##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

WASHINGTON, D.C. 20549




---

FORM 10-K

|   |  |                                                                                             
|-- |  | --------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|  
|   |  | For the fiscal year ended December 31,
    2003                                             
|  
|or
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 1-13521



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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 Number)

2851 West Kathleen Road

Phoenix, Arizona 85053


(Address of principal executive offices) (Zip
Code)


(602) 504-5000

(Registrants telephone number, including
area code)


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

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

Indicate by check
mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days.     Yes þ          No o

Indicate by
check mark 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.     Yes þ          No o

Indicate by
check mark whether the registrant is an accelerated filer (as
defined in Exchange Act
Rule 12b-2).     Yes þ          No o

The aggregate
market value of the voting stock held by non-affiliates of the
registrant was $203,373,676 as of June 30, 2003 (based on
the closing price of the common stock on the New York Stock
Exchange on that date).

Number of shares of the registrants common
stock, $.001 par value per share, outstanding as of
March 5, 2004, was 50,641,879.

DOCUMENTS INCORPORATED BY REFERENCE

Material from the
Companys Proxy Statement relating to its 2004 Annual
Meeting of Stockholders has been incorporated by reference into
Part III, Items 10, 11, 12, 13 and 14.



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TABLE OF CONTENTS

|              |     |         |    |                                                                                                        |  |  |    | 
|------------- | --- | ------- | -- | ------------------------------------------------------------------------------------------------------ |  |  | -- | 
|Item No.      |     | Caption |    | Page                                                                                                  
|              |     |         |    |                                                                                                       
|PART I       
|              | 1.  |         |    | Business                                                                                               |  |  | 2  | 
|              | 2.  |         |    | Properties                                                                                             |  |  | 11 | 
|              | 3.  |         |    | Legal Proceedings                                                                                      |  |  | 12 | 
|              | 4.  |         |    | Submission of Matters to a
    Vote of Security Holders                                                |  |  | 12 | 
|PART II      
|              | 5.  |         |    | Market for Registrants
    Common Equity and Related Stockholder Matters                              |  |  | 13 | 
|              | 6.  |         |    | Selected Financial Data                                                                                |  |  | 14 | 
|              | 7.  |         |    | Managements Discussion
    and Analysis of Financial Condition and Results of Operations              |  |  | 16 | 
|              | 7A  |         |    | Quantitative and Qualitative
    Disclosures About Market Risk                                         |  |  | 29 | 
|              | 8.  |         |    | Financial Statements and
    Supplementary Data                                                        |  |  | 30 | 
|              | 9.  |         |    | Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosure               |  |  | 31 | 
|              | 9a  |         |    | Controls and Procedures                                                                                |  |  | 31 | 
|PART III     
|              | 10. |         |    | Directors and Executive
    Officers of the Registrant                                                 |  |  | 31 | 
|              | 11. |         |    | Executive Compensation                                                                                 |  |  | 31 | 
|              | 12. |         |    | Security Ownership of
    Certain Beneficial Owners and Management and Related Stockholder
    Matters |  |  | 31 | 
|              | 13. |         |    | Certain Relationships and
    Related Transactions                                                     |  |  | 31 | 
|              | 14. |         |    | Principal Accountant Fees
    and Services                                                             |  |  | 31 | 
|PART IV      
|              | 15. |         |    | Exhibits, Financial
    Statement Schedules, and Reports on Form 8-K                                   |  |  | 32 | 
|Signatures    |     |         | 33 |                                                                                                       
|Exhibit Index |     |         |    |                                                                                                       
|Exhibit 10.6 
|Exhibit 10.8 
|Exhibit 14   
|Exhibit 21.1 
|Exhibit 23.1 
|Exhibit 24.1 
|Exhibit 31.1 
|Exhibit 31.2 
|Exhibit 32.1 
|Exhibit 32.2 
|Exhibit 99.1 



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##### Table of Contents






PART I




Item 1.Business

General Description

Hypercom designs, manufactures and sells
end-to-end electronic payment solutions, including point-of-sale
(POS)/point-of-transaction terminals, peripheral devices,
transaction networking devices, transaction management systems
and application software, and provides related support and
services. We have a global presence. Our customers include large
domestic and international financial institutions, electronic
payment processors, independent sales organizations,
distributors, resellers and merchants. We also provide
electronic transaction solutions to vertical markets, such as
government, education and healthcare that require reliable,
secure, high-speed and high-volume information/data transfers.

