UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 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 March 31, 2006

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 001-31950

MoneyGram International, Inc.

(Exact name of registrant as specified in its charter)

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

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 May 5, 2006, 84,728,404 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
Deferred Compensation Plan
2005 Omnibus Incentive Plan Performance-Based Restricted Stock Agreement
2005 Omnibus Incentive Plan Non-Qualified Stock Option Agrement (US Version )
2005 Omnibus Incentive Plan Non-Qualified Stock Option Agrement (UK Version )
2005 Omnibus Incentive Plan Non-Qualified Stock Option Agrement for Directors
Section 302 Certification of CEO
Section 302 Certification of CFO
Section 906 Certification of CEO
Section 906 Certification of CFO

PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

MONEYGRAM INTERNATIONAL, INC.

		(Unaudited)
		March 31,				December 31,
		2006				2005
		(Dollars in thousands, except
		share and per share data)
ASSETS
Cash and cash equivalents		$	—			$	—
Cash and cash equivalents (substantially restricted)			894,010				866,391
Receivables (substantially restricted)			1,282,693				1,325,622
Investments (substantially restricted)			6,060,111				6,233,333
Property and equipment			117,855				105,545
Deferred tax assets			49,865				37,477
Derivative financial instruments			40,979				28,743
Intangible assets			12,749				13,248
Goodwill			404,270				404,270
Other assets			65,549				60,535
Total assets		$	8,928,081			$	9,075,164
LIABILITIES
Payment service obligations		$	7,912,720			$	8,059,309
Debt			150,000				150,000
Derivative financial instruments			1,951				5,055
Pension and other postretirement benefits			105,443				105,485
Accounts payable and other liabilities			135,133				131,186
Total liabilities			8,305,247				8,451,035
COMMITMENTS AND CONTINGENCIES
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			79,124				80,038
Retained income			641,019				613,497
Unearned employee benefits and other			(17,717	)			(25,401	)
Accumulated other comprehensive income			(9,144	)			11,825
Treasury stock: 3,249,187 and 2,701,163 shares at March 31, 2006 and December 31, 2005			(71,334	)			(56,716	)
Total stockholders’ equity			622,834				624,129
Total liabilities and stockholders’ equity		$	8,928,081			$	9,075,164

See Notes to Consolidated Financial Statements

MONEYGRAM INTERNATIONAL, INC.

		Three Months Ended March 31
		2006				2005
		(Dollars and shares in thousands,
		per share data)
REVENUE:
Fee and other revenue		$	169,132			$	138,519
Investment revenue			94,960				89,502
Net securities (losses) gains			(420	)			(106	)
Total revenue			263,672				227,915
Fee commissions expense			67,484				52,188
Investment commissions expense			58,789				57,953
Total commissions expense			126,273				110,141
Net revenue			137,399				117,774
EXPENSES:
Compensation and benefits			40,627				29,274
Transaction and operations support			32,087				35,644
Depreciation and amortization			8,432				7,436
Occupancy, equipment and supplies			8,618				8,374
Interest expense			1,947				1,389
Total expenses			91,711				82,117
Income before income taxes			45,688				35,657
Income tax expense			14,753				7,868
NET INCOME		$	30,935			$	27,789
BASIC EARNINGS PER SHARE		$	0.37			$	0.33
DILUTED EARNINGS PER SHARE		$	0.36			$	0.32
Average outstanding common shares			84,369				84,576
Additional dilutive shares related to stock-based compensation			1,589				1,447
Average outstanding and potentially dilutive common shares			85,958				86,023

See Notes to Consolidated Financial Statements

MONEYGRAM INTERNATIONAL, INC.

		Three Months Ended March 31
		2006				2005
		(Dollars in thousands)
Net income		$	30,935			$	27,789
Other comprehensive income:
Net unrealized (losses) on available-for-sale securities:
Net holding (losses) arising during the period, net of tax (benefit) of ($18,880) and ($23,175)			(30,804	)			(38,625	)
Reclassification adjustment for net realized gains included in net income, net of tax expense of $160 and $40			260				67
			(30,544	)			(38,558	)
Net unrealized gains on derivative financial instruments:
Net holding gains arising during the period, net of tax expense of $4,620 and $25,446			7,538				42,410
Reclassifications from other comprehensive income to net income, net of tax expense (benefit) of $427 and ($6,926)			697				(11,544	)
			8,235				30,866
Unrealized foreign currency translation gains (losses), net of tax expense (benefit) of $822 and ($763)			1,340				(1,271	)
Other comprehensive loss			(20,969	)			(8,963	)
Comprehensive income		$	9,966			$	18,826

See Notes to Consolidated Financial Statements.

MONEYGRAM INTERNATIONAL, INC.

		Three Months Ended
		March 31,
		2006				2005
		(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	30,935			$	27,789
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization			8,432				7,436
Investment impairment charges			792				1,878
Provision for deferred income taxes			1,285				(2,117	)
Net gain on sale of investments			(372	)			(1,772	)
Net amortization of investment premium			(451	)			2,465
Provision for uncollectible receivables			741				1,399
Non-cash compensation expense			1,397				1,120
Other non-cash items, net			(4,786	)			6,131
Changes in foreign currency translation adjustments			1,340				(1,271	)
Changes in assets and liabilities:
Other assets			(5,013	)			(262	)
Accounts payable and other liabilities			66				(11,956	)
Total adjustments			3,431				3,051
Change in cash and cash equivalents (substantially restricted)			(24,606	)			52,555
Change in receivables, net (substantially restricted)			42,188				(93,515	)
Change in payment service obligations			(146,589	)			(28,241	)
Net cash used in operating activities			(94,641	)			(38,361	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investments			92,939				325,607
Proceeds from maturities of investments			192,719				245,435
Purchases of investments			(163,022	)			(495,761	)
Purchases of property and equipment			(20,597	)			(16,787	)
Net cash provided by investing activities			102,039				58,494
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options			8,130				1,410
Tax benefits from share-based compensation			1,421				136
Purchase of treasury stock			(13,536	)			(20,816	)
Cash dividends paid			(3,413	)			(863	)
Net cash used in financing activities			(7,398	)			(20,133	)
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.

