##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





Form 10-K


|   |  |                                                                                             
|-- |  | --------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934    
|  
|   |  | For the fiscal year ended December 31, 2005                                                 
|  
|or
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
|  
|   |  | For the transition period
    from           to                                             

Commission file number: 1-13521





Hypercom Corporation


(Exact name of registrant as specified in its charter)


|                                                                   |  |                                         
|------------------------------------------------------------------ |  | ----------------------------------------
|Delaware                                                           |  | 86-0828608                              
|(State or other jurisdiction of
    incorporation or organization) |  | (I.R.S. Employer
    Identification No.)

2851 West Kathleen Road,


Phoenix, Arizona 85053


(Address of principal executive offices) (Zip Code)


(602) 504-5000


(Registrants telephone number, including area code)


Securities registered pursuant to Section 12(b) of the
Act:


|                                        |  |                                          
|--------------------------------------- |  | -----------------------------------------
|Title of Each Class                     |  | Name of Each Exchange on Which Registered
|                                        |  |                                          
|Common Stock, $.001 par value per share |  | New York Stock Exchange                  

o þ


o þ


þ o


S-K 10-K 10-K. þ


12b-2


o þ o


12b-2 o þ




|                                        |  |                             
|--------------------------------------- |  | ----------------------------
|Class                                   |  | Outstanding at March 1, 2006
|                                        |  |                             
|Common Stock, $.001 par value per share |  | 53,029,519 shares           

DOCUMENTS INCORPORATED BY REFERENCE


|                                                                                                         |  |                                       
|-------------------------------------------------------------------------------------------------------- |  | --------------------------------------
|Document                                                                                                 |  | Parts Into Which Incorporated         
|                                                                                                         |  |                                       
|Proxy Statement for the Annual
    Meeting of Stockholders to be held
    May 18, 2006 (Proxy Statement) |  | Part III (Items 10, 11, 12, 13 and 14)









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TABLE OF CONTENTS







|              |  |                                                                                                                      |         |  |      |  |  | 
|------------- |  | -------------------------------------------------------------------------------------------------------------------- | ------- |  | ---- |  |  | 
|Item No.      |  |                                                                                                                      | Caption |  | Page | 
|              |  |                                                                                                                      |         |  |      | 
|              |  |                                                                                                                      |         |  |      |  |  | 
|PART I        |  |                                                                                                                      |         | 
|1.            |  | Business                                                                                                             |         |  | 3    | 
|1A.           |  | Risk Factors                                                                                                         |         |  | 14   | 
|1B.           |  | Unresolved Staff Comments                                                                                            |         |  | 24   | 
|2.            |  | Properties                                                                                                           |         |  | 24   | 
|3.            |  | Legal Proceedings                                                                                                    |         |  | 24   | 
|4.            |  | Submission of Matters to a Vote of Security
    Holders                                                              |         |  | 28   | 
|             
|              |  |                                                                                                                      |         |  |      |  |  | 
|PART II       |  |                                                                                                                      |         | 
|5.            |  | Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities |         |  | 29   | 
|6.            |  | Selected Financial Data                                                                                              |         |  | 30   | 
|7.            |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                            |         |  | 31   | 
|7A            |  | Quantitative and Qualitative Disclosures
    About Market Risk                                                       |         |  | 49   | 
|8.            |  | Financial Statements and Supplementary
    Data                                                                      |         |  | 50   | 
|9.            |  | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure                             |         |  | 50   | 
|9A.           |  | Controls and Procedures                                                                                              |         |  | 50   | 
|9B.           |  | Other Information                                                                                                    |         |  | 52   | 
|             
|              |  |                                                                                                                      |         |  |      |  |  | 
|PART III      |  |                                                                                                                      |         | 
|10.           |  | Directors and Executive Officers of the
    Registrant                                                               |         |  | 52   | 
|11.           |  | Executive Compensation                                                                                               |         |  | 52   | 
|12.           |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters                   |         |  | 52   | 
|13.           |  | Certain Relationships and Related
    Transactions                                                                   |         |  | 52   | 
|14.           |  | Principal Accountant Fees and Services                                                                               |         |  | 52   | 
|             
|              |  |                                                                                                                      |         |  |      |  |  | 
|PART IV       |  |                                                                                                                      |         | 
|15.           |  | Exhibits and Financial Statement
    Schedule                                                                        |         |  | 52   | 
|Signatures    |  |                                                                                                                      | 54      | 
|Exhibit Index |  |                                                                                                                      | 94      | 
|Exhibit 10.12
|Exhibit 21.1 
|Exhibit 23.1 
|Exhibit 24.1 
|Exhibit 31.1 
|Exhibit 31.2 
|Exhibit 32   



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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS






10-K


2



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PART I


Unless otherwise indicated, the terms Hypercom,
the Company, we, our, and
our business refer to Hypercom Corporation and its
subsidiaries on a consolidated basis.







|        |         
|------- | --------
|Item 1. | Business

General


point-of




Business History










Electronic Payment Industry


point-of




3



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| |                            
| | ---------------------------
| | Market Size and Constraints





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Price. Pricing is a significant consideration in our
    customers purchase decisions. Consequently, terminal
    manufacturers have been increasingly challenged to deliver
    products and services that target critical specifications at
    competitive price points.                                                                                                                                                                                                                
|
| |  | Scale. The design, manufacture and distribution of POS
    terminals on a global basis requires a significant investment in
    development, manufacturing and distribution resources. As a
    result, smaller or regional manufacturers may have limited
    ability to compete with larger manufacturers who can spread
    costs on a broader basis at higher volumes.                                                                                                                  
|
| |  | Certification Standards and Costs. All payment solutions
    must be certified with card associations, financial institutions
    and payment processors. A certification can be a lengthy and
    expensive undertaking. Many terminal manufacturers in the
    industry lack the relationships, knowledge and experience
    necessary to obtain these certifications quickly and
    cost-effectively, thereby limiting or delaying their time to
    market and overall competitiveness.
|
| |  | Commitment to Future Technologies. New standards,
    regulations and certifications in the electronic payment
    industry require terminal manufacturers to continually develop
    new technologies that enhance the performance and profitability
    of both customers and end-users. This commitment requires
    significant annual investment in research and development.                                                                                                          
|
| |  | Global Presence. Large customers may prefer terminal
    manufacturers that have a global presence with the ability to
    provide services and support in many geographic regions. Smaller
    or regional manufacturers, while they may be competitive in
    their niche, may not be able to provide cost-effective
    equipment, services and support on a global scale for larger
    customers.                                                                                      

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| |                      
| | ---------------------
| | Market Growth Drivers





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Security and Interoperability Standards. New industry
    security standards and interoperability standards are driving
    recertification and replacement of electronic payment systems,
    particularly in Europe and the U.S. In order to offer
    electronic payment systems that connect to payment networks,
    electronic payment system providers must certify their products
    and services with card associations, financial institutions and
    payment processors as well as comply with government and
    telecommunication company regulations. The major card
    associations have introduced new security standards to address
    the growing need for transaction security. The two major
    security initiatives in the industry are EMV and PCI. EMV is a
    set of global specifications for cards, terminals, and
    applications designed to ensure interoperability between smart
    cards and electronic payment systems on a global basis, increase
    functionality of electronic payment systems and reduce fraud.
    The move to comply with EMV specifications is expected to
    significantly promote terminal replacement especially in regions
    such as Europe, Asia/ Pacific and Latin America where EMV
    implementation conversion dates have been established. Visa
    International and MasterCard International recently cooperated
    on the development and release of the Payment Card Industry
    (PCI) specification and test methods for the certification
    of electronic payment systems for secure debit transactions.
    This new set of standards supersedes previous standards
    separately issued by Visa and MasterCard and will drive
    additional terminal replacement. In the U.S., payment processors
    have two levels of certification, referred to as Class A
    and Class B. Class B certification ensures that an
    electronic payment system adheres to the payment
    processors basic functional and network requirements.
    Class A certification adds another stipulation that the
    payment processor will support the electronic payment system on
    its internal help desk systems. Obtaining these certifications
    can be time intensive and is required by U.S. payment
    processors. Electronic payment systems must also comply with
    evolving country-specific security regulations. Countries such
    as Australia, Canada, the Netherlands, New Zealand, Singapore,
    Sweden and Switzerland have particularly stringent and specific
    security standards. Electronic payment systems also must comply
    with recommendations of quasi-regulatory authorities and
    standard-setting committees, which address, among other things,
    fraud prevention, processing protocols and technologies
    utilized. New standards are continually being adopted as a
    result of worldwide fraud prevention initiatives, increasing the
    need for system compatibility and new developments in
    technology. These complex and evolving requirements will provide
    an opportunity for replacement with newly certified electronic
    payment systems.
|
| |  | Broadband & Internet Protocol (IP). IP
    connectivity provides faster transmission of transaction data at
    a lower cost, enabling more advanced payment and other
    value-added applications at the point of sale. Major
    telecommunications carriers have expanded their communications
    networks and lowered fees to allow more merchants to utilize IP
    networks cost effectively. The faster processing and lower costs
    associated with IP connectivity have opened new markets for
    electronic payment systems, many of which have previously been
    primarily cash-only industries such as QSRs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Contactless. Contactless technology creates a convenient
    way to pay for goods and services. It is an emerging technology
    and rapidly gaining acceptance. It can deliver extremely fast
    transaction times, reduce waiting times and eliminate the need
    for paper receipts. It is especially suitable for access control
    and use in employee cafeterias, QSRs, gas stations and public
    transit systems.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | Wireless. Wireless electronic payment solutions are being
    developed to increase transaction efficiency and mobility.
    Wireless terminals can provide consumers with additional
    security by allowing them to maintain control of their payment
    card at all times. Additionally, the cost per transaction using
    wireless terminals may be lower than that of wired terminals in
    regions burdened with high telecommunications costs such as
    Europe and Asia/ Pacific. It also enables terminal deployment in
    those regions lacking an established landline telecommunications
    infrastructure. We provide IP, Code-Division Multiple                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | Access (CDMA), General Packet Radio Service (GPRS) and
    wi-fi connectivity across our range of wireless products.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | Debit. Debit is the dominant payment instrument in most
    international markets and is rapidly growing in the
    U.S. Debit cards allow banks to reach a wider population of
    potential cardholders, thereby increasing the number of
    transactions. The cost of a debit transaction is generally lower
    than that of a credit transaction and combined with PIN-based
    security or biometric technology, provides a solution to reduce
    high rates of fraud. As a consequence, electronic payment is now
    an affordable and convenient option in markets lacking a
    significant consumer credit base as well as for small ticket or
    lower margin merchants.                                                                                                                                                                                                                                                                                       
|
| |  | Emerging Regions and Market Segments. In the U.S. and
    Europe, consumer segments such as QSRs and unattended/self
    service have started using IP POS terminal devices. These lesser
    penetrated market verticals represent a significant opportunity
    for us, as do geographies such as Russia, India, Mexico and
    China, who are experiencing rapid growth in the usage of
    card-based payments. In China, Visa and MasterCard purchase
    volume increased 68% from 2003 to 2004, where only 3% of
    merchants currently have POS terminals, according to a
    MasterCard International survey. The increasing adoption of
    electronic payments in these regions is driven primarily by
    strong economic growth, improving telecommunications
    infrastructure development, strong support from governments
    seeking to increase sales tax collection, and the dramatic
    increase of wireless networks for voice and data communications.
|
| |  | Multiple Applications. In addition to payment, terminals
    have the capability to perform concurrent applications like
    loyalty, stored value, on-screen advertising, electronic
    signature capture, age identification, benefits authorization
    and transfer. The secure integration of these applications along
    with payment processing provides a comprehensive solution that
    allows merchants a means of competitive differentiation, revenue
    enhancement, and cost reduction.                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Non-Traditional Applications. The government sector,
    particularly in the U.S., is a significant opportunity for
    terminal manufacturers. Initiatives such as identity
    verification, check imaging/conversion, electronic benefit
    transfer programs, and the U.S. militarys payment
    programs are all potential drivers of terminal deployment.
    Additionally, electronic transaction terminals and transaction
    transport technology can be utilized in the healthcare sector to
    provide fast and secure transmission of health benefits
    eligibility, authorization and payment.                                                                                                                                                                                                                                                                                                                                                              

Competition


start-ups






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Competitive Strategy


end-to




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Further Penetrate Existing Market Segments. We plan to
    continue promoting and marketing the functionality of our
    product portfolio to address the specific needs of key vertical
    markets. We intend to continue to focus on these attractive
    electronic transaction markets, as well as increase our
    penetration of new markets such as ATMs, Electronic Benefit
    Transfer (EBT), Medical EBT and unattended and integrated
    kiosks. In planning to maintain our leadership in the
    independent retail segment, we have further segmented our
    products to target both the high-end and low-end segments,
    through acceptance of magnetic and smart cards, support of
    credit, debit, check, EBT and a full range of prepaid products,
    including gift cards and loyalty programs, among others. Our
    products are easily integrated with a full range of optional
    internal or external devices, including secure PIN pads, check
    imaging equipment, barcode readers, contactless/ RFID readers
    and biometric devices. Our secure PIN pads support credit and
    debit transactions, as well as a wide range of applications that
    are either built into electronic payment systems or connect to
    electronic cash registers (ECRs) and other electronic payment
    systems.
|
| |  | Capitalize on Demand for Wireless Transactions. We plan
    to accommodate the growing demand for reliable, secure,
    convenient and cost-efficient wireless devices. Potential users
    of this technology include mobile merchants such as taxi and
    delivery drivers, off-site services and pay-at-table
    restaurants. These merchants are looking for a POS terminal that
    utilizes the convenience of wireless communication technologies
    and the security of being able to receive real-time
    authorizations with the reliability of a wired terminal.
    Simultaneously, we are aggressively transitioning into the
    consumer transaction market by providing processing alternatives
    like stored value and prepaid replenishment services for the
    transportation sector and electronic wallet technology as an
    alternative to cash payments.                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Capitalize on Terminalization Requirements of Emerging
    Geographic Regions. We plan to continue seeking
    opportunities to expand global market share by leveraging our
    product portfolio and distribution channels in emerging,
    high-growth regions in Europe, Asia/ Pacific and Latin America.
    In addition to expanding into new geographic markets, we will
    benefit from a replacement cycle that is ongoing in various
    geographic regions for a variety of reasons, including
    valued-added technologies (signature capture, contactless,
    multi-application); new security standards (EMV and PCI); and
    newer communications technologies (wireless, IP connectivity).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | Focus on Market-Driven Product Development. We plan to
    continue concentrating our research and development resources on
    new products and services that address the current and near
    future requirements of our customers and end-users. We plan to
    focus our development efforts in the following areas: enhanced
    security at both the terminal and transaction level; advanced
    communications technologies such as
    IP-enabled and wireless
    terminals; multiple-application; contactless technologies; and
    products for new verticals such as unattended/integrated kiosks
    and ATMs. We will continue to work with our customers to ensure
    our products meet their needs and technical requirements and are
    brought to market in a timely and cost-effective manner.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | Improve Total Cost Structure. We plan to continue
    reducing our cost of manufacturing, services delivery, research
    and development, selling, general, and administrative functions
    to enhance our profitability and competitiveness. We intend to
    further reduce our product costs through design and process
    improvements, reductions in component costs, and more efficient
    inventory management. We will continue to maintain a
    market-centric approach to our research and product development
    activities, thus ensuring that our efforts are directed at
    commercially feasible opportunities. As our current
    infrastructure is suitable to our current and foreseeable
    business requirements, our incremental investment requirements
    should be nominal and our existing cost structure is expected to
    be significantly leverageable at higher volumes of revenue. We
    continue to evaluate our direct sales channel infrastructure and
    will pursue alternate channels, such as distributors, in regions
    where it                                                                                                                                                                                                                                                        

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | makes economic sense to do so. We also intend to continue to
    refine our foreign exchange hedging program and global tax
    strategy to minimize the costs and risks associated with
    international operations.                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Continue to Pursue Recurring Revenue Opportunities. We
    plan to further identify and pursue opportunities that are
    complementary to our existing products to provide recurring
    revenue. We also intend to expand our service business in Brazil
    that provides deployment, help-desk, repair, and other post-sale
    services. We will continue to pursue similar opportunities that
    will help us enhance our primary business of terminal
    manufacturing to a more diversified business model that includes
    both one-time and recurring revenue streams.
|
| |  | Consider Strategic Acquisitions. We may augment our
    growth by acquiring complimentary businesses, new products to
    enhance our core competencies, or new technologies to complement
    in-house research and development activities. Any acquisition
    would be intended to broaden our suite of electronic payment
    solutions, expand our presence in selected geographies, broaden
    our customer base, or increase our penetration of channels and
    vertical markets.                                                                                         

Product Lines and Services






| |                          
| | -------------------------
| | Terminals and Peripherals





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Optimum  includes the L4100, a compact,
    high-performance signature capture and PIN entry card payment
    terminal specifically designed for multilane retailers; the
    T4100, a powerful 32-bit desktop terminal for true
    multi-application; the T2100, a handover desktop terminal
    specifically designed to perform fast EMV transactions; the
    M2100, a mobile terminal that leverages the latest wireless
    communication technologies; and the P2100, an EMV-compliant PIN
    pad for integrated retail environments. Both the L4100 and T4100
    are RFID-ready. Additionally, in early 2006 we announced
    enhanced multi-lane product offerings with the new lower cost
    Optimum L4200 and L4250.
|
| |  | T7Plus  includes a combination of features and
    functions for merchants who need a reliable, low-cost POS device.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | Peripherals  includes printers, PIN pads,
    check readers, receipt capture devices, biometric and radio
    frequency identity verification devices and external modems. Our
    family of durable, high-security PIN pads and card acceptance
    devices are designed for either indoor or outdoor use. The
    products include the S9 and S9Plus, secure PIN pads built
    for indoor use, and the S1200 and S1300, the outdoor components
    to our QSR drive-thru solution.                                                                                                                                                                                                                                              



| |                                                                                            
| | -------------------------------------------------------------------------------------------
| | Transaction Networking Devices, Transaction Management
    Systems and Application Software

® tact ® ®


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| |         
| | --------
| | Services







| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | NetSet Brazil, NetSet Chile, and Hypercom de
    Mexico NetSet Brazil, NetSet Chile, and Hypercom
    de Mexico are each full service organizations that operate as
    stand alone service businesses under service contracts with
    major banks and card associations. The recurring services they
    provide principally include deployments, help-desk, repairs,
    on-site technician
    visits and the provision of supplies. Additionally, these
    organizations perform one-off special projects such as software
    uploads or terminal enhancement programs requested by our
    customers. Terms of our service arrangements are set forth in
    separate service contracts ranging from one to three years,
    although termination is allowed with appropriate advanced
    notification. Revenues under these contracts are recognized as
    we perform the service.





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Transaction Transport Services  Our
    transaction transport service provides value-added data
    communication services for transaction-based applications. The
    service provides such functionality as protocol conversion,
    intelligent transaction routing and web-based, transaction-level
    reporting. As technologies such as IP and wireless begin to take
    hold at the
    point-of-sale, this
    market will see a growing shift toward more sophisticated
    applications. Transaction transport will provide a support
    infrastructure for our multi-application operating systems to
    quickly and cost-effectively deliver transactions to diverse
    processing entities. Early adopters include organizations
    involved in biometrics, health care, prepaid, micropayments,
    gift and loyalty. Market penetration of these complex
    applications is expected to dramatically increase in coming
    years as the consumer interaction can be transacted in several
    seconds with broadband connectivity, as compared to several
    minutes over dial-up
    connection. We believe transaction transport will continue to
    support our growth beyond the payments industry into information
    delivery segments. Transaction transport is a slow-growth
    opportunity given the structure of the marketplace and the long
    term nature of the contracts for which we compete. Presently, it
    does not account for a significant portion of our consolidated
    revenue or our total service revenue.

Product Marketing




9



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Sales and Distribution






| |   |                              
| | - | -----------------------------
| |  | Payment processors;          
|
| |  | Distributors/ resellers;     
|
| |  | Large retail chains and QSRs;
|
| |  | Financial institutions;      
|
| |  | ISOs; and                    
|
| |  | Government entities.         









| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Global Presence. We are one of the largest worldwide
    providers of electronic payment system solutions for use at the
    point of sale. We have developed a global network of sales,
    support and development centers. We believe that our experience
    and global presence enable us to manufacture, market, distribute
    and service our products more effectively, and in more markets
    than most of our competitors.                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Comprehensive Product Portfolio. We offer a full range of
    products and services that fulfill the spectrum of market needs.
    Our product portfolio ranges from the low-cost, established and
    reliable T7 family of terminals to the recently released,
    high-performance 32-bit Optimum family. Our terminals are
    further complemented by a wide variety of peripherals that
    enhance their capabilities. Services include deployment,
    help-desk, repair and maintenance. We have major service centers
    in Brazil, Mexico, Chile and the United Kingdom.                                                                                                                                                                                                                                  
|
| |  | Low Total Cost of Ownership. The total cost of ownership
    includes the following costs: deployment, implementation,
    application certification, repair and maintenance and product
    obsolescence. We continue to support and focus on providing our
    customers with a clear migration strategy for new technologies,
    versus a buy today, replace tomorrow strategy.                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Technology Adoption. Our technological advances have
    continued to support industry adoption of value-added features,
    such as electronic receipt capture, smart cards, electronic
    signature capture, positive identification and
    multi-application. Our engineering has consistently focused on
    quality and performance, including speed of the transaction,
    number of and type of completed transactions, the speed of
    application download and the user interface. Our modular design
    allows our customers to only select the features that meet their
    specific needs, thereby minimizing their costs and increasing
    their flexibility. We have reorganized our development team to
    more rapidly develop, prototype, and release new products to
    meet customer needs.

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##### Table of Contents





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Terminal Management and Networking Expertise. We are a
    leader in the fields of terminal management and networking with
    a significant number of installations of our POS network
    controllers worldwide, managing, not only our terminals, but
    those of our competitors as well.                                                                                                                                                                                                                                                            
|
| |  | Security Expertise. We are the industry leader in secure,
    state-of-the-art,
    network payment transactions providing full EMV and PCI
    certification, regulatory certifications, association
    certifications, contactless authentication, signature capture,
    ID and biometric authentication and enterprise security
    management, ensuring both physical and logical high performance
    interfaces are securely regulated and certified for use
    globally, by both public telephony and mission critical
    computing processors.