Our principal executive offices are located at
2851 West Kathleen Road, Phoenix, Arizona, 85053, and our
telephone number is (602) 504-5000. 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 filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act as
soon as reasonably practicable after we electronically file such
material with, or furnish it to, the Securities and Exchange
Commission. The information on our website is neither
incorporated by reference into, nor a part of, this Report.

History and Business Profile

We are the successor to an Australian company
founded in 1978. Our operations were primarily focused on Asian
markets until 1987 when the company expanded its operations into
the United States as a result of being awarded contracts to
supply advanced technology POS terminals and related network
systems to American Express. Commencing in the early 1990s, we
expanded our operations into Latin America and Europe to take
advantage of their increasing usage of credit and debit cards
and the successful performance of our POS products in a less
developed telecommunications environment. In 2003, international
revenues accounted for approximately 67% of our total revenues
from continuing operations.

Hypercom was 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
operations of the Australian corporation and its subsidiaries
and affiliates. In 1997, we completed an initial public offering
of our common stock, which is listed on the New York Stock
Exchange under the symbol HYC.

With worldwide headquarters in Phoenix, Arizona,
we market our products in more than 100 countries through a
global network of sales, service and development offices located
in Australia, Brazil, Chile, China, Hong Kong, Hungary, Latvia,
Mexico, Russia, Singapore, Sweden and the United Kingdom. We
also use distributors and value-added resellers to complement
our direct sales organization.

Recent Business Developments

Hypercom products are designed and customized to
support the unique requirements of the electronic transaction
industry with flexibility, reliability, security, speed and low
total cost of ownership. In 2003, we introduced a number of new
products that help us strengthen our existing product line and
to penetrate new markets. These new products include:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Optimum, a portfolio of 32-bit, high-security,
    multi-application POS products that include card payment
    terminals, wireless, handheld terminals and personal
    identification number (PIN) pads. The first products in this
    family are the T2100, a stand-alone card payment terminal, the
    L4100, a terminal for the multiple checkout lane (multi-lane)
    retail environment, and the M2100, a wireless terminal that
    leverages the latest wireless communication technologies.
|
| |  | S9, a high security payment device that reads
    both smart cards and magnetic stripe cards and can be used as a
    hand-over countertop PIN-entry device to enable merchants to
    take advantage of increased PIN-based card transactions.                                                                                                                                                                                                                                                         

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| |   |                                                                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | ICE 6000Plus, a terminal for multi-lane
    retailers with reconfigured connectivity ports for easier
    in-lane configuration options.                                                                                                                          
|
| |  | Enhanced Plusfamily of card payment
    terminals with market-requested features, such as 3-inch paper
    rolls for larger print on receipts, 56K modems for fast
    application downloads, and Ethernet ports for added connectivity
    options for retailers.
|
| |  | HFT 500 family of outdoor card payment terminals
    and technology for the quick service restaurant (QSR) market, a
    fast growing segment of the POS market.                                                                                                  

In recognition of our technological leadership,
market advances and customer focus in the electronic payments
industry, we received two significant awards in 2003:



| |   |                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In March 2003, VISA EU (European Union) and CEMEA
    (Central Europe, Middle East and Africa) awarded us its Chip
    Vendor of the Year Award.
|
| |  | In April 2003, Frost & Sullivan awarded us
    with the Market Engineering Company of the Year for the second
    consecutive year.             

Recent Financial Developments

During 2003, we continued to strengthen our
balance sheet and improve our long-term profitability.
Throughout the year, we:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Increased cash flow and our cash position as we
    continued to maintain our previous acceleration of the
    collection of accounts receivable and inventory turnover as a
    result of an increased focus on cash flow from operations.
    Additionally, we disposed of non-core peripheral assets and
    divisions, resulting in increased cash balances and working
    capital.                                                                            
|
| |  | Expanded our foreign currency hedging program to
    include additional currencies and further mitigate translation
    exposures resulting from foreign operations.                                                                                                                                                                                                                                                                                                
|
| |  | Improved the core business cost structure by
    maintaining an appropriate level of general operating costs,
    increasing manufacturing efficiencies, reducing component costs,
    and re-engineering product design resulting in improved gross
    margins and operating profit.                                                                                                                                                                              
|
| |  | Restructured our senior secured credit facility
    to a cash secured $10 million revolving line of credit with
    our primary lender to eliminate the majority of the restrictions
    and financial covenants contained in the original agreement as
    well as to significantly reduce the fees associated with it. We
    did not borrow against our line of credit in 2003 and the only
    significant long-term debt remaining is a real property mortgage.

