UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(mark one)

þ		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the Quarterly Period Ended September 30, 2007

o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the transition period from            to           .

MONEYGRAM INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		16-1690064 (I.R.S. Employer Identification No.)
1550 Utica Avenue South, Suite 100, Minneapolis, Minnesota (Address of principal executive offices)		55416 (Zip Code)

(952) 591-3000
(Registrant’s telephone number, including area code)

Not applicable
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ      No 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. (Check one):

Large accelerated filer þ      Accelerated filer o      Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o      No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of November 2, 2007, 82,647,173 shares of Common Stock, $0.01 par value, were outstanding.

 

 

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets

Consolidated Statements of Income

Consolidated Statements of Comprehensive Income

Consolidated Statements of Cash Flows

Consolidated Statements of Stockholders’ Equity

Notes to Consolidated Financial Statements

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Item 4. Controls and Procedures

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Item 1A. Risk Factors

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Item 6. Exhibits

Signatures

Exhibit Index

Section 302 Certification of Chief Executive Officer

Section 302 Certification of Chief Financial Officer

Section 906 Certification of Chief Executive Officer

Section 906 Certification of Chief Financial Officer

PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

MONEYGRAM INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

		September 30,				December 31,
		2007				2006
(Amounts in thousands, except share and per share data)
ASSETS
Cash and cash equivalents		$	—			$	—
Cash and cash equivalents (substantially restricted)			1,152,993				973,931
Receivables (substantially restricted)			1,717,464				1,758,682
Trading investments (substantially restricted)			62,300				145,500
Available for sale investments (substantially restricted)			5,260,296				5,690,600
Property and equipment			164,459				148,849
Deferred tax assets			152,742				11,677
Derivative financial instruments			7,878				24,191
Intangible assets			12,817				15,453
Goodwil			421,078				421,316
Other assets			91,451				85,938
Total assets		$	9,043,478			$	9,276,137
LIABILITIES
Payment service obligations		$	7,907,393			$	8,209,789
Debt			347,000				150,000
Derivative financial instruments			10,685				3,490
Pension and other postretirement benefits			105,932				103,947
Accounts payable and other liabilities			187,730				139,848
Total liabilities			8,558,740				8,607,074
COMMITMENTS AND CONTINGENCIES (Note 12)
STOCKHOLDERS’ EQUITY
Preferred shares — undesignated, $0.01 par value, 5,000,000 authorized, none issued			—				—
Preferred shares — junior participating, $0.01 par value, 2,000,000 authorized, none issued			—				—
Common shares — $.01 par value, 250,000,000 shares authorized, 88,556,077 shares issued			886				886
Additional paid-in capital			73,589				71,900
Retained income			785,140				723,106
Unearned employee benefits			(3,744	)			(17,185	)
Accumulated other comprehensive loss			(220,939	)			(6,292	)
Treasury stock: 5,919,016 and 4,285,783 shares at September 30, 2007 and December 31, 2006, respectively			(150,194	)			(103,352	)
Total stockholders’ equity			484,738				669,063
Total liabilities and stockholders’ equity		$	9,043,478			$	9,276,137

See Notes to Consolidated Financial Statements

MONEYGRAM INTERNATIONAL, INC.

		Three Months Ended								Nine Months Ended
		September 30								September 30
		2007				2006				2007				2006
(Amounts and shares in thousands, except per share data)
REVENUE
Fee and other revenue		$	242,743			$	200,894			$	688,409			$	556,862
Investment revenue			102,000				96,406				299,161				297,882
Net securities losses			(3,162	)			(869	)			(2,679	)			(1,728	)
Total revenue			341,581				296,431				984,891				853,016
Fee commissions expense			105,453				83,144				295,744				226,246
Investment commissions expense			64,899				63,520				192,467				185,346
Total commissions expense			170,352				146,664				488,211				411,592
Net revenue			171,229				149,767				496,680				441,424
EXPENSES
Compensation and benefits			49,572				44,753				149,966				128,473
Transaction and operations support			44,277				41,318				128,129				112,615
Depreciation and amortization			13,944				10,419				37,835				28,197
Occupancy, equipment and supplies			11,975				9,314				33,377				26,748
Interest expense			2,202				2,003				6,143				5,925
Total expenses			121,970				107,807				355,450				301,958
Income before income taxes			49,259				41,960				141,230				139,466
Income tax expense			14,967				11,922				44,740				41,787
NET INCOME		$	34,292			$	30,038			$	96,490			$	97,679
Basic earnings per share		$	0.42			$	0.36			$	1.16			$	1.16
Diluted earnings per share		$	0.41			$	0.35			$	1.15			$	1.13
Average outstanding common shares			82,488				84,298				82,956				84,468
Additional dilutive shares related to stock-based compensation			963				1,501				1,183				1,684
Average outstanding and potentially dilutive common shares			83,451				85,799				84,139				86,152

See Notes to Consolidated Financial Statements

MONEYGRAM INTERNATIONAL, INC.

		Three Months Ended								Nine Months Ended
		September 30								September 30
	2007				2006				2007				2006
(Amounts in thousands)
NET INCOME		$	34,292			$	30,038			$	96,490			$	97,679
OTHER COMPREHENSIVE (LOSS) INCOME
Net unrealized (losses) gains on available-for-sale securities:
Net holding (losses) gains arising during the period, net of tax (benefit) expense of ($88,785) and $22,689 for the three months ended September 30, 2007 and 2006, respectively, and ($126,075) and ($8,306) for the nine months ended September 30, 2007 and 2006, respectively			(144,857	)			37,019				(205,699	)			(13,551	)
Reclassification adjustment for net realized losses included in net income, net of tax benefit of $1,202 and $330 for the three months ended September 30, 2007 and 2006, respectively, and $1,018 and $657 for the nine months ended September 30, 2007 and 2006, respectively			1,961				539				1,661				1,071
			(142,896	)			37,558				(204,038	)			(12,480	)
Net unrealized (losses) on derivative financial instruments:
Net holding (losses) arising during the period, net of tax (benefit) of ($9,716) and ($10,844), for the three months ended September 30, 2007 and 2006, respectively and ($4,836) and ($4,373) for the nine months ended September 30, 2007 and 2006, respectively			(15,854	)			(17,692	)			(7,891	)			(7,136	)
Reclassifications adjustment for net unrealized (gains) losses included in net income, net of tax (expense) benefit of ($976) and $2,248 for the three months ended September 30, 2007 and 2006, respectively, and ($4,306) and $4,158 for the nine months ended September 30, 2007 and 2006, respectively			(1,592	)			3,667				(7,025	)			6,785
			(17,446	)			(14,025	)			(14,916	)			(351	)
Prior service costs for pension and postretirement benefit plans:
Reclassification of prior service costs for pension and postretirement benefit plans recorded to net income, net of tax benefit of $18 and $54 for the three and nine months ended September 30, 2007, respectively			29				—				88				—
			29				—				88				—
Net actuarial loss for pension and postretirement benefit plans:
Reclassification of net actuarial loss for pension and postretirement benefit plans recorded to net income, net of tax benefit of $417 and $1,251 for the three and nine months ended September 30, 2007, respectively			662				—				1,986				—
			662				—				1,986				—
Unrealized foreign currency translation gains, net of tax expense of $815 and $30 for the three months ended September 30, 2007 and 2006, respectively, and $1,368 and $1,574 for the nine months ended September 30, 2007 and 2006, respectively			1,330				48				2,233				2,569
Other comprehensive (loss) income			(158,321	)			23,581				(214,647	)			(10,262	)
COMPREHENSIVE (LOSS) INCOME		$	(124,029	)		$	53,619			$	(118,157	)		$	87,417

See Notes to Consolidated Financial Statements.

