UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549


________________




Form
10-K





R
              ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the fiscal year ended December 31, 2008or£
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      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.)





8888
East Raintree Drive, Suite 300,


Scottsdale,
Arizona 85260


(Address
of principal executive offices) (Zip Code)





(480)
642-5000


(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
      RegisteredCommon
      Stock, $.001 par value per share
              
              New
      York Stock Exchange





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


None





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.


Yes £No R





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.


Yes £No R





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





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  £





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.





Large
      accelerated filer £
              Accelerated
      filer R
              Non-accelerated
      filer £
              Smaller
      reporting company £





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


Yes £No R





As of
June 30, 2008, the aggregate market value of the registrant’s common stock held
by non-affiliates of the registrant was $182,233,357 based on the closing sale
price as reported on the New York Stock Exchange. Shares held by executive
officers, directors and persons owning directly or indirectly more than 10% of
the outstanding common stock have been excluded from the preceding number
because such persons may be deemed to be affiliates of the registrant. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.





Class
              
              Outstanding at March 10,
    2009Common
      Stock, $.001 par value per share
              
              53,442,799
      shares





DOCUMENTS
INCORPORATED BY REFERENCE





Document
              
              Parts Into Which
    IncorporatedNotice
      and Proxy Statement for the 2009 Annual
              
              Part
      III (Items 10, 11, 12, 13 and 14)Meeting
      of Stockholders (Proxy Statement)





TABLEOF CONTENTS





Item No.
                      
                      Caption
                      
                      PagePART
      I1.
                      
                      Business
                      
                      21A.
                      
                      Risk Factors
                      
                      151B.
                      
                      Unresolved Staff Comments
                      
                      282.
                      
                      Properties
                      
                      283.
                      
                      Legal Proceedings
                      
                      294.
                      
                      Submission of Matters to a Vote of Security
      Holders
                      
                      30PART
      II5.
                      
                      Market for Registrant’s Common Equity, Related Stockholder
      Matters and Issuer Purchases of Equity Securities
                      
                      306.
                      
                      Selected Financial Data
                      
                      317.
                      
                      Management’s Discussion and Analysis of Financial Condition and
      Results of Operations
                      
                      337A.
                      
                      Quantitative and Qualitative Disclosures About Market
      Risk
                      
                      538.
                      
                      Financial Statements and Supplementary Data
                      
                      549.
                      
                      Changes in and Disagreements With Accountants on Accounting and
      Financial Disclosure
                      
                      549A.
                      
                      Controls and Procedures
                      
                      549B.
                      
                      Other Information
                      
                      56PART
      III10.
                      
                      Directors, Executive Officers and Corporate
      Governance
                      
                      5611.
                      
                      Executive Compensation
                      
                      5612.
                      
                      Security Ownership of Certain Beneficial Owners and Management
      and Related Stockholder Matters
                      
                      5613.
                      
                      Certain Relationships and Related Transactions, and Director
      Independence
                      
                      5614.
                      
                      Principal Accountant Fees and Services
                      
                      56PART
      IV15.
                      
                      Exhibits and Financial Statement Schedules
                      
                      57Signatures
                      
                      58Exhibit Index
                      
                      106





Table of Contents





CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS





This
report and certain information incorporated by reference herein contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. In passing the Private Securities Litigation Reform Act of 1995, as
amended (the “Reform Act”), Congress encouraged public companies to make
“forward-looking statements” by creating a safe harbor to protect companies from
securities law liability in connection with such forward-looking statements. We
intend to qualify both our written and oral forward-looking statements for
protection under the Reform Act and any other similar safe harbor
provisions.





“Forward-looking
statements” include expressed expectations of future events and the assumptions
on which the expressed expectations are based. The words “believe,” “expect,”
“anticipate,” “intend,” “forecast,” “estimate,” “project,” “will” and similar
expressions identify forward-looking statements. Such statements may include,
but are not limited to, the severity and duration of the current economic and
financial conditions, the state of the electronic payments industry and
competition within the industry; projections regarding specific demand for our
products and services; the level of demand and performance of the major
industries we serve, including but not limited to the banking sector; the
commercial feasibility and acceptance of new products, services and market
development initiatives; our ability to successfully penetrate the vertical and
geographic markets that we have targeted; our ability to improve our cost
structure, including reducing our product and operating costs; our ability to
develop more recurring revenue streams; our ability to successfully manage our
transition to a contract manufacturing model, including the impact on
inventories; our ability to allocate research and development resources to new
product and service offerings; our ability to increase market share and our
competitive strength; our future financial performance and financial condition;
the adequacy of our current facilities and management systems infrastructure to
meet our operational needs; the status of our relationship with and condition of
third parties upon whom we rely in the conduct of our business; the sufficiency
of reserves for assets and obligations exposed to revaluation; our ability to
successfully integrate the acquisition of certain subsidiaries of Thales SA; our
ability to successfully expand our business and increase revenue; our ability to
integrate and obtain expected results and benefits from acquisitions (including
pending and future acquisitions); our ability to effectively hedge our exposure
to foreign currency exchange rate fluctuations; our ability to sustain our
current income tax structure; the impact of current and future litigation
matters on our business; our ability to fund our projected liquidity needs from
cash flow from operations and our current cash reserves; our ability to remain
compliant with and provide transaction security as required by
relevant industry standards and government regulations; and future access to
capital on terms that are acceptable, as well as assumptions related to the
foregoing. All forward-looking statements are inherently uncertain as they are
based on various expectations and assumptions concerning future events and are
subject to numerous unquantifiable risks and uncertainties, some of which are
unknown, that could cause actual events or results to differ materially from
those projected. Due to such risks and uncertainties, you should not place undue
reliance on our written or oral forward-looking statements. We are under no
obligation, nor do we intend, to update or revise such forward-looking
statements to reflect future developments, changed assumptions, the occurrence
of unanticipated events, or changes to future operating results over
time.





We
provide the risk factor disclosure contained in “Item 1A — Risk Factors” of this
Annual Report on Form 10-K in connection with our continuing effort to qualify
our written and oral forward-looking statements under the safe harbor protection
of the Reform Act and any other similar safe harbor provisions. Many of the
important factors currently known to management that could cause actual results
to differ materially from those in forward-looking statements include such risks
contained in our “Risk Factors” section.


1
 Table of Contents





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.





Item1.Business





General





Hypercom
Corporation is one of the largest global providers of complete electronic
payment and transaction solutions and value-added services at the point of
transaction. Our vision is to be the world’s most recognized and trusted brand
for electronic transaction solutions through a suite of secure and certified,
end-to-end electronic transaction products and software, as well as through a
wide range of support and maintenance services. Our customers include domestic
and international financial institutions, electronic payment processors,
transaction network operators, retailers, system integrators, independent sales
organizations (“ISOs”) and distributors. We also sell our products to companies
in the hospitality, transportation, healthcare, prepaid card and restaurant
industries. Customers around the globe select us because of our proven
leadership and expertise in the global electronic payments industry, commitment
to our customers’ success, continued support of technologies and the quality and
reliability of our products and services. We deliver convenience and value to
businesses that depend on reliable, secure, high-speed and high-volume
electronic transactions.





We
believe our strength lies in our people, technology and a commitment to
delivering excellent value to our customers. Our products enable our customers
to accept a wide range of payments and other transactions, including credit
cards, signature and PIN (Personal Identification Number) based debit cards,
contactless identification and near field communications (“NFC”), stored-value
cards, and electronic benefits transfer. We will continue to enhance our product
and service portfolio, and make long-term investments in technology for the
evolving needs of our customers. We are positioned to meet the increased demands
of the global marketplace and capitalize on key geographic and vertical market
opportunities in order to achieve our goal of increasing market share and
profitability.





Recent
Developments





In
addition to our core payments business, we have recently made significant
advances in the deployment of our technology in other sectors that depend on
secure electronic transactions, including, in particular, the certification and
volume roll-out of our medLine product family in Germany at the end of 2008.
Hypercom is the first vendor to achieve BCS, or Basic Command Set, approval from
Gematik, the organization responsible for overseeing the introduction of the new
German electronic health card and the supporting acceptance infrastructure. The
roll-out commenced in December 2008 when the first unit was installed at a
medical practice during a ceremony attended by representatives of the German
government, health insurance companies and the medical practitioners’
self-governing body. Germany’s eHealth card program is one of the largest IT
projects worldwide, with a planned deployment of more than 80 million electronic
health insurance cards.





Business
History





We design
and sell a variety of electronic transaction terminals, peripheral devices,
transaction networking devices, transaction management systems, application
software and information delivery services. Additionally, we provide directly,
or through qualified contractors, support and related services, which include
maintenance, 24/7 management and monitoring of customer networks, online
reports, on-site technology assessments, network training, and design and
implementation.





Founded
in 1978, in Australia, our operations were primarily focused on Asia-Pacific
markets until 1987, when we expanded our operations into the United States, and
later into South America, Central America, Europe, and the Middle
East.  We reincorporated in 1996 under the laws of Delaware and
shortly thereafter, through a series of corporate restructurings, became a U.S.
holding company for the Australian corporation and its subsidiaries. In 1997, we
completed an initial public offering of our common stock, which is listed on the
New York Stock Exchange (“NYSE”) under the symbol “HYC.”





2
 Table of Contents





We report
our operating information in four business segments as follows (i) Americas,
(ii) Northern EMEA (“NEMEA”), (iii) Southern EMEA (“SEMEA”), and (iv)
Asia-Pacific.   The Americas segment consists of the U.S.,
Canada, Mexico, the Caribbean, Central America, and South America. The NEMEA
segment consists of Belgium, Sweden, Austria and Germany.  The SEMEA
segment consists of France, Spain, the U.K., Western and Central Eastern Europe,
Russia, Hungary, the Middle East, and Africa. The Asia-Pacific segment consists
of China, Hong Kong, Singapore, Thailand, Australia and New Zealand. See Note 21
to our consolidated financial statements included herein.





On
April 1, 2008, we acquired all of the outstanding shares of Thales
e-Transactions SA, Thales e-Transactions GmbH, Thales e-Transactions Ltd, and
Thales e-Transactions España, (collectively, “Thales e-Transactions” or “TeT”).
Thales e-Transactions was a leading provider of secure card payment solutions in
some of Europe’s largest markets, including France, Germany, Spain and the
United Kingdom. With the acquisition, Hypercom has become one of the largest
providers of electronic payment solutions and services in Western Europe,
solidifying our position as the third largest provider globally, and expanded
our team of industry experts that will lead our operations going
forward.





With
worldwide headquarters in Scottsdale, Arizona, we market our products in more
than 100 countries through a global network of sales, service and development
offices. Our main regional sales headquarters are located in the U.S., Brazil
and Mexico; France, Germany andthe U.K.; and Australia,
China and Singapore.





Electronic
Payment Industry





Over the
past several decades, consumers worldwide have increasingly utilized card-based
payment methods, such as credit, debit, and gift cards, to replace checks and
cash. Card-based payments require the use of a point of sale (“POS”) terminal
capable of reading a cardholder’s account information from the card’s magnetic
stripe or chip and combining this information with the amount of the sale. The
POS terminal electronically captures and securely transmits this transaction
information over a communications network to an authorized computer data center
and then displays the returned approval or denial response.





The
structure of the electronic payments industry is best described by examining the
entities involved and their relationship to one another. Card associations, like
Visa and MasterCard, which license their “brand” to card issuers, such as banks,
operate high volume communications networks connecting card issuers with
transaction processors. Card associations also define the standards that POS
terminals must meet to be certified for use in their respective networks.
Transaction acquirers and their agents sign up merchants, install POS terminal
equipment, capture the transaction data, and route it through the credit or
debit card network to obtain transaction approval. Payment processors charge an
interchange fee to authorize the customers’ transactions, providing a tally of
these transactions to merchants, and transfer funds to merchants to cover card
purchases. Card issuers provide consumers with the payment card and settle their
accounts. Equipment providers make the POS terminal hardware and software and,
in our case, also network equipment upon which high-performance and secure
payment processing networks rely. Transaction services providers facilitate the
delivery of the transaction data between merchants and payment processors. This
structure may vary in each geographic region or country where multiple functions
may be performed by a single entity such as a bank.





Card
associations, bank card issuers, transaction acquirers and payment processors
are differentiating their offerings, in part, by offering value-added
applications and incorporating innovative acceptance technologies including
contactless, biometrics and flexible connectivity options like wired and
wireless internet protocol technologies. As a result, electronic payment systems
that can run multiple value-added applications and incorporate emerging
technologies are becoming increasingly important in today’s market.





Payment
systems require an exceptionally high level of reliability and security, as even
an apparently small system failure or a security breach can have significant
consequences. The electronic payment industry operates in a secure environment
of dedicated systems, applications, specialized hardware products and access
networks. The industry will continue to evolve as the demands of the market and
the rules that govern its standards and security change rapidly.





3
 Table of Contents





Market
Size and Barriers to Entry





The POS
terminal market is highly concentrated with the top three POS terminal providers
accounting for the majority of terminals shipped. The remaining portion of the
market is spread among approximately 25 providers who compete on either a
regional or local country basis, within specific markets or with a limited range
of products and services. We believe the following market constraints are
barriers to entry and may inhibit the ability of certain terminal providers to
take advantage of future market growth in our industry:





•
            Price.  Pricing
      is a significant consideration in our customers’ purchase decisions.
      Consequently, terminal providers 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 providers may
      have limited ability to compete with larger providers 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. Many banking
      organizations have their own national or even regional standards for
      communications messaging, user operation, security and local card
      acceptance. These standards and certification requirements are constantly
      changing and the certification process can be a lengthy and expensive
      undertaking. Several terminal providers 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
      providers to continually develop new technologies that enhance the
      performance and profitability of both customers and end-users. Such
      requirements necessitate significant annual investment in research and
      development.





•
            Global
      Presence.  Large customers may prefer terminal providers
      that have a worldwide presence with the ability to provide services and
      support in many geographic regions. Smaller or regional providers may be
      competitive in their niche, but they may not be able to provide
      cost-effective equipment, services and timely support on a global
      scale.





Market
Growth Drivers





The
following are a number of factors that have contributed to recent growth in our
industry that we believe will continue to do so in the near future:





•
            Security
      Standards.  New industry security 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 continually growing need for transaction security. The two major
      security standards initiatives in the industry are EMV and PCI. The name
      EMV comes from the initial letters of EuroPay International, MasterCard
      International and Visa International, the three companies that originally
      cooperated to develop the standard. 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 should continue to significantly
      promote terminal replacement, particularly in regions such as Europe,
      Asia-Pacific, and Central and South America, where EMV implementation
      conversion dates have been established. Visa International and MasterCard
      International cooperated in recent years to develop and release 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 security standards separately issued by Visa
      and MasterCard (not including EMV) and has been a driver of additional
      terminal replacement.





4
 Table of Contents


In
      late 2008 and early 2009, there were several high profile security
      breaches in tier 1 payment transaction processors in the U.S. These
      breaches in systems that had been certified as compliant with PCI
      standards is causing a review of the existing standards and may result in
      an industry move, at least in the U.S., to mandate end-to-end encryption
      of payment transactions. Such a move is expected to be a significant
      driver in the replacement of older equipment currently in
      operation.


•
            Interoperability
      Standards.  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 costly and time intensive, and is
      required by U.S. payment processors. In other countries outside of the
      U.S., payment applications have to be certified with local banks,
      processors or card schemes. Electronic payment systems must also comply
      with evolving country-specific security regulations. Countries such as
      Australia, Canada, Germany, the Netherlands, New Zealand, Singapore,
      Sweden and Switzerland have particularly stringent and specific security
      standards. Electronic payment systems must also 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 continuous replacement of outdated equipment
      with newly certified electronic payment
systems.





•
            Broadband & Internet
      Protocol.  Internet Protocol (“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 quick
      service restaurants (“QSRs”).





•
            Contactless.  Contactless
      technology, based on the deployment of contactless cards
      of  NFC-enabled mobile telephones, creates a convenient way to
      pay for goods and services. It is an emerging technology that is rapidly
      gaining acceptance it can deliver extremely fast transaction times, reduce
      waiting times and eliminate the need for paper signatures and 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 Access (“CDMA”), General Packet Radio Service (“GPRS”), Bluetooth
      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 that helps reduce 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
      Markets.  In the U.S. and Europe, consumer markets such
      as QSRs and unattended/self service have started using IP POS terminal
      devices. These lesser penetrated vertical markets represent a significant
      opportunity for us, as well as other geographies in each of our segments,
      such as Brazil,
      China, Eastern Europe, India, Mexico and Russia, which are experiencing
      rapid growth in the usage of card-based payments. 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.




5
 Table of Contents





•
            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,
      and 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 providers. 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 services technology can be utilized
      in the healthcare sector to provide fast and secure transmission of health
      benefits eligibility, authorization and payment. With the exception of
      healthcare, Hypercom does not presently have any significant programs
      related to these initiatives.





Competition





The
electronic payments industry is intensely competitive and subject to an
increasing rate of technological change, evolving customer requirements and
changing business models. Despite the previously discussed barriers to entry,
the rapid pace of technological change creates new opportunities for existing
competitors and start-ups and may render existing technologies less valuable.
Customer requirements and preferences continually change as new technologies
emerge or become less expensive, and as concerns such as security and privacy
rise to new levels.





We face
competition from well-established companies and entities with differing
approaches to the market. Our main direct global competitors are Ingenico SA, a
French company, and VeriFone Holdings, Inc., a U.S. company, both of which are
publicly-held companies that are substantially larger and historically more
profitable than we are. In any particular market, we may also find ourselves in
competition with local or regional providers.





In our
multi-lane business line (department stores, grocery stores, QSR and discount
merchants), we compete with additional vendors including Fujitsu, Hand Held
Products (a division of Honeywell International Inc.) and Retail Solutions
Inc.




Competitive
Strategy





Our
strategy is to distinguish ourselves by combining operational excellence,
technology and customer relationships with an end-to-end comprehensive portfolio
of products and services that drives merchant revenues and reduces their total
cost of ownership. Key elements of our competitive strategy
include:





•
            Further Penetrate Existing
      Markets.  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
      markets such as automatic teller machines (“ATMs”), Electronic Benefit
      Transfer (“EBT”), eHealth, and unattended applications such as
      transportation ticketing and integrated kiosks. In planning to maintain
      our leadership in the independent retail market, we have further organized
      our products to target high-end and low-end markets, through acceptance of
      magnetic stripe 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 and NFC 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.





6
 Table of Contents





•
            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, in-flight airline service
      providers, stadium event operators, 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 South 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 the terminal and transaction level; advanced
      communications technologies such as IP-enabled and wireless terminals;
      multiple-application; contactless technologies; and products for new
      vertical markets 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, research and development, selling, services delivery,
      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 and distribution. 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 sales channel infrastructure and will pursue alternate
      channels where it makes economic sense to do
so.





•
            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, including expanding our services business,
      which provides deployment, help-desk, repair and other post-sale services
      in Australia, Brazil, Chile, France, Germany, Mexico and the U.K. 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.  Although our acquisition and subsequent
      integration of TeT has required and will continue to require significant
      effort on our part and will be a major focus of ours throughout the
      remainder of 2009, we may augment our growth by acquiring complementary
      businesses, new products to enhance our core competencies, or new
      technologies to complement our 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, expand recurring revenue opportunities or increase our
      penetration of selected channels and vertical
  markets.





Product
Lines and Services





Our
products and services include electronic transaction terminals, peripheral
devices, application software, transaction networking devices, transaction
management systems, asset management services, transaction services, and payment
solutions. Unless otherwise noted below, we sell a full range of products and
services in each of our Americas, NEMEA, SEMEA and Asia-Pacific business
segments. In 2009, we will continue to integrate the TeT product set and move to
a common terminal architecture permitting the migration of Artema-based payment
application software to execute on both the Artema and Optimum family of
terminals.


7
 Table of Contents




Terminals
and Peripherals





We
currently offer the following terminal and peripheral products, the sale of
which accounted for 73.4%, 71.4% and 77.0% of total revenues during the years
ended December 31, 2008, 2007 and 2006, respectively





•
            Terminals — includes
      the Optimum L4150, and L4250—compact, high-performance signature capture
      and PIN entry card payment terminals specifically designed for multilane
      retailers (the L4150 is not currently offered in our Asia-Pacific
      segment); the Optimum T4100 and T4200 family—powerful 32-bit desktop
      terminals for true multiple applications; the Artema Hybrid, Artema
      Compact and Artema Desk family of countertop terminals specifically
      designed to manage highly secure EMV transactions in markets formerly
      served by TeT; the Optimum M4100, M4230 and M4240—mobile terminals that
      leverage the latest in wireless communication technologies. The Optimum
      L4150, L4250 and M4100 products include built-in contactless
      readers.





•
            Peripherals — includes
      printers, PIN pads, check readers, receipt capture devices, biometric, NFC
      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 Optimum P2100—an
      EMV-compliant PIN pad for integrated retail environments (currently
      offered only in our NEMEA and SEMEA segments); the PV130 and
      P1300—PCI-approved PIN entry devices that meet the latest PCI security
      standards; the S9, S9S and S9C—secure PIN pads built for indoor use; and
      the S1200 and S1300—the outdoor components to our QSR drive-thru solution.
      The PIN pad product family is augmented with the Artema PIN Hybrid and
      Artema S10 PIN Pads servicing the high security markets formerly served by
      TeT. The Wymix PIN Pad, which has a built-in contactless reader, is
      offered to our large retail market segment serviced by the Wynid family of
      retail payment solutions. Users of this solution include some of the
      world’s largest retailers.





•
            Unattended Solutions —
      includes a range PIN pads and keyboards, card readers and payment
      controllers designed to permit the efficient integration of payment
      functionality in a variety of self-service environments such as
      transportation ticketing, gasoline station pumps, petrol forecourt, on and
      off-street parking machines, and general purpose kiosks. As well as being
      a leading supplier of highly secure Encrypting PIN Pads (“EPPs”) for ATMs,
      our unattended payment solution, Artema Modular, is widely regarded as
      best-in-class by the many system integrators who have deployed it
      worldwide.





•
            eHealth — in 2008 we
      launched the medLine family of terminals to support the next generation
      German eHealth healthcare system. The medLine family includes a full range
      of terminal devices for both attended and unattended environments within
      the public healthcare environment





Transaction
Networking Devices, Transaction Management Systems and Application
Software





Products
that interface with our POS terminal technology include our industry exclusive
network access controllers and gateway devices specifically designed to support
the unique requirements of high volume/high value transaction-based networks.
Products in this family include the MegaNAC® 180 and 8000, ATMConnectTM and the
IN-tact® family of
Ethernet/Internet gateway devices. Every network application software program we
produce includes a management and control module that interacts with our
HypercomView® management system to monitor system operations. We also offer a
complete portfolio of software applications for terminal operations, network
device operations, systems development and management, and retail POS systems
designed for use on a personal computer (“PC”).





8
 Table of Contents


Services


We are
committed to providing a high level of service and support to our customers
either directly, or through our distributors or other third-party providers. We
offer a wide range of support services that contribute to the increased
profitability of our customers and meet their individual needs. Our service
business is organized around three important markets: asset management services;
trusted transaction services; and payment solutions. Services accounted for
26.6%, 28.6% and 23.0% of total revenues during the years ended December 31,
2008, 2007 and 2006, respectively.





Asset Management
Services — Our services organizations are focused on protecting our
customer’s investment in payment systems and principally provide deployment,
help desk, repairs, on-site support, logistics and inventory management
services, as well as payment systems supplies provisioning. Additionally, these
entities manage 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 advance
notification. In many cases we provide services not only for our products, but
also for other manufacturers’ terminals and other hardware. Revenues under these
contracts are recognized as we perform the service. Asset management revenue
accounted for 17.2%, 24.4% and 20.3% of total revenues during the years ended
December 31, 2008, 2007 and 2006, respectively.




•
            NetSet Brazil, NetSet Chile
      and Hypercom de Mexico —NetSet Brazil, NetSet Chile and Hypercom
      de Mexico are highly capable services organizations that provide asset
      management services to major banks, card associations and other customers
      in our industry. NetSet Brazil is our largest service organization,
      covering all of Brazil with multiple service centers and service resources
      located throughout the country. We continually seek to expand our service
      market share by increasing the deployed population of our terminals and
      product offerings in Brazil, as well as servicing terminals manufactured
      by our competitors. Hypercom de Mexico and NetSet Chile operate under a
      similar business model as NetSet Brazil and cover substantially all of
      their respective countries.





•
            ACG Group — On February
      8, 2007, we acquired the existing business and assets of ACG Group Pty
      Limited and its associated entities in Australia (“ACG”), which provided
      asset management services to merchant locations throughout Australia. We
      continue to leverage this investment and apply this service capability to
      opportunities throughout the Asia-Pacific
  region.





•
            Pan-region Repair
      Services — Through NetSet Americas Centro Servicio, our repair
      facility in Hermosillo, Mexico, we provide quality repair services for
      in-warranty and out-of-warranty equipment repairs to North American
      customers





•
            Authorized Repair
      Facilities — In addition to our direct repair service offerings, we
      selectively authorize capable third-party repair facilities to service and
      repair Hypercom equipment through our Authorized Repair Facility program.
      This program seeks to offer increased choices for repair service with our
      assurance of repair service quality and cycle time for our
      customers.





•
            Enhanced Warranty
      Solutions — We allow customers to purchase enhanced warranty plans
      for select Hypercom payment terminals and other devices. The plans extend
      the term protection of our standard industry-leading warranty for total
      coverage of up to five years.





Trusted
Transaction Services — Our Trusted Transaction Services provide
value-added data communication and other value added services for
transaction-based applications. These capabilities include such functionality as
protocol conversion, intelligent transaction routing and web-based,
transaction-level reporting. As technologies such as IP and wireless take hold
at the point of sale, this market will see a growing shift toward more
sophisticated applications. Trusted Transaction Services 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
Trusted Transaction Services will continue to support our growth beyond the
payments industry into the information delivery market.





9
 Table of Contents





Our HBNet
subsidiary continues to grow by offering a variety of transaction transport
services for dial-up, IP and wireless transactions. To more efficiently
facilitate the deployment of wireless transaction terminals across multiple
wireless carriers networks, in 2008 we launched the Hypercom Mobile Network
(“HMN”). HMN permits a wireless payment device to be provisioned with a HMN SIM
(subscriber identity module) at the manufacturing or logistics center. The HMN
SIM is only activated on deployment of the device and permits the terminal to
connect to the wireless communications carrier with the strongest wireless
signal in the area. The HMN offers a range of control and reporting functions to
ease management of a large number of wireless devices, thereby significantly
reducing the total cost of ownership for the device owner.





In 2008,
Hypercom also launched our Smart Payments Gateway. The Smart Payments Gateway is
a Hypercom hosted service that utilizes our HPS Smart Payments server solution
and permits smaller ISO’s and service providers to connect with their
transaction processor of choice. The Smart Payments Gateway solution generates
recurring revenues for Hypercom as connections to the Smart Payments Gateway are
billed on a per transaction basis.





Hypercom Payment
Solutions — Traditionally, only large retail merchants have been able to
implement POS systems with interactive payment terminals. Through the
acquisition in December 2006 of the existing technology and assets of TPI
Software, LLC (“TPI”), a U.S.-based enterprise payment solutions business, we
expanded our transaction services portfolio with the introduction of PC-based
payment solutions, including support for PC-based retail POS systems, which has
enabled us to broaden our customer base to include small- and medium-sized
retailers. Hypercom Payment Solutions is also enabling the generation of new
revenue streams by addressing the technology requirements of, and rising market
interest in, a converged payment infrastructure that places electronic payment
functionality on PC-based cash registers. Our strategy is to increase our stream
of recurring revenue by charging for enterprise payment services. Hypercom
Payment Solutions is currently offered only in our Americas
segment.





Wynid Solution –Through the acquisition of TeT we were able to complement our payment
solutions business with the integrated payment solution developed by the Wynid
Technologies business unit in France. This powerful, server-based payment
solution has been widely deployed by many of the leading retailers and
hospitality organizations in France, and is being deployed internationally by
some major petrol companies. The Wynid solution was one of the first integrated
payment solutions to be EMV certified worldwide, and has recently evolved to
support transactions using contactless cards and NFC-enabled mobile
phones.





Product
Marketing





Our
marketing organization has been significantly strengthened by the introduction
of a global product marketing group with product managers assigned to manage the
life cycle of all new and legacy products. Our marketing communications
strategy, which coordinates key market messaging across regions, is directed
from our Scottsdale, Arizona headquarters; however, each region develops
programs to meet the requirements of local markets. Components of our marketing
program include product marketing, trade shows, news releases, editorial
interviews, industry analyst briefings, speaking platforms and engagements,
training and technology seminars, sales collateral and white papers, print
advertising, articles and newsletters.





Sales
and Distribution





Our major
sales, marketing and distribution regions, broken down by segment,
include:





•
            Americas;





•
            NEMEA;





•
            SEMEA;
      and





•
            Asia-Pacific.





10
 Table of Contents





In 2008,
approximately 21.3% and 78.7% of our consolidated revenue came from U.S. and
international sources, respectively. Our global customers include:




•
              Payment
      processors;
 
 •
              Distributors/resellers;
 
 •
              Large
      retail chains and QSRs;
 
 •
              Financial
      institutions;
 
 •
              System
      integrators;
 
 •
              ISOs;
      and
 
 •
              Government
      entities.


Sales to
specific customers have historically accounted for a significant portion of our
revenue. Beginning in 2007, and continuing through 2008 as a result of the TeT
acquisition, we saw greater diversification of our customer base. However, we
remain reliant on certain large customers for our revenue streams. For example,
First Data Corporation (which includes TASQ Technology) accounted for
approximately 6.2% and 5.3% of our revenue in 2008 and 2007, respectively. In
2008, our top five customers accounted for 22.1% of our revenue compared to
21.3% in 2007.





We
distribute and sell our products internationally primarily to large retailers,
financial institutions and distributors. Domestically, we primarily distribute
and sell our products to financial institutions, payment processors, retail
chains, ISOs, distributors and resellers.





Some of
our key sales attributes are:





•
            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 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 address the spectrum of market requirements. Our product
      portfolio ranges from the low-cost, established and reliable T7 family of
      terminals to the more recently released, high-performance 32-bit Optimum
      family and the Artema family of secure high-performance terminals acquired
      in the TeT transaction. Our terminals are further complemented by a wide
      variety of peripherals that enhance their capabilities. Our services
      include networking, deployment, help-desk, repair and maintenance. We have
      major service centers in each of our segments: Americas—Brazil, Chile and
      Mexico; NEMEA—Germany; SEMEA—the U.K and France; and
      Asia-Pacific—Australia.





•
            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. We offer network products to host
      such multi-application offerings. Other technology innovations include IP
      and wireless connectivity, as well as RFID and contactless acceptance. 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 select only those features they require,
      thereby minimizing their costs and increasing their flexibility. We have
      reorganized our development team in recent years to more rapidly develop,
      prototype, and release new products to meet customer
  needs.





11
 Table of Contents





•
            Terminal Management and
      Networking Expertise.  We are a leader in 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 an 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, identity and biometric
      authentication and enterprise security management, ensuring both physical
      and logical high performance interfaces are secure and certified for use
      globally, by both public telephony and mission critical computing
      processors.





Research
and Development





Our
market-focused research and product development activities concentrate on
developing new products, technologies and applications for our products, as well
as enhancements and aggressive cost reduction measures for existing technologies
and applications. We typically design and develop all of our own products and
incorporate, where appropriate, state of the art technologies from leading third
party vendors. Development projects are evaluated and coordinated by our global
product marketing team and follow a management review process that includes
input from our sales, marketing, finance, supply chain and engineering teams.
Our product development process generally involves the following:





•
            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.





Through
this process, we can assess the requirements of individual customers and
markets, and develop products and platforms that address those needs globally.
Bringing quality products to market in a timely manner is the primary objective
of our product development initiatives.





Our
research and development activities are coordinated through our Scottsdale,
Arizona headquarters. To serve the needs of customers around the world, we
“localize” many of our products to reflect local languages and conventions.
Localizing a product may require modifying the user interface, altering dialog
boxes, translating text and altering the communications messaging to suit local
requirements. Each of our regional geographic sales and marketing units has
in-region development resources that can provide customization and adapt
products to meet the needs of customers in local markets. International
development groups are located in Australia, Brazil, China, France, Germany,
Hong Kong, Hungary, Latvia, Mexico, Puerto Rico, Singapore, Sweden and the
U.K.





Our
research and development expenses were $46.1 million for the year ended December
31, 2008, $28.8 million for the year ended December 31, 2007, and $27.7 million
for the year ended December 31, 2006.





Manufacturing
and Resource Procurement





During
2007, we began to outsource our manufacturing requirements to a third-party
contract manufacturer, Venture Corporation (Singapore) LTD (“Venture”),
including supply chain, production, assembly, and testing previously performed
in our facilities in Shenzhen, China and in Atibaia, Brazil. The transition of
our entire manufacturing operations in Shenzhen, China to Venture’s locations
concluded in 2008. See “Item 1A — Risk Factors” for certain risks related to
operating and conducting business in China. With the acquisition of TeT on April
1, 2008, we expanded our network of third party manufactures, which will provide
us with significant advantages in terms of competitive cost structures and
flexibility in where our products are manufactured. We currently utilize three
contract manufacturers.





12
 Table of Contents





To
control product costs, we centrally manage product documentation, procurement
and material requirements planning from our Scottsdale, Arizona headquarters,
utilizing an integrated enterprise system linking all of our manufacturing and
design centers. Centralized management of the planning processes, combined with
regional procurement, enables us to ensure the quality and availability of our
components. We continue to look for opportunities to reduce the cost of existing
products by working with our suppliers to seek more favorable pricing,
purchasing components in volume to achieve lower unit costs, and seeking greater
efficiencies in product design.





Under our
original agreement entered into with Venture in the second quarter of 2007,
Venture’s services to us were limited to the manufacture and supply of printed
circuit board assemblies for certain products and providing on-site general
management support at our manufacturing facility in Shenzhen,
China.





In
December 2007, we entered into a new contract manufacturing agreement with
Venture, which expanded upon our previous agreement, for the manufacture and
assembly by Venture of both our existing products and products that we may
develop from time to time during the term of the agreement. The agreement has an
initial term of three years and is automatically renewable for additional
consecutive one-year periods.





Under the
agreement, Venture procures components and tests, packages and prepares all
covered products for shipment. With limited exceptions, we are not required to
purchase any minimum quantities or units of products. We are required
to complete open purchase orders we placed that fall within certain periods
of time prior to shipment. Further, we are required to reimburse Venture for any
of its unrecoverable costs related to excess inventory and obsolete material.
Venture also provides new product introduction and design services to us from
time to time.





Industry
Standards and Government Regulations





Electronic
payment system providers must certify products and services with card
associations, financial institutions and payment processors, as well as comply
with government and telecommunications company regulations. We are also subject
to other domestic and international legal and regulatory
requirements.





We comply
with the following standards and requirements:





•
            Security
      Standards.  Security standards in our industry are
      promulgated largely by regional bank associations and card associations,
      as well as certain government regulations. 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 issued or used. Specific certifications are required for all
      electronic payment systems and their application software. PCI provides a
      set of standards and certification criteria to validate the security of
      payment devices and ensure the protection of confidential transaction data
      during storage and transit. We obtain EMV and PCI certifications at a
      global level, prior to specific local market
    certifications.





•
            Payment Processor/Financial
      Institution Requirements.  We are required to certify our
      products with payment processors. We actively perform 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. In international
      markets, we also obtain certifications from local financial institutions
      and payment processors so that our products can be used on their specific
      networks.





13
 Table of Contents





•
            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 electronic waste. The RoHS Directive
      restricts the use of certain material in physical devices that include our
      solutions and/or requires 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 (“FCC”) 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 FCC and Underwriters Laboratory in the U.S., and
      similar requirements in other countries. Wireless network carriers also
      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





We rely
upon patents, copyrights, trademarks and trade secret laws to establish and
maintain our proprietary rights in our technology and products. We currently
hold patents issued internationally relating to POS terminal products. We also
have a number of pending patent applications relating to our POS terminal
products and networking products.





We
currently hold trademark registrations in the U.S. and numerous other countries
for the “Hypercom” mark and logo. In addition, we have several other U.S. and
foreign trademark registrations, and pending trademark applications, relating to
our products and services.





We embed
copyright notices in our software products advising all users that we own the
rights to the software. We also place copyright notices on documentation related
to these products. We routinely rely on contractual arrangements to protect our
proprietary software programs, including written contracts prior to product
distribution or through the use of click-through license agreements. We
typically do not obtain federal copyright registrations for our
software.





Employees





As of
December 31, 2008, we employed approximately 1,606 people on a full-time basis,
275 of which are located in the U.S., with the remaining 1,331 located
internationally, as set forth in the following table:





U.S.
                        
                        
                        International
                        
                        
                        TotalSales,
      Marketing and Operations
                        
                        
                        81
                        
                        
                        
                        157
                        
                        
                        
                        238Development
                        
                        
                        67
                        
                        
                        
                        268
                        
                        
                        
                        335Service
      Operations
                        
                        
                        38
                        
                        
                        
                        746
                        
                        
                        
                        784Manufacturing
                        
                        
                        27
                        
                        
                        
                        59
                        
                        
                        
                        86Finance
      and Administration
                        
                        
                        62
                        
                        
                        
                        101
                        
                        
                        
                        163Total
      Employees
                        
                        
                        275
                        
                        
                        
                        1,331
                        
                        
                        
                        1,606





Employees
by segment, as of December 31, 2008, are as follows: Americas (652); NEMEA
(192); SEMEA; (205) Asia-Pacific (214); and Shared Cost Centers
(343).





14
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We
believe that we have an excellent relationship with our employees. We believe we
have been successful in our efforts to recruit qualified employees, but we
cannot guarantee that we will continue to be as successful in the future.
Certain of our employees globally are subject to collective bargaining
agreements or are members of unions or other organized labor
associations.





Available
Information





Our
principal executive offices are located at 8888 East Raintree Drive, Suite 300,
Scottsdale, Arizona 85260, and our telephone number is (480) 642-5000. Our
website is located at www.hypercom.com. We make available free of charge,
through our website, our Annual Report on Form 10-K, Quarterly Reports on Form
10-Q, Current Reports on Form 8-K, and amendments to those reports, as soon as
reasonably practicable after we electronically file or furnish such material to
the Securities and Exchange Commission (“SEC”). The information found on our
website is not part of this or any other report we file or furnish to the
SEC.





Item1A.  Risk Factors





The risks
set forth below may adversely affect our business, financial condition and
operating results and cause actual results to differ materially from the results
contemplated by the forward-looking statements contained in this Annual Report
on Form 10-K or elsewhere in our SEC filings. In addition to the risks set forth
below, and the factors affecting specific business operations identified
elsewhere in this Annual Report on Form 10-K, there may also be risks of which
we are currently unaware, or that we currently regard as immaterial based on the
information available to us, that later may prove to be material.





Risks
Related To Our Business





Our
integration of the Thales e-Transactions business, as well as future
acquisitions we may make, involves numerous risks. We may not be able to address
these risks without substantial expense, delay or other operational or financial
problems.





The
ongoing integration of TeT involves various potential risks,
including:


•
              the
      inability to assimilate the technologies, operations and personnel of
      TeT;
 
 •
              the
      potential disruption of our existing business, including the diversion of
      management attention and the redeployment of
  resources;
 
 •
              the
      loss of customers;
 
 •
              the
      possibility of our entering markets in which we have limited prior
      experience;
 
 •
              the
      loss of key employees of TeT;
 
 •
              the
      necessity to respond to and negotiate with local labor unions or other
      organized labor associations, which may cause
      delays with and obstacles to our implementation of business initiatives;
      and
 
 •
              the
      inability to obtain the desired strategic and financial benefits from the
      TeT acquisition.


Future
acquisitions and investments could also result in substantial cash expenditures,
potentially dilutive issuance of our equity securities, our incurrence of
additional debt and contingent liabilities, and amortization expenses related to
intangible assets that could adversely affect our business, operating results
and financial condition.




15
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International
operations pose additional challenges and risks that if not properly managed
could adverselyaffect
our financial results.