In July 2003, we completed the sale of our
Horizon Group subsidiary. This transaction was part of our
strategy to dispose of under-performing assets and was the final
component of our corporate restructuring effort announced in
September 2002.

In August 2003, the Board of Directors approved a
stock repurchase program of up to $10 million of our common
stock. As of the end of fiscal 2003, the Company had repurchased
60,000 shares of common stock at an average price per share of
$4.50.

In August 2003, our co-founders, Paul and George
Wallner, each sold 7 million shares of their personal
holdings in Hypercom to institutional investors. These
transactions diversified our shareholder base and addressed
market concerns over potential large block sales. In connection
with the sale, George Wallner resigned from our Board of
Directors.

In October 2003, we sold Golden Eagle Leasing,
our direct finance lease subsidiary. This transaction was
consistent with our strategy of disposing of operating units not
aligned with our core business, simplified our business model
and enhanced our ability to fund growth opportunities.

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Hypercom®Products and Services

We provide a complete range of products and
services to our electronic transaction customers, including
point-of-sale/point-of-transaction terminals, peripheral devices
that effectively extend terminal capabilities, transaction
networking devices, network access controllers, transaction
environment software and a host of pre- and post-sale services.

Point of
Sale/ Point-of-Transaction Terminals

Our terminals include stand-alone terminals,
terminals integrated with host server or PC based systems, and
wireless terminals. These terminals service a number of end-user
environments, including that of the stand-alone merchant
countertop, multi-lane retailer, temporary merchant locations
and kiosks, quick service restaurants, outdoor drive-thrus,
mobile units and operations requiring on-site portability such
as rental car lots and restaurants.

Our terminal products are designed to accept
magnetic stripe cards, smart or chip cards, check truncation,
conversion and imaging, and radio frequency (RF) transmitting
devices. Terminal functionality ranges from routine tasks, such
as credit or debit authorization, electronic receipt capture and
electronic batch submission and settlement, to more advanced
functions, such as interactive customer coupon and loyalty
programs, issuance of gift and prepaid cards, signature capture,
time and attendance, electronic benefits transfer and
identification verification.

The peripheral device products that interface
with our terminals include printers, PIN pads, check readers,
receipt capture devices, identity verification devices and
external modems.

Hypercom Optimum.Our Optimum family of products is the
next generation of payment terminals that combine speed and
security with the ability to support multiple applications.
Optimum terminals contain a 32-bit processor for enhanced
multi-application performance. These products have been designed
to deliver superior performance in a cost-effective manner. The
first products in this family are the T2100, a desktop terminal,
the M2100, a mobile terminal that leverages the latest wireless
communication technologies, and the L4100, a compact,
high-performance signature capture card payment terminal
specifically designed for multi-lane retailers.

Hypercom ICE.
Our Interactive Customer Environment (ICE) family of
products consists of high performance, multi-function
touch-screen terminals incorporating a high-speed thermal
printer and our Hypercom FastPOS® modem technology. Our ICE
terminals provide financial transaction technology incorporated
with a highly interactive and intuitive user interface to
support sophisticated transactions with minimal user training.

ICE terminals support multiple payment options
such as magnetic-stripe charge, credit and debit cards, smart
cards and paper check conversion. They enable retailers to take
advantage of value-added services such as electronic gift, cash
and promotion/loyalty cards, prepaid, payroll or government
check cashing, age and/or ID verification, and
on-screen/on-terminal advertising. They also support
administrative activities such as electronic receipt capture,
time and attendance, email and electronic statements. The
advanced technology and breadth of the ICE product line not only
accommodates the aforementioned expanded applications at the
point-of-sale transaction, but also enables the deployment of
our terminals in non-traditional markets, such as government,
education and health.

Products in the ICE family include the ICE 5000,
ICE 5500 and ICE 5700, the ICE 5500M and the ICE 6000 for the
multi-lane retail environment, ICE 6500, the ICE 4000 for
wireless transaction environments and the Windows CE-based ICE
7000, for health-care, electronic benefit transfer and
industrial-commercial markets.