MONEYGRAM INTERNATIONAL, INC.

		Three Months Ended								Nine Months Ended
		September 30								September 30
	2007				2006				2007				2006
(Amounts in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	34,292			$	30,038			$	96,490			$	97,679
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization			13,944				10,419				37,835				28,197
Investment impairment charges			4,629				1,091				6,124				3,529
Net gain on sale of investments			(1,467	)			(222	)			(3,445	)			(1,801	)
Net amortization of investment discounts			(3,895	)			(2,773	)			(12,989	)			(5,721	)
Provision for uncollectible receivables			2,828				1,518				6,780				2,763
Other non-cash items, net			3,835				77				11,214				(1,570	)
Changes in foreign currency translation adjustments			1,330				48				2,233				2,569
Changes in other assets			(8,039	)			(1,986	)			(5,288	)			723
Changes in accounts payable and other liabilities			11,936				6,053				21,917				2,784
Total adjustments			25,101				14,225				64,381				31,473
Change in cash and cash equivalents (substantially restricted)			(161,391	)			(98,608	)			(166,296	)			(43,823	)
Change in trading investments, net (substantially restricted)			58,900				(55,575	)			83,200				33,350
Change in receivables, net (substantially restricted)			55,140				12,052				34,439				(178,935	)
Change in payment service obligations			(304,142	)			(316,147	)			(302,396	)			(292,985	)
Net cash used in operating activities			(292,100	)			(414,015	)			(190,182	)			(353,241	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investments classified as available-for-sale			12,112				306,400				321,687				419,886
Proceeds from maturities of investments classified as available-for-sale			148,710				239,261				536,569				625,567
Purchases of investments classified as available-for-sale			(29,391	)			(103,511	)			(758,898	)			(596,252	)
Purchases of property and equipment			(23,431	)			(17,102	)			(53,442	)			(57,299	)
Cash paid for acquisitions			—				5,741				(1,116	)			(7,311	)
Net cash provided by investing activities			108,000				430,789				44,800				384,591
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in credit facilities			197,000				—				197,000				—
Proceeds and tax benefit from exercise of share-based compensation			3,736				4,135				6,867				25,128
Purchase of treasury stock			(12,482	)			(17,504	)			(45,992	)			(46,236	)
Cash dividends paid			(4,154	)			(3,405	)			(12,493	)			(10,242	)
Net cash provided by (used in) financing activities			184,100				(16,774	)			145,382				(31,350	)
CHANGE IN CASH AND CASH EQUIVALENTS			—				—				—				—
CASH AND CASH EQUIVALENTS — Beginning of period			—				—				—				—
CASH AND CASH EQUIVALENTS — End of period		$	—			$	—			$	—			$	—

See Notes to Consolidated Financial Statements

MONEYGRAM INTERNATIONAL, INC.

														Unearned				Accumulated
														Employee				Other				Common
		Common				Additional				Retained				Benefits				Comprehensive				Stock in
(Amounts in thousands, except per share data)		Stock				Capital				Income				and Other				Loss				Treasury				Total
December 31, 2006		$	886			$	71,900			$	723,106			$	(17,185	)		$	(6,292	)		$	(103,352	)		$	669,063
Cumulative effect of adoption of FIN 48											(21,963	)															(21,963	)
Net income											96,490																96,490
Dividends ($0.15 per share)											(12,493	)															(12,493	)
Employee benefit plans							1,689								13,441								(850	)			14,280
Treasury shares acquired																							(45,992	)			(45,992	)
Unrealized foreign currency translation adjustment																			2,233								2,233
Unrealized loss on available-for-sale securities, net of tax																			(204,038	)							(204,038	)
Unrealized loss on derivative financial instruments																			(14,916	)							(14,916	)
Amortization of prior service cost for pension and postretirement benefits, net of tax																			88								88
Amortization of unrealized losses on pension and postretirement benefits, net of tax																			1,986								1,986
September 30, 2007		$	886			$	73,589			$	785,140			$	(3,744	)		$	(220,939	)		$	(150,194	)		$	484,738

See Notes to Consolidated Financial Statements

MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES

(Unaudited)

1. Basis of Presentation

The accompanying unaudited consolidated financial statements of MoneyGram International, Inc. (“MoneyGram” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal recurring nature. Operating results for the three and nine month periods ended September 30, 2007 are not necessarily indicative of the results that may be expected for future periods. For further information, refer to the Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

2. Acquisitions

Money Express — On May 31, 2006, MoneyGram completed the acquisition of Money Express S.r.l. (“Money Express”), the Company’s former super agent in Italy. In connection with the acquisition, the Company formed MoneyGram Payment Systems Italy S.r.l., a wholly-owned subsidiary, to operate the former Money Express network. The acquisition provides the Company with the opportunity for further network expansion and more control of marketing and promotional activities in the region.

MoneyGram acquired Money Express for $15.0 million. The acquisition cost included $1.3 million of transaction costs and the forgiveness of $0.7 million of liabilities. The Company has finalized its purchase price allocation, which resulted in a decrease of $0.3 million to goodwill during the second quarter of 2007. Purchased intangible assets of $7.7 million, consisting primarily of agent contracts and a non-compete agreement, will be amortized over useful lives ranging from three to five years. Goodwill of $16.7 million was recorded and assigned to the Company’s Global Funds Transfer segment.

The operating results of Money Express subsequent to May 31, 2006 are included in the Company’s Consolidated Statements of Income. The financial impact of the acquisition is not material to the Consolidated Balance Sheets or Consolidated Statements of Income.

ACH Commerce — The Company purchased ACH Commerce in April 2005 for $8.5 million, of which $1.1 million was to be paid upon the second anniversary of the acquisition. Based on the terms of the acquisition agreement, the Company paid this amount during the second quarter of 2007.

Subsequent Event — On October 1, 2007, the Company acquired PropertyBridge, Inc. (“PropertyBridge”) for $28.0 million, subject to certain post-closing adjustments and a potential earn-out payment of up to $10.0 million contingent on PropertyBridge’s performance during 2008. PropertyBridge is a provider of electronic payment processing services for the real estate management industry and offers a complete solution to the resident payment cycle, including the ability to electronically accept deposits and rent payments. Residents can pay rent online, by phone or in person and set up recurring payments. PropertyBridge will be a component of the Company’s Global Funds Transfer segment.