For the
year ended December 31, 2008, we derived approximately 78.7% of our total net
revenues outside of the U.S., principally in Europe, Asia-Pacific and Central
and South America. We expect that international sales will continue to account
for a significant percentage of our net revenues and operating income in the
foreseeable future. In addition, substantially all of our manufacturing
operations are located outside of the U.S. Accordingly, we face numerous risks
associated with conducting international operations, any of which could
negatively affect our results of operations and financial condition. These risks
include the following:





•
            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;





•
            changes
      in local economic environments, including inflation, recession and foreign
      currency exchange rate
fluctuations;





•
            inability
      to secure commercial relationships to help establish our presence in
      international markets;





•
            inability
      to hire and train personnel capable of marketing, installing and
      integrating our products and services, supporting customers and managing
      operations in foreign countries;





•
            building
      our brand name and awareness of our products and services among foreign
      customers;





•
            competition
      from existing market participants that may have a longer history in and
      greater familiarity with the foreign markets we
  enter;





•
            extended
      payment terms and the ability to collect accounts
    receivable;





•
            the
      ability to repatriate funds or transfer funds among
      our subsidiaries and between our subsidiaries and their parent
      entities;





•
            complicated
      tax and regulatory schemes 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.





Additionally,
we are subject to the Foreign Corrupt Practices Act, which may place us at a
competitive disadvantage to foreign companies that are not subject to similar
regulations.





Quarterly
revenues and operating results can vary, depending on a number of
factors.





Our
consolidated results of operations and financial position can vary significantly
from quarter to quarter, which is not conducive to a predictable business or
operating environment. Consequently, this can impact our overall business. The
following factors impact our quarterly business operations and
results:





•
            variations
      in product mix, timing and size of fulfilled orders as a result of
      customer deferral or cancellation of purchases and/or delays in the
      delivery of our products and
services;





•
            accomplishment
      of certain performance parameters embedded in our service level
      agreements;





•
            market
      demand for new product offerings;





16
 Table of Contents





•
            delays
      in the delivery of our products and
services;





•
            the
      type, timing and size of orders and
shipments;





•
            product
      returns and warranty claims;





•
            variations
      in product mix and cost during any
period;





•
            development
      of new relationships and maintenance and enhancement of existing
      relationships with customers and strategic
  partners;





•
            deferral
      of customer contracts in anticipation of product or service
      enhancements;





•
            deferral
      of certain revenue or gross margin in accordance with U.S.GAAP
      requirements;





•
            incremental
      costs incurred as a result of product quality and/or performance
      issues;





•
            inventory
      obsolescence and write-downs related to product life
    cycles;





•
            write-off
      of doubtful accounts receivable;





•
            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;





•
            availability
      and cost of financing;





•
            variations
      in income tax as a function of income recognition by tax
      jurisdiction;





•
            changing
      security standards or other technological changes;
  and





•
            industry
      and economic conditions, including competition, industry and security
      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.





We have
derived, and believe that we may continue to derive, a significant portion of
our net revenues from a limited number of large customers. For the fiscal year
ended December 31, 2008, our largest customer accounted for 6.2% of our net
revenues, and our five largest customers accounted for 22.1% of our net
revenues. In addition, our largest customer does substantial business with some
of our most significant competitors. The TeT acquisition may mitigate this risk
somewhat by further diversifying our customer base. Nevertheless, our customers
may buy less of our products or services depending on their own technological
developments, end-user demand for our products, internal budget cycles and
market conditions. A major customer in one year may not purchase any of our
products or services in another year, which may negatively affect our financial
performance. If any of our large customers significantly reduces or delays
purchases from us or if we are required to sell products to them at reduced
prices or unfavorable terms, our revenues and results of operations could be
materially adversely affected. See “Item 1, Business — Sales and Distribution”
for more information on our customer base.





17
 Table of Contents





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.





We offer
technologically complex products that, when first introduced or released in new
versions, may contain software or hardware defects that are difficult to detect
and correct. The existence of defects and delays in correcting them could result
in negative consequences, including the following:





•
            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;





•
            claims
      against us;





•
            diversion
      of research and development resources from new product development;
      and





•
            write-downs
      of and creation of reserves against inventory in our possession or located
      at our contract manufacturers.





Even
though we test all of our products, defects may continue to be identified after
products are shipped. In past periods, we have experienced various issues in
connection with product launches, including the need to rework certain products
and stabilize product designs. Correcting defects can be a time-consuming,
difficult and expensive task. Software errors may take several months to
correct, and hardware errors may take even longer.





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





Managing
the proper inventory levels for components and finished products is challenging.
In formulating our product offerings, we have focused our efforts on providing
to our customers products with greater capability and functionality, which
requires us to develop and incorporate the most current technologies in our
products. This approach tends to increase the risk of obsolescence for products
and components we or our third-party contract manufacturer hold in inventory and
may compound the difficulties posed by other factors that affect our inventory
levels, including the following:





•
            the
      need to maintain significant inventory of components that are in limited
      supply;





•
            buying
      components in bulk for the best
pricing;





•
            responding
      to the unpredictable demand for
products;





•
            responding
      to customer requests for short lead-time delivery
    schedules;





•
            failure
      of customers to take delivery of ordered products;
  and





•
            product
      returns.





In
addition, we may in some cases have to reimburse, or incur other charges from,
our third-party contract manufacturing partners for excess or obsolete inventory
or unfulfilled, non-cancelable open purchase orders resulting from changes in
product design or demand. If we accumulate excess or obsolete inventory, price
reductions and inventory write-downs may result, which could adversely affect
our results of operations and financial condition. The total impact of excess
and obsolete inventory, including inventory held by our third-party
manufacturers, on our financial results was $8.7 million, $8.5 million, and $7.9
million for the years ended December 31, 2008, 2007 and 2006,
respectively.


18
 Table of Contents




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.





Protection
against fraud is of key importance to the purchasers and end-users of our
solutions. We incorporate security features, such as encryption software and
secure hardware, into our solutions to protect against fraud in electronic
payment transactions and to ensure the privacy and integrity of consumer data.
Our solutions may be vulnerable to breaches in security in the security
mechanisms, the operating system and applications or the hardware platform.
Security vulnerabilities could jeopardize the security of information
transmitted or stored using our solutions. In general, liability associated with
security breaches of a certified electronic payment system belongs to the
institution that acquires the financial transaction. We have not experienced any
material security breaches affecting our business. However, if the security of
our solutions is compromised, our reputation and marketplace acceptance of our
solutions will be adversely affected, which would adversely affect our results
of operations, and subject us to potential liability.





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.





We rely
on patent, copyright, trademark and trade secret laws, as well as
confidentiality, licensing and other contractual arrangements, to establish and
protect the proprietary aspects of our products. Our efforts may result in only
limited protection, and our competitors may develop, market and sell products
substantially equivalent to our products, or utilize technologies similar to
those used by us. If we are unable to adequately protect our proprietary
technology, these third parties may be able to compete more effectively against
us, which could result in the loss of customers and adversely affect our
business.





In
addition, the legal systems of many foreign countries do not protect or honor
intellectual property rights to the same extent as the legal system of the U.S.
For example, in China, the legal system in general and the intellectual property
regime in particular, is still in the development stage. It may be very
difficult, time-consuming and costly for us to attempt to enforce our
intellectual property rights in such jurisdictions.





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





Although
we believe that our products do not infringe on any third party’s patents, from
time to time we have become involved in claims and litigation involving patents
or proprietary rights. Patent and proprietary rights litigation entails
substantial legal and other costs, and diverts the attention of our management
resources. There can be no assurance that we will have the necessary financial
and other resources required to appropriately defend or prosecute our rights in
connection with any such litigation.





In the
past we have received third-party claims of infringement and may receive
additional claims of infringement in the future. To date, such activities have
not had a material adverse effect on our business and we have prevailed in
litigation, obtained a license on commercially acceptable terms or otherwise
been able to modify any affected products or technology. However, there can be
no assurance that we will continue to prevail in any such actions, or that any
license required under any such patent or other intellectual property would be
made available on commercially acceptable terms, if at all, or that we would be
able to successfully modify our products or technology to negate claims of
infringement.





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





We
currently rely on third-party manufacturers to manufacture and assemble a
majority of our products and subassemblies. We also depend upon third-party
suppliers to deliver components that are free from defects, competitive in
functionality and cost, and in compliance with our specifications and delivery
schedules.  If we are unable to successfully manage our relationship
with these third-party manufacturers, or if such manufacturers experience any
significant disruption in their supply chain and manufacturing capabilities, or
they experience similar economic, political and business issues which may impact
their ability to fulfill their obligations to us, we may be unable to fulfill
customer orders in a timely manner, which would have a material adverse effect
on our business and financial performance.




19
 Table of Contents




We have
occasionally experienced, and may in the future experience, delays in delivery
of products and delivery of products of inferior quality from component
suppliers and third-party manufacturers. Although alternate manufacturers and
suppliers are generally available to provide our products and product
components, the number of manufacturers or suppliers of some of our products and
components is limited, and qualifying a replacement manufacturer or supplier
could take time.





The
components used in our systems are purchased from outside sources. Certain
components, such as processors, wireless modules, etc., are purchased from
single suppliers. The failure of any such supplier to meet its commitment on
schedule could have a material adverse effect on our business, operating results
and financial condition. If a sole-source supplier were to go out of business or
otherwise become unable to meet its supply commitments, the process of locating
and qualifying alternate sources could require up to several months, during
which time our production could be delayed, and may, in some cases, require us
to redesign our products and systems. Such delays and potential costly redesigns
could have a material adverse effect on our business, operating results and
financial condition.





In
addition, our use of third-party manufacturers reduces our direct control over
product quality, manufacturing timing, yields and costs. Disruption of the
manufacture or supply of our products or components, or a third-party
manufacturer’s or supplier’s failure to remain competitive in functionality,
quality or price, could delay or interrupt our ability to deliver our products
to customers on a timely basis, which would have a material adverse effect on
our business and financial performance.




We
are subject to a complex system of domestic and foreign taxation and
unanticipated changes in our tax rates or exposure to additional tax liabilities
could affect our profitability.




We are
subject to income taxes in both the U.S. and various foreign jurisdictions, and
our domestic and international tax liabilities are subject to the allocation of
expenses in different jurisdictions. Our effective tax rates could be adversely
affected by changes in the mix of earnings in countries with differing statutory
tax rates, in the valuation of deferred tax assets and liabilities or in tax
laws, or by material audit assessments, which could affect our profitability. In
addition, the amount of tax we pay is subject to ongoing audits in various
jurisdictions, and a material assessment by a governing tax authority could
affect our profitability. Further tax law changes in jurisdictions in which we
conduct business could materially affect our profitability.




We are
responsible for charging end customers certain taxes in numerous international
jurisdictions. In the ordinary course of our business, there are many
transactions and calculations where the ultimate tax determination is uncertain.
In the future, we may come under audit, which could result in changes to the
estimates. We believe that we maintain adequate tax reserves to offset potential
liabilities that may arise upon audit. Although we believe our tax estimates and
associated reserves are reasonable, the final determination of tax audits and
any related litigation could be materially different than the amounts
established for tax contingencies. To the extent that such estimates ultimately
prove to be inaccurate, the associated reserves would be adjusted resulting in
our recording a benefit or expense in the period a final determination was
made.





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





A
substantial part of our business consists of sales to international customers
and as a result the majority of our revenues and expenses related to our
international operations are denominated in Euros and other non-U.S. dollar
currencies. Adverse currency exchange rate fluctuations could have a material
impact on our financial results in the future.  In addition, our
balance sheet reflects non-U.S. dollar denominated assets and liabilities, which
can be adversely affected by fluctuations in currency exchange rates. We have
entered into foreign currency forward contracts intended to hedge our exposure
to adverse fluctuations in exchange rates. Nevertheless, these hedging
arrangements may not always be effective, particularly in the event of imprecise
forecasts of non-U.S. dollar denominated assets and liabilities and such
attempts to mitigate these risks may be costly. Further, we may not hedge
against our entire foreign currency risk as it may become even more costly as a
result of recent market developments. Accordingly, an adverse movement in
exchange rates could have a material adverse effect on our financial results. In
the year ended December 31, 2008, we incurred foreign currency expense of
approximately $1.8 million, net of foreign currency transaction gains or
losses.


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 Table of Contents




Adverse
resolution of litigation may adversely affect our business or financial
results.





We are
party to litigation in the normal course of our business. Litigation can be
expensive, lengthy and disruptive to normal business operations. Moreover, the
results of complex legal proceedings are difficult to predict. An unfavorable
resolution of a particular lawsuit could have a material adverse effect on our
business, operating results, or financial condition. See “Item 3 — Legal
Proceedings” below for more information on our litigation.





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





The loss
of the services of our senior management or other key employees could make it
more difficult to successfully operate our business and achieve our business
goals. The market for highly qualified and talented executives in our industry
is very competitive and we cannot provide assurance that we will be able to
replace these senior management members with equally-qualified executives in a
timely and cost-effective manner, if at all.





We also
may be unable to retain existing management, sales personnel and development and
engineering personnel that are critical to our success, which could result in
harm to key customer relationships, loss of key information, expertise or
know-how and unanticipated recruitment and training costs.





Shipments
of electronic payment systems may be delayed by factors outside of our control,
which can harm our relationships with our customers.





The
shipment of payment systems requires us or our manufacturers, distributors or
other agents to obtain customs or other government certifications and approvals,
and, on occasion, to submit to physical inspection of our systems in transit.
Failure to satisfy these requirements, and the process of trying to satisfy
them, can lead to lengthy delays in the delivery of our solutions to our
customers, which may harm our relationships with our customers.





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





We are
subject to environmental, legal and regulatory requirements, including the RoHS
Directive and the WEEE Directive. The RoHS Directive sets a framework for
producers’ obligations in relation to manufacturing (including the amounts of
named hazardous substances contained in products sold) and the WEEE Directive
sets a framework for treatment, labeling, recovery and recycling of electronic
products in the European Union, which may require us to alter the manufacturing
of the physical devices that include our solutions and/or require active steps
to promote recycling of materials and components. Although the WEEE Directive
has been adopted by the European Commission, national legislation to implement
the directive is still pending in certain member states of the European Union.
In addition, similar legislation has been enacted in China and could be enacted
in other jurisdictions, including in the U.S. If we do not comply with the RoHS
Directive and the WEEE Directive, we may suffer a loss of revenues, be unable to
sell in certain markets or countries, be subject to penalties and enforced fees
and/or suffer a competitive disadvantage. Furthermore, the costs to comply with
the RoHS Directive and the WEEE Directive, or with current and future
environmental and worker health and safety laws, may have a material adverse
effect on our results of operation, expenses and financial
condition.





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





Domestic
and international threats of terrorism, terrorist attacks, wars and regional
conflicts may cause instability in the global financial markets, and contribute
to downward pressure on securities prices of U.S. publicly traded companies,
such as us. Future terrorist activities or armed conflicts, epidemics, such as
influenza or bird flu, and pandemics could result in economic, political and
other uncertainties that could adversely affect our revenues and operating
results, and depress securities prices, including the price of our common stock.
Such events may disrupt the global insurance and reinsurance industries, and
adversely affect our ability to obtain or renew certain insurance policies, and
may result in significantly increased costs of maintaining insurance coverage.
Further, we may not be able to obtain insurance coverage at historical or
acceptable levels for all of our facilities. Future terrorist activities, armed
conflicts and epidemics could affect our domestic and international sales,
disrupt our supply chain and impair our ability to produce and deliver our
products. Such events could directly impact our physical facilities or those of
our suppliers (including sole-source suppliers) or customers in the U.S. and
elsewhere. Our primary facilities include administrative, sales and research and
development facilities in the U.S., Australia, Brazil, China, France, Germany,
Latvia, Spain and the U.K., and our manufacturing partners’ facilities in
Germany, Malaysia and Romania. Acts of terrorism, wars and epidemics may make
transportation of our supplies and products more difficult or cost
prohibitive.


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 Table of Contents




China’s
changing economic environment may impact our ability to do business in
China.





In recent
years, the Chinese government has been reforming the economic system in China to
increase the emphasis placed on decentralization and the utilization of market
forces in the development of China’s economy. These reforms have resulted in
significant economic growth. However, any economic reform policies or measures
in China may from time to time be modified or revised by the Chinese government.
While we may be able to benefit from the effects of some of these policies,
certain policies and other measures taken by the Chinese government to regulate
the economy could also have a significant negative impact on economic conditions
in China, which would result in an adverse impact on our business. China’s
economic environment has been changing as a result of China’s 2001 entry into
the World Trade Organization (the “WTO”). China’s entry into the WTO required
that China reduce tariffs and eliminate non-tariff barriers, including quotas,
licenses and other restrictions, and we cannot predict the future impact of such
changes on China’s economy. Moreover, although China’s entry into the WTO and
the related relaxation of trade restrictions may lead to increased foreign
investment, it may also lead to increased competition in China’s markets from
other foreign companies. If China’s entry into the WTO results in increased
competition or has a negative impact on China’s economy, our business could
suffer. In addition, although China is increasingly affording foreign companies
and foreign investment enterprises established in China similar rights and
privileges as Chinese domestic companies, special laws, administrative rules and
regulations governing foreign companies and foreign investment enterprises in
China may still place foreign companies at a disadvantage in relation to Chinese
domestic companies and may adversely affect our competitive
position.





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





We
conduct our business in China primarily through direct or indirect wholly-owned
subsidiaries incorporated in China and Hong Kong. Our subsidiaries are generally
subject to laws and regulations applicable to foreign investment in China.
Accordingly, our business may be affected by changes in China’s developing legal
system. Many new laws and regulations covering general economic matters have
been promulgated in China in recent years, and government policies and internal
rules promulgated by governmental agencies may not be published in time, or at
all. As a result, we may operate our business in violation of new rules and
policies without having any knowledge of their existence. In addition, there are
uncertainties regarding the interpretation and enforcement of laws, rules and
policies in China. The Chinese legal system is based on written statutes, and
prior court decisions have limited precedential value. Because many laws and
regulations are relatively new and the Chinese legal system is still evolving,
the interpretations of many laws, regulations and rules are not always uniform.
Moreover, the relative inexperience of China’s judiciary in many cases creates
additional uncertainty as to the outcome of any litigation, and the
interpretation of statutes and regulations may be subject to government policies
reflecting domestic political concerns. Finally, enforcement of laws or
contracts based on existing law may be uncertain and sporadic, and it may be
difficult to obtain swift and equitable enforcement, or to obtain enforcement of
a judgment by a court of another jurisdiction. Any litigation in China may be
protracted, have unexpected outcomes and result in substantial costs and
diversion of resources and management’s attention.





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 financial information about
our business, which could harm our business and stock price.





Section
404 of the Sarbanes-Oxley Act of 2002 (“SOX 404”) requires that we establish and
maintain effective internal controls over financial reporting. SOX 404 also
requires us to include a management report of internal control over financial
reporting in our Annual Report on Form 10-K. Based on management’s evaluation of
internal control over financial reporting as of December 31, 2008, we are able
to conclude that our internal control over financial reporting is effective.
However, we cannot be certain that our internal control over financial reporting
will remain effective in the future. Any future failure to maintain adequate
internal control over our financial accounting and reporting could harm our
operating results or could cause investors to lose confidence in our reported
financial results or condition, which could adversely affect our business and
the trading price of our common stock.




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 Table of Contents




Our
business may be negatively affected by the current global economic
crisis.





The
business and operating results of our point of transaction businesses have been
and will continue to be affected by worldwide economic conditions and, in
particular, conditions in the banking sector and other major industries we
serve. The current economic climate, the credit market crisis, particularly the
increased difficulty in securing credit, declining consumer and business
confidence, fluctuating commodity prices, and other challenges currently
affecting the global economy could impact our ability to sell and our customers’
ability to make capital expenditures, thereby affecting their ability to
purchase our products. Additionally, customers in the financial services sector,
which has been severely impacted by the credit crisis, have consolidated in
response to the crisis, which could further impact our business by reducing our
customer base. Certain of our retail customers who have seen significant
dampening of consumer demand, could face increased financial pressures that
could impact their capital expenditures.





Also,
although we believe that our cash flows from operations and other sources of
liquidity, including borrowings available under our revolving credit facility or
other financing options, will satisfy our working capital needs, capital
expenditures, commitments, and other liquidity requirements associated with our
operations and our TeT acquisition debt requirement through the next 12 months,
in the event that we require additional capital to fulfill our future business
plans, we may need to obtain additional financing from third parties. In light
of the current global credit crisis, if we experience such a need for additional
financing, we may not be able to obtain sufficient financing on advantageous
terms or at all, which could materially and adversely affect our business,
financial condition, results of operations and long-term prospects.





The
extent of the impact of the global economic crisis will depend on a number of
factors, including whether the United States economy and the global economy
generally, enter into a prolonged recession as a result of the deterioration of
the credit markets. If the global economic slowdown continues for a significant
period or there is significant further deterioration in the global economy, our
results of operations, financial position and cash flows could be materially
adversely affected.





Risks
Related To The Industry





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





The
markets in which we operate are maturing and highly competitive. Increased
competition from manufacturers or distributors of products similar to or
competitive with ours, or from service providers that provide services similar
to ours, could result in price reductions, extended terms, free services, lower
margins and loss of market share. In some markets, we may sell products with
negative margins to large customers who have existing service contracts that
generate contractual service revenues at positive margins over a multi-year
period. Such transactions may negatively affect our revenues, margins and net
income.





We expect
to continue to experience significant and increasing levels of competition in
the future. With respect to our POS products, we compete primarily on the basis
of ease-of-use, product performance, price, features, quality, the availability
of application software programs, the number of third-party network host and
telecommunication system certifications we have obtained for our products and
application programs, rapid development, release and delivery of software
products and customer support and responsiveness. Software products compete on
the basis of functionality, scalability, price, quality and
support.





We often
face additional competitive factors in foreign countries, including but not
limited to preferences for national vendors, difficulties in obtaining required
certifications, conformity with local government policies and trade practices,
and compliance with the Foreign Corrupt Practices Act. Some of our competitors
and potential competitors are more established, benefit from greater name
recognition and have significantly greater resources than we do. Moreover, there
are limited barriers to entry that could keep our competitors from developing
products or services and technology similar to ours, or from selling competing
products or services in our markets. Further, there can be no assurance that we
will be able to lower our product or operating costs to effectively compete in
these markets.


23
 Table of Contents




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.





The
industry in which we operate is characterized by rapid changes in technology and
numerous new product introductions. Our success depends to a large degree upon
our continued ability to offer new products and services, and enhancements to
our existing products and services, to meet changing market requirements,
including conformity with applicable standards. The introduction of new
products, services and technologies by third parties could have an adverse
effect on the sales of our existing products, services and technologies. We
cannot be certain of our ability to successfully:





•
            identify,
      develop, or manufacture new products, services and technologies in a cost
      effective manner;





•
            market
      or support these new products, services and technologies on a timely and
      effective basis;





•
            eliminate
      defects in new products and service
offerings;





•
            gain
      market acceptance for new products, services and technologies;
      or





•
            respond
      to technological changes, new industry standards, and announcements of new
      products, services and technologies by
  competitors.





Developing
new products, services and technologies is a complex, uncertain process
requiring innovation and accurate anticipation of technological and market
trends. When changes to our product line are announced, we will be challenged to
manage possible shortened life cycles for existing products, continue to sell
existing products and prevent customers from returning existing products. Our
inability to respond effectively to any of these challenges may have a material
adverse effect on our business and financial results.





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.





Our
product sales are subject to a substantial and complex array of industry driven
standards and governmental regulation, both domestic and foreign,
including:





•
            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 (or other similar regulations in countries in
      which we sell our products);





•
            the
      WEEE and RoHS Directives in the European Union;
  and





•
            certification
      standards set by domestic
processors.





Our
failure to properly comply with these standards and regulations could result in
lost product sales, significant costs associated with required remedial measures
or production stoppages, any of which could have a material adverse effect on
our business and financial results.




24
 Table of Contents




Risks
Related To Our Common Stock





We
have incurred significant losses recently and in the past and our results of
operations have and may continue to vary from quarter to quarter, impacted in
particular by 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.





We had a
loss from continuing operations of $76.7 million for the year ended December 31,
2008, a loss from continuing operations of $10.7 million for the year ended
December 31, 2007, and income from continuing operations of $3.1 million for the
year ended December 31, 2006. If the results of our continuing efforts to
improve profitability, increase our cash flow and strengthen our balance sheet
do not meet or exceed the expectations of securities analysts or investors, the
price of our common stock will suffer.





Further,
given the variability in our revenues, our quarterly financial results have
fluctuated significantly in the past and are likely to do so in the future.
Accordingly, we believe that period-to-period comparisons of our results of
operations may be misleading and not indicative of future performance. If our
quarterly financial results fall below the expectations of securities analysts
or investors, the price of our common stock may suffer.





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





The
market price of our common stock has been, and is likely to continue to be,
volatile. When we or our competitors announce new products, services, or
customer orders, change pricing policies, experience quarterly fluctuations in
operating results, announce strategic relationships, acquisitions or
dispositions, change earnings estimates, fail to maintain effective internal
controls, restate financial results, incur litigation, experience government
regulatory actions or suffer from generally adverse economic conditions, our
stock price is often affected. Recently, companies similar to ours have
experienced extreme price fluctuations, often for reasons unrelated to their
performance. The volatility of our stock price may be accentuated during periods
of low volume trading.




Our
common stock may be delisted by NYSE.




Our
common stock is currently listed on the NYSE. On December 31, 2008, we received
notice from NYSE Regulation advising that the average per share closing price of
our common stock was below the NYSE continued listing standard, which requires
that a company’s common stock trade at a minimum average closing price of $1.00
over a consecutive 30 trading-day period. The NYSE rules allow us six months
from receipt of the notice to cure the deficiency before NYSE Regulation
initiates suspension and delisting procedures. During this period, our common
stock will continue to be listed and trade on the NYSE, subject to our continued
compliance with other NYSE listing standards.




Effective
on February 26, 2009, the NYSE suspended the $1.00 minimum price requirement on
a temporary basis, initially through June 30, 2009. We will be deemed to have
regained compliance during this rule suspension period if: (1) at the end of any
calendar month during the rule suspension period we have a $1.00 closing share
price on the last trading day of such month and a minimum average closing price
of $1.00 over the preceding 30 trading days, or (2) at the end of our original
six-month cure period we have a $1.00 closing share price on the last trading
day of the period and a minimum average closing price of $1.00 over the
preceding 30 trading days. If we do not regain compliance during the rule
suspension period, our original compliance period will recommence for the
remaining balance of our original compliance period.




If the
closing price and average closing price of our common stock do not sufficiently
improve, we may consider presenting a proposal to our stockholders for a
consolidation of our outstanding common stock at our next annual meeting of
stockholders. In the event that we do not attain compliance with the minimum
price requirement within the allowed time period, NYSE Regulation will commence
suspension and delisting procedures.





25
 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 such review may have a material
adverse impact on the trading price of our common stock.





The
reports of publicly-traded companies are subject to review by the SEC from time
to time for the purpose of assisting companies in complying with applicable
disclosure requirements and to enhance the overall effectiveness of companies’
public filings, and comprehensive reviews of such reports are now required at
least every three years under the Sarbanes-Oxley Act of 2002. SEC reviews may be
initiated at any time. While we believe that our previously filed SEC reports
comply, and we intend that all future reports will comply in all material
respects with the published SEC rules and regulations, we could be required to
modify or reformulate information contained in prior filings as a result of an
SEC review. Any modification or reformulation of information contained in such
reports could be significant and result in 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.





We have
provisions in our certificate of incorporation and bylaws that:





•
            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 (the “Board”) and regulate nominations
      for the Board;





•
            make
      it more difficult for stockholders to take certain corporate actions;
      and





•
            may
      delay or prevent a change of
control.





These and
other provisions of our charter documents, as well as certain provisions of
Delaware law, could delay or make more difficult certain types of transactions
involving a change of control of Hypercom or our management. As a result, the
price of our common stock may be adversely affected.





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





As of
March 10, 2009, we had 53,442,799 shares of our common stock outstanding, all of
which have been listed for trading according to the rules of the NYSE. We also
had outstanding, as of March 10, 2009, options and warrants to acquire an
additional 4,459,378 and 10,544,000 shares, respectively, of our common stock.
All of the shares underlying the outstanding options and warrants have been
registered for resale. Future public sales of our common stock, or the
availability of such shares for sale, including the shares subject to
outstanding options and warrants, could adversely affect the prevailing market
price of our common stock and impair our ability to raise capital through the
sale of additional equity securities.





The
issuance of warrants to purchase common stock as part of the TeT acquisition
could result in a lowering of our stock price.





In
accordance with the terms of our credit agreement with Francisco Partners, upon
funding of the loan and the closing of the TeT acquisition, we granted Francisco
Partners a five-year warrant to purchase approximately 10.5 million shares of
our common stock at $5.00 per share. The warrant contains a cashless exercise
provision. We have also filed a registration statement covering the shares of
common stock underlying the warrant. The market price of our common stock could
decline as a result of sales of a large number of shares of our common stock in
the market (or the perception that these sales could occur) if the warrant is
exercised once our common stock is trading above the warrant exercise price of
$5.00 per share. Any such sales, or the possibility that these sales may occur,
also might make it more difficult for us to sell equity securities in the future
at a time and at a price that we deem appropriate. Any issuance of common stock
to the warrant holder upon exercise of the warrant would dilute the then-current
common stockholders’ interests in our company.




26
 Table of Contents




We
currently do not intend to pay any dividends on our common stock.





We
currently do not intend to pay any dividends on our common stock. While we may
declare dividends at some point in the future, we cannot assure you that you
will ever receive cash dividends as a result of ownership of our common stock
and any gains from investment in our common stock may only come from increases
in our stock prices, if any.





Risks
Related To Our Indebtedness





Our
credit agreements contain various covenants and restrictions that limit the
discretion of management in operating our business and could prevent us from
engaging in some activities that may be beneficial to us and our
stockholders.





The
agreements governing our financing, including our $60 million credit agreement
to partially fund the TeT acquisition and our $25 million revolving credit
facility, contain various covenants and restrictions that, in certain
circumstances, limit our ability and the ability of certain subsidiaries
to:





•
            grant
      liens on assets;





•
            make
      restricted payments (including paying dividends on capital stock or
      redeeming or repurchasing capital
stock);





•
            make
      investments (including investments in joint
  ventures);





•
            merge,
      consolidate or transfer all or substantially all of our
      assets;





•
            incur
      additional debt; or





•
            engage
      in certain transactions with
affiliates.





As a
result of these covenants and restrictions, we may be limited in how we conduct
our business and may be unable to raise additional debt, compete effectively,
make investments or pursue available business opportunities. We cannot assure
you that these covenants will not adversely affect our ability to finance our
future operations or capital needs. A breach of any of these covenants could
result in a default in respect of the related indebtedness. If a default occurs,
the affected lenders could elect to declare the indebtedness, together with
accrued interest and other fees, to be immediately due and payable.





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 current and future debt arrangements
could adversely affect our financial condition and our ability to respond to
changes in our business.





If we
incur additional debt, we may be subject to the following risks:





•
            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.





27
 Table of Contents





We cannot
be assured that our leverage and such restrictions will not materially and
adversely affect our ability to finance our future operations or capital needs
or to engage in other business activities. In addition, we cannot be assured
that additional financing will be available when required or, if available, will
be on terms satisfactory to us.





The
current condition of the credit markets may not allow us to secure financing for
potential future activities on satisfactory terms, or at all.





Our
existing cash and short-term investments are available for operating
requirements, strategic investments, acquisitions of companies or products
complimentary to our business, the repayment of outstanding indebtedness,
repurchases of our outstanding securities and other potential large-scale needs.
While we believe existing cash and short-term investments, together with funds
generated from operations, should be sufficient to meet operating requirements
for the foreseeable future, we may also consider incurring additional
indebtedness and issuing additional debt or equity securities in the future to
fund potential acquisitions or investments, to refinance existing debt or for
general corporate purposes. As a result of recent subprime loan losses and
write-downs, as well as other economic trends in the credit market industry, we
may not be able to secure additional financing for future activities on
satisfactory terms, or at all, which may adversely affect our financial
condition and results of operations.





Item1B.  Unresolved Staff
Comments





None.





Item2.Properties





Americas





Our
current corporate headquarters building is located in Scottsdale,
Arizona.  The facility is 48,650 square feet, and the lease for this
facility expires on June 23, 2018. Our corporate headquarters serves as a shared
cost center for all of our geographic segments.





In the
U.S., we also lease offices in Atlanta, Georgia (currently subleased) and
Savannah, Georgia, as well as a storage facility in Phoenix, Arizona.
Internationally, we lease facilities in Brazil, Chile, Mexico and Puerto Rico
for sales, support, representation, and research and development
activities.





We also
own an approximately 102,000 square foot facility in Brazil that is utilized for
administrative, final assembly, warehouse, distribution, and sales and support
services.





NEMEA





We lease
facilities in Belgium, Germany and Sweden for sales, support, representation,
and research and development activities.





SEMEA





We lease
facilities in France, Hungary, Latvia, Russia, Scotland, Spain, the United Arab
Emirates and the U.K. for sales, support, representation, and research and
development activities.





Asia-Pacific





We lease
facilities in Australia, China, Hong Kong, Singapore and Thailand for sales,
support, representation, and research and development activities.





We
believe that our facilities are adequate for our current operations and will be
sufficient for the foreseeable future.




28
 Table of Contents




Item 3.Legal
Proceedings





We are
currently a party to various legal proceedings, including those noted below.
While we presently believe that the ultimate outcome of these proceedings,
individually and in the aggregate, will not have a material adverse affect on
our financial position, results of operations or cash flows, litigation is
subject to inherent uncertainties, and unfavorable rulings could occur. An
unfavorable ruling could include monetary damages or, in cases where injunctive
relief is sought, an injunction. Were an unfavorable ruling to occur, it is
possible such a ruling could have a material adverse impact on our financial
position, results of operations or cash flows in the period in which the ruling
occurs or in future periods.




SPA
Syspatronic AG v. Hypercom Corporation, et al.  (United States
District Court for the Eastern District of Texas, Marshall Division, Civil
Action No. 2:07-CV-416 (LED), filed on September 18, 2007)





SPA
Syspatronic AG (“SPA”) commenced this action in the United States District Court
for the Eastern District of Texas against us and others, alleging that certain
of our products infringe U.S. Patent No. 5,093,862 entitled “Data Carrier –
Controlled Terminal in a Data Exchange System” issued on March 3, 1992 (the
“’862 Patent”) allegedly owned by SPA. The plaintiff is seeking a judgment of
infringement, an injunction against further infringement, damages, interest and
attorneys’ fees. We have filed an answer denying liability on the basis of a
lack of infringement, invalidity of the ‘862 Patent, laches, waiver, equitable
estoppel and unclean hands, lack of damages, failure to state a claim, and
inequitable conduct during the prosecution of the ‘862 Patent. We have also
counterclaimed seeking a declaratory judgment of non-infringement and invalidity
of the ‘862 Patent, and seeking attorneys’ fees and costs as an exceptional case
due to the plaintiff’s inequitable conduct during the prosecution of the ‘862
Patent. On April 4, 2008, the U.S. Patent and Trademark Office (the “Patent
Office”) granted the defendants’ request for re-examination of the ‘862 Patent.
On April 24, 2008, the Court granted the defendants’ motion to stay proceedings
in this case until the Patent Office completed its re-examination of the ‘862
Patent. On December 22, 2008, the Patent Office filed an office action rejecting
all ten claims of the ‘862 Patent as invalid because they were anticipated by
prior art references. SPA has the right to file a response within two months of
the office action; however, at SPA’s request, the Patent Office granted a one
month extension to respond to the office action.





CardSoft,
Inc., et al. v. Hypercom Corporation, et al. (United States District Court for
the Eastern District of Texas, Marshall Division, Civil Action No.
2:08-CV-00098, filed on March 6, 2008)





CardSoft,
Inc. (“CardSoft”) filed this action on March 6, 2008 in the United States
District Court for the Eastern District of Texas against us and others, alleging
that certain of our terminal products infringe two patents allegedly owned by
CardSoft: U.S. Patent No. 6,934,945 (the “945 Patent”), entitled “Method and
Apparatus for Controlling Communications,” issued on August 23, 2005, and U.S.
Patent No. 7,302,683 (the “683 Patent”), also entitled “Method and Apparatus for
Controlling Communications”, issued on November 27, 2007, which is a
continuation of the ‘945 patent.  The plaintiff is seeking a judgment
of infringement, an injunction against further infringement, damages, interest
and attorneys’ fees.  In June 2008, we filed its answer to the
complaint in this action, denying liability on the basis of a lack of
infringement, invalidity of the ‘945 Patent and the ‘683 Patent, laches, waiver,
equitable estoppel and unclean hands, lack of damages and failure to state a
claim.  We have also counterclaimed seeking a declaratory judgment of
non-infringement and invalidity of the ‘945 Patent and the ‘683
Patent.  A Markman hearing is scheduled for July 20, 2011 and trial is
scheduled for November 7, 2011.





Lisa
Shipley v. Hypercom Corporation. (United States District Court for the Northern
District of Georgia, Civil Action No. 1:09-CV-0265, filed on January 30,
2009)





Lisa
Shipley (“Shipley”), a former employee, filed this action in the United States
District Court for the Northern District of Georgia on January 30, 2009 against
us, alleging that we violated Title VII of the Civil Rights Act by
discriminating against her on the basis of her gender, violated the Georgia Wage
Payment laws by failing to pay certain sales commissions, and violated the Equal
Pay Act and Georgia law by paying her lower compensation than we paid males who
performed the same work.  Shipley is seeking compensatory damages for
emotional distress, damage to reputation, embarrassment, lost wages, back pay,
accrued interest, punitive damages, attorney’s fees and expenses, and
interest.  We deny the allegations and intend to vigorously defend
this litigation.  On February 23, 2009, we filed a motion to dismiss
based on improper venue or, in the alternative, to transfer venue to the United
States District Court for the District of Arizona.





29
 Table of Contents





Item4.Submission of Matters to
a Vote of Securities Holders





No
matters were submitted to a vote of security holders during the fourth quarter
of fiscal 2008.





Executive
Officers of the Registrant





The
following are our executive officers as of March 10, 2009:





Name
                      
                      Age
                      
                      Title
                      
                      Other Business Experience since
      1/1/2004Norman
      Stout
                      
                      51
                      
                      Chairman
      of the Company (since December 2007)
                      
                      Director,
      Hypercom Corporation (since 2003); Chief Executive Officer, Mitel US;
      Chief Executive Officer, Inter-Tel, Inc.; Chief Strategy Officer and Chief
      Administrative Officer, Inter-Tel, Inc.Philippe
      Tartavull
                      
                      51
                      
                      Chief
      Executive Officer and President (since December 2007)
                      
                      Director,
      Hypercom Corporation (since December 2007 and April 2006 – January 2007);
      President and Chief Operating Officer, Hypercom Corporation; President,
      Oberthur Card Systems, USARobert
      M. Vreeland
                      
                      47
                      
                      Interim
      Chief Financial Officer (since April 2008)
                      
                      Vice
      President, Americas Finance and Corporate Financial Planning &
      Analysis, Hypercom Corporation; Senior Vice President, Operations,
      Hypercom CorporationHenry
      Gaillard
                      
                      48
                      
                      Senior
      Vice President, Global Operations (since April 2008)
                      
                      Chief
      Operating Officer, Thales e-Transactions, a division of the Thales Group;
      Chief Executive Officer, Thales Navigation (Magellan); Chief Operating
      Officer and General Manager of the Consumer Business Unit, Thales
      Navigation (Magellan)Scott
      Tsujita
                      
                      45
                      
                      Senior
      Vice President, Finance, Treasury and
                        Investor
      Relations (since October 2003)Douglas
      J. Reich
                      
                      65
                      
                      Senior
      Vice President, General
                        Counsel,
      Chief Compliance Officer and Secretary
                        (since
      November 2001)








PART
II





Item5.Market for Registrant’s
Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities





Our
common stock trades on the New York Stock Exchange (“NYSE”) under the symbol
“HYC.” The following table sets forth, for the fiscal quarters indicated, the
high and low sales prices for our common stock as reported on the
NYSE.