Research and Development






| |   |                                                                             
| | - | ----------------------------------------------------------------------------
| |  | Identification of the applicable market and development
    parameters;     
|
| |  | Rapid development of engineering specifications, including
    target costs;
|
| |  | State of the art design and engineering;                                    
|
| |  | Accelerated testing;                                                        
|
| |  | Quality assurance; and                                                      
|
| |  | Pilot production.                                                           







Manufacturing and Resource Procurement








11



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##### Table of Contents







Industry Standards and Government Regulations








| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Security Standards. Security standards in our industry
    are promulgated largely by government, regional bank
    associations and card associations. These standards ensure the
    integrity of the payment process and protect the privacy of
    consumers using electronic transaction systems. New standards
    are continually being adopted or proposed as a result of
    worldwide fraud prevention initiatives, increasing the need for
    new security solutions and technologies. We have developed a
    security architecture that incorporates physical, electronic,
    operating system, encryption and application-level security
    measures in order to remain compliant with the growing variety
    of international requirements. This architecture is particularly
    successful in countries that have stringent and specific
    security requirements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | EMV and PCI Standards. EMV standards define a set of
    requirements to ensure interoperability between chip cards and
    terminals on a global basis, regardless of the manufacturer, the
    financial institution, or where the card is used or issued.
    Specific certifications are required for all electronic payment
    systems and their application software. PCI is a set of
    specification and test methods for the certification of
    electronic payment systems for secure debit transactions. We
    obtain EMV/ PCI certifications where required.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Payment Processor/ Financial Institution Requirements. In
    the U.S., we are required to certify our products with payment
    processors. We actively perform the essential Class B and
    Class A product certifications with all the major payment
    processors in the U.S. and international markets. The
    Class B certification process pertains to successful
    testing of the integrity of the host (interface) message
    formats with the payment processors requirements and
    specifications. Once the Class B certification process is
    completed, the payment processor may elect to take the software
    application and the hardware for additional in-house testing and
    support. Class A certification (which may take up to
    12 months or more) includes more intensive functional and
    user-acceptance testing in order to establish their help-desk
    infrastructure. Class A Certification enables payment
    processors to provide direct support, deploy and promote the new
    products with their merchant base and sales force. We have
    significant experience in attaining these critical payment
    processor certifications and have a large portfolio of
    Class A certifications with major U.S. payment
    processors. We also have obtained certifications from
    international financial institutions and payment processors so
    that our products can be used on their specific networks.
|
| |  | WEEE and RoHS Directives. In the European Union, we are
    subject to the Waste Electrical and Electronic Equipment
    (WEEE) Directive and the Restriction on Hazardous
    Substances (RoHS) Directive. The WEEE Directive requires
    producers of electrical and electronic equipment to label all
    covered products and also establish collection, treatment, and
    recovery systems for their electric and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

12



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##### Table of Contents



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | electronic waste. The RoHS Directive restricts the use of
    certain material in physical devices that include our solutions
    and/or require active steps to promote the recycling of
    materials.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | Telecommunications Regulatory Authority and Carrier
    Requirements. Our products must comply with government
    regulations, including those imposed by the Federal
    Communications Commission and similar telecommunications
    authorities worldwide regarding emissions, hazardous materials,
    radiation, safety and connections with telephone lines and radio
    networks. Our products must also comply with recommendations of
    quasi-regulatory authorities and of standards-setting
    committees. Our products have been certified as compliant with a
    large number of national requirements, including those of the
    Federal Communications Commission and Underwriters Laboratory in
    the U.S., and similar local requirements in other countries.
    Wireless network carriers have standards with which systems
    connected to their networks must comply. In addition to national
    requirements for telecommunications systems, many wireless
    network carriers have their own certification process for
    devices to be used on their networks.

Proprietary Rights








Employees




|                                |  |      |     |  |               |  |       |       |  |  |       | 
|------------------------------- |  | ---- | --- |  | ------------- |  | ----- | ----- |  |  | ----- | 
|                                |  | U.S. |     |  | International |  |       | Total | 
|                                |  |      |     |  |               |  |       |       | 
|Sales, Marketing and Operations |  |      | 95  |  |               |  | 419   |       |  |  | 514   | 
|Development                     |  |      | 90  |  |               |  | 148   |       |  |  | 238   | 
|Manufacturing                   |  |      | 99  |  |               |  | 443   |       |  |  | 542   | 
|Finance and Administration      |  |      | 71  |  |               |  | 87    |       |  |  | 158   | 
|                                |  |      |     |  |               |  |       |       | 
|Total Employees                 |  |      | 355 |  |               |  | 1,097 |       |  |  | 1,452 | 



Available Information


10-K, 10-Q, 8-K,


13



---



##### Table of Contents










|         |             
|-------- | ------------
|Item 1A. | Risk Factors

10-K 10-K, .


Risks Related To Our Business


We have incurred significant
losses in the past and our results of operations have and may
continue to vary from quarter to quarter impacted in particular
by continued business reviews performed by management. If our
financial performance is not in line with investor expectations,
the price of our common stock will suffer and our access to
future capital may be impaired.




period-to




| |                                                                                                  
| | -------------------------------------------------------------------------------------------------
| | Quarterly revenue and operating results can vary depending
    on a number of factors, including:



| |   |                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | variations in product mix, timing and size of fulfilled orders
    as a result of customer deferral of purchases and/or delays in
    the delivery of our products and services;
|
| |  | accomplishment of certain performance parameters embedded in our
    service level agreements;                                                                                  
|
| |  | the markets demand for new product offerings;                                                                                                                                  
|
| |  | delays in the delivery of our products and services;                                                                                                                            
|
| |  | product returns and warranty claims;                                                                                                                                            
|
| |  | incremental costs incurred as a result of product quality and/or
    performance issues;                                                                                        
|
| |  | write-off of doubtful accounts receivable;                                                                                                                                      
|
| |  | inventory obsolescence and write-downs related to product life
    cycles;                                                                                                      
|
| |  | write-offs of research and development expenses;                                                                                                                                
|
| |  | variations in operating expenses, including research and
    development, selling, and general and administrative expenses;                                                     
|
| |  | lease portfolio risk adjustments and loss provisions;                                                                                                                           
|
| |  | restructuring activities;                                                                                                                                                       
|
| |  | employment and severance agreement charges;                                                                                                                                     
|
| |  | foreign currency exchange rate fluctuations;                                                                                                                                    

14



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##### Table of Contents





| |   |                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | availability and cost of financing;                                                                                                                               
|
| |  | variations in income tax as a function of income recognition by
    tax jurisdiction; and                                                                         
|
| |  | industry and economic conditions, including competition,
    industry standards, product certification requirements, trade
    restrictions and other regulations.



| |                                                                                                      
| | -----------------------------------------------------------------------------------------------------
| | The loss of one or more of our key customers could
    significantly reduce our revenues and profits.



Our products may
contain defects that may be difficult or even impossible to
correct. Product defects could result in lost sales, additional
costs and customer erosion.






| |   |                                                                                      
| | - | -------------------------------------------------------------------------------------
| |  | delays in shipping products;                                                         
|
| |  | cancellation of orders;                                                              
|
| |  | additional warranty expense;                                                         
|
| |  | delays in the collection of receivables;                                             
|
| |  | product returns;                                                                     
|
| |  | the loss of market acceptance of our products;                                       
|
| |  | diversion of research and development resources from new product
    development; and
|
| |  | inventory write-downs.                                                               



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






| |   |                                                                                         
| | - | ----------------------------------------------------------------------------------------
| |  | the need to maintain significant inventory of components that
    are in limited supply;
|
| |  | buying components in bulk for the best pricing;                                         

15



---



##### Table of Contents





| |   |                                                                            
| | - | ---------------------------------------------------------------------------
| |  | responding to the unpredictable demand for products;                       
|
| |  | responding to customer requests for short lead-time delivery
    schedules;
|
| |  | failure of customers to take delivery of ordered
    products; and         
|
| |  | product returns.                                                           



Security is
vital to our customers and therefore breaches in the security of
transactions involving our products or services could adversely
affect our reputation and results of operations.




If we are
unable to adequately protect our proprietary technology, our
competitors may develop products substantially similar to our
products and use similar technologies, which may result in the
loss of customers.






Our products and other
proprietary rights may infringe on the proprietary rights of
third parties, which may expose us to claims and
litigation.






16



---



##### Table of Contents



A disruption in our
manufacturing capabilities or those of our third-party
manufacturers or suppliers would negatively impact our ability
to meet customer requirements.






International operations
pose additional challenges and risks that if not properly
managed could adversely affect our financial results.






| |   |                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | changes in foreign country regulatory requirements;                                                                                                    
|
| |  | various import/export restrictions and the availability of
    required import/export licenses;                                                        
|
| |  | imposition of foreign tariffs and other trade barriers;                                                                                                
|
| |  | political and economic instability;                                                                                                                    
|
| |  | foreign currency exchange rate fluctuations;                                                                                                           
|
| |  | extended payment terms and the ability to collect accounts
    receivable;                                                                             
|
| |  | the ability to repatriate funds;                                                                                                                       
|
| |  | complicated tax and regulatory schemes, such as in Brazil, where
    failure to comply may result in fines, penalties or litigation;                   
|
| |  | complications associated with enforcing legal agreements in
    certain foreign countries, including Brazil, China and in
    developing countries; and
|
| |  | availability of qualified and affordable staff with which to
    manage our foreign operations.                                                        



17



---



##### Table of Contents



Our failure to sell
our UK lease business where we provide our POS products directly
to end-user merchants under sales-type leases that are subject
to governmental regulation and involve a risk of default may
result in us having to take a further write down of the value of
this business or result in higher than anticipated lease
defaults that, if excessive, could impair our
profitability.






Fluctuations in currency
exchange rates may adversely affect our financial
results.


non-U.S. non-U.S.


Adverse resolution of
litigation, including litigation arising out of the restatement
of our consolidated financial statements, may adversely affect
our business or financial results.






18



---



##### Table of Contents







Our future success is
substantially dependent on the continued service of our senior
management and other key employees.






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






| |   |                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the inability to assimilate the technologies, operations and
    personnel of the acquired business;                                                    
|
| |  | the potential disruption of our existing business, including the
    diversion of management attention and the redeployment of
    additional resources;
|
| |  | the loss of key employees of an acquired business; and                                                                                                  
|
| |  | the inability to obtain the desired strategic and financial
    benefits from the acquisition or investment.                                            



Force majeure events, such
as terrorist attacks, other acts of violence or war, and health
epidemics may affect the markets in which our common stock
trades, our ability to operate and our financial results.




19



---



##### Table of Contents







| |                                                                                          
| | -----------------------------------------------------------------------------------------
| | Chinas changing economic environment may impact our
    ability to do business in China.





| |                                                                                    
| | -----------------------------------------------------------------------------------
| | Uncertainties with respect to the Chinese legal system may
    adversely affect us.



20



---



##### Table of Contents



If we are unable
to maintain the quality of our internal control over financial
reporting, any unremediated material weaknesses could materially
and adversely affect our ability to provide timely and accurate
information about our business, which could harm our business
and stock price.


10-K. 10-K/


Risks Related To The Industry




| |                                                                                                    
| | ---------------------------------------------------------------------------------------------------
| | The markets in which we compete are highly competitive,
    maturing, and subject to price erosion.



ease-of




We are subject
to industry and technology changes and are dependent on
development and market acceptance of new products. If we are
unable to adequately respond to these changes and to market
demands in a timely manner, our business will not be
successful.




21



---



##### Table of Contents







| |   |                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------
| |  | identify, develop, or manufacture new products and technologies
    in a cost effective manner;                
|
| |  | market or support these new products and technologies on a
    timely and effective basis;                     
|
| |  | eliminate defects in new products;                                                                             
|
| |  | gain market acceptance for the new products and
    technologies; or                                           
|
| |  | respond to technological changes, new industry standards, and
    announcements of new products by competitors.



We are subject to
extensive industry standards and government regulations. Our
failure to properly comply with these standards and regulations
could adversely affect our production and sales.






| |   |                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------
| |  | industry standards imposed by EuroPay International, MasterCard
    International, VISA International, and others;
|
| |  | certification standards required for connection to some public
    telecommunications networks;                   
|
| |  | Federal Communications Commission regulations;                                                                    
|
| |  | Underwriters Laboratories regulations;                                                                           
|
| |  | the WEEE and RoHS Directives in the European Union; and                                                           
|
| |  | certification standards set by domestic processors.                                                               



Risks Related To Our Common Stock


Our stock price has been and
may continue to be volatile.




22



---



##### Table of Contents



Our publicly-filed reports
are reviewed by the SEC from time to time and any significant
changes required as a result of any such review may result in
material liability to us, and have a material adverse impact on
the trading price of our common stock






| |                                                                                                      
| | -----------------------------------------------------------------------------------------------------
| | We are subject to anti-takeover effects of certain charter
    and bylaw provisions and Delaware law.





| |   |                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------
| |  | make it more difficult for a third party to acquire control of
    us, and discourage a third party from attempting to acquire
    control of us;
|
| |  | may limit the price some investors are willing to pay for our
    common stock;                                                                  
|
| |  | enable us to issue preferred stock without a vote of our
    stockholders or other stockholder action;                                           
|
| |  | provide for a classified Board of Directors and regulate
    nominations for the Board of Directors;                                             
|
| |  | make it more difficult for stockholders to take certain
    corporate actions; and                                                               
|
| |  | may delay or prevent a change of control.                                                                                                        



Our stock price could be
affected because a substantial number of shares of our common
stock will be available for sale in the future.




We do not plan to pay any
dividends on our common stock in the foreseeable future.




23



---



##### Table of Contents



Risks Related To Our Indebtedness


Although
our current indebtedness is limited, we may be required to incur
additional debt to meet the future capital requirements of our
business. Should we be required to incur additional debt, the
restrictions imposed by the terms of our debt could adversely
affect our financial condition and our ability to respond to
changes in our business.






| |   |                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our vulnerability to adverse economic conditions and competitive
    pressures may be heightened;                                                                                      
|
| |  | our flexibility in planning for, or reacting to, changes in our
    business and industry may be limited;                                                                              
|
| |  | we may be sensitive to fluctuations in interest rates if any of
    our debt obligations are subject to variable interest
    rates; and                                               
|
| |  | our ability to obtain additional financing in the future for
    working capital, capital expenditures, acquisitions, general
    corporate purposes or other purposes may be impaired.








|         |                          
|-------- | -------------------------
|Item 1B. | Unresolved Staff Comments








|        |           
|------- | ----------
|Item 2. | Properties
















|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings



24



---



##### Table of Contents





Shareholder Class Action.


Shareholder Derivative Actions.




| |               
| | --------------
| | Verve Matters.

Verve L.L.C. vs. Hypercom Corporation, et al.


25



---



##### Table of Contents



Hypercom Corporation vs. Omron Corporation.


In the Matter of Certain Point of Sale Terminals and
Components Thereof.


Brazilian Central Bank Administrative Proceeding.


26



---



##### Table of Contents





Colleen E. Ryan v. Hypercom Corporation, et al.


27



---



##### Table of Contents








|        |                                                          
|------- | ---------------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Securities
    Holders



Executive Officers of the Registrant




|                  |  |     |    |  |       |                                                                                                      |  |                                                                                                                                                                                        |  | 
|----------------- |  | --- | -- |  | ----- | ---------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
|Name              |  | Age |    |  | Title |                                                                                                      |  | Other Business Experience since 1/1/2001                                                                                                                                              
|                  |  |     |    |  |       |                                                                                                      |  |                                                                                                                                                                                       
|William Keiper    |  |     | 55 |  |       | Chief Executive Officer and President (since August 2005)                                            |  | Chairman and Interim Chief Executive Officer, Hypercom
    Corporation; Director, Hypercom Corporation (since 2000);
    Chairman and Chief Executive Officer, Arrange Technology, LLC
|Thomas Liguori    |  |     | 47 |  |       | Senior Vice President and Chief Financial Officer (since November 2005)                              |  | Chief Financial Officer, Iomega Corporation; Chief Financial
    Officer, Channell Commercial Corporation.                                                                            
|William A. Dowlin |  |     | 59 |  |       | Senior Vice President, Manufacturing and Materials (since November 2003)                             |  | President, Hypercom Manufacturing Resources, Inc.                                                                                                                                     
|Neil P. Hudd      |  |     | 60 |  |       | Senior Vice President, Global Product Development and Marketing (since September 2005)               |  | President, Americas Sales and Vice President, Strategic
    Initiatives, Way Systems Incorporated; President, NBS
    Transaction Systems, Inc.                                       
|O.B. Rawls        |  |     | 54 |  |       | Senior Vice President, International Sales (since February 2006)                                     |  | Senior Vice President, North America Sales; President Hypercom
    North America                                                                                                      
|Douglas J. Reich  |  |     | 62 |  |       | Senior Vice President, General Counsel, Chief Compliance Officer and Secretary (since November 2001) |  | Senior Vice President, General Counsel and Secretary, Wavo
    Corporation                                                                                                            
|Jonatan Schmidt   |  |     | 39 |  |       | Chief Scientist and Technology Officer (since October 2005)                                          |  | Chief Strategy Officer and Chief Technology Officer, SiVault
    Systems, Inc.; Chief Technology Officer, One Network                                                                 
|Scott Tsujita     |  |     | 42 |  |       | Senior Vice President, Finance, Treasury and Investor Relations(since October 2003)                  |  | Vice President, Finance and Treasurer, Hypercom Corporation;
    Senior Executive Officer, Golden Eagle Leasing, Inc.,
    Hypercoms former U.S. leasing subsidiary                  
|Diane Handley     |  |     | 53 |  |       | Vice President, Global Human Resources (since September 2005)                                        |  | Compensation Manager, Hypercom Corporation; Manager of Pension
    Plans, CSX Corporation                                                                                             

28



---



##### Table of Contents






PART II





Item 5.Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities




|                    |  |      |      |  |     |   |      | 
|------------------- |  | ---- | ---- |  | --- | - | ---- | 
|                    |  | High |      |  | Low |  
|                    |  |      |      |  |     |  
|Year Ended 12/31/05 |  |      |      |  |     |   |      | 
|First Quarter       |  | $    | 6.00 |  |     | $ | 4.11 | 
|Second Quarter      |  |      | 6.83 |  |     |   | 4.65 | 
|Third Quarter       |  |      | 7.17 |  |     |   | 5.73 | 
|Fourth Quarter      |  |      | 7.25 |  |     |   | 5.57 | 
|Year Ended 12/31/04 |  |      |      |  |     |   |      | 
|First Quarter       |  | $    | 8.00 |  |     | $ | 4.55 | 
|Second Quarter      |  |      | 8.68 |  |     |   | 5.75 | 
|Third Quarter       |  |      | 8.50 |  |     |   | 6.50 | 
|Fourth Quarter      |  |      | 7.50 |  |     |   | 4.70 | 





ISSUER PURCHASES OF EQUITY SECURITIES


|                                                      |       |                    |        |        |                    |                  |      |                     |                   |  |                       |        |  |   |         |         | 
|----------------------------------------------------- | ----- | ------------------ | ------ | ------ | ------------------ | ---------------- | ---- | ------------------- | ----------------- |  | --------------------- | ------ |  | - | ------- | ------- | 
|                                                      |       |                    |        |        |                    | (c)Total Number  |      |                     | (d)Maximum Number | 
|                                                      |       |                    |        |        |                    | of Shares (or    |      |                     | (or Approximate   | 
|                                                      |       |                    |        |        |                    | Units) Purchased |      |                     | Dollar Value) of  | 
|                                                      |       | (a)Total Number of |        |        | (b)Average Price   |                  |      | as Part of Publicly |                   |  | Shares that May Yet   |       
|                                                      |       | Shares (or Units)  |        |        | Paid per Share (or |                  |      | Announced Plans or  |                   |  | Be Purchased Under    |       
|Period                                                |       | Purchased          |        |        | Unit)              |                  |      | Programs            |                   |  | the Plans or Programs |       
|                                                      |       |                    |        |        |                    |                  |      |                     |                   |  |                       |       
|Month #1 (October  1, 2005 to October 31,
    2005)   |       |                    |       |        |                    |                  |     |                     |                   |  |                      |        |  |   |        |        
|Month #2 (November  1, 2005 to November 30,
    2005) |       |                    |       |        |                    |                  |     |                     |                   |  |                      |        |  |   |        |        
|Month #3 (December  1, 2005 to December 31,
    2005) |       |                    | 47,100 |        |                    | $                | 6.22 |                     |                   |  | 47,100                |        |  | $ | 556,072 |        
|                                                      | Total |                    |        | 47,100 |                    |                  | $    | 6.22                |                   |  |                       | 47,100 |  |   | $       | 556,072 | 







