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, 2009

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

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements			3
Consolidated Balance Sheets			3
Consolidated Statements of Loss			4
Consolidated Statements of Comprehensive Loss			5
Consolidated Statements of Cash Flows			6
Consolidated Statements of Stockholders’ Deficit			7
Notes to Consolidated Financial Statements			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			24
Item 3. Quantitative and Qualitative Disclosures About Market Risk			40
Item 4. Controls and Procedures			40
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			40
Item 1A. Risk Factors			41
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			51
Item 4. Submission of Matters to a Vote of Security Holders			51
Item 6. Exhibits			51
Signatures			52
Exhibit Index			53
EX-10.8
EX-10.9
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I. FINANCIAL INFORMATION

See Notes to Consolidated Financial Statements

See Notes to Consolidated Financial Statements

See Notes to Consolidated Financial Statements

MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES

The following table shows the total amount of assets in excess of payment service obligations at September 30, 2009 and December 31, 2008:

The Company was in compliance with its contractual and financial regulatory requirements as of September 30, 2009 and December 31, 2008.

Note 3 — Acquisitions and Disposals

Raphaels Bank — On February 2, 2009, the Company acquired the French assets of R. Raphaels & Sons PLC (“Raphaels Bank”) for a purchase price of $3.2 million. The acquisition of Raphaels Bank provides the Company with five money transfer stores in and around Paris, France that have been integrated into the Company’s French retail operations. The preliminary purchase price allocation as of September 30, 2009 includes $2.0 million of goodwill assigned to the Company’s Global Funds Transfer segment. The purchase price allocation is preliminary pending the completion of the valuation of fixed assets, intangible assets and deferred taxes. The operating results of Raphaels Bank subsequent to the acquisition date are included in the Company’s Consolidated Statements of Loss. The financial impact of the acquisition is not material to the Consolidated Balance Sheets or Consolidated Statements of Loss.

FSMC, Inc. — On May 15, 2009, the Company’s subsidiary FSMC, Inc. (“FSMC”), a component of the Payment Systems segment, entered into an asset purchase agreement with Solutran, Inc. to sell certain assets and rights for a price of $4.5 million. As a result of the sale, which was completed in the third quarter of 2009, the Company recorded an impairment charge of $0.6 million in the second quarter of 2009 to write-off goodwill associated with FSMC. This impairment charge is recorded in the “Transaction and operations support” line in the Consolidated Statements of Loss. The operating results of FSMC are not material to the Company’s Consolidated Statements of Loss and the assets and liabilities are not material to the Company’s Consolidated Balance Sheets.

ACH Commerce — After evaluating the market opportunity for certain electronic payment services, the Company announced a decision in December 2008 to exit the ACH Commerce business, a component of the Payment Systems segment. In connection with this decision, the Company recognized an impairment charge of $3.2 million to write-off the goodwill associated with ACH Commerce. During the second quarter of 2009, the Company entered into a Letter of Intent to sell proprietary software related to the ACH Commerce business and provide referral services on behalf of a third party. In October 2009, the Company determined that it would not proceed with the sale of its proprietary software, resulting in a $1.4 million impairment charge in the third quarter of 2009 to write-off the asset. The impairment charge was recorded in the “Transaction and operations support” line in the Consolidated Statements of Loss. ACH Commerce is not material to the Consolidated Statements of Loss or the Consolidated Balance Sheets.

Other Disposals — During the third quarter of 2009, the Company decided to sell its corporate airplane. In connection with this decision, the Company recognized a $7.0 million impairment in the “Transaction and operations support” line in the Consolidated Statements of Loss.

Note 4 — Fair Value Measurement

Following is a description of the Company’s valuation methodologies for assets and liabilities measured at fair value:

Cash equivalents — The estimated fair values for cash equivalents approximate their carrying values due to the short-term maturities of these instruments. Accordingly, cash equivalents are classified as Level 1.

Investments — Trading and available-for-sale investments are valued using quoted market prices for identical or similar securities where possible, including broker quotes. If market quotes are not available, or broker quotes could not be corroborated by market observable data, the Company will value a security using a pricing service and externally developed cash flow models.

For U.S. government agencies, residential mortgage-backed securities collateralized by U.S. government agency securities, fair value measures are generally obtained from independent sources, including a pricing service. As market quotes are generally not readily available or accessible for these specific securities, the pricing service generally measures fair value through the use of pricing models and observable inputs for similar assets and market data. Accordingly, these securities are classified as Level 2 financial instruments.

The Company periodically corroborates the valuations provided by the pricing service through internal valuations utilizing externally developed cash flow models, comparison to actual transaction prices for sold securities and any broker quotes received on the same security.