																		Accumulated
														Unearned				Other
														Employee				Comprehensive				Common
		Common				Additional				Retained				Benefits				(Loss)				Stock in
		Stock				Capital				Income				and Other				Income				Treasury				Total
		(Dollars in thousands, except per share data)
As of December 31, 2005		$	886			$	80,038			$	613,497			$	(25,401	)		$	11,825			$	(56,716	)		$	624,129
Net income											30,935																30,935
Dividends ($0.04 per share)											(3,413	)															(3,413	)
Employee benefit plans							(914	)							7,684								(1,082	)			5,688
Treasury shares acquired																							(13,536	)			(13,536	)
Unrealized foreign currency translation adjustment																			1,340								1,340
Unrealized loss on available-for-sale securities																			(30,544	)							(30,544	)
Unrealized gain on derivative financial instruments																			8,235								8,235
As of March 31, 2006		$	886			$	79,124			$	641,019			$	(17,717	)		$	(9,144	)		$	(71,334	)		$	622,834

See Notes to Consolidated Financial Statements

MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES

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 month period ended March 31, 2006 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, 2005.

2. Acquisitions

On March 24, 2006, the Company signed a Sale and Purchase Agreement to acquire the net assets of Money Express, the Company’s super agent in Italy. The acquisition, expected to close in the second quarter of 2006, will provide the Company with the opportunity to further expand its network in Italy. In connection with the acquisition, the Company formed MoneyGram Payment Systems Italy S.R.L., a wholly-owned subsidiary.

3. Unrestricted Assets

The Company has unrestricted cash and cash equivalents, receivables and investments to the extent those assets exceed all payment service obligations as shown in the following table. These amounts are generally available; however, management considers a portion of these amounts as providing additional assurance that regulatory requirements are maintained during the normal fluctuations in the value of investments.

		March 31				December 31
(Dollars in thousands)		2006				2005
Cash and cash equivalents (substantially restricted)		$	894,010			$	866,391
Receivables (substantially restricted)			1,282,693				1,325,622
Investments (substantially restricted)			6,060,111				6,233,333
			8,236,814				8,425,346
Amounts restricted to cover payment service obligations			(7,912,720	)			(8,059,309	)
Unrestricted assets		$	324,094			$	366,037

4. Investments (Substantially Restricted)

The amortized cost and market value of investments by type were as follows at March 31, 2006:

						Gross				Gross
		Amortized				Unrealized				Unrealized				Market
(Dollars in thousands)		Cost				Gains				Losses				Value
Obligations of states and political subdivisions		$	774,327			$	26,313			$	(766	)		$	799,874
Commercial mortgage-backed securities			680,482				6,303				(4,177	)			682,608
Residential mortgage-backed securities			1,804,351				2,328				(38,854	)			1,767,825
Other asset-backed securities			2,050,068				34,500				(13,269	)			2,071,299
Obligations of U.S. government agencies			358,903				3,511				(9,516	)			352,898
Corporate debt securities			349,313				9,362				(1,101	)			357,574
Preferred and common stock			30,175				282				(2,424	)			28,033
Total		$	6,047,619			$	82,599			$	(70,107	)		$	6,060,111

The amortized cost and market value of investments by type were as follows at December 31, 2005:

						Gross				Gross
		Amortized				Unrealized				Unrealized				Market
(Dollars in thousands)		Cost				Gains				Losses				Value
Obligations of states and political subdivisions		$	836,419			$	35,610			$	(529	)		$	871,500
Commercial mortgage-backed securities			691,604				10,297				(2,235	)			699,666
Residential mortgage-backed securities			1,894,227				5,024				(20,800	)			1,878,451
Other asset-backed securities			1,963,047				38,340				(10,885	)			1,990,502
U.S. government agencies			360,236				5,641				(5,274	)			360,603
Corporate debt securities			395,869				11,830				(2,266	)			405,433
Preferred and common stock			30,175				217				(3,214	)			27,178
Total		$	6,171,577			$	106,959			$	(45,203	)		$	6,233,333

All securities were classified as available-for-sale at March 31, 2006 and December 31, 2005. The amortized cost and market value of securities at March 31, 2006 by contractual maturity are shown below. Actual maturities may differ from contractual maturities because 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				Market
(Dollars in thousands)		Cost				Value
In one year or less		$	34,752			$	34,984
After one year through five years			327,562				326,757
After five years through ten years			716,789				734,780
After ten years			403,440				413,825
Mortgage-backed and other asset-backed securities			4,534,901				4,521,732
Preferred and common stock			30,175				28,033
Total		$	6,047,619			$	6,060,111

At March 31, 2006 and December 31, 2005, net unrealized gains of $12.5 million ($7.7 million net of tax) and $61.8 million ($38.3 million net of tax), respectively, are included in the Consolidated Balance Sheets in “Accumulated other comprehensive income.” During the three months ended March 31, 2006 and 2005, $0.3 million and $0.1 million, respectively, was reclassified from “Accumulated other comprehensive income” to earnings in connection with the sale of the underlying securities.

Gross realized gains and losses on sales of securities classified as available-for-sale, using the specific identification method, and other-than-temporary impairments were as follows:

		Three Months Ended
		March 31
(Dollars in thousands)		2006				2005
Gross realized gains		$	1,637			$	6,264
Gross realized losses			(1,265	)			(4,492	)
Other-than-temporary impairments			(792	)			(1,878	)
Net securities gains and losses		$	(420	)		$	(106	)

At March 31, 2006, the investment portfolio had the following aged unrealized losses:

		Less than 12 months								12 months or More								Total
		Market				Unrealized				Market				Unrealized				Market				Unrealized
(Dollars in thousands)		Value				Losses				Value				Losses				Value				Losses
Obligations of states and political subdivisions		$	49,985			$	(766	)		$	—			$	—			$	49,985			$	(766	)
Commercial mortgage-backed securities			252,430				(3,136	)			45,370				(1,041	)			297,800				(4,177	)
Residential mortgage-backed securities			1,620,390				(38,854	)			—				—				1,620,390				(38,854	)
Other asset-backed securities			641,600				(11,690	)			71,455				(1,579	)			713,055				(13,269	)
U.S. government agencies			169,110				(4,297	)			149,092				(5,219	)			318,202				(9,516	)
Corporate debt securities			59,079				(784	)			20,642				(317	)			79,721				(1,101	)
Preferred and common stock			—				—				12,040				(2,424	)			12,040				(2,424	)
		$	2,792,594			$	(59,527	)		$	298,599			$	(10,580	)		$	3,091,193			$	(70,107	)

At December 31, 2005, the investment portfolio had the following aged unrealized losses:

		Less than 12 months								12 months or More								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
(Dollars in thousands)		Value				Losses				Value				Losses				Value				Losses
Obligations of states and political subdivisions		$	62,783			$	(529	)		$	—			$	—			$	62,783			$	(529	)
Commercial mortgage-backed securities			209,056				(1,572	)			33,770				(663	)			242,826				(2,235	)
Residential mortgage-backed securities			1,081,400				(13,105	)			375,400				(7,695	)			1,456,800				(20,800	)
Other asset-backed securities			656,313				(10,086	)			75,813				(799	)			732,126				(10,885	)
U.S. government agencies			241,994				(3,327	)			80,452				(1,947	)			322,446				(5,274	)
Corporate debt securities			104,438				(1,847	)			30,719				(419	)			135,157				(2,266	)
Preferred and common stock			9,960				(40	)			11,290				(3,174	)			21,250				(3,214	)
		$	2,365,944			$	(30,506	)		$	607,444			$	(14,697	)		$	2,973,388			$	(45,203	)

The Company has determined that the unrealized losses reflected above represent temporary impairments. Thirty-one and sixty-one securities had unrealized losses for more than 12 months as of March 31, 2006 and December 31, 2005, respectively. The Company believes that the unrealized losses generally are caused by liquidity discounts and risk premiums required by market participants in response to temporary market conditions, rather than a fundamental weakness in the credit quality of the issuer or underlying assets or changes in the expected cash flows from the investments. Temporary market conditions at March 31, 2006 are primarily due to changes in interest rates. The Company has both the intent and ability to hold these investments to maturity.

Of the $70.1 million of unrealized losses at March 31, 2006, $1.8 million relates to one preferred stock security and three asset-backed securities which have an unrealized loss greater than 20 percent of amortized cost. These securities were evaluated considering factors such as the financial condition and near and long-term prospects of the issuer and deemed to be temporarily impaired. The remaining $68.3 million of unrealized losses at March 31, 2006 relates to securities with an unrealized loss position of less than 20 percent of amortized cost, the degree of which suggests that these securities do not pose a high risk of being other than temporarily impaired. Of these securities, $47.3 million relates to unrealized losses on investment grade fixed income securities. Investment grade is defined as a security having a Moody’s equivalent rating of Aaa, Aa, A or Baa or a Standard & Poor’s equivalent rating of AAA, AA, A or BBB.

The remaining $21.0 million is comprised of $20.6 million of U.S. government agency and corporate fixed income securities and $0.4 million of mortgage and asset-backed securities.

5. Derivative Financial Instruments

The notional amount of the Company’s swap agreements totaled $2.7 billion at March 31, 2006 and December 31, 2005, with an average fixed pay rate of 4.2% and an average variable receive rate of 4.8% and 4.1%, respectively. The variable rate portion of the swaps is generally based on Treasury bill, federal funds or 6 month LIBOR. 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 through “Interest expense” for the debt swaps and through “Investment commissions expense” for all other swaps. As of March 31, 2006, the Company estimates that $10.8 million (net of tax) of the unrealized gain included in “Accumulated other comprehensive income” in the Consolidated Balance Sheets will be recognized in the Consolidated Statements of Income within the next 12 months as the swap payments are settled.

6. Sale of Receivables

The balance of sold receivables as of March 31, 2006 and December 31, 2005 was $350.8 million and $299.9 million, respectively. The average receivables sold totaled $393.0 million and $407.8 million during the quarter ended March 31, 2006 and 2005, respectively. The expense of selling the agent receivables is included in the Consolidated Statements of Income in “Investment commissions expense” and totaled $5.7 million and $3.6 million during the quarter ended March 31, 2006 and 2005, respectively.

7. Income Taxes

For the three months ended March 31, 2006, the effective tax rate was 32.3 percent, reflecting lower levels of tax-exempt investment income. For the three months ended March 31, 2005, the effective tax rate was 22.1 percent, reflecting a benefit of 5.5 percentage points due to reversals of $2.1 million of tax reserves that were deemed to be no longer needed due to the passage of time.

8. Stockholders’ Equity

As of March 31, 2006, the Company has 84,466,671 shares of common stock outstanding. During the three months ended March 31, 2006, the Company repurchased 483,900 shares of its common stock at an average cost of $27.97 per share. As of March 31, 2006, the Company has remaining authorization to purchase up to 3,470,150 shares of its common stock. Following is a summary of common stock and treasury stock share activity during the three months ended March 31, 2006:

		Common Stock				Treasury Stock
(Amounts in thousands)		Shares Issued				Shares
Balance at December 31, 2005			88,556				2,701
Stock repurchases			—				484
Submission of shares for withholding taxes upon exercise of stock options and release of restricted stock, net of issuances			—				64
Balance at March 31, 2006			88,556				3,249

The Company has an employee equity trust (the “Trust”) used to fund employee compensation and benefit plans. The fair market value of the shares held by the Trust is recorded in the “Unearned employee benefits and other” component in the Consolidated Balance Sheets and is reduced as shares are released to fund employee benefits. During the three months ended March 31, 2006, the Company released 461,639 shares upon the exercise of stock options and the vesting of restricted stock. As of March 31, 2006, 456,393 shares of MoneyGram common stock remained in the Trust.