3. Unrestricted Assets

The Company is regulated by various state agencies which generally require us to maintain liquid assets and investments with an investment rating of A or higher in an amount generally equal to the payment service obligation for those regulated payment instruments, namely teller checks, agent checks, money orders and money transfers. Consequently, a significant amount of cash and cash equivalents, receivables and investments are restricted to satisfy the liability to pay the face amount of regulated payment service obligations upon presentment. The Company is not regulated by state agencies for payment service obligations resulting from outstanding cashier’s checks. However, the Company restricts a portion of the funds related to these payment instruments due to contractual arrangements and Company policy. The Company also maintains several special purpose entities for the benefit of our official check customers in which we are required to hold investments with a value sufficient to cover the clearance of items. Assets restricted for regulatory or contractual reasons are not available to satisfy working capital or other financing requirements. The regulatory and contractual requirements do not require the Company to specify individual assets held to meet the Company’s payment service obligations, nor is the Company required to deposit specific assets into a trust, escrow or other special account. Rather, the Company must maintain a pool of liquid assets. No third party places limitations, legal or otherwise, on the Company regarding the use of its individual liquid assets. The Company is able to withdraw, deposit or sell its individual liquid assets at will, with no prior notice or penalty, provided the Company maintains a total pool of liquid assets sufficient to meet the regulatory and contractual requirements.

The Company has unrestricted cash and cash equivalents, receivables and investments to the extent those assets exceed all payment service obligations. These amounts are generally available for use by the Company. However, management considers a portion of these amounts as providing additional assurance that regulatory and other requirements are met during the normal fluctuations in the value of investments. The following table shows the total amount of unrestricted assets at September 30, 2007 and December 31, 2006, respectively:

		September 30,				December 31,
(Amounts in thousands)		2007				2006
Cash and cash equivalents		$	1,152,993			$	973,931
Receivables, net			1,717,464				1,758,682
Trading investments			62,300				145,500
Available-for-sale investments			5,260,296				5,690,600
			8,193,053				8,568,713
Amounts restricted to cover payment service obligations			(7,907,393	)			(8,209,789	)
Unrestricted assets		$	285,660			$	358,924

4. Investments (Substantially Restricted)

At September 30, 2007 and December 31, 2006, no investments were classified as held-to-maturity. Trading investments, which consist of auction rate securities, have contractual maturities in the year 2049, with auction dates typically 28 days after the date the Company purchases the security. The amortized cost and fair value of available-for-sale investments were as follows at September 30, 2007:

						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
(Amounts in thousands)		Cost				Gains				Losses				Value
Obligations of states and political subdivisions		$	595,981			$	18,851			$	(188	)		$	614,644
Commercial mortgage-backed securities			355,178				2,992				(20,684	)			337,486
Residential mortgage-backed securities			1,497,590				4,025				(24,664	)			1,476,951
Other asset-backed securities			2,444,042				16,399				(281,161	)			2,179,280
U.S. government agencies			386,992				1,242				(1,612	)			386,622
Corporate debt securities			249,743				4,392				(6,637	)			247,498
Preferred and common stock			20,175				5				(2,365	)			17,815
Total		$	5,549,701			$	47,906			$	(337,311	)		$	5,260,296

The amortized cost and fair value of available-for-sale investments were as follows at December 31, 2006:

						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
(Amounts in thousands)		Cost				Gains				Losses				Value
Obligations of states and political subdivisions		$	765,525			$	25,006			$	(490	)		$	790,041
Commercial mortgage-backed securities			585,611				6,659				(2,148	)			590,122
Residential mortgage-backed securities			1,623,220				3,876				(23,219	)			1,603,877
Other asset-backed securities			1,992,164				36,920				(7,839	)			2,021,245
U.S. government agencies			342,749				2,564				(6,589	)			338,724
Corporate debt securities			311,465				7,745				(470	)			318,740
Preferred and common stock			30,175				13				(2,337	)			27,851
Total		$	5,650,909			$	82,783			$	(43,092	)		$	5,690,600

In rating the securities in its investment portfolio, the Company uses ratings from Moody’s Investors Service (“Moody’s”), Standard & Poors (“S&P”) and Fitch Ratings (“Fitch”). If the rating agencies have split ratings, the Company uses the highest rating from either Moody’s or S&P. Securities issued or backed by U.S. government agencies are included in the AAA rating category. Investment grade is defined as a security having a Moody’s equivalent rating of Aaa, Aa, A or Baa or an S&P or Fitch equivalent rating of AAA, AA, A or BBB. At September 30, 2007 and December 31, 2006, the Company’s investment portfolio consisted of the following ratings:

		September 30, 2007												December 31, 2006
		Number of				Fair				% of Total				Number of				Fair				% of Total
(Amounts in thousands)		Securities				Value				Portfolio				Securities				Value				Portfolio
AAA, including U.S. agencies			301				2,719,761				52	%			324				2,999,500				53	%
AA			188				1,303,232				25	%			173				1,233,254				22	%
A			142				999,961				19	%			141				1,206,583				21	%
BBB			12				88,361				1	%			10				58,009				1	%
Below investment grade			54				148,981				3	%			56				193,254				3	%
			697			$	5,260,296								704			$	5,690,600

From July 1, 2007 through October 31, 2007, 33 securities were downgraded and 11 securities were upgraded by one or more rating agencies. The rating agencies are continuing to review the credit ratings for all securities, particularly asset-backed securities. The Company does not believe the ratings changes have a material impact on the fair value of the securities as of September 30, 2007.

The amortized cost and fair value of available-for-sale securities at September 30, 2007, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities as borrowers may have the right to call or prepay obligations, sometimes without call or prepayment penalties. Maturities of mortgage-backed and other asset-backed securities depend on the repayment characteristics and experience of the underlying obligations.

		Amortized				Fair
(Amounts in thousands)		Cost				Value
In one year or less		$	10,161			$	10,163
After one year through five years			466,967				473,562
After five years through ten years			528,904				541,250
After ten years			226,684				223,789
Mortgage-backed and other asset-backed securities			4,296,810				3,993,717
Preferred and common stock			20,175				17,815
Total		$	5,549,701			$	5,260,296

At September 30, 2007 and December 31, 2006, net unrealized losses of $289.4 million ($179.4 million net of tax benefit) and gains of $39.7 million ($24.6 million net of tax expense), respectively, are included in the Consolidated Balance Sheets in “Accumulated other comprehensive loss.” During the three and nine months ended September 30, 2007, losses of $2.0 million and $1.7 million, respectively, were reclassified from “Accumulated other comprehensive loss” to earnings in connection with the sales and maturities of the underlying securities, compared to losses of $0.5 million and $1.1 million for the three and nine months ended September 30, 2006, respectively.