For residential mortgage-backed securities, other asset-backed securities, investments in limited partnerships and trading investments, market quotes are generally not available. If available, the Company will utilize a fair value measurement from a pricing service. The pricing service utilizes a pricing model based on market observable data and indices, such as quotes for comparable securities, yield curves, default indices, interest rates and historical prepayment speeds. If a fair value measurement is not available from the pricing service, the Company will utilize a broker quote if available. Due to a general lack of transparency in the process that the brokers use to develop prices, most valuations that are based on brokers’ quotes are classified as Level 3. If no broker quote is available, or if such quote cannot be corroborated by market data or internal valuations, the Company performs internal valuations utilizing externally developed cash flow models. These pricing models are based on market observable spreads and, when available, observable market indices. The pricing models also use inputs such as the rate of future prepayments and expected default rates on the principal, which are derived by the Company based on the characteristics of the underlying structure and historical prepayment speeds experienced at the interest rate levels projected for the underlying collateral. The pricing models for certain asset-backed securities also include significant non-observable inputs such as internally assessed credit ratings for non-rated securities combined with externally provided credit spreads. Observability of market inputs to the valuation models used for pricing certain of the Company’s investments has deteriorated with the disruption to the credit markets as overall liquidity and trading activity in these sectors has been substantially reduced. Accordingly, securities valued using a pricing model have consistently been classified as Level 3 financial instruments since January 1, 2008.

Other Financial Instruments — Other financial instruments consist of put options related to trading investments. The fair value of the put options related to trading investments are valued using the expected cash flows from the instruments assuming their exercise in June 2010 and discounted at a rate corroborated by market data for a financial institution comparable to the put option counter-party, as well as the Company’s interest rate on its Notes. The discounted cash flows of the put options are then reduced by the estimated fair value of the trading investments. Given the subjectivity of the discount rate and the estimated fair value of the trading investments, the Company has classified its put options related to trading investments as Level 3 financial instruments. The fair value of the put options is remeasured each period, with the change in fair value recognized in earnings.

Debt — Debt is carried at amortized cost; however, the Company estimates the fair value of debt for disclosure purposes. The fair value of debt is estimated using market quotations, where available, credit ratings, observable market indices and other market data. As of September 30, 2009, the fair value of the Company’s Tranche A loan, Tranche B loan and revolving credit facility under the Senior Facility is estimated at $95.2 million, $239.5 million and $42.2 million, respectively. As of September 30, 2009, the fair value of the Second Lien Notes is estimated at $471.4 million.

Following are the Company’s financial assets recorded at fair value by hierarchy level as of September 30, 2009 and December 31, 2008; the Company had no financial liabilities recorded at fair value for either period. The amount shown as “Cash equivalents (substantially restricted)” does not reflect the entire balance in the “Cash and cash equivalents (substantially restricted)” line in the Consolidated Balance Sheets as cash is not subject to fair value measurement.

The tables below provide a roll-forward for the three and nine months ended September 30, 2009 and 2008 of the financial assets classified in Level 3 which were measured at fair value on a recurring basis.

There were no financial liabilities classified in Level 3 for the three and nine months ended September 30, 2009. The table below provides a roll-forward for the three and nine months ended September 30, 2008 of the financial liabilities classified in Level 3.

Cash and Cash Equivalents — Cash and cash equivalents consist of cash, money-market securities and time deposits. Cash primarily consists of interest-bearing deposit accounts and non-interest bearing transaction accounts. The Company’s money-market securities are invested in seven funds, all of which are AAA rated and are comprised of U.S. Treasury bills, notes or other obligations issued or guaranteed by the U.S. government and its agencies, as well as repurchase agreements secured by such instruments.

Trading Investments and Related Put Options — Trading investments consisted of three securities: an auction rate security collateralized by commercial paper with a rating of A-1/P-1 and original maturities of less than 28 days; an auction rate security collateralized by perpetual preferred stock issued by the monoline insurer and paying a discretionary dividend; and perpetual preferred stock of a monoline insurer paying a discretionary dividend. The Company also held three put options which, beginning in June 2010, allow the Company to put each trading security back at par to the trading firm that originally sold the security to the Company. Under the November 2008 buy-back program that generated the put options, the trading firm also had the right to call the related security at any time at par plus accrued interest. Two auction rate securities were called in June and July 2009, resulting in a gain of $2.4 million and $5.5 million, net of the reversal of the related put options, for the three and nine months ended September 30, 2009.

