands)
Balance at November 1, 2005	—			$	—
Granted	2,138,220			29.26
Exercised	—			—
Cancelled	(2,000	)		29.28
Balance at July 31, 2006	2,136,220			$	29.26		6.85		$	(2,159	)
Vested or expected to vest at July 31, 2006	1,982,412			$	29.26		6.85		$	(2,005	)
Exercisable at July 31, 2006	—			$	—		—		$	—

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

The weighted average grant date fair value of options granted during the nine months ended July 31, 2006 was $9.75 per share.

As of July 31, 2006, pursuant to SFAS 123(R) there was $20.1 million of total unrecognized compensation cost related to non-vested shared based compensation arrangements granted under the 2006 Plan. The cost is expected to be recognized over remaining service period of 3.8 years.

The total tax benefit recognized for all share based compensation arrangements pursuant to SFAS 123(R) was $614,000 and $1.3 million for the three and nine months ended July 31, 2006, respectively.

The total cash received from employees as a result of employee stock option exercises under all plans for nine months ended July 31, 2006 was approximately $2.1 million. In connection with these exercises, the windfall tax benefits realized by the Company and credited to equity for the nine months ended July 31 2006 were $2.7 million.

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

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

	Three Months Ended						Nine Months Ended
	July 31,						July 31,
	2006			2005			2006		2005
Cost of net revenues		$	204		$	73	$	519		$	73
Research and development		326			185		716			185
Sales and marketing		569			355		1,309			355
General and administrative		587			250		1,254			302
		$	1,686		$	863	$	3,798		$	915

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

	Three Months Ended		Nine Months Ended
	July 31,		July 31,
	2006	2005	2006	2005
Expected term of the options	3 years	4 years	3.1 years	4 years
Risk-free interest rate	5.2%	4.0%	5.0%	3.8%
Expected stock price volatility	41%	58%	42%	59%
Expected dividend rate	0.0%	0.0%	0.0%	0.0%

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

Pro forma information regarding net income and net income per share has been determined as if the Company had applied the fair value recognition provisions of SFAS 123 to options granted under the Company’s stock option plans in all periods presented prior to the Company adopting SFAS 123(R) on May 1, 2005. For the purposes of pro forma disclosure, the estimated fair value of the options is amortized to expense over the options’ vesting period using the straight-line method. The Company’s pro forma information is as follows (in thousands, except per share data):

	Nine Months Ended
	July 31, 2005
Net income as reported:		$	21,179
Plus: stock-based employee compensation expense included in reported net income		915
Less: total stock-based employee compensation expense determined under fair value based method for all awards		(1,163		)
Pro forma Net income		$	20,931
Basic net income per share—as reported		$	0.38
Basic net income per share—pro forma		$	0.37
Diluted net income per share—as reported		$	0.36
Diluted net income per share—pro forma		$	0.35

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Note 9. Segment and Geographic Information

Segment Information

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

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

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

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

	Three Months Ended						Nine Months Ended
	July 31,						July 31,
	2006			2005			2006			2005
Net revenues:
North America	$	85,404		$	72,063		$	243,045		$	210,154
International	62,289			53,846			181,791			145,218
Corporate	(76		)	(208		)	(399		)	(495		)
Total revenues	$	147,617		$	125,701		$	424,437		$	354,877
Operating income:
North America	$	32,763		$	28,203		$	94,268		$	73,569
International	16,819			10,296			45,052			25,858
Corporate	(21,123		)	(20,402		)	(62,102		)	(52,344		)
Total operating income	$	28,459		$	18,097		$	77,218		$	47,083

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

	July 31, 2006			October 31, 2005
North America		$	6,290		$	5,110
International		2,430			1,715
		$	8,720		$	6,825

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

	July 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):

	July 31, 2006			October 31, 2005
North America		$	301,574		$	272,727
International		98,357			54,625
		$	399,931		$	327,352

Geographic Information

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

	Three Months Ended				Nine Months Ended
	July 31,				July 31,
	2006		2005		2006		2005
United States	$	79,976	$	69,585	$	231,400	$	204,776
Canada	5,352		2,270		11,246		4,883
Latin America	23,981		21,180		74,426		52,330
Europe	31,554		24,239		80,754		65,885
Asia	6,754		8,427		26,611		27,003
	$	147,617	$	125,701	$	424,437	$	354,877

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):

	July 31, 2006			October 31, 2005
United States		$	6,290		$	5,110
Latin America		667			633
Europe		1,383			1,074
Asia		380			8
		$	8,720		$	6,825

Note 10. Related-Party Transactions

For the three and nine months ended July 31, 2005, the Company recorded zero and $125,000, respectively, of management fees payable to GTCR. These fees are included in general and administrative expenses in the accompanying consolidated statements of operations. The Company’s obligation to pay fees to GTCR terminated following the Company’s initial public offering in May 2005.

In June 2004, the Company paid a placement fee of $2,920,000 to GTCR, for services related to the new Secured 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 $69,000 and $201,000, respectively, for the three and nine months ended July 31, 2006, compared to $63,000 and $218,000 for the comparable periods in fiscal 2005, which is included in interest expense in the accompanying consolidated statements of operations. As of July 31, 2006 and October 31, 2005, the

31

balance of unamortized debt issuance costs related to the placement fee is $1.6 million and $1.8 million, respectively.

For the three and nine months ended July 31, 2006 and 2005, the Company recorded zero, zero, zero and $152,000, respectively, of expenses paid to affiliates in connection with services they provided or arranged, which are included in general and administrative expenses in the accompanying consolidated statements of operations. For the three and nine months ended July 31, 2006, the Company recorded $713,000 and $1.1 million, respectively, of receipts from affiliates of related parties in connection with sales, which are included in System Solutions net revenues in the accompanying consolidated statements of operations.

Note 11. Income Taxes

The Company’s effective tax rate was 35.0% for the three months ended July 31, 2006 as compared to 27.1% for the three months ended July 31, 2005. The effective tax rate was lower in the period ended July 31, 2005 primarily due to the impact of a discrete item in that period related to the write-off of debt financing costs. There were no discrete items affecting the tax rate in the current period.