29



---



##### Table of Contents








|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data



|                                                                                                         |                                          |                          |         |         |      |   |         |        |   |   |         |        |  |      |         |         |   |   |         |         |  
|-------------------------------------------------------------------------------------------------------- | ---------------------------------------- | ------------------------ | ------- | ------- | ---- | - | ------- | ------ | - | - | ------- | ------ |  | ---- | ------- | ------- | - | - | ------- | ------- | -
|                                                                                                         |                                          | Years Ended December 31, |        
|                                                                                                         |                                          |                          |        
|                                                                                                         |                                          | 2005                     |         |         | 2004 |   |         | 2003   |   |   | 2002    |        |  | 2001 |        
|                                                                                                         |                                          |                          |         |         |      |   |         |        |   |   |         |        |  |      |        
|Statements of Operations Data:                                                                           |                                          |                          |         |         |      |   |         |        |   |   |         |        |  |      |         |         |   |   |         |        
|Net revenue                                                                                              |                                          | $                        | 245,223 |         |      | $ | 241,285 |        |   | $ | 218,816 |        |  | $    | 232,666 |         |   | $ | 228,190 |        
|Costs of revenue                                                                                         |                                          |                          | 172,091 | b       |      |   | 144,140 |        |   |   | 128,212 |        |  |      | 147,094 | c       |   |   | 139,527 |        
|Provision for deferred contract costs                                                                    |                                          |                          |        |         |      |   | 11,305  | d      |   |   |        |        |  |      |        |         |   |   |        |        
|                                                                                                         |                                          |                          |         |         |      |   |         |        |   |   |         |        |  |      |        
|Gross profit                                                                                             |                                          | $                        | 73,132  |         |      | $ | 85,840  |        |   | $ | 90,604  |        |  | $    | 85,572  |         |   | $ | 88,663  |        
|                                                                                                         |                                          |                          |         |         |      |   |         |        |   |   |         |        |  |      |        
|Gross profit percentage                                                                                  |                                          |                          | 29.8    | %       |      |   | 35.6    | %      |   |   | 41.4    | %      |  |      | 36.8    | %       |   |   | 38.9    | %      
|                                                                                                         |                                          |                          |         |         |      |   |         |        |   |   |         |        |  |      |        
|Research and development                                                                                 |                                          | $                        | 27,555  |         |      | $ | 27,188  |        |   | $ | 24,163  |        |  | $    | 24,744  |         |   | $ | 28,107  |        
|Selling, general, and administrative                                                                     |                                          |                          | 72,649  |         |      |   | 65,242  |        |   |   | 57,662  |        |  |      | 57,256  |         |   |   | 63,267  |        
|Restructuring charges                                                                                    |                                          |                          |        |         |      |   |        |        |   |   |        |        |  |      | 4,434   | c       |   |   |        |        
|                                                                                                         |                                          |                          |         |         |      |   |         |        |   |   |         |        |  |      |        
|                                                                                                         | Total operating expenses                 |                          | $       | 100,204 | b    |   | $       | 92,430 |   |   | $       | 81,825 |  |      | $       | 86,434  |   |   | $       | 91,374  |  
|                                                                                                         |                                          |                          |         |         |      |   |         |        |   |   |         |        |  |      |        
|                                                                                                         | Income (loss) from continuing operations |                          | $       | (27,072 | )    |   | $       | (6,590 | ) |   | $       | 8,779  |  |      | $       | (862    | ) |   | $       | (2,711  | )
|                                                                                                         |                                          |                          |         |         |      |   |         |        |   |   |         |        |  |      |        
|Income (loss) before discontinued operations and cumulative
    effect of change in accounting principle |                                          | $                        | (30,243 | )       |      | $ | (12,530 | )      |   | $ | 851     |        |  | $    | (29,716 | )e      |   | $ | (13,942 | )      
|Income (loss) from discontinued operations                                                               |                                          |                          | (3,123  | )a      |      |   | 3,868   | a      |   |   | 10,347  | a f g  |  |      | (9,602  | )a e g  |   |   | (5,966  | )a g   
|Cumulative effect of change in accounting principle                                                      |                                          |                          |        |         |      |   |        |        |   |   |        |        |  |      | (21,766 | )h      |   |   |        |        
|                                                                                                         |                                          |                          |         |         |      |   |         |        |   |   |         |        |  |      |        
|                                                                                                         | Net income (loss)                        |                          | $       | (33,366 | )    |   | $       | (8,662 | ) |   | $       | 11,198 |  |      | $       | (61,084 | ) |   | $       | (19,908 | )
|                                                                                                         |                                          |                          |         |         |      |   |         |        |   |   |         |        |  |      |        
|Diluted income (loss) per share:                                                                         |                                          |                          |         |         |      |   |         |        |   |   |         |        |  |      |         |         |   |   |         |        
|Income (loss) before discontinued operations and cumulative
    effect of change in accounting principle |                                          | $                        | (0.58   | )       |      | $ | (0.24   | )      |   | $ | 0.02    |        |  | $    | (0.64   | )       |   | $ | (0.38   | )      
|Income (loss) from discontinued operations                                                               |                                          |                          | (0.06   | )       |      |   | 0.07    |        |   |   | 0.20    |        |  |      | (0.21   | )       |   |   | (0.16   | )      
|Cumulative effect of change in accounting principle                                                      |                                          |                          |        |         |      |   |        |        |   |   |        |        |  |      | (0.47   | )       |   |   |        |        
|                                                                                                         |                                          |                          |         |         |      |   |         |        |   |   |         |        |  |      |        
|Diluted income (loss) per share                                                                          |                                          | $                        | (0.64   | )       |      | $ | (0.17   | )      |   | $ | 0.22    |        |  | $    | (1.32   | )       |   | $ | (0.54   | )      
|                                                                                                         |                                          |                          |         |         |      |   |         |        |   |   |         |        |  |      |        
|Weighted average basic shares                                                                            |                                          |                          | 52,395  |         |      |   | 51,252  |        |   |   | 49,146  |        |  |      | 46,142  |         |   |   | 36,644  |        
|Weighted average diluted shares                                                                          |                                          |                          | 52,395  |         |      |   | 51,252  |        |   |   | 50,351  |        |  |      | 46,142  |         |   |   | 36,644  |        
|Balance Sheet Data:                                                                                      |                                          |                          |         |         |      |   |         |        |   |   |         |        |  |      |         |         |   |   |         |        
|Cash and equivalents                                                                                     |                                          | $                        | 35,940  |         |      | $ | 23,445  |        |   | $ | 65,415  |        |  | $    | 23,069  |         |   | $ | 19,769  |        
|Short-term investments                                                                                   |                                          |                          | 57,951  |         |      |   | 69,962  |        |   |   | 17,400  |        |  |      |        |         |   |   |        |        
|Working capital                                                                                          |                                          |                          | 143,039 |         |      |   | 159,789 |        |   |   | 155,048 |        |  |      | 128,179 |         |   |   | 126,088 |        
|Total assets                                                                                             |                                          |                          | 238,914 |         |      |   | 277,260 |        |   |   | 265,870 |        |  |      | 260,400 |         |   |   | 337,409 |        
|Short and long-term debt                                                                                 |                                          |                          | 8,377   |         |      |   | 8,829   |        |   |   | 9,857   |        |  |      | 25,025  |         |   |   | 67,888  |        
|Total shareholders equity                                                                               |                                          |                          | 170,774 |         |      |   | 205,372 |        |   |   | 204,297 |        |  |      | 187,972 |         |   |   | 210,226 |        






|   |                                                                                                                                                                                                                                                                                                                                 
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|a) | During the 2005 fourth quarter, we made the decision to sell our
    United Kingdom leasing business (the UK Lease
    Business). As of December 31, 2005, the UK Lease
    Businesss operating results have been classified as
    discontinued operations in the statements of operations for all
    periods presented. We

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|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | recognized a $6.6 million loss on the writedown of the UK
    Lease Business to its estimated fair value based on purchase
    offers received from potential buyers. See Note 4 to the
    Consolidated Financial Statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  
|b) | During 2005, we performed a comprehensive review of our
    financial performance; market strategy; products; product
    development and life cycle management; and employee, customer
    and vendor relationships. The objective of the business review
    was to create a plan to improve profitability and customer
    relations, transition more rapidly to 32-bit technology
    products, rationalize operations and reorganize the
    Companys corporate structure. As a result of this business
    review, we recorded charges of $20.0 million to cost of
    revenue and $7.7 million to operating expenses during 2005.
    See Note 3 to the Consolidated Financial Statements.                                                                                                                                                                       
|  
|c) | During the 2002 third quarter, we committed to a profit
    improvement plan which included the closure of offices around
    the world in favor of a more cost-effective distributor sales
    model and the termination of our direct manufacturing operations
    in Brazil. Restructuring charges in cost of sales include
    $2.0 million related to the write-down of inventories and
    other related costs. Restructuring charges of $4.4 million,
    which are separately stated, include $3.6 million related
    to the write-down of a building and other fixed assets to their
    estimated fair value and $0.8 million related to
    termination costs and other charges. See Note 4 to the
    Consolidated Financial Statements.                                                                                                                    
|  
|d) | During the 2004 second quarter, we recorded an
    $11.3 million charge to cost of revenue to reserve all
    costs previously deferred under our long-term contract with the
    Brazilian Health Ministry. Our decision to record the provision
    was principally due to the lack of timely acknowledgement and
    acceptance of the pending claim, the expiration of the contract
    during April 2004 and the delay in the negotiation of the
    extension of the maintenance element of the contract. We believe
    that the delay was due to an internal scandal within the
    Brazilian Health Ministry, which in no way relates to Hypercom
    or our pending claim, but nevertheless, cast doubt and concern
    over the ability to recover, timely, the amounts owed under the
    contract. See Note 13 to the Consolidated Financial
    Statements.
|  
|e) | During 2002, we recorded a $2.6 million loss on early
    extinguishment of debt in connection with the early retirement
    of two term loans. The loss resulted from the write-off of
    unamortized debt issuance costs and a loan discount associated
    with our term loans.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      



|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|f) | During 2003, we completed the disposition of all remaining
    operating units identified and initially held for sale in
    September 2002. In connection with the disposition of these
    operating units, we recorded a loss on sale of the units
    totaling $3.2 million during 2003 comprised of a
    $0.3 million cash infusion made by us in accordance with
    the terms of the sale, non-cash inventory and fixed asset
    write-downs of $1.4 million, severance costs of
    $0.5 million, the write-off of $0.8 million in
    uncollectible accounts receivable, and facility lease and other
    exit costs of $0.2 million.



|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|g) | Consistent with our strategy of disposing of operating units not
    aligned with our core business, we sold our direct finance lease
    subsidiary, Golden Eagle, effective October 1, 2003, for
    $30.0 million gross cash proceeds, and recorded a
    $7.0 million gain net of severance and other exit costs. As
    a result of the disposition, the net operating results of Golden
    Eagle have been classified as discontinued operations in the
    statement of operations for all periods presented.
|  
|h) | During 2002, we adopted SFAS No. 142, Goodwill and
    Other Intangible Assets. Under the transition provisions of
    SFAS 142, we evaluated our reporting units for impairment
    of goodwill and recorded a $21.8 million write-off
    primarily attributable to goodwill associated with the 2000
    acquisition of Golden Eagle Leasing.                                                                                                                                                                     








|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations

10-K.


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10-K.




| |                                           
| | ------------------------------------------
| | Critical Accounting Policies and Estimates







| |                                
| | -------------------------------
| | Allowance for Doubtful Accounts







| |                  
| | -----------------
| | Sales-Type Leases

Accounting for
Leases,




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| |            
| | -----------
| | Inventories

first-in,




| |                    
| | -------------------
| | Revenue Recognition

00-21, Revenue Arrangements with Multiple Deliverables, Software Revenue Recognition, Accounting for Performance of
Construction-Type and Certain Production Type Contracts, Revenue Recognition in Financial
Statements,


percentage-of






| |   |                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The delivered item(s) has value to the customer on a standalone
    basis;                                                                                                                                      
|
| |  | There is objective and reliable evidence of the fair value of
    the undelivered item(s); and                                                                                                                  
|
| |  | If the arrangement includes a general right of return relative
    to the delivered item(s), delivery or performance of the
    undelivered item(s) is considered probable and substantially in
    our control.





| |                 
| | ----------------
| | Product Warranty



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| |                    
| | -------------------
| | Legal Contingencies





| |                 
| | ----------------
| | Foreign Currency





| |             
| | ------------
| | Income Taxes







| |                              
| | -----------------------------
| | Overview of Financial Results





| |          
| | ---------
| | Year 2005



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | For 2005, we recorded a net loss of $33.4 million ($0.64
    loss per share) on revenues of $245.2 million. Revenues for
    2005 increased by 1.6% over 2004 revenues of $241.3 million
    due to gains in multi-lane and processor sales markets in North
    America as well as our service businesses, offset by

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | declines associated with the completion of EMV rollouts in
    Europe and Asia in 2004 and the completion of a significant
    portion of an outsource manufacturing contract in late 2004 for
    one of our larger global customers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| | The 2005 net loss was most notably impacted by charges
    resulting from a comprehensive business review and the
    discontinuance of our UK Lease Business. During the latter part
    of March 2005, a change in senior management was made. An
    interim Chief Executive Officer and interim Chief Financial
    Officer (collectively Interim Management) were
    appointed to replace the former Chief Executive Officer and
    Chief Financial Officer. The interim Chief Executive Officer,
    William Keiper, was appointed as our Chief Executive Officer and
    President in August 2005 and a new Chief Financial Officer, Tom
    Liguori, was appointed in November 2005. Interim Management
    commenced a comprehensive review of our financial performance;
    market strategy; products; product development and life cycle
    management; and employee, customer and vendor relationships (the
    2005 Business Review). The objective of the 2005
    Business Review, was to create a plan to improve profitability
    and customer relations, transition more rapidly to
    32-bit technology
    products, rationalize operations and reorganize our corporate
    structure. The 2005 Business Review included the following
    actions and amounts:



| |   |                                                                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Implementing an
    end-of-product-life
    cycle strategy, including identifying products and related
    inventory with near term
    end-of-life
    requirements resulting in charges of $12.1 million;                                                                                                                   
|
| |  | More aggressively addressing and correcting product performance
    issues, including negotiated warranty and product trade-in/
    trade-out programs required for the
    end-of-product-life
    cycle strategies resulting in charges of $7.4 million;                                                                    
|
| |  | Implementing certain workforce reductions, including members of
    the senior management team, sales, operations and manufacturing
    personnel, as well as moving certain research and development
    resources to lower cost foreign geographies, and compensation
    plan changes resulting in charges of $5.4 million;
|
| |  | Vacating a leased building in Phoenix, Arizona due to the
    reductions in force resulting in a charge of $1.0 million
    in future rental expense, net of estimated sublet recoveries;                                                                                                                                     
|
| |  | Evaluating other assets and liabilities and evaluating the past
    underlying operating decisions or strategies supporting such
    assets and liabilities resulting in charges of $1.8 million;                                                                                                                             
|
| |  | Investing in the implementation of a comprehensive product
    marketing function; and                                                                                                                                                                                                                                        
|
| |  | Evaluating opportunities for short, medium and long-term
    improvements in manufacturing costs.                                                                                                                                                                                                                             

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|                                                |  |         |       |  |         |   |        |         |  |   |           |   |  |   |        |  
|----------------------------------------------- |  | ------- | ----- |  | ------- | - | ------ | ------- |  | - | --------- | - |  | - | ------ | -
|                                                |  | 2005    |       |  | 2005    |   |        | 2005    |  |   |          
|                                                |  | First   |       |  | Second  |   |        | Fourth  |  |   | 2005      |  
|                                                |  | Quarter |       |  | Quarter |   |        | Quarter |  |   | Full Year |  
|                                                |  |         |       |  |         |   |        |         |  |   |           |  
|Costs of revenue:                               |  |         |       |  |         |   |        |         |  |   |           |   |  |   |        |  
|Warranty charges and product return accruals    |  | $       | 706   |  |         | $ | 6,076  |         |  | $ | 667       |   |  | $ | 7,449  |  
|Inventory write-downs                           |  |         | 2,132 |  |         |   | 7,090  |         |  |   | 2,889     |   |  |   | 12,111 |  
|One-time termination benefits and related costs |  |         |      |  |         |   | 177    |         |  |   | 292       |   |  |   | 469    |  
|Other                                           |  |         | 148   |  |         |   | 161    |         |  |   |          |   |  |   | 309    |  
|                                                |  |         |       |  |         |   |        |         |  |   |           |  
|Total costs of revenue                          |  |         | 2,986 |  |         |   | 13,504 |         |  |   | 3,848     |   |  |   | 20,338 |  
|                                                |  |         |       |  |         |   |        |         |  |   |           |  
|Operating expenses:                             |  |         |       |  |         |   |        |         |  |   |           |   |  |   |        |  
|One-time termination benefits and related costs |  |         | 1,543 |  |         |   | 2,021  |         |  |   | 1,349     |   |  |   | 4,913  |  
|Idle facility lease charge                      |  |         |      |  |         |   |       |         |  |   | 1,013     |   |  |   | 1,013  |  
|Other                                           |  |         | 525   |  |         |   | 463    |         |  |   | 632       |   |  |   | 1,620  |  
|                                                |  |         |       |  |         |   |        |         |  |   |           |  
|Total operating expenses                        |  |         | 2,068 |  |         |   | 2,484  |         |  |   | 2,994     |   |  |   | 7,546  |  
|                                                |  |         |       |  |         |   |        |         |  |   |           |  
|Non-operating expenses and income taxes:        |  |         |       |  |         |   |        |         |  |   |           |   |  |   |        |  
|Other, including tax impact of above entries    |  |         |      |  |         |   | 61     |         |  |   | (203      | ) |  |   | (142   | )
|                                                |  |         |       |  |         |   |        |         |  |   |           |  
|Total non-operating expenses and income taxes   |  |         |      |  |         |   | 61     |         |  |   | (203      | ) |  |   | (142   | )
|                                                |  |         |       |  |         |   |        |         |  |   |           |  
|                                                |  | $       | 5,054 |  |         | $ | 16,049 |         |  | $ | 6,639     |   |  | $ | 27,742 |  
|                                                |  |         |       |  |         |   |        |         |  |   |           |  



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | There were no significant charges resulting from decisions and
    actions taken during the third quarter of 2005 as part of the
    2005 Business Review.                                                                                                                                                                                                                                                                                                                                          
|
| | The 2005 Business Review was completed as of December 31,
    2005. While we believe significant progress has been made and
    strategic initiatives put in place as of December 31, 2005,
    we will continue to review and align our business as demands and
    markets change and evolve. Accordingly there could be additional
    charges in future periods arising from the decisions and actions
    related to ongoing business reviews.                                                 
|
| | In addition to the 2005 Business Review, we also evaluated our
    UK Lease Business during the 2005 fourth quarter and decided to
    exit this business and sell the existing lease portfolio and
    related assets, resulting in its classification as a
    discontinued operation for all periods being presented. We
    recognized a $6.6 million loss on the writedown of the UK
    Lease Business to it estimated fair value based on purchase
    offers received from potential buyers.
|
| | We continued to maintain our cash reserves, consisting of cash
    and cash equivalents and marketable securities of
    $93.9 million at December 31, 2005 compared to
    $93.4 million at December 31, 2004, despite funding
    the cash elements of the 2005 Business Review of
    $6.6 million, and purchasing $9.2 million of treasury
    stock, and without incurring any indebtedness to fund continuing
    operations.                                                                 



| |          
| | ---------
| | Year 2004



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | For 2004, we recorded a net loss of $8.7 million ($0.17
    loss per diluted share) on revenues of $241.3 million. Our
    10.3% revenue growth in 2004 was primarily due to bringing our
    new 32-bit products to market, expanding our multi-lane and
    quick service restaurant customer (QSR) base, and serving
    the growing European market led by tightening security
    standards. The 2004 results include a second quarter charge of
    $11.3 million to write-off all costs previously deferred
    under our contract with the Brazilian Health Ministry.
|
| | The increase in revenues was tempered by a decline in gross
    profit as a percent of revenues resulting primarily from the
    aforementioned deferred contract charge in Brazil. To a lesser
    degree, the 2004 gross                                                                                                                                                                                                                                                                                                                                                   

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | profit percentage was negatively impacted by pricing pressures
    in certain markets, a lower margin on a high volume contract
    with a domestic processor, sales to high volume multi-lane and
    quick service restaurant customers, and incremental inventory
    reserves attributable to technology obsolescence induced by our
    new product offerings and altered market demand for dated
    products and components. Additionally, the 2004 gross profit
    percentage was negatively impacted by the reclassification of
    certain leases as operating leases rather than sales-type leases.
|
| | Operating expenses increased by $10.6 million in 2004, from
    $81.8 million in 2003 to $92.4 million in 2004.
    Operating expenses represented 38.3% of net revenues in 2004
    versus 37.4% in 2003. This increase was primarily due to costs
    for Section 404 of the Sarbanes-Oxley Act compliance and
    higher selling expenses principally related to accelerating
    expansion into certain markets in response to 2005 market
    opportunities and pre-selling costs related to longer sales
    cycle multi-lane contracts.                                                                 
|
| | Non-operating expenses (net interest expense, foreign currency
    losses and other income / loss) decreased by $1.7 million
    in 2004. This decrease is primarily due to higher interest
    income as a result of our increased cash and short-term
    investment balances as well as rising interest rates and lower
    interest expense as a result of reduced debt fees and the
    cessation of amortization of debt issuance costs in 2004.                                                                                                                                                         
|
| | We continued to build our cash reserves, increasing our total
    cash, cash equivalents and marketable securities from
    $82.8 million at December 31, 2003 to
    $93.4 million at December 31, 2004. During 2004, our
    working capital increased by $4.7 million.                                                                                                                                                                                                                                                                                                                                      



| |          
| | ---------
| | Year 2003



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The year 2003 was highlighted by the completion of our profit
    improvement and restructuring plan initiated in September 2002
    with a resulting improvement in operating income and net income,
    strengthening of our balance sheet, and the sale of Golden Eagle
    Leasing.                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | Completing the 2002 restructuring plan during 2003 allowed us to
    focus on our core terminal and network systems business, which
    resulted in improved gross margins while maintaining operating
    expenses at levels appropriate to support the core business
    activities. Gross margins improved principally from continuing
    improvements in cost reductions in our core set of product
    offerings through reductions in material costs as well as
    improved manufacturing efficiencies. Operating expenses were
    essentially unchanged from 2002 reflecting a leveling off of
    spending to match our business model as contemplated under our
    profit improvement and restructuring plan initiated in September
    2002.
|
| | In addition to improving our profits, we were able to strengthen
    our balance sheet as of December 31, 2003 compared to
    December 31, 2002. Improvements in our balance sheet
    included an increase in cash and short-term investment balances,
    elimination of current debt and increased working capital and
    stockholders equity. We maintained a $10 million
    revolving line of credit with no borrowings during 2003. These
    achievements were principally a result of our profit
    improvements, improvements in our accounts receivable days sales
    outstanding and inventory turnover, and the sale of Golden Eagle
    Leasing.                                                                                       
|
| | While we continued to experience improvements in the financial
    performance of Golden Eagle Leasing, we decided a direct-finance
    leasing operation was outside our core business and did not have
    a long-term role in our strategic plan. Consequently, we sold
    Golden Eagle Leasing in the fourth quarter of 2003 resulting in
    a gain of $7.0 million, with gross proceeds received of
    $30.0 million.                                                                                                                                                                                                                                                                                                                             
|
| | The following should be read in light of the matters highlighted
    in the Overview.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