The fair value of the trading investments on September 30, 2009 and December 31, 2008 was $11.8 million and $21.5 million, respectively, on a par value of $29.4 million and $62.3 million, respectively. The fair value of the put options was $14.0 million and $26.5 million as of September 30, 2009 and December 31, 2008, respectively. Net securities gains for the three and nine months ended September 30, 2009 reflect a $2.4 million and $5.5 million gain, net of the reversal of the related put options, from the call of two trading investments in June and July 2009. The fair value of the remaining trading investment did not change during 2009. The Company recorded a valuation gain on the related put option of $1.1 million and $3.2 million in the three and nine months ended September 30, 2009, respectively, which reflects the passage of time. The fair value of the remaining put option will be remeasured each period through earnings and should continue to significantly offset any further unrealized losses recognized in the Consolidated Statements of Loss related to the Company’s trading investment. The Company recorded unrealized losses on trading investments of $4.9 million and $31.8 million during the three and nine months ended September 30, 2008, respectively. The Company has received all contractual interest payments, including the penalty rate payments, as of the date of this filing.

Available-for-sale Investments — Available-for-sale investments consist of mortgage-backed securities, asset-backed securities and agency debenture securities. After other-than-temporary impairment charges, the amortized cost and fair value of available-for-sale investments were as follows at September 30, 2009:

After other-than-temporary impairment charges, the amortized cost and fair value of available-for-sale investments were as follows at December 31, 2008:

Gains and Losses and Other-Than-Temporary Impairments — At September 30, 2009 and December 31, 2008, net unrealized gains of $16.5 million and $9.3 million, respectively, are included in the Consolidated Balance Sheets in “Accumulated other comprehensive loss.” No deferred tax liability is currently recognized for the net unrealized gains due to the deferred tax position described in Note 13 — Income Taxes . During the three and nine months ended September 30, 2009, gains of $0.9 million and $1.1 million, respectively, and during the three and nine months ended September 30, 2008, gains of $1.8 million and $26.6 million, respectively, were reclassified from “Accumulated other comprehensive loss” to earnings in connection with the sale, maturity or pay-down of the underlying securities during the period. Net securities gains (losses) were as follows:

The Company realigned its portfolio during the first quarter of 2008, resulting in the sale of securities with a fair value of $3.2 billion (after other-than-temporary impairment charges) for proceeds of $2.9 billion and a net realized loss of $256.3 million which is reflected in the nine months ended September 30, 2008. This net realized loss was the result of further deterioration in the markets during the first quarter of 2008 and the short timeframe over which the Company sold its securities. Proceeds from the sales were reinvested in cash and cash equivalents. Other-than-temporary impairment charges of $0.8 million and $3.7 million during the three and nine months ended September 30, 2009, respectively, and $8.3 million and $62.7 million during the three and nine months ended September 30, 2008, respectively, were the result of further deterioration in the market.

At September 30, 2009 and December 31, 2008, 94 percent and 93 percent, respectively, of the available-for-sale portfolio was invested in debentures of U.S. government agencies or securities collateralized by U.S government agency debentures. These securities have always had the implicit backing of the U.S. government. During 2008, the U.S. government took action to place certain agencies under conservatorship and provide unlimited lines of credit through the U.S. Treasury. These actions served to provide greater comfort to the market regarding the intent of the U.S. government to back the securities issued by its agencies. The Company expects to receive full par value of these securities upon maturity or pay-down, as well as all interest payments. The “Other asset-backed securities” continue to have market exposure. The Company has factored this risk into its fair value estimates, with the average price of an asset-backed security at $0.03 per dollar of par at September 30, 2009.

Investment Ratings — In rating the securities in its investment portfolio, the Company uses ratings from Moody’s Investor 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 for disclosure purposes. 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. The Company’s investments at September 30, 2009 and December 31, 2008 had the following ratings:

Had the Company used the lowest rating from either Moody’s or S&P in the information presented above, investments rated A or better would have been reduced by $0.9 million and $3.5 million, as of September 30, 2009 and December 31, 2008, respectively.

Contractual Maturities — The amortized cost and fair value of available-for-sale securities at September 30, 2009, 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.

Fair Value Determination — Following are the sources of pricing used by the Company for its fair value estimates as a result of its valuation process:

Assessment of Unrealized Losses — At September 30, 2009 and December 31, 2008, the Company had no or nominal unrealized losses in its available-for-sale portfolio, with no unrealized losses aged 12 months or more, after the recognition of other-than- temporary impairment charges.

Note 6 — Derivative Financial Instruments

The Company historically used interest rate swaps to hedge the variability of cash flows from its floating rate debt and floating rate commission payments to financial institution customers of the Payment Systems segment, primarily relating to the official check product. In connection with the restructuring of the official check business initiated in the first quarter of 2008, the Company terminated certain of its financial institution customer relationships. The termination of the relationships resulted in the recognition of a net loss of $27.7 million on its commissions swaps during the nine months ended September 30, 2008 as the forecasted commission payments being hedged no longer occurred. This loss was recorded in “Investment commissions expense” in the Consolidated Statements of Loss. Additionally, the Company’s Senior Facility was deemed extinguished as a result of the modifications made to the Senior Facility in connection with the recapitalization. As a result, the Company recognized a net loss of $2.0 million on its interest rate swaps during the nine months ended September 30, 2008. The loss was recorded in “Interest expense” in the Consolidated Statements of Loss. The Company terminated its commission and debt interest rate swaps in the second quarter of 2008.