Note 12. Employee Benefit Plans

The Company maintains a defined contribution 401(k) plan that allows eligible employees to contribute up to 60% of their pretax salary up to the maximum allowed under Internal Revenue Service regulations. Discretionary employer matching contributions of $0.5 million and $1.4 million were made to the plan during the three and nine months ended July 31, 2006, respectively, compared to $0.5 million and $1.3 million for the comparable periods in fiscal 2005.

Note 13. Acquisition of Business

On March 1, 2005, the Company acquired the assets of GO Software 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. 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 for GO Software 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 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 $261,000 has been paid as of July 31, 2006.

On April 10, 2006, the Company entered into a definitive agreement to acquire Lipman Electronic Engineering, Ltd. (“Lipman”). At the effective time of the acquisition, Lipman shareholders will receive at their election, for each ordinary Lipman share (par value per share: 1 New Israeli Shekel) issued and outstanding immediately prior to the effective time of the acquisition (i) one half (0.50) share of the Company’s Common Stock and (ii) $12.804 in cash, as reduced by the per share value of a special cash dividend of $1.50 to be paid by Lipman prior to closing of the acquisition. The amount of the special cash dividend has not been finally determined. Alternatively, Lipman shareholders may elect to receive for each Lipman share either $27.57 in cash as reduced by the special cash dividend to be paid by Lipman or

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0.9336 shares of the Company’s stock as adjusted by the per share value of the special cash dividend to be paid by Lipman. The cash and stock elections are subject to proration such that the Company will issue in the aggregate approximately 13.3 million shares of the Company’s stock and pay approximately $342 million, determined as $12.804 as reduced by the aggregate amount of the special cash dividend to be paid by Lipman times the number of outstanding Lipman ordinary shares. The amount of stock consideration as of the effective date of the merger is fixed at 0.50 of the total number of Lipman shares outstanding on the effective date. The acquisition is subject to satisfying a number of closing conditions, including shareholder and regulatory approvals, which could occur prior to the Company’s fiscal year end.

Note 14. Subsequent Event

On August 14, 2006, a subsidiary of the Company agreed to acquire the payment systems business of Trintech Group PLC (“Trintech”). Under the terms of the Agreement, the subsidiary will pay Trintech $12.1 million cash for all of the outstanding shares of a newly-formed subsidiary which, prior to closing, will hold the assets and liabilities of the payment systems business of Trintech. The purchase price is subject to adjustment based on the working capital of the business and other accruals at the closing date. Trintech’s board of directors has approved the sale and is expected to close on September 1, 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 Quarterly Report on 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 our 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 Quarterly Report on Form 10-Q. Unless required by law, we expressly disclaim any obligation to update publicly any forward-looking statements, whether as result of new information, future events or otherwise.

This management’s discussion and analysis describes certain trends affecting our business and financial performance. While certain of these trends may be affected by the proposed acquisition of Lipman, the discussion does not, except as expressly indicated, address the effect of these trends on Lipman or on the combined company following the completion of our proposed acquisition of Lipman.

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 25-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 historically have been higher because of the relatively lower 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 internet protocol (“IP”) based and wireless communications, growth of personal identification number (“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

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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 July 31, 2006, included 38 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 Europay Mastercard Visa (“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 our Vx Solutions, which by virtue of a superior, uni-processor design, generates a gross profit percentage in excess of the solution that we 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 will grow.

On April 10, 2006, we entered into a definitive agreement to acquire Lipman. At the effective time of the acquisition, Lipman shareholders will receive at their election, for each ordinary Lipman share (par value per share: 1 New Israeli Shekel) issued and outstanding immediately prior to the effective time of the acquisition (i) one half (0.50) share of our Common Stock and (ii) $12.804 in cash, as reduced by the per share value of a special cash dividend of $1.50 to be paid by Lipman prior to closing of the acquisition. The amount of the special cash dividend has not been finally determined. Alternatively, Lipman shareholders may elect to receive for each Lipman share either $27.57 in cash as reduced by the special cash dividend to be paid by Lipman or 0.9336 shares of our stock as adjusted by the per share value of the special cash dividend to be paid by Lipman. The cash and stock elections are subject to proration such that we will issue in the aggregate approximately 13.3 million shares of our stock and pay approximately $342 million, determined as $12.804 as reduced by the aggregate amount of the special cash dividend to be paid by Lipman times the number of outstanding Lipman ordinary shares. The amount of stock consideration as of the effective date of the merger is fixed at 0.50 of the total number of Lipman shares outstanding on the effective date. The acquisition is subject to satisfying a number of closing conditions, including shareholder and regulatory approvals, which could occur prior to our fiscal year end.

We expect to complete the acquisition of the payment systems business of Trintech Group PLC on September 1, 2006. Under the terms of the Agreement, we paid $12.1 million cash for the shares of a newly-formed company which held Trintech’s payment systems business. The purchase price is subject to adjustment based on the working capital of the business and other accruals at the closing date.

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 July 31,										Nine Months Ended July 31,
					Change			Change							Change			Change
	2006		2005		In Dollars			In Percent			2006		2005		In Dollars			In Percent
Systems Solutions	$	131,960	$	111,388		$	20,572		18.5	%	$	378,781	$	314,791		$	63,990		20.3	%
Services	15,657		14,313			1,344			9.4	%	45,656		40,086			5,570			13.9	%
Total	$	147,617	$	125,701		$	21,916		17.4	%	$	424,437	$	354,877		$	69,560		19.6	%

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System Solutions

System Solutions net revenues increased $20.6 million, or 18.5%, to $132.0 million in the quarter ended July 31, 2006, from $111.4 million in the quarter ended July 31, 2005. System Solutions net revenues comprised 89.4% of total net revenues in the quarter ended July 31, 2006, as compared to 88.6% in the quarter ended July 31, 2005.