Results of Continuing
Operations




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|                                                            |                                                        |                         |       |       |      |  |       |      |    |  |       |      |  
|----------------------------------------------------------- | ------------------------------------------------------ | ----------------------- | ----- | ----- | ---- |  | ----- | ---- | -- |  | ----- | ---- | -
|                                                            |                                                        | Year Ended December 31, |      
|                                                            |                                                        |                         |      
|                                                            |                                                        | 2005                    |       |       | 2004 |  |       | 2003 |   
|                                                            |                                                        |                         |       |       |      |  |       |      |   
|Net revenue                                                 |                                                        |                         | 100.0 | %     |      |  | 100.0 | %    |    |  | 100.0 | %   
|Costs of revenue                                            |                                                        |                         | 70.2  |       |      |  | 59.7  |      |    |  | 58.6  |     
|Provision for deferred contract costs                       |                                                        |                         |      |       |      |  | 4.7   |      |    |  |      |     
|                                                            |                                                        |                         |       |       |      |  |       |      |   
|                                                            | Gross profit                                           |                         |       | 29.8  |      |  |       | 35.6 |    |  |       | 41.4 |  
|Research and development                                    |                                                        |                         | 11.2  |       |      |  | 11.3  |      |    |  | 11.0  |     
|Selling, general and administrative                         |                                                        |                         | 29.6  |       |      |  | 27.0  |      |    |  | 26.4  |     
|                                                            |                                                        |                         |       |       |      |  |       |      |   
|                                                            | Income (loss) from continuing operations               |                         |       | (11.0 | )    |  |       | (2.7 | )  |  |       | 4.0  |  
|Interest and other income net of interest and other expense |                                                        |                         | 0.7   |       |      |  | (0.1  | )    |    |  | (1.0  | )   
|Foreign currency loss                                       |                                                        |                         | (0.6  | )     |      |  | (0.8  | )    |    |  | (0.7  | )   
|                                                            |                                                        |                         |       |       |      |  |       |      |   
|                                                            | Income (loss) before taxes and discontinued operations |                         |       | (10.9 | )    |  |       | (3.6 | )  |  |       | 2.3  |  
|Provision for income taxes                                  |                                                        |                         | (1.4  | )     |      |  | (1.6  | )    |    |  | (1.9  | )   
|                                                            |                                                        |                         |       |       |      |  |       |      |   
|Income (loss) before discontinued operations                |                                                        |                         | (12.3 | )     |      |  | (5.2  | )    |    |  | 0.4   |     
|Income (loss) from discontinued operations                  |                                                        |                         | (1.3  | )     |      |  | 1.6   |      |    |  | 4.7   |     
|                                                            |                                                        |                         |       |       |      |  |       |      |   
|                                                            | Net income (loss)                                      |                         |       | (13.6 | )%   |  |       | (3.6 | )% |  |       | 5.1  | %
|                                                            |                                                        |                         |       |       |      |  |       |      |   



|                                                             |        |                         |      |       |      |  |      |       |   |  |      |       |  
|------------------------------------------------------------ | ------ | ----------------------- | ---- | ----- | ---- |  | ---- | ----- | - |  | ---- | ----- | -
|                                                             |        | Year Ended December 31, |     
|                                                             |        |                         |     
|Revenues by Region                                           |        | 2005                    |      |       | 2004 |  |      | 2003  |  
|                                                             |        |                         |      |       |      |  |      |       |  
|North America                                                |        |                         | 39.4 | %     |      |  | 34.1 | %     |   |  | 34.9 | %    
|Latin America including Central and South America and Mexico |        |                         | 20.3 |       |      |  | 18.3 |       |   |  | 19.6 |      
|Asia/ Pacific                                                |        |                         | 16.4 |       |      |  | 17.8 |       |   |  | 18.4 |      
|Europe, Middle East and Africa                               |        |                         | 23.9 |       |      |  | 29.8 |       |   |  | 27.1 |      
|                                                             |        |                         |      |       |      |  |      |       |  
|                                                             | Totals |                         |      | 100.0 | %    |  |      | 100.0 | % |  |      | 100.0 | %
|                                                             |        |                         |      |       |      |  |      |       |  

on-site


38



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| |                                                         
| | --------------------------------------------------------
| | Comparison of Years Ended December 31, 2005 and
    2004

|                                                     |                                       |                        |         |         |     |  |       |       |      |   |         |          |  |            |      |       |   |   |         |         |  
|---------------------------------------------------- | ------------------------------------- | ---------------------- | ------- | ------- | --- |  | ----- | ----- | ---- | - | ------- | -------- |  | ---------- | ---- | ----- | - | - | ------- | ------- | -
|                                                     |                                       |                        |         | % of    |     |  |       |       | % of |   |         | Increase | 
|                                                     |                                       | 2005                   |         |         | Rev |  |       | 2004  |      |   | Rev     |          |  | (Decrease) |     
|                                                     |                                       |                        |         |         |     |  |       |       |      |   |         |          |  |            |     
|                                                     |                                       | (Dollars in thousands) |        
|Net revenue:                                         |                                       |                        |         |         |     |  |       |       |      |   |         |          |  |            |      |       |   |   |         |        
|                                                     | Product and other                     |                        | $       | 210,963 |     |  |       | 86.0  | %    |   | $       | 214,239  |  |            |      | 88.8  | % |   | $       | (3,276  | )
|                                                     | Services                              |                        |         | 34,260  |     |  |       | 14.0  |      |   |         | 27,046   |  |            |      | 11.2  |   |   |         | 7,214   |  
|                                                     |                                       |                        |         |         |     |  |       |       |      |   |         |          |  |            |     
|                                                     | Total net revenue                     |                        |         | 245,223 |     |  |       | 100.0 |      |   |         | 241,285  |  |            |      | 100.0 |   |   |         | 3,938   |  
|                                                     |                                       |                        |         |         |     |  |       |       |      |   |         |          |  |            |     
|Costs of revenue:                                    |                                       |                        |         |         |     |  |       |       |      |   |         |          |  |            |      |       |   |   |         |        
|                                                     | Product and other                     |                        |         | 144,649 |     |  |       | 68.6  |      |   |         | 123,419  |  |            |      | 57.6  |   |   |         | 21,230  |  
|                                                     | Services                              |                        |         | 27,442  |     |  |       | 80.1  |      |   |         | 20,721   |  |            |      | 76.6  |   |   |         | 6,721   |  
|                                                     | Provision for deferred contract costs |                        |         |        |     |  |       | 0.0   |      |   |         | 11,305   |  |            |      | 4.7   |   |   |         | (11,305 | )
|                                                     |                                       |                        |         |         |     |  |       |       |      |   |         |          |  |            |     
|                                                     | Total costs of revenue                |                        |         | 172,091 |     |  |       | 70.2  |      |   |         | 155,445  |  |            |      | 64.4  |   |   |         | 16,646  |  
|                                                     |                                       |                        |         |         |     |  |       |       |      |   |         |          |  |            |     
|Gross profit                                         |                                       |                        | 73,132  |         |     |  | 29.8  |       |      |   | 85,840  |          |  |            | 35.6 |       |   |   | (12,708 | )      
|Operating expenses:                                  |                                       |                        |         |         |     |  |       |       |      |   |         |          |  |            |      |       |   |   |         |        
|                                                     | Research and development              |                        |         | 27,555  |     |  |       | 11.2  |      |   |         | 27,188   |  |            |      | 11.3  |   |   |         | 367     |  
|                                                     | Selling, general and administrative   |                        |         | 72,649  |     |  |       | 29.6  |      |   |         | 65,242   |  |            |      | 27.0  |   |   |         | 7,407   |  
|                                                     |                                       |                        |         |         |     |  |       |       |      |   |         |          |  |            |     
|Total operating expenses                             |                                       |                        | 100,204 |         |     |  | 40.8  |       |      |   | 92,430  |          |  |            | 38.3 |       |   |   | 7,774   |        
|                                                     |                                       |                        |         |         |     |  |       |       |      |   |         |          |  |            |     
|Loss from continuing operations                      |                                       |                        | (27,072 | )       |     |  | (11.0 | )     |      |   | (6,590  | )        |  |            | (2.7 | )     |   |   | (20,482 | )      
|Non-operating income (expenses)                      |                                       |                        | 355     |         |     |  | 0.1   |       |      |   | (2,107  | )        |  |            | (0.9 | )     |   |   | 2,462   |        
|                                                     |                                       |                        |         |         |     |  |       |       |      |   |         |          |  |            |     
|Loss before income taxes and discontinued operations |                                       |                        | (26,717 | )       |     |  | (10.9 | )     |      |   | (8,697  | )        |  |            | (3.6 | )     |   |   | (18,020 | )      
|Provision for income taxes                           |                                       |                        | (3,526  | )       |     |  | (1.4  | )     |      |   | (3,833  | )        |  |            | (1.6 | )     |   |   | 307     |        
|                                                     |                                       |                        |         |         |     |  |       |       |      |   |         |          |  |            |     
|Loss before discontinued operations                  |                                       |                        | (30,243 | )       |     |  | (12.3 | )     |      |   | (12,530 | )        |  |            | (5.2 | )     |   |   | (17,713 | )      
|Income (loss) from discontinued operations           |                                       |                        | (3,123  | )       |     |  | (1.3  | )     |      |   | 3,868   |          |  |            | 1.6  |       |   |   | (6,991  | )      
|                                                     |                                       |                        |         |         |     |  |       |       |      |   |         |          |  |            |     
|Net loss                                             |                                       | $                      | (33,366 | )       |     |  | (13.6 | )%    |      | $ | (8,662  | )        |  |            | (3.6 | )%    |   | $ | (24,704 | )      
|                                                     |                                       |                        |         |         |     |  |       |       |      |   |         |          |  |            |     
|Loss per diluted share                               |                                       | $                      | (0.64   | )       |     |  |       |       |      | $ | (0.17   | )        |  |            |      |       |   | $ | (0.47   | )      
|                                                     |                                       |                        |         |         |     |  |       |       |      |   |         |          |  |            |     



| |            
| | -----------
| | Net revenue







39



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##### Table of Contents







| |                 
| | ----------------
| | Costs of revenue





| |             
| | ------------
| | Gross profit









| |                         
| | ------------------------
| | Research and development





| |                                   
| | ----------------------------------
| | Selling general and administrative



40



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##### Table of Contents







| |                                                        
| | -------------------------------------------------------
| | Interest income, interest expense, and foreign currency





| |                   
| | ------------------
| | Income tax expense



Accounting for
Income Taxes




41



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| |                                                         
| | --------------------------------------------------------
| | Comparison of Years Ended December 31, 2004 and
    2003

|                                                     |                                       |                          |         |         |     |  |      |       |      |   |        |          |  |            |      |       |   |   |         |        | 
|---------------------------------------------------- | ------------------------------------- | ------------------------ | ------- | ------- | --- |  | ---- | ----- | ---- | - | ------ | -------- |  | ---------- | ---- | ----- | - | - | ------- | ------ | 
|                                                     |                                       | Years Ended December 31, |        
|                                                     |                                       |                          |        
|                                                     |                                       |                          |         | % of    |     |  |      |       | % of |   |        | Increase | 
|                                                     |                                       | 2004                     |         |         | Rev |  |      | 2003  |      |   | Rev    |          |  | (Decrease) |     
|                                                     |                                       |                          |         |         |     |  |      |       |      |   |        |          |  |            |     
|                                                     |                                       | (Dollars in Thousands)   |        
|Net revenue:                                         |                                       |                          |         |         |     |  |      |       |      |   |        |          |  |            |      |       |   |   |         |       
|                                                     | Product and other                     |                          | $       | 214,239 |     |  |      | 88.8  | %    |   | $      | 196,231  |  |            |      | 89.7  | % |   | $       | 18,008 | 
|                                                     | Services                              |                          |         | 27,046  |     |  |      | 11.2  |      |   |        | 22,585   |  |            |      | 10.3  |   |   |         | 4,461  | 
|                                                     |                                       |                          |         |         |     |  |      |       |      |   |        |          |  |            |     
|                                                     | Total net revenue                     |                          |         | 241,285 |     |  |      | 100.0 |      |   |        | 218,816  |  |            |      | 100.0 |   |   |         | 22,469 | 
|                                                     |                                       |                          |         |         |     |  |      |       |      |   |        |          |  |            |     
|Costs of revenue:                                    |                                       |                          |         |         |     |  |      |       |      |   |        |          |  |            |      |       |   |   |         |       
|                                                     | Product and other                     |                          |         | 123,419 |     |  |      | 57.6  |      |   |        | 111,404  |  |            |      | 56.8  |   |   |         | 12,015 | 
|                                                     | Services                              |                          |         | 20,721  |     |  |      | 76.6  |      |   |        | 16,808   |  |            |      | 74.4  |   |   |         | 3,913  | 
|                                                     | Provision for deferred contract costs |                          |         | 11,305  |     |  |      | 4.7   |      |   |        |         |  |            |      | 0.0   |   |   |         | 11,305 | 
|                                                     |                                       |                          |         |         |     |  |      |       |      |   |        |          |  |            |     
|                                                     | Total costs of revenue                |                          |         | 155,445 |     |  |      | 64.4  |      |   |        | 128,212  |  |            |      | 58.6  |   |   |         | 27,233 | 
|                                                     |                                       |                          |         |         |     |  |      |       |      |   |        |          |  |            |     
|Gross profit                                         |                                       |                          | 85,840  |         |     |  | 35.6 |       |      |   | 90,604 |          |  |            | 41.4 |       |   |   | (4,764  | )     
|Operating expenses:                                  |                                       |                          |         |         |     |  |      |       |      |   |        |          |  |            |      |       |   |   |         |       
|                                                     | Research and development              |                          |         | 27,188  |     |  |      | 11.3  |      |   |        | 24,163   |  |            |      | 11.0  |   |   |         | 3,025  | 
|                                                     | Selling, general and administrative   |                          |         | 65,242  |     |  |      | 27.0  |      |   |        | 57,662   |  |            |      | 26.4  |   |   |         | 7,580  | 
|                                                     |                                       |                          |         |         |     |  |      |       |      |   |        |          |  |            |     
|Total operating expenses                             |                                       |                          | 92,430  |         |     |  | 38.3 |       |      |   | 81,825 |          |  |            | 37.4 |       |   |   | 10,605  |       
|                                                     |                                       |                          |         |         |     |  |      |       |      |   |        |          |  |            |     
|Loss from continuing operations                      |                                       |                          | (6,590  | )       |     |  | (2.7 | )     |      |   | 8,779  |          |  |            | 4.0  |       |   |   | (15,369 | )     
|Non-operating expenses                               |                                       |                          | (2,107  | )       |     |  | (0.9 | )     |      |   | (3,814 | )        |  |            | (1.7 | )     |   |   | 1,707   |       
|                                                     |                                       |                          |         |         |     |  |      |       |      |   |        |          |  |            |     
|Loss before income taxes and discontinued operations |                                       |                          | (8,697  | )       |     |  | (3.6 | )     |      |   | 4,965  |          |  |            | 2.3  |       |   |   | (13,662 | )     
|Provision for income taxes                           |                                       |                          | (3,833  | )       |     |  | (1.6 | )     |      |   | (4,114 | )        |  |            | (1.9 | )     |   |   | 281     |       
|                                                     |                                       |                          |         |         |     |  |      |       |      |   |        |          |  |            |     
|Loss before discontinued operations                  |                                       |                          | (12,530 | )       |     |  | (5.2 | )     |      |   | 851    |          |  |            | 0.4  |       |   |   | (13,381 | )     
|Income from discontinued operations                  |                                       |                          | 3,868   |         |     |  | 1.6  |       |      |   | 10,347 |          |  |            | 4.7  |       |   |   | (6,479  | )     
|                                                     |                                       |                          |         |         |     |  |      |       |      |   |        |          |  |            |     
|Net loss                                             |                                       | $                        | (8,662  | )       |     |  | (3.6 | )%    |      | $ | 11,198 |          |  |            | 5.1  | %     |   | $ | (19,860 | )     
|                                                     |                                       |                          |         |         |     |  |      |       |      |   |        |          |  |            |     
|Loss per diluted share                               |                                       | $                        | (0.17   | )       |     |  |      |       |      | $ | 0.23   |          |  |            |      |       |   | $ | (0.40   | )     
|                                                     |                                       |                          |         |         |     |  |      |       |      |   |        |          |  |            |     



| |            
| | -----------
| | Net revenue







42



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start-up




| |                 
| | ----------------
| | Costs of revenue





| |                                     
| | ------------------------------------
| | Write-off of deferred contract costs





| |             
| | ------------
| | Gross profit





| |                         
| | ------------------------
| | Research and development



43



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tact IP-enabled




| |                                   
| | ----------------------------------
| | Selling general and administrative





| |                                                        
| | -------------------------------------------------------
| | Interest income, interest expense, and foreign currency





| |                   
| | ------------------
| | Income tax expense







| |                                
| | -------------------------------
| | Liquidity and Capital Resources





| |                                      
| | -------------------------------------
| | Cash flows from continuing operations



44



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|                                                        |  |      |         |   |      |   |         |        |  |   |         |  
|------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ------ |  | - | ------- | -
|                                                        |  | 2005 |         |   | 2004 |   |         | Change | 
|                                                        |  |      |         |   |      |   |         |        | 
|Accounts receivable                                     |  | $    | 8,201   |   |      | $ | (8,059  | )      |  | $ | 16,260  |  
|Inventories                                             |  |      | (15,057 | ) |      |   | (11,614 | )      |  |   | (3,443  | )
|Accounts payable                                        |  |      | (8,294  | ) |      |   | 4,925   |        |  |   | (13,219 | )
|Other                                                   |  |      | 3,070   |   |      |   | 3,951   |        |  |   | (881    | )
|                                                        |  |      |         |   |      |   |         |        | 
|Increase (decrease) in operating assets and liabilities |  | $    | (12,080 | ) |      | $ | (10,797 | )      |  | $ | (1,283  | )
|                                                        |  |      |         |   |      |   |         |        | 





| |                                     
| | ------------------------------------
| | Cash flows from investing activities









| |                                     
| | ------------------------------------
| | Cash flows from financing activities







| |                                                                     
| | --------------------------------------------------------------------
| | Cash flows from discontinued operations (See Note 4 and
    Note 19)



45



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| |                                          
| | -----------------------------------------
| | Projected liquidity and capital resources







| |                        
| | -----------------------
| | Contractual Obligations



|                                |       |       |        |           |        |   |        |           |  |   |           |       |  |         |       |       |  |   |     |     | 
|------------------------------- | ----- | ----- | ------ | --------- | ------ | - | ------ | --------- |  | - | --------- | ----- |  | ------- | ----- | ----- |  | - | --- | --- | 
|                                |       |       |        | Less than |        |   |        |           |  |   | After     |      
|                                |       | Total |        |           | 1 Year |   |        | 1-3 Years |  |   | 3-5 Years |       |  | 5 Years |      
|                                |       |       |        |           |        |   |        |           |  |   |           |       |  |         |      
|Long-term debt                  |       | $     | 8,327  |           |        | $ | 8,327  |           |  | $ |          |       |  | $       |      |       |  | $ |    |    
|Capital lease obligations       |       |       | 50     |           |        |   | 28     |           |  |   | 19        |       |  |         | 3     |       |  |   |    |    
|Operating leases                |       |       | 5,541  |           |        |   | 1,876  |           |  |   | 2,333     |       |  |         | 1,168 |       |  |   | 164 |    
|Minimum purchase obligations(1) |       |       | 17,614 |           |        |   | 17,614 |           |  |   |          |       |  |         |      |       |  |   |    |    
|                                |       |       |        |           |        |   |        |           |  |   |           |       |  |         |      
|                                | Total |       | $      | 31,532    |        |   | $      | 27,845    |  |   | $         | 2,352 |  |         | $     | 1,171 |  |   | $   | 164 | 
|                                |       |       |        |           |        |   |        |           |  |   |           |       |  |         |      






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Minimum purchase obligations include all outstanding obligations
    to purchase goods or services at December 31, 2005
    including agreements that are cancelable without penalty and
    agreements which are enforceable and legally binding. We
    estimate that approximately 27% of the outstanding purchase
    obligations at December 31, 2005 are non-cancelable due to
    the customized nature of the order and the long lead time
    required.

46



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| |                
| | ---------------
| | Debt Amendments







| |                 
| | ----------------
| | Stock Repurchase

10b5-1






| |                               
| | ------------------------------
| | Off-Balance Sheet Arrangements

S-K Consolidation of Variable
Interest Entities,




| |        
| | -------
| | Backlog







| |             
| | ------------
| | 2006 Outlook



47



---



##### Table of Contents











| |                                 
| | --------------------------------
| | Recent Accounting Pronouncements

Share-Based Payment


Inventory Costs, an amendment of ARB No. 29,
Chapter 4


Accounting Changes and Error Corrections  A
Replacement of APB Opinion No. 20 and FASB Statement
No. 3


Accounting for Conditional Asset Retirement Obligations


48



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##### Table of Contents





143-1, Accounting
for Electronic Equipment Waste Obligations 143-1), 143-1 143-1


The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments







|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7a. | Quantitative and Qualitative Disclosures About Market
    Risk









49



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mark-to


10-K.











|        |                                            
|------- | -------------------------------------------
|Item 8. | Financial Statements and Supplementary Data

S-X 10-K.







|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure








|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures



| |                                                  
| | -------------------------------------------------
| | Evaluation of Disclosure Controls and Procedures.

13a-15(e) 15d-15(e)




| |                                                                      
| | ---------------------------------------------------------------------
| | Managements Report on Internal Control Over
    Financial Reporting.

13a-15(f) 15d-15(f). Internal Control  Integrated
Framework.




10-K/


50



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| |   |                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | an inappropriate level of review of certain significant
    financial statement accounts requiring a higher degree of
    judgment and estimates;        
|
| |  | insufficient analysis, documentation, review, and oversight of
    the financial statements of certain foreign subsidiaries during
    consolidation; and
|
| |  | insufficient staffing of the accounting and financial reporting
    function.                                                                            





| |                                                                                                     
| | ----------------------------------------------------------------------------------------------------
| | Control improvements related to contract administration
    and accounting for leasing transactions:



| |   |                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | New policies and procedures were developed, communicated and
    implemented governing the accounting review and approval of
    lease contract changes;
|
| |  | Increased review by Phoenix-based management over leasing
    operations and accounting; and                                                            
|
| |  | Internal audits to ensure proper accounting treatment for
    leasing transactions.                                                                     



| |                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------
| | Control improvements related to the analysis, evaluation
    and review of financial information in the year-end financial
    close process:



| |   |                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------
| |  | Hiring of additional financial accounting staff;                                                                                      
|
| |  | Improved organizational management of international finance and
    accounting functions; and                                         
|
| |  | Increased review by financial management of transactions
    involving complex accounting treatment, judgments and/or
    estimations.



10-K.




| |                                                          
| | ---------------------------------------------------------
| | Changes in Internal Control over Financial
    Reporting.