Historically, the Company entered into foreign currency forward contracts with 12-month durations to hedge forecasted foreign currency money transfer transactions. The Company designated these forward contracts as cash flow hedges. The Company recognized a gain of $2.4 million for the nine months ended September 30, 2009 and losses of $0.4 million and $3.6 million for the three and nine months ended September 30, 2008, respectively, in the “Fee and other revenue” line of the Consolidated Statements of Loss upon the final settlement of these cash flow hedges.

There were no outstanding cash flow hedges as of September 30, 2009. As of December 31, 2008, the Company had $0.8 million of unrealized losses on its cash flow hedges recorded in “Accumulated other comprehensive loss” in the Consolidated Balance Sheets. The notional amount of outstanding cash flow hedges as of December 31, 2008 was $18.1 million.

The Company also uses forward contracts to hedge income statement exposure to foreign currency exchange risk arising from its assets and liabilities denominated in foreign currencies. While these forward contracts economically hedge foreign currency risk, they are not designated as hedges for accounting purposes. The “Transaction and operations support” line in the Consolidated Statements of Loss reflects a $0.1 million gain and a $4.6 million loss for the three and nine months ended September 30, 2009, respectively, from the effect of changes in foreign exchange rates on foreign-denominated receivables and payables, which is net of losses of $3.6 million and $6.0 million from the related forward contracts for the three and nine months ended September 30, 2009, respectively. Losses of $2.4 million and $2.9 million were recognized for the three and nine months ended September 30, 2008, respectively, from the effect of changes in foreign exchange rates, which is net of gains of $5.2 million and $0.3 million from the related forward contracts for the three and nine months ended September 30, 2008, respectively. As of September 30, 2009 and December 31, 2008, the Company had $78.6 million and $98.4 million, respectively, of outstanding notional amounts relating to its forward contracts.

As of September 30, 2009 and December 31, 2008, the Company reflects the following fair values for all of its forward contract instruments in its Consolidated Balance Sheets:

The addition of goodwill relates to the acquisition of Raphaels Bank in the first quarter of 2009. In the second quarter of 2009, the Company decided to discontinue offering certain bill payment products which it had replaced with new product offerings. As a result, the Company recognized a $3.2 million charge to impair all goodwill related to the discontinued products, which were a component of the Global Funds Transfer segment. Also in the second quarter of 2009, the Company recognized a $0.6 million goodwill impairment charge in connection with the sale of FSMC. Goodwill impairment charges are recorded in the “Transaction and operations support” line of the Consolidated Statements of Loss. Goodwill was reduced by $4.5 million in the third quarter of 2009 upon completion of the sale of FSMC.

Senior Facility — The Company may elect an interest rate for the Senior Facility at each reset period based on the U.S. bank prime rate or the Eurodollar rate. Through 2008, the Company elected the Eurodollar rate as its basis. Effective with its first interest payment in 2009, the Company elected the U.S. bank prime rate as its basis. Amortization of the debt discount on the Tranche B loan recorded in “Interest expense” in the Consolidated Statements of Loss was $0.8 million and $2.2 million for the three and nine months ended September 30, 2009, respectively, and $0.9 million and $1.6 million for the three and nine months ended September 30, 2008, respectively. As of September 30, 2009, the Company has $189.5 million of availability under the revolving credit facility, including outstanding letters of credit which reduce the amount available under the revolving credit facility. In May 2009 and August 2009, the Company repaid $70.0 million and $30.0 million, respectively, of the revolving credit facility. In October 2009, the Company repaid the remaining $45.0 million outstanding under the revolving credit facility at September 30, 2009. This payment will be recorded in the fourth quarter of 2009.

Second Lien Notes — Prior to March 25, 2011, the Company has the option to capitalize interest at a rate of 15.25 percent. If interest is capitalized, 0.50 percent of the interest is payable in cash and 14.75 percent is capitalized into the outstanding principal balance. The Company elected to pay its interest through September 30, 2009 and anticipates that it will continue to pay the interest on the Notes for the foreseeable future.

Debt Covenants — The Senior Facility has certain financial covenants, including an interest coverage ratio and a senior secured debt ratio. Under the Senior Facility, the Company must maintain a minimum interest coverage ratio of 1.5:1 through September 30, 2010, 1.75:1 from December 31, 2010 through September 30, 2012 and 2:1 from December 31, 2012 through maturity. The Company was not permitted to have a senior secured debt ratio in excess of 6.5:1 through September 30, 2009, and the ratio is not permitted to exceed 6.0:1 from December 31, 2009 through September 30, 2010, 5.5:1 from December 31, 2010 through September 30, 2011, 5.0:1 from December 31, 2011 through September 30, 2012 and 4.5:1 from December 31, 2012 through maturity. Both the Senior Facility and the Notes also contain a covenant requiring the Company to maintain a minimum liquidity ratio of at least 1:1 for certain assets to outstanding payment service obligations. The Company is in compliance with all covenants.