The components of accumulated other comprehensive income include:

		March 31				December 31
(Dollars in thousands)		2006				2005
Unrealized gain on securities classified as available-for-sale		$	7,745			$	38,288
Unrealized loss on derivative financial instruments			21,885				13,651
Cumulative foreign currency translation adjustments			3,557				2,217
Minimum pension liability adjustment			(42,331	)			(42,331	)
Accumulated other comprehensive income		$	(9,144	)		$	11,825

9. Pensions and Other Benefits

Net periodic pension cost for the defined benefit pension plan and the combined supplemental executive retirement plans (“SERPs”) includes the following components:

		Three Months Ended
		March 31,
(Dollars in thousands)		2006				2005
Service cost		$	480			$	429
Interest cost			2,896				3,013
Expected return on plan assets			(2,231	)			(2,201	)
Amortization of prior service cost			176				192
Recognized net actuarial loss			1,080				998
Net periodic pension cost		$	2,401			$	2,431

Benefits paid through the defined benefit pension plan and the combined SERPs were $4.0 million and $4.2 million for the three months ended March 31, 2006 and 2005, respectively. The Company made contributions to the defined benefit pension plan and the combined SERPs totaling $2.9 million and $1.2 million during the three months ended March 31, 2006 and 2005, respectively.

Net periodic postretirement benefit cost for the defined benefit postretirement plans includes the following components:

		Three Months Ended
		March 31,
(Dollars in thousands)		2006				2005
Service cost		$	159			$	129
Interest cost			179				144
Amortization of prior service cost			(74	)			(74	)
Recognized net actuarial loss			6				4
Net periodic pension cost		$	270			$	203

Benefits paid through, and contributions made to, the defined benefit postretirement plan were less than $0.1 million during the three months ended March 31, 2006 and 2005.

The Company incurred expenses for and made contributions to the 401(k) defined contribution plan totaling $0.7 million and $0.5 million during the three months ended March 31, 2006 and 2005, respectively. In addition, the Company made a discretionary profit sharing contribution to the 401(k) defined contribution plan totaling $2.1 million and $1.9 million during the three months ended March 31, 2006 and 2005, respectively.

10. Debt

On March 31, 2006, the interest rate under the Company’s bank credit facility was 5.46%, exclusive of the effect of commitment fees and other costs, and the facility fee was 0.125%. At March 31, 2006 and December 31, 2005, the two interest rate debt swaps used to

hedge the cash flows under our variable rate debt had an average fixed pay rate of 4.3% and an average variable receive rate of 4.3% and 3.9%, respectively. See Note 5 for further information regarding the Company’s portfolio of derivative financial instruments.

11. Stock-Based Compensation

Option awards are granted with an exercise price equal to the market price of the Company’s common stock on the date of grant. Stock options granted in 2006 become exercisable in a three-year period in an equal number of shares each year 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.

		2006				2005
Expected dividend yield			0.6	%			0.2	%
Expected volatility			26.5	%			24.1	%
Risk-free interest rate			4.7	%			3.8	%
Expected life		6.5 years				5 years

Following is a summary of stock option activity:

										Weighted-
						Weighted				Average				Aggregate
						Average				Remaining				Intrinsic
						Exercise				Contractual				Value
		Shares				Price				Term				($000)
Options outstanding at December 31, 2005			4,883,262			$	18.42
Granted			399,540				27.28
Exercised			(381,346	)			18.31
Forfeited			(44,961	)			18.93
Options outstanding at March 31, 2006			4,856,495			$	19.16			5.48 years				$	56,143
Options exercisable at March 31, 2006			3,836,060			$	18.21				4.85			$	47,974

The weighted-average grant date fair value of options granted during 2006 and 2005 was $10.38 and $5.95, respectively. The total intrinsic value of options exercised during the three months ended March 31, 2006 and 2005 was $3.9 million and $0.4 million, respectively. Cash received from option exercises for the three months ended March 31, 2006 and 2005 was $8.1 million and $1.4 million, respectively. The tax benefit realized for the tax deductions from option exercises totaled $1.4 million and $0.1 million for the three months ended March 31, 2006 and 2005, respectively.

The Company has granted both restricted stock and performance-based restricted stock. The vesting of restricted stock is typically 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. Vesting could accelerate if performance targets are met at certain achievement levels. Future vesting in all cases is subject generally to continued employment with MoneyGram or MoneyGram’s former parent company, Viad Corp (“Viad”). 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 were 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, 2005			692,939			$	18.28
Granted			112,070				27.33
Vested and issued			(421,183	)			17.43
Forfeited			(7,500	)			19.32
Restricted stock outstanding at March 31, 2006			376,326			$	21.89

During the three months ended March 31, 2006 and 2005, the Company recognized expense totaling $0.6 million and $0.5 million, respectively, related to its options and $0.6 million and $0.4 million, respectively, related to its restricted stock. As of March 31, 2006, there was $6.1 million and $4.1 million of total unrecognized compensation expense related to nonvested options and restricted stock, respectively. That expense is expected to be recognized over a weighted average period of 2.62 years for options and 1.91 years for restricted stock. The total fair value of options that vested during the three months ended March 31, 2006 and 2005 was $5.6 million and $1.5 million, respectively, on the vesting date. The total fair value of restricted stock that vested during the three months ended March 31, 2006 and 2005 was $11.6 million and $9.4 million, respectively.

As of March 31, 2006, the Company has remaining authorization to issue awards of up to 6,931,890 shares of common stock under its 2005 Omnibus Incentive Plan.

Options to purchase 19,556 and 1,511,754 shares of common stock were outstanding at March 31, 2006 and 2005, respectively, but were not included in the computation of diluted earnings per share because the effect would be antidilutive. Options are antidilutive if the exercise price of the option is greater than the average market price of the Company’s common stock for the period presented.

12. Commitments and Contingencies

At March 31, 2006, the Company had various reverse repurchase agreements, letters of credit and overdraft facilities totaling $2.3 billion to assist in the management of investments and the clearing of payment service obligations. Included in this amount is a reverse repurchase agreement with one clearing bank totaling $1.0 billion. At March 31, 2006, $10.4 million was outstanding under five letters of credit and $175.0 million was outstanding under the reverse repurchase agreements. No amounts were outstanding at March 31, 2006 under the overdraft facilities.