Gross realized gains and losses on sales of investments, using the specific identification method, and other-than-temporary impairments were as follows:

		Three Months Ended								Nine Months Ended
		September 30								September 30
(Amounts in Thousands)		2007				2006				2007				2006
Gross realized gains		$	1,467			$	1,552			$	5,396			$	4,399
Gross realized losses			—				(1,330	)			(1,951	)			(2,598	)
Other-than-temporary impairments			(4,629	)			(1,091	)			(6,124	)			(3,529	)
Net securities losses		$	(3,162	)		$	(869	)		$	(2,679	)		$	(1,728	)

Impairments in the three months ended September 30, 2007 related to two investments backed primarily by home equity loans and one security backed by a diversified asset-backed pool, including home equity loans, manufactured housing loans and aircraft leases. One investment backed primarily by home equity loans experienced an adverse change in cash flows as a result of credit rating downgrades in the third quarter of 2007, while the other security experienced an adverse change in cash flows as a result of the tight credit market for commercial paper. The tight credit market caused this security to utilize its alternative funding vehicle, which has a higher cost and reduced cash flows available to the investors. The security backed by a diversified asset-backed pool experienced an adverse change in cash flows as a result of credit rating downgrades in the third quarter of 2007 that reflected collateral losses in the underlying pool. The nine months ended September 30, 2007 also included impairments to investments backed by home equity loans recorded in the first half of the year as a result of an adverse change in cash flows. Impairments in the three and nine months ended September 30, 2006 related primarily to investments backed by automobile, aircraft and manufactured housing collateral.

Exposure to Sub-prime Mortgages

The Company holds securities that are collateralized by sub-prime mortgages which are classified in “Other asset-backed securities.” At September 30, 2007, $336.2 million, or less than 7 percent of the fair value of the Company’s $5,260.3 million investment portfolio, had direct exposure to sub-prime mortgages as collateral. Nearly all of these securities had investment grade ratings. In considering securities collateralized by sub-prime mortgages, it is important to note the vintage, or year of origination, of the mortgages as the industry loss experience in pre-2006 vintages appears to be much lower than the 2006 and 2007 vintages. Of the Company’s $336.2 million direct exposure to sub-prime mortgages, $298.4 million relates to sub-prime mortgages originated prior to 2006. Following is the fair value of securities collateralized by sub-prime mortgages at September 30, 2007 by vintage (based on the original security issuance date) and rating:

Direct exposure to sub-prime mortgages

		Vintage																								Percent
																		2003 and								of Total
(Amounts in thousands)		2007				2006				2005				2004				earlier				Total				Portfolio
AAA		$	—			$	—			$	11,231			$	—			$	32,982			$	44,213				0.8	%
AA			4,574				21,946				37,574				38,874				51,136				154,104				2.9	%
A			—				11,339				18,382				81,344				17,695				128,760				2.5	%
BBB			—				—				—				9,088				—				9,088				0.2	%
Below investment grade			—				—				—				55				—				55				—
		$	4,574			$	33,285			$	67,187			$	129,361			$	101,813			$	336,220				6.4	%
Vintage as a percent of total direct sub-prime exposure			1	%			10	%			20	%			39	%			30	%			100	%

At September 30, 2007, “Other asset-backed securities” with a fair value of $2,179.3 million had gross unrealized losses of $281.2 million, which includes gross unrealized losses of $34.1 million for securities with direct exposure to sub-prime mortgages as collateral. These unrealized losses are included in the Consolidated Balance Sheet in “Accumulated other comprehensive loss.”

Also included in “Other asset-backed securities” are collateralized debt obligations (“CDOs”) which are backed by diversified collateral pools that may include sub-prime mortgages of various vintages. Following is the fair value of CDOs with indirect sub-prime mortgage exposure by CDO type and rating. The Company defines high grade CDOs as those having collateral with an A- or better average rating at purchase, while mezzanine asset-backed CDOs are defined as those having collateral with a BBB/BBB- average rating at purchase.

Indirect exposure to sub-prime mortgages

														Percent
		High												of Total
(Amounts in thousands)		Grade				Mezzanine				Total				Portfolio
AAA, including U.S. agencies		$	92,165			$	106,883			$	199,048				3.8	%
AA			27,240				97,774				125,014				2.4	%
A			22,564				111,778				134,342				2.5	%
BBB			—				17,326				17,326				0.3	%
Below investment grade			7,089				18,139				25,228				0.5	%
		$	149,058			$	351,900			$	500,958				9.5	%
CDO type as a percent of total indirect sub-prime exposure			30	%			70	%			100	%

Fair Value Determination

The Company determines the fair value of its securities using both external and internal sources. The Company sends its entire portfolio to a third party pricing service every month-end to request pricing. This third party pricing service uses a combination of quoted prices, broker pricing and matrix pricing depending on the nature of the individual securities. If the third party pricing service is not able to price a security, the Company requests pricing from various brokers. If the Company is not able to obtain pricing from its pricing service or a broker, the Company will internally value the security using the best available market information, pricing models and, in certain circumstances, its own assumptions regarding how a similar market participant would value the security. The assumptions used by the Company include expected cash flows from the security, risk and liquidity premiums, default rates on the collateral specific to the security and interest rate movements. In limited circumstances, as part of the normal pricing process, the Company will evaluate pricing received from third party pricing services and brokers for reasonableness against internal expectations. If a price falls outside of expectations, the Company will internally value the security and evaluate the assumptions used by the third party, if possible. After evaluating the available information, the Company may determine that the third party price does not reflect the assumptions that a similar market participant would use in valuing the security. In these limited circumstances, the Company will use its internal price rather than the third party price.

During 2007, brokers have become increasingly unwilling to provide pricing on certain securities, requiring the Company to internally value more securities. We expect this trend to continue for the foreseeable future. Following are the categories of pricing for the Company’s portfolio:

		September 30,								December 31,
(Amounts in thousands)		2007								2006
Third party pricing service		$	3,065,508				58	%		$	3,605,963				63	%
Broker pricing			1,411,708				27	%			1,986,502				35	%
Internal pricing			783,080				15	%			98,135				2	%
		$	5,260,296							$	5,690,600

Assessment of Unrealized Losses

At September 30, 2007, the available-for-sale investment portfolio had the following aged unrealized losses:

		Less than 12 months								12 months or More								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
(Amounts in Thousands)		Value				Losses				Value				Losses				Value				Losses
Obligations of states and political subdivisions		$	5,238			$	(26	)		$	5,176			$	(162	)		$	10,414			$	(188	)
Commercial mortgage-backed securities			197,433				(19,086	)			28,290				(1,598	)			225,723				(20,684	)
Residential mortgage-backed securities			178,699				(5,373	)			975,197				(19,291	)			1,153,896				(24,664	)
Other asset-backed securities			1,509,175				(246,476	)			292,440				(34,685	)			1,801,615				(281,161	)
U.S. government agencies			—				—				326,085				(1,612	)			326,085				(1,612	)
Corporate debt securities			110,270				(6,150	)			14,515				(487	)			124,785				(6,637	)
Preferred and common stock			5,371				(337	)			12,436				(2,028	)			17,807				(2,365	)
		$	2,006,186			$	(277,448	)		$	1,654,139			$	(59,863	)		$	3,660,325			$	(337,311	)

At December 31, 2006, the available-for-sale investment portfolio had the following aged unrealized losses:

		Less than 12 months								12 months or More								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
(Amounts in Thousands)		Value				Losses				Value				Losses				Value				Losses
Obligations of states and political subdivisions		$	22,467			$	(180	)		$	25,075			$	(310	)		$	47,542			$	(490	)
Commercial mortgage-backed securities			97,747				(812	)			110,859				(1,336	)			208,606				(2,148	)
Residential mortgage-backed securities			173,179				(653	)			1,213,278				(22,566	)			1,386,457				(23,219	)
Other asset-backed securities			292,742				(2,066	)			318,944				(5,773	)			611,686				(7,839	)
U.S. government agencies			—				—				321,117				(6,589	)			321,117				(6,589	)
Corporate debt securities			6,306				(7	)			60,832				(463	)			67,138				(470	)
Preferred and common stock			5,663				(45	)			12,173				(2,292	)			17,836				(2,337	)
		$	598,104			$	(3,763	)		$	2,062,278			$	(39,329	)		$	2,660,382			$	(43,092	)

As of September 30, 2007 and December 31, 2006, 171 and 188 securities, respectively, had unrealized losses for more than 12 months. The unrealized losses were caused by a general lack of liquidity in the asset-backed securities market and deterioration in the broader credit markets (the “market disruption”). This market disruption was triggered by concerns surrounding sub-prime mortgage-backed securities, but also extended to other asset-backed securities in the market. The Company believes that the unrealized losses generally are caused by liquidity discounts and risk premiums required by market participants in response to current market conditions. Market conditions at September 30, 2007 primarily reflect wider credit spreads due to heightened concerns regarding the risk of securities backed by mortgage-based collateral, historically low levels of activity in the related market for these securities and a tighter credit market. These market conditions have not adversely impacted the cash flow performance of these securities at this time, nor have any adverse changes in expected future cash flow performance been identified at this time based on information available through the date of this filing. The Company believes at this time that these market conditions are temporary and will improve on a gradual basis.

The Company regularly monitors its investment portfolio to ensure that investments that may be other-than-temporarily impaired are identified in a timely manner and that any impairments are charged against earnings in the proper period. Pursuant to the Company’s impairment review process, changes in individual security values are regularly monitored to identify potential impairment indicators, such as credit rating downgrades, accelerating default rates on underlying collateral and changes in cash flow performance. The process includes a monthly global assessment of the Company’s portfolio given current market conditions, as well as a monthly review of all securities using a screening process to identify those securities for which fair value falls below established thresholds for certain time periods, or which are identified through other monitoring criteria such as credit ratings downgrades. The Company evaluates the facts related to the individual securities identified as a result of this process, including cash flow performance, actual default rates compared to default rates assumed in determining expected cash flows, subordination available as credit protection on the Company’s investment and the impact of any credit rating downgrades on expected future cash flows. The Company also considers its intent and ability to hold the security for a time sufficient to recover its amortized cost. The Company utilizes a buy and hold strategy for its portfolio, and generally does not utilize its portfolio for liquidity purposes. While this strategy does not factor into the pricing of securities, it does factor into the Company’s assessment of other-than-temporary impairments. The Company believes that if cash flows continue to perform as expected, the Company will be able to recover its amortized cost prior to or upon maturity or call of the security. Given the facts and circumstances of the securities in an unrealized loss position, particularly the continued cash flow performance as expected, the Company has determined that the securities presented in the above unrealized loss table are temporarily impaired as of the date of this filing. The Company has both the intent and ability to hold these investments to recovery.

Following is an assessment of the securities in an unrealized loss position at September 30, 2007 by rating and degree of loss:

		Unrealized loss less than/equal to 20%												Unrealized loss greater than 20%												Total
		Number of				Fair				Unrealized				Number of				Fair				Unrealized				Number of				Fair				Unrealized
(Amounts in thousands)		Securities				Value				Loss				Securities				Value				Loss				Securities				Value				Loss
AAA, including U.S. agencies			157				1,730,839				(49,881	)			4				50,193				(18,824	)			161				1,781,032				(68,705	)
AA			115				806,790				(71,640	)			10				96,034				(30,883	)			125				902,824				(102,523	)
A			98				669,276				(59,949	)			29				171,306				(68,734	)			127				840,582				(128,683	)
BBB			3				20,350				(2,582	)			4				38,109				(19,074	)			7				58,459				(21,656	)
Below investment grade			19				59,296				(7,950	)			6				18,131				(7,794	)			25				77,427				(15,744	)
			392			$	3,286,551			$	(192,002	)			53			$	373,773			$	(145,309	)			445			$	3,660,324			$	(337,311	)

Of the $337.3 million in unrealized losses, $321.6 million relates to securities with an investment grade rating. All of the securities in an unrealized loss position continue to have cash flow performance as expected. The $145.3 million of unrealized losses that are greater than 20 percent of amortized cost are comprised of 49 securities categorized in “Other asset-backed securities” and four securities categorized in “Commercial mortgage-backed securities.” Twenty-six securities are mezzanine asset-backed CDOs, seven securities are high-grade asset-backed CDOs and three are sub-prime mortgage securities. The remaining seventeen are asset-backed securities that include a broad range of collateral types. The Company believes that the decline in fair value on these securities is primarily attributable to the market disruption caused by the sub-prime concerns and not credit quality. These securities do not tend to be influenced by the credit of the issuer, but rather the characteristics and projected cash flows of the underlying collateral.

5. Derivative Financial Instruments

The notional amount of the Company’s swap agreements totaled $1.5 billion and $2.6 billion at September 30, 2007 and December 31, 2006, respectively, with an average fixed pay rate of 4.4 percent and 4.3 percent and an average variable receive rate of 4.8 percent and 5.2 percent at September 30, 2007 and December 31, 2006, respectively. The variable rate portion of the swaps is generally based on federal funds, LIBOR or Treasury bill. As the swap payments are settled, the net difference between the fixed amount the Company pays and the variable amount the Company receives is reflected in the Consolidated Statements of Income in “Investment commissions expense.” The amount recognized in earnings due to ineffectiveness of the cash flow hedges was not material for the three and nine months ended September 30, 2007 and 2006. As of September 30, 2007, the Company estimates that $1.6 million (net of tax) of the unrealized gain included in “Accumulated other comprehensive loss” in the Consolidated Balance Sheets will be recognized in the Consolidated Statements of Income in “Investment commissions expense” within the next 12 months as the swap payments are settled.

6. Sale of Receivables

The balance of sold receivables as of September 30, 2007 and December 31, 2006 was $321.5 million and $297.6 million, respectively. The average receivables sold totaled $356.3 million and $365.3 million during the three and nine months ended September 30, 2007, respectively, and $390.0 million and $385.9 million during the three and nine months ended September 30, 2006, respectively. The expense of selling the agent receivables is included in the Consolidated Statements of Income in “Investment commissions expense” and totaled $5.9 million and $17.9 million for the three and nine months ended September 30, 2007, respectively, and $6.2 million and $17.7 million for the three and nine months ended September 30, 2006, respectively.

7. Income Taxes

The Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes, on January 1, 2007. The cumulative effect of applying FIN No. 48 is reported as an adjustment to the opening balance of retained income. As a result of the implementation of FIN No. 48, the Company recognized a $29.6 million increase in the liability for unrecognized tax benefits, a $7.6 million increase in deferred tax assets and a $22.0 million reduction to the opening balance of retained income. The $29.6 million increase in the liability for unrecognized tax benefits is recorded as a non-cash item in “Accounts payable and other liabilities” in the Consolidated Balance Sheets.