Deferred Financing Costs — Amortization of deferred financing costs recorded in “Interest expense” in the Consolidated Statements of Loss was $1.8 million and $5.3 million for the three and nine months ended September 30, 2009, respectively, and $1.8 million and $3.7 million for the three and nine months ended September 30, 2008, respectively. During the nine months ended September 30, 2008, the Company recognized a debt extinguishment loss of $1.5 million in connection with the modification of the Senior Facility and expensed $0.4 million of unamortized deferred financing costs upon the termination of its $150.0 million revolving credit facility with JPMorgan.

Interest Paid in Cash — The Company paid $23.4 million and $71.8 million of interest for the three and nine months ended September 30, 2009, respectively, and $25.1 million and $57.9 million for the three and nine months ended September 30, 2008, respectively.

Benefits paid through the defined benefit pension plan and the combined SERPs were $4.4 million and $4.2 million for the three months ended September 30, 2009 and 2008, respectively, and $12.6 million and $12.3 million for the nine months ended September 30, 2009 and 2008, respectively. No contributions were made to the defined benefit pension plan during the nine months ended September 30, 2009 and 2008. The Company made contributions to the combined SERPs totaling $1.3 million and $1.0 million for the three months ended September 30, 2009 and 2008, respectively, and $3.3 million and $2.9 million for the nine months ended September 30, 2009 and 2008, respectively.

The net loss (gain) for the defined benefit pension plan and combined SERPs that the Company amortized from “Accumulated other comprehensive loss” into “Net periodic benefit expense” was $0.9 million ($0.6 million, net of tax) and $2.8 million ($1.8 million, net of tax), during the three and nine months ended September 30, 2009, respectively, and $(0.3) million ($(0.2) million, net of tax) and $1.0 million ($0.6 million net of tax) during the three and nine months ended September 30, 2008, respectively. The prior service costs for the defined benefit pension plan and combined SERPs amortized from “Accumulated other comprehensive loss” into “Net periodic benefit expense” was $1.3 million ($0.8 million, net of tax) and $1.5 million ($0.9 million, net of tax) for the three and nine months ended September 30, 2009 and was less than $0.1 million (less than $0.1 million, net of tax), and $0.7 million ($0.5 million, net of tax), for the three and nine months ended September 30, 2008, respectively.

During the three and nine months ended September 30, 2009, the Company recorded prior service costs of $1.2 million under the Company’s combined SERPs related to the departure of certain executive officers in the third quarter of 2009. During the nine months ended September 30, 2008, the Company recorded a curtailment loss of $0.5 million and prior service costs of $0.5 million under the Company’s combined SERPs related to the departure of the Company’s former chief executive officer and another executive officer.

Net periodic benefit expense for the Company’s defined benefit postretirement plans include the following components:

Benefits paid through, and contributions made to, the defined benefit postretirement plans were $0.1 million and $0.2 million during the three and nine months ended September 30, 2009, respectively, compared to $0.1 million and $0.2 million during the three and nine months ended September 30, 2008, respectively.

The prior service credit amortized from “Accumulated other comprehensive loss” into “Net periodic benefit expense” for the defined benefit postretirement plans was $0.1 million (less than $0.1 million, net of tax) for both the three months ended September 30, 2009 and 2008 and $0.3 million ($0.2 million, net of tax) for both the nine months ended September 30, 2009 and 2008. There was no net loss for the defined benefit postretirement plans for 2009 or 2008.

Contribution expense for the 401(k) defined contribution plan was $0.9 million and $2.7 million for the three and nine months ended September 30, 2009, respectively, compared to $1.0 million and $2.9 million for the three and nine months ended September 30, 2008, respectively. In addition, the Company made a discretionary profit sharing contribution to the 401(k) defined contribution plan of $2.0 million in each of the nine months ended September 30, 2009 and 2008.

Treasury Stock — Following is a summary of treasury stock share activity during the nine months ended September 30, 2009:

Accumulated Other Comprehensive Loss — The components of “Accumulated other comprehensive loss” were as follows:

Note 12 — Stock-Based Compensation

On May 12, 2009, the stockholders of the Company approved a modification of the 2005 Omnibus Incentive Plan to increase the authorization for the issuance of awards from 7,500,000 shares of common stock to 47,000,000 shares of common stock. As of September 30, 2009, the Company has remaining authorization to issue awards of up to 12,935,784 shares of common stock.