The Company has agreements with certain other co-investors to provide funds related to investments in limited partnership interests. As of March 31, 2006, the total amount of unfunded commitments related to these agreements was $5.8 million.

13. New Accounting Pronouncements

In May 2005, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 154, Accounting Changes and Error Corrections, which replaces Accounting Principle Board (“APB”) No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. This statement requires that an entity apply the retrospective method in reporting a change in an accounting principle or the reporting entity. The standard only allows for a change in accounting principle if it is required by a newly issued accounting pronouncement or the entity can justify the use of an allowable alternative accounting principle on the basis that it is preferable. This statement also requires that corrections for errors discovered in prior period financial statements be reported as a prior period adjustment by restating the prior period financial statements. Additional disclosures are required when a change in accounting principle or reporting entity occurs, as well as when a correction for an error is reported. The statement is effective for the Company for fiscal 2006. The adoption of this SFAS did not have a material impact to the Company’s consolidated financial statements.

In January 2006, the FASB issued FASB Staff Position (“FSP”) No. 45-3, Application of FASB Interpretation No. 45 (“FIN 45”) to Minimum Revenue Guarantees Granted to a Business or Its Owners. This FSP amends FIN 45 to include guarantees granted to a business that its revenue for a specified period of time will be at least a specified amount. FIN 45 requires that a company record an obligation at the inception of a guarantee equal to the fair value of the guarantee, as well as disclose certain information relating to the guarantee. The FSP is applicable for minimum revenue guarantees issued or modified by the Company on or after January 1, 2006, with no revision or restatement to the accounting treatment of such guarantees issued prior to the adoption date allowed. The

disclosure requirements of FIN 45 will be applicable to all outstanding minimum revenue guarantees. The Company has adopted this FSP effective January 1, 2006 with no material impact to the Company’s consolidated financial statements.

In February 2006, the FASB issued FSP No. 123R-4, Classification of Options and Similar Instruments Issued as Employee Compensation That Allow for Cash Settlement upon the Occurrence of a Contingent Event. This FSP amends SFAS No. 123R to require that stock options issued to employees as compensation be accounted for as equity instruments until a contingent event allowing for cash settlement is probable of occurring. The Company has adopted this FSP effective January 1, 2006 with no material impact to the Company’s consolidated financial statements.

14. Minimum Commission Guarantees

The Company may grant minimum commission guarantees to certain money transfer agents which guarantees that the agent’s commission for a specified period of time will be at least a contractually specified amount. These guarantees are granted in limited circumstances as an incentive to become a new agent for the Company. Under the guarantees, the Company will pay to the agent the difference between the contractually specified minimum commission revenue and the actual commissions earned by the agent.

As of March 31, 2006, the minimum commission guarantees had a maximum payment of $23.7 million over a weighted average remaining term of four 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. However, under the terms of the agent contracts, the Company may terminate the contract if the projected or actual volume of transactions falls beneath a contractually specified amount. In fiscal 2005, the Company paid $2.5 million under these guarantees, or approximately 50 percent of the maximum payment for the year.

15. Segment Information

Our 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 following table reconciles segment operating income to the income from continuing operations before income taxes as reported in the financial statements:

		Three Months Ended
		March 31
(Dollars in thousands)		2006				2005
Total revenue
Global Funds Transfer
Money transfer, including bill payment		$	144,987			$	111,297
Retail money orders			37,509				35,052
Other			491				796
Total Global Funds Transfer			182,987				147,145
Payment Systems
Official check and payment processing			72,942				73,938
Other			7,743				6,832
Total Payment Systems			80,685				80,770
Total revenue		$	263,672			$	227,915
Operating Income
Global Funds Transfer		$	39,907			$	26,429
Payment Systems			10,323				13,240
Total operating income			50,230				39,669
Interest expense			(1,947	)			(1,389	)
Other unallocated expenses			(2,595	)			(2,623	)
Income before income taxes		$	45,688			$	35,657

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

		Three Months Ended
		March 31
(Dollars in thousands)		2006				2005
Depreciation and amortization
Global Funds Transfer		$	7,482			$	6,460
Payment Systems			950				976
Total depreciation and amortization		$	8,432			$	7,436
Capital expenditures
Global Funds Transfer		$	17,143			$	16,691
Payment Systems			3,454				96
Total capital expenditures		$	20,597			$	16,787

The following table presents revenue by major geographic area:

		Three Months Ended
		March 31
(Dollars in thousands)		2006				2005
United States		$	213,754			$	183,847
Foreign			49,918				44,068
Total revenue		$	263,672			$	227,915

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

The following discussion should be read in conjunction with MoneyGram International, Inc.’s (“MoneyGram,” “the Company,” “we,” “us” and “our”) consolidated financial statements and related notes. This discussion contains forward-looking statements that involve risks and uncertainties. MoneyGram’s actual results could differ materially from those anticipated due to various factors discussed under “Forward-Looking Statements” and elsewhere in this Quarterly Report.

Highlights

The following are financial highlights of the first quarter of 2006:

	•		Global Funds Transfer segment revenue grew 24 percent from the first quarter of 2005, driven by 46 percent volume growth and 30 percent revenue growth in money transfer.
	•		Fee and other revenue of $169.1 million grew 22 percent from the first quarter of 2005, driven primarily from the growth in money transfer volume.
	•		The net investment margin of 2.31 percent (see Table 3) improved over the net investment margin in the first quarter of 2005 of 1.91 percent, due to higher yields on the portfolio.