North America System Solutions net revenues for the quarter ended July 31, 2006 increased $13.5 million, or 22.9%, to $72.4 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. Other factors included demand for a check processing system which is still winding down and expected to terminate early next year, strength in Canada and greater demand for solutions which address the lower priced single application financial system market. Partially offsetting this growth was a decline in demand from quick service restaurant, or QSR, customers, due to some large rollouts to corporate owned stores of major customers in the quarter ended July 31, 2005.

International System Solutions net revenues for the quarter ended July 31, 2006 increased $7.0 million, or 13.3%, to $59.5 million. The increase was largely attributable to increased sales in Europe, and to a lesser degree in Latin America. Factors driving this increase included the broadened European customer acceptance of our Vx Solutions, including our second generation wireless solutions and strength in Brazil and Argentina. This increase was partially offset by a decline in Asia sales, particularly in China, due to increased competition. We expect that International System Solutions net revenues, relative to North America System Solutions net revenues, will increase assuming the completion of the acquisition of Lipman, given the strength of Lipman’s international business. We expect that International System Solutions net revenues will thereafter continue to grow at a 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.

The growth in System Solutions net revenues for the first nine months ended July 31, 2006 occurred in both International and North America. International System Solutions net revenues for the nine months ended July 31, 2006 increased $35.0 million, or 25.0%, to $175.3 million. Factors driving this increase included the desire of emerging market countries to improve collection of VAT, broaden customer acceptance of our Vx Solutions, including our second generation wireless solutions and the need for customers to comply with EMV requirements. North America System Solutions net revenues for the nine months ended July 31, 2006 increased $29.0 million, or 16.6%, to $203.5 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 and greater demand for solutions which address the lower priced single application financial system market, demand for a check processing system which is still winding down and expected to terminate early next year, and strength in the Canadian marketplace. Partially offsetting this growth was a decline in rollouts to corporate owned stores at major QSR customers.

Services

Services net revenues increased $1.3 million, or 9.4%, to $15.6 million in the quarter ended July 31, 2006, from $14.3 million in the quarter ended July 31, 2005. The increase was entirely in the International segment, primarily driven by direct customers in Brazil and Mexico who received repair and installation services. North America services net revenues were effectively unchanged as additional helpdesk and installation services to North America petroleum customers were offset by decreased installation services to quick service restaurant customers.

Services net revenues increased $5.6 million, or 13.9%, to $45.7 million in the first nine months ended July 31, 2006, from $40.1 million in the first nine months ended July 31, 2005. This growth was driven

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primarily by North America services provided to petroleum and multilane retail customers, partially offset by a decline in services provided to quick service restaurant customers. International services grew because of increased demand for repair and installation services in Latin America and software application services provided to a large European petroleum customer.

Gross Profit

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

	Three Months Ended July 31,						Nine Months Ended July 31,
	Amount				Gross Profit Percentage		Amount				Gross Profit Percentage
	2006		2005		2006	2005	2006		2005		2006	2005
Systems Solutions	$	59,256	$	43,153	44.9%	38.7%	$	167,197	$	122,027	44.1%	38.8%
Services	7,205		7,952		46.0%	55.6%	22,265		19,132		48.8%	47.7%
Total	$	66,461	$	51,105	45.0%	40.7%	$	189,462	$	141,159	44.6%	39.8%

Gross profit on System Solutions, including amortization of purchased core and developed technology assets, increased $16.1 million, or 37.3%, to $59.3 million in the quarter ended July 31, 2006, from $43.2 million in the quarter ended July 31, 2005. Gross profit on System Solutions represented 44.9% of System Solutions net revenues in the quarter ended July 31, 2006, up from 38.7% in the quarter ended July 31, 2005. Amortization of purchased core and developed technology assets was 0.8% of Systems Solutions net revenues in the quarter ended July 31, 2006, compared to 1.4% in the quarter ended July 31, 2005, as several purchased core and developed technology assets became fully amortized and System Solutions revenues grew. International gross profit percentage improved as volume increased in the Vx product line translated into lower unit components prices from suppliers. In addition, there was a favorable product mix shift towards wireless products, where the gross profit percentages are generally higher, relative to landline products. In addition, there was a favorable regional mix impact due to the shift in sales to Europe, where gross profit was generally higher, relative to Latin America and Asia. Other positive impacts on gross profit percentage included a decrease in warranty provision due to improved warranty cost experience, the non recurrence of 2005 obsolescence charges of legacy products driven by our customers’ adoption of the Vx product line and changes in absorption of supply chain overhead due to the increase of inventory. Partially offsetting these increases was a decrease in the North America gross profit percentage due to increased sales of a check processing system which has a low gross profit percentage.

Gross profit on System Solutions, including amortization of purchased core and developed technology assets, increased $45.2 million, or 37.0%, to $167.2 million for the first nine months ended July 31, 2006 from $122.0 million for the nine months ended July 31, 2005. Gross profit on System Solutions represented 44.1% of System Solutions, net revenues for the nine months ended July 31, 2006 up from 38.8% for the nine months ended July 31, 2005. Amortization of purchased core and developed technology assets was 1.1% of Systems Solutions net revenues in the nine months ended July 31, 2006, compared to 1.7% in the nine months ended July 31, 2005, as several purchased core and developed technology assets became fully amortized and System Solutions revenues grew. Gross profit percentage improved in both North America and International. In North America, the improvement in gross profit percentage was primarily due to a change in product mix as sales of higher margin IP solutions increased. Internationally, demand for wireless and landline Vx Solutions, designed with a lower manufacturing cost than the previous generation System Solutions, resulted in an improved gross profit percentage. Gross profit percentage for the first nine months ended July 31, 2006 also benefited due to the non-recurrence of obsolescence expenses associated with a product transition and lower warranty provisions due to improved warranty cost experience.