Hypercom T7.Our T7
family of terminals is a well established product line in the
POS industry, with more than three million units sold since its
introduction in 1994. The T7 series combines an intuitive user
interface, one-step initiation of all daily functions and
transaction types, multiple peripheral options, and
high-performance communications. The T7 family offers a low-cost
terminal option for credit, debit, smart cards and specialized
financial applications through its extensive software
application library.

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Hypercom Financial Terminals (HFT).Our HFT family of products protects
the entry of PINs and secures both data input and data
transmission according to standards set by international payment
bodies, regulatory authorities and banking associations. Our HFT
500 series of high-security PIN pads and card acceptance devices
can be used either indoors or out, are easy to operate and
enable fast, secure verification of both card and cardholder,
and is currently the outdoor component to our quick service
restaurant drive-thru solution for this rapidly developing
segment of the POS market. Our HFT 900 series is a family of
electronic purse loading devices that allow cardholders to
easily load additional funds from their bank accounts onto their
electronic purse or stored value smart cards.

Hypercom Plus.Our
Plusfamily of products consists of enhanced versions of
our T series and ICE product lines. These products incorporate
the Hypercom SureLoad® printer, a new thermal printer that
incorporates fast, easy loading of paper rolls. The Plusproducts also have integrated PIN pads and the ability to
read traditional magnetic stripe cards and smart cards. The
T7Plusis the next generation of the Hypercom T7P and
combines the reliability of the T7P with increased functionality
and speed. The ICE 5500Plusincludes all of the features
and functionality of the ICE 5500, with the addition of the
SureLoad printer and an integrated PIN pad. The ICE 5700Pluscombines the ability to do check conversion and
credit/debit/chip card transactions in one, convenient,
easy-to-use device. The ICE 6000Plusincludes improved
connectivity design for easier integration into multi-lane
retail environments.

The ICE product family accounted for 38% of our
terminals shipped in 2003, with the T series family comprising
the remaining 62%. The Optimum product family was introduced in
late 2003, with sales commencing in 2004.



| |                              
| | -----------------------------
| | Transaction Network Solutions

Our networking products and services are
specially-designed to support the unique requirements of both
high volume and high value transaction based networks, whether
they are the traditional retail point-of-sale or other industry
verticals such as financial/ ATMs, petroleum, gaming/lotteries,
government and healthcare. Regardless of end use, all Hypercom
networks are designed for speed, reliability and security. Our
transaction network solutions not only sustain the value and
extend the life of legacy networks, but also provide a clear
migration and evolution to internet enabled communications.

Our networking family of products consists of
Network Access Controllers (NACs) that provide the networking
hardware technology and communications infrastructure necessary
to achieve connectivity in the POS environment. NACs are
intelligent communications devices that provide a wide range of
digital and analog interfaces, line concentration, protocol
conversion, data concentration, transaction routing, backup
transmission paths and multiple device interface capabilities
that allow access to high-performance data communications
networks. Our networking products have been shown to reduce
operating costs and protect our customers investments in
current legacy networks. Specific recent developments in our
network offerings include:



| |   |                                                                                                                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Rapid acceptance of the MegaNAC® 180, the
    next generation of dial access concentrators. The MegaNAC 180 is
    actively being implemented in major North America locations and
    others to support the markets new speed and security
    requirements, while still meeting the challenge of successful,
    secure delivery of high-volume and high- value transactions.
|
| |  | Creation of EFTSecNACTM, a
    comprehensive network system which protects against
    line-tapping fraud on the terminal transmission line
    by securing the line between the terminal and the network.                                                                                                                                                                    



| |                                                
| | -----------------------------------------------
| | Transaction Management/Application
    Software

We also offer a complete portfolio of software
applications for terminal operations, network device operations,
systems development and management.

Terminal Application
Software.We work closely with our
customers to develop standard and customized applications that
operate on our terminals. To date, we have developed over 80
terminal software applications, ranging from entry-level credit
and debit solutions to complex systems that support a
comprehensive range of

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electronic payment and medical transaction
functions. Among these software applications are specialized
applications for specific markets such as lodging, restaurants,
multi-lane retail and health care. In 2003, we released
HyperWare® 08A, a multi-function POS software application
which provides support for payment-based and valued-added
applications, such as gift/loyalty cards and check conversion.