Pursuant to the terms of all options granted in 2009, 50 percent of the options awarded become exercisable through the passage of time (the “Time-based Tranche”) and 50 percent of the options awarded become exercisable upon the achievement of certain conditions (the “Performance-based Tranche”). The Time-based Tranche generally becomes exercisable over a five-year period in either (a) an equal number of shares each year or (b) a tranched vesting schedule whereby 15 percent of the Time-based Tranche vests immediately and then at rates of 10 to 20 percent each year. The Time-based Tranche for options granted to the Company’s Chairman and Chief Executive Officer become exercisable over a four-year period in an equal number of shares each year. The Performance-based Tranche becomes exercisable upon the achievement within five years of grant of the earlier of (a) a pre-defined common stock price for any period of 20 consecutive trading days, (b) a change in control of the Company resulting in a pre-defined per share consideration or (c) in the event the Company’s common stock does not trade on a U.S. exchange or trading market, a public offering resulting in the Company’s common stock meeting pre-defined equity values. All options granted in 2009 have a term of 10 years.

Options granted to the Chairman and Chief Executive Officer, as well as the Company’s former chief executive officer, contain certain forfeiture provisions, including the continuation of vesting terms for the 12-month period immediately following termination by the Company without cause or voluntary termination for good reason, as defined by the award agreement. The Company’s Chairman and Chief Executive Officer was granted an option award on August 31, 2009 for 6,300,000 shares, of which 2,000,000 shares will not vest and are subject to forfeiture if the stockholders of the Company do not approve certain amendments to the MoneyGram International, Inc. 2005 Omnibus Incentive Plan. On August 31, 2009, options granted to the Company’s Chairman and Chief Executive Officer in January and May 2009 were modified to extend the timeframe under which the Performance-based Tranche may vest to August 31, 2014, provided employment is maintained through August 31, 2013. There was no incremental expense resulting from this modification.

For purposes of determining the fair value of these options, the Company utilized the Black-Scholes single option pricing model for the Time-based Tranches and a combination of Monte-Carlo simulation and the Black-Scholes single option pricing model for the Performance-based Tranches. Expected volatility is based on the historical volatility of the daily price of the Company’s common stock since June 30, 2004. The Company used the simplified method to estimate the expected term of the award and historical information to estimate the forfeiture rate. Under the simplified method, the expected term represents the median between the expected vesting timeframe and the contractual term of the award. The forfeiture rate, which has been estimated to be zero or 4.1 percent for the 2009 option awards, represents the number of shares that will be forfeited by the grantee due to termination of employment. In estimating the expected term and forfeiture rate, the Company considered historical activity and any expectations regarding future activity which could impact these assumptions. The risk-free rate for the Black-Scholes model is based on the U.S. Treasury yield curve in effect at the time of grant for periods within the expected term of the option, while the risk-free rate for the Monte-Carlo simulation is based on the five-year U.S. Treasury yield in effect at the time of grant. Compensation cost, net of expected forfeitures, is recognized using a straight-line method over the vesting or service period. Following are the weighted-average grant-date fair value and assumptions utilized to estimate the grant-date fair value of the options granted during the nine months ended September 30, 2009. No stock options were granted in 2008.

As of September 30, 2009, the Company’s outstanding stock options had unrecognized compensation expense of $51.5 million and a remaining weighted-average vesting period of 1.75 years.

The Company recorded stock-based compensation expense, net of forfeitures, of $5.4 million and $7.0 million for the three and nine months ended September 30, 2009, respectively.

Note 13 — Income Taxes

For the three months ended September 30, 2009, the Company had $0.4 million of tax benefit on a pre-tax loss of $18.7 million, resulting in an effective income tax rate of 2.1 percent. For the nine months ended September 30, 2009, the Company had $0.1 million of tax benefit on a pre-tax loss of $9.9 million, resulting in an effective income tax rate of 1.1 percent. The effective income tax rate for the three and nine months ended September 30, 2009 reflects income tax on foreign income, the reversal of tax benefits upon forfeiture of share-based awards and discrete tax benefits of $2.8 million and $3.2 million, respectively. The Company is continuing to evaluate available tax positions related to the net securities losses, which may result in future tax benefits. The Company received a federal income tax refund of $43.5 million during the nine months ended September 30, 2009. The Company paid $0.2 million of federal and state income taxes for both the three and nine months ended September 30, 2009.

For the three and nine months ended September 30, 2008, the Company had a negative effective income tax rate of 0.2 percent and 7.3 percent, respectively. The effective income tax rate for the three and nine months ended September 30, 2008 reflects a $47.2 million and $16.0 million non-taxable unrealized loss from embedded derivatives, respectively. Additionally, the effective income tax rate for the nine months ended September 30, 2008 reflects $6.1 million of expense resulting from non-deductible severance costs for the Company’s former chief executive officer recorded in the second quarter of 2008 and a deferred tax asset valuation allowance of $16.1 million relating to other-than-temporary impairment charges on securities recorded in the first quarter of 2008.