Table 1 — Results of Operations

		Three Months Ended								2006				As a Percentage
		March 31,								vs				of Total Revenue
		2006				2005				2005				2006				2005
		(Dollars in thousands)								(%)				(%)				(%)
Revenue:
Fee and other revenue		$	169,132			$	138,519				22				64				61
Investment revenue			94,960				89,502				6				36				39
Net securities (losses) gains			(420	)			(106	)			NM				(0	)			(0	)
Total revenue			263,672				227,915				16				100				100
Fee commissions expense			67,484				52,188				29				26				23
Investment commissions expense			58,789				57,953				1				22				25
Total commissions expense			126,273				110,141				15				48				48
Net revenue			137,399				117,774				17				52				52
Expenses:
Compensation and benefits			40,627				29,274				39				15				13
Transaction and operations support			32,087				35,644				(10	)			12				16
Depreciation and amortization			8,432				7,436				13				3				3
Occupancy, equipment and supplies			8,618				8,374				3				3				4
Interest expense			1,947				1,389				40				1				1
Total expenses			91,711				82,117				12				34				37
Income before income taxes			45,688				35,657				28				18				15
Income tax expense			14,753				7,868				88				6				3
Net income		$	30,935			$	27,789				11				12				12

NM = Not meaningful

Compared to the first quarter of 2005, total revenue and net revenue for the first quarter of 2006 increased by $35.8 million, or 16 percent, and $19.6 million, or 17 percent, respectively. This increase is primarily driven by transaction growth in the money transfer business. Total operating expenses excluding commissions increased by $9.6 million, or 12 percent, primarily due to increased headcount to support the growth in the business, partially offset by lower transaction and operations support expense due to the timing of marketing expenditures and legal settlements in the first quarter of 2005.

Table 2 — Net Fee Revenue Analysis

		Three Months Ended
		March 31,								2006 vs
		2006				2005				2005
		(Dollars in thousands)
Fee and other revenue		$	169,132			$	138,519				22	%
Fee commissions expense			(67,484	)			(52,188	)			29	%
Net fee revenue		$	101,648			$	86,331				18	%
Commissions as a percentage of fee and other revenue			39.9	%			37.7	%

Fee and other revenue includes fees on money transfer transactions, money orders and, to a lesser extent, official check transactions, and is a growing portion of our total revenue, increasing to 64 percent of total revenue for the first quarter of 2006 from 61 percent for the same period of 2005. Fee and other revenue in the first quarter 2006 increased 22 percent compared to the same period in the prior

year, primarily driven by a 46 percent growth in transaction volumes in our money transfer and urgent bill payment products. Fee and other revenue in the first quarter of 2005 included $2.2 million of revenue from payment received due to the early termination of a customer contract. The revenue growth rate for the first quarter of 2006 is lower than the money transfer volume growth rate due primarily to simplified pricing initiatives and the mix of transaction origination in the money transfer business. Our simplified pricing initiatives include reducing the number of pricing tiers or bands and allow us to manage our price-volume dynamic while streamlining the point of sale process for our agents and customers. Our pricing philosophy continues to maintain a price point below our higher priced competitor but above the niche players in the market. Our domestically originated transactions, which contribute lower revenue per transaction, are growing at a faster rate than internationally originated transactions. In addition, the Euro exchange rate has declined by 9 percent as compared to the first quarter of 2005.

Fee commissions consist primarily of fees paid to our third-party agents for the money transfer service. Fee commissions expense was up 29 percent in the first quarter of 2006 as compared to the same period in 2005, primarily driven by higher money transfer transaction volume.

Net fee revenue increased $15.3 million, or 18 percent, in the first quarter of 2006 as compared to 2005, driven by the increase in money transfer and urgent bill payment transactions. Growth in net fee revenue was less than fee and other revenue growth primarily due to the growth in money transfer, which has a lower margin than money orders.

Table 3 — Net Investment Revenue Analysis

		Three Months Ended
		March 31,								2006 vs
		2006				2005				2005
		(Dollars in thousands)
Components of net investment revenue:
Investment revenue		$	94,960			$	89,502				6	%
Investment commissions expense (1)			(58,789	)			(57,953	)			1	%
Net investment revenue		$	36,171			$	31,549				15	%
Average balances:
Cash equivalents and investments		$	6,343,281			$	6,703,839				-5	%
Payment service obligations (2)			4,792,925				5,240,596				-9	%
Average yields earned and rates paid (3):
Investment yield			6.07	%			5.41	%			0.66	%
Investment commission rate			4.97	%			4.48	%			0.49	%
Net investment margin			2.31	%			1.91	%			0.40	%

	(1)		Investment commissions expense includes payments made to financial institution customers based on short-term interest rate indices on the outstanding balances of official checks sold by that financial institution, as well as costs associated with swaps and the sale of receivables program.
	(2)		Commissions are paid to financial institution customers based upon average outstanding balances generated by the sale of official checks only. The average balance in the table reflects only the payment service obligations for which commissions are paid and does not include the average balance of the sold receivables ($393.0 million and $407.8 million for the three months ended March 31, 2006 and 2005, respectively) as these are not recorded in the Consolidated Balance Sheets.
	(3)		Average yields/rates are calculated by dividing the applicable amount shown in the “Components of net investment revenue” section by the applicable amount shown in the “Average balances” section, divided by the number of days in the period presented and multiplied by the number of days in the year. The “Net investment margin” is calculated by dividing “Net investment revenue” by the “Cash equivalents and investments” average balance, divided by the number of days in the period presented and multiplied by the number of days in the year.

Investment revenue increased six percent in the first quarter of 2006 compared to the same period in 2005 due to higher yields on the portfolio, partially offset by lower investable balances. Investment revenue for the first quarter of 2006 includes $3.8 million of cash flow recoveries on previously impaired investments and income from limited partnership interests, while the first quarter of 2005 includes $5.3 million of cash flow recoveries from previously impaired investments. The limited partnership interests are accounted for under the equity method.

Investment commissions expense increased one percent in the first quarter of 2006 compared to the same period in 2005 as rising short-term rates resulted in higher commissions paid to financial institution customers. The impact of rising rates was significantly offset by lower swap costs.

Net investment revenue increased 15 percent in the first quarter of 2006 compared to the prior year, with the net investment margin increasing 40 basis points to 2.31 percent. This growth is attributable to the higher yields, lower swap costs and income from limited partnership interests, partially offset by a lower level of cash recoveries from previously impaired securities.