As of January 1, 2007, the liability for unrecognized tax benefits was $39.1 million, which is included in “Accounts payable and other liabilities” in the Consolidated Balance Sheets. Of the $39.1 million, $31.4 million could impact the effective tax rate if recognized. The balance at January 1, 2007 includes $5.7 million for interest and penalties. The Company records interest and penalties for unrecognized tax benefits in “Income tax expense” in the Consolidated Statements of Income. During the three and nine months ended September 30, 2007, the Company recognized $1.1 million and $2.7 million in interest and penalties, respectively.

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. With a few exceptions, the Company is no longer subject to U.S. federal, state and local, or foreign income tax examinations for years prior to 2004. The Company is currently subject to U.S. Federal, certain state and foreign income tax examinations for 2004 through 2006.

The effective tax rate was 30.4 percent and 31.7 percent for the three and nine months ended September 30, 2007, respectively, compared to 28.4 percent and 30.0 percent for the three and nine months ended September 30, 2006, respectively. The increase in the effective rate is due to tax exempt investment income declining as a percentage of total pre-tax income.

8. Stockholders’ Equity

The Company has authorization to repurchase up to 12.0 million shares, including 5.0 million shares approved by the Board of Directors on May 9, 2007. During the three and nine months ended September 30, 2007, the Company repurchased 470,000 shares and 1,620,000 shares of its common stock at an average cost of $26.56 per share and $28.39 per share, respectively. As of September 30, 2007, the Company had repurchased 6.8 million shares under the authorization and has remaining authorization to purchase up to 5.2 million shares. Following is a summary of common stock issued and outstanding:

		September 30,				December 31,
(Amounts in thousands)		2007				2006
Common shares issued			88,556				88,556
Treasury stock			(5,919	)			(4,286	)
Restricted stock			(242	)			(323	)
Shares held in employee equity trust			—				(456	)
Common shares outstanding			82,395				83,491

Following is a summary of treasury stock share activity during the nine months ended September 30, 2007:

		Treasury Stock
(Amounts in thousands)		Shares
Balance at December 31, 2006			4,286
Stock repurchases			1,620
Issuance of stock for exercise of stock options			(72	)
Submission of shares for withholding taxes upon exercise of stock options and release of restricted stock			85
Balance at September 30, 2007			5,919

The Company has an employee equity trust (the “Trust”) that was used to fund the issuance of shares under employee compensation and benefit plans. The fair value of the shares held by the Trust as of December 31, 2006 is recorded in the “Unearned employee benefits” component in the Consolidated Balance Sheets. The balance is reduced as shares were released to fund employee benefits. During the nine months ended September 30, 2007, the Company released 456,393 shares upon the exercise of stock options and the vesting of restricted stock. As of September 30, 2007, there are no shares remaining in the Trust.

The components of accumulated other comprehensive loss, net of tax, include:

		September 30,				December 31,
(Amounts in thousands)		2007				2006
Unrealized (loss) gain on securities classified as available-for-sale		$	(179,431	)		$	24,607
Unrealized (loss) gain on derivative financial instruments			(3,571	)			11,345
Cumulative foreign currency translation adjustments			8,244				6,011
Prior service cost for pension and postretirement benefits			(1,027	)			(1,115	)
Unrealized losses on pension and postretirement benefits			(45,154	)			(47,140	)
Accumulated other comprehensive loss		$	(220,939	)		$	(6,292	)

9. Pensions and Other Benefits

Net periodic pension benefit expense for the Company’s defined benefit pension plan and the combined supplemental executive retirement plans (“SERPs”) and the defined benefit postretirement plans includes the following components:

		Pension and SERP’s																Postretirement Benefits
		Three Months Ended								Nine Months Ended								Three Months Ended								Nine Months Ended
		September 30								September 30								September 30								September 30
(Amounts in thousands)		2007				2006				2007				2006				2007				2006				2007				2006
Service cost		$	574			$	480			$	1,724			$	1,441			$	174			$	159			$	523			$	478
Interest cost			2,975				2,896				8,925				8,689				209				179				627				536
Expected return on plan assets			(2,521	)			(2,231	)			(7,563	)			(6,694	)			—				—				—				—
Amortization of prior service cost			121				176				362				527				(74	)			(74	)			(221	)			(221	)
Recognized net actuarial loss			1,057				1,080				3,170				3,241				23				6				68				18
Net periodic pension cost		$	2,206			$	2,401			$	6,618			$	7,204			$	332			$	270			$	997			$	811

Benefits paid through the defined benefit pension plan and the combined SERPs were $4.1 million for both the three months ended September 30, 2007 and 2006, respectively, and $12.2 million and $12.1 million for the nine months ended September 30, 2007 and 2006, respectively. The Company made contributions to the combined SERPs totaling $0.9 million and $2.6 million during the three and nine months ended September 30, 2007, respectively. No contributions were made to the defined benefit pension plan during the three and nine months ended September 30, 2007. The Company made contributions to the defined benefit pension plan and the combined SERPs totaling $14.0 million and $20.9 million during the three and nine months ended September 30, 2006. Benefits paid through, and contributions made to, the defined benefit postretirement plans were less than $0.1 million for both the three months ended September 30, 2007 and 2006 and were $0.2 million and $0.1 million during the nine months ended September 30, 2007 and 2006, respectively.

The net loss and prior service cost for the defined benefit pension plan and SERPs that the Company amortized from “Accumulated other comprehensive loss” into “Net periodic benefit expense” was $1.1 million ($0.7 million, net of tax) and $0.1 million (less than $0.1 million, net of tax), respectively, during the three months ended September 30, 2007 and $3.2 million ($2.0 million, net of tax) and $0.4 million ($0.2 million, net of tax), respectively, during the nine months ended September 30, 2007. The net loss and prior service credit for the defined benefit postretirement plan amortized from “Accumulated other comprehensive loss” into “Net periodic benefit expense” was nominal during the three months ended September 30, 2007 and $0.1 million (less than $0.1 million, net of tax) and $0.2 million ($0.1 million, net of tax), respectively, during the nine months ended September 30, 2007.

Contribution expense for the 401(k) defined contribution plan totaled $0.9 million and $0.8 million for the three months ended September 30, 2007 and 2006, respectively, and $2.5 million and $2.1 million for the nine months ended September 30, 2007 and 2006, respectively. In addition, the Company made discretionary profit sharing contributions to the 401(k) defined contribution plan totaling $2.5 million and $2.1 million during the nine months ended September 30, 2007 and 2006, respectively.