51



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|         |                  
|-------- | -----------------
|Item 9B. | Other Information






PART III







|         |                                                   
|-------- | --------------------------------------------------
|Item 10. | Directors and Executive Officers of the Registrant





10-K







|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation








|         |                                                                                                   
|-------- | --------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial Owners and
    Management and Related Stockholder Matters








|         |                                               
|-------- | ----------------------------------------------
|Item 13. | Certain Relationships and Related Transactions








|         |                                       
|-------- | --------------------------------------
|Item 14. | Principal Accountant Fees and Services






PART IV







|         |                                          
|-------- | -----------------------------------------
|Item 15. | Exhibits and Financial Statement Schedule





| |                                                                                                             
| | ------------------------------------------------------------------------------------------------------------
| | (1) Audited Consolidated Financial Statements 
     Reports of Independent Registered Public Accounting Firm

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Consolidated Balance Sheets at December 31, 2005 and 2004
    
     Consolidated Statements of Operations for the years ended
    December 31, 2005, 2004, and 2003 
     Consolidated Statements of Stockholders Equity for the
    years ended December 31, 2005, 2004, and 2003 
     Consolidated Statements of Cash Flows for the years ended
    December 31, 2005, 2004, and 2003 
     Notes to Consolidated Financial Statements (2) Financial Statement ScheduleSchedule II  Valuation and Qualifying
    Accounts
|
| | (All other financial statement schedules have been omitted since
    they are not required, not applicable, or the information is
    otherwise included in the financial statements)                                                                                                                                                                                                                                                                                                                                         



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SIGNATURES






| |                     
| | --------------------
| | HYPERCOM CORPORATION



| |     |                   
| | --- | ------------------
| | By: | /s/ William Keiper

| |                                      
| | -------------------------------------
| |                                      
| | William Keiper                       
| | Chief Executive Officer and President





|                                                           |  |                                                       |  | 
|---------------------------------------------------------- |  | ----------------------------------------------------- |  | 
|Signature                                                  |  | Title                                                
|                                                           |  |                                                      
|(1) Principal Executive, Financial and Accounting Officers |  |                                                      
|                                                          
|/s/ William KeiperWilliam Keiper                           |  | Chief Executive Officer
    and President, Director  
|                                                          
|/s/ Thomas LiguoriThomas Liguori                           |  | Senior Vice President and
    Chief Financial Officer
|                                                          
|(2) Directors                                              |  |                                                      
|                                                          
|*Daniel D. Diethelm                                        |  | Director                                             
|                                                          
|*Phillip J. Riese                                          |  | Director                                             
|                                                          
|*Norman Stout                                              |  | Director                                             

10-K




|     |                    | 
|---- | ------------------ | 
|*By: | /s/ William Keiper | 

|                 | 
|---------------- | 
|                 | 
|Attorney-in-Fact | 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
















| |                          
| | -------------------------
| | /s/ Ernst & Young
    LLP





55



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




















| |                          
| | -------------------------
| | /s/ Ernst & Young
    LLP





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HYPERCOM CORPORATION


CONSOLIDATED BALANCE SHEETS


|                                           |                                                                                                                                                                             |                        |         |         |      |   |         |         |  
|------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------- | ------- | ------- | ---- | - | ------- | ------- | -
|                                           |                                                                                                                                                                             | December 31,           |        
|                                           |                                                                                                                                                                             |                        |        
|                                           |                                                                                                                                                                             | 2005                   |         |         | 2004 |  
|                                           |                                                                                                                                                                             |                        |         |         |      |  
|                                           |                                                                                                                                                                             | (Dollars in thousands, |        
|                                           |                                                                                                                                                                             | except share data)     |        
|ASSETS                                    
|Current assets:                            |                                                                                                                                                                             |                        |         |         |      |   |         |        
|                                           | Cash and cash equivalents                                                                                                                                                   |                        | $       | 35,940  |      |   | $       | 23,445  |  
|                                           | Short-term investments                                                                                                                                                      |                        |         | 57,951  |      |   |         | 69,962  |  
|                                           | Accounts receivable, net of allowance for doubtful accounts of
    $3,266 and $2,390, respectively                                                                          |                        |         | 48,852  |      |   |         | 59,776  |  
|                                           | Current portion of net investment in sales-type leases                                                                                                                      |                        |         |        |      |   |         | 9,441   |  
|                                           | Inventories                                                                                                                                                                 |                        |         | 39,414  |      |   |         | 44,455  |  
|                                           | Prepaid expenses and other current assets                                                                                                                                   |                        |         | 8,946   |      |   |         | 12,955  |  
|                                           | Deferred tax assets, net                                                                                                                                                    |                        |         | 122     |      |   |         |        |  
|                                           | Assets of discontinued operations held for sale                                                                                                                             |                        |         | 12,613  |      |   |         |        |  
|                                           |                                                                                                                                                                             |                        |         |         |      |  
|Total current assets                       |                                                                                                                                                                             |                        | 203,838 |         |      |   | 220,034 |        
|Property, plant and equipment, net         |                                                                                                                                                                             |                        | 27,746  |         |      |   | 29,920  |        
|Net investment in sales-type leases        |                                                                                                                                                                             |                        |        |         |      |   | 17,668  |        
|Intangible assets, net                     |                                                                                                                                                                             |                        | 3,503   |         |      |   | 4,475   |        
|Other long-term assets                     |                                                                                                                                                                             |                        | 3,827   |         |      |   | 5,163   |        
|                                           |                                                                                                                                                                             |                        |         |         |      |  
|Total assets                               |                                                                                                                                                                             | $                      | 238,914 |         |      | $ | 277,260 |        
|                                           |                                                                                                                                                                             |                        |         |         |      |  
|                                          
|LIABILITIES AND STOCKHOLDERS EQUITY      
|Current liabilities:                       |                                                                                                                                                                             |                        |         |         |      |   |         |        
|                                           | Accounts payable                                                                                                                                                            |                        | $       | 17,721  |      |   | $       | 27,817  |  
|                                           | Accrued payroll and related expenses                                                                                                                                        |                        |         | 8,460   |      |   |         | 8,679   |  
|                                           | Accrued sales and other taxes                                                                                                                                               |                        |         | 9,479   |      |   |         | 8,792   |  
|                                           | Accrued liabilities                                                                                                                                                         |                        |         | 12,371  |      |   |         | 8,308   |  
|                                           | Deferred revenue                                                                                                                                                            |                        |         | 2,762   |      |   |         | 2,768   |  
|                                           | Income taxes payable                                                                                                                                                        |                        |         | 1,651   |      |   |         | 3,411   |  
|                                           | Current portion of long-term debt                                                                                                                                           |                        |         | 8,355   |      |   |         | 470     |  
|                                           |                                                                                                                                                                             |                        |         |         |      |  
|Total current liabilities                  |                                                                                                                                                                             |                        | 60,799  |         |      |   | 60,245  |        
|Long-term debt                             |                                                                                                                                                                             |                        | 22      |         |      |   | 8,359   |        
|Deferred tax liabilities, net              |                                                                                                                                                                             |                        | 341     |         |      |   |        |        
|Other liabilities                          |                                                                                                                                                                             |                        | 6,978   |         |      |   | 3,284   |        
|                                           |                                                                                                                                                                             |                        |         |         |      |  
|Total liabilities                          |                                                                                                                                                                             |                        | 68,140  |         |      |   | 71,888  |        
|                                           |                                                                                                                                                                             |                        |         |         |      |  
|Stockholders equity:                      |                                                                                                                                                                             |                        |         |         |      |   |         |        
|                                           | Common stock, $.001 par value; 100,000,000 shares
    authorized; 52,991,959 and 52,254,935 shares outstanding at
    December 31, 2005 and December 31, 2004, respectively |                        |         | 55      |      |   |         | 52      |  
|                                           | Additional paid-in capital                                                                                                                                                  |                        |         | 238,186 |      |   |         | 228,567 |  
|                                           | Deferred compensation                                                                                                                                                       |                        |         | (2,123  | )    |   |         | (505    | )
|                                           | Accumulated deficit                                                                                                                                                         |                        |         | (53,335 | )    |   |         | (19,969 | )
|                                           | Treasury stock, 1,815,620 and 290,211 shares (at cost) at
    December 31, 2005 and December 31, 2004, respectively                                                         |                        |         | (12,009 | )    |   |         | (2,773  | )
|                                           |                                                                                                                                                                             |                        |         |         |      |  
|Total stockholders equity                 |                                                                                                                                                                             |                        | 170,774 |         |      |   | 205,372 |        
|                                           |                                                                                                                                                                             |                        |         |         |      |  
|Total liabilities and stockholders equity |                                                                                                                                                                             | $                      | 238,914 |         |      | $ | 277,260 |        
|                                           |                                                                                                                                                                             |                        |         |         |      |  



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HYPERCOM CORPORATION


CONSOLIDATED STATEMENTS OF OPERATIONS


|                                                              |                                              |                                           |         |            |      |   |         |            |   |   |        |            | 
|------------------------------------------------------------- | -------------------------------------------- | ----------------------------------------- | ------- | ---------- | ---- | - | ------- | ---------- | - | - | ------ | ---------- | 
|                                                              |                                              | Year Ended December 31,                   |        
|                                                              |                                              |                                           |        
|                                                              |                                              | 2005                                      |         |            | 2004 |   |         | 2003       |  
|                                                              |                                              |                                           |         |            |      |   |         |            |  
|                                                              |                                              | (Dollars in thousands, except share data) |        
|Net revenue:                                                  |                                              |                                           |         |            |      |   |         |            |   |   |        |           
|                                                              | Product and other                            |                                           | $       | 210,963    |      |   | $       | 214,239    |   |   | $      | 196,231    | 
|                                                              | Services                                     |                                           |         | 34,260     |      |   |         | 27,046     |   |   |        | 22,585     | 
|                                                              |                                              |                                           |         |            |      |   |         |            |  
|                                                              | Total net revenue                            |                                           |         | 245,223    |      |   |         | 241,285    |   |   |        | 218,816    | 
|                                                              |                                              |                                           |         |            |      |   |         |            |  
|Costs of revenue:                                             |                                              |                                           |         |            |      |   |         |            |   |   |        |           
|                                                              | Product and other                            |                                           |         | 144,649    |      |   |         | 123,419    |   |   |        | 111,404    | 
|                                                              | Services                                     |                                           |         | 27,442     |      |   |         | 20,721     |   |   |        | 16,808     | 
|                                                              | Write-off of deferred contract costs         |                                           |         |           |      |   |         | 11,305     |   |   |        |           | 
|                                                              |                                              |                                           |         |            |      |   |         |            |  
|                                                              | Total costs of revenue                       |                                           |         | 172,091    |      |   |         | 155,445    |   |   |        | 128,212    | 
|                                                              |                                              |                                           |         |            |      |   |         |            |  
|Gross profit                                                  |                                              |                                           | 73,132  |            |      |   | 85,840  |            |   |   | 90,604 |           
|                                                              |                                              |                                           |         |            |      |   |         |            |  
|Operating expenses:                                           |                                              |                                           |         |            |      |   |         |            |   |   |        |           
|                                                              | Research and development                     |                                           |         | 27,555     |      |   |         | 27,188     |   |   |        | 24,163     | 
|                                                              | Selling, general and administrative          |                                           |         | 72,649     |      |   |         | 65,242     |   |   |        | 57,662     | 
|                                                              |                                              |                                           |         |            |      |   |         |            |  
|Income (loss) from continuing operations                      |                                              |                                           | (27,072 | )          |      |   | (6,590  | )          |   |   | 8,779  |           
|Interest income                                               |                                              |                                           | 2,679   |            |      |   | 1,198   |            |   |   | 382    |           
|Interest expense                                              |                                              |                                           | (787    | )          |      |   | (1,412  | )          |   |   | (2,474 | )         
|Foreign currency loss                                         |                                              |                                           | (1,297  | )          |      |   | (1,906  | )          |   |   | (1,609 | )         
|Other income (expense)                                        |                                              |                                           | (240    | )          |      |   | 13      |            |   |   | (113   | )         
|                                                              |                                              |                                           |         |            |      |   |         |            |  
|Income (loss) before income taxes and discontinued operations |                                              |                                           | (26,717 | )          |      |   | (8,697  | )          |   |   | 4,965  |           
|Provision for income taxes                                    |                                              |                                           | (3,526  | )          |      |   | (3,833  | )          |   |   | (4,114 | )         
|                                                              |                                              |                                           |         |            |      |   |         |            |  
|Income (loss) before discontinued operations                  |                                              |                                           | (30,243 | )          |      |   | (12,530 | )          |   |   | 851    |           
|Income (loss) from discontinued operations                    |                                              |                                           | (3,123  | )          |      |   | 3,868   |            |   |   | 10,347 |           
|                                                              |                                              |                                           |         |            |      |   |         |            |  
|Net income (loss)                                             |                                              | $                                         | (33,366 | )          |      | $ | (8,662  | )          |   | $ | 11,198 |           
|                                                              |                                              |                                           |         |            |      |   |         |            |  
|Basic income (loss) per share:                                |                                              |                                           |         |            |      |   |         |            |   |   |        |           
|                                                              | Income (loss) before discontinued operations |                                           | $       | (0.58      | )    |   | $       | (0.24      | ) |   | $      | 0.02       | 
|                                                              | Income (loss) from discontinued operations   |                                           |         | (0.06      | )    |   |         | 0.07       |   |   |        | 0.21       | 
|                                                              |                                              |                                           |         |            |      |   |         |            |  
|                                                              | Basic income (loss) per share                |                                           | $       | (0.64      | )    |   | $       | (0.17      | ) |   | $      | 0.23       | 
|                                                              |                                              |                                           |         |            |      |   |         |            |  
|Diluted income (loss) per share:                              |                                              |                                           |         |            |      |   |         |            |   |   |        |           
|                                                              | Income (loss) before discontinued operations |                                           | $       | (0.58      | )    |   | $       | (0.24      | ) |   | $      | 0.02       | 
|                                                              | Income (loss) from discontinued operations   |                                           |         | (0.06      | )    |   |         | 0.07       |   |   |        | 0.20       | 
|                                                              |                                              |                                           |         |            |      |   |         |            |  
|                                                              | Diluted income (loss) per share              |                                           | $       | (0.64      | )    |   | $       | (0.17      | ) |   | $      | 0.22       | 
|                                                              |                                              |                                           |         |            |      |   |         |            |  
|Shares used in computing net income (loss) per common share:  |                                              |                                           |         |            |      |   |         |            |   |   |        |           
|                                                              | Basic                                        |                                           |         | 52,395,001 |      |   |         | 51,251,975 |   |   |        | 49,145,980 | 
|                                                              |                                              |                                           |         |            |      |   |         |            |  
|                                                              | Diluted                                      |                                           |         | 52,395,001 |      |   |         | 51,251,975 |   |   |        | 50,350,849 | 
|                                                              |                                              |                                           |         |            |      |   |         |            |  



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HYPERCOM CORPORATION


CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY


|                                |                                                                                    |                                           |            |            |            |   |    |             |  |   |              |       |             |              |        |       |          |       |        |               |   |   |         |         |   |   |         |        |   |   |         |         |  
|------------------------------- | ---------------------------------------------------------------------------------- | ----------------------------------------- | ---------- | ---------- | ---------- | - | -- | ----------- |  | - | ------------ | ----- | ----------- | ------------ | ------ | ----- | -------- | ----- | ------ | ------------- | - | - | ------- | ------- | - | - | ------- | ------ | - | - | ------- | ------- | -
|                                |                                                                                    | Common Stock                              |            |            | Additional |   |    | Receivables |  |   |              |       | Accumulated |              |        |       |          | Total |       
|                                |                                                                                    |                                           |            |            | Paid-In    |   |    | from        |  |   | Deferred     |       |             | (Deficit)    |        |       | Treasury |       |        | Stockholders |  
|                                |                                                                                    | Shares                                    |            |            | Balance    |   |    | Capital     |  |   | Stockholders |       |             | Compensation |        |       | Earnings |       |        | Stock         |   |   | Equity  |        
|                                |                                                                                    |                                           |            |            |            |   |    |             |  |   |              |       |             |              |        |       |          |       |        |               |   |   |         |        
|                                |                                                                                    | (Dollars in thousands, except share data) |           
|Balance as of December 31, 2002 |                                                                                    |                                           | 48,014,350 |            |            | $ | 48 |             |  | $ | 213,987      |       |             | $            | (1,056 | )     |          | $     |       |               |   | $ | (22,505 | )       |   | $ | (2,502  | )      |   | $ | 187,972 |        
|                                | Issuance of common stock                                                           |                                           |            | 1,852,351  |            |   |    | 2           |  |   |              | 5,396 |             |              |        |      |          |       |        |              |   |   |         |        |   |   |         |       |   |   |         | 5,398   |  
|                                | Purchase of treasury stock                                                         |                                           |            | (60,122    | )          |   |    |            |  |   |              |      |             |              |        |      |          |       |        |              |   |   |         |        |   |   |         | (271   | ) |   |         | (271    | )
|                                | Restricted common stock issued for deferred compensation                           |                                           |            | 124,224    |            |   |    |            |  |   |              | 600   |             |              |        |      |          |       |        | (600          | ) |   |         |        |   |   |         |       |   |   |         |        |  
|                                | Net income                                                                         |                                           |            |           |            |   |    |            |  |   |              |      |             |              |        |      |          |       |        |              |   |   |         | 11,198  |   |   |         |       |   |   |         | 11,198  |  
|                                |                                                                                    |                                           |            |            |            |   |    |             |  |   |              |       |             |              |        |       |          |       |        |               |   |   |         |        
|Balance as of December 31, 2003 |                                                                                    |                                           | 49,930,803 |            |            |   | 50 |             |  |   | 219,983      |       |             |              | (1,056 | )     |          |       | (600   | )             |   |   | (11,307 | )       |   |   | (2,773  | )      |   |   | 204,297 |        
|                                | Issuance of common stock                                                           |                                           |            | 2,274,484  |            |   |    | 2           |  |   |              | 8,274 |             |              |        |      |          |       |        |              |   |   |         |        |   |   |         |       |   |   |         | 8,276   |  
|                                | Restricted common stock issued for deferred compensation, net of
    cancellations |                                           |            | 49,648     |            |   |    |            |  |   |              | 310   |             |              |        |      |          |       |        | (310          | ) |   |         |        |   |   |         |       |   |   |         |        |  
|                                | Recognition of deferred compensation, net of award reacquisitions                  |                                           |            |           |            |   |    |            |  |   |              |      |             |              |        |      |          |       |        | 405           |   |   |         |        |   |   |         |       |   |   |         | 405     |  
|                                | Decrease in stockholders receivable                                               |                                           |            |           |            |   |    |            |  |   |              |      |             |              |        | 1,056 |          |       |        |              |   |   |         |        |   |   |         |       |   |   |         | 1,056   |  
|                                | Net loss                                                                           |                                           |            |           |            |   |    |            |  |   |              |      |             |              |        |      |          |       |        |              |   |   |         | (8,662  | ) |   |         |       |   |   |         | (8,662  | )
|                                |                                                                                    |                                           |            |            |            |   |    |             |  |   |              |       |             |              |        |       |          |       |        |               |   |   |         |        
|Balance as of December 31, 2004 |                                                                                    |                                           | 52,254,935 |            |            |   | 52 |             |  |   | 228,567      |       |             |              |       |       |          |       | (505   | )             |   |   | (19,969 | )       |   |   | (2,773  | )      |   |   | 205,372 |        
|                                | Issuance of common stock                                                           |                                           |            | 1,873,021  |            |   |    | 3           |  |   |              | 7,173 |             |              |        |      |          |       |        |              |   |   |         |        |   |   |         |       |   |   |         | 7,176   |  
|                                | Purchase of treasury stock                                                         |                                           |            | (1,525,409 | )          |   |    |            |  |   |              |      |             |              |        |      |          |       |        |              |   |   |         |        |   |   |         | (9,236 | ) |   |         | (9,236  | )
|                                | Restricted common stock issued for deferred compensation, net of
    cancellations |                                           |            | 389,412    |            |   |    |            |  |   |              | 2,446 |             |              |        |      |          |       |        | (2,446        | ) |   |         |        |   |   |         |       |   |   |         |        |  
|                                | Recognition of deferred compensation, net of award reacquisitions                  |                                           |            |           |            |   |    |            |  |   |              |      |             |              |        |      |          |       |        | 828           |   |   |         |        |   |   |         |       |   |   |         | 828     |  
|                                | Net loss                                                                           |                                           |            |           |            |   |    |            |  |   |              |      |             |              |        |      |          |       |        |              |   |   |         | (33,366 | ) |   |         |       |   |   |         | (33,366 | )
|                                |                                                                                    |                                           |            |            |            |   |    |             |  |   |              |       |             |              |        |       |          |       |        |               |   |   |         |        
|Balance as of December 31, 2005 |                                                                                    |                                           | 52,991,959 |            |            | $ | 55 |             |  | $ | 238,186      |       |             | $            |       |       |          | $     | (2,123 | )             |   | $ | (53,335 | )       |   | $ | (12,009 | )      |   | $ | 170,774 |        
|                                |                                                                                    |                                           |            |            |            |   |    |             |  |   |              |       |             |              |        |       |          |       |        |               |   |   |         |        



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HYPERCOM CORPORATION


CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                                                     |                                                                                                                                       |                                                    |                                                     |          |         |        |         |         |         |         |        |         |        |        | 
|-------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------- | --------------------------------------------------- | -------- | ------- | ------ | ------- | ------- | ------- | ------- | ------ | ------- | ------ | ------ | 
|                                                                     |                                                                                                                                       | Year Ended December 31,                            |                                                    
|                                                                     |                                                                                                                                       |                                                    |                                                    
|                                                                     |                                                                                                                                       | 2005                                               |                                                     |          | 2004    |        |         | 2003    |        
|                                                                     |                                                                                                                                       |                                                    |                                                     |          |         |        |         |         |        
|                                                                     |                                                                                                                                       | (Dollars in thousands)                             |                                                    
|Cash flows from continuing operations:                               |                                                                                                                                       |                                                    |                                                     |          |         |        |         |         |         |         |        |        
|                                                                     | Net income (loss) from continuing operations                                                                                          |                                                    | $                                                   | (30,243  | )       |        | $       | (12,530 | )       |         | $      | 851     |       
|                                                                     | Adjustments to reconcile net income (loss) from continuing
    operations to net cash provided by (used in) operating
    activities: |                                                    |                                                     |          |         |        |         |         |         |         |        |         |       
|                                                                     |                                                                                                                                       | Amortization of deferred financing costs           |                                                     |          | 15      |        |         |         | 529     |         |        |         | 869    |       
|                                                                     |                                                                                                                                       | Depreciation and amortization                      |                                                     |          | 7,890   |        |         |         | 8,007   |         |        |         | 8,883  |       
|                                                                     |                                                                                                                                       | Amortization of discount on short-term investments |                                                     |          | (1,099  | )      |         |         | (223    | )       |        |         |        |       
|                                                                     |                                                                                                                                       | Provision for doubtful accounts                    |                                                     |          | 2,046   |        |         |         | 1,915   |         |        |         | 1,972  |       
|                                                                     |                                                                                                                                       | Write-down of excess and obsolete inventory        |                                                     |          | 18,539  |        |         |         | 7,922   |         |        |         | 4,668  |       
|                                                                     |                                                                                                                                       | Provision for warranty and other product charges   |                                                     |          | 8,926   |        |         |         | 727     |         |        |         |        |       
|                                                                     |                                                                                                                                       | Foreign currency (gains) losses                    |                                                     |          | (976    | )      |         |         | 74      |         |        |         | (1,669 | )     
|                                                                     |                                                                                                                                       | Write-down of deferred contract costs              |                                                     |          |        |        |         |         | 11,305  |         |        |         |       |       
|                                                                     |                                                                                                                                       | Non-cash stock-based compensation                  |                                                     |          | 828     |        |         |         | 405     |         |        |         |       |       
|                                                                     |                                                                                                                                       | Non-cash write-off of intangibles and other assets |                                                     |          | 2,181   |        |         |         | 1,515   |         |        |         |       |       
|                                                                     |                                                                                                                                       | Deferred income taxes                              |                                                     |          | 219     |        |         |         |        |         |        |         |       |       
|                                                                     |                                                                                                                                       | Changes in operating assets and liabilities, net   |                                                     |          | (12,080 | )      |         |         | (10,797 | )       |        |         | 11,690 |       
|                                                                     |                                                                                                                                       |                                                    |                                                     |          |         |        |         |         |        
|                                                                     |                                                                                                                                       |                                                    | Net cash provided by (used in) operating activities |          |         | (3,754 | )       |         |         | 8,849   |        |         |        | 27,264 | 
|                                                                     |                                                                                                                                       |                                                    |                                                     |          |         |        |         |         |        
|Cash flows from investing activities:                                |                                                                                                                                       |                                                    |                                                     |          |         |        |         |         |         |         |        |        
|                                                                     | Proceeds from the sale of discontinued operations, net of
    purchase price adjustments                                              |                                                    |                                                     |         |         |        |         |        |         |         |        | 32,512  |       
|                                                                     | Purchase of property, plant and equipment                                                                                             |                                                    |                                                     | (4,916   | )       |        |         | (5,855  | )       |         |        | (4,319  | )     
|                                                                     | Software development costs capitalized                                                                                                |                                                    |                                                     | (559     | )       |        |         | (2,953  | )       |         |        | (1,590  | )     
|                                                                     | Purchase of short-term investments                                                                                                    |                                                    |                                                     | (216,915 | )       |        |         | (90,239 | )       |         |        | (76,696 | )     
|                                                                     | Proceeds from the sale or maturity of short-term investments                                                                          |                                                    |                                                     | 230,025  |         |        |         | 37,900  |         |         |        | 59,323  |       
|                                                                     |                                                                                                                                       |                                                    |                                                     |          |         |        |         |         |        
|                                                                     |                                                                                                                                       |                                                    | Net cash provided by (used in) investing activities |          |         | 7,635  |         |         |         | (61,147 | )      |         |        | 9,230  | 
|                                                                     |                                                                                                                                       |                                                    |                                                     |          |         |        |         |         |        
|Cash flows from financing activities:                                |                                                                                                                                       |                                                    |                                                     |          |         |        |         |         |         |         |        |        
|                                                                     | Repayment of bank notes payable and other debt instruments                                                                            |                                                    |                                                     | (425     | )       |        |         | (995    | )       |         |        | (2,415  | )     
|                                                                     | Proceeds from issuance of common stock                                                                                                |                                                    |                                                     | 7,176    |         |        |         | 8,276   |         |         |        | 5,398   |       
|                                                                     | Purchase of treasury stock                                                                                                            |                                                    |                                                     | (9,236   | )       |        |         |        |         |         |        | (271    | )     
|                                                                     | Advances from/(to) discontinued operations                                                                                            |                                                    |                                                     |         |         |        |         |        |         |         |        | 294     |       
|                                                                     | Repayment of advances to stockholders                                                                                                 |                                                    |                                                     |         |         |        |         | 1,056   |         |         |        |        |       
|                                                                     |                                                                                                                                       |                                                    |                                                     |          |         |        |         |         |        
|                                                                     |                                                                                                                                       |                                                    | Net cash provided by (used in) financing activities |          |         | (2,485 | )       |         |         | 8,337   |        |         |        | 3,006  | 
|Effect of exchange rate changes on cash and cash equivalents         |                                                                                                                                       |                                                    | (333                                                | )        |         |        | 407     |         |         |         | 728    |        
|                                                                     |                                                                                                                                       |                                                    |                                                     |          |         |        |         |         |        
|Net increase (decrease) in cash flow from continuing operations      |                                                                                                                                       |                                                    | 1,063                                               |          |         |        | (43,554 | )       |         |         | 40,228 |        
|Cash flows from discontinued operations (Revised 
    See Note 19): |                                                                                                                                       |                                                    |                                                     |          |         |        |         |         |         |         |        |        
|                                                                     | Net cash provided by operating activities                                                                                             |                                                    |                                                     | 11,432   |         |        |         | 4,450   |         |         |        | 5,613   |       
|                                                                     | Net cash provided by (used in) investing activities                                                                                   |                                                    |                                                     |         |         |        |         | (2,866  | )       |         |        | 9,323   |       
|                                                                     | Net cash used in financing activities                                                                                                 |                                                    |                                                     |         |         |        |         |        |         |         |        | (12,818 | )     
|Cash and cash equivalents, beginning of year                         |                                                                                                                                       |                                                    | 23,445                                              |          |         |        | 65,415  |         |         |         | 23,069 |        
|                                                                     |                                                                                                                                       |                                                    |                                                     |          |         |        |         |         |        
|Cash and cash equivalents, end of year                               |                                                                                                                                       | $                                                  | 35,940                                              |          |         | $      | 23,445  |         |         | $       | 65,415 |        
|                                                                     |                                                                                                                                       |                                                    |                                                     |          |         |        |         |         |        