RANGE
OF SALES PRICES





High
                    
                    
                    LowYear
      Ended 12/31/08First
      Quarter
                    
                    $
                    5.12
                    
                    
                    $
                    3.37Second
      Quarter
                    
                    
                    5.18
                    
                    
                    
                    4.17Third
      Quarter
                    
                    
                    5.01
                    
                    
                    
                    3.70Fourth
      Quarter
                    
                    
                    3.78
                    
                    
                    
                    0.57Year
      Ended 12/31/07First
      Quarter
                    
                    $
                    6.43
                    
                    
                    $
                    4.76Second
      Quarter
                    
                    
                    6.38
                    
                    
                    
                    5.58Third
      Quarter
                    
                    
                    6.19
                    
                    
                    
                    4.33Fourth
      Quarter
                    
                    
                    5.58
                    
                    
                    
                    4.50




30
 Table of Contents





Since
becoming publicly-traded, we have not paid any cash dividends on our common
stock. We currently intend to retain our earnings for our business and do not
anticipate paying any cash dividends on our common stock in the foreseeable
future. See “Item 7, Management’s Discussion and Analysis of Financial Condition
and Results of Operations — Liquidity and Capital Resources” for more
information on retained earnings.





As of
March 10, 2009, we had approximately 46 stockholders of record of our common
stock and approximately 5,000 beneficial stockholders of our common
stock.





Item6. Selected
Financial Data





The
following table contains selected consolidated financial data for the five years
ended December 31, 2008, derived from our audited consolidated financial
statements. The selected financial data should be read in conjunction with our
consolidated financial statements, related notes and the section of this Annual
Report on Form 10-K entitled “Management's Discussion and Analysis of Financial
Condition and Results of Operations.”  Historical consolidated
financial data may not be indicative of our future performance.





31
 Table of Contents





Years Ended December 31,2008
                    
                    
                    2007
                    
                    
                    2006
                    
                    
                    2005
                    
                    
                    2004Statements
      of Operations Data:Net
      revenue
                    
                    $
                    437,310
                    
                    
                    $
                    289,527
                    
                    
                    $
                    248,565
                    
                    
                    $
                    245,223
                    
                    
                    $
                    241,285Costs
      of revenue
                    
                    
                    312,498
                    
                    
                    
                    214,848
                    
                    
                    
                    159,540
                    
                    
                    
                    172,091
                    f
                    
                    
                    144,140Provision
      for deferred contract costs
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    11,305Gross
      profit
                    
                    $
                    124,812
                    
                    
                    $
                    74,679
                    
                    
                    $
                    89,025
                    
                    
                    $
                    73,132
                    
                    
                    $
                    85,840Gross
      profit percentage
                    
                    
                    28.5
                    %
                    
                    
                    25.8
                    %
                    
                    
                    35.8
                    %
                    
                    
                    29.8
                    %
                    
                    
                    35.6
                    %Research
      and development
                    
                    $
                    46,107
                    
                    
                    $
                    28,753
                    
                    
                    $
                    27,706
                    
                    
                    $
                    27,555
                    
                    
                    $
                    27,188Selling,
      general, and administrative
                    
                    
                    81,954
                    
                    
                    
                    59,964
                    
                    
                    
                    60,105
                    
                    
                    
                    72,649
                    
                    
                    
                    65,242Impairment
      of goodwill and intangible assets
                    
                    
                    67,798
                    aAmortization
      of purchased intangible assets
                    
                    
                    5,678
                    
                    
                    
                    502In-process
      research and development
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,000
                    c
                    
                    
                    -
                    
                    
                    
                    -Gain
      on sale of real property
                    
                    
                    -
                    
                    
                    
                    (3,796
                    )
                    
                    
                    (2,953
                    )
      dTotal
      operating expenses
                    
                    
                    201,537
                    
                    
                    
                    85,423
                    
                    
                    
                    85,858
                    
                    
                    
                    100,204
                    f
                    
                    
                    92,430Income
      (loss) from continuing operations
                    
                    
                    (76,725
                    )
                    
                    
                    (10,744
                    )
                    
                    
                    3,167
                    
                    
                    
                    (27,072
                    )
                    
                    
                    (6,590
                    )Income
      (loss) before discontinued operations
                    
                    
                    (84,922
                    )
                    
                    
                    (9,100
                    )
                    
                    
                    4,737
                    
                    
                    
                    (30,243
                    )
                    
                    
                    (12,530
                    )Income
      (loss) from discontinued operations
                    
                    
                    (481
                    )
                    
                    
                    1,623
                    
                    
                    
                    2,233
                    
                    
                    
                    (3,123
                    )
      e
                    
                    
                    3,868Net
      income (loss)
                    
                    $
                    (85,403
                    )
                    
                    $
                    (7,477
                    )
      b
                    
                    $
                    6,970
                    
                    
                    $
                    (33,366
                    )
                    
                    $
                    (8,662
                    )Diluted
      income (loss) per share:Income
      (loss) before discontinued operations
                    
                    $
                    (1.59
                    )
                    
                    $
                    (0.17
                    )
                    
                    $
                    0.09
                    
                    
                    $
                    (0.58
                    )
                    
                    $
                    (0.24
                    )Income
      (loss) from discontinued operations
                    
                    
                    (0.01
                    )
                    
                    
                    0.02
                    
                    
                    
                    0.04
                    
                    
                    
                    (0.06
                    )
                    
                    
                    0.07Diluted
      income (loss) per share
                    
                    $
                    (1.60
                    )
                    
                    $
                    (0.15
                    )
                    
                    $
                    0.13
                    
                    
                    $
                    (0.64
                    )
                    
                    $
                    (0.17
                    )Weighted
      average basic shares
                    
                    
                    53,321
                    
                    
                    
                    52,927
                    
                    
                    
                    53,248
                    
                    
                    
                    52,395
                    
                    
                    
                    51,252Weighted
      average diluted shares
                    
                    
                    53,321
                    
                    
                    
                    52,927
                    
                    
                    
                    53,966
                    
                    
                    
                    52,395
                    
                    
                    
                    51,252Balance
      Sheet Data:Cash
      and equivalents
                    
                    $
                    35,978
                    
                    
                    $
                    76,925
                    
                    
                    $
                    34,190
                    
                    
                    $
                    35,940
                    
                    
                    $
                    23,445Short-terms
      investments
                    
                    
                    499
                    
                    
                    
                    4,988
                    
                    
                    
                    47,228
                    
                    
                    
                    57,951
                    
                    
                    
                    69,962Working
      capital
                    
                    
                    46,835
                    
                    
                    
                    119,657
                    
                    
                    
                    141,923
                    
                    
                    
                    143,039
                    
                    
                    
                    159,789Total
      assets
                    
                    
                    306,300
                    
                    
                    
                    250,244
                    
                    
                    
                    236,716
                    
                    
                    
                    238,914
                    
                    
                    
                    277,260Short
      and long-term debt, net of discount
                    
                    
                    48,769
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    8,377
                    
                    
                    
                    8,829Total
      stockholders' equity
                    
                    
                    93,788
                    
                    
                    
                    174,499
                    
                    
                    
                    178,931
                    
                    
                    
                    170,774
                    
                    
                    
                    205,372








a)
            In
      December 2008, we recognized asset impairment charges totaling $67.8
      million for 2008, primarily related to the write-off of goodwill and
      intangible assets from our acquisition of TeT on April, 1, 2008. See Note
      4 to our consolidated financial
statements.





b)
            In
      June 2007, we completed the sale of our former headquarters facilities,
      located in Phoenix, Arizona, for a sale price of $16.3 million. We
      recorded a gain of $3.8 million on the sale in the second quarter of 2007.
      See Note 10 to our consolidated financial statements included herein.
      During the second quarter of 2007, we initiated a reconfiguration of our
      global sales and marketing organizations and incurred charges of $2.9
      million during the year. During the second quarter of 2007, we increased
      inventory reserves by $6.1 million primary related to non-PCI compliant
      products and components.





32
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c)
            During
      December 2006, we acquired TPI and incurred a $1.0 million charge for the
      acquired in-process research and development. See Note 3 to our
      consolidated financial statements included
  herein.





d)
            During
      September 2006, we completed the sale of our real property in Hong Kong
      for $5.2 million. We recorded a gain of approximately $3.0 million on the
      sale in the third quarter of 2006. See Note 10 to our consolidated
      financial statements included
herein.





e)
            During
      the fourth quarter of 2005, we sold our U.K. lease portfolio (the “U.K.
      Lease Business”) as this leasing business did not align with our core
      business. As of December 31, 2005, the U.K. Lease Business’ operating
      results have been classified as discontinued operations in the statements
      of operations for all periods presented. We recognized a $6.6 million loss
      on the write-down of the U.K. Lease Business to its estimated fair value
      based on purchase offers received from potential buyers. See Note 6 to our
      consolidated financial statements included
  herein.





f)
            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 our corporate structure. As a result
      of this business review, we recorded charges of $16.3 million to costs of
      revenue and $2.7 million to operating expenses during
  2005.





g)
            During
      the second quarter of 2004, we recorded an $11.3 million charge to cost of
      revenue to reserve all costs previously deferred under a contract with the
      Brazilian Health Ministry. See Note 15 to our consolidated financial
      statements included herein.





See Note23toourconsolidated financial
statementsincluded hereinfor a presentation of certain of the
above information on a quarterly basis for each of the four quarters in the
years endedDecember31, 2008and 2007.





Item7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations





The
following sets forth a discussion and analysis of our financial condition and
results of operations for the three years ended December 31, 2008. This
discussion and analysis should be read in conjunction with our consolidated
financial statements appearing elsewhere in this Annual Report on
Form 10-K. The following discussion contains forward-looking statements.
Our actual results may differ significantly from the results discussed in such
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in
“Item 1A — Risk Factors” of this Annual Report on
Form 10-K.





Critical Accounting Policies and
Estimates





Our
discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the U.S. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent liabilities. On an on-going
basis, we evaluate past judgments and our estimates, including those related to
bad debts, product returns, long-term contracts, inventories, goodwill and other
intangible assets, income taxes, financing operations, foreign currency, and
contingencies and litigation. We base our estimates on historical experience and
on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.





We
believe the following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our consolidated financial
statements.




33
 Table of Contents





Goodwill
and Impairment of Long-Lived Assets


We
evaluate our goodwill at least annually and at any other time if an event or
change in circumstances indicates that the fair value of a reporting unit is
below its carrying amount.  Our long-lived assets (to be held and
used) are reviewed for impairment when events or changes in circumstances
indicate that the related carrying amount of such assets may not be recoverable.
During fourth-quarter 2008, we concluded that the current economic environment
and the significant declines in our share price compared to our net book value
represented significant adverse events, and therefore, we evaluated our goodwill
and long-lived assets for impairment as of December 31, 2008, under the two-step
model established by Statement of Financial Accounting Standards (SFAS) No. 142,
“Goodwill and Intangible Assets.” (“SFAS
142”) and SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets” (“SFAS 144”).





In
evaluating our long-lived assets for recoverability, we use estimates of
undiscounted future cash flows of our individual reporting units and for
goodwill our recoverability is measured by reference to fair value using
after-tax discounted cash flows. As quoted market prices are unavailable for our
individual reporting units, fair value was determined through the use of
estimated future cash flows. The estimated cash flows used to assess
recoverability of our long-lived assets and measure fair value of our reporting
units were derived from current business plans developed using near-term and
long term management projections.  Our asset impairment evaluations,
including our annual goodwill impairment test, required us to make several
assumptions in determining estimates of future cash flows to determine fair
value of our individual reporting units, including near and long term revenue
and cost assumptions.





Our
evaluation of goodwill and long-lived assets resulted in the recognition of
asset impairment charges totaling $67.8 million in the fourth quarter of 2008,
primarily related to our acquisition of TeT on April, 1,
2008.





We
believe future events that could result in additional impairment of our goodwill
and long-lived assets include, but are not limited to, declines in the current
economic environment or significant losses of our customer base in Europe or in
Australia.





Revenue
Recognition





We
recognize revenue pursuant to applicable revenue recognition guidance and
interpretations, including the requirements of Emerging Issues Task Force Issue
(“EITF”) No. 00-21, Revenue Arrangements with Multiple
Deliverables, SFAS No. 13, Accounting for Leases(“SFAS
13”), Statement of Position 97-2, Software Revenue Recognition,
Statement of Position 81-1, Accounting for Performance of
Construction-Type and Certain Production Type Contracts, Staff Accounting
Bulletins No. 101 and No. 104, Revenue Recognition in Financial
Statements, and other applicable revenue recognition guidance and
interpretations. Accordingly, revenue is recognized when all four of the
following criteria are met: (a) persuasive evidence that an arrangement
exists; (b) delivery of the products and/or services has occurred;
(c) the selling price is both fixed and determinable; and
(d) collectability is reasonably assured.





We
generally recognize product revenue, including sales to distributors and sales
under sales-type leases, upon shipment of product. We recognize services revenue
when services have been provided and collection of invoiced amounts is
reasonably assured. Routine recurring services include terminal repairs,
help-desk, on-site technician visits, deployment and the provision of supplies.
Amounts received in advance of services being rendered are recorded as deferred
revenue. Revenues from long-term contracts that require substantial performance
of customized software and hardware over an extended period are recorded based
upon the attainment of scheduled performance milestones under the
percentage-of-completion method. Operating lease revenue is recognized monthly
over the lease term. The units leased under operating leases are included in the
balance sheet under “Property, plant and equipment.” We accrue for warranty
costs, sales returns and other allowances at the time of shipment.





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





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





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





34
 Table of Contents





•
            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.





Items
that do not meet these criteria are combined into a single unit of accounting.
If there is objective and reliable evidence of fair value for all units of
accounting, the arrangement consideration is allocated to the separate units of
accounting based on their relative fair values. In cases where there is
objective and reliable evidence of the fair value(s) of the undelivered item(s)
in an arrangement but no such evidence for one or more of the delivered item(s),
the residual method is used to allocate the arrangement consideration. In cases
in which there is not objective and reliable evidence of the fair value(s) of
the undelivered item(s), we either recognize revenue in accordance with SFAS 13
for items that are considered to be leasing under EITF 01-8 and we have
sufficient evidence to make our best estimate of the relative fair value of the
delivered element or defer all revenue for the arrangement until the period in
which the last item is delivered.





We present
revenues net of sales taxes and value-added taxes in our consolidated
statement of operations in accordance with EITF No. 06-3, How Taxes Collected From Customers
and Remitted to Governmental Authorities should Be Presented in the Income
Statements.





Share-Based
Compensation





Prior to
fiscal 2006, we accounted for stock-based compensation plans under the
recognition and measurement provisions of Accounting Principles Board (“APB”)
Opinion No. 25, Accounting for
Stock Issued to Employees. Effective January 1, 2006, we adopted the
provisions of SFAS No. 123 (Revised 2004), Share Based Payment(“SFAS
123R”) issued by the Financial Accounting Standards Board (“FASB”) using the
modified-prospective-transition method. SFAS 123R requires companies to
recognize the fair-value of stock-based compensation transactions in the
statement of income. The fair value of our stock-based awards is estimated at
the date of grant using the Black-Scholes option pricing model. The
Black-Scholes valuation calculation requires us to estimate key assumptions such
as future stock price volatility, expected terms, risk-free rates and dividend
yield. Expected stock price volatility is based on the historical volatility of
our stock. We also use historical data to estimate option exercises and employee
terminations within the valuation model. The expected term of options granted is
derived from an analysis of historical exercises and remaining contractual life
of stock options, and represents the period of time that options granted are
expected to be outstanding. The risk-free rate is based on the U.S. Treasury
yield curve in effect at the time of grant. We have never paid cash dividends,
and do not currently intend to pay cash dividends, and thus have assumed a 0%
dividend yield. If our actual experience differs significantly from the
assumptions used to compute our share-based compensation expense, or if
different assumptions had been used, we may have recorded too much or too little
share-based compensation expense. In addition, we are required to estimate the
expected forfeiture rate of our stock grants and only recognize the expense for
those shares expected to vest. If the actual forfeiture rate is materially
different from our estimate, our share-based compensation expense could be
materially different. For stock options with graded vesting terms, we recognize
compensation expense over the requisite service period on the accelerated method
in accordance with FASB Interpretation No. 28, Accounting for Stock Appreciation
Rights and other Variable Stock Option Award Plans, rather than the
straight-line method. We had approximately $2.2 million of total unrecognized
compensation expense related to stock options at December 31, 2008 that is
expected to be recognized over a weighted-average period of one year. See Note
13 to our consolidated financial statements included herein for a further
discussion on stock-based compensation.





The fair
value of our restricted stock grants is based on the fair market value of our
common stock on the date of grant.





Allowance
for Doubtful Accounts





Payment
terms for product and service trade receivables generally range from 30 to
90 days depending on the circumstances of each order or service contract.
Payment on trade receivables from long-term contracts is generally received
within four months of the milestone approval date. Any payments not received
within the agreed upon due date are considered past due.





35
 Table of Contents





We
maintain an allowance for doubtful accounts for estimated losses resulting from
the inability of our customers to make required payments. Such allowance is
computed based upon a specific customer account review of larger customers and
balances past due as well as a general reserve against individually smaller
accounts receivable balances. Our assessment of our customers’ ability to pay
generally includes direct contact with the customer, investigation into
customers’ financial status, as well as consideration of customers’ payment
history with us. If we determine, based on our assessment, that it is more
likely than not that our customers will be unable to pay, we will charge off the
account receivables to the allowance for doubtful accounts.





Sales-Type
Leases





Certain
product sales made under a capital lease arrangement are recorded as a
sales-type lease in accordance with SFAS 13. Lease contract
receivables represent the total lease payments to be received reduced by lease
payments already collected. Sales-type lease revenues consist of the initial
sale of the product shipped and the interest and maintenance elements of the
lease payments as they are earned. An allowance for estimated uncollectible
sales-type lease receivables at an amount sufficient to provide adequate
protection against losses in our sales-type lease portfolio is recorded. The
allowance is determined principally on the basis of historical loss experience
and management’s assessment of the credit quality of the sales-type lease
customer base. If loss rates increase or customer credit conditions deteriorate,
the allowance for uncollectible sales-type leases may need to be increased.
Unearned income, including an interest and maintenance element, is the amount by
which the original sum of the lease contract receivable exceeds the fair value
of the equipment sold. The interest element is amortized to lease income over
the lease in a manner that produces a constant rate of return. The maintenance
element is amortized on a straight-line basis over the lease term. Recognition
of the interest and maintenance income did not exceed 10% of our net revenues in
2008, 2007 or 2006.





Inventories





Inventories
are stated at the lower of cost or market. Cost is computed using standard cost,
adjusted for absorption of manufacturing variances, which approximates actual
cost, on a first-in, first-out basis. Reserves for estimated excess and/or
obsolete inventory are recorded on a product or part level basis based upon
historical usage and future demand and establish a new cost basis for the
respective item. For components not yet billed to us by our third-party contract
manufacturers, contingent liabilities are recorded by component based on the
likelihood of our ultimate usage of the components.





Product
Warranty





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





Legal
Contingencies





In the
ordinary course of business, we are involved in legal proceedings involving
contractual and employment relationships, product liability claims, intellectual
property rights, and a variety of other matters. We record contingent
liabilities resulting from asserted and unasserted claims against us, when it is
probable that a liability has been incurred and the amount of the loss is
estimable. Estimating probable losses requires analysis of multiple factors, in
some cases including judgments about the potential actions of third-party
claimants and courts. Therefore, actual losses in any future period are
inherently uncertain. Currently, we do not believe any of our pending legal
proceedings or claims will have a material impact on our financial position,
results of operations or cash flows. However, if actual or estimated probable
future losses exceed our recorded liability for such claims, we would
record additional charges as other expense during the period in which the actual
loss or change in estimate occurred.




36
 Table of Contents





Foreign
Currency


Assets
and liabilities of subsidiaries operating outside the United States with a
functional currency other than U.S. dollars are translated into U.S. dollars
using year-end exchange rates. Revenue, costs and expenses are translated at the
average exchange rates in effect during the year. Foreign currency translation
gains and losses are included as a component of accumulated other comprehensive
loss.





For
subsidiaries operating outside the United States where the functional currency
is U.S. dollars, monetary assets and liabilities denominated in local currency
are remeasured at year-end exchange rates whereas non-monetary assets, including
inventories and property, plant and equipment, are reflected at historical
rates. Revenue, costs and expenses are translated at the average exchange rates
in effect during the year. Any gains or losses from foreign currency
remeasurement are included in foreign currency loss on our consolidated
statements of operation. During the years ended December 31, 2008, 2007,
and 2006, we recorded net gains (losses) on remeasurement of $(2.8
million), $1.9 million and $0, respectively. For the same periods, we
recorded net gains (losses) on transactions denominated in foreign
currencies of $1.0 million, $(3.6) million and $(0.7) million, respectively.
These amounts are included in the results of operations.





Income
Taxes





Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities from
a change in tax laws (including rates) is recognized in income in the period
that includes the enactment date. See Note 16 to the consolidated financial
statements regarding the valuation reserve against our deferred tax
assets.





We do not
provide for federal income taxes on the undistributed earnings of our
international subsidiaries because earnings are reinvested and, in the opinion
of management, will continue to be reinvested indefinitely.





Overview of Financial
Results





The
following overview highlights certain key events and factors impacting our
financial performance over the past three years.





Year 2008
Overview





On April
1, 2008, we completed our acquisition of TeT for approximately $149.4 million in
cash. TeT was a leading provider of secure card payment solutions in some of
Europe’s largest markets, including France, Germany, Spain and the United
Kingdom. With the acquisition, Hypercom became one of the largest providers of
electronic payment solutions and services in Western Europe, solidifying our
position as the third largest provider globally.





Net
revenue for the twelve months ended December 31, 2008 was $437.3 million, a
51.0% increase over the twelve months ended December 31, 2007. The primary
reason for the increase was due to our acquisition of TeT on April 1, 2008 which
accounted for the majority of the increase. In addition, we have seen
a strong increase in demand for our countertop and multilane products in the
U.S., as well as an increase in our service business in Brazil.





Product
gross profit was 31.6% for the twelve months ended December 31, 2008, compared
to 27.7% for the twelve months ended December 31, 2007. Product gross profit
increase is principally due to the result of higher gross margin on TeT product
sales, changes in product mix for countertop, mobile, and multilane products, as
well as efficiencies gained from transitioning to contract manufacturing during
the first half of 2008. We expect to see continued efficiencies gained from our
move to a contract manufacturing model in the future, although actual results
may be materially different than our expectations.





During
the twelve months ended December 31, 2008, we incurred a net loss of $85.4
million ($1.60 per share), which was principally due to the expense related to
our evaluation of goodwill and long-lived assets that resulted in the
recognition of asset impairment charges totaling $67.8 million. These charges
were primarily related to our acquisition of TeT on April, 1, 2008. Additional
expenses related to contingent liabilities recorded for potential commitments to
purchase potentially excess and obsolete inventory at our third party contract
manufacturer, the cost moving to outsourcing of manufacturing, acquisition
expenses, integration expenses, amortization and interest incurred related to
our acquisition of TeT all added to the net loss for the year.




37
 Table of Contents




Year
2007 Overview




For 2007,
we recorded a net loss of $7.5 million ($0.14 per share) on revenues of $289.5
million. Revenues for 2007 increased by 16.5% over 2006 revenues of $248.6
million. Products revenue increased $15.1 million or 7.9% over 2006 due to gains
achieved principally in SEMEA, as well as the Americas with an increase within
this segment in Mexico, the Caribbean and Central America (“MCCA”), offset by
declines in North America. The increases in product revenue resulted principally
from gains in mobile and multi-lane products. Services revenue increased $25.9
million or 45.2% over 2006 principally due to the acquisition of TPI in late
December 2006 and of ACG in February 2007 (noted below), which contributed an
incremental $2.3 million and $16.5 million, respectively, and the billing and
collection of past service contract fees of $4.6 million, the costs of which
were written off in 2004 when acceptance of the billing and collection was
deemed to be doubtful. In addition, we experienced growth in our two significant
service operations in the Americas segment due to higher volume type services in
Brazil and an increased installed terminal base in Mexico.




The net
loss in 2007 was principally the result of $8.0 million increase in our
inventory reserves primarily related to non-PCI compliant products and
components and restructuring activities to reconfigure our global sales and
marketing organizations, as well as the outsourcing of manufacturing and
consolidation of software, repairs and maintenance functions globally. These
activities included the following:




•
            Outsourcing
      our manufacturing requirements to a third-party contract manufacturer,
      including supply chain, production, assembly, and testing previously
      performed in Shenzhen, China and in Atibaia, Brazil. Transitioning of our
      entire manufacturing operations in Shenzhen, China to third-party
      manufacturing partner locations, which commenced in 2007 and was expected
      to be completed in 2008.





•
            Shut
      down of manufacturing operations in Atibaia, Brazil in accordance with our
      plans to cease negative margin terminal sales. This activity was completed
      during the third quarter of 2007;





•
            Consolidating
      global software development activities to Singapore, Latvia, and India,
      and reducing similar activities previously performed in the U.S. and
      Sweden. The consolidation of global development activities was completed
      in 2007;





•
            Relocating
      U.S. service and repair operations from Phoenix, Arizona to Hermosillo,
      Mexico, which was completed in 2007;
and





•
            Reorganizing
      and reducing the manufacturing and operations management team in Phoenix,
      Arizona consistent with the move to third-party contract manufacturing,
      which commenced in 2007 and was expected to continue during
      2008.




As a
result of these actions, we incurred charges of $2.9 million during 2007 of
which $0.6 million of cost is in the Americas segment, $0.8 million in the
Asia-Pacific segment, $0.4 million in the SEMEA segment and $1.1 million in
shared cost centers. These costs are exclusive of any reversals of stock based
compensation. We expect additional costs associated with these and other related
activities that will take place during the first and second quarters of 2008 to
approximate $1.5 million. The estimated costs are based on planned activities
and circumstances known by us as of the filing of the 2007 Annual Report on Form
10-K. However, due to the inherent risk of the activities being undertaken, we
cannot provide assurance that these estimated additional costs will not exceed
$1.5 million.





In
February 2007, we acquired the assets of ACG, a provider of installation,
technical support and help desk services for point of sale equipment in
Australia for $12 million. The acquisition builds on our existing card payment
terminal business in Australia and expands our service business footprint in the
Asia-Pacific marketplace, providing merchant support for all vendors’ point of
sale terminals in Australia as well as a business platform for potential
expansion throughout the region.


38
 Table of Contents




In June
2007, we completed the sale of our headquarters facilities located in Phoenix,
Arizona, for a gross sales price of $16.3 million. We recorded a gain of $3.8
million on the sale in the second quarter of 2007. We have entered into a
long-term operating lease for our new headquarters with annual net rentals
approximating $1.1 million commencing in March 2008 and concluding in
approximately 7.75 to 10 years, depending on whether we elect to terminate the
lease after the initial 7.75 years.





Year
2006 Overview




For 2006,
we recorded net income of $7.0 million ($0.13 per diluted share) on revenues of
$248.6 million. Revenues for 2006 increased by 1.4% over 2005 revenues of $245.2
million. Products revenue gains were achieved in Central and Eastern Europe,
Russia and the Commonwealth of Independent States, Middle East and Africa, as
well as Mexico and South America from increased sales of our Optimum T2100
product. We experienced declines in the multilane sector in North America due to
the completion of a significant order in the first half of 2006 as well as the
effects of transitioning from a direct to indirect sales model for that product
line; and we experienced declines in our Pacific region due to reduction in
product volume at a large customer in Australia and a slow down in the New
Zealand market and EMV migration. Our service revenues increased by 4.1% in 2006
to $57.3 million principally from gains in Brazil due to new service contract
awards, including servicing competitor products, as well as increased terminal
sales, which were put under existing service contracts.





The
return to profit in 2006 from losses in 2005 and 2004 resulted from favorable
impacts of actions taken after our comprehensive 2005 business review (see Note
4 to our consolidated financial statements included herein) (the “2005 Business
Review”), which improved profitability. These actions resulted in a lower cost
structure, a streamlined product line, an increase in revenues from newer 32-bit
products and the establishment of a global product marketing
group.





As of
December 31, 2006, we had $1.4 million remaining in liabilities associated with
the 2005 Business Review compared to $5.3 million at December 31, 2005. During
2006, $1.6 million of the $5.3 million was reversed out through earnings as a
result of customers opting out of a particular warranty program and a change in
severance benefits paid out. The remaining liability balance at December 31,
2006 relates to a particular warranty matter in Australia of $0.8 million where
we expect to replace certain faulty units in 2007 and the balance of an idle
facility charge of $0.6 million expected to be paid out through
2011.





We also
experienced a favorable impact of a gain on the sale of real property in Hong
Kong and had a net positive contribution from interest income less interest
expense and foreign exchange losses.





In
December 2006, we acquired the assets of TPI, which resulted in a charge of $1.0
million related to acquired in-process research and development. While this
acquisition is expected to contribute significantly toward both our product and
services offerings, the contribution in 2006 was not
material.





Our cash
and short-term investments amounted to $81.6 million as of December 31, 2006.
This balance decreased from December 31, 2005 due to the acquisition of TPI, use
of cash in operations, and our purchase of additional treasury
shares.





39
 Table of Contents





Comparison
of Years Ended December 31, 2008 and 2007





2008
                  
                  
                  % of
                    Revenue
                  
                  
                  2007
                  
                  
                  % of
                    Revenue
                  
                  
                  Dollar
                    Change(Amounts
      in thousands, except share and per share data)Net
      revenue:Products
                  
                  $
                  321,111
                  
                  
                  
                  73.4
                  %
                  
                  $
                  206,360
                  
                  
                  
                  71.3
                  %
                  
                  $
                  114,751Services
                  
                  
                  116,199
                  
                  
                  
                  26.6
                  %
                  
                  
                  83,167
                  
                  
                  
                  28.7
                  %
                  
                  
                  33,032Total
      net revenue
                  
                  
                  437,310
                  
                  
                  
                  100.0
                  %
                  
                  
                  289,527
                  
                  
                  
                  100.0
                  %
                  
                  
                  147,783Costs
      of revenue:Products
                  
                  
                  219,653
                  
                  
                  
                  68.4
                  %
                  
                  
                  149,787
                  
                  
                  
                  72.6
                  %
                  
                  
                  69,866Services
                  
                  
                  89,770
                  
                  
                  
                  77.3
                  %
                  
                  
                  64,734
                  
                  
                  
                  77.8
                  %
                  
                  
                  25,036Amortization
      of purchased intangible assets
                  
                  
                  3,075
                  
                  
                  
                  0.7
                  %
                  
                  
                  327
                  
                  
                  
                  0.1
                  %
                  
                  
                  2,748Total
      costs of revenue
                  
                  
                  312,498
                  
                  
                  
                  71.5
                  %
                  
                  
                  214,848
                  
                  
                  
                  74.2
                  %
                  
                  
                  97,650Gross
      profit:Products
                  
                  
                  101,458
                  
                  
                  
                  31.6
                  %
                  
                  
                  56,573
                  
                  
                  
                  27.4
                  %
                  
                  
                  44,885Services
                  
                  
                  26,429
                  
                  
                  
                  22.7
                  %
                  
                  
                  18,433
                  
                  
                  
                  22.2
                  %
                  
                  
                  7,996Amortization
      of purchased intangible assets
                  
                  
                  (3,075
                  )
                  
                  
                  -0.7
                  %
                  
                  
                  (327
                  )
                  
                  
                  -0.1
                  %
                  
                  
                  (2,748
                  )Total
      gross profit
                  
                  
                  124,812
                  
                  
                  
                  28.5
                  %
                  
                  
                  74,679
                  
                  
                  
                  25.8
                  %
                  
                  
                  50,133Operating
      expenses:Research
      and development
                  
                  
                  46,107
                  
                  
                  
                  10.6
                  %
                  
                  
                  28,753
                  
                  
                  
                  9.9
                  %
                  
                  
                  17,354Selling,
      general and administrative
                  
                  
                  81,954
                  
                  
                  
                  18.7
                  %
                  
                  
                  59,964
                  
                  
                  
                  20.7
                  %
                  
                  
                  21,990Impairment
      of goodwill and intangible assets
                  
                  
                  67,798
                  
                  
                  
                  15.5
                  %
                  
                  
                  -
                  
                  
                  
                  0.0
                  %
                  
                  
                  67,798Amortization
      of purchased intangible assets
                  
                  
                  5,678
                  
                  
                  
                  1.3
                  %
                  
                  
                  502
                  
                  
                  
                  0.2
                  %
                  
                  
                  5,176Gain
      on sale of real property
                  
                  
                  -
                  
                  
                  
                  0.0
                  %
                  
                  
                  (3,796
                  )
                  
                  
                  -1.3
                  %
                  
                  
                  3,796Total
      operating expenses
                  
                  
                  201,537
                  
                  
                  
                  46.1
                  %
                  
                  
                  85,423
                  
                  
                  
                  29.5
                  %
                  
                  
                  116,114Loss
      from continuing operations
                  
                  
                  (76,725
                  )
                  
                  
                  -17.6
                  %
                  
                  
                  (10,744
                  )
                  
                  
                  -3.7
                  %
                  
                  
                  (65,981
                  )Interest
      income
                  
                  
                  1,466
                  
                  
                  
                  0.4
                  %
                  
                  
                  3,954
                  
                  
                  
                  1.4
                  %
                  
                  
                  (2,488
                  )Interest
      expense
                  
                  
                  (6,822
                  )
                  
                  
                  -1.6
                  %
                  
                  
                  (122
                  )
                  
                  
                  -0.1
                  %
                  
                  
                  (6,700
                  )Foreign
      currency loss
                  
                  
                  (1,821
                  )
                  
                  
                  -0.4
                  %
                  
                  
                  (1,685
                  )
                  
                  
                  -0.6
                  %
                  
                  
                  (136
                  )Other
      income (expense)
                  
                  
                  191
                  
                  
                  
                  0.0
                  %
                  
                  
                  (25
                  )
                  
                  
                  0.0
                  %
                  
                  
                  216Non-operating
      income (expense)
                  
                  
                  (6,986
                  )
                  
                  
                  -1.6
                  %
                  
                  
                  2,122
                  
                  
                  
                  0.7
                  %
                  
                  
                  (9,108
                  )Loss
      before income taxes and discontinued operations
                  
                  
                  (83,711
                  )
                  
                  
                  -19.2
                  %
                  
                  
                  (8,622
                  )
                  
                  
                  -3.0
                  %
                  
                  
                  (75,089
                  )Income
      tax provision
                  
                  
                  (1,211
                  )
                  
                  
                  -0.3
                  %
                  
                  
                  (478
                  )
                  
                  
                  -0.1
                  %
                  
                  
                  (733
                  )Loss
      before discontinued operations
                  
                  
                  (84,922
                  )
                  
                  
                  -19.5
                  %
                  
                  
                  (9,100
                  )
                  
                  
                  -3.1
                  %
                  
                  
                  (75,822
                  )Income
      (loss) from discontinued operations
                  
                  
                  (481
                  )
                  
                  
                  -0.1
                  %
                  
                  
                  1,623
                  
                  
                  
                  0.5
                  %
                  
                  
                  (2,104
                  )Net
      loss
                  
                  $
                  (85,403
                  )
                  
                  
                  -19.6
                  %
                  
                  $
                  (7,477
                  )
                  
                  
                  -2.6
                  %
                  
                  $
                  (77,926
                  )Basic
      and diluted income (loss) per share:Income
      (loss) before discontinued operations
                  
                  $
                  (1.59
                  )
                  
                  
                  
                  
                  
                  $
                  (0.17
                  )Income
      (loss) from discontinued operations
                  
                  
                  (0.01
                  )
                  
                  
                  
                  
                  
                  
                  0.03Basic
      and diluted income per share
                  
                  $
                  (1.60
                  )
                  
                  
                  
                  
                  
                  $
                  (0.14
                  )





40
 Table of Contents





Net
Revenue





Net
revenue increased approximately $147.8 million or 51.0% in 2008 compared to
2007. This increase was comprised of an increase of $114.8 million or 55.6% in
product revenue, and $33.0 million or 39.7% in services
revenue.




Of the
$114.8 million increase in products revenue during 2008, $109.9 million is
attributable to the acquisition of TeT. Excluding the additional TeT product
revenue, the increase in products revenue of $4.9 million is a result of
increases in unattended sales in SEMEA and Asia-Pacific of $3.2
million.  Other increases in revenue were due primarily to increases
in multi-lane sales in the Americas and NEMEA of $5.3 million offset primarily
by decreases in mobile sales in the Americas and SEMEA of $4.5
million.





Of the
$33.0 million increase in services revenue during 2008, the majority is
attributable to the acquisition of TeT.  Other areas of changes in the
service revenue were due to growth in our service operations due to higher
volume type services in Brazil of $6.1 million offset by a decline of $5.0
million in Mexico as the result of the loss of a significant service contract
whereby our customer was acquired and changed their outsource
strategy.  Offsetting this net increase was the billing and collection
of past service contract fees in Brazil during 2007 of $4.6
million.  This collection did not re-occur during
2008.





Cost of Revenue
and Gross Profit





Costs
of revenue include the costs of raw materials, manufacturing and service labor,
overhead and subcontracted manufacturing costs, telecommunication cost,
inventory valuation provisions, as well as loan loss provisions with respect to
sales-type leases included in continuing operations.  Costs of revenue
also include amortization of certain intangible assets. Total gross profit as a
percent of revenue increased to 28.5% during 2008 from 25.8% during
2007.   Amortization expense included in cost of revenue
increased by $2.7 million or 840.4% in 2008 compared to 2007 due to the
acquisition of TeT on April 1, 2008.





Products
Gross Profit





Product
gross profit excluding amortization was 31.6% in 2008 compared to 27.4% in 2007.
The product gross profit increase is principally due to higher gross margins on
TeT product sales, changes in product mix for countertop, mobile, and multilane
products, as well as efficiencies gained from transitioning to contract
manufacturing during the first half of 2008. Offsetting some of those gains in
margin in 2008 were costs associated with the shut down of our China
manufacturing plant totaling approximately $2.5 million and excess inventory
contingencies of approximately $4.2 million related to excess components at our
third-party contract manufacturers. We expect to see continued efficiencies
gained from our move to a contract manufacturing model in the future, although
actual results may be materially different than our expectations. In addition,
gross profit in 2007 was negatively impacted by approximately $9.6 million of
one off charges for inventory not in compliance with industry security standards
as well as other costs to begin the transition to contract
manufacturing.





Services
Gross Profit





Services
gross profit excluding amortization was 22.7% in 2008 compared to 22.2% in 2007.
Services gross profit during 2007 was impacted by the collection of service
contract fees in Brazil of $4.6 million that had no associated costs, as all
costs had been written off in 2004 due to uncertainties regarding realization.
Excluding this collection at 100% margin, the services gross profit was 17.6% in
2007.  The increase in the gross profit percentage from 2007 to 2008,
excluding the service contract fees in Brazil, is principally due to the
acquisition of TeT and improved cost controls in Brazil during 2008. Offsetting
these increases were decreases in gross profit in our Mexico and Australian
service businesses.





Operating
Expenses





Research and development —
Research and development expenses consist mainly of software and hardware
engineering costs and the cost of development personnel.  Research and
development expense increased approximately $17.4 million or 60.4% in 2008
compared to 2007, primarily related to the acquisition of TeT. Excluding TeT,
research and development expense decreased $5.5 million from 2007 to 2008,
primarily due to the re-prioritization of projects of $2.6 million, lower
consulting fees of $1.1 million and lower salaries, bonus and severance of $2.8
million.  Research and development expenses as a percent of revenue
were 10.6% in 2008 compared to 9.9% in 2007.  The increase as a
percentage of revenue is due to the acquisition of TeT and the research and
development expenditures needed to support the maintenance of two product
lines.  We expect these product lines to converge over time and to
synergize our research and development efforts.