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Gross profit on Services decreased $0.8 million, or 9.4%, to $7.2 million in the quarter ended July 31, 2006, from $8.0 million in the quarter ended July 31, 2005. Gross profit on Services represented 46.0% of Services net revenues in the quarter ended July 31, 2006, as compared to 55.6% in the quarter ended July 31, 2005. This decline was due to the shift of revenues towards Latin America, which generally has a lower gross profit percentage relative to North America, and to less profitable custom software application projects in North America.

Gross profit on Services increased $3.1 million, or 16.4%, to $22.3 million for the first nine months ended July 31, 2006, from $19.1 million in the same period of fiscal 2005. Gross profit represented 48.8% of Services net revenues in the nine months ended July 31, 2006, as compared to 47.7% for the same periods in fiscal 2005. This improvement was due to a favorable shift in mix towards helpdesk and onsite maintenance service to petroleum customers. International services gross profit percent increased slightly due to operational improvements.

We expect the gross profit percentages, both System Solutions and Services, of our International segment to continue to be lower than the comparable gross profit percentages of our North America segment.

Research and Development Expense

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

	Three Months Ended July 31,									Nine Months Ended July 31,
					Change			Change						Change			Change
	2006		2005		In Dollars			In Percent		2006		2005		In Dollars			In Percent
Research and development	$	11,726	$	10,400		$	1,326		12.8%	$	35,354	$	30,351		$	5,003		16.5%
Percentage of net revenues	7.9%		8.3%							8.3%		8.6%

R&D expenses in the quarter ended July 31, 2006 increased compared to the quarter ended July 31, 2005, due to $1.5 million of increased expenses to support Vx 670 pay at the table, QX720 outdoor unattended payment and other initiatives and $0.3 million of expenses to develop applications for financial and retail customers, offset by $0.7 million of decreased international expenses due to the non-recurrence of certification expenses to support the 2005 introduction of the Vx platform and wireless products. In addition, $0.1 million of increased expenses was due to stock-based compensation.

R&D expenses in the first nine months ended July 31, 2006 increased compared to the same period ended July 31, 2005, due to $2.9 million of increased expenses to support Vx 670 pay at the table, MX870 multi-lane, QX720 outdoor unattended payment and other initiatives, $1.0 million of expenses from the inclusion of GO Software, $0.8 million of expenses to develop applications for financial and retail customers, offset by $0.3 million of decreased international expenses due to the non-recurrence of certification expenses to support the 2005 introduction of the Vx platform and wireless products. In addition,$ 0.5 million of increased expenses was due to stock-based compensation.

We expect R&D expenses to remain, over time, in a range between 7% and 8% of net revenues for the foreseeable future assuming the completion of the proposed acquisition of Lipman, as Lipman R&D expenses, as a percentage of revenue, are generally lower than VeriFone R&D expenses and the two companies would be able to rationalize their product roadmaps to some extent

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Sales and Marketing Expense

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

	Three Months Ended July 31,									Nine Months Ended July 31,
					Change			Change						Change			Change
	2006		2005		In Dollars			In Percent		2006		2005		In Dollars			In Percent
Sales and marketing	$	14,181	$	13,334		$	847		6.4%	$	42,786	$	38,310		$	4,476		11.7%
Percentage of net revenues	9.6%		10.6%							10.1%		10.8%

Sales and marketing expenses increased for the quarter ended July 31, 2006 compared to the quarter ended July 31, 2005 due primarily to $0.7 million of increased international expenses to support increased sales opportunities in emerging markets. In addition, $0.2 million of increased expenses was due to stock-based compensation.

Sales and marketing expenses in the first nine months ended July 31, 2006 increased compared to the same period ended July 31, 2005, due to $1.4 million of increased international expenses, primarily in Europe and Latin America, to support sales growth, $1.1 million increased in corporate sales incentive programs and promotional expenses pertaining to the MX870, Visual Payments launch, Vx product family and wireless initiatives, $0.7 million of increased expenses from the inclusion of GO Software and $0.3 million of increased domestic expenses to address sales opportunities in multi-lane retail and hospitality. An additional$1.0 million of increased expenses was due to stock-based compensation.

We expect sales and marketing expenses assuming the completion of the proposed acquisition of Lipman to continue to decline as a percentage of net revenues, for the foreseeable future, as over time as the higher revenues of the combined companies is expected to create economies of scale in our distribution channel.

General and Administrative Expense

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

	Three Months Ended July 31,										Nine Months Ended July 31,
					Change			Change							Change			Change
	2006		2005		In Dollars			In Percent			2006		2005		In Dollars			In Percent
General and administrative	$	10,936	$	8,116		$	2,820		34.7	%	$	30,627	$	21,607		$	9,020		41.7	%
Percentage of net revenues	7.4%		6.5%								7.2%		6.1%

General and administrative expenses in the quarter ended July 31, 2006 increased compared to the quarter ended July 31, 2005, due to a $1.2 million increase in expenses related to our anticipated compliance with Section 404 of the Sarbanes-Oxley Act of 2002, a $0.6 million increase in executive bonuses, a $0.3 million increase in expense related to planning costs in connection with the proposed acquisition of Lipman and Enterprise Resource Planning system upgrade and a net $0.2 million increase in bad debt expense primarily due to the growth in our current accounts receivable portfolio and associated reserve requirements, and $0.2 million expense related to a Brazilian tax assessment. Partially offsetting these expenses was a $0.3 million reduction of legal expenses in connection with prior patent infringement claims brought by Verve against us and other companies that design manufacture or sell point of electronic payment systems. In addition, $0.3 million of increased expenses was due to stock-based compensation.

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General and administrative expenses in the first nine months ended July 31, 2006 increased compared to the same period ended July 31, 2005, due to a $3.5 million increase in expenses related to the requirements of operating as a public company and our anticipated compliance with Section 404 of the Sarbanes-Oxley Act of 2002, a $1.6 million one-time credit for the favorable resolution of the payroll tax contingency recorded in 2005, a net $1.1 million increase in bad debt expense primarily due to the non-recurrence of 2005 credits associated with the collection of specifically reserved accounts receivables, a $1.2 million increase in executive bonuses, a $0.5 million increased in executive bonuses, a $0.3 million increase in expenses related to planning costs in connection with the proposed acquisition of Lipman and Enterprise Resource Planning system upgrade. In addition, $1.0 million of increased expenses was due to stock-based compensation.