For the three and nine months ended September 30, 2009, the Company recognized $0.4 million and $0.6 million, respectively, in interest and penalties for unrecognized tax benefits, compared to $0.6 million and $1.8 million for the three and nine months ended September 30, 2008, respectively. The Company records interest and penalties for unrecognized tax benefits in “Income tax (benefit) expense” in the Consolidated Statements of Loss. As of September 30, 2009 and December 31, 2008, the Company had accrued $1.8 million and $3.6 million, respectively, in interest and penalties within “Accounts payable and other liabilities” in the Consolidated Balance Sheets.

Note 14 — Commitments and Contingencies

We are involved in various claims, litigations and government inquiries that arise from time to time in the ordinary course of our business. All of these matters are subject to uncertainties and outcomes that are not predictable with certainty. We accrue for these matters as any resulting losses become probable and can be reasonably estimated. Further, we maintain insurance coverage for many claims and litigations alleged. Management does not believe that after final disposition any of these matters is likely to have a material adverse impact on our financial position.

Federal Securities Class Actions — The Company and certain of its officers and directors are parties to a consolidated class action case in the United States District Court for the District of Minnesota captioned In re MoneyGram International, Inc. Securities Litigation . The Consolidated Complaint was filed on October 3, 2008, and alleges against each defendant violations of Section 10(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Rule 10b-5 under the Exchange Act and alleges against Company officers violations of Section 20(a) of the Exchange Act. The Consolidated Complaint alleges failure to adequately disclose, in a timely manner, the nature and risks of the Company’s investments, as well as unrealized losses and other-than-temporary impairments related to certain of the Company’s investments. The complainant seeks recovery of losses incurred by stockholder class members in connection with their purchases of the Company’s securities. On May 20, 2009, the Court granted in part and denied in part defendants’ motion to dismiss.

ERISA Class Action — On April 22, 2008, Delilah Morrison, on behalf of herself and all other MoneyGram 401(k) Plan participants, brought an action in the United States District Court for the District of Minnesota. The complaint alleges claims under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), including claims that the defendants breached fiduciary duties by failing to manage the plan’s investment in Company stock, and by continuing to offer Company stock as an investment option when the stock was no longer a prudent investment. The complaint also alleges that defendants failed to provide complete and accurate information regarding Company stock sufficient to advise plan participants of the risks involved with investing in Company stock and breached fiduciary duties by failing to avoid conflicts of interests and to properly monitor the performance of plan fiduciaries and fiduciary appointees. Finally, the complaint alleges that to the extent that the Company is not a fiduciary, it is liable for knowingly participating in the fiduciary breaches as alleged. On August 7, 2008, plaintiff amended the complaint to add an additional plaintiff, name additional defendants and additional allegations. For relief, the complaint seeks damages based on what the most profitable alternatives to Company stock would have yielded, unspecified equitable relief, costs and attorneys’ fees. On March 25, 2009, the Court granted in part and denied in part defendants’ motion to dismiss.

Stockholder Derivative Claims — On January 22, 2008, Russell L. Berney filed a complaint in Los Angeles Superior Court against the Company and its officers and directors, Thomas H. Lee Partners, L.P., and PropertyBridge, Inc. and two of its officers, alleging false and negligent misrepresentation, violations of California securities laws and unfair business practices with regard to disclosure of the Company’s investments. The complaint also alleges derivative claims against the Company’s Board of Directors relating to the Board’s oversight of disclosure of the Company’s investments and with regard to the Company’s negotiations with Thomas H. Lee Partners, L.P. and Euronet Worldwide, Inc. The complaint seeks monetary damages, disgorgement, restitution or rescission of stock purchases, rescission of agreements with third parties, constructive trust and declaratory and injunctive relief, as well as attorneys’ fees and costs. In July 2008, an amended complaint was filed asserting an additional claim for declaratory relief. In September 2009, an amended complaint was filed alleging additional facts and naming additional defendants.

SEC Inquiry — By letter dated February 4, 2008, the Company received notice from the Securities and Exchange Commission (“SEC”) that it is conducting an informal, non-public inquiry relating to the Company’s financial statements, reporting and disclosures related to the Company’s investment portfolio and offers and negotiations to sell the Company or its assets. The SEC’s notice states that it has not determined that any violations of the securities laws have occurred. On February 11, 2008 and November 5, 2008, the Company received additional letters from the SEC requesting certain information. The Company is cooperating with the SEC on a voluntary basis.