41
 Table of Contents




Selling, general and
administrative — Sales and
marketing expenses, administrative personnel costs, and facilities operations
make up the selling, general and administrative expenses. Selling, general and
administrative expense increased approximately $22.0 million or 36.7% in
2008 compared to 2007, primarily related to the acquisition of
TeT. Excluding TeT, selling, general and administrative expense would have
increased by $1.4 million, primarily due to an increase in professional fees of
$1.8 million principally from legal expenses, increase in salary of $1.2 million
principally from Human Resources and Information Technology headcount, increase
in depreciation of $0.7 million and commissions of $0.8 million.  These
were offset by decreases in bad debt expense of $2.2 million and bonus of $1.1
million.  As a percent of revenue, selling, general and administrative
expense was 18.7% for 2008 and 20.7% for 2007.  This decrease was
primarily due to operating expense synergies related to the acquisition of
TeT.


Impairment of goodwill and
intangible assets—
During fourth-quarter 2008, we concluded that the current economic environment
and the significant declines in our share price compared to our net book value
represented significant adverse events, and therefore, we evaluated our goodwill
and long-lived assets for impairment as of December 31, 2008.  Our
evaluation of goodwill and long-lived assets resulted in the recognition of
asset impairment charges totaling $67.8 million for 2008, primarily related to
our acquisition of TeT on April, 1, 2008.





Amortization of purchased
intangibles—
Amortization of purchased intangibles expense increased approximately $5.2
million or 1031% in 2008 compared to 2007, primarily related to the acquisition
of TeT and the amortization of our purchased intangible
assets.





Gain on sale of real
property—
During the second quarter of 2007, we completed the sale of our former
headquarters facilities located in Phoenix, Arizona, for a sale price of $16.3
million. We recorded a gain of $3.8 million on the sale in the second quarter of
2007. There were no such sales during 2008.





Interest income,
interest expense, and foreign currency





We
recognized $1.5 million in interest income in 2008 compared to $4.0 million in
2007. This decrease is principally attributable to lower average cash, cash
equivalent, and short-term investment balances in 2008 compared to 2007 due to
the acquisition of TeT.  We incurred interest expense of $6.8 million
in 2008 compared to $0.1 million in 2007. The increase in interest expense is
primarily due to the acquisition financing of TeT. Approximately $4.6 million of
interest expense was converted to principal in accordance with the
agreement.  Foreign currency losses totaled $1.8 million in 2008
compared with $1.7 million in 2007. The increase in foreign currency expense is
principally attributable to net unfavorable movements of currencies not hedged
and a general increase in hedged exposure increasing the direct cost of
hedging.




Income tax
expense





Income
tax expense for federal, state and foreign taxes was $1.2 million and $0.5
million for the years ended 2008 and 2007, respectively.  The increase
in income tax expense was due to taxable income in our NEMEA and SEMEA segments
and taxable income in Brazil which by law could not be offset against prior net
operating loss carryforwards.




During
2008, we continued to provide a valuation allowance on substantially all of our
deferred tax assets. That valuation allowance is subject to reversal in future
years at such time that the benefits are actually utilized or the operating
profits in the U.S. become sustainable at a level that meets the recoverability
criteria under SFAS No. 109, Accounting for Income Taxes(“SFAS 109”). Due to our net operating loss position and our valuation
allowance against our deferred tax assets, the consolidated effective tax rates
for 2008 and 2007 are not meaningful.





42
 Table of Contents




Comparison
of Years Ended December 31, 2007 and 2006


2007
                        
                        
                        % of
                          Revenue
                        
                        
                        2006
                        
                        
                        % of
                          Revenue
                        
                        
                        Dollar
                          Change(Amounts
      in thousands, except share and per share data)Net
      revenue:Products
                        
                        $
                        206,360
                        
                        
                        
                        71.3
                        %
                        
                        $
                        191,286
                        
                        
                        
                        77.0
                        %
                        
                        $
                        15,074Services
                        
                        
                        83,167
                        
                        
                        
                        28.7
                        %
                        
                        
                        57,279
                        
                        
                        
                        23.0
                        %
                        
                        
                        25,888Total
      net revenue
                        
                        
                        289,527
                        
                        
                        
                        100.0
                        %
                        
                        
                        248,565
                        
                        
                        
                        100.0
                        %
                        
                        
                        40,962Costs
      of revenue:Products
                        
                        
                        149,787
                        
                        
                        
                        72.6
                        %
                        
                        
                        117,756
                        
                        
                        
                        61.6
                        %
                        
                        
                        32,031Services
                        
                        
                        64,734
                        
                        
                        
                        77.8
                        %
                        
                        
                        41,784
                        
                        
                        
                        72.9
                        %
                        
                        
                        22,950Amortization
      of purchased intangible assets
                        
                        
                        327
                        
                        
                        
                        0.1
                        %
                        
                        
                        -
                        
                        
                        
                        0.0
                        %
                        
                        
                        327Total
      costs of revenue
                        
                        
                        214,848
                        
                        
                        
                        74.2
                        %
                        
                        
                        159,540
                        
                        
                        
                        64.2
                        %
                        
                        
                        55,308Gross
      profit:Products
                        
                        
                        56,573
                        
                        
                        
                        27.4
                        %
                        
                        
                        73,530
                        
                        
                        
                        38.4
                        %
                        
                        
                        (16,957
                        )Services
                        
                        
                        18,433
                        
                        
                        
                        22.2
                        %
                        
                        
                        15,495
                        
                        
                        
                        27.1
                        %
                        
                        
                        2,938Amortization
      of purchased intangible assets
                        
                        
                        (327
                        )
                        
                        
                        -0.1
                        %
                        
                        
                        -
                        
                        
                        
                        0.0
                        %
                        
                        
                        (327
                        )Total
      gross profit
                        
                        
                        74,679
                        
                        
                        
                        25.8
                        %
                        
                        
                        89,025
                        
                        
                        
                        35.8
                        %
                        
                        
                        (14,346
                        )Operating
      expenses:Research
      and development
                        
                        
                        28,753
                        
                        
                        
                        9.9
                        %
                        
                        
                        27,706
                        
                        
                        
                        11.1
                        %
                        
                        
                        1,047Selling,
      general and administrative
                        
                        
                        59,964
                        
                        
                        
                        20.7
                        %
                        
                        
                        60,105
                        
                        
                        
                        24.2
                        %
                        
                        
                        (141
                        )Amortization
      of purchased intangible assets
                        
                        
                        502
                        
                        
                        
                        0.2
                        %
                        
                        
                        1,000
                        
                        
                        
                        0.4
                        %
                        
                        
                        (498
                        )Gain
      on sale of real property
                        
                        
                        (3,796
                        )
                        
                        
                        -1.3
                        %
                        
                        
                        (2,953
                        )
                        
                        
                        -1.2
                        %
                        
                        
                        (843
                        )Total
      operating expenses
                        
                        
                        85,423
                        
                        
                        
                        29.5
                        %
                        
                        
                        85,858
                        
                        
                        
                        34.5
                        %
                        
                        
                        (435
                        )Income
      (loss) from continuing operations
                        
                        
                        (10,744
                        )
                        
                        
                        -3.7
                        %
                        
                        
                        3,167
                        
                        
                        
                        1.3
                        %
                        
                        
                        (13,911
                        )Interest
      income
                        
                        
                        3,954
                        
                        
                        
                        1.4
                        %
                        
                        
                        4,758
                        
                        
                        
                        1.9
                        %
                        
                        
                        (804
                        )Interest
      expense
                        
                        
                        (122
                        )
                        
                        
                        0.0
                        %
                        
                        
                        (1,072
                        )
                        
                        
                        -0.4
                        %
                        
                        
                        950Foreign
      currency loss
                        
                        
                        (1,685
                        )
                        
                        
                        -0.6
                        %
                        
                        
                        (699
                        )
                        
                        
                        -0.3
                        %
                        
                        
                        (986
                        )Other
      income (expense)
                        
                        
                        (25
                        )
                        
                        
                        0.0
                        %
                        
                        
                        (71
                        )
                        
                        
                        0.0
                        %
                        
                        
                        46Non-operating
      income
                        
                        
                        2,122
                        
                        
                        
                        0.7
                        %
                        
                        
                        2,916
                        
                        
                        
                        1.2
                        %
                        
                        
                        (794
                        )Income
      (loss) before income taxes and discontinued operations
                        
                        
                        (8,622
                        )
                        
                        
                        -3.0
                        %
                        
                        
                        6,083
                        
                        
                        
                        2.4
                        %
                        
                        
                        (14,705
                        )Income
      tax provision
                        
                        
                        (478
                        )
                        
                        
                        -0.1
                        %
                        
                        
                        (1,346
                        )
                        
                        
                        -0.5
                        %
                        
                        
                        868Income
      (loss) before discontinued operations
                        
                        
                        (9,100
                        )
                        
                        
                        -3.1
                        %
                        
                        
                        4,737
                        
                        
                        
                        1.9
                        %
                        
                        
                        (13,837
                        )Income
      from discontinued operations
                        
                        
                        1,623
                        
                        
                        
                        0.5
                        %
                        
                        
                        2,233
                        
                        
                        
                        0.9
                        %
                        
                        
                        (610
                        )Net
      income (loss)
                        
                        $
                        (7,477
                        )
                        
                        
                        -2.6
                        %
                        
                        $
                        6,970
                        
                        
                        
                        2.8
                        %
                        
                        $
                        (14,447
                        )Basic
      and diluted income (loss) per share:Income
      (loss) before discontinued operations
                        
                        $
                        (0.17
                        )
                        
                        
                        
                        
                        
                        $
                        0.09Income
      (loss) from discontinued operations
                        
                        
                        0.03
                        
                        
                        
                        
                        
                        
                        
                        0.04Basic
      and diluted income per share
                        
                        $
                        (0.14
                        )
                        
                        
                        
                        
                        
                        $
                        0.13


43
 Table of Contents


Net
Revenue


Net
revenue increased approximately $41.0 million or 16.5% in 2007 compared to 2006.
This increase was comprised of an increase of $15.1 million or 7.9% in product
revenue, and $25.9 million or 45.2% in services revenue.





The
increase in product revenue of $15.1 million was principally the result of gains
achieved in SEMEA, as well as the Americas with an increase within this segment
in MCCA, offset by declines in North America. The increases in product revenue
resulted principally from gains in mobile and multilane
products.





The
increase in service revenues of $25.9 million was principally the result of two
recent acquisitions, one in North America in late December 2006 and one in
Australia in February 2007, which contributed an incremental $18.8 million and
the billing and collection of past service contract fees of $4.6 million, the
costs of which were written off in 2004 when acceptance of the billing and
collection was deemed to be doubtful. In addition, we experienced growth in our
two significant service operations in the Americas segment due to higher volume
type services in Brazil and an increased installed terminal base in
Mexico.




Cost of Revenue
and Gross Profit





Costs of
revenue include the costs of raw materials, manufacturing and service labor,
overhead and subcontracted manufacturing costs, telecommunication cost,
inventory valuation provisions, as well as loan loss provisions with respect to
sales-type leases included in continuing operations.





Product
Gross Profit





Product
gross profit was 27.4% in 2007 compared to 38.4% in 2006. Product gross profit
was impacted by $12.9 million in charges related to the restructuring activities
and transition costs to contract manufacturing. The remaining decline in the
total gross profit percentage from 2006 to 2007 resulted principally from
changes in product mix in countertop, mobile, and multilane products resulting
in lower gross profit percentages partially offset by increases in
volume.




Services
Gross Profit





Services
gross profit was 22.2% in 2007 compared to 27.1% in 2006. Services gross profit
was impacted by the collection of service contract fees of $4.6 million in
Brazil that had no associated costs, as all costs had been written off in 2004
due to uncertainties regarding realization. Excluding this collection at 100%
margin, the services gross profit was 17.6%. Gross margin related to services
has declined principally due to competitive pressures and changes in service mix
in our key service market of Brazil. Although management has taken certain
actions to address improving gross margins, the impact of pricing and service
mix in Brazil will likely continue to have a negative impact in our service
margins for the foreseeable future. The services gross margin was also impacted
by charges primarily related to a contract loss with a European customer and
severances related to cost reductions in Brazil. Partially offsetting these
charges were the high margin sale of a software license, as well as the effect
of performing additional services in Mexico without a corresponding increase in
the cost base.




Operating
Expenses





Research and development —
Research and development expenses consist mainly of software and hardware
engineering costs and the cost of development personnel. Research and
development expenses as a percent of revenue was 9.9% in 2007 compared to 11.1%
in 2006, while overall research and development expenditures have increased $1.0
million. Research and development remained consistent from year to year with the
primary focus on new product development. Research and development expenses for
2007 include severance and other restructuring related charges of $0.5 million,
while 2006 includes severance and other termination costs of $1.5
million.





44
 Table of Contents





In
December 2006, we acquired the assets of TPI and approximately $1.0 million
related to acquired in-process research and development. This amount was written
off at the date of the acquisition in accordance with FASB Interpretation No. 4,
Applicability of FASB
Statement No. 2 Business Combinations Accounted for by the Purchase Method(“FIN 4”) as there were no alternative future uses. Management determined
the value assigned to this asset through various methods including assistance
from a third party valuation firm in valuing the TPI business. As of the
valuation date, there were seven projects that were considered to be in process.
The values of the projects were determined based on analyses of estimated cash
flows to be generated by the products that are expected to result from the
in-process projects. These cash flows were estimated by forecasting total
revenues expected from these products then deducting appropriate operating
expenses, cash flow adjustments and contributory asset returns to establish a
forecast of the net return on the in-process technology. These net returns were
substantially reduced to take into account the time value of money and the risks
associated with the inherent difficulties and uncertainties in achieving
commercial readiness. We believe the assumptions used in valuing in-process
research and development are reasonable, but are inherently uncertain. As of
December 31, 2007 all of the in-process research and development projects
associated with the purchase of TPI had been completed.





Selling, general and
administrative — Sales and marketing expenses, administrative personnel
costs, and facilities operations make up the selling, general and administrative
expenses. As a percent of revenue, selling, general and administrative expense
was 20.7% for 2007 and 24.2% for 2006. Selling, general and administrative
expenses of $60.0 million for 2007 include $1.7 million of merger and
acquisition costs, executive severance and collection costs related to the
Brazil service contract fees, offset by reductions in performance based stock
compensation and favorable litigation settlements. Selling, general and
administrative expenses of $60.1 million for 2006, include $0.5 million in
payroll tax charges associated primarily with former employees in China, offset
by $1.2 million in net favorable tax settlements in Brazil, reductions in
severance related liabilities and accounts receivable allowance recoveries.
Selling expenses have decreased principally due to the recognition of the
effects of the cost reductions put in place as part of the 2005 Business Review,
as well as the 2007 restructuring.





During
the second quarter of 2007, we completed the sale of our then headquarters
facilities located in Phoenix, Arizona, for a sale price of $16.3 million. We
recorded a gain of $3.8 million on the sale in the second quarter of
2007.





During
the third quarter of 2006, we sold our portion of an office building in Hong
Kong and we recorded a $3.0 million gain on the sale.





Interest income,
interest expense, and foreign currency





We
recognized $4.0 million in interest income in 2007, compared to $4.8 million in
2006. This decrease is principally attributable to lower average cash, cash
equivalent, and short-term investments balances maintained throughout 2007
compared to 2006, offset partially by increasing yields on our cash investments.
We incurred interest expense of $0.1 million in 2007 compared to $1.1 million in
2006. The decrease in interest expense is primarily due to the pay-off of
mortgage debt in April 2006, as well as the non-recurrence of interest penalties
incurred in 2006 on China payroll tax charges. Foreign currency losses totaled
$1.7 million in 2007, compared with $0.7 million in 2006. The increase in
foreign currency expense is principally attributable to net unfavorable
movements of currencies not hedged and a general increase in hedged exposure
increasing the direct cost of hedging.




Income tax
expense





Income
tax expense for federal, state and foreign taxes was $0.5 million and $1.3
million for the years ended 2007 and 2006, respectively. Income tax expense is
principally comprised of income taxes associated with our profitable foreign
locations.





During
2007, we continued to provide a valuation allowance on substantially all of our
deferred tax assets. That valuation allowance is subject to reversal in future
years at such time that the benefits are actually utilized or the operating
profits in the U.S. become sustainable at a level that meets the recoverability
criteria under SFAS 109.


45
 Table of Contents




Due to our net
operating loss position and our valuation allowance against our deferred tax
assets, the consolidated effective tax rates for 2007 and 2006 are not
meaningful.


Segment
and Geographic Information





During
the fourth quarter of 2008, we initiated new organizational changes, made
enhancements to our internal management reporting, and began to report
information pertaining to four business segments as follows: (i) Americas, (ii)
Northern EMEA (“NEMEA”), (iii) Southern EMEA (“SEMEA”) and (iv) Asia-Pacific.
The Americas segment consists of the U.S., Canada, Mexico, the Caribbean,
Central America, and South America. The NEMEA segment consists of Belgium,
Sweden, Austria, and Germany. The SEMEA segment consists of France, Spain, the
U.K., Western and Central Eastern Europe, Russia, Hungary, the Middle East, and
Africa. The Asia-Pacific segment consists of China, Hong Kong, Singapore,
Thailand, Australia and New Zealand. As required in SFAS No. 131 Disclosures about Segments of an
Enterprise and Related Information(“SFAS 131”), unless deemed
impractical to do so, prior year segment data has been restated for comparative
purposes.





Our Chief
Operating Decision Maker (“CODM”), as defined in SFAS 131, has been identified
as our CEO and Chairman of the Company. The CODM’s has access to discrete
financial information regarding the aforementioned segments revenues, gross
margins (using fully burdened manufacturing costs), direct local service costs,
direct operating expenses consisting of expenses directly associated with the
business segment; and indirect operating expenses consisting of global shared
cost centers, such as global R&D, marketing, corporate general and
administrative expenses, and stock-based compensation.  Our operations
are managed by Managing Directors (“MD’s”) for each region which report directly
to the CEO.  These MD’s have responsibility for all business
activities and combined operating results of their regions and these individuals
are compensated and evaluated based on the performance (Direct Trading Profit)
of their overall region (Americas, NEMEA, SEMEA, and Asia-Pacific).





Our
product revenues relate primarily to the sale of POS terminals, peripheral
devices, and transaction networking devices. Our services revenues are comprised
of asset management services, trusted transaction services and payment
solutions, as described in Part I to this Annual Report on Form 10-K.
No other type of revenue exceeded 10% of our consolidated net revenues in 2008,
2007 or 2006.





46
 Table of Contents





Year
      Ended December 31,2008
                                                
                                                
                                                % of
                                                  Revenue
                                                
                                                
                                                2007
                                                
                                                
                                                % of
                                                  Revenue
                                                
                                                
                                                2006
                                                
                                                
                                                % of
                                                  RevenueNet
      revenue:Americas
                                                
                                                $
                                                160,039
                                                
                                                
                                                
                                                36.6
                                                %
                                                
                                                $
                                                158,539
                                                
                                                
                                                
                                                54.8
                                                %
                                                
                                                $
                                                145,575
                                                
                                                
                                                
                                                58.6
                                                %NEMEA
                                                
                                                
                                                93,800
                                                
                                                
                                                
                                                21.5
                                                %
                                                
                                                
                                                16,400
                                                
                                                
                                                
                                                5.7
                                                %
                                                
                                                
                                                7,671
                                                
                                                
                                                
                                                3.1
                                                %SEMEA
                                                
                                                
                                                132,581
                                                
                                                
                                                
                                                30.3
                                                %
                                                
                                                
                                                64,984
                                                
                                                
                                                
                                                22.4
                                                %
                                                
                                                
                                                59,805
                                                
                                                
                                                
                                                24.1
                                                %Asia-Pacific
                                                
                                                
                                                50,890
                                                
                                                
                                                
                                                11.6
                                                %
                                                
                                                
                                                49,604
                                                
                                                
                                                
                                                17.1
                                                %
                                                
                                                
                                                35,514
                                                
                                                
                                                
                                                14.3
                                                %Total
      net revenue
                                                
                                                $
                                                437,310
                                                
                                                
                                                
                                                100.0
                                                %
                                                
                                                $
                                                289,527
                                                
                                                
                                                
                                                100.0
                                                %
                                                
                                                $
                                                248,565
                                                
                                                
                                                
                                                100.0
                                                %Operating
      income:Americas
                                                
                                                $
                                                5,973
                                                
                                                
                                                
                                                1.4
                                                %
                                                
                                                $
                                                11,257
                                                
                                                
                                                
                                                3.9
                                                %
                                                
                                                $
                                                33,367
                                                
                                                
                                                
                                                13.4
                                                %NEMEA
                                                
                                                
                                                (10,051
                                                )
                                                
                                                
                                                (2.3
                                                )%
                                                
                                                
                                                4,357
                                                
                                                
                                                
                                                1.5
                                                %
                                                
                                                
                                                1,915
                                                
                                                
                                                
                                                0.8
                                                %SEMEA
                                                
                                                
                                                (18,554
                                                )
                                                
                                                
                                                (4.2
                                                )%
                                                
                                                
                                                9,024
                                                
                                                
                                                
                                                3.1
                                                %
                                                
                                                
                                                12,500
                                                
                                                
                                                
                                                5.0
                                                %Asia-Pacific
                                                
                                                
                                                1,384
                                                
                                                
                                                
                                                0.3
                                                %
                                                
                                                
                                                8,769
                                                
                                                
                                                
                                                3.0
                                                %
                                                
                                                
                                                12,168
                                                
                                                
                                                
                                                4.9
                                                %Shared
      Cost Centers
                                                
                                                
                                                (55,477
                                                )
                                                
                                                
                                                (12.7
                                                )%
                                                
                                                
                                                (44,151
                                                )
                                                
                                                
                                                (15.2
                                                )%
                                                
                                                
                                                (56,783
                                                )
                                                
                                                
                                                (22.8
                                                )%Total
      operating income (loss)
                                                
                                                $
                                                (76,725
                                                )
                                                
                                                
                                                (17.5
                                                )%
                                                
                                                $
                                                (10,744
                                                )
                                                
                                                
                                                (3.7
                                                )%
                                                
                                                $
                                                3,167
                                                
                                                
                                                
                                                1.3
                                                %








Comparison
of Years Ended December 31, 2008 and 2007





Net
Revenue





Americas
net revenue increased in 2008 compared to 2007, principally as a result of
increases in countertop and multilane products in North America and increases in
service revenues in Brazil.  Offsetting these increases were declines
in countertop revenue in Brazil, as we discontinued local manufacturing and
sales activities in the third quarter of 2007, as well as a collection of $4.6
million from a past service contract that had been previously written off during
2007.  This did not re-occur in 2008.  NEMEA and SEMEA net
revenue increased due to the acquisition of TeT during the
year.





Operating
Income





Americas
operating income increased in 2008 compared to 2007, principally as a result of
increased product sales activity in North America and service revenue in
Brazil.  In addition, 2007 was negatively impacted by increased
inventory reserves related to excess non-compliant PCI
inventory.  NEMEA and SEMEA operating profit increased in 2008
compared to 2007, principally as a result the acquisition of TeT during the year
which was more than offset by the write-down of goodwill and intangible assets
within these regions.   Asia-Pacific operating income decreased
in 2008 compared to 2007, principally as a result of the sales mix and declines
in our Australian service margins.  In addition, the operating income
decreased due to the write-down of goodwill within this
region.





Shared
cost center expenses increased in 2008 compared to 2007 principally as a result
of an increase in costs incurred for due diligence and acquisition related
expenses of $8.3 million and global research and development of $4.7 million
related to our acquisition of TeT and stock based compensation of $1.6 million
offset by decreases in operations management of $4.6 million as a result of
our transition to third-party contract manufacturing during
2008.





47
 Table of Contents


C omparison
of Years Ended December 31, 2007 and 2006
 
 Net
Revenue


Americas
net revenue increased in 2007 compared to 2006, principally as a result of
increases in MCCA and Brazil due to countertop and mobile terminal and services
revenue, including a collection of $4.6 million from a past service contract
that had been written off in 2004, as well as gains in North America multilane
revenue, partially offset by declines in North America countertop and
unattended revenue. SEMEA net revenue increased in 2007 compared to 2006
principally as a result of increased mobile, countertop and unattended product
revenue throughout the region. Asia-Pacific net revenue increased in 2007
compared to 2006, principally as a result of the addition of ACG, the Australian
service business acquired in February 2007, which contributed $16.5 million
of revenue in 2007.




Operating
Income





Americas
operating income decreased in 2007 compared to 2006, principally as a result of
the following:





•
            increased
      inventory reserves related to excess non-compliant PCI inventory, together
      with an allocation of costs associated with our transition to contract
      manufacturing;





•
            service
      costs related to the move of our North American repair center to
      Hermosillo, Mexico;





•
            the
      decline in North American revenue that typically carries a higher gross
      margin and the replacement of that revenue with lower gross margin, newer
      product sales in Mexico and Brazil;
and





•
            certain
      larger multilane sales at lower
margins.





SEMEA
operating income increased in 2007 compared to 2006, principally as a result of
an increase in revenues with a slight improvement in gross margin due to
increased volumes and mix of higher margin products, offset by increased
inventory reserves for excess network equipment, a warranty settlement,
write-off of capitalized software, a lost contract with a European customer and
an allocation of costs associated with our transition to contract manufacturing.
Additionally, operating expenses did not increase despite the increase in
revenues, improving sales leverage and operating income. Asia-Pacific operating
income decreased in 2007 compared to 2006, principally as a result of a decline
in higher gross margin revenue in Thailand and New Zealand year-over-year, a
decline in high gross margin networking equipment revenue, as well as increases
in certain direct operating expenses related to increases in sales management
and bad debt expenses, partially offset by improvements in gross margin due to
the acquisition of ACG.





Shared
cost center expenses decreased in 2007 compared to 2006, principally as a result
of favorable impacts from a gain on sale of real property, litigation
settlements and reversal of stock basedcompensation, partially
offset by costs incurred for due diligence efforts and executive severance
charges.





Liquidity and Capital
Resources




We have
historically financed our operations primarily through cash generated from
operations and occasionally from borrowings under a line of credit and/or other
debt facilities. During 2008, our primary source of cash was cash generated by
our operations, as well as cash received from a debt instrument used to finance
the TeT acquisition.  Our ability to service our long-term debt, to
remain in compliance with the various restrictions and covenants contained in
our debt agreements and to fund working capital, capital expenditures and
business development efforts, will depend on our ability to generate cash from
operating activities which in turn is subject to, among other things, future
operating performance, as well as general economic, financial, competitive,
legislative, regulatory and other conditions, some of which may be beyond our
control.  We have available to us, upon compliance with certain
conditions, a revolving credit facility, less any letters of credit outstanding
under the sub-line of the revolving credit facility.  Outstanding
availability under our revolving credit facility for cash and outstanding
letters of credit was $10.9 million as of December 31,
2008.  Outstanding letters of credit under this revolving line of
credit at December 31, 2008, was $3.1 million.





48
 Table of Contents





Cash flows from
continuing operations




Cash
provided by operating activities is net income (loss) from continuing operations
adjusted for non-cash items and changes in operating assets and liabilities.
Cash provided by continuing operating activities totaled $22.2 million for 2008,
compared to cash provided by operating activities of $13.2 million for 2007, a
year-over-year increase of $9.0 million. The increase in cash provided by
operations is principally related to changes in operating assets and
liabilities, offset partially by the net loss.




Changes
in operating assets and liabilities and the related impact on our operating cash
flows consist of the following:








2008
                  
                  
                  2007
                  
                  
                  ChangeAccounts
      receivable
                  
                  $
                  5,464
                  
                  
                  $
                  (19,084
                  )
                  
                  $
                  24,548Inventories
                  
                  
                  (7,371
                  )
                  
                  
                  20,683
                  
                  
                  
                  (28,054
                  )Accounts
      payable
                  
                  
                  (4,333
                  )
                  
                  
                  7,623
                  
                  
                  
                  (11,956
                  )Other
                  
                  
                  5,174
                  
                  
                  
                  (4,413
                  )
                  
                  
                  9,587Increase
      (decrease) in operating assets and liabilities
                  
                  $
                  (1,066
                  )
                  
                  $
                  4,809
                  
                  
                  $
                  (5,875
                  )





The net
increase in cash was from improved collection of our accounts receivable,
partially offset by a decrease in accounts payable and other accrued
expenses.  Net cash was negatively impacted due to an increase in
inventory levels, as well as increases in accrued payroll and related expenses,
accrued liabilities primarily from professional services and deferred revenues
primarily due to the TeT
acquisition.





Cash flows used
in investing activities




Cash
flows used in investing activities of $120.0 million consist principally of
capital expenditures for property, plant and equipment of $9.3 million and the
acquisition of TeT during 2008 which resulted in cash expenditures of $115.2
million. This was partially offset by cash provided by the net proceeds from the
sale of short term investments of $4.6 million.





The
capital expenditures were principally for upgrades to computer software and
hardware related to the TeT acquisition, manufacturing tools and equipment
related to new product launches and our move to contract manufacturing, and
expenditures related to outfitting the new corporate
headquarters.  Depending on the global economic environment, we intend
to spend approximately $6 to $9 million over the next twelve months for capital
expenditures related to computer software to further integrate the TeT
acquisition and for manufacturing tools and equipment for new product
launches.





Cash
flows from financing activities





Cash
flows from financing activities of $59.5 million consist principally of the
proceeds of the TeT acquisition debt of $60.0 million, offset by the issuance of
common stock upon the exercise of employee stock options, repayment of long-term
debt, and debt issuance costs.




Projected
liquidity and capital resources





At
December 31, 2008, cash and cash equivalents were $36.0 million and short term
investments were $0.5 million.   The amount of consolidated cash
and short-term investments is subject to intra-month and seasonal fluctuations
and includes balances held by subsidiaries worldwide that are needed to fund
their operations.





49
 Table of Contents





On
January 15, 2008, we entered into a loan agreement that provides for a revolving
credit facility of up to $25 million with the ability to borrow up to $40
million if certain conditions are met. Available borrowings under the loan
agreement are subject to borrowing base calculations based on the value of
eligible inventory and accounts receivable. The loan agreement includes
customary covenants and certain negative covenants prohibiting the occurrence of
certain types of debt, limiting capital expenditures or disposing of assets. The
obligations under the revolving credit facility are secured by the inventory and
accounts receivable of certain of our subsidiaries in the U.S. and the U.K. The
remaining balance of our consolidated assets are unencumbered under the loan
agreement and, if needed, may be used as collateral for additional
debt.





During
the second quarter of 2008, we completed the acquisition of TeT for
approximately $149.4 million in cash, which included a base purchase price of
$120.0 million and approximately $23.6 million of cash and working capital
adjustments. To fund the acquisition, on February 13, 2008, we entered into a
credit agreement (the “Credit Agreement”) with Francisco Partners II, L.P. (“FP
II”). The Credit Agreement provided for a loan of up to $60.0 million to
partially fund the acquisition at closing. The loan under the Credit Agreement
bears interest at 10% per annum, provided that, at our election, interest may be
capitalized and added to the principal of the loan to be repaid at maturity. The
loan was funded by an affiliate of FP II, FP Hypercom Holdco, LLC (the
“Lender”). All amounts outstanding under the Credit Agreement are due four years
from the funding date of March 31, 2008. Based on past performance and current
expectations, we believe that our cash flows from operations and other sources
of liquidity, including borrowings available under our revolving credit facility
or other financing options, will satisfy our working capital needs, capital
expenditures, commitments, and other liquidity requirements associated with our
operations and our TeT acquisition debt requirement through the next 12 months.





We
believe that our cash reserves and short-term investments combined with our loan
agreement and our ability to influence operating cash flows, as well as certain
investing and financing cash outlays, will be sufficient to fund our projected
liquidity and capital resource requirements through 2009. Should operating
results prove unfavorable, we may need to obtain additional capital sources to
meet our short-term liquidity and capital resource
requirements.





Contractual
Obligations




The
following table summarizes our significant contractual obligations at December
31, 2008, and the effect such obligations are expected to have on our liquidity
and cash flows in future periods (dollars in thousands).





Less
      than
                  
                  
                  
                  
                  
                  
                  
                  
                  AfterTotal
                  
                  
                  1 Year
                  
                  
                  1-3 Years
                  
                  
                  3-5 Years
                  
                  
                  5 YearsLong-term
      debt
                  
                  $
                  87,176
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  87,176
                  
                  
                  $
                  -Operating
      leases
                  
                  
                  14,977
                  
                  
                  
                  3,533
                  
                  
                  
                  4,687
                  
                  
                  
                  1,067
                  
                  
                  
                  5,690Minimum
      purchase obligations(1)
                  
                  
                  7,396
                  
                  
                  
                  7,360
                  
                  
                  
                  36
                  
                  
                  
                  -
                  
                  
                  
                  -Total
                  
                  $
                  109,549
                  
                  
                  $
                  10,893
                  
                  
                  $
                  4,723
                  
                  
                  $
                  88,243
                  
                  
                  $
                  5,690





(1)
            Minimum
      purchase obligations include all outstanding obligations to purchase goods
      or services at December 31, 2008 including agreements that are cancelable
      without penalty and agreements, which are enforceable and legally binding.
      We estimate that approximately 98% of the outstanding purchase obligations
      at December 31, 2008 are non-cancelable due to the customized nature of
      the order and the long lead time
requirements.


(2)
            Our
      long-term debt obligation includes principal and accrued interest through
      the maturity of the debt in 2012. This assumes the debt will not be
      prepaid before maturity and the amount presented above reflects this
      estimate.





50
 Table of Contents





Debt
Amendments


On March
31, 2006, we entered into a line of credit agreement with a bank pursuant to
which we had access to a $5.0 million line of credit. Borrowings under the
credit agreement were fully collateralized by short-term investments held in our
investment accounts with the bank. Any borrowings bore interest at a rate set
forth in each promissory note issued at the time of the advance. The credit
agreement contained customary default provisions and was set to expire on March
31, 2008, but was extended to March 31, 2009.


Stock
Repurchase




During
August 2003, the Board authorized a stock repurchase program to allow the
purchase of up to $10.0 million of our common stock. During November 2005, the
Board authorized a new stock repurchase program to purchase up to an additional
$20.0 million of our common stock. During March 2006, we announced the adoption
of a Rule 10b5-1 plan for the repurchase of up to $5.0 million of common stock
pursuant to the terms of an existing repurchase
authorization.




During
2006 and 2005, we purchased 1,346,628 and 1,525,409 shares of our common stock
for $10.7 million and $9.2 million, respectively. There were no treasury stock
repurchases during 2007 and 2008. The repurchased shares were recorded as
treasury stock and resulted in a reduction to stockholder’s equity. As of
December 31, 2007, we had repurchased 2,932,037 shares of common stock at an
average price per share of $6.86 under the share repurchase programs. The timing
and amount of any future repurchases will depend on market conditions and
corporate considerations.





Off-Balance
Sheet Arrangements




As of
December 31, 2008, we did not have any off-balance sheet arrangements, as
defined in Item 303(a)(4)(ii) of SEC Regulation S-K and FASB Interpretation No.
46(R), Consolidation of
Variable Interest Entities, as revised.





2009
Outlook




We
believe that uncertainty around the duration and extent of the global economic
crisis, projected volatility in currency markets, and the decrease in available
credit to both businesses and consumers will make 2009 a challenging year for
most companies around the world.  We also believe our business will be
further challenged by the issues within the banking industry and the general
retail slowdown in North America.  Regardless of these challenges, we
will continue to focus on initiatives to drive toward profitability and to
integrate the TeT acquisition to a common product
platform.   From a competitive landscape, we will continue to see
competitive pressures on a global basis as we and our major competitors try to
maintain and expand our respective market shares. These pressures will generally
serve to decrease average selling prices for certain products within certain
geographies. We intend to continue to offset declines in selling prices with
further cost reductions in our products, as well as continue to differentiate
our product and total electronic payment solution offerings from that of our
competitors.





We will
continue to manage our balance sheet and leverage our working capital to help
meet the objectives of our key initiatives and in response to the global
economic environment for 2009.





Impact
of Recently Issued Accounting Pronouncements





In March
2008, the FASB issued SFAS No. 161, “Disclosures About Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No.
133” (“SFAS 161”). SFAS 161 expands quarterly disclosure requirements in
SFAS No. 133 about an entity’s derivative instruments and hedging activities.
SFAS 161 is effective for fiscal years beginning after November 15, 2008. The
implementation of this standard is not expected to have a material impact on our
consolidated financial position, results of operations or cash
flows





In April
2008, the FASB issued FSP 142-3, “Determination of the Useful Life of
Intangible Assets” (“FSP 142-3”). FSP 142-3 amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS 142. FSP
142-3 is effective for fiscal years beginning after December 15, 2008. The
implementation of this standard is not expected to have a material impact on our
consolidated financial position, results of operations or cash
flows





51
 Table of Contents





In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS 162”). SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements. SFAS 162 is effective 60 days following the
SEC’s approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, “The Meaning of Present Fairly in Conformity with Generally
Accepted Accounting Principles”. The implementation of this standard is not
expected to have a material impact on our consolidated financial position,
results of operations or cash flows.





In
December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8, “Disclosures by Public Entities
(Enterprises) about Transfers of Financial Assets and Interests in Variable
Interest Entities” (“FSP 140-4 and 46(R)-8”). FSP 140-4 and 46(R)-8
requires additional disclosures about transfers of financial assets and
involvement with variable interest entities. FSP 140-4 and 46(R)-8 is effective
for the first reporting period (annual or interim) ending after December 15,
2008. The implementation of this standard is not expected to have a material
impact on our consolidated financial position, results of operations or cash
flows





In
December 2008, the FASB issued FSP 132(R)-1, “Employers’ Disclosures about
Postretirement Benefit Plan Assets” (“FSP 132(R)-1”). FSP 132(R)-1
provides guidance on an employer’s disclosures about plan assets of a defined
benefit pension or other postretirement plan. FSP 132(R)-1 is effective for
fiscal years ending after December 15, 2009. We are currently assessing the
impact of this FSP on our consolidated financial position, results of operations
or cash flows.





In
December 2007, FASB issued SFAS No. 141(R), Business Combinations(“SFAS
141R”), which replaces SFAS No. 141, Business Combinations(“SFAS
141”). SFAS 141R applies to all transactions and other events in which one
entity obtains control over one or more other businesses. The standard requires
the fair value of the purchase price, including the issuance of equity
securities, to be determined on the acquisition date. SFAS 141R requires an
acquirer to recognize the assets acquired, the liabilities assumed, and any
noncontrolling interests in the acquiree at the acquisition date, measured at
their fair values as of that date, with limited exceptions specified in the
statement. SFAS 141R requires acquisition costs to be expensed as incurred and
restructuring costs to be expensed in periods after the acquisition date.
Earn-outs and other forms of contingent consideration are to be recorded at fair
value on the acquisition date. Changes in accounting for deferred tax asset
valuation allowances and acquired income tax uncertainties after the measurement
period will be recognized in earnings rather than as an adjustment to the cost
of the acquisition. SFAS 141R generally applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008 with early
adoption prohibited. We are currently evaluating the impact that the
implementation of SFAS 141R may have on our consolidated financial position,
results of operations or cash flows.





In
December 2007, FASB issued SFAS No. 160, Non-controlling Interests in
Consolidated Financial Statements—an amendment of ARB No. 51(“SFAS
160”). SFAS 160 requires non-controlling interests or minority interests to be
treated as a separate component of equity, not as a liability or other item
outside of permanent equity. Upon a loss of control, the interest sold, as well
as any interest retained, is required to be measured at fair value, with any
gain or loss recognized in earnings. Based on SFAS 160, assets and liabilities
will not change for subsequent purchase or sale transactions with
non-controlling interests as long as control is maintained. Differences between
the fair value of consideration paid or received and the carrying value of
noncontrolling interests are to be recognized as an adjustment to the parent
interest’s equity. SFAS 160 is effective for fiscal year beginning on or after
December 15, 2008. Earlier adoption is prohibited. The implementation of this
standard is not expected to have a material impact on our consolidated financial
position, results of operations or cash flows.