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HYPERCOM CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2005




|   |                        
|-- | -----------------------
|1. | Description of Business

point-of






|   |                                
|-- | -------------------------------
|2. | Significant Accounting Policies



| |                            
| | ---------------------------
| | Principles of Consolidation





| |                 
| | ----------------
| | Reclassification





| |                 
| | ----------------
| | Use of Estimates





| |                          
| | -------------------------
| | Cash and Cash Equivalents



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##### Table of Contents



HYPERCOM CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


December 31, 2005




| |                       
| | ----------------------
| | Short-term Investments





| |                                
| | -------------------------------
| | Allowance for Doubtful Accounts







| |                  
| | -----------------
| | Sales-Type Leases

Accounting for
Leases




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##### Table of Contents



HYPERCOM CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


December 31, 2005








| |            
| | -----------
| | Inventories

first-in,




| |                              
| | -----------------------------
| | Property, Plant and Equipment



|                                |  |  |             | 
|------------------------------- |  |  | ----------- | 
|Building                        |  |  | 15-50 years | 
|Computer equipment and software |  |  | 3-5 years   | 
|Machinery and equipment         |  |  | 2-10 years  | 
|Equipment leased to customers   |  |  | 1-5 years   | 
|Furniture and fixtures          |  |  | 3-10 years  | 





| |                                       
| | --------------------------------------
| | Capitalized Software Development Costs





| |                                
| | -------------------------------
| | Impairment of Long-Lived Assets



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##### Table of Contents



HYPERCOM CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


December 31, 2005






| |                    
| | -------------------
| | Revenue Recognition

00-21, Revenue Arrangements with Multiple Deliverables Software Revenue Recognition Accounting for Performance of
Construction-Type and Certain Production Type Contracts Revenue Recognition in Financial
Statements


percentage-of






| |   |                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The delivered item(s) has value to the customer on a standalone
    basis;                                                                                                                                                     
|
| |  | There is objective and reliable evidence of the fair value of
    the undelivered item(s); and                                                                                                                                 
|
| |  | If the arrangement includes a general right of return relative
    to the delivered item(s), delivery or performance of the
    undelivered item(s) is considered probable and substantially in
    the control of the Company.





| |                    
| | -------------------
| | Contract Accounting

percentage-of


64



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##### Table of Contents



HYPERCOM CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


December 31, 2005








| |                 
| | ----------------
| | Product Warranty





| |                    
| | -------------------
| | Legal Contingencies





| |                            
| | ---------------------------
| | Shipping and Handling Costs





| |                  
| | -----------------
| | Advertising Costs





| |                         
| | ------------------------
| | Stock-Based Compensation

Accounting for Stock-Based
Compensation, Accounting for Stock
issued to Employees


65



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##### Table of Contents



HYPERCOM CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


December 31, 2005




|                                                                                                          |  |      |            |   |      |   |            |      |  |   |            |  
|--------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                                                          |  | 2005 |            |   | 2004 |   |            | 2003 | 
|                                                                                                          |  |      |            |   |      |   |            |      | 
|Net income (loss), as reported                                                                            |  | $    | (33,366    | ) |      | $ | (8,662     | )    |  | $ | 11,198     |  
|Add stock-based employee compensation expense included in
    reported net income (loss)                  |  |      | 828        |   |      |   | 405        |      |  |   |           |  
|Deduct total stock-based employee compensation expense
    determined under fair value methods for awards |  |      | (2,837     | ) |      |   | (2,680     | )    |  |   | (4,704     | )
|Add reversal of stock-based compensation expense for options
    forfeited prior to vesting               |  |      | 2,694      |   |      |   | 266        |      |  |   | 1,006      |  
|                                                                                                          |  |      |            |   |      |   |            |      | 
|Pro forma net income (loss)                                                                               |  | $    | (32,681    | ) |      | $ | (10,671    | )    |  | $ | 7,500      |  
|                                                                                                          |  |      |            |   |      |   |            |      | 
|Net income (loss) per share:                                                                              |  |      |            |   |      |   |            |      |  |   |            |  
|Basic, as reported                                                                                        |  | $    | (0.64      | ) |      | $ | (0.17      | )    |  | $ | 0.23       |  
|Basic, pro forma                                                                                          |  |      | (0.62      | ) |      |   | (0.21      | )    |  |   | 0.15       |  
|Diluted, as reported                                                                                      |  |      | (0.64      | ) |      |   | (0.17      | )    |  |   | 0.22       |  
|Diluted, pro forma                                                                                        |  |      | (0.62      | ) |      |   | (0.21      | )    |  |   | 0.15       |  
|Weighted average shares used in pro forma computation:                                                    |  |      |            |   |      |   |            |      |  |   |            |  
|Basic                                                                                                     |  |      | 52,395,001 |   |      |   | 51,251,975 |      |  |   | 49,145,980 |  
|Diluted                                                                                                   |  |      | 52,395,001 |   |      |   | 51,251,975 |      |  |   | 50,350,849 |  



|                                         |  |      |      |   |      |  |      |      |  |  |      |  
|---------------------------------------- |  | ---- | ---- | - | ---- |  | ---- | ---- |  |  | ---- | -
|                                         |  | 2005 |      |   | 2004 |  |      | 2003 | 
|                                         |  |      |      |   |      |  |      |      | 
|Weighted average risk free interest rate |  |      | 4.1  | % |      |  | 3.2  | %    |  |  | 2.7  | %
|Expected life of the options (in years)  |  |      | 5.77 |   |      |  | 6.98 |      |  |  | 7.31 |  
|Expected stock price volatility          |  |      | 75   | % |      |  | 86   | %    |  |  | 87   | %
|Expected dividend yield                  |  |      |     |   |      |  |     |      |  |  |     |  





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##### Table of Contents



HYPERCOM CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


December 31, 2005


Accounting for Stock Appreciation Rights and
Other Variable Stock Option Award Plan.




| |                 
| | ----------------
| | Foreign Currency





| |             
| | ------------
| | Income Taxes







| |                        
| | -----------------------
| | Income (Loss) Per Share



|                                                                                                          |  |      |            |  |      |  |            |      |  |  |            | 
|--------------------------------------------------------------------------------------------------------- |  | ---- | ---------- |  | ---- |  | ---------- | ---- |  |  | ---------- | 
|                                                                                                          |  | 2005 |            |  | 2004 |  |            | 2003 | 
|                                                                                                          |  |      |            |  |      |  |            |      | 
|Shares used in basic income (loss) per share calculation
    (weighted average common shares outstanding) |  |      | 52,395,001 |  |      |  | 51,251,975 |      |  |  | 49,145,980 | 
|Effect of dilutive stock options and warrants                                                             |  |      |           |  |      |  |           |      |  |  | 1,204,869  | 
|                                                                                                          |  |      |            |  |      |  |            |      | 
|Shares used in diluted income (loss) per share calculation                                                |  |      | 52,395,001 |  |      |  | 51,251,975 |      |  |  | 50,350,849 | 
|                                                                                                          |  |      |            |  |      |  |            |      | 



67



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##### Table of Contents



HYPERCOM CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


December 31, 2005




| |                                 
| | --------------------------------
| | Derivative Financial Instruments









| |                                    
| | -----------------------------------
| | Fair Value of Financial Instruments





| |                                          
| | -----------------------------------------
| | Recently Issued Accounting Pronouncements

Share-Based Payment


68



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##### Table of Contents



HYPERCOM CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


December 31, 2005




Inventory Costs, an amendment of ARB No. 29,
Chapter 4


Accounting Changes and Error Corrections 
A Replacement of APB Opinion No. 20 and FASB Statement
No. 3


Accounting for Conditional Asset Retirement Obligations


143-1, Accounting
for Electronic Equipment Waste Obligations 143-1), 143-1 143-1


The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments


69



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##### Table of Contents



HYPERCOM CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


December 31, 2005






|   |                                          
|-- | -----------------------------------------
|3. | Business Review and Restructuring Charges





| |   |                                                                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Implementing an
    end-of-product-life
    cycle strategy, including identifying products and related
    inventory with near term
    end-of-life
    requirements;                                                                                                                    
|
| |  | More aggressively addressing and correcting product performance
    issues, including negotiated warranty and product trade-in/
    trade-out programs required for the
    end-of-product-life
    cycle strategies;                                                                    
|
| |  | Implementing certain workforce reductions, including members of
    the senior management team, sales, operations and manufacturing
    personnel, as well as moving certain research and development
    resources to lower cost foreign geographies, and compensation
    plan changes;
|
| |  | Vacating a leased building in Phoenix, Arizona due to the
    reductions in force;                                                                                                                                                                                                       
|
| |  | Evaluating other assets and liabilities and evaluating the past
    underlying operating decisions or strategies supporting the
    future benefit of the assets or the probability of a liability;                                                                                      
|
| |  | Addressing individual country/ regional sales and profitability
    performance, and reallocating of resources based upon market
    share growth objectives by country to support the new strategies
    going forward;                                                                 
|
| |  | Investing in the implementation of a comprehensive product
    marketing function within the Companys
    organization; and                                                                                                                                                             
|
| |  | Evaluating opportunities for short, medium and long-term
    improvements in manufacturing costs.                                                                                                                                                                                        

70



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##### Table of Contents



HYPERCOM CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


December 31, 2005




|                               |                                                                        |                   |        |        |                |   |        |                   |  |   |       |       | 
|------------------------------ | ---------------------------------------------------------------------- | ----------------- | ------ | ------ | -------------- | - | ------ | ----------------- |  | - | ----- | ----- | 
|                               |                                                                        | Costs Expected to |        |        | Costs Incurred |   |        |                  
|                               |                                                                        | be Incurred as of |        |        | through        |   |        | Accrued Liability | 
|                               |                                                                        | December 31,      |        |        | December 31,   |   |        | Balance at        | 
|                               |                                                                        | 2005              |        |        | 2005           |   |        | December 31, 2005 | 
|                               |                                                                        |                   |        |        |                |   |        |                   | 
|Costs of revenue:              |                                                                        |                   |        |        |                |   |        |                   |  |   |       |      
|                               | Warranty charges and product replacement accruals(a)                   |                   | $      | 7,374  |                |   | $      | 3,832             |  |   | $     | 3,542 | 
|                               | Inventory write-downs, primarily for product end-of-life
    decisions |                   |        | 12,111 |                |   |        | 12,111            |  |   |       |      | 
|                               | One-time termination benefits and related employment costs(a)          |                   |        | 469    |                |   |        | 351               |  |   |       | 118   | 
|                               |                                                                        |                   |        |        |                |   |        |                   | 
|Total costs of revenue charges |                                                                        |                   | 19,954 |        |                |   | 16,294 |                   |  |   | 3,660 |      
|                               |                                                                        |                   |        |        |                |   |        |                   | 
|Operating expenses:            |                                                                        |                   |        |        |                |   |        |                   |  |   |       |      
|                               | One-time termination benefits and related employment costs(a)          |                   |        | 3,370  |                |   |        | 2,551             |  |   |       | 819   | 
|                               | Idled facility lease charge(b)                                         |                   |        | 1,013  |                |   |        | 195               |  |   |       | 818   | 
|                               |                                                                        |                   |        |        |                |   |        |                   | 
|Total operating expenses       |                                                                        |                   | 4,383  |        |                |   | 2,746  |                   |  |   | 1,637 |      
|                               |                                                                        |                   |        |        |                |   |        |                   | 
|Total charges                  |                                                                        | $                 | 24,337 |        |                | $ | 19,040 |                   |  | $ | 5,297 |      
|                               |                                                                        |                   |        |        |                |   |        |                   | 






|    |  |                                                                                                                                                             
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | These accrued liability balances are classified as current
    liabilities as these amounts are expected to be paid during the
    first half of 2006.      
|   
|(b) |  | The idled facility lease charge accrued liability is classified
    based on the timing of the projected lease payments that are
    scheduled through 2011.





| |   |                                                                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $4.8 million of replacement cost provisions related to
    certain electronic payment equipment that the Company has
    elected to provide to certain customers to reduce future
    warranty costs, increase customer satisfaction, drive future
    revenue opportunities, and protect the Companys
    competitive positioning;
|
| |  | $2.6 million of charges related to additional negotiated
    warranty work and replacement cost provisions for customer owned
    product as a result of higher than expected repair costs;                                                                                                                                         
|
| |  | $12.1 million of write-downs for inventory primarily
    related to products at or near
    end-of-life;                                                                                                                                                                                                                            
|
| |  | $3.8 million of severance and related provisions related to
    recent termination and severance of certain executives and
    employees, and the elimination of certain executive
    benefits; and                                                                                                                                
|
| |  | $1.0 million for future lease payments under a
    non-cancelable lease covering an idled facility.                                                                                                                                                                                                                                 

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HYPERCOM CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


December 31, 2005




|   |                        
|-- | -----------------------
|4. | Discontinued Operations



|                                           |                                              |      |        |        |      |   |       |        |   |   |        |        |  
|------------------------------------------ | -------------------------------------------- | ---- | ------ | ------ | ---- | - | ----- | ------ | - | - | ------ | ------ | -
|                                           |                                              | 2005 |        |        | 2004 |   |       | 2003   |  
|                                           |                                              |      |        |        |      |   |       |        |  
|United Kingdom Lease Business:             |                                              |      |        |        |      |   |       |        |   |   |        |       
|                                           | Net revenues                                 |      | $      | 14,355 |      |   | $     | 13,870 |   |   | $      | 12,698 |  
|                                           | Cost of revenues                             |      |        | 9,531  |      |   |       | 7,614  |   |   |        | 7,272  |  
|                                           |                                              |      |        |        |      |   |       |        |  
|                                           | Gross profit                                 |      |        | 4,824  |      |   |       | 6,256  |   |   |        | 5,426  |  
|                                           | Selling, general and administrative expenses |      |        | (1,397 | )    |   |       | (1,071 | ) |   |        | (1,170 | )
|                                           | Foreign currency loss                        |      |        | (340   | )    |   |       | (1,317 | ) |   |        | (1,142 | )
|                                           | Loss on asset impairment                     |      |        | (6,609 | )    |   |       |       |   |   |        |       |  
|                                           |                                              |      |        |        |      |   |       |        |  
|                                           |                                              |      | (3,522 | )      |      |   | 3,868 |        |   |   | 3,114  |       
|Golden Eagle Leasing                       |                                              |      | 399    |        |      |   |      |        |   |   | 12,610 |       
|2002 Profit Improvement Plan               |                                              |      |       |        |      |   |      |        |   |   | (5,377 | )     
|                                           |                                              |      |        |        |      |   |       |        |  
|Income (loss) from discontinued operations |                                              | $    | (3,123 | )      |      | $ | 3,868 |        |   | $ | 10,347 |       
|                                           |                                              |      |        |        |      |   |       |        |  



| |                              
| | -----------------------------
| | United Kingdom Lease Business

Accounting for the Impairment or
Disposal of Long-Lived Assets




|                                                |  |      |        |  |      |   |        | 
|----------------------------------------------- |  | ---- | ------ |  | ---- | - | ------ | 
|                                                |  | 2005 |        |  | 2004 |  
|                                                |  |      |        |  |      |  
|Prepaid expenses and other current assets       |  | $    | 57     |  |      | $ | 552    | 
|Net investment in sales-type leases             |  |      | 10,782 |  |      |   | 17,668 | 
|Property, plant and equipment, net              |  |      | 475    |  |      |   | 1,151  | 
|Other assets                                    |  |      | 1,299  |  |      |   | 2,817  | 
|                                                |  |      |        |  |      |  
|Assets of discontinued operations held for sale |  | $    | 12,613 |  |      | $ | 22,188 | 
|                                                |  |      |        |  |      |  



72



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##### Table of Contents



HYPERCOM CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


December 31, 2005




| |                     
| | --------------------
| | Golden Eagle Leasing





| |                             
| | ----------------------------
| | 2002 Profit Improvement Plan





|   |                       
|-- | ----------------------
|5. | Short-term Investments







|                                           |  |      |        |  |      |   |        | 
|------------------------------------------ |  | ---- | ------ |  | ---- | - | ------ | 
|                                           |  | 2005 |        |  | 2004 |  
|                                           |  |      |        |  |      |  
|Municipal debt securities                  |  | $    | 10,500 |  |      | $ | 14,900 | 
|U.S. government and agency debt securities |  |      | 23,439 |  |      |   | 35,962 | 
|Corporate debt securities                  |  |      | 10,012 |  |      |   |       | 
|Preferred equity securities                |  |      | 14,000 |  |      |   | 19,100 | 
|                                           |  |      |        |  |      |  
|                                           |  | $    | 57,951 |  |      | $ | 69,962 | 
|                                           |  |      |        |  |      |  



73



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##### Table of Contents



HYPERCOM CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


December 31, 2005


35-day




|   |       
|-- | ------
|6. | Leases



| |                  
| | -----------------
| | Sales-Type Leases



|                                      |  |      |        |  
|------------------------------------- |  | ---- | ------ | -
|                                      |  | 2004 |       
|                                      |  |      |       
|Lease contracts receivable            |  | $    | 31,983 |  
|Allowance for credit losses           |  |      | (1,198 | )
|Estimated unguaranteed residual value |  |      | 6,039  |  
|Unearned revenue                      |  |      | (9,715 | )
|                                      |  |      |       
|Net investment in sales-type leases   |  |      | 27,109 |  
|Less: current portion                 |  |      | (9,441 | )
|                                      |  |      |       
|Long-term portion                     |  | $    | 17,668 |  
|                                      |  |      |       



| |                 
| | ----------------
| | Operating Leases





|   |            
|-- | -----------
|7. | Inventories



|                 |  |      |        |  |      |   |        | 
|---------------- |  | ---- | ------ |  | ---- | - | ------ | 
|                 |  | 2005 |        |  | 2004 |  
|                 |  |      |        |  |      |  
|Purchased parts  |  | $    | 24,118 |  |      | $ | 21,083 | 
|Work in progress |  |      | 3,609  |  |      |   | 5,134  | 
|Finished goods   |  |      | 11,687 |  |      |   | 18,238 | 
|                 |  |      |        |  |      |  
|                 |  | $    | 39,414 |  |      | $ | 44,455 | 
|                 |  |      |        |  |      |  

74



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##### Table of Contents



HYPERCOM CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


December 31, 2005


8.     Property, Plant and
Equipment




|                                |  |      |         |   |      |   |         |  
|------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                |  | 2005 |         |   | 2004 |  
|                                |  |      |         |   |      |  
|Land and improvements           |  | $    | 4,743   |   |      | $ | 4,711   |  
|Buildings                       |  |      | 15,133  |   |      |   | 14,883  |  
|Computer equipment and software |  |      | 20,656  |   |      |   | 18,620  |  
|Machinery and equipment         |  |      | 23,318  |   |      |   | 20,571  |  
|Equipment leased to customers   |  |      | 1,195   |   |      |   | 3,609   |  
|Furniture and fixtures          |  |      | 4,803   |   |      |   | 5,657   |  
|Leasehold improvements          |  |      | 3,156   |   |      |   | 2,942   |  
|Construction in process         |  |      | 448     |   |      |   | 1,386   |  
|                                |  |      |         |   |      |  
|                                |  |      | 73,452  |   |      |   | 72,379  |  
|Less accumulated depreciation   |  |      | (45,706 | ) |      |   | (42,459 | )
|                                |  |      |         |   |      |  
|                                |  | $    | 27,746  |   |      | $ | 29,920  |  
|                                |  |      |         |   |      |  







|   |                  
|-- | -----------------
|9. | Intangible Assets



|                              |  |      |        |   |      |   |       |  
|----------------------------- |  | ---- | ------ | - | ---- | - | ----- | -
|                              |  | 2005 |        |   | 2004 |  
|                              |  |      |        |   |      |  
|Capitalized software          |  | $    | 5,039  |   |      | $ | 5,058 |  
|Other                         |  |      | 24     |   |      |   | 29    |  
|                              |  |      |        |   |      |  
|                              |  |      | 5,063  |   |      |   | 5,087 |  
|Less accumulated amortization |  |      | (1,560 | ) |      |   | (612  | )
|                              |  |      |        |   |      |  
|                              |  | $    | 3,503  |   |      | $ | 4,475 |  
|                              |  |      |        |   |      |  