We expect general and administrative expenses for the next several quarters to increase due to expenses associated with the planned upgrade of our Enterprise Resource Planning system and the planned integration of Lipman.

Amortization of Purchased Intangible Assets

Amortization of purchased intangible assets remained flat at $1.2 million in the third quarter of fiscal 2006 and fiscal 2005. For the first nine months of fiscal 2006, amortization of purchased intangible assets decreased $0.3 million to $3.5 million from $3.8 million for the comparable period in fiscal 2005. The decrease for the period was 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 $3.4 million in the third quarter of fiscal 2006 increased from $3.1 million in the third quarter of fiscal 2005. The increase in the third quarter of fiscal 2006 was attributable to the increase in the interest rate of our Term B Loan. For the first nine months of fiscal 2006, interest expense decreased $2.1 million to $9.9 million from $12.0 million for the comparable period in fiscal 2005. The decrease for the first nine months of fiscal 2006 was attributable to the repayment of our Second Lien Loan in May 2005 with the proceeds that we received from our initial public offering. Assuming the completion of the proposed acquisition of Lipman, we expect our interest expense to increase as a result of our higher borrowing levels.

Interest Income

Interest income of $0.9 million in the third quarter of fiscal 2006 increased from $88,000 in the third quarter of fiscal 2005. For the first nine months of fiscal 2006, interest income increased $2.4 million to $2.6 million from $200,000 for the comparable period in fiscal 2005. The increase in the three-month and nine-month periods was attributable to our investment of a portion of the proceeds that we received from our secondary offering.

Other Income (Expense), Net

Other expense, net in the third quarter of fiscal 2006 was $195,000 resulting primarily from $354,000 associated with foreign currency contract losses. This was partially offset by foreign currency transaction gains of $137,000. For the first nine months of fiscal 2006, other income, net was $71,000 resulting primarily from $ 309,000 associated with foreign currency transaction gains and a $288,000 refund associated with an Indian customs appeal resolution. This was partially offset by foreign currency contract losses of $543,000. Other expenses, net in the third quarter of fiscal 2005 and the first nine months of fiscal 2005 were $6.1 million and $6.3 million, respectively, resulting primarily from expensing the unamortized

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portion of debt issuance costs of $2.7 million, the prepayment premium of $2.2 million associated with the $72.0 million repayment of our secured credit facility, $0.5 million in fees for repricing our Term B Loan and $0.2 million associated with the write-off of debt issuance cost related to the $5.0 million prepayment of our Term B Loan and $0.3 million settlement fee related to patent litigation.

Provision for Income Tax

We recorded a provision for income taxes of $9.0 million and $24.3 million, respectively, for the three and nine months ended July 31, 2006, compared to an income tax expense of $2.4 million and $7.8 million, respectively, for the comparable periods in fiscal 2005. The increase in the provision for both periods is primarily attributable to an increase in our pre-tax income and secondarily to an increase in our effective tax rate. For the third quarter of fiscal 2006, our effective tax rate was 35.0% as compared to 27.1% for the third quarter of 2005. The increase in the tax rate is primarily attributable to the net effect of increases in pre-tax income, a smaller reduction in our valuation allowance for deferred tax assets, expiration of the federal research credit offset by increases in the amount of income considered permanently reinvested in foreign operations and subject to lower foreign tax rates.

As of July 31, 2006, we have recorded $31.7 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 substantially complete. Certain minor implementation steps were postponed pending the evaluation of the integration of our company with Lipman. We continue to expect that our long-term average worldwide statutory tax rate will be in the low thirty percent range.

Segment Information

The following table reconciles segmented net revenues and operating income to totals for the three and nine months ended July 31, 2006 and 2005 (in thousands). 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 July 31,													Nine Months Ended July 31,
							Change				Change									Change				Change
	2006			2005			In Dollars				In Percent			2006			2005			In Dollars				In Percent
Revenues
North America	$	85,404		$	72,063			$	13,341			18.5	%	$	243,045		$	210,154			$	32,891			15.7	%
International	62,289			53,846				8,443				15.7	%	181,791			145,218				36,573				25.2	%
Corporate	(76		)	(208		)		132				(63.5	)%	(399		)	(495		)		96				(19.4	)%
Total revenues	$	147,617		$	125,701			$	21,916			17.4	%	$	424,437		$	354,877			$	69,560			19.6	%
Operating income:
North America	$	32,763		$	28,203			$	4,560			16.2	%	$	94,268		$	73,569			$	20,699			28.1	%
International	16,819			10,296				6,523				63.4	%	45,052			25,858				19,194				74.2	%
Corporate	(21,123		)	(20,402		)		(721		)		3.5	%	(62,102		)	(52,344		)		(9,758		)		18.6	%
Total operating income	$	28,459		$	18,097			$	10,362			57.3	%	$	77,218		$	47,083			$	30,135			64.0	%

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Net revenues growth in North America for the three months ended July 31, 2006 compared to the quarter ended July 31, 2005 was primarily driven by an increase of approximately $13.5 million in System Solutions net revenues. Net revenues growth in North America for the first nine months ended July 31, 2006 compared to the same period of fiscal 2005 was primarily driven by an increase of approximately $29.0 million in System Solutions net revenues and $3.8 million in Services net revenues. See “Results of Operations—Net Revenues.”

System Solutions net revenues in International grew approximately $7.1 million and $35.0 million for the three and nine months ended July 31, 2006, respectively. Services net revenues in International were essentially unchanged. See “Results of Operations—Net Revenues.”

The increase in operating income for North America for the quarter ended July 31, 2006 compared to the quarter ended July 31, 2005 was mainly due to higher net revenues and a lower gross profit percentage as a result of unfavorable product mix in System Solutions and to a lesser extent Services and higher operating expenses.