In
September 2006, FASB issued SFAS No. 157, Fair Value Measurements
(“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring
fair value in GAAP and expands disclosures about fair value measurements. SFAS
157 is generally effective for years beginning after December 15, 2007. SFAS 157
was effective for us on January 1, 2008; however, in February 2008, the FASB
issued FSP No. SFAS 157-2 (FSP 157-2), which delayed the effective date of SFAS
157 for non-financial assets and non-financial liabilities, except for items
that are recognized or disclosed at fair value in the financial statements on a
recurring basis, for one year. The adoption of SFAS 157 on January 1, 2008 with
respect to our financial assets and liabilities did not have a material impact
on its consolidated financial position, results of operations or cash flows.
We intend to adopt the provisions of SFAS 157 with respect to our
non-financial assets and non-financial liabilities effective January 1, 2009
pursuant to the requirements of FSP 157-2.  The implementation of this
standard is not expected to have a material impact on our consolidated
financial position, results of operations or cash flows.


52
 Table of Contents




In
February 2007, FASB issued SFAS No. 159, Fair Value Option for Financial
Assets and Financial Liabilities—including an amendment of FASB
Statement No. 115(“SFAS 159”), which permits entities to choose to
measure many financial instruments and certain other items at fair value. If
elected, SFAS 159 is effective beginning January 1, 2008. Under SFAS 159, a
company may elect to use fair value to measure eligible items at specified
election dates and report unrealized gains and losses on items for which the
fair value option has been elected in earnings at each subsequent reporting
date. Eligible items include, but are not limited to, accounts and loans
receivable, available-for-sale and held-to-maturity securities, equity method
investments, accounts payable, guarantees, issued debt and firm commitments. We
elected not to measure any additional financial instruments or other items at
fair value as of January 1, 2008 in accordance with SFAS 159.





Item7A. Quantitative and Qualitative
Disclosures About Market Risk





At
December 31, 2008, our cash equivalent investments are primarily in money market
accounts and certificates of deposit and are reflected as cash equivalents
because all maturities are within 90 days from date of purchase. Our interest
rate risk with respect to existing investments is limited due to the short-term
duration of these arrangements and the yields earned, which approximate current
interest rates for similar investments.





Our
investment portfolio, consisting of fixed income securities, was $0.5 million as
of December 31, 2008. These securities, like all fixed income instruments, are
subject to interest rate risk and will decline in value if market interest rates
increase. If market rates were to increase immediately and uniformly by 10% from
the levels of December 31, 2008, the decline in the fair value of our investment
portfolio would not be material given that our discount notes have fixed rates.
Additionally, we have the ability to hold our fixed income investments until
maturity and, therefore, we would not expect to recognize any material adverse
impact in income or cash flows.





We are
exposed to financial market risks, including changes in interest rates and
foreign currency exchange rates in connection with our international operations
and markets. Nevertheless, the fair value of our investment portfolio or related
income would not be significantly impacted by a 100 basis point increase or
decrease in interest rates, due primarily to the short-term nature of the major
portion of our investment portfolio.





The
majority of our revenue and expenses are denominated in Euros and other non-US
denominated currencies. As a policy, we hedge the translation of our net
investment in foreign subsidiaries with functional currencies other than local
in an attempt to neutralize the effect of translation gains or losses in the
statement of operations. Financial hedging instruments are limited by our policy
to foreign-currency forward or option contracts and foreign-currency debt. We
enter into forward or option contracts with our bank or other financial
institutions to accomplish our hedging strategy. At December 31, 2008, we had
foreign currency forward contracts outstanding in the amount of $13.0 million,
denominated principally in the Brazilian real, Thai baht, Mexican peso and
Australian dollar, with smaller contracts for the British pound and Chilean
peso. Gains and losses on these contracts principally consist of mark-to-market
adjustments, which are recorded in earnings as foreign currency gains or losses.
As a result of significant variations in the currency markets during last half
of 2008 and the potential for a material cash impact in settling of forward
contracts, we may elect to suspend our hedging activities in relation to foreign
currency forward contracts which could materially impact our non-cash foreign
currency gain or loss.





We do not
purchase or hold any such derivative financial instruments for the purpose of
speculation or arbitrage. See “Item 1A, Risk Factors — International operations pose
additional challenges and risks that if not properly managed could adversely
affect our financial results” elsewhere in this Annual Report on Form
10-K.





At
present, all of our long-term debt obligations are at a fixed interest rate over
the term of the agreement and there are no borrowings under our revolving credit
facility at December 31, 2008; however, as of March 10, 2009, we have $2.5
million outstanding against the line of credit at an interest rate of
3.25%.





During
the normal course of business, we are routinely subjected to a variety of market
risks, examples of which include, but are not limited to, interest rate
movements and foreign currency fluctuations, as we discuss in this Item 7A, and
collectability of accounts receivable. We continuously assess these risks and
have established policies and procedures to protect against the adverse effects
of these and other potential exposures. Although we do not anticipate any
material losses in these risk areas, no assurance can be made that material
losses will not be incurred in these areas in the future.




53
 Table of Contents




Item8.Financial Statements and
Supplementary Data





The
financial statements and supplementary data required by Regulation S-X are
included in Part IV, Item 15 of this Annual Report on Form 10-K.





Item9.Changes in and
Disagreements with Accountants on Accounting and Financial
Disclosure





None.





Item9A.Controls and
Procedures





Evaluation
of Disclosure Controls and Procedures





We
maintain disclosure controls and procedures designed to ensure information
required to be disclosed in the reports we file or submit under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed,
summarized and timely reported as specified in the SEC’s rules and forms. They
are also designed to ensure that such information is accumulated and
communicated to our management, including our Chief Executive Officer, interim
Chief Financial Officer, and Chief Accounting Officer, as appropriate, to allow
timely decisions regarding required disclosure.





Our
management, with the participation of our Chief Executive Officer, interim Chief
Financial Officer, and Chief Accounting Officer, has evaluated the effectiveness
of our disclosure controls and procedures (as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period
covered by this report. Our evaluation did not include the TeT companies that
were acquired during the fiscal year ended December 31, 2008, since, under SEC
guidelines, acquisitions do not have to be evaluated until 12 months after the
acquisition date. Based on such evaluation, our Chief Executive Officer, interim
Chief Financial Officer, and Chief Accounting Officer have concluded that, as of
the end of such period, our disclosure controls and procedures were effectively
designed to ensure that information we are required to disclose in reports we
file or submit under the Exchange Act is (1) recorded, processed, summarized and
reported timely as specified in SEC rules and forms and is (2) accumulated and
communicated to our management, including our certifying officers, as
appropriate to allow timely decisions regarding required
disclosures.





Changes
in Internal Control over Financial Reporting





There was
no change in our internal control over financial reporting, as defined in the
Exchange Act Rules 13a-15(f) and 15d-15(f), that occurred during our most
recently completed fiscal quarter that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.





Management’s
Report on Internal Control Over Financial Reporting





Our
management is responsible for establishing and maintaining adequate internal
control over Hypercom’s financial reporting, as defined in the Exchange Act
Rules 13a-15(f) and 15d-15(f). Under the supervision of our Chief Executive
Officer, interim Chief Financial Officer, and Chief Accounting Officer, and with
the participation of other management, Hypercom conducted an evaluation of the
effectiveness of internal control over financial reporting as of December 31,
2008 based on the framework established by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”) entitled Internal Control — Integrated
Framework.Our evaluation did not include the TeT companies that were
acquired during the fiscal year ended December 31, 2008, since, under SEC
guidelines, acquisitions do not have to be evaluated until 12 months after the
acquisition date.





Based on
this evaluation, our management concluded that, as of December 31, 2008, our
internal control over financial reporting was effective.







54
 Table of Contents




Report
of Independent Registered Public Accounting Firm





The Board
of Directors and Stockholders of Hypercom Corporation





We have
audited Hypercom Corporation’s internal control over financial reporting as of
December 31, 2008, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). Hypercom Corporation’s management is responsible
for maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting
included in the accompanying Management’s Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion on the
company’s internal control over financial reporting based on our
audit.





We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.





A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable


Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
 
 In our
opinion, Hypercom Corporation maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2008, based onthe COSO criteria.
 
 We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Hypercom
Corporation as of December 31, 2008 and 2007, and the related consolidated
statements of operations, stockholders’ equity, and cash flows for each of the
three years in the period ended December 31, 2008 of Hypercom Corporation, and
the schedule listed in Item 15.a.(2), and our report dated March 12, 2009
expressed an unqualified opinion thereon.
 
 /s/
      Ernst & Young LLP
 
 Phoenix,
Arizona
 March 12,
2009


55
 Table of Contents





Item9B.Other
Information





None.





PART
III





Item10.Directors, Executive
Officers and Corporate Governance





The
information required by this item regarding our directors, audit committee and
compliance with Section 16 of the Exchange Act is incorporated by reference from
the information contained in our 2009 Proxy Statement (which will be filed with
the SEC no later than 120 days following our fiscal year end). The information
required by Item 10 regarding our executive officers appears under Item 4 of
Part I of this Annual Report.





We have
adopted a code of ethics that applies to all directors, officers and employees
of our company, including our Chief Executive Officer, Chief Accounting Officer,
or persons performing similar functions. A copy of our Code of Ethics is
available on our website at www.hypercom.com. We intend
to satisfy the disclosure requirements under Item 10 of Form 8-K in the event of
an amendment to, or a waiver from, a provision of our Code of Ethics that
applies to our Chief Executive Officer, Chief Accounting Officer, or persons
performing similar functions, by disclosing such information on our
website.





Item11.Executive
Compensation





Information
required in response to this item is incorporated by reference to our 2009
Annual Meeting Proxy Statement, which will be filed with the SEC within 120 days
following our fiscal year end.





Item12.Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder
Matters





Information
required in response to this item is incorporated by reference from our 2009
Annual Meeting Proxy Statement, which will be filed with the SEC within 120 days
following our fiscal year end.





Item13.Certain Relationships
and Related Transactions, and Director Independence






Item14.Principal Accountant
Fees and Services
 
 Information
required in response to this item is incorporated by reference from our 2009
Annual Meeting Proxy Statement, which will be filed with the SEC within 120 days
following our fiscal year end.


56
 Table of Contents





PART
IV





Item15.Exhibits and Financial
Statement Schedules





a. The
following documents are filed as part of this Annual Report on Form
10-K:





(1)
Audited Consolidated Financial Statements


Reports
of Independent Registered Public Accounting Firm


Consolidated
Balance Sheets at December 31, 2008 and 2007


Consolidated
Statements of Operations for the years ended December 31, 2008, 2007, and
2006


Consolidated
Statements of Stockholders’ Equity for the years ended December 31, 2008, 2007,
and 2006


Consolidated
Statements of Cash Flows for the years ended December 31, 2008, 2007, and
2006


Notes to
Consolidated Financial Statements





(2)
Financial Statement Schedule


Schedule
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)





b. The
Exhibit Index is included following the Financial Statement
Schedule.





57
 Table of Contents





SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this Annual Report to be signed on our
behalf by the undersigned, thereunto duly authorized.





HYPERCOM
      CORPORATIONBy:
                /s/ Philippe TartavullPhilippe
      TartavullChief
      Executive Officer and
President





Date:
March 16, 2009





Pursuant
to the requirements of the Securities Exchange Act of 1934, this Annual Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on March 16, 2009.





Signature
              
              TitlePrincipal
      Executive, Financial andAccounting
      Officers/s/ Philippe Tartavull
              
              Chief
      Executive Officer, President andPhilippe
      Tartavull
              
              Director/s/ Robert M. Vreeland
              
              Interim
      Chief Financial OfficerRobert
      M. Vreeland/s/ Shawn Rathje
              
              Chief
      Accounting Officer and CorporateShawn
      Rathje
              
              ControllerDirectors*
              
              DirectorDaniel
      Diethelm*
              
              DirectorJohann
      J. Dreyer*
              
              DirectorKeith
      B. Geeslin*
              
              DirectorIan
      K. Marsh*
              
              DirectorPhillip
      J. Riese*
              
              Chairman
      and DirectorNorman
      Stout





Philippe
Tartavull, by signing his name hereto, does sign and execute this Annual Report
on Form 10-K on behalf of such of the above named directors of the registrant on
this 16th day of
March, 2009, pursuant to the power of attorney executed by each of such
directors filed as Exhibit 24.1 to this Annual Report on Form 10-K.





*By:
              /s/   Philippe
      TartavullAttorney-in-Fact





58
 Table of Contents





REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and Stockholders of Hypercom Corporation





We have
audited the accompanying consolidated balance sheets of Hypercom Corporation as
of December 31, 2008 and 2007, and the related consolidated statements of
operations, stockholders’ equity, and cash flows for each of the three years in
the period ended December 31, 2008.  Our audits also included the
financial statement schedule included in Item 15.a.(2). These financial
statements and schedule are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Hypercom Corporation
at December 31, 2008 and 2007, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
2008, in conformity with U.S. generally accepted accounting principles. Also, in
our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.





We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Hypercom Corporation’s internal control over
financial reporting as of December 31, 2008, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated March 12, 2009
expressed an unqualified opinion thereon.





/s/
      Ernst & Young LLP





Phoenix,
Arizona


March 12,
2009





59
 Table of Contents





HYPERCOM
      CORPORATIONCONSOLIDATED
      BALANCE SHEETSDecember 31,2008
                    
                    
                    2007(Dollars
      in thousands, except share data)ASSETSCurrent
      assets:Cash
      and cash equivalents
                    
                    $
                    35,978
                    
                    
                    $
                    76,925Short-term
      investments
                    
                    
                    499
                    
                    
                    
                    4,988Accounts
      receivable, net of allowance for doubtful accounts of $4,799 and $4,034,
      respectively
                    
                    
                    96,986
                    
                    
                    
                    71,341Current
      portion of net investment in sales-type leases
                    
                    
                    9,915
                    
                    
                    
                    3,751Inventories
                    
                    
                    31,681
                    
                    
                    
                    22,343Prepaid
      expenses and other current assets
                    
                    
                    7,106
                    
                    
                    
                    11,500Deferred
      income taxes
                    
                    
                    1,320
                    
                    
                    
                    497Total
      current assets
                    
                    
                    183,485
                    
                    
                    
                    191,345Property,
      plant and equipment, net
                    
                    
                    26,870
                    
                    
                    
                    17,694Net
      investment in sales-type leases
                    
                    
                    6,105
                    
                    
                    
                    2,220Intangible
      assets, net
                    
                    
                    57,311
                    
                    
                    
                    10,502Goodwill
                    
                    
                    26,715
                    
                    
                    
                    10,224Deferred
      acquisition costs
                    
                    
                    -
                    
                    
                    
                    12,529Other
      long-term assets
                    
                    
                    5,814
                    
                    
                    
                    5,730Total
      assets
                    
                    $
                    306,300
                    
                    
                    $
                    250,244LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
                    
                    $
                    52,929
                    
                    
                    $
                    30,448Accrued
      payroll and related expenses
                    
                    
                    16,619
                    
                    
                    
                    9,889Accrued
      sales and other taxes
                    
                    
                    7,709
                    
                    
                    
                    7,427Product
      warranty liabilities
                    
                    
                    6,597
                    
                    
                    
                    1,754Restructuring
      liabilities
                    
                    
                    7,724
                    
                    
                    
                    1,100Accrued
      other liabilities
                    
                    
                    22,866
                    
                    
                    
                    15,054Deferred
      revenue
                    
                    
                    12,177
                    
                    
                    
                    5,497Deferred
      tax liabilities
                    
                    
                    4,828
                    
                    
                    
                    -Income
      taxes payable
                    
                    
                    5,201
                    
                    
                    
                    519Total
      current liabilities
                    
                    
                    136,650
                    
                    
                    
                    71,688Deferred
      tax liabilities
                    
                    
                    15,999
                    
                    
                    
                    620Long
      term debt, net of discount
                    
                    
                    48,769
                    
                    
                    
                    -Other
      liabilities
                    
                    
                    11,094
                    
                    
                    
                    3,437Total
      liabilities
                    
                    
                    212,512
                    
                    
                    
                    75,745Commitments
      and contingenciesStockholders'
      equity:Common
      stock, $.001 par value; 100,000,000 shares authorized; 53,442,799
      and  53,167,702 shares outstanding at December 31, 2008 and
      2007, respectively
                    
                    
                    57
                    
                    
                    
                    56Additional
      paid-in capital
                    
                    
                    272,869
                    
                    
                    
                    251,034Accumulated
      deficit
                    
                    
                    (139,245
                    )
                    
                    
                    (53,842
                    )Treasury
      stock, 3,162,248 shares (at cost) atDecember 31, 2008
      and  2007.
                    
                    
                    (22,749
                    )
                    
                    
                    (22,749
                    )Accumulated
      other comprehensive loss
                    
                    
                    (17,144
                    )
                    
                    
                    -Total
      stockholders' equity
                    
                    
                    93,788
                    
                    
                    
                    174,499Total
      liabilities and stockholders' equity
                    
                    $
                    306,300
                    
                    
                    $
                    250,244The
      accompanying notes are an integral part of these consolidated financial
      statements.





60
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HYPERCOM
      CORPORATIONCONSOLIDATED
      STATEMENTS OF OPERATIONSYear Ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006(Dollars
      in thousands, except per share data)Net
      revenue:Products
                  
                  $
                  321,111
                  
                  
                  $
                  206,360
                  
                  
                  $
                  191,286Services
                  
                  
                  116,199
                  
                  
                  
                  83,167
                  
                  
                  
                  57,279Total
      net revenue
                  
                  
                  437,310
                  
                  
                  
                  289,527
                  
                  
                  
                  248,565Costs
      of revenue:Products
                  
                  
                  219,653
                  
                  
                  
                  149,787
                  
                  
                  
                  117,756Services
                  
                  
                  89,770
                  
                  
                  
                  64,734
                  
                  
                  
                  41,784Amortization
      of purchased intangible assets
                  
                  
                  3,075
                  
                  
                  
                  327
                  
                  
                  
                  -Total
      costs of revenue
                  
                  
                  312,498
                  
                  
                  
                  214,848
                  
                  
                  
                  159,540Gross
      profit
                  
                  
                  124,812
                  
                  
                  
                  74,679
                  
                  
                  
                  89,025Operating
      expenses:Research
      and development
                  
                  
                  46,107
                  
                  
                  
                  28,753
                  
                  
                  
                  27,706Selling,
      general and administrative
                  
                  
                  81,954
                  
                  
                  
                  59,964
                  
                  
                  
                  60,105Impairment
      of goodwill and intangible assets
                  
                  
                  67,798
                  
                  
                  
                  -
                  
                  
                  
                  -Amortization
      of purchased intangible assets
                  
                  
                  5,678
                  
                  
                  
                  502
                  
                  
                  
                  -In-process
      research and development
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,000Gain
      on sale of real property
                  
                  
                  -
                  
                  
                  
                  (3,796
                  )
                  
                  
                  (2,953
                  )Total
      operating expenses
                  
                  
                  201,537
                  
                  
                  
                  85,423
                  
                  
                  
                  85,858Income
      (loss) from continuing operations
                  
                  
                  (76,725
                  )
                  
                  
                  (10,744
                  )
                  
                  
                  3,167Interest
      income
                  
                  
                  1,466
                  
                  
                  
                  3,954
                  
                  
                  
                  4,758Interest
      expense
                  
                  
                  (6,822
                  )
                  
                  
                  (122
                  )
                  
                  
                  (1,072
                  )Foreign
      currency loss
                  
                  
                  (1,821
                  )
                  
                  
                  (1,685
                  )
                  
                  
                  (699
                  )Other
      income (expense)
                  
                  
                  191
                  
                  
                  
                  (25
                  )
                  
                  
                  (71
                  )Income
      (loss) before income taxes and discontinued operations
                  
                  
                  (83,711
                  )
                  
                  
                  (8,622
                  )
                  
                  
                  6,083Provision
      for income taxes
                  
                  
                  (1,211
                  )
                  
                  
                  (478
                  )
                  
                  
                  (1,346
                  )Income
      (loss) before discontinued operations
                  
                  
                  (84,922
                  )
                  
                  
                  (9,100
                  )
                  
                  
                  4,737Income
      (loss) from discontinued operations
                  
                  
                  (481
                  )
                  
                  
                  1,623
                  
                  
                  
                  2,233Net
      income (loss)
                  
                  $
                  (85,403
                  )
                  
                  $
                  (7,477
                  )
                  
                  $
                  6,970Basic
      income (loss) per share:Income
      (loss) before discontinued operations
                  
                  $
                  (1.59
                  )
                  
                  $
                  (0.17
                  )
                  
                  $
                  0.09Income
      (loss) from discontinued operations
                  
                  
                  (0.01
                  )
                  
                  
                  0.03
                  
                  
                  
                  0.04Basic
      income (loss) per share
                  
                  $
                  (1.60
                  )
                  
                  $
                  (0.14
                  )
                  
                  $
                  0.13Diluted
      income (loss) per share:Income
      (loss) before discontinued operations
                  
                  $
                  (1.59
                  )
                  
                  $
                  (0.17
                  )
                  
                  $
                  0.09Income
      (loss) from discontinued operations
                  
                  
                  (0.01
                  )
                  
                  
                  0.03
                  
                  
                  
                  0.04Diluted
      income (loss) per share
                  
                  $
                  (1.60
                  )
                  
                  $
                  (0.14
                  )
                  
                  $
                  0.13Shares
      used in computing net income (loss) per common share:Basic
                  
                  
                  53,321,154
                  
                  
                  
                  52,927,296
                  
                  
                  
                  53,248,194Diluted
                  
                  
                  53,321,154
                  
                  
                  
                  52,927,296
                  
                  
                  
                  53,965,576The
      accompanying notes are an integral part of these consolidated financial
      statements.





61
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HYPERCOM
      CORPORATIONCONSOLIDATED
      STATEMENTS OF STOCKHOLDERS' EQUITYAND
      COMPREHENSIVE INCOME (LOSS)Additional
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    Accumulated
                    
                    
                    TotalCommon Stock
                    
                    
                    Paid-in
                    
                    
                    Deferred
                    
                    
                    Accumulated
                    
                    
                    Treasury
                    
                    
                    Other
      comprehensive
                    
                    
                    Stockholders'Shares
                    
                    
                    Balance
                    
                    
                    Capital
                    
                    
                    Compensation
                    
                    
                    Deficit
                    
                    
                    Stock
                    
                    
                    Loss
                    
                    
                    Equity(Dollars
      in thousands)Balance
      as of December 31, 2005
                    
                    
                    52,991,959
                    
                    
                    
                    55
                    
                    
                    
                    238,186
                    
                    
                    
                    (2,123
                    )
                    
                    
                    (53,335
                    )
                    
                    
                    (12,009
                    )
                    
                    
                    -
                    
                    
                    
                    170,774Issuance
      of common stock
                    
                    
                    1,439,442
                    
                    
                    
                    1
                    
                    
                    
                    6,650
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    6,651Purchase
      of treasury stock
                    
                    
                    (1,346,628
                    )
                    
                    
                    
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (10,740
                    )
                    
                    
                    -
                    
                    
                    
                    (10,740
                    )Reclassification
      due to the adoption of SFAS 123R
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (2,123
                    )
                    
                    
                    2,123
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Restricted
      common stock issued for compensation, net of forfeitures
                    
                    
                    42,432
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Share-based
      compensation
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    5,276
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    5,276Net
      loss
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    6,970
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    6,970Balance
      as of December 31, 2006
                    
                    
                    53,127,205
                    
                    
                    
                    56
                    
                    
                    
                    247,989
                    
                    
                    
                    -
                    
                    
                    
                    (46,365
                    )
                    
                    
                    (22,749
                    )
                    
                    
                    -
                    
                    
                    
                    178,931Issuance
      of common stock
                    
                    
                    247,163
                    
                    
                    
                    -
                    
                    
                    
                    934
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    934Restricted
      common stock issued for compensation
                    
                    
                    93,334
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Restricted
      common stock forfeitures
                    
                    
                    (300,000
                    )
                    
                    
                    -
                    
                    
                    
                    (1,582
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (1,582
                    )Share-based
      compensation
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    3,693
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    3,693Net
      loss
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (7,477
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (7,477
                    )Balance
      as of December 31, 2007
                    
                    
                    53,167,702
                    
                    
                    
                    56
                    
                    
                    
                    251,034
                    
                    
                    
                    -
                    
                    
                    
                    (53,842
                    )
                    
                    
                    (22,749
                    )
                    
                    
                    -
                    
                    
                    
                    174,499Issuance
      of common stock
                    
                    
                    200,097
                    
                    
                    
                    1
                    
                    
                    
                    666
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    667Restricted
      common stock issued for compensation
                    
                    
                    75,000
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Share-based
      compensation
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    3,413
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    3,413Issuance
      of warrants
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    17,756
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    17,756Comprehensive
      loss:Net
      loss
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (85,403
                    )
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (85,403
                    )Other
      comprehensive loss:
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (17,418
                    )
                    
                    
                    (17,418
                    )Foreign
      currency translation adjustments
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    274
                    
                    
                    
                    274Unfunded
      portion of pension plan obligation
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (102,547
                    )Total
      comprehensive lossBalance
      as of December 31, 2008
                    
                    
                    53,442,799
                    
                    
                    $
                    57
                    
                    
                    $
                    272,869
                    
                    
                    $
                    -
                    
                    
                    $
                    (139,245
                    )
                    
                    $
                    (22,749
                    )
                    
                    $
                    (17,144
                    )
                    
                    $
                    93,788The
      accompanying notes are an integral part of these consolidated financial
      statements.





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HYPERCOM
      CORPORATIONCONSOLIDATED
      STATEMENTS OF CASH FLOWSYear Ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006(Dollars
      in thousands)Cash
      flows from continuing operations:Net
      income (loss) from continuing operations
                  
                  $
                  (84,922
                  )
                  
                  $
                  (9,100
                  )
                  
                  $
                  4,737Adjustments
      to reconcile net income (loss)from continuing operations to net cash
      provided by (used in) operating activities:Depreciation
      and amortization
                  
                  
                  9,887
                  
                  
                  
                  8,204
                  
                  
                  
                  7,872Amortization
      of purchased intangibles
                  
                  
                  8,753
                  
                  
                  
                  829
                  
                  
                  
                  -Interest
      conversion to debt
                  
                  
                  4,613
                  
                  
                  
                  -
                  
                  
                  
                  -Amortization
      of debt issuance costs
                  
                  
                  96
                  
                  
                  
                  -
                  
                  
                  
                  -Impairment
      of goodwill and intangible assets
                  
                  
                  67,798
                  
                  
                  
                  -
                  
                  
                  
                  -Amortization
      of discount on notes payable
                  
                  
                  1,726
                  
                  
                  
                  -
                  
                  
                  
                  -Acquired
      in-process research and development
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,000Amortization
      of discount on short-term investments
                  
                  
                  (61
                  )
                  
                  
                  (844
                  )
                  
                  
                  (1,303
                  )Provision
      (reversal) for doubtful accounts
                  
                  
                  (38
                  )
                  
                  
                  2,115
                  
                  
                  
                  826Provision
      for excess and obsolete inventory
                  
                  
                  4,147
                  
                  
                  
                  8,074
                  
                  
                  
                  2,342Provision
      for warranty and other product charges
                  
                  
                  2,266
                  
                  
                  
                  2,328
                  
                  
                  
                  125Foreign
      currency (gains) losses
                  
                  
                  3,426
                  
                  
                  
                  (2,317
                  )
                  
                  
                  35Gain
      on sale of real property
                  
                  
                  -
                  
                  
                  
                  (3,796
                  )
                  
                  
                  (2,953
                  )Non-cash
      stock-based compensation
                  
                  
                  3,484
                  
                  
                  
                  1,919
                  
                  
                  
                  6,253Non-cash
      write-off of intangibles and other assets
                  
                  
                  458
                  
                  
                  
                  509
                  
                  
                  
                  324Deferred
      income tax provision (benefit)
                  
                  
                  1,673
                  
                  
                  
                  434
                  
                  
                  
                  (530
                  )Changes
      in operating assets and liabilities, net
                  
                  
                  (1,066
                  )
                  
                  
                  4,809
                  
                  
                  
                  (26,463
                  )Net
      cash provided by (used in) operating activities
                  
                  
                  22,240
                  
                  
                  
                  13,164
                  
                  
                  
                  (7,735
                  )Cash
      flows from investing activities:Purchase
      of property, plant and equipment
                  
                  
                  (9,313
                  )
                  
                  
                  (7,481
                  )
                  
                  
                  (6,131
                  )Proceeds
      from the sale of real property
                  
                  
                  -
                  
                  
                  
                  16,250
                  
                  
                  
                  5,190Cash
      paid for acquisitions, net of cash acquired
                  
                  
                  (115,168
                  )
                  
                  
                  (13,075
                  )
                  
                  
                  (8,319
                  )Cash
      deposit for pending acquisition of Thales e-Transactions
      business
                  
                  
                  -
                  
                  
                  
                  (10,000
                  )
                  
                  
                  -Software
      development costs capitalized
                  
                  
                  (57
                  )
                  
                  
                  (1,392
                  )
                  
                  
                  (787
                  )Purchase
      of short-term investments
                  
                  
                  (37,375
                  )
                  
                  
                  (141,006
                  )
                  
                  
                  (295,054
                  )Proceeds
      from the sale or maturity of short-term investments
                  
                  
                  41,925
                  
                  
                  
                  184,090
                  
                  
                  
                  307,080Net
      cash provided by (used in) investing activities
                  
                  
                  (119,988
                  )
                  
                  
                  27,386
                  
                  
                  
                  1,979Cash
      flows from financing activities:Borrowings
      in revolving line of credit
                  
                  
                  6,400
                  
                  
                  
                  -
                  
                  
                  
                  -Repayment
      of bank notes payable and other debt instruments
                  
                  
                  (6,835
                  )
                  
                  
                  (6
                  )
                  
                  
                  (8,364
                  )Debt
      issuance cost
                  
                  
                  (687
                  )
                  
                  
                  (100
                  )
                  
                  
                  -Proceeds
      from long term debt and warrants
                  
                  
                  60,000
                  
                  
                  
                  -
                  
                  
                  
                  -Proceeds
      from issuance of common stock
                  
                  
                  667
                  
                  
                  
                  933
                  
                  
                  
                  6,651Purchase
      of treasury stock
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (10,740
                  )Net
      cash provided by (used in) financing activities
                  
                  
                  59,545
                  
                  
                  
                  827
                  
                  
                  
                  (12,453
                  )Effect
      of exchange rate changes on cash and cash equivalents
                  
                  
                  (3,246
                  )
                  
                  
                  716
                  
                  
                  
                  469Net
      increase (decrease) in cash flow from continuing
operations
                  
                  
                  (41,449
                  )
                  
                  
                  42,093
                  
                  
                  
                  (17,740
                  )Net
      cash provided by operating activities from discontinued
      operations
                  
                  
                  502
                  
                  
                  
                  642
                  
                  
                  
                  3,853Net
      cash provided by investing activities from discontinued
      operations
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  12,137Cash
      and cash equivalents, beginning of year
                  
                  
                  76,925
                  
                  
                  
                  34,190
                  
                  
                  
                  35,940Cash
      and cash equivalents, end of year
                  
                  $
                  35,978
                  
                  
                  $
                  76,925
                  
                  
                  $
                  34,190The
      accompanying notes are an integral part of these consolidated financial
      statements.





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HYPERCOM
CORPORATION


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008





1. Description
of Business





Hypercom
Corporation (“Hypercom”) is one of the largest global providers of complete
electronic payment and transaction solutions and value-added services at
the point-of-transaction. Hypercom designs and sells electronic transaction
terminals, peripheral devices, transaction networking devices, transaction
management systems, application software and information delivery services.
Additionally, Hypercom provides directly, or through qualified contractors,
support and related services that complement and enhance its hardware and
software products. Hypercom’s customers include large domestic and international
financial institutions, electronic payment processors, large retailers,
independent sales organizations (“ISOs”) and distributors as well as companies
in the transportation, healthcare, pre-paid card and quick service restaurant
(“QSR”) industries. Hypercom operates in one business market—electronic payment
products and services.





On April
1, 2008, Hypercom acquired all of the outstanding shares of Thales
e-Transactions SA, Thales e-Transactions GmbH, Thales e-Transactions Ltd, and
Thales e-Transactions España, (collectively, “Thales e-Transactions” or “TeT”)
for $149.4 million.  See Note 3 for additional information related to
this business combination.




Hypercom
is headquartered in Scottsdale, Arizona, where its operations include corporate
administration, product development, sales and marketing, distribution, repairs
management and customer service. Hypercom has sales and support offices in
Australia, Brazil, Belgium, Chile, China, France, Germany, Hong Kong,
Hungary, Latvia, Mexico, Puerto Rico, Russia, Singapore, Spain, Sweden,
Thailand, the United Arab Emirates and the United Kingdom (“U.K.”). These sales
and support offices perform sales, marketing, distribution, customer service and
custom development functions. Hypercom’s primary manufacturing is performed by
third party manufacturing operations located in Germany,
Romania, Poland and Malaysia. Hypercom has global product development
facilities in the U.S., France, Latvia, and
Singapore.





2.
Significant Accounting Policies





Principles
of Consolidation





The
consolidated financial statements include the accounts of Hypercom and its
wholly-owned subsidiaries (collectively, the “Company”). The Company, directly
or indirectly, owns 100% of the outstanding stock of all of its subsidiaries
with the exception of one subsidiary in Thailand. The Company owns a controlling
interest in the Thailand subsidiary and certain nominee shareholders own the
remaining shares. All of the Company’s subsidiaries are included in the
consolidated financial statements, and all significant intercompany accounts and
transactions have been eliminated in consolidation.





Use
of Estimates





The
preparation of the consolidated financial statements in conformity with U.S.
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. The accounting estimates that require
management’s most significant, difficult and subjective judgments include
collectability of accounts receivable; determination of inventory obsolescence;
recoverability of
long-lived assets and goodwill;expected product warranty costs;
recognition and measurement of current and deferred income tax assets and
liabilities; legal and tax contingency accruals; and the reductions to revenue
related to sales returns. The actual results experienced by the Company may
differ from management’s estimates.





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 Table of Contents





Cash
and Cash Equivalents





The
Company considers all investment instruments, including money market accounts
and certificates of deposits, with a remaining maturity of three months or less
when purchased, to be cash equivalents. These investments are stated at cost,
which approximates fair value.





Short-term
Investments





Management
determines the appropriate classification of its investments in marketable debt
and equity securities at the time of purchase. Securities for which the Company
does not have the intent or ability to hold to maturity are classified as
available for sale and are carried at fair value, with the unrealized holding
gains and losses, net of tax, reported in a separate component of stockholders’
equity, if material. On an ongoing basis, the Company evaluates its debt
securities to determine if a decline in fair value is other-than-temporary. When
a decline in fair value is determined to be other-than-temporary, an impairment
charge would be recorded and a new cost basis in the investment is established.
The amortized cost of debt securities in this category is adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization is included in interest income. Realized gains and losses and
interest and dividends on securities are included in interest income. The cost
of securities sold is based upon the specific identification method. Securities
classified as available for sale include both securities due within one year and
securities with maturity dates beyond one year.





Fair Value of Financial
Instruments





The
Company values financial instruments as required by Statement of Financial
Accounting Standards (“SFAS”) No. 115, Accounting for Certain Investments
in Debt and Equity Securities.The carrying amounts of
cash and cash equivalents approximate fair value due to the short maturity of
those instruments. The fair value of marketable securities is determined based
on quoted market prices, which approximate fair value. The fair value of
sales-type leases and long-term obligations is estimated by discounting the
future cash flows required under the terms of each respective lease or debt
agreement by current market rates for the same or similar issues of leases or
debt with similar remaining maturities. The fair value of financial hedge
instruments are based on quotes from brokers using market prices for those or
similar instruments.





Allowance
for Doubtful Accounts





Payment
terms for product and services trade receivables generally range from 30 to
90 days depending on the circumstances of each order or service contract.
Payment on trade receivables from long-term contracts is generally received
within four months of the milestone approval date. Any payments not received
within the agreed upon due date are considered past due.





The
Company maintains an allowance for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. Such
allowance is computed based upon a specific customer account review of larger
customers and balances past due as well as a general reserve against
individually smaller accounts receivable balances. The Company’s assessment of
its customers’ ability to pay generally includes direct contact with the
customer, investigation into customers’ financial status, as well as
consideration of customers’ payment history with the Company. If the Company
determines, based on its assessment, that it is more likely than not that the
Company’s customers will be unable to pay, the Company will charge off the
account receivables to the allowance for doubtful accounts.





Sales-Type
Leases





Certain
product sales made under a capital lease arrangement are recorded as a
sales-type lease in accordance with SFAS No. 13, Accounting for Leases(SFAS
13).Lease contract
receivables represent the total lease payments to be received reduced by lease
payments already collected. Sales-type lease revenues consist of the initial
sale of the product shipped and the interest and maintenance elements of the
lease payments as they are earned. An allowance for estimated uncollectible
sales-type lease receivables at an amount sufficient to provide adequate
protection against losses in the Company’s sales-type lease portfolio is
recorded. The allowance is determined principally on the basis of historical
loss experience and management’s assessment of the credit quality of the
sales-type lease customer base. If loss rates increase or customer credit
conditions deteriorate, the allowance for uncollectible sales-type leases may
need to be increased. Unearned income, including an interest and maintenance
element, is the amount by which the original sum of the lease contract
receivable exceeds the fair value of the equipment sold. The interest element is
amortized to lease income over the lease in a manner that produces a constant
rate of return. The maintenance element is amortized on a straight-line basis
over the lease term. Recognition of the interest and maintenance income did not
exceed 10% of the Company’s net revenues in 2008, 2007 or 2006.


65
 Table of Contents




In
addition, as part of the initial recording of the Company’s sales-type leases,
the estimated unguaranteed residual value of the equipment is recorded. The
residual value is based on industry standards and the Company’s actual
experience. There are no residual values recorded under sales-type leases at
December 31, 2008 or 2007.





Inventories





Inventories
are stated at the lower of cost or market. Cost is computed using standard cost,
adjusted for absorption of manufacturing variances, which approximates actual
cost, on a first-in, first-out basis. Reserves for estimated excess and obsolete
inventory are recorded on a product or part level basis based upon historical
usage and future demand and establish a new cost basis for the respective item.
For components not yet billed to the Company by its third-party contract
manufacturers, contingent liabilities are recorded by component based on the
likelihood of the Company's ultimate usage of the components. The
Company recorded a reserve for such potential billings of $4.8 million and $0.5
million as of December 31, 2008 and 2007, respectively.





Property,
Plant and Equipment





Property,
plant and equipment are stated at cost. Depreciation and amortization are
provided on straight-line and accelerated methods over the following useful
lives:





Building
                30
      yearsComputer
      equipment and software
                3-5
      yearsMachinery
      and equipment
                2-7
      yearsEquipment
      leased to customers
                1-5
      yearsFurniture
      and fixtures
                2-7
      years




Leasehold
improvements are amortized over the shorter of the lease term or the life of the
asset.





Capitalized
Software Development Costs





The
Company capitalizes certain internal and external expenses related to developing
computer software used in the products it sells. Costs incurred prior to the
establishment of technological feasibility are charged to research and
development expense. The Company considers technological feasibility to have
been established for a product when all of the following conditions have been
met: (a) the detail program design has been completed and it has been determined
that the necessary skills, hardware, and software technology are available to
produce the product; (b) the detail program design has been traced to product
specifications; and (c) all high-risk development issues have been resolved
through coding and testing. Upon general release to customers of the product in
which the software is included, capitalization ceases, and such costs are
amortized using the straight-line method over an estimated life of one to three
years. The amounts capitalized in the years ended December 31, 2008, 2007 and
2006, were $0.1 million, $1.4 million and $0.8 million,
respectively.





Goodwill
and Impairment of Long-Lived Assets





The
Company evaluates its goodwill at least annually and at any other time if an
event or change in circumstances indicates that the fair value of a reporting
unit is below its carrying amount.  Long-lived assets (to be held and
used) are reviewed for impairment when events or changes in circumstances
indicate that the related carrying amount of such assets may not be
recoverable.