75



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##### Table of Contents



HYPERCOM CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


December 31, 2005






|    |                 
|--- | ----------------
|10. | Product Warranty



|                                                     |  |      |        |   |      |   |        |  
|---------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                                     |  | 2005 |        |   | 2004 |  
|                                                     |  |      |        |   |      |  
|Balance at beginning of period                       |  | $    | 1,434  |   |      | $ | 1,079  |  
|Warranty charges to normal operations                |  |      | 2,793  |   |      |   | 2,057  |  
|Warranty charges related to the 2005 Business Review |  |      | 7,374  |   |      |   |       |  
|Utilization of warranty liability                    |  |      | (6,067 | ) |      |   | (1,702 | )
|                                                     |  |      |        |   |      |  
|Balance at end of period                             |  | $    | 5,534  |   |      | $ | 1,434  |  
|                                                     |  |      |        |   |      |  







|    |               
|--- | --------------
|11. | Long-term Debt



| |                 
| | ----------------
| | Debt Instruments



|                                                                                                                                                                                                                                                    |  |      |        |   |      |   |       |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ----- | -
|                                                                                                                                                                                                                                                    |  | 2005 |        |   | 2004 |  
|                                                                                                                                                                                                                                                    |  |      |        |   |      |  
|Floating Rate Option Note payable to Bank One, Arizona:payable in semi-annual installments plus interest at a
    variable rate, due April 1, 2019; collateralized by
    unconditional, irrevocable, direct pay letter of credit                   |  | $    | 8,327  |   |      | $ | 8,677 |  
|Wells Fargo Foothills Senior Secured Credit Facility, as
    Amended and Restated:consisting of a $10 million fully
    cash secured revolving line of credit which bears interest at
    the greater of 4% or prime plus 1%, matures July 31, 2005 |  |      |       |   |      |   |      |  
|Note payable to third party:collateralized by building
    in Brazil, payable in 51 installments including interest at
    11.5% plus a variable inflation rate factor, matures February
    2005                                                   |  |      |       |   |      |   | 75    |  
|Other capital leases                                                                                                                                                                                                                                |  |      | 50     |   |      |   | 77    |  
|                                                                                                                                                                                                                                                    |  |      |        |   |      |  
|                                                                                                                                                                                                                                                    |  |      | 8,377  |   |      |   | 8,829 |  
|Less: current portion of long-term debt                                                                                                                                                                                                             |  |      | (8,355 | ) |      |   | (470  | )
|                                                                                                                                                                                                                                                    |  |      |        |   |      |  
|Long-term debt                                                                                                                                                                                                                                      |  | $    | 22     |   |      | $ | 8,359 |  
|                                                                                                                                                                                                                                                    |  |      |        |   |      |  

76



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##### Table of Contents



HYPERCOM CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


December 31, 2005












|                          |  |   |       | 
|------------------------- |  | - | ----- | 
|Years Ending December 31, |  |  
|                          |  |  
|2006                      |  | $ | 8,355 | 
|2007                      |  |   | 16    | 
|2008                      |  |   | 3     | 
|2009                      |  |   | 2     | 
|2010                      |  |   | 1     | 
|                          |  |   |      
|                          |  | $ | 8,377 | 
|                          |  |   |      



|    |                     
|--- | --------------------
|12. | Stockholders Equity



77



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##### Table of Contents



HYPERCOM CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


December 31, 2005








| |              
| | -------------
| | Stock Options



|                              |  |        |            |          |          |   |      |        |          |  |            |   |  |          |      |  |          |  |            |   |  |   |      | 
|----------------------------- |  | ------ | ---------- | -------- | -------- | - | ---- | ------ | -------- |  | ---------- | - |  | -------- | ---- |  | -------- |  | ---------- | - |  | - | ---- | 
|                              |  | 2005   |            |          | 2004     |   |      | 2003   |         
|                              |  |        |            |          |          |   |      |        |         
|                              |  |        |            | Weighted |          |   |      |        | Weighted |  |            |   |  | Weighted |     
|                              |  | Shares |            |          | Average  |   |      | Shares |          |  | Average    |   |  | Shares   |      |  | Average  | 
|                              |  | Under  |            |          | Exercise |   |      | Under  |          |  | Exercise   |   |  | Under    |      |  | Exercise | 
|                              |  | Option |            |          | Price    |   |      | Option |          |  | Price      |   |  | Option   |      |  | Price    | 
|                              |  |        |            |          |          |   |      |        |          |  |            |   |  |          |      |  |          | 
|Beginning balance outstanding |  |        | 8,610,291  |          |          | $ | 6.75 |        |          |  | 10,056,327 |   |  | $        | 6.26 |  |          |  | 10,782,473 |   |  | $ | 6.28 | 
|Granted                       |  |        | 1,041,500  |          |          |   | 6.08 |        |          |  | 212,500    |   |  |          | 8.38 |  |          |  | 241,250    |   |  |   | 4.25 | 
|Exercised                     |  |        | (1,811,639 | )        |          |   | 3.83 |        |          |  | (1,492,686 | ) |  |          | 3.44 |  |          |  | (380,142   | ) |  |   | 1.91 | 
|Cancellations                 |  |        | (3,518,408 | )        |          |   | 7.89 |        |          |  | (165,850   | ) |  |          | 8.92 |  |          |  | (587,254   | ) |  |   | 8.76 | 
|                              |  |        |            |          |          |   |      |        |          |  |            |   |  |          |      |  |          | 
|Ending balance outstanding    |  |        | 4,321,744  |          |          | $ | 6.88 |        |          |  | 8,610,291  |   |  | $        | 6.75 |  |          |  | 10,056,327 |   |  | $ | 6.26 | 
|                              |  |        |            |          |          |   |      |        |          |  |            |   |  |          |      |  |          | 
|Exercisable at end of year    |  |        | 3,227,802  |          |          | $ | 7.13 |        |          |  | 7,056,279  |   |  | $        | 6.98 |  |          |  | 7,382,193  |   |  | $ | 6.57 | 
|                              |  |        |            |          |          |   |      |        |          |  |            |   |  |          |      |  |          | 



|                         |  |                     |           |          |                     |  |          |          |  |   |        |          |  |          |           |  |  |   |       | 
|------------------------ |  | ------------------- | --------- | -------- | ------------------- |  | -------- | -------- |  | - | ------ | -------- |  | -------- | --------- |  |  | - | ----- | 
|                         |  | Options Outstanding |           |          | Options Exercisable | 
|                         |  |                     |           |          |                     | 
|                         |  |                     |           | Weighted |                     |  | Weighted |          |  |   |        | Weighted | 
|                         |  | Shares              |           |          | Average             |  |          | Average  |  |   | Shares |          |  | Average  |          
|                         |  | Under               |           |          | Remaining           |  |          | Exercise |  |   | Under  |          |  | Exercise |          
|Range of Exercise Prices |  | Option              |           |          | Contractual Life    |  |          | Price    |  |   | Option |          |  | Price    |          
|                         |  |                     |           |          |                     |  |          |          |  |   |        |          |  |          |          
|$ 2.46 -  3.50           |  |                     | 1,170,385 |          |                     |  | 5.10     |          |  | $ | 3.49   |          |  |          | 1,164,760 |  |  | $ | 3.50  | 
|$ 3.52 -  5.28           |  |                     | 519,250   |          |                     |  | 7.77     |          |  |   | 4.94   |          |  |          | 231,250   |  |  |   | 4.60  | 
|$ 5.48 -  6.25           |  |                     | 468,875   |          |                     |  | 7.79     |          |  |   | 6.05   |          |  |          | 227,083   |  |  |   | 6.01  | 
|$ 6.40 -  9.31           |  |                     | 755,500   |          |                     |  | 8.02     |          |  |   | 6.65   |          |  |          | 221,375   |  |  |   | 6.94  | 
|$ 9.38                   |  |                     | 340,000   |          |                     |  | 4.33     |          |  |   | 9.38   |          |  |          | 340,000   |  |  |   | 9.38  | 
|$ 9.56 - 10.00           |  |                     | 424,100   |          |                     |  | 1.74     |          |  |   | 9.59   |          |  |          | 407,800   |  |  |   | 9.59  | 
|$10.25 - 14.88           |  |                     | 643,634   |          |                     |  | 3.74     |          |  |   | 12.38  |          |  |          | 635,534   |  |  |   | 12.37 | 
|                         |  |                     |           |          |                     |  |          |          |  |   |        |          |  |          |          
|                         |  |                     | 4,321,744 |          |                     |  |          |          |  |   |        |          |  |          | 3,227,802 |  |  |   |       | 
|                         |  |                     |           |          |                     |  |          |          |  |   |        |          |  |          |          

78



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##### Table of Contents



HYPERCOM CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


December 31, 2005




| |                        
| | -----------------------
| | Restricted Stock Awards





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In December 2003, the Company granted 124,224 restricted shares
    of common stock to certain employees under the 2000 Plan. The
    restricted shares vest 50% in December 2004, 25% in June 2005
    and 25% in December 2005. The Company recorded deferred
    compensation of $0.6 million in 2003 for these restricted
    shares. The Company recorded compensation expense of
    $0.3 million during each of the years ended
    December 31, 2005 and 2004 related to these restricted
    shares and no deferred compensation was recorded for these
    restricted shares at December 31, 2005.                                                                                                                                                             
|
| |  | In February 2004, the Company granted 60,000 shares of
    restricted common stock to the Companys former Chief
    Executive Officer under the 2000 Plan. The restricted shares
    were set to vest in February 2006 but were cancelled in March
    2005. The Company recorded deferred compensation of
    $0.4 million in 2004 for these restricted shares. The
    Company recorded compensation expense of $0.1 million
    during the year ended December 31, 2004 and a reduction of
    compensation expense of ($0.1) million during the year
    ended December 31, 2005 due to the cancellation of these
    restricted shares. No deferred compensation was recorded for
    these restricted shares at December 31, 2005.                                
|
| |  | During March 2005, the Company granted 50,000 shares of
    restricted common stock to its interim Chief Executive Officer
    under the 2000 Plan. Although the restricted common stock cannot
    be sold for a period of one year from the grant date, the stock
    was 100% vested on the grant date. Under the terms of the
    agreement, the interim Chief Executive Officer had no other
    performance criteria to meet in order to earn the stock.
    Accordingly, the Company recorded compensation expense of
    $0.2 million during the 2005 first quarter for these
    restricted shares.                                                                                                                                                             
|
| |  | On June 30, 2005, the Company granted 64,000 shares of
    restricted common stock to certain members of management. The
    restricted shares vest on June 30, 2006 provided the
    members of management are still employed by the Company at that
    time. The Company recorded deferred compensation of
    $0.4 million in 2005 for these restricted shares. The
    Company recorded compensation expense of $0.2 million
    during the year ended December 31, 2005 for these
    restricted shares. At December 31, 2005, the Company has
    deferred compensation of $0.2 million recorded for these
    restricted shares.                                                                                                                                 
|
| |  | In conjunction with appointing the interim Chief Executive
    officer as the Companys Chief Executive Officer and
    President, the Company granted 50,000 shares of restricted
    common stock to its Chief Executive Officer during August 2005.
    The restricted shares vest in August 2006 provided the Chief
    Executive Officer is still employed by the Company at that time.
    The Company recorded $0.3 million in 2005 in deferred
    compensation in connection with these shares. The Company
    recorded compensation expense of $0.1 million during the
    year ended December 31, 2005 for these restricted shares.
    At December 31, 2005, the Company has deferred compensation
    of $0.2 million recorded for these restricted shares.
|
| |  | During August 2005, the Company granted another 100,000
    restricted stock awards to its Chief Executive Officer and
    during the fourth quarter of 2005, the Company granted 200,000
    restricted stock awards to certain members of executive
    management. These shares vest over 2006 and 2007 provided the
    Chief Executive Officer and member of executive management meet
    certain performance criteria                                                                                                                                                                                                                                                                                                                                             

79



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##### Table of Contents



HYPERCOM CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


December 31, 2005




| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | as determined by the Board. During 2005, the Company recorded
    $1.9 million in deferred compensation in connection with
    the shares issued to the Companys Chief Executive Officer
    and members of executive management. The Company recorded
    compensation expense of $0.2 million during the year ended
    December 31, 2005 for these restricted shares. At
    December 31, 2005, the Company has deferred compensation of
    $1.7 million recorded for these restricted shares.

Accounting for Stock
Appreciation Rights and Other Variable Stock Option or Award
Plans




|                             |  |                  |          |                  |                 |   |      | 
|---------------------------- |  | ---------------- | -------- | ---------------- | --------------- | - | ---- | 
|                             |  |                  |          | Weighted Average |                
|                             |  | Nonvested Shares |          |                  | Grant Date Fair |  
|                             |  | Outstanding      |          |                  | Value per Share |  
|                             |  |                  |          |                  |                 |  
|Balance at December 31, 2002 |  |                  |         |                  |                 | $ |     | 
|Shares granted in 2003       |  |                  | 124,224  |                  |                 |   | 4.83 | 
|                             |  |                  |          |                  |                 |  
|Balance at December 31, 2003 |  |                  | 124,224  |                  |                 |   | 4.83 | 
|Shares granted in 2004       |  |                  | 60,000   |                  |                 |   | 6.00 | 
|Shares vested in 2004        |  |                  | (56,936  | )                |                 |   | 4.83 | 
|Shares forfeited in 2004     |  |                  | (10,352  | )                |                 |   | 4.83 | 
|                             |  |                  |          |                  |                 |  
|Balance at December 31, 2004 |  |                  | 116,936  |                  |                 |   | 5.43 | 
|Shares granted in 2005       |  |                  | 464,000  |                  |                 |   | 6.20 | 
|Shares vested in 2005        |  |                  | (104,348 | )                |                 |   | 4.78 | 
|Shares forfeited in 2005     |  |                  | (74,588  | )                |                 |   | 6.04 | 
|                             |  |                  |          |                  |                 |  
|Balance at December 31, 2005 |  |                  | 402,000  |                  |                 | $ | 6.38 | 
|                             |  |                  |          |                  |                 |  





| |               
| | --------------
| | Stock Warrants



80



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##### Table of Contents



HYPERCOM CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


December 31, 2005






| |                             
| | ----------------------------
| | Employee Stock Purchase Plan





| |                      
| | ---------------------
| | Directors Stock Plan





| |                 
| | ----------------
| | Stock Repurchase

10b5-1


first-in,




81



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##### Table of Contents



HYPERCOM CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


December 31, 2005






| |                
| | ---------------
| | Preferred Stock





| |                              
| | -----------------------------
| | Receivables from Stockholders





|    |                                   
|--- | ----------------------------------
|13. | Brazilian Health Ministry Contract







82



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##### Table of Contents



HYPERCOM CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


December 31, 2005








|    |             
|--- | ------------
|14. | Income Taxes



|                                   |               |      |         |         |      |   |        |        |   |   |       |         |  
|---------------------------------- | ------------- | ---- | ------- | ------- | ---- | - | ------ | ------ | - | - | ----- | ------- | -
|                                   |               | 2005 |         |         | 2004 |   |        | 2003   |  
|                                   |               |      |         |         |      |   |        |        |  
|Income (loss) before income taxes: |               |      |         |         |      |   |        |        |   |   |       |        
|                                   | United States |      | $       | (14,645 | )    |   | $      | 1,048  |   |   | $     | (24,334 | )
|                                   | Foreign       |      |         | (12,072 | )    |   |        | (9,745 | ) |   |       | 29,299  |  
|                                   |               |      |         |         |      |   |        |        |  
|                                   |               | $    | (26,717 | )       |      | $ | (8,697 | )      |   | $ | 4,965 |        
|                                   |               |      |         |         |      |   |        |        |  



|                   |         |      |       |       |      |   |       |       |  |   |       |       | 
|------------------ | ------- | ---- | ----- | ----- | ---- | - | ----- | ----- |  | - | ----- | ----- | 
|                   |         | 2005 |       |       | 2004 |   |       | 2003  | 
|                   |         |      |       |       |      |   |       |       | 
|Current:           |         |      |       |       |      |   |       |       |  |   |       |      
|                   | State   |      | $     | (5    | )    |   | $     | 59    |  |   | $     | 74    | 
|                   | Foreign |      |       | 3,312 |      |   |       | 3,774 |  |   |       | 4,040 | 
|                   |         |      |       |       |      |   |       |       | 
|                   |         |      | 3,307 |       |      |   | 3,833 |       |  |   | 4,114 |      
|Deferred  Foreign |         |      | 219   |       |      |   |      |       |  |   |      |      
|                   |         |      |       |       |      |   |       |       | 
|Total              |         | $    | 3,526 |       |      | $ | 3,833 |       |  | $ | 4,114 |      
|                   |         |      |       |       |      |   |       |       | 



|                                                     |  |      |       |    |      |  |       |      |  |  |        |  
|---------------------------------------------------- |  | ---- | ----- | -- | ---- |  | ----- | ---- |  |  | ------ | -
|                                                     |  | 2005 |       |    | 2004 |  |       | 2003 | 
|                                                     |  |      |       |    |      |  |       |      | 
|Tax expense (benefit) at the federal statutory rate  |  |      | 35.0  | %  |      |  | 35.0  | %    |  |  | 35.0   | %
|State income taxes, net of federal income tax effect |  |      |      |    |      |  | (0.7  | )    |  |  | 1.4    |  
|Foreign taxes                                        |  |      | (28.9 | )  |      |  | (81.5 | )    |  |  | (123.6 | )
|Tax credits                                          |  |      | 3.0   |    |      |  | 5.9   |      |  |  | (7.1   | )
|Translation gain (loss)                              |  |      | 2.6   |    |      |  | 2.1   |      |  |  | (27.1  | )
|Change in valuation allowance                        |  |      | (24.8 | )  |      |  | (27.0 | )    |  |  | 202.5  |  
|UK loss recapture                                    |  |      |      |    |      |  | 23.1  |      |  |  |       |  
|Other                                                |  |      | (0.1  | )  |      |  | (1.0  | )    |  |  | 1.8    |  
|                                                     |  |      |       |    |      |  |       |      | 
|Effective tax rate                                   |  |      | (13.2 | )% |      |  | (44.1 | )%   |  |  | 82.9   | %
|                                                     |  |      |       |    |      |  |       |      | 



83



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HYPERCOM CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


December 31, 2005




|                                                |                                  |      |      |         |      |   |   |         |  
|----------------------------------------------- | -------------------------------- | ---- | ---- | ------- | ---- | - | - | ------- | -
|                                                |                                  | 2005 |      |         | 2004 |  
|                                                |                                  |      |      |         |      |  
|Deferred tax assets (liabilities), current:     |                                  |      |      |         |      |   |   |        
|                                                | Inventory valuation and reserves |      | $    | 3,785   |      |   | $ | 2,552   |  
|                                                | Compensation accruals            |      |      | 1,059   |      |   |   | 1,059   |  
|                                                | Allowance for doubtful accounts  |      |      | 549     |      |   |   | 412     |  
|                                                | Foreign, net                     |      |      | 3,757   |      |   |   |        |  
|                                                | Other                            |      |      | 9       |      |   |   |        |  
|                                                | Valuation allowance              |      |      | (9,037  | )    |   |   | (4,023  | )
|                                                |                                  |      |      |         |      |  
|Deferred tax assets, current                    |                                  | $    | 122  |         |      | $ |  |        
|                                                |                                  |      |      |         |      |  
|Deferred tax assets (liabilities), non-current: |                                  |      |      |         |      |   |   |        
|                                                | Tax loss carry forwards          |      | $    | 43,228  |      |   | $ | 43,400  |  
|                                                | Intangibles                      |      |      | 179     |      |   |   |        |  
|                                                | Property, plant and equipment    |      |      | 106     |      |   |   | (274    | )
|                                                | Foreign, net                     |      |      | 646     |      |   |   |        |  
|                                                | Other                            |      |      | 5,225   |      |   |   | 4,339   |  
|                                                | Valuation allowance              |      |      | (49,725 | )    |   |   | (47,465 | )
|                                                |                                  |      |      |         |      |  
|Net deferred tax liabilities, non-current       |                                  | $    | (341 | )       |      | $ |  |        
|                                                |                                  |      |      |         |      |  

Accounting for Income Taxes










84



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HYPERCOM CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


December 31, 2005








|    |                    
|--- | -------------------
|15. | Profit Sharing Plan





|    |                              
|--- | -----------------------------
|16. | Commitments and Contingencies





| |                  
| | -----------------
| | Lease Commitments





|                          |  |   |       | 
|------------------------- |  | - | ----- | 
|Years Ending December 31, |  |  
|                          |  |  
|2006                      |  | $ | 1,876 | 
|2007                      |  |   | 1,402 | 
|2008                      |  |   | 931   | 
|2009                      |  |   | 613   | 
|2010                      |  |   | 555   | 
|Thereafter                |  |   | 164   | 
|                          |  |   |      
|                          |  | $ | 5,541 | 
|                          |  |   |      



85



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HYPERCOM CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


December 31, 2005




| |           
| | ----------
| | Litigation







| |                    
| | -------------------
| | International Taxes





|    |                                         
|--- | ----------------------------------------
|17. | Concentrations of Credit and Other Risks



| |                      
| | ---------------------
| | Financial Instruments







86



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HYPERCOM CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


December 31, 2005








| |            
| | -----------
| | Inventories







| |                         
| | ------------------------
| | International Operations







18.     Segment, Geographic, and
Customer Information




| |        
| | -------
| | Segment





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HYPERCOM CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