Table 4 — Summary of Gains, Losses and Impairments

		Three Months Ended
		March 31,								2006 vs
		2006				2005				2005
		(Dollars in thousands)
Gross realized gains		$	1,637			$	6,264			$	(4,627	)
Gross realized losses			(1,265	)			(4,492	)			3,227
Other-than-temporary impairments			(792	)			(1,878	)			1,086
Net securities losses		$	(420	)		$	(106	)		$	(314	)

Net securities losses remained relatively stable at $0.4 million in the first quarter of 2006 compared to $0.1 million in the first quarter of 2005. Gross securities gains and losses were higher in the first quarter of 2005 as the Company was repositioning its portfolio. The Company recognized lower impairments in 2006 as the credit quality of the portfolio remained strong.

Expenses

Compensation and benefits — Compensation and benefits includes salaries and benefits, management incentive programs, severance costs and other employee related costs. Compensation and benefits increased 39 percent in the first quarter of 2006 compared to the same period in 2005 due to higher headcount supporting the growth of the money transfer business and higher incentive compensation accruals. We expect compensation and benefits to increase in the second quarter of 2006 due to our annual merit increases and additional headcount from growth and the Money Express acquisition expected to close in the second quarter of 2006.

Transaction and operations support — Transaction and operations support expenses include marketing, professional fees and other outside services, telecommunications and forms expense. Transaction and operations support costs were down 10 percent in the first quarter of 2006 compared to 2005, due to the timing of marketing expenditures and lower professional services costs. Marketing expenditures in the first quarter of 2006 were lower than the prior year due to the timing of planned marketing campaigns and activities. Similar to 2005, we anticipate that our marketing expenditures will increase throughout the remainder of 2006. We will also incur additional costs in 2006 as we develop our own retail network in certain markets. During the first quarter of 2005, the Company incurred $2.2 million of costs related to the settlement of one legal matter and the accrual for an expected settlement in another legal matter. Also, we incurred higher professional services costs in 2005 primarily due to the compliance initiatives related to Section 404 of the Sarbanes-Oxley Act and the regulatory environment, software development and other projects. As 2005 was our first year of reporting under Section 404 of the Sarbanes-Oxley Act, we expect that our Section 404 costs in 2006 will be lower as the initiatives undertaken in 2005 become integrated into our daily activities. However, we continue to see a trend among state and federal regulators of banks and other financial services businesses toward greater scrutiny of anti-money laundering compliance. As we continue to add staff resources and enhancements to our technology systems to address this trend, our transaction expenses will likely increase.

Depreciation and amortization — Depreciation and amortization includes depreciation on point of sale equipment, computer hardware and software (including capitalized software development costs), office furniture, equipment and leasehold improvements, as well as amortization of our intangible assets. Depreciation and amortization expense in the first quarter of 2006 increased 13 percent over the same period in 2005, due to the amortization of capitalized software and hardware acquired in 2005 to enhance our product platforms and help drive growth.

Occupancy, equipment and supplies — Occupancy, equipment and supplies includes facilities rent and maintenance costs, software and equipment maintenance costs, freight and delivery costs, and supplies. Occupancy, equipment and supplies in the first quarter of 2006 increased three percent over 2005, as we had higher software expense and maintenance, office rent, equipment maintenance and supplies expense, partially offset by lower losses on disposals of fixed assets. Software expense and maintenance increases relate

primarily to purchased licenses to support our growth and compliance initiatives. Office rent has increased due to normal annual increases and expanded locations. Equipment maintenance and supplies expenses have increased in connection with the growth in our agent locations.

Interest expense — Interest expense in the first quarter of 2006 increased $0.6 million, or 40 percent, over 2005 due to rising interest rates, partially offset by receipts under our cash flow hedges. In the third quarter of 2005, the Company entered into two interest rate swaps with a total notional amount of $150.0 million to hedge our variable rate debt. Under these swaps, we pay a fixed amount and receive a variable rate indexed to LIBOR. As LIBOR rates increase, we receive a higher amount than we pay out under these swaps. .

Income taxes — The effective tax rate increased to 32.3 percent in the first quarter of 2006 compared to 22.1 percent in the first quarter of 2005, as tax exempt investment income is declining as a percentage of total pre-tax income. In addition, the effective tax rate in the first quarter of 2005 benefited by 5.5 percentage points from the reversal of $2.1 million of tax reserves that were deemed to be no longer needed due to the passage of time.

Segment Performance

We measure financial performance by our two business segments — Global Funds Transfer and Payment Systems. The business segments 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. Through our agent network, the Global Funds Transfer segment primarily provides our retail consumers with money transfer services and domestic money orders, as well as bill payment services. The Payment Systems segment primarily provides official check services and money orders for financial institutions, as well as controlled disbursements processing for our business customers. Segment pre-tax operating income and segment operating margin are used to evaluate performance and allocate resources.

We manage our investment portfolio on a consolidated level and the specific investment securities are not identifiable to a particular segment. However, average investable balances are allocated to our segments based upon the average balances generated by that segment’s sale of payment instruments. The investment yield is primarily allocated based upon the total average investment yield. Gains and losses are allocated based upon the allocation of average investable balances. Our derivatives portfolio is also managed on a consolidated level and the derivative instruments are not specifically identifiable to a particular segment. The total costs associated with our derivatives portfolio are allocated to each segment based upon the percentage of that segment’s average investable balances to the total average investable balances. Table 5 reconciles segment operating income to income from continuing operations before income taxes as reported in the financial statements.

Table 5 — Segment Information

		Three Months Ended
		March 31,								2006 vs
		2006				2005				2005
		(Dollars in thousands)
Operating income:
Global Funds Transfer		$	39,907			$	26,429				51	%
Payment Systems			10,323				13,240				-22	%
Total segment operating income			50,230				39,669				27	%
Interest expense			1,947				1,389				40	%
Other unallocated expenses			2,595				2,623				-1	%
Income from continuing operations before income taxes		$	45,688			$	35,657				28	%

Other unallocated expense represents pension and benefit obligation expense, as well as interim service fees paid to MoneyGram’s former parent Viad Corp (“Viad”). As part of our 2004 spin-off from Viad, we entered into an Interim Services Agreement (the “Agreement”) which provides for services to be provided by Viad on an interim basis. We were obligated under this Agreement to pay approximately $1.6 million annually, or $0.4 million quarterly, beginning July 1, 2004. On July 1, 2005, we notified Viad of our termination of certain services under the Agreement effective on September 28, 2005. As a result of this termination, our payments to Viad were less than $0.1 million in the first quarter of 2006. On December 22, 2005, we notified Viad of our termination of substantially all remaining services under the Agreement effective in the second quarter of 2006.