10. Debt

The Company has a bank credit facility providing availability up to $350.0 million in the form of a $250.0 million four-year revolving credit facility and a $100.0 million term loan. At December 31, 2006, the Company had outstanding borrowings under the credit facility of $150.0 million, consisting of a $100.0 million term loan and $50.0 million under the revolving credit facility. On September 24, 2007, the Company borrowed $197.0 million under the revolving credit facility. The proceeds were invested in cash equivalents to supplement the Company’s unrestricted assets, and were also used to fund the acquisition of PropertyBridge on October 1, 2007. At September 30, 2007, the Company had outstanding borrowings under the credit facility consisting of $247.0 million under the revolving credit facility and a $100.0 million term loan. The maturity date of both the revolving credit facility and term loan is June 2010. The revolving credit facility may be increased to $500.0 million under certain circumstances. The interest rate applicable to both the credit facility and the term loan is LIBOR plus 50 basis points, subject to adjustment in the event of a change in the credit rating of our senior unsecured debt. The usage fees on the facility range from 0.08 percent to 0.25 percent of outstanding borrowings, depending on the credit rating of our senior unsecured debt. Changes in the Company’s credit rating from any of the credit rating agencies could affect the interest rate and fees paid under the facility. At September 30, 2007 and December 31, 2006, the interest rate under the Company’s bank credit facility was 5.70 percent and 5.86 percent, respectively, exclusive of the effect of commitment fees and other costs, and the usage fee was 0.125 percent.

At September 30, 2007 and December 31, 2006, the interest rate swaps used to hedge the cash flows of a portion of the Company’s variable rate debt had an average fixed pay rate of 4.3 percent and an average variable receive rate of 4.7 percent and 4.6 percent, respectively. See Note 5 for further information regarding the Company’s portfolio of derivative financial instruments.

Subsequent Event — On October 31, 2007, the Company obtained a Commitment Letter from JPMorgan Chase Bank to provide a $150.0 million 364-day unsecured revolving credit facility. The credit facility would have substantially the same terms as the Company’s existing credit facility, which will remain in place. The interest rate under the new credit facility will be, at the Company’s option, either (a) LIBOR plus 60 basis points or (b) the higher of the prime rate or the federal funds rate plus 50 basis points. In either case, the interest rate is subject to adjustment in the event of a change in the credit rating of the Company’s senior unsecured debt. The usage fees under the new credit facility will range from 0.15 percent to 0.35 percent of outstanding borrowings, depending on the credit rating of the Company’s senior unsecured debt.

11. Stock-Based Compensation

Option awards are granted with an exercise price equal to the quoted market price (average of the high and low price) of the Company’s common stock on the date of grant. Stock options granted in 2007 become exercisable over a three-year period in equal installments and have a term of ten years. For purposes of determining the fair value of stock option awards, the Company uses the Black-Scholes single option pricing model and the assumptions set forth in the following table. Expected volatility is based on the historical volatility of the price of the Company’s common stock since the spin-off on June 30, 2004. The Company uses historical information to estimate option exercise and employee termination within the valuation model. The expected term of options granted is derived from the output of the option valuation model and represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Compensation cost is recognized using a straight-line method over the vesting or service period and is net of estimated forfeitures.

		2007				2006
Expected dividend yield			0.7	%			0.6	%
Expected volatility			29.1	%			26.5	%
Risk-free interest rate			4.6	%			4.7	%
Expected life		6.5 years				6.5 years

Following is a summary of stock option activity:

										Weighted-
										Average
						Weighted				Remaining				Aggregate
						Average				Contractual				Intrinsic
						Exercise				Term				Value
		Shares				Price				(in years)				($000)
Options outstanding at December 31, 2006			4,099,514			$	19.52
Granted			406,500				29.15
Exercised			(349,407	)			16.92
Forfeited			(60,361	)			25.04
Options outstanding at September 30, 2007			4,096,246			$	20.63			4.92 years				$	12,388
Vested or expected to vest at September 30, 2007		3,952,438				$20.48				4.83 years				$	12,216
Options exercisable at September 30, 2007			3,144,681			$	19.16			4.13 years				$	11,454

The weighted-average grant date fair value of options granted during 2007 and 2006 was $11.64 and $10.38, respectively.

The Company has granted both restricted stock and performance-based restricted stock. Restricted stock typically vests three years from the date of grant. The vesting of performance-based restricted stock is contingent upon the Company obtaining certain financial thresholds established on the grant date. Provided the incentive performance targets established in the year of grant are achieved, the performance-based restricted stock awards granted subsequent to 2002 will vest in a three-year period from the date of grant in an equal number of shares each year. Future vesting in all cases is subject generally to continued employment with MoneyGram. Holders of restricted stock and performance-based restricted stock have the right to receive dividends and vote the shares, but may not sell, assign, transfer, pledge or otherwise encumber the stock.

Restricted stock awards are valued at the quoted market price of the Company’s common stock on the date of grant and expensed using the straight-line method over the vesting or service period of the award. Following is a summary of restricted stock activity:

						Weighted
						Average
						Grant Date
		Shares				Fair Value
Restricted stock outstanding at December 31, 2006			322,998			$	22.39
Granted			92,430				29.25
Vested and issued			(173,161	)			19.82
Forfeited			—				—
Restricted stock outstanding at September 30, 2007			242,267			$	26.88

Following is a summary of pertinent information related to the Company’s stock-based awards:

		Three Months Ended								Nine Months Ended
		September 30								September 30
(Amounts in Thousands)		2007				2006				2007				2006
Fair value of options vesting during period		$	3			$	19			$	2,591			$	5,646
Fair value of restricted stock vesting during period			75				31				5,193				13,369
Expense recognized related to options			1,103				641				3,201				1,821
Expense recognized related to restricted stock			599				433				1,752				1,561
Intrinsic value of options exercised			1,693				3,318				3,554				14,323
Cash received from option exercises			3,554				2,964				6,325				20,192
Tax benefit realized for tax deductions from option exercises			182				1,171				542				4,936

As of September 30, 2007, the Company’s unvested stock-based awards had the following unrecognized compensation expense and remaining vesting periods:

						Restricted
(Amounts in Thousands)		Options				Stock
Unrecognized compensation expense		$	6,562			$	3,744
Remaining weighted average vesting period		1.68 years				1.49 years

As of September 30, 2007, the Company has remaining authorization to issue awards of up to 6,449,324 shares of common stock under its 2005 Omnibus Incentive Plan.

For the three and nine months ended September 30, 2007, options to purchase 763,958 shares and 694,582 shares of common stock, respectively, were not included in the computation of diluted earnings per share because the effect would be antidilutive. For the three and nine months ended September 30, 2006, options to purchase 392,563 shares and 326,930 shares of common stock, respectively, were not included in the computation of diluted earnings per share because the effect would be antidilutive. Options are generally antidilutive if the exercise price of the option is greater than the quoted market price of the Company’s common stock for the period presented.

12. Commitments and Contingencies

At September 30, 2007, the Company had various letters of credit, overdraft facilities and uncommitted repurchase agreements totaling $2.3 billion to assist in the management of investments and the clearing of payment service obligations. Included in this amount is an uncommitted repurchase agreement with one of the clearing banks totaling $1.0 billion. Overdraft facilities consist of $14.7 million of letters of credit, all of which are outstanding at September 30, 2007. Letters of credit totaling $4.6 million reduce amounts available under the revolving credit agreement. Fees on the letters of credit are paid in accordance with the terms of the revolving credit agreement.

The Company has agreements with certain other co-investors to provide funds related to investments in limited partnership interests. As of September 30, 2007, the total amount of unfunded commitments related to these agreements was $1.4 million.