The increase in operating income for North America for the nine months ended July 31, 2006 compared to the nine months ended July 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 to a lesser extent Services, which was partially offset by higher operating expenses.

The increase in International operating income for the quarter ended July 31, 2006 compared to the quarter ended July 31, 2005 was mainly due to increased net revenues and a higher gross profit percentage, partially offset by higher operating expenses. The gross profit percentage improvement was due primarily to an improved product mix and a revenue shift towards Europe, which generally has a higher gross profit, relative to Latin America and Asia.

The increase in International operating income for the nine months ended July 31, 2006 compared to the nine months ended July 31, 2005 was mainly due to increased net revenues and a higher gross profit percentage as a result of the introduction of  higher margin Vx wireless solutions and favorable product mix, 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. As of July 31, 2006 our primary sources of liquidity were cash and cash equivalents of $77.6 million, marketable securities of $14.5 million, our $30 million unused revolving credit facility, which is not currently used and cash generated from operations.

Our operations provided cash of $13.6 million in the first nine months of fiscal 2006, which was attributable to net income of $45.6 million and depreciation, amortization and other non-cash charges of $15.7 million, offset by $47.7 million used by net operating assets and liabilities. The principal uses of net operating assets and liabilities in the first nine months of fiscal 2006 were largely attributable to an increase in accounts receivable of $19.1 million, an increase in inventories of $40.3 million, an increase in prepaid expenses and other current assets of $1.2 million, an increase in other assets of $0.9 million, an increase in deferred tax assets of $2.7 million, a decrease in accrued warranty of $0.8 million, a decrease in accrued expenses and other liabilities of $1.5 million and a tax benefit from stock-based compensation of $2.7 million. This was partially offset by an increase in accounts payable of $15.4 million, an increase in accrued compensation of $0.2 million, an increase in income tax payable of $0.4 million and an increase in deferred revenue, net of $5.5 million.

Our investing activities used $5.4 million of net cash during the first nine months of fiscal 2006. Cash generated by the sale of marketable securities was $127.3 million, partially offset by investments in marketable securities of $125.0 million, capitalization of software development of $1.7 million, purchase of

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other assets of $0.7 million, purchase of equipment and improvements of $2.8 million and transaction costs for pending acquisitions of $2.5 million.

Our financing provided cash of $3.3 million for the first nine months of fiscal 2006, primarily due to a tax benefits related to exercise of stock options of $2.7 million and proceeds from stock options exercises of $2.1 million, partially offset by principal payments of $1.4 million on the Term B loan and repayment of $0.1 million on capital leases.

We expect our inventory levels, given the announcement of the Lipman acquisition and the associated change in composition of demand, will necessitate increased inventory levels for the time being.

In connection with our proposed acquisition of Lipman, we expect to pay approximately $342 million in cash, as reduced by the amount of the special cash dividend to be paid by Lipman prior to the closing of such acquisition. To fund the acquisition of Lipman, we intend to enter into a new secured credit facility with a syndicate of financial institutions, which consists of a $500 million Term B facility and a revolving credit facility permitting borrowings of up to $40 million, which will replace our existing debt facility. It is expected that the new credit facility will have terms and covenants substantially similar to the existing credit facility. If and when the existing facility is retired, we will write-off any remaining unamortized debt issuance cost.

In connection with our proposed acquisition of Trintech, we expect to pay approximately $12.1 million cash for all of the outstanding shares of a newly-formed subsidiary which will hold substantially all of the assets and liabilities of the payment systems business of Trintech.

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 July 31, 2006 (in thousands):

			Less than			1-3		3-5		More than
	Total		1 year			years		years		5 years
Term B loan	$	245,005		$	14,840	$	29,388	$	200,777		$	—
Capital lease obligation	133			71		39		23			—
Operating leases	34,386			6,653		8,610		6,682			12,441
Minimum purchase obligations	46,337			46,337		—		—			—
	$	325,861		$	67,901	$	38,037	$	207,482		$	12,441

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

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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;

·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 three and nine months ended July 31, 2006 and 2005 is as follows (in thousands):

	Three Months Ended July 31,						Nine Months Ended July 31,
	2006			2005			2006			2005
U.S. GAAP net income	$	16,755		$	6,535		$	45,585		$	21,179
Provision for income taxes	9,009			2,424			24,342			7,833
Interest expense	3,438			3,084			9,914			11,958
Interest income	(938		)	(88		)	(2,552		)	(200		)
Depreciation and amortization of equipment and improvements	881			855			2,532			2,292
Amortization of capitalized software	294			257			892			780
Amortization of purchased intangible assets	2,230			2,758			7,560			9,063
Amortization of step-up in deferred revenue on acquisition	76			208			399			495
Stock-based compensation	1,686			863			3,798			915
Management fees to majority stockholder	—			—			—			125
Loss on debt extinguishment and debt repricing fee	—			5,530			—			5,530
EBITDA as adjusted	$	33,431		$	22,426		$	92,470		$	59,970

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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 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 our consolidated results of operations, financial position or cash flows.

In November 2005, FASB issued FASB Staff Position (“FSP”) FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“FSP 115-1”), which provides guidance on determining when investments in certain debt and equity securities are considered impaired, whether that impairment is other-than-temporary, and on measuring such impairment loss. FSP 115-1 also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. FSP 115-1 is effective for reporting periods beginning after December 15, 2005. Our adoption of FSP 115-1 in the second quarter of fiscal 2006 did not have a material impact on our consolidated results of operations, financial position or cash flows.

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

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

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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, that was filed with the SEC on December 20, 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

There are numerous risks associated with our recent entry into an agreement to acquire Lipman.

On April 10, 2006 we announced that we had entered into an agreement to acquire Lipman in a transaction in which the outstanding shares of Lipman ordinary shares would be exchanged for a combination of VeriFone common stock and cash, as reduced by a special cash dividend and subject to proration.