Terminal Management
Software.Every Hypercom-produced
terminal application has a management and control module that
interacts with our Term-Master® Terminal Network Management
System. Term-Master is designed to provide mission-critical
functionality to users of our terminals. Term-Master is the
basis for an integrated terminal management approach that
centrally supports multiple merchant locations, remote and
automated downloading of terminal application software, multiple
application software management, merchant terminal set-ups, and
performance monitoring and on-line diagnostics. Term-Master
provides a highly-efficient and cost-effective system for
administering terminal functions in multiple locations. Our
product offerings in terminal management range from the basic
functionality offered in our new condensed Term-Master, to an
Internet-provided and managed system in I-Term-Master, to the
complete terminal management system, Term-Master Suite.

Network Application
Software.We work closely with our
customers to develop standard and customized applications that
operate on our network products. To date, we have developed over
400 network software applications. Our Hybrid Transport
Switching Protocol (HTSP) provides a secure routing
protocol that allows for the transparent transport of diverse
applications using multiple wide area network connections. HTSP
and Hypercom network products are currently supporting the
global transactions of Europes largest bank.

Network Management
Software.Every network application
software program we produce includes a management and control
module that interacts with our HypercomView (formerly
IENView®) Network Management System. HypercomView sets new
standards in graphical user interface (GUI) based management for
detail, ease and speed. Its easy-to-read screens and maps help
network managers configure, administer, and troubleshoot complex
POS and data networks.



| |                              
| | -----------------------------
| | Services and Customer Support

We are committed to providing a high level of
service and support to our customers in a cost-effective manner.
We provide a wide range of support services that contribute to
the increased profitability of our customers and meet their
individual needs. In the U.S., we provide consulting services to
assist with strategies and alternatives for POS payment systems,
assist in the design, installation, integration and management
of POS payment systems, and design customized software
applications. We also provide deployment, training, technical
assistance, help desk, and maintenance along with formal
training programs for engineers, developers and systems
administrators. We also provide to our customers, either
directly or through third party merchant service providers,
value-added services such as deployment and customized packaging
services, PIN pad encryption, equipment and asset management,
merchant training, system upgrades and conversions, help desk
services, and terminal repair and refurbishing.

Internationally, we offer support services
directly or through our distributors or other third party
providers. The level of services available varies by region. For
example, in Brazil, we provide full on-site support services
such as installation, training, repairs and help desk services.
In other markets, we maintain smaller direct support operations
and provide only help desk services and repair services. In
these markets, we contract with third party providers to provide
more extensive support services.

In the U.S., we provide up to a five-year
warranty on our POS terminal products and a one-year warranty on
other products. We believe our five-year warranty on POS
terminal products results in a lower total cost of ownership
than competitors products and contributes significantly to
our reputation for providing high-quality, reliable products.
Internationally, our warranty is typically one year for
terminals and 90 days for printers and other peripherals.

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Customers

POS Products.In the
U.S., our customers are predominantly large domestic and
international financial institutions, electronic payment
processors, independent sales organizations, credit card
companies, distributors, resellers and merchants. The majority
of our U.S. customers resell our products to end-users, which
are typically small and mid-sized retail businesses and multiple
retail stores of large corporations. Outside the U.S., we sell
primarily to large banks and financial institutions that provide
our products to their end-users.

Network Products.Our Network Systems customers
generally consist of large financial institutions, retailers,
lotteries, electronic payment processors, resellers and other
enterprises that have substantial branch networking requirements
spanning an average of 200 sites, and want to leverage their
existing equipment by connecting to networks.

In any given year, select customers may account
for a significant percentage of net revenue. For the year ended
December 31, 2003, First Data Corporation and its
affiliates accounted for 9.3% of our consolidated net revenue.
Including First Data Corporation, our two and five largest
customers accounted for 16.3% and 24.6% of our consolidated net
revenue, respectively.

Industry Trends

The electronic transaction industry is subject to
growth cycles. The trends that impact the industry include the
following:



| |   |                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Increased awareness of new communications
    technologies and how to harness them effectively;                                                                                                                        
|
| |  | Wireless Wide Area Networks using high-speed
    technologies such as GPRS, GSM and Bluetooth®, that deliver
    card payment devices that are always on;                                                            
|
| |  | Internet enabled communications for POS terminals;                                                                                                                                                                     
|
| |  | Increasing adoption of computer chip or
    smart cards that store value and information or
    secure token, particularly in Europe and more recently in Latin
    America and Asia;                                
|
| |  | Increasing popularity of debit cards that require
    country specific high-security technology;                                                                                                                       
|
| |  | Adoption of card payment in the quick service
    restaurant industry;                                                                                                                                                 
|
| |  | Use of POS systems in vertical industries, such
    as health care and the electronic payment of government benefits;                                                                                                  
|
| |  | Significant and increasing opportunities to
    replace or upgrade the existing POS terminal base to support the
    more enhanced functionality and product features increasingly
    demanded in the marketplace; and
|
| |  | Expected POS industry growth opportunities in
    China, India and Russia and other developing countries.                                                                                                              