13. New Accounting Pronouncements

In February 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 155, Accounting for Certain Hybrid Instruments — an amendment of FASB Statements No. 133 and 140. SFAS No. 155 permits companies to measure any hybrid instrument in its entirety at fair value. Changes in fair value are recorded in income. Previously, hybrid instruments were required to be separated into two instruments, a derivative and host. Generally, the derivative instrument was recorded at fair value. The election to measure the hybrid instrument at fair value is made on an instrument-by-instrument basis and is irreversible. SFAS No. 155 also requires that beneficial interests in securitized financial assets be evaluated for freestanding or embedded derivatives. The Company adopted SFAS No. 155 on January 1, 2007 with no material impact to its Consolidated Financial Statements.

In July 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income Taxes. FIN No. 48 is an interpretation of SFAS No. 109, Accounting for Income Taxes. FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in an entity’s tax return. FIN No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition of tax positions. As discussed in Note 7, the Company adopted FIN No. 48 on January 1, 2007.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This statement does not require any new fair value measurement, but it provides guidance on how to measure fair value under other accounting pronouncements. SFAS No. 157 also establishes a fair value hierarchy to classify the source of information used in fair value measurements. The hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad categories. SFAS No. 157 is effective for the Company on January 1, 2008. The Company is currently evaluating the impact of SFAS No. 157 on its Consolidated Financial Statements.

In January 2007, the FASB issued SFAS No. 133 Implementation Issue No. B40, Embedded Derivatives: Application of Paragraph 13(b) to Securitized Interests in Prepayable Financial Assets (“DIG B40”). DIG B40 provides the circumstances in which an embedded derivative of a securitized interest in a prepayable financial asset would not be subject to bifurcation. The Company adopted DIG B40 on January 1, 2007 with no material impact to its Consolidated Financial Statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits companies to choose to measure certain financial instruments and certain other items at fair value. The election to measure the financial instrument at fair value is made on an instrument-by-instrument basis for the entire instrument, with few exceptions, and is irreversible. SFAS No. 159 is effective for the Company on January 1, 2008. The Company is currently evaluating the impact of this pronouncement on its Consolidated Financial Statements.

In April 2007, the FASB issued FASB Staff Position (“FSP”) FIN 48-1, Definition of Settlement in FASB Interpretation No. 48. FIN No. 48 requires a tax position be measured or recognized based upon the outcomes that could be realized upon “ultimate settlement” with a tax authority. FSP FIN 48-1 amends FIN No. 48 to clarify when a tax position is effectively settled upon examination by a taxing authority. The Company adopted FSP FIN 48-1 as of January 1, 2007 with no material impact to its Consolidated Financial Statements.

In June 2007, the American Institute of Certified Public Accountants (“AICPA”) issued Statement of Position (“SOP”) 07-1, Clarification of the Scope of the Audit and Accounting Guide Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies. SOP 07-1 provides specific guidance for determining whether an entity meets the definition of an investment company and should follow the AICPA Audit Accounting Guide Investment Companies (the “Guide”). Entities that meet the definition of an investment company must apply the provisions of the Guide, which includes a requirement to carry investments at fair value. This standard is currently applicable for years beginning after December 15, 2007. The Company is currently evaluating the impact of this standard, if any, on its Consolidated Financial Statements. The FASB has proposed an indefinite delay of this standard pending resolution of implementation issues.

In June 2007, the Emerging Issues Task Force (“EITF”) approved EITF 06-11, Accounting for Income Tax Benefits on Dividends on Share-Based Payment. The EITF reached a final conclusion that a realized income tax benefit from dividends or dividend equivalents that are charged to retained earnings and are paid to employees for equity classified restricted stock, restricted stock units and stock options should be recognized as an increase to additional paid-in-capital (“APIC”). Those tax benefits are considered excess tax benefits under SFAS No. 123 (revised 2004), Share Based Payment. The amount recognized in APIC for the realized income tax benefit from dividends on those awards should be included in the pool of excess tax benefits available to absorb tax deficiencies. The guidance of EITF 06-11 will be adopted prospectively for the Company as of January 1, 2008. The Company is currently evaluating the impact of this pronouncement on its Consolidated Financial Statements.

14. Minimum Commission Guarantees

In limited circumstances, the Company may grant minimum commission guarantees as an incentive to new or renewing agents, for a specified period of time at a contractually specified amount. Under the guarantees, the Company will pay to the agent the difference between the contractually specified minimum commission and the actual commissions earned by the agent.

As of September 30, 2007, the liability for minimum commission guarantees is $4.3 million. As of September 30, 2007, the maximum amount that could be paid under commission guarantees is $26.7 million over a weighted average remaining term of 2.6 years. The maximum payment is calculated as the contractually guaranteed minimum commission times the remaining term of the contract and, therefore, assumes that the agent generates no money transfer transactions during the remainder of its contract. In fiscal 2006, the Company paid $3.0 million under these guarantees, or approximately 40 percent of the estimated maximum payment for the year.

15. Segment Information

The Company’s business is conducted through two reportable segments, Global Funds Transfer and Payment Systems, which are determined based upon factors such as the type of customers, the nature of products and services provided and the distribution channels used to provide those services. The Company’s largest agent in the Global Funds Transfer segment, Wal-Mart, accounted for approximately 20 percent of total Company revenue for both the three and nine months ended September 30, 2007 and approximately 18 percent and 17 percent for the three and nine months ended September 30, 2006, respectively. The following table reconciles segment operating income to “Income before income taxes” as reported in the Consolidated Financial Statements:

		Three Months Ended								Nine Months Ended
		September 30								September 30
(Amounts in Thousands)		2007				2006				2007				2006
Revenue:
Global Funds Transfer:
Money transfer, including bill payment		$	220,582			$	176,220			$	619,876			$	483,125
Retail money order			36,871				37,231				111,303				115,333
			257,453				213,451				731,179				598,458
Payment Systems:
Official check and payment processing			77,060				74,883				231,886				230,870
Other			6,699				7,585				21,163				23,159
			83,759				82,468				253,049				254,029
Other			369				512				663				529
Total revenue		$	341,581			$	296,431			$	984,891			$	853,016
Operating Income:
Global Funds Transfer		$	45,798			$	38,566			$	124,140			$	119,275
Payment Systems			6,618				7,539				26,082				34,068
			52,416				46,105				150,222				153,343
Interest expense			(2,202	)			(2,003	)			(6,143	)			(5,925	)
Other unallocated expenses			(955	)			(2,142	)			(2,849	)			(7,952	)
Income before income taxes		$	49,259			$	41,960			$	141,230			$	139,466

The following table presents depreciation and amortization expense and capital expenditures by segment:

		Three Months Ended								Nine Months Ended
		September 30								September 30
(Amounts in Thousands)		2007				2006				2007				2006
Depreciation and amortization:
Global Funds Transfer		$	12,950			$	9,464			$	34,481			$	25,008
Payment Systems			994				955				3,354				3,189
Total depreciation and amortization		$	13,944			$	10,419			$	37,835			$	28,197
Capital expenditures:
Global Funds Transfer		$	21,921			$	15,599			$	48,709			$	48,345
Payment Systems			1,510				1,503				4,733				8,954
Total capital expenditures		$	23,431			$	17,102			$	53,442			$	57,299