There are numerous risks associated with our having entered into this agreement, including the following:

We cannot assure you that all conditions to the merger will be completed and the merger consummated.   The merger is subject to the satisfaction of closing conditions, including the approval of our stockholders and Lipman’s shareholders, and we cannot assure you that the merger will be completed. In the event the merger is not completed, we may be subject to many risks, including the costs related to the proposed merger, such as legal, accounting and advisory fees, which must be paid even if the merger is not completed. If the merger is not completed, the market price of our common stock could decline.

Completion of the merger may result in the dilution of our per share operating results.   The completion of the merger may not result in improved per share operating results of VeriFone or a financial condition superior to that which would have been achieved by VeriFone on a stand-alone basis. The merger could fail to produce the benefits that we anticipate, or could have other adverse effects that we currently do not foresee. In addition, some of the assumptions that we have relied upon, such as the achievement of operating synergies, may not be realized. In this event, the merger could result in a reduction of per-share earnings of VeriFone as compared to the per-share earnings that would have been achieved by VeriFone if the merger had not occurred.

If we fail to successfully integrate our operations, the combined company may not realize the potential benefits of the merger.   If the merger is completed, the integration of VeriFone and Lipman will be a time consuming and expensive process and may disrupt our operations if it is not completed in a timely and efficient manner. If this integration effort is not successful, our results of operations could be harmed, employee morale could decline, key employees could leave and customers could cancel existing orders or choose not to place new ones. Following the merger, VeriFone and Lipman must operate as a combined organization utilizing common information and communication systems, operating procedures, financial controls and human resources practices. We may encounter the following difficulties, costs and delays involved in integrating these operations:

·failure to successfully manage relationships with customers and other important relationships;

·failure of customers to accept new services or to continue using the products and services of the combined company;

·difficulties in successfully integrating the management teams and employees of VeriFone and Lipman;

·challenges encountered in managing larger, more geographically dispersed operations;

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·the loss of key employees;

·diversion of the attention of management from other ongoing business concerns;

·inability to migrate both companies to a common enterprise resource planning platform in a timely and cost effective way;

·inability to integrate the two companies’ IT infrastructure;

·potential incompatibility of technologies;

·potential impairment charges incurred to write down the carrying amount of intangible assets generated as a result of the merger; and

·potential incompatibility of business cultures.

If the combined company’s operations after the merger do not meet the expectations of existing customers of VeriFone or Lipman, then these customers may cease doing business with the combined company altogether, which would harm our results of operations and financial condition.

We will incur substantial additional debt in connection with the proposed acquisition of Lipman. We currently expect to pay approximately $342 million in cash, as reduced by the amount of the special cash dividend of $1.50 to be paid by Lipman prior to the closing of such acquisition. To fund the acquisition of Lipman, we intend to enter into a secured credit facility with a syndicate of financial institutions, which consists of a $500 million Term B facility and a revolving credit facility permitting borrowings of up to $40 million, which will replace our existing debt facility. As a result, our total indebtedness will increase. The new secured credit facility is expected to contain a number of customary covenants that will require us to maintain certain specified financial ratios and restrict the ability of our subsidiaries to make distributions, prepay other debt, encumber assets, incur indebtedness or undertake certain other corporate activities. In addition, we expect to pledge substantially all of our assets and properties to secure this debt. If we are unable to comply with any of these covenants, the default could result in the acceleration of our outstanding indebtedness which we would be unable to repay without obtaining alternative financing which may not be available to us under these circumstances.

Costs associated with the merger are difficult to estimate, may be higher than expected and may harm the financial results of the combined company. We will incur substantial direct transaction costs associated with the merger, and additional costs associated with consolidation and integration of operations. If the total costs of the merger exceed estimates or the benefits of the merger do not exceed the total costs of the merger, our financial results could be adversely affected.

Lipman’s principal offices and manufacturing facility and many of its suppliers are located in Israel. Therefore, political, economic and military conditions in Israel directly affect its operations. The expanded VeriFone company cannot predict the effect on it of any increase in the degree of violence against Israel or the effect of military action elsewhere in the Middle East. Recently, hostilities have escalated between Israel and Hamas in the Gaza Strip and between Israel and Hezbollah, based in Lebanon. The future of peace efforts between Israel and its Arab neighbors remains uncertain. Any armed conflicts or political instability in the region would likely negatively affect business conditions and adversely affect the expanded VeriFone company’s results of operations. Furthermore, several countries continue to restrict or ban business with Israel and Israeli companies. These restrictive laws and policies may seriously limit the expanded VeriFone company’s ability to make sales in those countries.

In addition, many employees of Lipman in Israel are obligated to perform at least 30 days and up to 40 days, depending on rank and position, of military reserve duty annually and are subject top being called for active duty under emergency circumstances. If a military conflict or war arises, these individuals could be required to serve in the military for extended periods of time. The operations of Lipman before the

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merger or the expanded VeriFone, after the merger could be disrupted by the absence for a significant period of one or more key employees or a significant number of other employees due to military service. Any disruption in the operations could materially adversely affect the business of Lipman before the merger or the extended VeriFone, after the merger.

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 are unable to produce the quantities of ASICs or microprocessors we require, we would be faced with a shortage of critical components. We also experience from time to time an increase in the lead time for delivery of some of our key components. We may not be able to find alternative sources in a timely manner if suppliers of our key components become unwilling or unable to provide us with adequate supplies of these key components when we need them or increase their prices. The inability to obtain sufficient key components as required, or to develop alternative sources if and as required in the future, or to replace our plastic injection molds used to make the plastic casings for our products in a timely manner if they are damaged or destroyed, could cause delays or reductions in product shipments. This could harm our relationships with our customers and cause our revenues to decline. Even if we are able to secure alternative sources or replace our plastic injection molds in a timely manner, our costs could increase. In the quarter ended July 31, 2006, over half of our component spending was for components we sourced from a single supplier or a small number of suppliers.

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, independent sales organizations (“ISO”), 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 supporting 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.