Sales, Marketing and Distribution

We sell our POS payment system solutions
domestically through our direct sales force and independent
third-party resellers, including financial institutions,
electronic payment processors, service providers and
distributors, and internationally through financial institutions
and distributors.

Access to the industrys channels for
marketing, sale and distribution, and to value-added resellers,
is a critical factor for achieving success as a provider of POS
products. We have leveraged our extensive and long-standing
relationships in the industry with banks, card associations,
processors, independent sales organizations, value-added
resellers and others to complement our sales efforts.





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|  |                                                               
|- | --------------------------------------------------------------
|* | Bluetooth is a registered trademark of Bluetooth
    SIG, Inc.

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Our general marketing strategy is coordinated
from our Phoenix, Arizona headquarters; however, each region
develops programs to meet the needs of their local markets.
Components of our marketing program include trade shows, news
releases, editorial interviews, industry analyst briefings,
speaking platforms/engagements, training and technology
seminars, sales collateral and white papers, print advertising,
articles and newsletters supported by our marketing, public
relations and technical publications group.

Product development and strategy are also
coordinated from our Phoenix headquarters. Our sales, marketing,
manufacturing and engineering groups work closely with the
regions to accommodate the needs and provide product solutions
specific to local and individual customer requirements.

Our value-added reseller channel is comprised of
resellers and developers that support vertical and specialty
markets such as retail/ restaurant, e-commerce and gaming. The
applications being developed by our partners are a complement to
those applications we develop internally and effectively extend
our market penetration while also reducing our cost of software
development.

Manufacturing

Our primary manufacturing operations for the
manufacture of POS payment systems are conducted in China. Our
wholly-owned Chinese subsidiary controls the planning, final
assembly and final product testing, while using a subcontractor
for subassembly processes. This maximizes asset utilization
while providing significant flexibility. In the third quarter of
2002, we terminated our direct manufacturing operations in
Brazil and contracted with a leading electronics manufacturing
services provider to provide these services. This decision
enabled us to eliminate a fixed cost in favor of a more variable
expense structure, leverage the operating efficiencies of a
larger global manufacturer, reduce our working capital
requirements, including the use of cash, and mitigate our
foreign currency exposure. We outsource the manufacture of our
HFT family of products in Sweden through a third-party
manufacturer. In the United States, we use a third-party
contract manufacturer in the Phoenix, Arizona area for our
networking products.

To control product costs, we centrally manage
product documentation and material requirements planning from
our Phoenix facility, utilizing an integrated computer system
linking all Hypercom manufacturing and design centers.
Centralized management of the planning processes, combined with
regional-market procurement, allows us to ensure quality
components are used in our products, take advantage of volume
discounts and maximize customer responsiveness. Our product
development and manufacturing organizations engineer and test
our new products to recognized performance, quality and
regulatory standards.

We also rely on third-party suppliers for certain
components of our POS payment systems and networking products.
We purchase directly from select suppliers, using distributors
where flexibility is appropriate. We have been able to obtain
favorable pricing on commodity items as well as custom designed
components. Our suppliers must meet high standards of component
quality and delivery performance.

Research and Product Development

Since our inception, we have made substantial
investments in research and development. With respect to our POS
payment system and transaction networking products, our
development efforts are focused on products, including both
hardware and software, that support new technologies and payment
products emerging in the electronic transaction industry. We
work closely with our customers to define new product concepts
and identify emerging applications for both our hardware and
software products. Development projects are evaluated through a
management review process and assigned to our development
centers based upon the potential value of the target markets, as
well as the technology, staff resources and engineering
expertise requirements. Bringing quality products to market in a
timely manner is a primary objective of all our product
development initiatives.