66
 Table of Contents





During
fourth-quarter 2008, the Company concluded that the current economic environment
and the significant declines in its market capitalization compared to its net
book value represented significant adverse events, and therefore, management
evaluated goodwill and long-lived assets for impairment as of December 31, 2008,
under the two-step model established by SFAS No. 142, Goodwill and Intangible Assets(“SFAS 142”). and SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived
Assets(“SFAS 144”).  In evaluating goodwill and long-lived
assets for recoverability, estimates of after-tax undiscounted future cash flows
of the Company’s individual reporting units were compared to the carrying value
of the reporting units. As quoted market prices are unavailable for individual
reporting units, fair value was determined by discounting estimated future cash
flows. The estimated cash flows used to assess recoverability of long-lived
assets and measure fair value of reporting units were derived from current
business plans developed using near-term and long term management
projections.  The asset impairment evaluations, including the annual
goodwill impairment test, required management to make several assumptions in
determining estimates of future cash flows to determine fair value of the
individual reporting units, including near and long-term revenue and cost
assumptions.





The
evaluation of goodwill and long-lived assets resulted in the recognition of
asset impairment charges totaling $67.8 million for 2008, primarily related to
the assets acquired in the TeT acquisition on April 1, 2008. Future events that
could result in additional impairment of goodwill and long-lived assets include,
but are not limited to, further declines in the current economic environment or
significant losses of the Company’s customer base in Europe or in
Australia.  All recognized impairment charges are recorded as
operating expenses. See Note 4 for further discussion of impairment charges
related to goodwill and other intangible assets.





Revenue
Recognition





The
Company recognizes revenue pursuant to applicable revenue recognition guidance
and interpretations, including the requirements of Emerging Issues Task Force
(“EITF”) Issue No. 00-21, Revenue Arrangements with MultipleDeliverables,
EITF 01-8, Determining Whether
an Arrangement Contains a Lease(“EITF 01-8”),SFAS 13, Statement of
Position 97-2, Software
Revenue Recognition, Statement of Position 81-1,
Accounting for Performance of
Construction-Type and Certain Production Type Contracts(“SOP 81-1”), Staff
Accounting Bulletins No. 101 and No. 104, Revenue Recognition in Financial
Statements, and other applicable revenue recognition guidance and
interpretations. Accordingly, revenue is recognized when all four of the
following criteria are met: (a) persuasive evidence that an arrangement
exists; (b) delivery of the products and/or services has occurred;
(c) the selling price is both fixed and determinable; and
(d) collectability is reasonably assured.





The
Company generally recognizes product revenue, including sales to distributors
and sales under sales-type leases, upon shipment of product. The Company
recognizes services revenue when services have been provided and collection of
invoiced amounts is reasonably assured. Routine recurring services include
terminal repairs, help-desk, on-site technician visits, deployment and the
provision of supplies. Amounts received in advance of services being rendered
are recorded as deferred revenue. Revenues from long-term contracts that require
substantial performance of customized software and hardware over an extended
period are recorded based upon the attainment of scheduled performance
milestones under the percentage-of-completion method. Operating lease revenue is
recognized monthly over the lease term. The units leased under operating
leases are included in the balance sheet under “Property, plant and equipment.”
The Company accrues for warranty costs, sales returns and other allowances at
the time of shipment.





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




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





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





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




67
 Table of Contents





Items
that do not meet these criteria are combined into a single unit of accounting.
If there is objective and reliable evidence of fair value for all units of
accounting, the arrangement consideration is allocated to the separate units of
accounting based on their relative fair values. In cases where there is
objective and reliable evidence of the fair value(s) of the undelivered item(s)
in an arrangement but no such evidence for one or more of the delivered item(s),
the residual method is used to allocate the arrangement consideration. In cases
in which there is not objective and reliable evidence of the fair value(s) of
the undelivered item(s) but a portion of the arrangement is considered to be a
lease under EITF 01-8,  the Company recognizes revenue in accordance
with SFAS 13 where it has sufficient evidence to make an estimate of the
relative fair value of the delivered element.





The
Company presents revenues net of sales taxes and value-added taxes in its
consolidated statements of operations in accordance with EITF No. 06-3, How Taxes Collected From Customers
and Remitted to Governmental Authorities should Be Presented in the Income
Statements.





Product
Warranty





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





Legal
Contingencies





In the
ordinary course of business, the Company is involved in legal proceedings
involving contractual and employment relationships, product liability claims,
intellectual property rights, and a variety of other matters. The Company
records contingent liabilities resulting from asserted and unasserted claims
against it, when it is probable that a liability has been incurred and the
amount of the loss is estimable. Estimating probable losses requires analysis of
multiple factors, in some cases including judgments about the potential actions
of third-party claimants and courts. Therefore, actual losses in any future
period are inherently uncertain. Currently, the Company does not believe any of
its pending legal proceedings or claims will have a material impact on its
financial position, results of operations or cash flows. However, if actual or
estimated probable future losses exceed the Company’s recorded liability for
such claims, it would record additional charges as other expense during the
period in which the actual loss or change in estimate
occurred.





Shipping
and Handling Costs





Shipping
costs include charges associated with delivery of goods from the Company’s
facilities to its customers and are reflected in cost of product. Shipping costs
paid to the Company by our customers are classified as
revenue.





Advertising
Costs





Advertising
costs are expensed as incurred and totaled $0.3 million, $0.3 million and $0.6
million for the years ended December 31, 2008, 2007 and 2006,
respectively.





Stock-Based
Compensation





Prior to
January 1, 2006, the Company accounted for share-based employee compensation,
including stock options, using the method prescribed in Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to
Employees and Related Interpretations(“APB Opinion No. 25”). Under APB
Opinion No. 25, for stock options granted at market price, no compensation cost
was recognized, and a disclosure was made regarding the pro forma effect on net
earnings assuming compensation cost had been recognized in accordance with SFAS
No. 123, Accounting for
Stock-Based Compensation(“SFAS 123”). The Company adopted
SFAS  No. 123 (Revised 2004), Share Based Payment(“SFAS
123R”), using the modified prospective method. Under SFAS 123R the Company is
required to measure and recognize compensation expense for all share-based
payments at fair value. Other than restricted stock, no share-based employee
compensation cost has been reflected in net income prior to the adoption of SFAS
123R.


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Foreign
Currency





Assets
and liabilities of subsidiaries operating outside the United States with a
functional currency other than the U.S. dollar are translated into U.S. dollars
using year-end exchange rates. Revenue, costs and expenses are translated at the
average exchange rates in effect during the year. Foreign currency translation
gains and losses are included as a component of accumulated other comprehensive
loss.





For
subsidiaries operating outside the United States where the functional
currency is the U.S. dollar, monetary assets and liabilities denominated in
local currency are remeasured at year-end exchange rates whereas non-monetary
assets, including inventories and property, plant and equipment, are reflected
at historical rates. Revenue, costs and expenses are translated at the average
exchange rates in effect during the year. Any gains or losses from foreign
currency remeasurement are included in foreign currency loss in the consolidated
statements of operations. During the years ended December 31, 2008, 2007, and
2006, the Company recorded net gains (losses) on remeasurement of $(2.8
million), $1.9 million and $0.0 million, respectively. For the same periods, the
Company recorded net gains (losses) on transactions denominated in foreign
currencies of $1.0 million, $(3.6 million) and $(0.7 million), respectively.
These amounts are included in the results of operations.





Income
Taxes





Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax laws (including rates) is recognized in income in the period that
includes the enactment date. See Note 16 regarding the valuation reserve against
the Company’s deferred tax assets.





The
Company does not provide for federal income taxes on the undistributed earnings
of its international subsidiaries because earnings are reinvested and, in the
opinion of management, will continue to be reinvested
indefinitely.





Income
(Loss) Per Share





Basic
income (loss) per share is computed by dividing net income (loss) by the
weighted-average number of common shares outstanding during the period. Diluted
income (loss) per share reflects the potential dilution that could occur if the
income were divided by the weighted-average number of common shares outstanding
and potentially dilutive common shares from outstanding stock options and
warrants. Potentially dilutive common shares are calculated using the treasury
stock method and represent incremental shares issuable upon exercise of the
Company’s outstanding options and warrants. Due to losses in 2008 and 2007,
potentially dilutive securities are not included in the calculation of dilutive
loss per share as their impact would be anti-dilutive. The following table
reconciles the weighted average shares used in computing basic and diluted
income (loss) per share in the respective years:





2008
                
                
                2007
                
                
                2006Shares
      used in basic income (loss) per share calculation (weighted average common
      shares outstanding)
                
                
                53,321,154
                
                
                
                52,927,296
                
                
                
                53,248,194Effect
      of dilutive stock options and warrants
                
                
                -
                
                
                
                -
                
                
                
                717,382Shares
      used in diluted income (loss) per share calculation
                
                
                53,321,154
                
                
                
                52,927,296
                
                
                
                53,965,576





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Due to
losses in 2008 and 2007, options and warrants that could potentially dilute
income (loss) per share in the future were not included in the computation of
diluted income (loss) per share because they were anti-dilutive. In those years,
excluded options and warrants amounted to 14,988,718 and 2,974,536,
respectively.





Derivative Financial
Instruments





The
Company does not acquire, hold or issue derivative financial instruments for
trading purposes. Derivative financial instruments are used to manage foreign
exchange and interest rate risks that arise out of the Company’s core business
activities.





Derivative
financial instruments used to manage foreign exchange risk are designated as
hedging instruments for hedges of foreign currency exposure of the Company’s net
investment in foreign operations. The primary objective of the Company’s hedging
strategy is to protect its net investments in foreign subsidiaries and certain
accounts receivable that are exposed to volatility in foreign currency exchange
rates. Financial hedging instruments used in this strategy are limited by
Company policy to foreign currency forward or option contracts and foreign
currency debt. Changes in the fair value of foreign-currency forward contracts
are reported as foreign currency gains or losses in the consolidated statements
of operations. During 2008 and 2007, the Company had forward contracts in place
to hedge its foreign currency denominated net monetary assets in various foreign
countries, including Brazil, the U.K., Chile, Australia, Thailand and Sweden.
The U.S. dollar amount of the contracts at December 31, 2008 and
2007 was $13.0 million and $19.8 million, respectively. The total payable
recorded under the contracts is reflected in accrued liabilities and was $0.1
and $0.3 million as of December 31, 2008 and 2007,
respectively.





Comprehensive
Income (Loss)





Comprehensive
income (loss) represents net income (loss) for the year adjusted for changes in
stockholders’ equity from non-stockholder sources. Accumulated comprehensive
income (loss) items typically include currency translation and the impact of the
Company’s pension liability adjustment, net of tax.





Reclassification





Certain
amounts in the prior-year financial statements have been reclassified to conform
to the current year presentation.





Impact
of Recently Issued Accounting Pronouncements





In March
2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 161,
“Disclosures About Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No.
133” (“SFAS 161”). SFAS 161 expands quarterly disclosure requirements in
SFAS 133 about an entity’s derivative instruments and hedging activities. SFAS
161 is effective for fiscal years beginning after November 15, 2008. The
implementation of this standard is not expected to have a material impact on the
Company’s consolidated financial position, results of operations or cash
flows





In April
2008, the FASB issued FSP 142-3, “Determination of the Useful Life of
Intangible Assets” (“FSP 142-3”). FSP 142-3 amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS 142. FSP
142-3 is effective for fiscal years beginning after December 15, 2008. The
implementation of this standard is not expected to have a material impact on our
consolidated financial position, results of operations or cash
flows





In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS 162”). SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements. SFAS 162 is effective 60 days following the
SEC’s approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, “The Meaning of
Present Fairly in Conformity with Generally Accepted Accounting
Principles”. The implementation of this standard is not expected to have
a material impact on our consolidated financial position, results of operations
or cash flows.





In
December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8, “Disclosures by Public Entities
(Enterprises) about Transfers of Financial Assets and Interests in Variable
Interest Entities” (“FSP 140-4 and 46(R)-8”). FSP 140-4 and 46(R)-8
requires additional disclosures about transfers of financial assets and
involvement with variable interest entities. FSP 140-4 and 46(R)-8 is effective
for the first reporting period (annual or interim) ending after December 15,
2008. The implementation of this standard is not expected to have a material
impact on our consolidated financial position, results of operations or cash
flows.





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In
December 2008, the FASB issued FSP 132(R)-1, “Employers’ Disclosures about
Postretirement Benefit Plan Assets” (“FSP 132(R)-1”). FSP 132(R)-1
provides guidance on an employer’s disclosures about plan assets of a defined
benefit pension or other postretirement plan. FSP 132(R)-1 is effective for
fiscal years ending after December 15, 2009. The Company is currently assessing
the impact of this FSP on its consolidated financial position, results of
operations and cash flows.





In
December 2007, FASB issued SFAS No. 141(R), Business Combinations(“SFAS
141R”), which replaces SFAS No. 141, Business Combinations(“SFAS
141”). SFAS 141R applies to all transactions and other events in which one
entity obtains control over one or more other businesses. The standard requires
the fair value of the purchase price, including the issuance of equity
securities, to be determined on the acquisition date. SFAS 141R requires an
acquirer to recognize the assets acquired, the liabilities assumed, and any
noncontrolling interests in the acquiree at the acquisition date, measured at
their fair values as of that date, with limited exceptions specified in the
statement. SFAS 141R requires acquisition costs to be expensed as incurred and
restructuring costs to be expensed in periods after the acquisition date.
Earn-outs and other forms of contingent consideration are to be recorded at fair
value on the acquisition date. Changes in accounting for deferred tax asset
valuation allowances and acquired income tax uncertainties after the measurement
period will be recognized in earnings rather than as an adjustment to the cost
of the acquisition. SFAS 141R generally applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008 with early
adoption prohibited. The Company is currently evaluating the impact that the
implementation of SFAS 141R may have on the Company’s consolidated financial
position, results of operations or cash flows.





In
December 2007, FASB issued SFAS No. 160, Non-controlling Interests in
Consolidated Financial Statements—an amendment of ARB No. 51(“SFAS
160”). SFAS 160 requires non-controlling interests or minority interests to be
treated as a separate component of equity, not as a liability or other item
outside of permanent equity. Upon a loss of control, the interest sold, as well
as any interest retained, is required to be measured at fair value, with any
gain or loss recognized in earnings. Based on SFAS 160, assets and liabilities
will not change for subsequent purchase or sale transactions with
non-controlling interests as long as control is maintained. Differences between
the fair value of consideration paid or received and the carrying value of
noncontrolling interests are to be recognized as an adjustment to the parent
interest’s equity. SFAS 160 is effective for fiscal year beginning on or after
December 15, 2008. Earlier adoption is prohibited. The implementation of this
standard is not expected to have a material impact on the Company’s consolidated
financial position, results of operations or cash flows.





In
September 2006, FASB issued SFAS No. 157, Fair Value Measurements
(“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring
fair value in GAAP and expands disclosures about fair value measurements. SFAS
157 is generally effective for years beginning after December 15, 2007. SFAS 157
was effective for the Company on January 1, 2008; however, in February 2008, the
FASB issued FSP No. SFAS 157-2 (FSP 157-2), which delayed the effective date of
SFAS 157 for non-financial assets and non-financial liabilities, except for
items that are recognized or disclosed at fair value in the financial statements
on a recurring basis, for one year. The adoption of SFAS 157 on January 1, 2008
with respect to the Company’s financial assets and liabilities did not have a
material impact on its consolidated financial position, results of operations or
cash flows. The Company intends to adopt the provisions of SFAS 157
with respect to its non-financial assets and non-financial liabilities effective
January 1, 2009 pursuant to the requirements of FSP 157-2.  The
implementation of this standard is not expected have a material impact on the
Company’s consolidated financial position, results of operations or cash
flows.





In
February 2007, FASB issued SFAS No. 159, Fair Value Option for Financial
Assets and Financial Liabilities—including an amendment of FASB
Statement No. 115(“SFAS 159”), which permits entities to choose to
measure many financial instruments and certain other items at fair value. If
elected, SFAS 159 is effective beginning January 1, 2008. Under SFAS 159, a
company may elect to use fair value to measure eligible items at specified
election dates and report unrealized gains and losses on items for which the
fair value option has been elected in earnings at each subsequent reporting
date. Eligible items include, but are not limited to, accounts and loans
receivable, available-for-sale and held-to-maturity securities, equity method
investments, accounts payable, guarantees, issued debt and firm commitments. The
Company elected not to measure any additional financial instruments or other
items at fair value as of January 1, 2008 in accordance with SFAS
159.


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3.
Business Acquisitions





Thales
e-Transactions





On April
1, 2008, the Company acquired all of the outstanding shares of Thales
e-Transactions. The Company acquired the Thales e-Transactions business line to
expand the Company’s geographic reach in Europe and increase the Company’s size
and scale, with the expectation of accelerating product cost reductions given
the convergence towards a single, combined product family.





The
consideration paid to acquire TeT was $149.4 million in cash. To fund a portion
of the acquisition price, the Company entered into a credit agreement with
Francisco Partners II, L.P., which provided funding of $60.0 million. See Note
12 for additional information related to this credit
agreement.





The
purchase price consisted of the following (in thousands):





Cash
      paid to purchase TeT shares
                    
                    $
                    120,000Cash
      paid for working capital and assumed debt
                    
                    
                    23,611Transaction
      costs and expenses
                    
                    
                    3,827Preliminary
      working capital adjustment
                    
                    
                    2,000Total
      purchase price
                    
                    $
                    149,438








Cash
reconciliation of total purchase price (in thousands):





Cash
      paid
                    Total
                  
                  
                  Balance
      Accrued as of
                    December 31, 2008
                  
                  
                  Cash
      paid
                    2008
                  
                  
                  Cash
      paid
                    2007Cash
      paid to purchase TeT shares, working capital and assumed
    debt
                  
                  $
                  133,611
                  
                  
                  $
                  -
                  
                  
                  $
                  133,611
                  
                  
                  $
                  -Cash
      paid for transaction costs
                  
                  
                  3,827
                  
                  
                  
                  37
                  
                  
                  
                  3,422
                  
                  
                  
                  368Cash
      deposit
                  
                  
                  10,000
                  
                  
                  
                  -
                  
                  
                  
                  —
                  
                  
                  
                  10,000Preliminary
      working capital adjustment
                  
                  
                  2,000
                  
                  
                  
                  2,000
                  
                  
                  
                  -
                  
                  
                  
                  -Subtotal
                  
                  
                  149,438
                  
                  
                  
                  2,037
                  
                  
                  
                  137,033
                  
                  
                  
                  10,368Cash
      acquired from TeT
                  
                  
                  (21,865
                  )
                  
                  
                  -
                  
                  
                  
                  (21,865
                  )
                  
                  
                  -Total
      cash paid, net of cash acquired
                  
                  $
                  127,573
                  
                  
                  $
                  2,037
                  
                  
                  $
                  115,168
                  
                  
                  $
                  10,368








The
acquisition was accounted for as a purchase business combination in accordance
with SFAS 141, and accordingly, the results of TeT’s operations are included in
the Company’s consolidated results from the date of the
acquisition.





Under the
purchase method of accounting, the total estimated purchase price as shown in
the table above is allocated to TeT’s tangible and intangible assets acquired
and liabilities assumed. The excess of the purchase price over the net tangible
and intangible assets is recorded as goodwill. The initial allocation of the
purchase price is based on preliminary estimates and currently available
information.




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Cash
                
                $
                21,865Accounts
      receivable
                
                
                39,072Inventory
                
                
                9,023Property,
      plant and equipment
                
                
                5,679Other
      assets
                
                
                13,191Amortizable
      intangible assets:Customer
      relationships
                
                
                66,350Unpatented
      technology
                
                
                5,688Trademarks,
      trade names
                
                
                2,127Total
      assets
                
                
                162,995Deferred
      revenue
                
                
                (6,904
                )Other
      current liabilities
                
                
                (66,047
                )Net
      deferred tax liabilities
                
                
                (20,634
                )Non
      current liabilities
                
                
                (2,916
                )Total
      liabilities
                
                
                (96,501
                )Fair
      value of tangible and intangible assets acquired, net of liabilities
      assumed
                
                
                66,494Goodwill
                
                
                82,944Total
      purchase price
                
                $
                149,438





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 Table of Contents





Net Tangible and Intangible Assets.Of the total purchase price, a preliminary estimate of approximately
$66.5 million has been allocated to net tangible and intangible assets acquired
either based on their approximate fair value or their carrying value if the fair
value had not yet been determined. Of the total $74.2 million of intangible
assets, $62.7 million is reported in the Northern Europe (“NEMEA”) segment and
$11.5 million in the Southern Europe (“SEMEA”) segment. Intangible assets in
these segments are subject to translation adjustment for currency
changes.





TeT’s
customer relationships are represented through a distribution network of banks,
distributors and retailers through which TeT sells the majority of its products
and services. The Company expects to amortize the fair value of these assets
over an average estimated life of five to ten years.





Supplier
relationships represent third party manufacturing relationships through which
the majority of TeT products are produced. The Company expects to amortize the
fair value of these assets over an average estimated life of two
years.





Product
technology includes TeT products, principally the Artema product line. TeT
technology and products are designed for hardware, software, solutions and
services, serving the European markets. The Company expects to amortize the
developed and core technology and patents over an average estimated life of two
years.





The fair
value of intangible assets was determined using an income approach, based on
discussions with TeT management and a review of certain transaction-related
documents and forecasts prepared by the Company and TeT management. The rate
utilized to discount net cash flows to their present values is 19%. This
discount rate was determined after consideration of the Company’s weighted
average cost of capital specific to this transaction and the assets being
purchased.





Estimated
useful lives for the intangible assets were based on historical experience with
technology life cycles, product roadmaps, branding strategy, historical and
projected maintenance renewal rates, historical treatment of the Company’s
acquisition-related intangible assets and the Company’s intended future use of
the intangible assets. Deferred tax liabilities in the amount of $20.6 million
have been recorded based upon preliminary conclusions regarding the tax
positions expected to be taken and prior to the completion of a third party
valuation of TeT’s assets.





Related
to the TeT acquisition, the Company began formulating a restructuring plan that
is not yet complete. At the acquisition date, the Company accrued into the
purchase price allocation restructuring costs related to reduction in workforce
and future facilities lease obligations of approximately $9.1 million in
accordance with the requirements of EITF 95-3, Recognition of Liabilities in
Connection with a Purchase Business Combination(“EITF 95-3”).See Note 5 for additional
information related to the restructuring plan. As the Company finalizes its
restructuring plan, additional amounts may be accrued with an offset to
goodwill.





Goodwill.Of the
total purchase price, approximately $82.9 million is estimated to be allocated
to goodwill. Goodwill represents the excess of the purchase price of an acquired
business over the fair value of the underlying net tangible and intangible
assets. Goodwill will not be amortized but instead will be tested for impairment
at least annually (more frequently if certain indicators are present). In the
event that the management of the combined company determines that the value of
goodwill has become impaired, the combined company will incur an accounting
charge for the amount of impairment during the fiscal quarter in which the
determination is made.





As of
December 31, 2008, the purchase price allocation is preliminary and is subject
to adjustment for final valuation of intangible assets, property, plant and
equipment, pre-acquisition contingencies, deferred taxes and EITF 95-3
restructuring charges. The Company has recorded a preliminary adjustment of $2.0
million for the working capital adjustment which is expected to be settled in
2009, but is subject to negotiation which could result in further changes. None
of the goodwill is expected to be deductible for tax purposes.




See Note
4 for a discussion of impairment charges related to our goodwill and other
intangible assets.





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The
following represents the pro forma results of operations for the year ended
December 31, 2008 and 2007 and gives effect to the acquisition of TeT as if the
acquisition was consummated at the beginning of fiscal year 2007. The unaudited
pro forma results of operations are not necessarily indicative of what would
have occurred had the acquisition been made as of the beginning of the period or
of the results that may occur in the future. Net loss includes additional
interest expense of $2.4 million and amortization of intangible assets related
to the acquisition of $2.8 million for the first quarter of 2008. The unaudited
pro forma information is as follows (in thousands, except for per share
data):





2008
                  
                  
                  2007Total
      net revenue
                  
                  $
                  480,456
                  
                  
                  $
                  482,093Net
      loss
                  
                  $
                  (94,063
                  )
                  
                  $
                  (20,157
                  )Net
      loss per share - basic and diluted
                  
                  $
                  (1.76
                  )
                  
                  $
                  (0.38
                  )








ACG
Group





On
February 8, 2007, the Company acquired the assets of ACG Group Pty Limited
(“ACG”), a provider of installation, technical support, courier services and
help desk services for point of sale equipment in Australia. The acquisition
builds on the Company’s existing card payment terminal business in Australia and
expands the Company’s service business footprint in the Asia-Pacific marketplace
by providing merchant support for all point of sale terminals in Australia, as
well as a business platform for potential expansion throughout the
region.





The
purchase price was $12.0 million in cash, plus the assumption of $0.5 million in
liabilities. The Company paid $0.7 million for acquisition-related costs, which
have been added to the purchase price allocation, including professional fees
and internal direct out-of-pocket expenses.





The
acquisition was accounted for as a purchase business combination in accordance
with SFAS 141, and accordingly, the results of ACG’s operations are included in
the Company’s consolidated results from the date of the acquisition. Pro forma
financial information is not presented because the acquisition was not
considered significant under the rules and regulations of the SEC (Rule 3-05 of
Regulation S-X).





The
amount paid for ACG in excess of the fair value of the net tangible assets has
been allocated to separately identifiable intangible assets based upon an
estimate of the fair value. An allocation of $6.1 million of the purchase price
was made to customer relationships, trademarks, service know-how and other
identifiable intangible assets and will be amortized over their estimated useful
lives of four to ten years. The amount of the purchase price in excess of assets
acquired of approximately $8.4 million was considered goodwill in accordance
with SFAS 142. None of the goodwill is expected to be deductible for tax
purposes. See Note 4 for a discussion of impairment charges related to goodwill
and other intangible assets.





TPI
Software





On
December 14, 2006, the Company acquired the technology and assets of TPI
Software, LLC (“TPI”), a provider of personal computer and enterprise
server-based credit/debit/gift card, electronic benefit transfer, automated
clearing house and electronic check processing software. The purchase price was
$8.5 million in cash. Approximately $0.2 million of the purchase price has been
recorded as payment of compensation in advance, and is being amortized into
operating expenses over the contingency period.





Approximately
$3.2 million of the purchase price was allocated to core technology and other
identifiable intangible assets and will be amortized over their estimated useful
lives of two to ten years.





Initially,
an allocation of approximately $2.7 million of the purchase price was made to
goodwill in accordance with SFAS 142. Upon the resolution of certain
contingencies in 2007 and 2008, $1.3 million was allocated to goodwill and $1.1
million previously held by a third party escrow company was paid to the selling
principals. TPI was in its early stages of operation and did not have the
Company’s capabilities in marketing, sales and distribution, thereby resulting
in the Company paying a premium over fair value of tangible and intangible
assets acquired. The Company expects to be able to utilize the acquired
technologies in its other products separate from those acquired from TPI.
Goodwill is expected to be deductible for tax purposes. See Note 4, for a
discussion of impairment charges related to goodwill and other intangible
assets.




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4. Intangible Assets and Goodwill





In 2008,
the Company determined that $8.8 million of intangible assets were impaired. Of
the total write-down, $2.4 million is related to our 2006 acquisition of TPI and
$6.4 million from our 2008 acquisition of TeT. The Company performed the
impairment test for these assets primarily due to the decline in its stock price
that caused its book value to exceed its market capitalization, which was an
indication that these assets may not be recoverable. The primary reason for
these impairment charges relates to the ongoing recession, which has caused the
Company to reduce its estimates of projected cash flows, has reduced overall
industry valuations, and has caused an increase in discount rates in the credit
and equity markets.





Intangible
assets consist of the following at December 31, 2008 and 2007 (dollars in
thousands):





Gross
      Carrying Amount
                  
                  
                  Accumulated
      Amortization
                  
                  
                  NetDecember 31,
                  
                  
                  December 31,
                  
                  
                  December 31,
                  
                  
                  December 31,
                  
                  
                  December 31,
                  
                  
                  December 31,2008
                  
                  
                  2007
                  
                  
                  2008
                  
                  
                  2007
                  
                  
                  2008
                  
                  
                  2007Capitalized
      software
                  
                  $
                  4,699
                  
                  
                  $
                  6,159
                  
                  
                  $
                  (3,597
                  )
                  
                  $
                  (3,949
                  )
                  
                  $
                  1,102
                  
                  
                  $
                  2,210Customer
      and supplier relationships
                  
                  
                  55,517
                  
                  
                  
                  2,830
                  
                  
                  
                  (4,266
                  )
                  
                  
                  (263
                  )
                  
                  
                  51,251
                  
                  
                  
                  2,567Unpatented
      technology
                  
                  
                  3,039
                  
                  
                  
                  2,300
                  
                  
                  
                  (1,851
                  )
                  
                  
                  (240
                  )
                  
                  
                  1,188
                  
                  
                  
                  2,060Trademarks,
      trade names
                  
                  
                  3,562
                  
                  
                  
                  2,220
                  
                  
                  
                  (930
                  )
                  
                  
                  (204
                  )
                  
                  
                  2,632
                  
                  
                  
                  2,016Service
      know-how
                  
                  
                  1,330
                  
                  
                  
                  1,330
                  
                  
                  
                  (255
                  )
                  
                  
                  (122
                  )
                  
                  
                  1,075
                  
                  
                  
                  1,208Other
                  
                  
                  149
                  
                  
                  
                  609
                  
                  
                  
                  (86
                  )
                  
                  
                  (168
                  )
                  
                  
                  63
                  
                  
                  
                  441$
                  68,296
                  
                  
                  $
                  15,448
                  
                  
                  $
                  (10,985
                  )
                  
                  $
                  (4,946
                  )
                  
                  $
                  57,311
                  
                  
                  $
                  10,502





Amortization
of these intangibles is provided on straight-line method on their estimated
useful lives:





Capitalized
      software
                        3
      yearsCustomer
      relationships
                        4 -
      10 yearsUnpatented
      technology
                        2 -
      10 yearsTrademarks,
      trade names
                        2 -
      10 yearsService
      know-how
                        10
      yearsOther
                        2-5
      years








Amortization
expense related to intangible assets used in continuing operations was
$9.9 million, $2.3 million and $1.6 million for the years ended
December 31, 2008, 2007 and 2006, respectively. Based on the intangible
assets recorded at December 31, 2008, and assuming no subsequent impairment
of the underlying assets, the annual amortization expense for each period, is
expected to be as follows: $9.4 million for 2009, $6.8 million for
2010, $6.3 million for 2011, $6.3 million for 2012 and $5.4 million for
2013.





In 2008,
the Company performed its annual goodwill impairment test which resulted in
a $59.0 million write-down of goodwill. Of the total amount, $4.0 million
related to the 2006 acquisition of TPI, $4.5 million related the 2007
acquisition of ACG and, $50.5 million related to the 2008 acquisition of
TeT. The primary reason for these impairment charges relates to the ongoing
recession, which has caused us to reduce our estimates for projected cash flows,
has reduced overall industry valuations, and caused an increase in discount
rates in the credit and equity markets.




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Activity related to
goodwill consisted of the following at December 31, 2008 and December 31, 2007
(in thousands):


December 31, 2008
                  
                  
                  December 31, 2007Balance,
      beginning of year
                  
                  $
                  10,224
                  
                  
                  $
                  2,691Additions
      related to acquisitions
                  
                  
                  82,944
                  
                  
                  
                  6,820Resolution
      of tax contingencies and adjustments to tax reserves, valuation allowances
      and performance holdback established in purchase
accounting
                  
                  
                  2,184
                  
                  
                  
                  713Goodwill
      impairment
                  
                  
                  (59,006
                  )
                  
                  
                  -Currency
      translation adjustment
                  
                  
                  (9,631
                  )
                  
                  
                  -Balance,
      end of year
                  
                  $
                  26,715
                  
                  
                  $
                  10,224





Of the
total $67.8 million impairment of goodwill and intangible assets, $6.4 million
is reported in the Americas segment, $4.5 million in the Asia-Pacific segment,
$24.4 million in the NEMEA segment and $32.5 million in the SEMEA
segment.





The
Company will continue to evaluate the carrying value of the remaining goodwill
and intangible assets and if it determines in the future that there is further
impairment in any of its reporting units, the Company may be required to record
additional charges to earnings which could adversely affect the Company’s
financial results.




5.
Restructuring and Other Charges




Thales
e-Transactions Restructuring





On April
1, 2008, the Company completed the acquisition of TeT and began formulating a
restructuring plan that is not yet complete. At the acquisition date, the
Company accrued into the purchase price allocation restructuring costs related
to reduction in workforce and future facilities lease obligations of
approximately $9.1 million. The balance at December 31, 2008 is $7.7
million.





Activities
related to the TeT acquisition restructuring plan are as follows (in
thousands):





Facilities
                  
                  
                  Severance
                  
                  
                  TotalBalance
      at March 31, 2008
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -Additions
                  
                  
                  409
                  
                  
                  
                  8,677
                  
                  
                  
                  9,086Cash
      payments
                  
                  
                  (383
                  )
                  
                  
                  0
                  
                  
                  
                  (383
                  )Currency
      translation adjustment
                  
                  
                  (26
                  )
                  
                  
                  (953
                  )
                  
                  
                  (979
                  )Balance
      at December 31, 2008
                  
                  $
                  -
                  
                  
                  $
                  7,724
                  
                  
                  $
                  7,724





The
Company expects the remaining amounts accrued to be paid in 2009.





The
restructuring plan has not been finalized and the amounts are subject to change
based on the negotiation of severance and other workforce reduction negotiations
with employees and other work groups.





2007
Business Restructuring





During
the second quarter of 2007, the Company initiated a reconfiguration of its
global sales and marketing organizations. In addition, the Company announced its
intention to outsource its manufacturing and consolidate its software, repair
and maintenance functions globally. Pursuant to this restructuring plan, the
Company has undertaken the following initiatives:





•
Outsourcing the Company’s entire manufacturing requirements to third-party
contract manufacturers, including supply chain, production, assembly, and
testing presently performed in Shenzhen, China and in Atibaia, Brazil.
Transitioning of the Company’s manufacturing operations commenced in 2007 and is
expected to be completed in 2008;





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• Shut
down of manufacturing operations in Atibaia, Brazil in accordance with the
Company’s plans to cease negative margin terminal sales. This activity was
completed during the third quarter of 2007;





•
Consolidating global software development activities to Singapore, Latvia, and
India, reducing similar activities now performed in the U.S. and Sweden. The
consolidation of global development activities is complete;





•
Relocating U.S. service and repair operations from Phoenix, Arizona to
Hermosillo, Mexico, which was completed in 2007; and





•
Reorganizing and reducing the manufacturing and operations management team in
Phoenix, Arizona consistent with the move to third-party contract manufacturing,
which commenced in 2007 and is expected to continue during 2008.





The
following table summarizes these charges and activities during 2007 and 2008
(dollars in thousands):








2008
                
                
                2007Severance
                
                
                Transition to Contract
      Manufacturing
                
                
                Total
                
                
                Severance
                
                
                Transition to Contract
      Manufacturing
                
                
                TotalBeginning
      Balance Accrual
                
                $
                1,100
                
                
                $
                -
                
                
                $
                1,100
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -Charges
                
                
                500
                
                
                
                -
                
                
                
                500
                
                
                
                1,737
                
                
                
                1,183
                
                
                
                2,920Amounts
      utilized
                
                
                (1,600
                )
                
                
                -
                
                
                
                (1,600
                )
                
                
                (637
                )
                
                
                (1,183
                )
                
                
                (1,820
                )Ending
      Balance Accrual
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                1,100
                
                
                $
                -
                
                
                $
                1,100






During
the second quarter of 2008, the Company accrued the remaining lease termination
and severance costs related to the exit out of its manufacturing facility in
China. The total costs of the lease termination and severance costs of $0.5
million were recorded in costs of revenue in the Asia-Pacific segment. The
Company paid the cost during the third quarter of 2008.





Of the
$2.9 million of costs incurred during 2007, $1.6 million was recorded in costs
of revenue and $1.3 million was recorded in operating expenses. Of the $2.9
million, $0.6 million was reported in the Americas segment, $0.4 million in the
SEMEA segment, $0.8 million in the Asia-Pacific segment and $1.1 million in
Shared cost centers.





In
addition, the Company also incurred $0.6 million of severance costs in 2006
related to the shut down of its Sweden facility.  As of December 31,
2007, $0.3 million remained of this accrual.





6.
Discontinued Operations





U.K.
Lease Portfolio





During
the fourth quarter of 2005, the Company made the decision to sell its U.K.
leasing business (the “U.K. Lease Business”). As of December 31, 2005, the U.K.
Lease Business qualified as discontinued operations under SFAS 144. Accordingly,
the U.K. Lease Business operating results have been classified as discontinued
operations in the statements of operations and cash flows for all periods
presented.





Effective
May 31, 2006, the Company sold the U.K. Lease Business for $12.1 million (the
“U.K. Lease Sale”). The U.K. Lease Sale includes the lease arrangements with
merchants and all related obligations and rights to payment under such
agreements. The U.K. Lease Sale agreement contains covenants and indemnification
provisions, which could result in additional liabilities to the Company if
certain events occur or fail to occur in the future.




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The
income (loss) from the Company’s discontinued operations for the years ended
December 31, 2008, 2007 and 2006 include the following (dollars in
thousands):





2008
                  
                  
                  2007
                  
                  
                  2006U.K.
      Lease Portfolio:Net
      revenue
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  3,230Costs
      of revenues (reversals of commissions)
                  
                  
                  118
                  
                  
                  
                  (1,098
                  )
                  
                  
                  1,195Gross
      profit (a)
                  
                  
                  (118
                  )
                  
                  
                  1,098
                  
                  
                  
                  2,035Selling,
      general and administrative expenses
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (1,020
                  )Foreign
      currency loss
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (343
                  )Gain
      on sale
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,561Income
      (loss) from discontinued operations
                  
                  $
                  (118
                  )
                  
                  $
                  1,098
                  
                  
                  $
                  2,233





(a)  During
the year ended December 31, 2007, the Company received a rebate of previously
paid lease originations related to commission payments.





There
were no assets or liabilities held for sale related to the U.K. Lease Business
as of December 31, 2008 or 2007.





Australian
Courier Business





During
the fourth quarter of 2008, the Company decided to sell its small courier
business in Australia (“Australian Courier Business”) which was acquired in the
ACG transaction. As of December 31, 2008, the Australian Courier Business
qualified as discontinued operations under SFAS 144.  Accordingly, the
income (loss) from discontinued operations includes direct revenues and direct
expenses of this discontinued courier operation within our Asia-Pacific
segment.  General corporate overhead costs have not been allocated to
discontinued operations. A summary of the operating results included in
discontinued operations in the accompanying consolidated statements of
operations is as follows (dollars in thousands):





2008
                  
                  
                  2007Australian
      Courier Business:Net
      revenue
                  
                  $
                  4,381
                  
                  
                  $
                  4,275Costs
      of revenue
                  
                  
                  3,703
                  
                  
                  
                  3,506Gross
      profit
                  
                  
                  678
                  
                  
                  
                  769Selling,
      general and administrative expenses
                  
                  
                  (323
                  )
                  
                  
                  (244
                  )Impairment
      of goodwill and intangible assets
                  
                  
                  (718
                  )
                  
                  
                  -Income
      (loss) from discontinued operations
                  
                  $
                  (363
                  )
                  
                  $
                  525








Assets
and liabilities held for sale included in accounts receivable and accrued other
liabilities amounted to $0.4 million and $0.1 million, respectively in the
Company’s consolidated balance sheets at December 31, 2008.





Effective
March 1, 2009, the Company sold the Australian Currier Business for $0.3
million. The sale agreement includes all related rights and obligations of the
courier business. The sale agreement contains general warranty and
indemnification provisions, which could result in additional liabilities to the
Company if certain events occur or fail to occur in the future.





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7.
Leases





Sales-Type
Leases





The
Company’s net investments in sales-type leases consist of the following at
December 31, 2008 and 2007 (dollars in thousands):








2008
                  
                  
                  2007Lease
      contracts receivable
                  
                  $
                  18,919
                  
                  
                  $
                  6,495Unearned
      revenue
                  
                  
                  (2,899
                  )
                  
                  
                  (524
                  )Net
      investment in sales-type leases
                  
                  $
                  16,020
                  
                  
                  $
                  5,971








Operating
Leases





The
Company leases equipment to customers under operating leases with terms
generally under four years. The leases contain provisions for mutual renewal
options.