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We depend on a small number of large customers and the loss of one or more of these customers, or a significant decrease in sales to any of these customers, could significantly reduce revenues and income.

A significant percentage of our net revenues is attributable to a limited number of customers, including distributors and ISOs. In the first nine months of fiscal 2006, our ten largest customers accounted for approximately 34% of our net revenues and sales to First Data Corporation and its affiliates represented 13% 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 less favorable terms, our revenues and income could be materially adversely affected.

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 first nine months of fiscal 2006, 45.5% of our net revenues were generated outside of the United States. We expect this percentage to increase materially following the completion of our proposed acquisition of Lipman. 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 segment 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;

·economic and political instability in foreign countries;

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

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

·changes in a specific country’s or region’s political or economic conditions; and

·greater difficulty in safeguarding intellectual property in areas such as China, Russia and Latin America

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:

·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.

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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. In addition, it is impossible to predict for any future period our proportion of revenues that will result from International sales versus sales in North America. 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 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.

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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 products 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 incurred an obsolescence cost of $2.1 million in the nine months ended July 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 patent, 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

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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 that relates to products supplied to us by a contract manufacturer. The assessment relates to an asserted deficiency of 6.8 million Brazilian reais (approximately $3.1 million) including interest and penalties. The tax assessment was based on a clerical error in which our Brazilian subsidiary omitted the required tax exemption number on its invoices. On May 25, 2005, we had an administrative hearing with respect to this audit. 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

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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.

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.

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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 our annual or interim financial statements would not be prevented or detected by our 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 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.

While we believe we comply with environmental laws and regulations, we are still exposed to potential risks associated with environmental laws and regulations

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 and a European Union directive on Waste Electrical and Electronic Equipment (WEEE). RoHS sets a framework for producers’ obligations in relation to manufacturing (including the amounts of named hazardous substances contained in products sold) and WEEE sets a framework for treatment, labeling, recovery and recycling of electronic products in the European Union which 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 WEEE directive has been adopted by the European Commission, national legislation to implement the directive is still pending in some of the member states of the European Union. In

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addition, similar legislation could be enacted in other jurisdictions, including in the United States. If we do not comply with the RoHS and WEEE directives, 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 be assured that the costs to comply with RoHS and WEEE, 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;

·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

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of developing or producing our solutions. New products designed to meet any new standards need to be introduced to the market and ordinarily need to be certified by the credit card associations and our customers before being purchased. The certification process is costly and time consuming and increases the amount of time it takes to sell our products. Our business and financial condition could be adversely affected if we cannot comply with new or existing industry standards, or obtain or retain necessary regulatory approval or certifications in a timely fashion, or if compliance results in increasing the cost of our products. Selling products that are non-compliant may result in fines against us or our customers, which we may be liable to pay.

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 July 31, 2006, VeriFone, Inc. had outstanding indebtedness, excluding capital leases, of approximately $181.2 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.

Our indebtedness and debt service obligations will increase under the new secured credit facility, which may adversely affect our cash flow, cash position and stock price.

We intend to fulfill our debt service obligations under the new secured credit facility from existing cash, investments and operations. In the future, if we are unable to generate cash or raise additional cash financings sufficient to meet these obligations and needs to use more of our existing cash than planned or to liquidate investments in order to fund these obligations, it may have to delay or curtail the development and or the sales and marketing of new payment systems.

Our new indebtedness could have significant additional negative sequences, including, without limitation:

·requiring the dedication of a significant portion of our expected cash flow to service the indebtedness, thereby reducing the amount of expected cash flow available for other purposes, including capital expenditures;

·increasing our vulnerability to general adverse economic conditions;

·limiting our ability to obtain additional financing; and

·placing us at a possible competitive disadvantages to less leveraged competitors and competitors that have better access to capital resources.

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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 beneficially owns or controls shares representing, in the aggregate, an approximately 28.6% voting interest in our company and has two of the eight 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 control 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 or control 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.

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

Two principals of GTCR serve on our board of directors, which currently has eight 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;

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·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

·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 the price of our common stock may 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 nor do we issue or hold leveraged derivative financial instruments.

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, we purchased a two-year interest rate cap for $285,000 with a notional amount of $50 million, under which we will receive interest payments if the three-month LIBOR rate exceeds 4%. In March 2005, we 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 we will receive interest payments if the three-month LIBOR rate exceeds 5%. These two interest rate caps both expired in July 2006.

For the three and nine months ended July 31, 2006, we received interest of $157,000 and $269,000 as a result of the three months LIBOR rate on the Term B Loan exceeding 4% and 5%. 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 $1.8 million.

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

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 July 31, 2006, we had no foreign currency forward contracts outstanding. As of August 1, 2006, we had entered into foreign currency forward contracts to sell Australian dollars, British pounds, Mexican pesos and Euros with notional amounts of $2.4 million, $3.3 million, $4.4 million and $2.2 million, respectively. If we chose not to enter into foreign currency forward contracts to hedge against these exposures and if the Euro, Australian dollar, British pounds and Mexican pesos real were to devalue 5% to 10% against the U.S. dollar, results of operations would include a foreign exchange loss of $0.6 million to $1.2 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.

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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.

During the third quarter of our fiscal year ending October 31, 2006, we implemented the following changes to internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934):

·enhanced the secondary review for certain sales orders to ensure proper accounting;

·issued additional formal accounting policies and enhanced processes surrounding the recording of certain transactions for the purposes of enhancing internal controls.

These actions represent management’s continued emphasis to adopt internal control related to developing business needs and to enhance the internal control environment as management continues to prepare for reporting on our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002.

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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 that relates to products supplied to us by a contract manufacturer. The assessment relates to an asserted deficiency of 6.8 million Brazilian reais (approximately $3.1 million) including interest and penalties. The tax assessment was based on a clerical error in which 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 are likely to prevail in the proceedings relating to this assessment. On May 25, 2005, we had an administrative hearing with the Brazilian Tax Authority 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: September 1, 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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