Other Matters — On September 25, 2009, the United States District Court for the Western District of Texas, Austin returned a jury verdict in a patent suit brought against the Company by Western Union, awarding $16.5 million to Western Union. Post-trial motions are pending, including the Company’s motions for judgment in its favor and for a new trial. On October 21, 2009, the Company entered into an agreement with the Federal Trade Commission (“FTC”) to make enhancements to its consumer anti-fraud program and to pay $18.0 million into an FTC-administered fund to refund consumers who have been victimized through third-party fraud. The Company accrued $22.5 million and $34.5 million for these two matters in the “Transaction and operations support” line in the Consolidated Statements of Loss for the three and nine months ended September 30, 2009, respectively. The Company is continuing to cooperate with a government entity in a separate matter involving complaints that certain individuals or entities may have used our money transfer services for fraud-induced money transfers.

Credit Facilities — At September 30, 2009, the Company has overdraft facilities through its Senior Facility consisting of $15.5 million of letters of credit to assist in the management of investments, the clearing of payment service obligations and international regulatory needs. All of these letters of credit are outstanding as of September 30, 2009. At September 30, 2009, the Company also has $189.5 million of availability under the Senior Facility.

Minimum Commission Guarantees — In limited circumstances, as an incentive to new or renewing agents, the Company may grant minimum commission guarantees 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. Expense related to the guarantee is recognized in the “Fee commissions expense” line in the Consolidated Statements of Loss.

As of September 30, 2009, the liability for minimum commission guarantees is $0.9 million and the maximum amount that could be paid under the minimum commission guarantees is $11.4 million over a weighted-average remaining term of 1.4 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 certain agent contracts, the Company may terminate the contract if the projected or actual volume of transactions falls beneath a contractually specified amount. With respect to minimum commission guarantees that expired in 2008, the Company paid $0.6 million or approximately 15 percent of the estimated maximum payment for the year.

Note 15 — Earnings per Common Share

Following are the potential common shares excluded from diluted earnings per common share as their effect would be anti-dilutive:

Note 16 — Recent Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (“FASB”) issued accounting guidance on how business combinations are accounted for and disclosed, including the elimination of capitalized transaction costs and accounting for contingent consideration. The Company adopted the guidance effective January 1, 2009 with no material impact on its Consolidated Financial Statements.

In June 2008, the FASB issued guidance addressing whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in computing earnings per share under the two-class method. The guidance requires companies to treat unvested share-based payment awards that have non-forfeitable rights to dividend or dividend equivalents as a separate class of securities in calculating earnings per share. The Company adopted the guidance effective January 1, 2009 with no material impact on its Consolidated Financial Statements.

In January 2009, the FASB issued guidance to conform the application of other-than-temporary impairment guidance on beneficial interests in securitized financial assets to the impairment model in guidance previously issued . The Company adopted the guidance on January 1, 2009 with no material impact on its Consolidated Financial Statements.

In April 2009, the FASB issued guidance that requires disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements and in summarized financial information at interim reporting periods. The Company adopted the guidance effective for the interim period ending June 30, 2009 and has included the required disclosures in the Notes to its Consolidated Financial Statements.

In April 2009, the FASB issued guidance to make the other-than-temporary impairments guidance more operational and to improve the presentation of other-than-temporary impairments in the financial statements. This guidance replaces the existing requirement that the entity’s management assert it has both the intent and ability to hold an impaired debt security until recovery with a requirement that management assert it does not have the intent to sell the security and that it is more likely than not management will not have to sell the security before recovery of its cost basis.

This guidance requires increased disclosure about the credit and noncredit components of impaired debt securities that are not expected to be sold, as well as increased disclosures regarding expected cash flows, credit losses and an aging of securities with unrealized losses. The Company adopted the guidance effective for the interim period ending June 30, 2009 with no material impact on its Consolidated Financial Statements.

In April 2009, the FASB issued guidance that provides additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased and also includes guidance on identifying circumstances that indicate a transaction is not orderly for fair value measurements. The Company adopted the guidance effective for the interim period ending June 30, 2009 with no material impact on its Consolidated Financial Statements.

In April 2009, the FASB issued guidance that amends and clarifies the application issues associated with initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. The Company adopted the guidance effective January 1, 2009 with no material impact on its Consolidated Financial Statements.

In May 2009, the FASB issued guidance to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The guidance requires entities to disclose the date through which subsequent events were evaluated as well as the rationale for why that date was selected. The Company adopted the guidance effective for the interim period ending June 30, 2009 with no material impact on its Consolidated Financial Statements.

In June 2009, the FASB issued guidance which amends previously issued derecognition guidance and eliminates the exemption from consolidation for qualifying SPEs. This guidance is effective for financial asset transfers occurring after the beginning of an entity’s first fiscal year that begins after November 15, 2009. The Company is currently evaluating the impact of this guidance on its Consolidated Financial Statements.

In June 2009, the FASB issued guidance which amends the consolidation guidance applicable to variable interest entities. This guidance is effective as of the beginning of a reporting entity’s first annual reporting period that begins after November 15, 2009. The Company is currently evaluating the impact of this guidance on its Consolidated Financial Statements.