Future
minimum payments to be received under sales-type and operating leases are as
follows (dollars in thousands):








Years Ending December 31,2009
                    
                    
                    11,8322010
                    
                    
                    5,1952011
                    
                    
                    2,0962012
                    
                    
                    1,0272013
                    
                    
                    -Thereafter
                    
                    
                    -$
                    20,150








8.
Short-term Investments





The
Company’s short-term investments consist entirely of U.S. government and agency
debt securities and are classified as available-for-sale and recorded at fair
value. As of December 31, 2008 and 2007, amortized cost of the Company’s
short-term investments equaled fair value. Accordingly, there were no unrealized
gains and losses as of December 31, 2008 and 2007.





Proceeds
from the sale of available-for-sale securities amounted to $41.9 million, $184.1
million and $307.1 million respectively, for the years ended December 31, 2008,
2007 and 2006. Gross realized gains and losses from the sale of
available-for-sale securities were not material for the years ended December 31,
2008, 2007 and 2006.





At
December 31, 2008, all of the Company’s U.S. government and agency debt
securities mature within calendar year 2009.





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9.
Inventories
 
 Inventories
consist of the following at December 31, 2008 and 2007 (dollars in
thousands):


2008
                  
                  
                  2007Purchased
      parts
                  
                  $
                  4,039
                  
                  
                  $
                  8,676Work
      in progress
                  
                  
                  353
                  
                  
                  
                  4,566Finished
      goods
                  
                  
                  27,289
                  
                  
                  
                  9,101$
                  31,681
                  
                  
                  $
                  22,343





During
2007, the Company transferred approximately $12.7 million of inventory to our
third-party manufacturing partner in connection with the outsourcing of
manufacturing. Inventory was sold at the material value excluding capitalized
overhead costs and no associated revenue was recorded relating to this transfer
of inventory.





10.
Property, Plant and Equipment, net





Property,
plant and equipment consist of the following at December 31, 2008 and 2007
(dollars in thousands):




2008
                  
                  
                  2007Buildings
                  
                  $
                  2,524
                  
                  
                  $
                  2,524Computer
      equipment and software
                  
                  
                  31,738
                  
                  
                  
                  24,955Machinery
      and equipment
                  
                  
                  31,121
                  
                  
                  
                  25,793Equipment
      leased to customers
                  
                  
                  3,992
                  
                  
                  
                  4,350Furniture
      and fixtures
                  
                  
                  5,683
                  
                  
                  
                  4,944Leasehold
      improvements
                  
                  
                  6,983
                  
                  
                  
                  3,809Construction
      in process
                  
                  
                  4,081
                  
                  
                  
                  3,83287,122
                  
                  
                  
                  70,207Less
      accumulated depreciation
                  
                  
                  (60,252
                  )
                  
                  
                  (52,513
                  )$
                  26,870
                  
                  
                  $
                  17,694





Depreciation
expense from continuing operations, which includes depreciation for assets under
capital lease, was $8.8 million, $6.9 million and $6.3 million for the years
ended December 31, 2008, 2007 and 2006, respectively.





Accumulated
depreciation for equipment leased to customers amounted to $1.1 million and $2.8
million for the years ended December 31, 2008 and 2007,
respectively.





During
June 2007, the Company completed the sale of its former headquarter facilities
located in Phoenix, Arizona, for a sale price of $16.3 million. The Company
recorded a gain of $3.8 million on the sale in the second quarter of 2007. The
net book value of the headquarters facilities was $11.8 million and was included
in property, plant and equipment, net, at December 31, 2006. The gain of $3.8
million is included as a separate line within operating expenses in the
Company’s consolidated statements of operations and is included in the Shared
cost Centers’ operating income relative to the segment and geographic
information as disclosed in Note 21. As part of the sale, the Company entered
into a lease agreement with the buyer for the continued use of the building
space during a period of 15 months starting on May 16, 2007 through August 31,
2008.  We elected to exit the facility on approximately June 16,
2008.





During
September 2006, the Company completed the sale of its real property in Hong Kong
for a purchase price of $5.2 million. The Company received deposits totaling
$0.5 million on the sale in the second quarter of 2006 and the balance of $4.7
million in September 2006. The Company recorded a gain of $3.0 million on the
sale in the third quarter of 2006. This amount has been included as a separate
line within operating expenses.





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 Table of Contents





11.
Product Warranty Liability
 
 The
following table reconciles the changes to the product warranty liability for the
years ended December 31, 2008 and 2007 (dollars in thousands):


2008
                  
                  
                  2007Balance
      at beginning of period
                  
                  $
                  1,754
                  
                  
                  $
                  2,636Warranty
      liability assumed on acquisitions
                  
                  
                  6,457
                  
                  
                  
                  -Warranty
      charges to normal operations
                  
                  
                  2,266
                  
                  
                  
                  2,428Utilization
      of warranty liability
                  
                  
                  (3,880
                  )
                  
                  
                  (3,310
                  )Balance
      at end of period
                  
                  $
                  6,597
                  
                  
                  $
                  1,754




Deferred
revenue associated with the Company’s extended warranty programs was
$3.3 million and $1.9 million at December 31, 2008 and 2007,
respectively.





12.
Long-term Debt





Revolving
Credit Facilities





On March
31, 2006, the Company entered into a line of credit agreement with a bank
pursuant to which the Company had access to a $5.0 million line of credit.
Borrowings under the credit agreement were fully collateralized by short-term
investments held in the Company’s investment accounts with the bank. Any
borrowings bore interest at a rate set forth in each promissory note issued at
the time of the advance. The credit agreement contained customary default
provisions and was set to expire on March 31, 2008, but was extended to March
31, 2009. No amounts were borrowed against the line of credit as of December 31,
2008 or 2007. However, the Company has outstanding letters of credit totaling
$0.4 million at December 31, 2008. On March 12, 2009 the letters of credit were
cancelled and there are no amounts outstanding.




On
January 15, 2008, the Company and certain of its subsidiaries (the “Borrowers”)
entered into a Loan and Security Agreement (the “Loan Agreement”) with a bank
and other financial institutions party to the Loan Agreement. The bank also
serves as agent for the lenders under the Loan Agreement (the “Agent”). The Loan
Agreement provides for a revolving credit facility of up to $25 million. Under
the Loan Agreement, if certain conditions are met, the Company may request an
increase in the credit facility to an aggregate total of up to $40 million.
Amounts borrowed under the Loan Agreement and repaid or prepaid during the term
may be reborrowed. Outstanding amounts under the Loan Agreement will bear
interest, at the Company’s option, at either (i) LIBOR plus 175 basis points, or
(ii) the bank’s prime rate. All amounts outstanding under the Loan Agreement are
due on January 15, 2011.





No
amounts were borrowed against the line of credit as of December 31, 2008. The
Company has availability of $10.9 million as of December 31, 2008 which is
decreased by outstanding letters of credit totaling $3.1 million at December 31,
2008.





Availability
of borrowings and the issuance of letters of credit under the Loan Agreement are
subject to a borrowing base calculation based upon a valuation of the Company’s
eligible inventories (including raw materials, finished and semi-finished goods,
and certain in-transit inventory) and eligible accounts receivable, each
multiplied by an applicable advance rate.





In
addition to representations and warranties, covenants, conditions and other
terms customary for instruments of this type, the Loan Agreement includes
negative covenants that prohibit the Company from, among other things, incurring
certain types of indebtedness (excluding indebtedness secured by certain assets
of the Company and its subsidiaries in an aggregate amount not to exceed $50.0
million for working capital purposes), making annual capital expenditures in
excess of proscribed amounts, or disposing of certain assets. The Loan Agreement
provides for customary events of default, including failure to pay any principal
or interest when due, failure to comply with covenants, any representation made
by the Company that is incorrect in any material respect, certain defaults
relating to other material indebtedness, certain insolvency and receivership
events affecting the Company, judgments in excess of $2.5 million in the
aggregate being rendered against the Company, and the incurrence of certain
liabilities under the Employee Retirement Income Security Act (“ERISA”) in
excess of $1.0 million in the aggregate.





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In the
event of a default by the Borrowers, the Agent may, at the direction of the
lenders, terminate the lenders’ commitments to make loans under the Loan
Agreement, declare the obligations under the Loan Agreement immediately due and
payable and enforce any and all rights of the lenders or Agent under the Loan
Agreement and related documents. For certain events of default related to
insolvency and receivership, the commitments of the lenders are automatically
terminated and all outstanding obligations become immediately due and payable.
The obligations of the Company under the Loan Agreement are secured by its
inventory and accounts receivable of certain of the Company’s subsidiaries in
the U.S. and the U.K. The remaining balance of the Company’s consolidated
assets, including the subsidiaries acquired in connection with the TeT
acquisition, is unencumbered under the Loan Agreement and, if needed, may be
used as collateral for additional debt. The Company’s obligations as guarantor
under the Loan Agreement are unsecured.





Acquisition
Financing





In
February 2008, in connection with the acquisition of TeT, the Company entered
into a credit agreement (the “Credit Agreement”) with Francisco Partners II,
L.P. (“FP II”) pursuant to a commitment letter dated December 20, 2007 between
the Company and FP II. See Note 2 for additional information related to the TeT
acquisition. The Credit Agreement provided for a loan of up to $60 million to
partially fund the acquisition at closing. The loan under the Credit Agreement
bears interest at 10% per annum, provided that, at the election of the Company,
interest may be capitalized and added to the principal of the loan to be repaid
at maturity. The loan was funded on April 1, 2008 by an affiliate of FP II, FP
Hypercom Holdco, LLC. All amounts outstanding under the Credit Agreement are due
four years from the funding date. On funding of the loan under the Credit
Agreement and the closing of the acquisition, the lender was granted a five-year
warrant to purchase approximately 10.5 million shares (the “Warrant”) of the
Company’s common stock at $5.00 per share. The Warrant contains a cashless
exercise provision which can be utilized by the lender at its sole option. The
cashless exercise provision permits the lender, in lieu of making the cash
payment otherwise contemplated to be made to the Company upon exercise of the
Warrant in whole or in part, to receive upon such exercise the “net number” of
shares of the Company’s common stock determined according to the agreement. In
the event the lender elects a cashless exercise of the Warrant, the Company will
not receive any cash payment for the shares delivered to the lender pursuant to
such cashless exercise.





The
estimated fair value of the Warrant at the date issued was $1.68 per share using
a Black-Scholes option pricing model. The valuation date for the Warrant was
February 14, 2008, when all relevant terms and conditions of the debt agreement
had been reached in accordance with Accounting Principles Board No. 14, Accounting for Convertible Debt and
Debt Issued with Stock Purchase Warrants.The total fair value of
the Warrant of $17.8 million was recorded as a discount to the acquisition
financing and has been recognized in equity as additional paid in capital. The
loan discount is being amortized as interest expense over the life of the loan
and amounted to $1.7 million for the year ended December 31, 2008.





In
accordance with the loan agreement, $4.6 million of interest accrued during 2008
was added to the loan balance.





In
addition to representations and warranties, covenants, conditions and other
terms customary for instruments of this type, the Credit Agreement includes
negative covenants that prohibit the Company from, among other things, incurring
certain types of indebtedness, granting liens on assets, engaging in
transactions with affiliates and disposing of certain assets. The Credit
Agreement provides for customary events of default, including failure to pay any
principal or interest when due, failure to comply with covenants, any
representation made by the Company that is incorrect in any material respect,
certain defaults relating to other material indebtedness, certain insolvency and
receivership events affecting the Company, judgments in excess of $3.0 million
in the aggregate being rendered against the Company, and the incurrence of
certain ERISA liabilities in excess of $5.0 million in the
aggregate.





In the
event of a default by the Company, the Lender may declare the obligations under
the Credit Agreement immediately due and payable and enforce any and all of its
rights under the Credit Agreement and related documents.




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Long-term debt consists of
the following at December 31, 2008 (dollars in thousands):


2008FP
      II Credit Agreement
                    
                    $
                    60,000Interest
      conversion to debt
                    
                    
                    4,613Discount
      on warrants issued to FP II
                    
                    
                    (17,758
                    )Amortization
      of warrant discount
                    
                    
                    1,726Debt
      assumed on acquisitions
                    
                    
                    185Other
                    
                    
                    3$
                    48,769




Long-term
debt of $48.8 million is due in 2012.








The
following table summarizes the book value and fair value of our debt as of
December 31, 2008:




Book Value
                  
                  
                  Fair ValueFrancisco
      Partners note payable
                  
                  $
                  48,581
                  
                  
                  $
                  43,795Debt
      assumed on acquisitions
                  
                  
                  185
                  
                  
                  
                  185Other
                  
                  
                  3
                  
                  
                  
                  3$
                  48,769
                  
                  
                  $
                  43,983




The fair
value of our debt is based on the face amount of the debt obligation, the coupon
rate and corporate bond spreads for similar debt instruments.





13.
Share Based Compensation




The
following table summarizes share-based compensation expense included in the
consolidated statements of operations for December 31, 2008, 2007 and
2006:




2008
                  
                  
                  2007
                  
                  
                  2006Costs
      of revenue
                  
                  $
                  119
                  
                  
                  $
                  111
                  
                  
                  $
                  170Research
      and development
                  
                  
                  132
                  
                  
                  
                  (104
                  )
                  
                  
                  896Selling,
      general and administrative
                  
                  
                  3,233
                  
                  
                  
                  1,912
                  
                  
                  
                  5,187Total
                  
                  $
                  3,484
                  
                  
                  $
                  1,919
                  
                  
                  $
                  6,253




Share-based
compensation expense included $0.1 million, $0.2 million and $1.0 million of
payroll tax paid on behalf of employees that received stock awards during the
years ended December 31, 2008, 2007 and 2006, respectively.





During
2007, the Company reversed $1.1 million and $0.5 million of previously
recognized expense and accrual of payroll tax, respectively, due to
non-achievement of performance goals related to restricted stock
awards.





As of
December 31, 2008, total unrecognized compensation cost, net of forfeiture,
related to stock-based options and awards was $2.2 million and the related
weighted-average period over which it is expected to be recognized is
approximately one year.




Stock
Options





At
December 31, 2008, the Company had four active share-based employee compensation
plans. Stock option awards granted from these plans are granted at the fair
market value on the date of grant, and vest over a period determined at the time
the options are granted, generally ranging from one to five years, and generally
have a maximum term of ten years. For stock options with graded vesting
terms, the Company recognizes compensation cost over the requisite service
period on the accelerated method in accordance with FASB Interpretation No. 28,
Accounting for Stock
Appreciation Rights and other Variable Stock Option Award Plans, rather
than the straight-line method.


84
 Table of Contents




A summary
of stock option activity within the Company’s share-based compensation plans and
changes for the year ended December 31, 2008 is as
follows:





Number of Options
                
                
                Weighted Average Exercise
    Price
                
                
                Weighted Average Remaining Contractual
      Term
                
                
                Aggregate Intrinsic Value (In
      Thousands)Outstanding
      at December 31, 2008
                
                
                4,444,718
                
                
                $
                5.74
                
                
                
                7.35
                
                
                $
                9Vested
      and expected to vest at December 31, 2008
                
                
                4,159,133
                
                
                $
                5.83
                
                
                
                7.22
                
                
                $
                8Exercisable
      at December 31, 2008
                
                
                2,103,857
                
                
                $
                7.25
                
                
                
                5.37
                
                
                $
                -




The
aggregate intrinsic value of options exercised during the years ended December
31, 2008, 2007 and 2006


was
$0.2 million, $0.3 million and $3.9 million, respectively.





The key
assumptions used in the Black-Scholes valuation model to calculate the fair
value are as follows:




2008
                  
                  
                  2007
                  
                  
                  2006Weighted
      average risk free interest rate
                  
                  
                  5.4
                  %
                  
                  
                  4.5
                  %
                  
                  
                  4.8
                  %Expected
      life of the options (in years)
                  
                  
                  4.75
                  
                  
                  
                  5.41
                  
                  
                  
                  5.48Expected
      stock price volatility
                  
                  
                  49
                  %
                  
                  
                  56
                  %
                  
                  
                  67
                  %Expected
      dividend yield
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -





The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
changes in the subjective input assumptions can materially affect the fair value
estimate, in management’s opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options. The risk-free interest rate is based on the U.S. treasury security
rate in effect as of the date of grant. The expected lives of options and stock
price volatility are based on historical data of the Company. The weighted
average fair value of options granted in the years ended December 31, 2008,
2007 and 2006 was $1.81, $2.91 and $5.90, respectively.





Restricted
Stock Awards





The
Company grants restricted stock awards to certain employees. Restricted stock
awards are valued at the closing market value of the Company’s common stock on
the date of grant, and the total value of the award is expensed ratably over the
service period of the employees receiving the grants. Share-based compensation
expense (reversal) related to all restricted stock awards outstanding in 2008,
2007, and 2006 was approximately $0.4 million, ($0.5 million) and $1.4 million,
respectively. As of December 31, 2008, the total amount of unrecognized
compensation cost related to nonvested restricted stock awards was less than
$0.1 million, which is expected to be recognized over a weighted-average period
of one year. Compensation expense with respect to the grants could be reduced
and/or reversed to the extent employees receiving the grants leave the Company
prior to vesting in the award.


85
 Table of Contents




A summary
of nonvested restricted stock activity for the years ended December 31, 2008,
2007 and 2006 is as follows:





Nonvested Shares
Outstanding
                    
                    
                    Weighted Average Grant Date Fair Value per
      ShareBalance
      at December 31, 2005
                    
                    
                    402,000
                    
                    
                    
                    6.38Shares
      granted in 2006
                    
                    
                    92,432
                    
                    
                    
                    8.40Shares
      vested in 2006
                    
                    
                    (102,000
                    )
                    
                    
                    6.36Shares
      forfeited in 2006
                    
                    
                    (50,000
                    )
                    
                    
                    6.42Balance
      at December 31, 2006
                    
                    
                    342,432
                    
                    
                    
                    6.92Shares
      granted in 2007
                    
                    
                    93,334
                    
                    
                    
                    5.76Shares
      vested in 2007
                    
                    
                    (60,766
                    )
                    
                    
                    6.14Shares
      forfeited in 2007
                    
                    
                    (300,000
                    )
                    
                    
                    6.89Balance
      at December 31, 2007
                    
                    
                    75,000
                    
                    
                    
                    6.24Shares
      granted in 2008
                    
                    
                    75,000
                    
                    
                    
                    3.99Shares
      vested in 2008
                    
                    
                    (100,000
                    )
                    
                    
                    5.21Balance
      at December 31, 2008
                    
                    
                    50,000
                    
                    
                    
                    4.94





The total
fair value of restricted shares vested during the years ended December 31, 2008,
2007 and 2006 was $0.5 million, $0.4 and $0.6 million,
respectively.




14.
Stockholders' Equity





In 1997,
the Company’s Board of Directors (the “Board”) adopted and the stockholders of
the Company approved the Hypercom Corporation Long-Term Incentive Plan, which
was amended in 2001 (the “1997 Plan”), to allocate a total of 6,000,000 shares
of common stock for issuance at the Company’s discretion. The 1997 Plan
authorizes issuance of “incentive stock options” (as defined by the Internal
Revenue Code of 1986), non-qualified stock options, stock appreciation rights,
restricted stock awards, performance share awards, dividend equivalent awards
and other stock-based awards. Stock options issued under the 1997 Plan become
exercisable over a period determined by the Board (generally over two to five
years) and expire after a period determined by the Board (generally ten years
after the date of grant).





In 2000,
the Board approved the Hypercom Corporation 2000 Broad-Based Stock Incentive
Plan, which was amended in 2002 (the “2000 Plan”), to allocate 7,000,000 shares
of common stock for issuance at the Company’s discretion. The 2000 Plan
authorizes the issuance of non-qualified stock options and restricted stock
awards, the majority of which must be issued to employees of the Company who are
not officers or directors. Non-qualified stock options issued under the 2000
Plan become exercisable over a period determined by the Board (generally over
two to five years), and expire after a period determined by the Board (generally
ten years after the date of grant).




86
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Stock
Options
 
 A summary
of the Company's stock option activity, including stock options issued under the
Directors Plan, defined below, and related information for the years ended
December 31, 2008, 2007 and 2006 is as follows:


2008
                
                
                2007
                
                
                2006Weighted
                
                
                
                
                
                Weighted
                
                
                
                
                
                WeightedShares
                
                
                Average
                
                
                Shares
                
                
                Average
                
                
                Shares
                
                
                AverageUnder
                
                
                Exercise
                
                
                Under
                
                
                Exercise
                
                
                Under
                
                
                ExerciseOption
                
                
                Price
                
                
                Option
                
                
                Price
                
                
                Option
                
                
                PriceBeginning
      balance outstanding
                
                
                2,974,536
                
                
                $
                7.33
                
                
                
                3,726,642
                
                
                $
                8.07
                
                
                
                4,321,744
                
                
                $
                6.88Granted
                
                
                2,215,000
                
                
                
                4.09
                
                
                
                649,070
                
                
                
                5.29
                
                
                
                1,083,500
                
                
                
                9.54Exercised
                
                
                (140,100
                )
                
                
                3.78
                
                
                
                (201,024
                )
                
                
                3.61
                
                
                
                (1,060,942
                )
                
                
                4.38Cancellations
                
                
                (604,718
                )
                
                
                7.98
                
                
                
                (1,200,152
                )
                
                
                9.04
                
                
                
                (617,660
                )
                
                
                8.73Ending
      balance outstanding
                
                
                4,444,718
                
                
                $
                5.74
                
                
                
                2,974,536
                
                
                $
                7.33
                
                
                
                3,726,642
                
                
                $
                8.07Exercisable
      at end of year
                
                
                2,103,857
                
                
                $
                7.25
                
                
                
                1,919,734
                
                
                $
                7.71
                
                
                
                2,249,506
                
                
                $
                7.77






The
following table summarizes additional information about the Company's stock
options outstanding as of December 31, 2008:




Options Outstanding
                                    
                                    
                                    
                                    
                                    
                                    Options ExercisableWeighted
                                    
                                    
                                    Weighted
                                    
                                    
                                    
                                    
                                    
                                    WeightedRange of Exercise Prices
                                    
                                    
                                    Shares
                                    
                                    
                                    Average
                                    
                                    
                                    Average
                                    
                                    
                                    Shares
                                    
                                    
                                    AverageUnder
                                    
                                    
                                    Remaining
                                    
                                    
                                    Exercise
                                    
                                    
                                    Under
                                    
                                    
                                    ExerciseOption
                                    
                                    
                                    Contractual Life
                                    
                                    
                                    Price
                                    
                                    
                                    Option
                                    
                                    
                                    Price$2.46
      - 3.50
                                    
                                    
                                    
                                    308,600
                                    
                                    
                                    
                                    6.26
                                    
                                    
                                    $
                                    2.27
                                    
                                    
                                    
                                    143,600
                                    
                                    
                                    $
                                    3.49$3.52
      - 5.28
                                    
                                    
                                    
                                    2,665,241
                                    
                                    
                                    
                                    8.58
                                    
                                    
                                    
                                    4.47
                                    
                                    
                                    
                                    670,240
                                    
                                    
                                    
                                    4.93$5.41
      - 6.25
                                    
                                    
                                    
                                    291,000
                                    
                                    
                                    
                                    6.71
                                    
                                    
                                    
                                    6.02
                                    
                                    
                                    
                                    218,999
                                    
                                    
                                    
                                    6.07$6.28
      - 9.29
                                    
                                    
                                    
                                    519,750
                                    
                                    
                                    
                                    6.95
                                    
                                    
                                    
                                    7.36
                                    
                                    
                                    
                                    479,745
                                    
                                    
                                    
                                    7.32$9.31
      - 9.38
                                    
                                    
                                    
                                    150,000
                                    
                                    
                                    
                                    1.54
                                    
                                    
                                    
                                    9.37
                                    
                                    
                                    
                                    150,000
                                    
                                    
                                    
                                    9.37$9.40
      - 9.63
                                    
                                    
                                    
                                    20,000
                                    
                                    
                                    
                                    3.00
                                    
                                    
                                    
                                    9.57
                                    
                                    
                                    
                                    16,133
                                    
                                    
                                    
                                    9.58$10.38
      - 14.44
                                    
                                    
                                    
                                    490,127
                                    
                                    
                                    
                                    4.03
                                    
                                    
                                    
                                    11.63
                                    
                                    
                                    
                                    425,140
                                    
                                    
                                    
                                    11.774,444,718
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    2,103,857








Stock
Warrants




During
July 2006, the Company issued 319,858 shares of common stock, par value
$0.001 per share, upon the conversion of 319,858 Series D Warrants at
an exercise price of $5.21 per share. Proceeds from the conversion amounted
to $1.7 million.





In
connection with the funding of the Credit Agreement, the Company granted
the Warrant to purchase approximately 10.5 million shares of the Company’s
common stock at $5.00 per share. See further discussion in Note 12. The Warrant
was outstanding at December 31, 2008.







Employee
Stock Purchase Plan





In 1997,
the Board adopted and the stockholders of the Company approved the Employee
Stock Purchase Plan (the “Purchase Plan”). The Purchase Plan was subsequently
amended and restated in its entirety in 2008 upon adoption by the Board and
approval by the Company’s stockholders. The Purchase Plan allows eligible
employees of the Company to purchase shares of the Company’s common stock
through periodic payroll deductions every three months. At the end of each
offering period, payroll deductions for the offering period are used to purchase
shares of common stock for each participant’s account at a price equal to 85% of
the fair market value of the common stock on either the first or last day of the
offering period, whichever is less. Payroll deductions under the Purchase Plan
are limited to 10% of each eligible employee’s earnings during the offering
period, and no single participant will be granted an option to purchase shares
with a value in excess of $25,000 for each calendar year. The Board has reserved
625,000 shares of common stock for issuance under the Purchase Plan, subject to
adjustment in the event of a stock split, reverse stock split, stock dividend or
similar event. Under the Purchase Plan, for the years ended December 31, 2008,
2007, and 2006 the Company sold 59,997, 46,139 and 58,642 shares to employees at
weighted average prices of $2.30, $4.47 and $5.88,
respectively.





87
 Table of Contents




Under
SFAS 123R, the Company’s 1997 Purchase Plan is considered compensatory. During
the years ended December 31, 2008, 2007 and 2006, the Company recorded
compensation expense of $59,000, $55,000 and $78,000, respectively related to
the Purchase Plan.





Directors'
Stock Plan





In 1997,
the Board adopted and the stockholders of the Company approved the Hypercom
Corporation Nonemployee Directors’ Stock Option Plan, which was amended in 2002
and 2006 (the “Directors Plan”). The Directors Plan is administered by a
committee appointed by the Board and provides for an initial grant to each
Nonemployee Director of an option to purchase 15,000 shares of Common Stock;
thereafter, each Nonemployee Director will receive an annual grant of an option
to purchase 15,000 shares of Common Stock. The aggregate number of shares of
Common Stock subject to the Directors Plan may not exceed 600,000, subject to
adjustment in the event of a stock split, reverse stock split, stock dividend or
similar event. Options granted under the Directors Plan are fully vested and
become fully exercisable on the first anniversary of the date of grant and have
a term of ten years. The exercise price per share under the Director Plan
is equal to the fair market value of such shares upon the date of grant. In
general, options may be exercised by payment in cash or a cash equivalent,
and/or previously acquired shares having a fair market value at the time of
exercise equal to the total option exercise price.





Stock
Repurchase





During
August 2003, the Board authorized a stock repurchase program to allow the
purchase of up to $10.0 million of our common stock. During November 2005, the
Board authorized a stock repurchase program to purchase up
to $20.0 million of the Company’s common stock. When treasury shares
are issued, the Company uses a first-in, first-out method and any excess of
repurchase costs over the reissue price is treated as a reduction of paid in
capital. Any excess of reissue price over repurchase cost is treated as an
increase to paid-in capital.








During
2006 the Company purchased 1,346,628 shares of its common stock for $10.7
million. There were no treasury stock repurchases during 2007 or 2008. The
repurchased shares were recorded as treasury stock and result in a reduction to
stockholder’s equity. As of December 31, 2007, the Company had repurchased
2,932,037 shares of common stock at an average price per share of $6.86
under the share repurchase programs during 2003, 2005 and 2006. The timing and
amount of any future repurchases will depend on market conditions and corporate
considerations.





Preferred
Stock





The
Company is authorized to issue 10,000,000 shares of $0.001 par value preferred
stock. As of December 31, 2008 and 2007, there were no preferred shares
outstanding.





15.
Brazilian Health Ministry Contract





The
Company has been involved in a long-term contract with the Brazilian Health
Ministry requiring substantial delivery of customized software and hardware.
Revenue and a resulting margin under this contract were recorded based on the
achievement of contract milestones approved by the Brazilian Health Ministry in
accordance with SOP 81-1. The margin for the entire contract was estimated to be
9%. Inherent in this margin was an expectation of realizing all amounts owed
under the terms of the original contract and recovering claims for additional
contract revenue, due to changes in the scope of the contract and additional
currency exchange variation adjustments. Scope changes involved expanding the
overall design specifications requiring additional hours and administration
costs. The currency adjustments represented the inflation of cost on imported
equipment caused by currency movements. At the end of 2003, the Company formally
presented a claim to the Brazilian Health Ministry detailing the amount and
nature of the scope changes and currency variation impact. The Company did not
recognize revenues above the original contract amount, and contract costs
associated with the scope changes and currency adjustments amounting to $11.3
million were deferred in anticipation of recognizing contract revenue. Due to
the lack of timely acknowledgement and acceptance of the pending claim, the
Company recorded a charge to operations for the deferred costs during the year
ended December 31, 2004.


88
 Table of Contents




Since
2004, the Company has actively pursued discussions with the Brazilian Health
Ministry regarding both the collection of the contract costs as well as renewal
of the maintenance element of the contract; however, there is no certainty as to
how much will ultimately be collected, whether revenue for work previously done
will be recorded or if the maintenance element of the contract will ultimately
be extended. The Company collected $4.6 million and $0.9 million in 2007 and
2006, respectively, related to this contract and the deferred costs previously
charged to operations during 2004. These collections were recorded as services
revenue during the years ended December 31, 2007 and 2006. There were no amounts
collected from the Brazilian Health Ministry during 2008.





16.
Income Taxes





Income
(loss) before income taxes and discontinued operations consists of the following
for the years ended December 31, 2008, 2007 and 2006 (dollars in
thousands):








2008
                
                
                2007
                
                
                2006Income
      (loss) before income taxes and discontinued operations:United
      States
                
                $
                (24,276
                )
                
                $
                (15,760
                )
                
                $
                (18,952
                )Foreign
                
                
                (59,435
                )
                
                
                7,138
                
                
                
                25,035$
                (83,711
                )
                
                $
                (8,622
                )
                
                $
                6,083


The
(provision) benefit for income taxes for the years ended December 31, 2008, 2007
and 2006 consists of the following (dollars in thousands):




2008
                
                
                2007
                
                
                2006Current:State
                
                $
                (3
                )
                
                $
                4
                
                
                $
                (3
                )Federal
                
                
                
                
                
                
                (8
                )
                
                
                -Foreign
                
                
                465
                
                
                
                (40
                )
                
                
                (1,873
                )462
                
                
                
                (44
                )
                
                
                (1,876
                )Deferred
      - Foreign
                
                
                (1,673
                )
                
                
                (434
                )
                
                
                530Total
                
                $
                (1,211
                )
                
                $
                (478
                )
                
                $
                (1,346
                )




89
 Table of Contents


A
reconciliation of the U.S. federal statutory income tax rate to the Company’s
effective tax rate for the years ended December 31, 2008, 2007 and 2006 is as
follows:




2008
                
                
                2007
                
                
                2006Tax
      expense at the federal statutory rate
                
                
                35.0
                %
                
                
                35.0
                %
                
                
                35.0
                %State
      income taxes, net of federal income tax effect
                
                
                0.0
                
                
                
                0.0
                
                
                
                0.0Foreign
      taxes
                
                
                (5.2
                )
                
                
                27.5
                
                
                
                (119.7
                )Impairment
      charges
                
                
                (21.3
                )
                
                
                0.0
                
                
                
                0.0Translation
      gain
                
                
                0.0
                
                
                
                0.0
                
                
                
                19.7Change
      in valuation allowance
                
                
                (8.0
                )
                
                
                (67.4
                )
                
                
                85.0Transaction
      costs
                
                
                (1.8
                )
                
                
                0.0
                
                
                
                0.0Other
                
                
                (0.2
                )
                
                
                (1.0
                )
                
                
                1.6Effective
      tax rate
                
                
                (1.5
                )%
                
                
                (5.9
                )%
                
                
                21.6
                %





Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of the
Company’s deferred tax assets and liabilities at December 31, 2008 and 2007 are
as follows (dollars in thousands):





2008
                  
                  
                  2007Deferred
      tax assets (liabilitites), current:Inventory
      valuation and reserves
                  
                  $
                  2,657
                  
                  
                  $
                  2,761Compensation
      accruals
                  
                  
                  1,059
                  
                  
                  
                  1,060Allowance
      for doubtful accounts
                  
                  
                  441
                  
                  
                  
                  886Foreign,
      net
                  
                  
                  (3,015
                  )
                  
                  
                  1,478Valuation
      allowance
                  
                  
                  (4,650
                  )
                  
                  
                  (5,688
                  )Net
      deferred tax assets (liabilities), current
                  
                  $
                  (3,508
                  )
                  
                  $
                  497Deferred
      tax assets (liabilities), non-current:Tax
      loss carry forwards - United States
                  
                  $
                  35,202
                  
                  
                  $
                  29,401Tax
      loss carry forwards - Foreign
                  
                  
                  22,404
                  
                  
                  
                  22,954Intangibles
                  
                  
                  (16,714
                  )
                  
                  
                  280Property,
      plant and equipment
                  
                  
                  (1,097
                  )
                  
                  
                  (667
                  )Foreign
                  
                  
                  3,918
                  
                  
                  
                  179Other
                  
                  
                  5,827
                  
                  
                  
                  5,340Valuation
      allowance
                  
                  
                  (65,539
                  )
                  
                  
                  (58,107
                  )Net
      deferred tax liabilities, non-current
                  
                  $
                  (15,999
                  )
                  
                  $
                  (620
                  )





For the
year ended December 31, 2008, the Company’s valuation allowance increased
by $6.4 million, primarily related to a loss from operations in the
U.S. The Company does not believe it is more likely than not that it will
be able to realize the majority of its deferred tax assets through expected
future taxable profits and has recorded a full valuation allowance for all U.S.
federal and state deferred tax assets and the majority all foreign deferred tax
assets. The valuation allowance is subject to reversal in future years at such
time the benefits are actually utilized or the operating profits become
sustainable at a level that meets the recoverability criteria under
SFAS No. 109, Accounting for Income Taxes
(“SFAS 109”).





At
December 31, 2008, the Company has a gross deferred tax asset of $35.2
million associated with its U.S. federal and state tax net operating loss
carryforwards of $100.6 million. The U.S. federal and state net operating loss
carryforwards will begin to expire in 2020 through 2028 if not previously
utilized. The Company’s ability to utilize its net operating losses may be
restricted due to statutory “ownership changes” (as defined for purposes of
Section 382 of the Internal Revenue Code).





As of
December 31, 2008, the Company has a gross deferred tax asset of $22.4
million associated with foreign net operating loss carryforwards of $71.4
million. The foreign net operating loss carryforwards begin to expire in various
periods if not previously utilized.





90
 Table of Contents





In June
2006, FASB issued its Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an
interpretation of FASB Statement No. 109 (“FIN 48”), which clarifies
the accounting for uncertainty in income taxes recognized in a company’s
financial statements in accordance with SFAS 109. The interpretation
prescribes a recognition threshold and measurement attribute criteria for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. The interpretation also provides guidance
on non-recognition, classification, interest and penalties, accounting in
interim periods, disclosure and transition. The Company adopted the provisions
of FIN 48 on January 1, 2007. The adoption of FIN 48 did not
impact the consolidated balance sheets, statements of operations or cash flows.
The total amount of unrecognized tax benefits at December 31, 2008 is $39.4
million of which $4.0 million would impact the Company’s effective tax rate
were it to be recognized.  The gross unrecognized tax benefits as of
January 1, 2007 include a reclassification of $31.6 million from a previously
recorded SFAS 109 reserve.  The following table summarizes the
activity related to the Company’s unrecognized tax benefits (dollars in
thousands):




2008
                  
                  
                  2007Gross
      unrecognized tax benefits at beginning of the year
                  
                  $
                  40,015
                  
                  
                  $
                  39,959Decrease
      in tax positions for prior years
                  
                  
                  (608
                  )
                  
                  
                  (624
                  )Increase
      in tax positions for current year
                  
                  
                  -
                  
                  
                  
                  680Gross
      unrecognized tax benefits at the end of the year
                  
                  $
                  39,407
                  
                  
                  $
                  40,015





The
Company and its subsidiaries file income tax returns in the U.S. federal
jurisdiction, and various states and foreign jurisdictions. With few exceptions,
the Company is no longer subject to U.S. federal, state and local, or non-U.S.
income tax examinations by tax authorities for years prior to 2000. The
Company’s policy is to recognize interest related to unrecognized tax benefits
as interest expense and penalties as operating expenses. Accrued interest and
penalties are insignificant at December 31, 2008. The Company believes that it
has appropriate support for the income tax positions taken and to be taken on
its tax returns and that its accruals for tax liabilities are adequate for all
open years based on an assessment of many factors including past experience and
interpretations of tax law applied to the facts of each
matter.





It is
reasonably possible that the amount of unrecognized tax benefits for the Company
will decrease within the next twelve months by $0.5 million relating to income
tax exposure in various foreign jurisdictions. The anticipated reduction is
based on the Company’s ongoing assessment of the administrative practices and
precedents of the taxing authorities in the respective foreign
jurisdictions.





Undistributed
earnings of the Company’s historic and acquired foreign subsidiaries are
considered to be indefinitely reinvested, and accordingly, no provision for
federal and state income taxes or foreign withholding taxes has been provided on
such undistributed earnings. Determination of the potential amount of
unrecognized deferred federal and state income tax liability and foreign
withholding taxes is not practicable because of the complexities associated with
its hypothetical calculation; however, unrecognized foreign tax credits would be
available to reduce some portion of the federal liability.





17.
Benefit Plans




Defined Benefit
Plan




In
conjunction with the acquisition of TeT, the Company assumed pension plans for
eligible employees in Germany and France. Benefits are based primarily on a
benefits multiplier and years of service.   The Company had no
defined benefit plan or pension expenses prior to the acquisition of
TeT.





The
expected long-term rate of return on plan assets is updated annually taking into
consideration the related asset allocation, historical returns on the types of
assets held in the plan, and the current economic environment. Based on these
factors, the Company expects its plan assets to earn a long-term rate of return
of 4.5%. Actual year-


91
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In
September 2006, the FASB issued Statement No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans, an amendment of FASB Statement
Nos. 87, 88, 106 and 132(R)(“SFAS 158”). SFAS 158 requires employers to
recognize the funded status of a defined benefit postretirement plan as an asset
or liability in its statement of financial position and to recognize changes in
that funded status in comprehensive income in the year in which the changes
occur. The funded status of a defined benefit pension plan is measured as the
difference between plan assets at fair value and the plan’s projected benefit
obligation.




Based on
the projected benefit obligations of the Company’s defined benefit pension plan
at December 31, 2008, the aggregate funded status of the Company’s defined
benefit pension plan in Germany was $2.9 million underfunded.





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The following table shows
a reconciliation of changes in the plan’s benefit obligation and plan assets for
the year ended December 31, 2008 and a reconciliation of the funded status with
amounts recognized in the consolidated balance sheets as of December 31, 2008
(in thousands).