December 31, 2005




| |           
| | ----------
| | Geographic



|                  |  |               |        |  |               |   |        |              |  |   |        |  |  |       |        |  |  |   |         | 
|----------------- |  | ------------- | ------ |  | ------------- | - | ------ | ------------ |  | - | ------ |  |  | ----- | ------ |  |  | - | ------- | 
|                  |  |               |        |  |               |   |        | Europe,      |  |   |       
|                  |  |               |        |  |               |   |        | Middle East  |  |   |       
|                  |  | North America |        |  | Latin America |   |        | Asia/Pacific |  |   | Africa |  |  | Total |       
|                  |  |               |        |  |               |   |        |              |  |   |        |  |  |       |       
|2005:             |  |               |        |  |               |   |        |              |  |   |        |  |  |       |        |  |  |   |         | 
|Revenues          |  | $             | 96,681 |  |               | $ | 49,763 |              |  | $ | 40,219 |  |  | $     | 58,560 |  |  | $ | 245,223 | 
|Long-lived assets |  |               | 19,510 |  |               |   | 5,595  |              |  |   | 4,815  |  |  |       | 5,156  |  |  |   | 35,076  | 
|2004:             |  |               |        |  |               |   |        |              |  |   |        |  |  |       |        |  |  |   |         | 
|Revenues          |  | $             | 82,375 |  |               | $ | 44,033 |              |  | $ | 43,006 |  |  | $     | 71,871 |  |  | $ | 241,285 | 
|Long-lived assets |  |               | 20,555 |  |               |   | 7,159  |              |  |   | 4,260  |  |  |       | 7,584  |  |  |   | 39,558  | 
|2003:             |  |               |        |  |               |   |        |              |  |   |        |  |  |       |        |  |  |   |         | 
|Revenues          |  | $             | 76,466 |  |               | $ | 42,897 |              |  | $ | 40,193 |  |  | $     | 59,260 |  |  | $ | 218,816 | 
|Long-lived assets |  |               | 21,307 |  |               |   | 13,624 |              |  |   | 3,450  |  |  |       | 2,218  |  |  |   | 40,599  | 



| |         
| | --------
| | Customer



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HYPERCOM CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


December 31, 2005




|    |                                   
|--- | ----------------------------------
|19. | Supplemental Cash Flow Information

Continuing
Operations:


|                                                    |                                                                                          |                |   |         |      |  |   |         |   |  |   |        |  
|--------------------------------------------------- | ---------------------------------------------------------------------------------------- | -------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------ | -
|                                                    |                                                                                          | 2005           |   |         | 2004 |  |   | 2003    |  
|                                                    |                                                                                          |                |   |         |      |  |   |         |  
|                                                    |                                                                                          | (In thousands) |  
|Changes in operating assets and liabilities:        |                                                                                          |                |   |         |      |  |   |         |   |  |   |       
|                                                    | Accounts receivable                                                                      |                | $ | 8,201   |      |  | $ | (8,059  | ) |  | $ | (2,370 | )
|                                                    | Net investment in sales-type leases                                                      |                |   |        |      |  |   | 373     |   |  |   | (2,510 | )
|                                                    | Inventories                                                                              |                |   | (15,057 | )    |  |   | (11,634 | ) |  |   | 2,762  |  
|                                                    | Income tax receivable                                                                    |                |   |        |      |  |   |        |   |  |   | 9,118  |  
|                                                    | Prepaid expenses and other current assets                                                |                |   | 2,967   |      |  |   | (315    | ) |  |   | 1,833  |  
|                                                    | Other assets                                                                             |                |   | (774    | )    |  |   | (205    | ) |  |   | (368   | )
|                                                    | Accounts payable                                                                         |                |   | (8,294  | )    |  |   | 4,925   |   |  |   | 1,130  |  
|                                                    | Accrued payroll and related expenses                                                     |                |   | 51      |      |  |   | 687     |   |  |   | 1,265  |  
|                                                    | Accrued sales and other tax                                                              |                |   | 1,843   |      |  |   | 497     |   |  |   | 200    |  
|                                                    | Accrued liabilities                                                                      |                |   | (2,632  | )    |  |   | (391    | ) |  |   | (266   | )
|                                                    | Deferred revenue                                                                         |                |   | 52      |      |  |   | 1,410   |   |  |   | (625   | )
|                                                    | Income taxes payable                                                                     |                |   | (1,708  | )    |  |   | 1,495   |   |  |   | (18    | )
|                                                    | Other liabilities                                                                        |                |   | 3,271   |      |  |   | 420     |   |  |   | 1,539  |  
|                                                    |                                                                                          |                |   |         |      |  |   |         |  
|                                                    | Net increase (decrease) in operating assets and liabilities                              |                | $ | (12,080 | )    |  | $ | (10,797 | ) |  | $ | 11,690 |  
|                                                    |                                                                                          |                |   |         |      |  |   |         |  
|Cash paid during the year by continuing operations: |                                                                                          |                |   |         |      |  |   |         |   |  |   |       
|                                                    | Interest                                                                                 |                | $ | (786    | )    |  | $ | (879    | ) |  | $ | (1,064 | )
|                                                    |                                                                                          |                |   |         |      |  |   |         |  
|                                                    | Income taxes                                                                             |                | $ | (4,298  | )    |  | $ | (3,569  | ) |  | $ | (2,275 | )
|                                                    |                                                                                          |                |   |         |      |  |   |         |  
|Noncash investing activities:                       |                                                                                          |                |   |         |      |  |   |         |   |  |   |       
|                                                    | Changes in accounts payable related to the purchase of property,
    plant and equipment |                | $ | 166     |      |  | $ |        |   |  | $ |       |  
|                                                    |                                                                                          |                |   |         |      |  |   |         |  

Discontinued
Operations  Revised Disclosure:




Year 2005




Year 2004




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HYPERCOM CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


December 31, 2005




Year 2003










|    |                                      
|--- | -------------------------------------
|20. | Interim Financial Results (Unaudited)

quarter-to


|                                             |                         |            |         |       |            |   |         |         |   |   |            |      |  |         |         |       |   |   |         |       |  
|-------------------------------------------- | ----------------------- | ---------- | ------- | ----- | ---------- | - | ------- | ------- | - | - | ---------- | ---- |  | ------- | ------- | ----- | - | - | ------- | ----- | -
|                                             |                         | First      |         |       | Second     |   |         | Third   |   |   | Fourth     |      |  | Fiscal  |        
|                                             |                         | Quarter(A) |         |       | Quarter(B) |   |         | Quarter |   |   | Quarter(C) |      |  | Year(D) |        
|                                             |                         |            |         |       |            |   |         |         |   |   |            |      |  |         |        
|2005:                                        |                         |            |         |       |            |   |         |         |   |   |            |      |  |         |         |       |   |   |         |      
|Net revenue                                  |                         | $          | 50,433  |       |            | $ | 60,154  |         |   | $ | 66,547     |      |  | $       | 68,089  |       |   | $ | 245,223 |      
|Gross profit                                 |                         | $          | 16,537  |       |            | $ | 7,733   |         |   | $ | 25,479     |      |  | $       | 23,383  |       |   | $ | 73,132  |      
|Income (loss) before discontinued operations |                         | $          | (11,647 | )     |            | $ | (18,149 | )       |   | $ | 2,845      |      |  | $       | (3,292  | )     |   | $ | (30,243 | )    
|Income (loss) from discontinued operations   |                         |            | 2,007   |       |            |   | 1,493   |         |   |   | 656        |      |  |         | (7,279  | )     |   |   | (3,123  | )    
|                                             |                         |            |         |       |            |   |         |         |   |   |            |      |  |         |        
|Net income (loss)                            |                         | $          | (9,640  | )     |            | $ | (16,656 | )       |   | $ | 3,501      |      |  | $       | (10,571 | )     |   | $ | (33,366 | )    
|                                             |                         |            |         |       |            |   |         |         |   |   |            |      |  |         |        
|Basic and diluted income (loss) per share:   |                         |            |         |       |            |   |         |         |   |   |            |      |  |         |         |       |   |   |         |      
|                                             | Continuing operations   |            | $       | (0.22 | )          |   | $       | (0.35   | ) |   | $          | 0.05 |  |         | $       | (0.06 | ) |   | $       | (0.58 | )
|                                             | Discontinued operations |            |         | 0.04  |            |   |         | 0.03    |   |   |            | 0.02 |  |         |         | (0.14 | ) |   |         | (0.06 | )
|                                             |                         |            |         |       |            |   |         |         |   |   |            |      |  |         |        
|                                             | Net income (loss)       |            | $       | (0.18 | )          |   | $       | (0.32   | ) |   | $          | 0.07 |  |         | $       | (0.20 | ) |   | $       | (0.64 | )
|                                             |                         |            |         |       |            |   |         |         |   |   |            |      |  |         |        

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HYPERCOM CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


December 31, 2005


|                                             |                         |         |        |       |            |   |         |         |   |   |         |       |   |         |        |      |  |   |         |       |  
|-------------------------------------------- | ----------------------- | ------- | ------ | ----- | ---------- | - | ------- | ------- | - | - | ------- | ----- | - | ------- | ------ | ---- |  | - | ------- | ----- | -
|                                             |                         | First   |        |       | Second     |   |         | Third   |   |   | Fourth  |       |   | Fiscal  |       
|                                             |                         | Quarter |        |       | Quarter(E) |   |         | Quarter |   |   | Quarter |       |   | Year(D) |       
|                                             |                         |         |        |       |            |   |         |         |   |   |         |       |   |         |       
|2004:                                        |                         |         |        |       |            |   |         |         |   |   |         |       |   |         |        |      |  |   |         |      
|Net revenue                                  |                         | $       | 47,174 |       |            | $ | 60,609  |         |   | $ | 58,870  |       |   | $       | 74,632 |      |  | $ | 241,285 |      
|Gross profit                                 |                         | $       | 19,843 |       |            | $ | 14,301  |         |   | $ | 22,768  |       |   | $       | 28,928 |      |  | $ | 85,840  |      
|Income (loss) before discontinued operations |                         | $       | (3,296 | )     |            | $ | (11,205 | )       |   | $ | (719    | )     |   | $       | 2,690  |      |  | $ | (12,530 | )    
|Income (loss) from discontinued operations   |                         |         | 323    |       |            |   | 679     |         |   |   | 1,028   |       |   |         | 1,838  |      |  |   | 3,868   |      
|                                             |                         |         |        |       |            |   |         |         |   |   |         |       |   |         |       
|Net income (loss)                            |                         | $       | (2,973 | )     |            | $ | (10,526 | )       |   | $ | 309     |       |   | $       | 4,528  |      |  | $ | (8,662  | )    
|                                             |                         |         |        |       |            |   |         |         |   |   |         |       |   |         |       
|Basic income (loss) per share:               |                         |         |        |       |            |   |         |         |   |   |         |       |   |         |        |      |  |   |         |      
|                                             | Continuing operations   |         | $      | (0.07 | )          |   | $       | (0.22   | ) |   | $       | (0.01 | ) |         | $      | 0.05 |  |   | $       | (0.24 | )
|                                             | Discontinued operations |         |        | 0.01  |            |   |         | 0.02    |   |   |         | 0.02  |   |         |        | 0.04 |  |   |         | 0.07  |  
|                                             |                         |         |        |       |            |   |         |         |   |   |         |       |   |         |       
|                                             | Net income (loss)       |         | $      | (0.06 | )          |   | $       | (0.20   | ) |   | $       | 0.01  |   |         | $      | 0.09 |  |   | $       | (0.17 | )
|                                             |                         |         |        |       |            |   |         |         |   |   |         |       |   |         |       
|Diluted income (loss) per share:             |                         |         |        |       |            |   |         |         |   |   |         |       |   |         |        |      |  |   |         |      
|                                             | Continuing operations   |         | $      | (0.07 | )          |   | $       | (0.22   | ) |   | $       | (0.01 | ) |         | $      | 0.05 |  |   | $       | (0.24 | )
|                                             | Discontinued operations |         |        | 0.01  |            |   |         | 0.02    |   |   |         | 0.02  |   |         |        | 0.03 |  |   |         | 0.07  |  
|                                             |                         |         |        |       |            |   |         |         |   |   |         |       |   |         |       
|                                             | Net income (loss)       |         | $      | (0.06 | )          |   | $       | (0.20   | ) |   | $       | 0.01  |   |         | $      | 0.08 |  |   | $       | (0.17 | )
|                                             |                         |         |        |       |            |   |         |         |   |   |         |       |   |         |       






|    |                                                                                                                                                                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(A) | During the 2005 first quarter, the Company incurred charges
    totaling $5.1 million as a result of actions taken during
    the 2005 Business Review. The following is a summary of the 2005
    Business Review charges recorded in the 2005 first quarter:



| |   |                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------
| |  | $0.7 million for charges related to negotiated warranty
    work;                                                          
|
| |  | $2.1 million for write-downs of inventory primarily for
    products at or near
    end-of-life;                           
|
| |  | $1.6 million for severance and related employment
    provisions related to certain executives and other
    employees; and
|
| |  | $0.7 million for other individually immaterial charges and
    provisions.                                                 



|    |                                                                                                                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(B) | During the 2005 second quarter, the Company incurred charges
    totaling $16.0 million as a result of actions taken during
    the 2005 Business Review. The following is a summary of the 2005
    Business Review charges recorded in the 2005 second quarter:



| |   |                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $4.8 million for replacement cost provisions related to
    electronic payment equipment that the Company elected to provide
    certain customers;                          
|
| |  | $1.3 million for charges related to additional negotiated
    warranty work;                                                                                                 
|
| |  | $7.1 million for write-downs of inventory primarily for
    products at or near
    end-of-life;                                                                             
|
| |  | $2.2 million for severance and related employment
    provisions related to certain executives and other employees and
    the elimination of certain executive benefits; and
|
| |  | $0.6 million for other individually immaterial charges and
    provisions.                                                                                                   



|    |                                                                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(C) | During the 2005 fourth quarter, the Company made the decision to
    sell the UK Lease Business. As a result of this decision, the UK
    Lease Business assets and liabilities were held for sale and the
    Company

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HYPERCOM CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


December 31, 2005




| |                                                                                                                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | recorded a $6.6 million loss on the writedown of the assets
    to fair value. Additionally, the Company incurred charges
    totaling $6.6 million in the 2005 fourth quarter as a
    result of actions taken during the 2005 Business Review. The
    following is a summary of the 2005 Business Review charges
    recorded in the 2005 fourth quarter:



| |   |                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------
| |  | $0.6 million for charges related to additional negotiated
    warranty work;                                               
|
| |  | $2.9 million for write-downs of inventory primarily for
    products at or near
    end-of-life;                           
|
| |  | $1.0 million for future rent charges in excess of estimated
    sublet recoveries on a vacated building:                   
|
| |  | $1.6 million for severance and related employment
    provisions related to certain executives and other
    employees; and
|
| |  | $0.5 million for other individually immaterial charges and
    provisions.                                                 



|    |                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(D) | Earnings per share calculations are based on the weighted
    average number of shares outstanding for each quarter. The sum
    of the quarters may not be equal to the fiscal year amount.



|    |                                                                                                                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(E) | During the second quarter of 2004, the Company recorded an
    $11.3 million provision to reserve all projects costs
    previously deferred under its contract with the Brazilian Health
    Ministry (see Note 13).

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FINANCIAL STATEMENT SCHEDULE


SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS


|                                |  |                        |       |            |            |   |       |          |  |            |   |            |        |   |        |   |  |   |       | 
|------------------------------- |  | ---------------------- | ----- | ---------- | ---------- | - | ----- | -------- |  | ---------- | - | ---------- | ------ | - | ------ | - |  | - | ----- | 
|                                |  |                        |       | Additions  |            |   |       |         
|                                |  |                        |       |            |            |   |       |         
|                                |  |                        |       | Charges to |            |   |       |          |  |            |  
|                                |  |                        |       | Costs and  |            |   |       |          |  |            |  
|                                |  | Balance at             |       |            | Expense in |   |       | Charges  |  |            |   | Balance at |       
|                                |  | Beginning              |       |            | Continuing |   |       | to Other |  | Deductions |   |            | End of |  
|                                |  | of Period              |       |            | Operations |   |       | Accounts |  | (A)        |   |            | Period |  
|                                |  |                        |       |            |            |   |       |          |  |            |   |            |        |  
|                                |  | (Dollars in thousands) |      
|Year Ended December 31, 2005:   |  |                        |       |            |            |   |       |          |  |            |   |            |        |   |        |   |  |   |       | 
|Allowance for doubtful accounts |  | $                      | 2,390 |            |            | $ | 2,046 |          |  | $          |  |            |        | $ | (1,170 | ) |  | $ | 3,266 | 
|Year Ended December 31, 2004:   |  |                        |       |            |            |   |       |          |  |            |   |            |        |   |        |   |  |   |       | 
|Allowance for doubtful accounts |  | $                      | 993   |            |            | $ | 1,915 |          |  | $          |  |            |        | $ | (518   | ) |  | $ | 2,390 | 
|Year Ended December 31, 2003:   |  |                        |       |            |            |   |       |          |  |            |   |            |        |   |        |   |  |   |       | 
|Allowance for doubtful accounts |  | $                      | 3,282 |            |            | $ | 1,972 |          |  | $          |  |            |        | $ | (4,261 | ) |  | $ | 993   | 






|    |                                                                                          
|--- | -----------------------------------------------------------------------------------------
|(A) | Write-offs of uncollectible amounts and recoveries of amounts
    previously written off.

93



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EXHIBIT INDEX


|        |    |     |  |                                             |  |                                                                                                                                                                                                                                                                                                                                                                                                 
|------- | -- | --- |  | ------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |     |  |                                            
|Number  |    |     |  | Description of Exhibit and Method of Filing
|        |    |     |  |                                            
|        | 3  | .1  |  |                                            |  | Amended and Restated Certificate of Incorporation of Hypercom
    Corporation (incorporated by reference to Exhibit 3.1 to
    Hypercom Corporations Registration Statement on
    Form S-1 (Registration No. 333-35461))                                                                                                                                                                      
|       
|        | 3  | .2  |  |                                            |  | Amended and Restated Bylaws of Hypercom Corporation
    (incorporated by reference to Exhibit 3.2 to Hypercom
    Corporations Annual Report on Form 10-K for the year
    ended December 31, 2001)                                                                                                                                                                                            
|       
|        | 4  | .1  |  |                                            |  | Amended and Restated Certificate of Incorporation of Hypercom
    Corporation (incorporated by reference to Exhibit 3.1 to
    Hypercom Corporations Registration Statement on
    Form S-1 (Registration No. 333-35461))                                                                                                                                                                      
|       
|        | 10 | .1  |  |                                            |  | Lease, as amended, dated June 14, 1996, by and between
    Estes-Samuelson Partnership and Hypercom, Inc. (incorporated by
    reference to Exhibit 10.2 to Hypercom Corporations
    Registration Statement on Form S-1 (Registration
    No. 333-35461))                                                                                                                                     
|       
|        | 10 | .2  |  |                                            |  | Hypercom Corporation Long-Term Incentive Plan (incorporated by
    reference to Exhibit 4.3 to Hypercom Corporations
    Registration Statement on Form S-8 (Registration
    No. 333-67440))                                                                                                                                                                                                 
|       
|        | 10 | .3  |  |                                            |  | Amended and Restated Hypercom Corporation 1997 Employee Stock
    Purchase Plan (incorporated by reference to Exhibit 10.1 to
    Hypercom Corporations Quarterly Report on Form 10-Q
    for the quarter ended March 31, 2004)                                                                                                                                                               
|       
|        | 10 | .4  |  |                                            |  | Hypercom Corporation 2000 Broad-Based Stock Incentive Plan
    (incorporated by reference to Exhibit 10.1 to Hypercom
    Corporations Registration Statement on Form S-8
    (Registration No. 333-97181))                                                                                                                                                                                   
|       
|        | 10 | .5  |  |                                            |  | Hypercom Corporation Nonemployee Directors Stock Option
    Plan (incorporated by reference to Exhibit 10.1 to Hypercom
    Corporations Registration Statement on Form S-1
    (Registration No. 333-97179))                                                                                                                                                                                
|       
|        | 10 | .6  |  |                                            |  | Employment Agreement, effective August 29, 2005, between
    William Keiper and Hypercom Corporation (incorporated by
    reference to Exhibit 10.1 to Hypercom Corporations
    Current Report on Form 8-K dated August 31, 2005)                                                                                                                                                            
|       
|        | 10 | .7  |  |                                            |  | Offer Letter to Thomas Liguori from Hypercom Corporation dated
    October 3, 2005 (incorporated by reference to
    Exhibit 10.1 to Hypercom Corporations Current Report
    on Form 8-K dated October 26, 2005)                                                                                                                                                                             
|       
|        | 10 | .8  |  |                                            |  | Amended Employment Agreement, effective March 31, 2005,
    between Christopher S. Alexander and Hypercom Corporation
    (incorporated by reference to Exhibit 10.1 to Hypercom
    Corporations Current Report on Form 8-K dated
    April 5, 2005)                                                                                                                                         
|       
|        | 10 | .9  |  |                                            |  | Factory Premises and Quarters Lease Agreement between Hypercom
    Electronic Manufacturing (Shenzhen) Co., Ltd. And Xin He
    Economic Development Company, Fu Yong Town, Boa An District,
    Shenzhen City, dated September 1, 2004 (incorporated by
    reference to Exhibit 10.1 to Hypercom Corporations
    Quarterly Report on Form 10-Q for the quarter ended
    September 30, 2004)
|       
|        | 10 | .10 |  |                                            |  | Credit Agreement dated January 31, 2005, by and between
    Hypercom Corporation and Wells Fargo N.A. (incorporated by
    reference to Exhibit 10.1 to Hypercom Corporations
    Current Report on Form 8-K dated February 3, 2005)                                                                                                                                                           
|       
|        | 10 | .11 |  |                                            |  | First Amendment dated February 15, 2005, to the Credit
    Agreement dated January 31, 2005, by and between Hypercom
    Corporation and Wells Fargo N.A. (incorporated by reference to
    Exhibit 10.1 to Hypercom Corporations Quarterly
    Report on Form 10-Q for the quarter ended June 30,
    2005)                                                                                   
|       
|        | 10 | .12 |  |                                            |  | Second Amendment dated March 15, 2006, to the Credit
    Agreement dated January 31, 2005, by and between Hypercom
    Corporation and Wells Fargo N.A.*                                                                                                                                                                                                                                        
|       
|        | 21 | .1  |  |                                            |  | List of Subsidiaries*                                                                                                                                                                                                                                                                                                                                                                           

94



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##### Table of Contents



|        |    |    |  |                                             |  |                                                                                                                                                                                        
|------- | -- | -- |  | ------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |    |  |                                            
|Number  |    |    |  | Description of Exhibit and Method of Filing
|        |    |    |  |                                            
|       
|        | 23 | .1 |  |                                            |  | Consent of Ernst & Young LLP, Independent Registered
    Public Accounting Firm*                                                                                                       
|       
|        | 24 | .1 |  |                                            |  | Powers of Attorney*                                                                                                                                                                    
|       
|        | 31 | .1 |  |                                            |  | Certification of Chief Executive Officer, as adopted pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002*                                                                    
|       
|        | 31 | .2 |  |                                            |  | Certification of Chief Financial Officer, as adopted pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002*                                                                    
|        | 32 |    |  |                                            |  | Certification of Chief Executive Officer and Chief Financial
    Officer pursuant to 18 U.S.C. Section 1350, as adopted
    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**



| |   |                
| | - | ---------------
| | * | Filed herewith.



|   |                    
|-- | -------------------
|** | Furnished herewith.



| |   |                                              
| | - | ---------------------------------------------
| |  | Management or compensatory plan or agreement.

95