Table 6 — Global Funds Transfer Segment

		Three Months Ended
		March 31,								2006 vs
		2006				2005				2005
		(Dollars in thousands)
Revenue		$	182,987			$	147,145				24	%
Commissions			72,148				56,817				27	%
Operating income			39,907				26,429				51	%
Operating margin			21.8	%			18.0	%

Global Funds Transfer revenue includes investment revenue, securities gains and losses and fees on money transfers, retail money orders and bill payment products. Global Funds Transfer revenue increased 24 percent in the first quarter of 2006 over the same period in 2005, primarily driven by the growth in money transfer and investment revenue from higher yields on the money order portfolio. Money transfer volumes grew 46 percent in the first quarter of 2006 and money transfer revenue grew 30 percent. Money transfer revenue growth rates are lower than volume growth rates due to simplified pricing initiatives and the mix of transaction origination in the money transfer business. Our domestically originated transactions, which contribute lower revenue per transaction, grew 51 percent in the first quarter of 2006, while transactions originated outside of North America grew 30 percent. In addition, the Euro exchange rate has declined by 9 percent as compared to the first quarter of 2005. The money transfer agent base expanded, primarily in the international markets, by 16 percent over the first quarter of 2005 to over 92,000 agent locations. As expected, retail money order volume declined four percent in the first quarter of 2006 compared to the same period in 2005, consistent with the overall trend of paper-based payment instruments.

Investment revenue in Global Funds Transfer increased 20 percent in the first quarter of 2006 compared to the same period in 2005, primarily due to higher interest rates earned on the portfolio. Global Funds Transfer realized $0.9 million and $1.1 million of income from limited partnership interests and pretax cash flow recoveries from previously impaired investments in the first quarter of 2006 and 2005, respectively.

Commissions expense consists of fees paid to our third-party agents for the money transfer service and costs associated with swaps and the sale of receivables program. Commissions expense in the first quarter of 2006 increased 27 percent compared to 2005, primarily driven by the transaction volume growth in money transfer and urgent bill payment services. Commissions expense as a percentage of revenue increased from 38.6 percent in the first quarter of 2005 to 39.4 percent in the first quarter of 2006 due to product mix as the money transfer business, the primary source of commissions, continues to comprise a larger percent of the revenue of Global Funds Transfer.

Operating margin was 21.8 percent in the first quarter of 2006 compared to 18.0 percent in the first quarter of 2005. The increase in operating margin is due to strong money transfer revenue growth and lower expense growth, partially offset by the continued shift in product mix from higher-margin money orders to lower-margin money transfers. In the first quarter of 2006, our marketing expenditures were lower than the same period in the prior year. We expect to see an increase in marketing expenditures over the next couple of quarters in markets such as Italy. We also expect our operating margin to decline in the next couple of quarters to a level seen in the fourth quarter of 2005 due to the increased spend in marketing, integration costs from the pending Money Express acquisition, our continuing investment in the agent network and start-up costs related to the development of our own retail network in specific locations.

Table 7 — Payment Systems Segment

		Three Months Ended
		March 31,								2006 vs
		2006				2005				2005
		(Dollars in thousands)
Revenue		$	80,685			$	80,770				0	%
Commissions			54,124				53,325				2.0	%
Operating income			10,323				13,240				(22	)%
Operating margin			12.8	%			16.4	%
Taxable equivalent basis (1):
Revenue		$	85,112			$	85,489				0	%
Commissions			54,124				53,325				2	%
Operating income			14,750				17,959				(18	)%
Operating margin			17.3	%			21.0	%

Payment Systems revenue includes investment revenue, securities gains and losses, fees charged to our official check financial institution customers and fees earned on our rebate processing business. Revenue remained flat during the first quarter of 2006 as compared to 2005 due to a decrease in fee and other revenue, fully offset by an increase in investment revenue from higher yields on the investments portfolio. Fee and other revenue in the first quarter of 2005 included $2.2 million of revenue from payment received due to the early termination of a customer contract. Included in investment revenue for the first quarter of 2006 and 2005 is $2.9 million and $4.2 million, respectively, of pretax cash flows from previously impaired investments and income from limited partnership interests.

Commission expense includes payments made to financial institution customers based on official check average investable balances and short-term interest rate indices, as well as costs associated with swaps and the sale of receivables program. Commission expense increased two percent in the first quarter of 2006 as compared to 2005, primarily due to higher short-term interest rates that resulted in higher commissions paid to financial institution customers, partially offset by a decline in swap costs, repricing efforts and lower investable balances.

Operating margin in the first quarter of 2006 was 12.8 percent (17.3 percent on a taxable equivalent basis) as compared to 16.4 percent (21.0 percent on a taxable equivalent basis) in 2005. The operating margin for the first quarter of 2006 and 2005 benefited by 3.2 percentage points and 4.6 percentage points, respectively, from pretax cash flows from previously impaired securities and income from limited partnership interests. In addition, the operating margin in the first quarter of 2005 benefited by 2.6 percentage points from the customer early termination fee.

Outlook

We believe that the following key items will have an impact on our future operations. We expect:

	•		Diluted earnings per share in 2006 to be in the range of $1.36 to $1.41.
	•		Net revenue (total revenue less total commissions) to be in the range of $565.0 to $590.0 million for 2006.
	•		Our net investment margin in 2006 to be in the range of 195 to 205 basis points. This guidance includes the effect of actual and anticipated cash flows on previously impaired investments and income from limited partnership interests.
	•		Average portfolio balances to be in the range of $6.3 to $6.6 billion in 2006.
	•		Our income before taxes to be in the range of $165.0 to $173.0 million.

This guidance is dependent on a variety of factors, including those listed below under Forward Looking Statements. From time to time, events may occur which can result in unanticipated income or losses. Our outlook does not reflect such events.