December
      312008Change
      in Benefit ObligationAcquired
      pension obligation at April 1, 2008
                    
                    $
                    (4,961
                    )Service
      cost
                    
                    
                    (254
                    )Interest
      cost
                    
                    
                    (274
                    )Defered
      amounts
                    
                    
                    633Benefits
      paid
                    
                    
                    490Foreign
      currency translation adjustment
                    
                    
                    513Benefit
      obligation at end of year
                    
                    $
                    (3,853
                    )Change
      in Plan AssetsFair
      value of plan assets at April 1, 2008
                    
                    $
                    3,395Actual
      return on plan assets
                    
                    
                    111Defered
      amounts
                    
                    
                    20Foreign
      currency translation adjustment
                    
                    
                    (356
                    )Benefits
      paid
                    
                    
                    (432
                    )Fair
      value of plan assets at end of year
                    
                    $
                    2,738Funded
      status
                    
                    $
                    (1,115
                    )Net
      balance sheet liability
                    
                    $
                    (1,115
                    )Amounts
      recognized in the consolidated balance sheets:Noncurrent
      asset
                    
                    
                    2,481Noncurrent
      liabilities
                    
                    
                    (3,596
                    )Amount
      recognized
                    
                    $
                    (1,115
                    )


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The
components of net periodic benefit cost and other amounts recognized in other
accumulated comprehensive loss are as follows (in thousands):


December 31.
      2008Net
      periodic benefit costService
      cost
                                    
                                    $
                                    (254
                                    )Interest
      cost
                                    
                                    
                                    (274
                                    )Expected
      return on plan assets
                                    
                                    
                                    111Amortization
      of deferred amounts and asset ceiling impact
                                    
                                    
                                    161$
                                    (256
                                    )Amounts
      recognized in accumulated other comprehensive income (loss)
      reclassComprehensive
      income
                                    
                                    
                                    274





As of
December 31, 2008, the average expected future working lifetime for each
participant of the plans ranges from 12 to 22 years.





The
Company’s weighted-average assumptions used to determine net periodic benefit
cost for the year ended December 31, 2008 are as follows:





December 31,2008Discount
      rate
                        
                        5.75%
      to 5.80%Expected
      return on plan assets
                        
                        4.5%








The
Company changes important assumptions whenever changing conditions warrant. The
discount rate is typically changed at least annually and the expected long-term
rate of return on plan assets will typically be revised every three to five
years. Other material assumptions include the rates of employee termination and
rates of participant mortality.





The
discount rate was determined by projecting the plan’s expected future benefit
payments as defined for the projected benefit obligation, discounting those
expected payments using a theoretical zero-coupon spot yield curve derived from
a universe of high-quality bonds as of the measurement date, and solving for the
single equivalent discount rate that resulted in the same projected benefit
obligation.




The
expected return on plan assets was determined based on historical and expected
future returns of the various asset classes, using the target allocations
described below.





The
expected long-term rate of return on pension assets is selected by taking into
account the expected duration of the Projected Benefit Obligation (“PBO”) for
the plan, and the asset mix of the plan. SFAS No. 87, Employers’ Accounting for
Pensions, calls for the rate of return to be the rate to be earned over
the period until the benefits represented by the current PBO are paid. The
expected return on plan assets is based on the Company’s expectation of
historical long-term average rates of return on the different asset classes held
in the pension fund. This is reflective of the current and projected asset mix
of the funds and considers the historical returns earned on our asset allocation
and the duration of the plan liabilities. Thus, the Company has taken a
historical approach to the development of the expected return on asset
assumption. The Company believes that fundamental changes in the markets cannot
be predicted over the long-term. Rather, historical returns, realized across
numerous economic cycles, should be representative of the market return
expectations applicable to the funding of a long-term benefit
obligation.





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The
Company’s pension plan asset allocations at December 31, 2008 are as follows (in
thousands):





2008Cash
                      
                      
                      110Equities
                      
                      
                      301Bonds
                      
                      
                      2,136Other
                      
                      
                      191$
                      2,738








In
determining the asset allocation, our investment manager recognizes the
Company’s desire for funding and expense stability, the long-term nature of the
pension obligation and current and projected cash needs for retiree benefit
payments. The pension fund is actively managed within the target asset
allocation ranges.





The
plan’s investment policy includes a mandate to diversify assets and invest in a
variety of asset classes to achieve that goal. The plan’s assets are currently
invested in a variety of funds representing most standard equity and debt
security classes. While no significant changes in the asset allocation are
expected during the upcoming year, the Company may make changes at any
time.





As of
December 31, 2008, the Company’s pension plan assets did not hold any direct
investment in the Company’s common stock.





The
following estimated future benefit payments, including future benefit accrual,
which reflect expected future service, as appropriate, are expected to be paid
(in thousands):





Period
                  
                  Pension Benefits2009
                  
                  $
                  732010
                  
                  $
                  1892011
                  
                  $
                  1542012
                  
                  $
                  852013
                  
                  $
                  982014-beyond
                  
                  $
                  1,390








Funding
requirements for subsequent years are uncertain and will significantly depend on
whether the plan’s actuary changes any assumptions used to calculate plan
funding levels, the actual return on plan assets, changes in the employee groups
covered by the plan, and any legislative or regulatory changes affecting plan
funding requirements. While the current market conditions could have an adverse
effect on our plan investments, any additional required contribution is not
expected to have a material effect on our consolidated financial statements and
we expect to fund such contributions from our cash balances and operating cash
flows. For tax planning, financial planning, cash flow management or cost
reduction purposes, the Company may increase, accelerate, decrease or delay
contributions to the plan to the extent permitted by law.





18.
Profit Sharing Plan





The
Company has a 401(k) profit sharing plan (the “401(k) Plan”), which commenced in
fiscal 1998, covering all eligible full-time employees of the Company.
Contributions to the 401(k) Plan are made by the participants to their
individual accounts through payroll withholding. Additionally, the 401(k) Plan
provides for the Company to make profit sharing contributions to the 401(k) Plan
in amounts at the discretion of management. The employer contribution was $0.1
million for the years ended December 31, 2008, 2007 and 2006.





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19.
Commitments and Contingencies





Lease
Commitments





The
Company leases office and warehouse space, equipment and vehicles under
non-cancelable operating leases. The office space leases provide for annual rent
payments plus a share of taxes, insurance and maintenance on the
properties.





Future
minimum payments under operating leases are as follows (dollars in
thousands):




Years Ending December 31,2009
                        
                        $
                        3,5562010
                        
                        
                        2,1692011
                        
                        
                        1,3592012
                        
                        
                        1,1592013
                        
                        
                        1,067Thereafter
                        
                        
                        5,690$
                        15,000






Rental
expense from continuing operations amounted to $6.7 million, $4.2 million and
$3.0 million for the years ended December 31, 2008, 2007, and 2006,
respectively.





Litigation





The
Company is currently a party to various legal proceedings, including those noted
below. While the Company presently believes that the ultimate outcome of these
proceedings, individually and in the aggregate, will not have a material adverse
affect on the Company’s financial position, results of operations or cash flows,
litigation is subject to inherent uncertainties, and unfavorable rulings could
occur. An unfavorable ruling could include monetary damages or, in cases where
injunctive relief is sought, an injunction. Were an unfavorable ruling to occur,
it is possible such a ruling could have a material adverse impact on the
Company’s consolidated results of operations or financial position in the period
in which the ruling occurs or in future periods.





SPA
Syspatronic AG v. Hypercom Corporation, et al.(United States District Court for
the Eastern District of Texas, Marshall Division, Civil Action No. 2:07-CV-416
(LED), filed onSeptember 18, 2007). SPA Syspatronic AG (“SPA”)
commenced this action in the United States District Court for the Eastern
District of Texas (the “Court”) against the Company and others, alleging that
certain of the Company’s products infringe U.S. Patent No. 5,093,862 entitled
“Data Carrier – Controlled Terminal in a Data Exchange System” issued on March
3, 1992 (the “862 Patent”) allegedly owned by SPA. The plaintiff is seeking a
judgment of infringement, an injunction against further infringement, damages,
interest and attorneys’ fees. The Company has filed an answer denying liability
on the basis of a lack of infringement, invalidity of the ‘862 Patent, laches,
waiver, equitable estoppel and unclean hands, lack of damages, failure to state
a claim, and inequitable conduct during the prosecution of the ‘862 Patent. The
Company has also counterclaimed seeking a declaratory judgment of
non-infringement and invalidity of the ‘862 Patent, and seeking attorneys’ fees
and costs as an exceptional case due to the plaintiff’s inequitable conduct
during the prosecution of the ‘862 Patent. On April 4, 2008, the U.S. Patent and
Trademark Office (the “Patent Office”) granted the defendants’ request for
re-examination of the ‘862 Patent. On April 24, 2008, the Court granted the
defendants’ motion to stay proceedings in this case until the Patent Office
completed its re-examination of the ‘862 Patent. On December 22, 2008, the
Patent Office filed an office action rejecting all ten claims of the ‘862 Patent
as invalid because they were anticipated by prior art references. SPA has the
right to file a response within two months of the office action; however, at
SPA’s request the Patent Office granted a one month extension to respond to the
office action.





CardSoft,
Inc., et al. v. Hypercom Corporation, et al.(United
States District Court for the Eastern District of Texas, Marshall Division,
Civil Action No. 2:08-CV-00098, filed on March 6, 2008). CardSoft, Inc.
(“CardSoft”) filed this action on March 6, 2008 in the United States District
Court for the Eastern District of Texas againstthe Company and others,
alleging that certain of the Company’s terminal products infringe two patents
allegedly owned by CardSoft: U.S. Patent No. 6,934,945 (the “‘945 Patent”),
entitled “Method and Apparatus for Controlling Communications,” issued on August
23, 2005, and U.S. Patent No. 7,302,683 (the “‘683 Patent”), also entitled
“Method and Apparatus for Controlling Communications”, issued on November 27,
2007, which is a continuation of the ‘945 patent. The plaintiff is seeking a
judgment of infringement, an injunction against further infringement, damages,
interest and attorneys’ fees. In June 2008, the Company filed its answer to the
complaint in this action, denying liability on the basis of a lack of
infringement, invalidity of the ‘945 Patent and the ‘683 Patent, laches, waiver,
equitable estoppel and unclean hands, lack of damages and failure to state a
claim. The Company has also counterclaimed seeking a declaratory judgment of
non-infringement and invalidity of the ‘945 Patent and the ‘683 Patent. A
Markman hearing is scheduled for July 20, 2011 and trial is scheduled for
November 7, 2011.




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Lisa
Shipley v. Hypercom Corporation. (United States District Court for
the Northern District of Georgia, Civil Action No. 1:09-CV-0265, filed on
January 30, 2009). Lisa Shipley (“Shipley”), a former employee, filed
this action in the United States District Court for the Northern District of
Georgia on January 30, 2009 against the Company, alleging that the Company
violated Title VII of the Civil Rights Act by discriminating against her on the
basis of her gender, violated the Georgia Wage Payment laws by failing to pay
certain sales commissions, and violated the Equal Pay Act and Georgia law by
paying her lower compensation than the Company paid males who performed the same
work. Shipley is seeking compensatory damages for emotional distress, damage to
reputation, embarrassment, lost wages, back pay, accrued interest, punitive
damages, attorney’s fees and expenses, and interest. The Company denies the
allegations and intends to vigorously defend this litigation. On February 23,
2009, the Company filed a motion to dismiss based on improper venue or, in the
alternative, to transfer venue to the United States District Court for the
District of Arizona.





20. Concentrations of Credit and
Other Risks





Financial
Instruments





The
Company’s financial instruments that are exposed to concentrations of credit
risk consist primarily of cash and cash equivalents, accounts receivable
and short-term investments.





The
Company’s cash and cash equivalents and short-term investments are maintained
with major, high-quality international banks and financial institutions.
Generally, these securities are traded in a highly liquid market, may be
redeemed upon demand and bear minimal risk. Management regularly monitors the
composition and maturities of these investments and the Company has not
experienced any material loss on its investments. Cash and cash equivalents at
times may exceed the FDIC limits. The Company believes that no significant
concentration of credit risk exists with respect to these cash
investments.




The
Company’s accounts receivable result primarily from credit sales to a broad
customer base, both nationally and internationally, with a concentration
generally existing among five to ten customers. The Company’s top five customers
amounted to 22.1%, 21.3% and 25.9% of the Company’s total revenues for the years
ended December 31, 2008, 2007 and 2006, respectively. These same five
customers accounted for 17.4% and 26.9% of the Company’s net accounts
receivable balance at December 31, 2008 and 2007, respectively. Sales to
the Company’s largest customer totaled 6.2%, 5.3% and 10.8% of total revenues in
2008, 2007 and 2006, respectively.





The
Company routinely assesses the financial strength of its customers, requiring
letters of credit from certain foreign customers, and provides an allowance for
doubtful accounts as necessary.





Inventories





All of
the Company’s inventory is purchased from third party manufacturers that are
considered to be outside sources. The failure of any such third party
manufacturer to meet its commitment on schedule could have a material adverse
effect on the Company’s business, operating results and financial condition. If
a sole-source supplier were to go out of business or otherwise become unable to
meet its supply commitments, the process of locating and qualifying alternate
sources could require up to several months, during which time the Company’s
production could be delayed. Such delays could have a material adverse effect on
the Company’s business, operating results and financial
condition.





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 Table of Contents





All of
the Company’s third party manufacturers are located in foreign jurisdictions and
are subject to certain risks, including the imposition of tariffs and import and
export controls, together with changes in governmental policies. The occurrence
of any of these events could have a material adverse effect on the Company’s
business, operating results and financial condition.





The
Company estimates inventory provisions for potentially excess and obsolete
inventory on a part level basis based on forecasted demand and historical usage.
Actual demand may differ from such anticipated demand and may have a material
adverse effect on inventory valuation.





International
Operations





The
Company’s international business is an important contributor to the Company’s
net revenue and operating results. However, a substantial portion of the
Company’s international sales are denominated in the U.S. dollar, and an
increase in the value of the U.S. dollar relative to foreign currencies
could make products sold internationally less competitive. The operating
expenses of the Company’s overseas offices are paid in local currencies and are
subject to the effects of fluctuations in foreign currency exchange
rates.




The
Company maintained significant accounts receivable balances outside of the
United States comprising 72.0% and 46.8%, respectively, of the Company’s
net accounts receivable balance at December 31, 2008 and 2007. These
balances are subject to the economic risks inherent to those
regions.





21.
Segment, Geographic, and Customer Information





Our Chief
Operating Decision Maker (“CODM”), as defined in SFAS No. 131 Disclosures about Segments of an
Enterprise and Related Information (“SFAS 131”), has been identified as
the CEO of the Company.  The CODM’s has access to discrete
financial information regarding the aforementioned segments revenues, gross
margins (using fully burdened manufacturing costs), direct local service costs,
direct operating expenses consisting of expenses directly associated with the
business segment; and indirect operating expenses consisting of global shared
cost centers such as global R&D, marketing, corporate general and
administrative expenses, and stock-based compensation.  The Company
operations are managed by Managing Directors (MD’s) for each region which report
directly to the CEO.  These MD’s have responsibility for all business
activities and combined operating results of their regions and these individuals
are compensated and evaluated based on the performance (Direct Trading Profit)
of their overall region (Americas, NEMEA, SEMEA, and
Asia-Pacific)





During
the fourth quarter of 2008, the Company initiated new organizational changes and
made enhancements to the Company’s internal management reporting and began to
report information pertaining to four business segments as follows: (i)
Americas, (ii) NEMEA, (iii) SEMEA and (iv) Asia-Pacific. The Americas segment
consists of the U.S., Canada, Mexico, the Caribbean, Central America, and South
America. The NEMEA segment consists of Belgium, Sweden, Austria and Germany. The
SEMEA segment consists of France, Spain, the U.K., Western and Central Eastern
Europe, Russia, Hungary, and Middle East, and Africa. The Asia-Pacific segment
consists of China, Hong Kong, Singapore, Thailand, Australia and New Zealand. As
required in SFAS 131, prior year segment data has been restated for comparative
purposes.





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Year
      Ended December 31,2008
                                                                
                                                                
                                                                2007
                                                                
                                                                
                                                                2006Net RevenueAmericas
                                                                
                                                                $
                                                                160,039
                                                                
                                                                
                                                                $
                                                                158,539
                                                                
                                                                
                                                                $
                                                                145,575NEMEA
                                                                
                                                                
                                                                93,800
                                                                
                                                                
                                                                
                                                                16,400
                                                                
                                                                
                                                                
                                                                7,671SEMEA
                                                                
                                                                
                                                                132,581
                                                                
                                                                
                                                                
                                                                64,984
                                                                
                                                                
                                                                
                                                                59,805Asia-Pacific
                                                                
                                                                
                                                                50,890
                                                                
                                                                
                                                                
                                                                49,604
                                                                
                                                                
                                                                
                                                                35,514$
                                                                437,310
                                                                
                                                                
                                                                $
                                                                289,527
                                                                
                                                                
                                                                $
                                                                248,565Year
      Ended December 31,2008
                                                                
                                                                
                                                                2007
                                                                
                                                                
                                                                2006Operating IncomeAmericas
                                                                
                                                                $
                                                                5,973
                                                                
                                                                
                                                                $
                                                                11,257
                                                                
                                                                
                                                                $
                                                                33,367NEMEA
                                                                
                                                                
                                                                (10,051
                                                                )
                                                                
                                                                
                                                                4,357
                                                                
                                                                
                                                                
                                                                1,915SEMEA
                                                                
                                                                
                                                                (18,554
                                                                )
                                                                
                                                                
                                                                9,024
                                                                
                                                                
                                                                
                                                                12,500Asia-Pacific
                                                                
                                                                
                                                                1,384
                                                                
                                                                
                                                                
                                                                8,769
                                                                
                                                                
                                                                
                                                                12,168Shared
      cost centers
                                                                
                                                                
                                                                (55,477
                                                                )
                                                                
                                                                
                                                                (44,151
                                                                )
                                                                
                                                                
                                                                (56,783
                                                                )Total
      segment profit (loss)
                                                                
                                                                $
                                                                (76,725
                                                                )
                                                                
                                                                $
                                                                (10,744
                                                                )
                                                                
                                                                $
                                                                3,167Interest
      income
                                                                
                                                                
                                                                1,466
                                                                
                                                                
                                                                
                                                                3,954
                                                                
                                                                
                                                                
                                                                4,757Interest
      expense
                                                                
                                                                
                                                                (6,822
                                                                )
                                                                
                                                                
                                                                (122
                                                                )
                                                                
                                                                
                                                                (1,071
                                                                )Foreign
      currency loss
                                                                
                                                                
                                                                (1,821
                                                                )
                                                                
                                                                
                                                                (1,685
                                                                )
                                                                
                                                                
                                                                (699
                                                                )Other
      expense
                                                                
                                                                
                                                                191
                                                                
                                                                
                                                                
                                                                (25
                                                                )
                                                                
                                                                
                                                                (71
                                                                )Income
      (loss) before income taxes and discontinued operations
                                                                
                                                                $
                                                                (83,711
                                                                )
                                                                
                                                                $
                                                                (8,622
                                                                )
                                                                
                                                                $
                                                                6,083December
      31,
                                                                
                                                                
                                                                December
      31,2008
                                                                
                                                                
                                                                2007Total AssetsAmericas
                                                                
                                                                $
                                                                61,813
                                                                
                                                                
                                                                $
                                                                79,210NEMEA
                                                                
                                                                
                                                                99,909
                                                                
                                                                
                                                                
                                                                9,701SEMEA
                                                                
                                                                
                                                                79,132
                                                                
                                                                
                                                                
                                                                19,781Asia-Pacific
                                                                
                                                                
                                                                35,840
                                                                
                                                                
                                                                
                                                                55,004Shared
      cost centers
                                                                
                                                                
                                                                29,606
                                                                
                                                                
                                                                
                                                                86,548$
                                                                306,300
                                                                
                                                                
                                                                $
                                                                250,244




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


Year
      Ended December 31,2008
                                              
                                              
                                              2007Americas
                                              
                                              $
                                              -
                                              
                                              
                                              $
                                              3,404NEMEA
                                              
                                              
                                              16,255
                                              
                                              
                                              
                                              -SEMEA
                                              
                                              
                                              6,634
                                              
                                              
                                              
                                              -Asia-Pacific
                                              
                                              
                                              3,826
                                              
                                              
                                              
                                              6,820$
                                              26,715
                                              
                                              
                                              $
                                              10,224








The
Company’s intangible assets by segment are as follows (in
thousands):








Year Ended December 31,2008
                                              
                                              
                                              2007Americas
                                              
                                              $
                                              1,102
                                              
                                              
                                              $
                                              4,973NEMEA
                                              
                                              
                                              50,181
                                              
                                              
                                              
                                              4SEMEA
                                              
                                              
                                              1,945
                                              
                                              
                                              
                                              -Asia-Pacific
                                              
                                              
                                              4,083
                                              
                                              
                                              
                                              5,525$
                                              57,311
                                              
                                              
                                              $
                                              10,502




100
 Table of Contents






The Company’s depreciation
and amortization of property, plant, and equipment and acquired intangible
assets are as follows (in thousands):






Year
      Ended December 31,2008
                                        
                                        
                                        2007
                                        
                                        
                                        2006Americas
                                        
                                        $
                                        7,442
                                        
                                        
                                        $
                                        6,415
                                        
                                        
                                        $
                                        6,220NEMEA
                                        
                                        
                                        6,793
                                        
                                        
                                        
                                        318
                                        
                                        
                                        
                                        625SEMEA
                                        
                                        
                                        2,047
                                        
                                        
                                        
                                        171
                                        
                                        
                                        
                                        296Asia-Pacific
                                        
                                        
                                        2,348
                                        
                                        
                                        
                                        2,129
                                        
                                        
                                        
                                        731$
                                        18,630
                                        
                                        
                                        $
                                        9,033
                                        
                                        
                                        $
                                        7,872








The
Company’s impairment of goodwill and intangible assets is as follows (in
thousands):




Year Ended December 31,2008
                                        
                                        
                                        2007
                                        
                                        
                                        2006Americas
                                        
                                        $
                                        6,432
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -NEMEA
                                        
                                        
                                        24,400
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -SEMEA
                                        
                                        
                                        32,426
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Asia-Pacific
                                        
                                        
                                        4,540
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -$
                                        67,798
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -





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22.
Supplemental Cash Flow Information (in thousands)


2008
                    
                    
                    2007
                    
                    
                    2006Changes
      in operating assets and liabilities:Accounts
      receivable
                    
                    $
                    5,464
                    
                    
                    $
                    (19,084
                    )
                    
                    $
                    (3,641
                    )Net
      investment in sales-type leases
                    
                    
                    -Inventories
                    
                    
                    (7,371
                    )
                    
                    
                    20,683
                    
                    
                    
                    (16,748
                    )Income
      tax receivable
                    
                    
                    761
                    
                    
                    
                    (1,354
                    )Prepaid
      expenses and other current assets
                    
                    
                    (207
                    )
                    
                    
                    (4,959
                    )
                    
                    
                    1,604Other
      assets
                    
                    
                    5,660
                    
                    
                    
                    (4,175
                    )
                    
                    
                    (600
                    )Accounts
      payable
                    
                    
                    (4,333
                    )
                    
                    
                    7,623
                    
                    
                    
                    4,638Accrued
      payroll and related expenses
                    
                    
                    (3,863
                    )
                    
                    
                    3,466
                    
                    
                    
                    (3,653
                    )Accrued
      sales and other tax
                    
                    
                    117
                    
                    
                    
                    (759
                    )
                    
                    
                    (2,101
                    )Accrued
      liabilities
                    
                    
                    (4,318
                    )
                    
                    
                    2,465
                    
                    
                    
                    (1,929
                    )Deferred
      revenue
                    
                    
                    1,626
                    
                    
                    
                    3,287
                    
                    
                    
                    (669
                    )Income
      taxes payable
                    
                    
                    (817
                    )
                    
                    
                    (1,903
                    )
                    
                    
                    608Other
      liabilities
                    
                    
                    6,215
                    
                    
                    
                    (481
                    )
                    
                    
                    (3,976
                    )Net
      decrease in operating assets and liabilities
                    
                    $
                    (1,066
                    )
                    
                    $
                    4,809
                    
                    
                    $
                    (26,467
                    )Cash
      paid during the year by continuingoperations:Interest
                    
                    $
                    144
                    
                    
                    $
                    (74
                    )
                    
                    $
                    (575
                    )Income
      taxes
                    
                    $
                    664
                    
                    
                    $
                    (2,128
                    )
                    
                    $
                    (1,823
                    )Noncash
      investing activities:Changes
      in accounts payable related to the purchase of property, plant and
      equipment
                    
                    $
                    765
                    
                    
                    $
                    70
                    
                    
                    $
                    116





Discontinued
Operations:





Year 2008. The net cash provided by
operating activities relates to our Australia Courier business and is due to its
operating activities for the year.





Year 2007. The net cash provided
by operating activities for the year ended December 31, 2007 relates
to the U.K. Lease Business and is primarily due to reimbursements of previously
paid commissions paid to the Company in the first quarter of 2007 for those
leases not reaching full lease term. The net cash provided by operating
activities also relates to our Australia Courier business and is due to its
operating activities for the year.





Year 2006. The net cash
provided by operating and investment activities for the year ended
December 31, 2006 relates to the U.K. Lease Business and is primarily due
to $3.9 million of net cash earnings from the leasing operations and
$12.1 million of proceeds from the sale of the business on May 31,
2006.





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23.
Interim Financial Results (Unaudited)





The
following tables set forth certain unaudited consolidated financial information
for each of the four quarters in the years ended December 31, 2008 and 2007. In
management's opinion, this unaudited quarterly information has been prepared on
the same basis as the audited consolidated financial statements and includes all
necessary adjustments, consisting only of normal recurring adjustments that
management considers necessary for a fair presentation of the unaudited
quarterly results when read in conjunction with the Consolidated Financial
Statements and Notes. The results for each of the quarters have been adjusted to
reflect the Australian Courier Business as a discontinued
operation.  See Note 6 for additional discussion. The Company believes
that quarter-to-quarter comparisons of its financial results are not necessarily
meaningful and should not be relied upon as an indication of future performance
(dollars in thousands, except per share data).





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First
                        
                        
                        Second
                        
                        
                        Third
                        
                        
                        Fourth
                        
                        
                        FiscalQuarter
                        
                        
                        Quarter (A)
                        
                        
                        Quarter
                        
                        
                        Quarter (B)
                        
                        
                        Year2008:Net
      revenue
                        
                        $
                        70,505
                        
                        
                        $
                        124,180
                        
                        
                        $
                        121,060
                        
                        
                        $
                        121,565
                        
                        
                        $
                        437,310Gross
      profit
                        
                        $
                        19,560
                        
                        
                        $
                        33,583
                        
                        
                        $
                        38,888
                        
                        
                        $
                        32,781
                        
                        
                        $
                        124,812Income
      (loss) before discontinued operations
                        
                        $
                        (607
                        )
                        
                        $
                        (11,119
                        )
                        
                        $
                        895
                        
                        
                        $
                        (74,091
                        )
                        
                        $
                        (84,922
                        )Income
      (loss) from discontinued operations
                        
                        
                        275
                        
                        
                        
                        224
                        
                        
                        
                        (270
                        )
                        
                        
                        (710
                        )
                        
                        
                        (481
                        )Net
      income (loss)
                        
                        $
                        (332
                        )
                        
                        $
                        (10,895
                        )
                        
                        $
                        625
                        
                        
                        $
                        (74,801
                        )
                        
                        $
                        (85,403
                        )Basic
      income (loss) per share:Continuing
      operations
                        
                        $
                        (0.01
                        )
                        
                        $
                        (0.21
                        )
                        
                        $
                        0.02
                        
                        
                        $
                        (1.39
                        )
                        
                        $
                        (1.59
                        )Discontinued
      operations
                        
                        
                        -
                        
                        
                        
                        0.01
                        
                        
                        
                        (0.01
                        )
                        
                        
                        (0.01
                        )
                        
                        
                        (0.01
                        )Net
      income (loss)
                        
                        $
                        (0.01
                        )
                        
                        $
                        (0.20
                        )
                        
                        $
                        0.01
                        
                        
                        $
                        (1.40
                        )
                        
                        $
                        (1.60
                        )Diluted
      income (loss) per share:Continuing
      operations
                        
                        $
                        (0.01
                        )
                        
                        $
                        (0.21
                        )
                        
                        $
                        0.02
                        
                        
                        $
                        (1.39
                        )
                        
                        $
                        (1.59
                        )Discontinued
      operations
                        
                        
                        -
                        
                        
                        
                        0.01
                        
                        
                        
                        (0.01
                        )
                        
                        
                        (0.01
                        )
                        
                        
                        (0.01
                        )Net
      income (loss)
                        
                        $
                        -
                        
                        
                        $
                        (0.20
                        )
                        
                        $
                        0.01
                        
                        
                        $
                        (1.40
                        )
                        
                        $
                        (1.60
                        )First
                        
                        
                        Second
                        
                        
                        Third
                        
                        
                        Fourth
                        
                        
                        FiscalQuarter
                        
                        
                        Quarter (C)
                        
                        
                        Quarter
                        
                        
                        Quarter
                        
                        
                        Year2007:Net
      revenue
                        
                        $
                        64,205
                        
                        
                        $
                        66,269
                        
                        
                        $
                        69,552
                        
                        
                        $
                        89,501
                        
                        
                        $
                        289,527Gross
      profit
                        
                        $
                        20,614
                        
                        
                        $
                        8,467
                        
                        
                        $
                        21,029
                        
                        
                        $
                        24,569
                        
                        
                        $
                        74,679Income
      (loss) before discontinued operations
                        
                        $
                        (3,290
                        )
                        
                        $
                        (5,884
                        )
                        
                        $
                        254
                        
                        
                        $
                        (180
                        )
                        
                        $
                        (9,100
                        )Income
      (loss) from discontinued operations
                        
                        
                        765
                        
                        
                        
                        141
                        
                        
                        
                        275
                        
                        
                        
                        442
                        
                        
                        
                        1,623Net
      income (loss)
                        
                        $
                        (2,525
                        )
                        
                        $
                        (5,743
                        )
                        
                        $
                        529
                        
                        
                        $
                        262
                        
                        
                        $
                        (7,477
                        )Basic
      income (loss) per share:Continuing
      operations
                        
                        $
                        (0.06
                        )
                        
                        $
                        (0.11
                        )
                        
                        $
                        0.01
                        
                        
                        $
                        -
                        
                        
                        $
                        (0.17
                        )Discontinued
      operations
                        
                        
                        0.01
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        0.03Net
      income (loss)
                        
                        $
                        (0.05
                        )
                        
                        $
                        (0.11
                        )
                        
                        $
                        0.01
                        
                        
                        $
                        -
                        
                        
                        $
                        (0.14
                        )Diluted
      income (loss) per share:Continuing
      operations
                        
                        $
                        (0.06
                        )
                        
                        $
                        (0.11
                        )
                        
                        $
                        0.01
                        
                        
                        $
                        -
                        
                        
                        $
                        (0.17
                        )Discontinued
      operations
                        
                        
                        0.01
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        0.03Net
      income (loss)
                        
                        $
                        (0.05
                        )
                        
                        $
                        (0.11
                        )
                        
                        $
                        0.01
                        
                        
                        $
                        -
                        
                        
                        $
                        (0.14
                        )




(A)
            On
      April 1, 2008, the Company acquired all the outstanding shares in Thales
      e-Transaction. Revenue from the acquired entities was $49.1 million for
      the second quarter of 2008.





(B)
            During
      the fourth quarter of 2008, the Company recorded $67.8 million
      non-cash write-downs of goodwill and intangible assets related to the TPI,
      ACG and TeT acquisitions.





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(C)
            In
      June 2007, the Company completed the sale of its headquarters facilities,
      located in Phoenix, Arizona, for a sale price of $16.3 million resulting
      in a gain of $3.8 million. See Note 10 to the consolidated financial
      statements. During the second quarter of 2007, the Company initiated a
      reconfiguration of the Company’s global sales and marketing organizations
      and incurred charges of $2.9 million during the year. During the second
      quarter of 2007, the Company increased inventory reserves by $6.1 million,
      primarily related to non-PCI compliant products and
      components.





(D)
            During
      the second quarter of 2006, the Company had a $1.6 million gain on the
      sale of its U.K. Lease Business, which was disposed of effective May 31,
      2006





(E)
            During
      the fourth quarter of 2006, the Company acquired TPI and incurred in a
      one-time charge of $1.0 million for the acquired in-process research and
      development.





(F)
            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








FINANCIAL
STATEMENT SCHEDULE


SCHEDULE
II VALUATION AND QUALIFYING ACCOUNTS








Balance at
                      Beginning of
                      Period
                    
                    
                    Assumed in
                      Acquistions
                    
                    
                    Additions
                      Charges to
                      Costs and
                      Expense in
                      Continuinng
                      Operations
                    
                    
                    Foreign
                      Currency
                      Impact
                    
                    
                    Deductions
                      (A)
                    
                    
                    Balance at
                      End of
                      Period(Dollars
      in thousands)Year
      Ended December 31, 2008:Allowance
      for doubtful accounts
                    
                    $
                    4,034
                    
                    
                    $
                    5,046
                    
                    
                    $
                    (38
                    )
                    
                    $
                    (852
                    )
                    
                    $
                    (3,390
                    )
                    
                    $
                    4,800Year
      Ended December 31, 2007:Allowance
      for doubtful accounts
                    
                    $
                    1,934
                    
                    
                    $
                    -
                    
                    
                    $
                    2,115
                    
                    
                    $
                    -
                    
                    
                    $
                    (15
                    )
                    
                    $
                    4,034Year
      Ended December 31, 2006:Allowance
      for doubtful accounts
                    
                    $
                    3,266
                    
                    
                    $
                    -
                    
                    
                    $
                    826
                    
                    
                    $
                    -
                    
                    
                    $
                    (2,158
                    )
                    
                    $
                    1,934




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





105
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EXHIBITINDEX





Exhibit
                    Number
                  
                  Description of Exhibit and Method of
      Filing3.1
                  —
                  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
                  —
                  Second
      Amended and Restated Bylaws of Hypercom Corporation (incorporated by
      reference to Exhibit 3.1 to Hypercom Corporation’s Current Report on Form
      8-K dated October 31, 2006)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
                  —
                  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))***10.2
                  —
                  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)***10.3
                  —
                  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))***10.4
                  —
                  Hypercom
      Corporation Nonemployee Directors’ Stock Option Plan (incorporated by
      reference to Exhibit 10.1 to Hypercom Corporation’s Registration Statement
      on Form S-8 (Registration No. 333-97179))***10.5
                  —
                  Amendment
      to the Hypercom Corporation Nonemployee Directors’ Stock Option Plan
      (Incorporated by reference to Appendix I of the Company’s Definitive Proxy
      Statement on Schedule 14A filed on April 17, 2006)***10.6
                  —
                  Hypercom
      Corporation 2008 Employee Stock Purchase Plan (incorporated by reference
      to Appendix A to Hypercom Corporation’s Definitive Proxy Statement on
      Schedule 14A filed on April 30, 2008)***10.7
                  —
                  First
      Amendment to the Hypercom Corporation Long-Term Incentive Plan (effective
      January 1, 2009)* ***10.8
                  —
                  First
      Amendment to the Hypercom Corporation 2000 Broad-Based Stock Incentive
      Plan (effective January 1, 2009)* ***10.9
                  —
                  Second
      Amendment to the Hypercom Corporation Nonemployee Directors’ Stock Option
      Plan (effective January 1, 2009)* ***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.
      (incorporated by reference to Exhibit 10.12 to Hypercom Corporation’s
      Annual Report on Form 10-K for the year ended December 31,
      2005)10.13
                  —
                  Employment
      Agreement, effective January 16, 2007, between Philippe Tartavull and
      Hypercom Corporation (incorporated by reference to Exhibit 10.1 to
      Hypercom Corporation’s Current Report on Form 8-K dated January 17,
      2007)***





106
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Exhibit
                    Number
                  
                  Description of Exhibit and Method of
      Filing10.14
                  —
                  Amendment
      to Employment Agreement, dated July 11, 2007, by and between Hypercom
      Corporation and Philippe Tartavull (incorporated by reference to Exhibit
      10.3 to Hypercom Corporation’s Current Report on Form 8-K filed on July
      13, 2007)***10.15
                  —
                  Contract
      Manufacturing Agreement, dated as of December 7, 2007, between Hypercom
      Manufacturing Resources, Inc. and Venture Corporation (Singapore) LTD
      (incorporated by reference to Exhibit 10.20 to Hypercom Corporation’s
      Annual Report on Form 10-K for the year ended December 31,
      2007)†10.16
                  —
                  Amendment
      to Employment Agreement, dated December 20, 2007, by and between Hypercom
      Corporation and Philippe Tartavull (incorporated by reference to Exhibit
      10.4 to Hypercom Corporation’s Current Report on Form 8-K filed on
      December 20, 2007)***10.17
                  —
                  Employment
      Agreement, dated December 26, 2007, by and between Norman Stout and
      Hypercom Corporation (incorporated by reference to Exhibit 10.1 to
      Hypercom Corporation’s Current Report on Form 8-K filed on December 31,
      2007)***10.18
                  —
                  Loan
      and Security Agreement, dated as of January 15, 2008, among Hypercom
      U.S.A., Inc. and Hypercom Manufacturing Resources, Inc., as Borrowers,
      Certain Financial Institutions, as Lenders, and Bank of America, N.A., as
      Agent (incorporated by reference to Exhibit 10.2 to Hypercom Corporation’s
      Current Report on Form 8-K/A filed on January 22, 2008)10.19
                  —
                  Share
      Purchase Agreement, dated as of February 13, 2008, by and among Thales SA,
      Thales Holding GmbH, Thales UK Limited, and Hypercom Corporation
      (incorporated by reference to Exhibit 10.1 to Hypercom Corporation’s
      Current Report on Form 8-K filed on February 14, 2008)10.20
                  —
                  Indemnification
      Agreement, dated as of February 13, 2008, by and between Francisco
      Partners II, L.P. and Hypercom Corporation (incorporated by reference to
      Exhibit 10.2 to Hypercom Corporation’s Current Report on Form 8-K filed on
      February 14, 2008)10.21
                  —
                  Credit
      Agreement, dated as of February 13, 2008, by and between Hypercom
      Corporation and Francisco Partners II, L.P. (incorporated by reference to
      Exhibit 10.3 to Hypercom Corporation’s Current Report on Form 8-K filed on
      February 14, 2008)10.22
                  —
                  Amendment
      to the Share Purchase Agreement (Amendment No1), dated as of April 1,
      2008, by and between Thales SA, Thales Holding GmbH, Thales UK Limited,
      and Hypercom Corporation (incorporated by reference to Exhibit 10.1 to
      Hypercom Corporation’s Current Report on Form 8-K filed on April 2, 2008,
      as amended by the Current Report on Form 8-K/A filed on June 16,
      2008)10.23
                  —
                  Employment
      Contract, dated March 31, 2008, by and between Thales e-Transactions SA
      and Henry Gaillard (incorporated by reference to Exhibit 10.1 to Hypercom
      Corporation’s Current Report on Form 8-K filed on July 11,
      2008)***10.24
                  —
                  Amendment
      to Employment Agreement, dated October 23, 2008, by and between Hypercom
      Corporation and Philippe Tartavull (incorporated by reference to Exhibit
      10.1 to Hypercom Corporation’s Current Report on Form 8-K filed on October
      28, 2008)***10.25
                  —
                  Amendment
      to Employment Agreement, dated December 31, 2008, by and between Hypercom
      Corporation and Norman Stout* ***10.26
                  —
                  Amendment
      to Employment Agreement, dated December 31, 2008, by and between Hypercom
      Corporation and Philippe Tartavull* ***21.1
                  —
                  List
      of Subsidiaries*23.1
                  —
                  Consent
      of 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*





107
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Exhibit
                    Number
                  
                  Description of Exhibit and Method of
      Filing31.2
                  —
                  Certification
      of Chief Accounting Officer, as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002*32
                  —
                  Certification
      of Chief Executive Officer and Chief Accounting 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.





†
            Certain
      Confidential Information contained in this Exhibit was omitted by means of
      redacting a portion of the text and replacing it with an asterisk. This
      Exhibit has been filed separately with the Secretary of the Securities and
      Exchange Commission without the redaction pursuant to Confidential
      Treatment Request under Rule 24b-2 of the Securities Exchange Act of 1934,
      as amended.





109