8



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##### Table of Contents



Our product development process generally
involves the following:



| |   |                                                                              
| | - | -----------------------------------------------------------------------------
| |  | Identification of the applicable market for the
    product.                 
|
| |  | Design of the product for the market.                                        
|
| |  | Engineering and development of the product.                                  
|
| |  | Testing of the product.                                                      
|
| |  | Quality assurance with respect to the components
    and product performance.
|
| |  | Certification of the hardware and software by
    applicable organizations.  
|
| |  | Production.                                                                  

We design and develop all of our products and
incorporate where appropriate, technologies from third parties
and those available in the public domain. Our product
development units are principally headquartered in Phoenix,
Arizona. Development staffs also are located in Dallas, Texas,
Australia, Brazil, Hong Kong, Latvia, Russia, Singapore, Sweden,
and the United Kingdom.

In the periods ended December 31, 2003, 2002
and 2001, our research and development expenditures from
continuing operations were $24.2 million, $24.7 million,
and $28.1 million, respectively. To date, a substantial
majority of our research and development costs have been
expensed as incurred.

Seasonality

The POS equipment business is seasonal with net
revenue and results of operations typically stronger from July
to December. This seasonality is generally attributable to the
following factors:



| |   |                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------
| |  | Increased POS purchases to satisfy increased
    retail demand during the holiday season;                                                  
|
| |  | Incentive programs that VISA and MasterCard offer
    from July to December to encourage merchants to offer card-based
    payment systems;
|
| |  | Allocation of customers capital budgets by
    the end of March, with volume shipments beginning in July; and                             
|
| |  | Timing of new product availability.                                                                                                        

Competition

The markets in which we operate are highly
competitive. With respect to our POS payment system 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, quality and support.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In the POS terminal market, our global
    competitors are Ingenico, a France-based company, VeriFone,
    Inc., a privately-held domestic company, and Lipman, an
    Israel-based, publicly-held company. According to The Nilson
    Report(September 2003), the top three manufacturers
    (Hypercom, VeriFone and Ingenico) accounted for approximately
    65% of POS terminals shipped in 2002, while 46 other
    manufacturers accounted for the remaining 35%. In any particular
    market, we may also find ourselves in competition with
    participants that compete on either a regional or local country
    basis, within certain market segments or with a limited range of
    products and services.
|
| |  | In the multi-lane POS market, we offer terminals
    designed specifically for the multi-lane retailer environment.
    Our multi-lane terminals compete with integrated electronic cash
    register/ POS terminal products from companies such as IBM,
    Siemens, NCR, ICL and Micros.                                                                                                                                                                                                                                                                                                                                                                                                                                

9



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| |   |                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------
| |  | In the transaction network products market, our
    primary competitors are Cisco and UTStarcom, both of which are
    U.S.-based.

Marketing in foreign countries poses additional
challenges, the more common being a customer preference for a
national vendor, difficulties in obtaining necessary
certifications, and an ability to accommodate government imposed
policy requirements.

Proprietary Rights

Our success is attributable in part to our
proprietary technology. 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 in the U.S. and
several other countries relating to POS terminal products. We
also have a number of pending U.S. and foreign patent
applications relating to our POS terminal products, as well as
our Integrated Enterprise Networking product family.

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 U.S. and foreign
trademark applications relating to our products and services.

We embed copyright notices in our software
products advising all users that the software is owned by
Hypercom. 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 shrink-wrap license agreements. We typically
do not obtain federal copyright registrations for our software.

Other parties may independently develop products
or technologies that are equivalent or superior to those of
Hypercom, and the patents, trademarks, copyrights,
confidentiality agreements and internal safeguards upon which we
rely may not be adequate to protect our interests.

Industry Standards and Government
Regulation

Before product sales are completed in the United
States, our products must:



| |   |                                                                        
| | - | -----------------------------------------------------------------------
| |  | meet industry standards as imposed by VISA,
    MasterCard, and others;
|
| |  | be certified to connect to some public
    telecommunications networks;
|
| |  | comply with Federal Communications Commission
    regulations; and     
|
| |  | comply with Underwriters Laboratories
    regulations.                

We must also comply with state, federal, and
international laws governing such areas as occupational health
and safety, minimum wages, work hours and overtime, retirement
and profit-sharing plans and severance payments, and the use,
storage, handling, and disposal of dangerous chemicals.

In foreign countries, our products must comply
with local telecommunications standards, recommendations of
quasi-regulatory authorities, and recommendations of
standards-setting committees. In addition, public carriers
require that equipment connected to their networks comply with
their own standards. These standards in part reflect their
currently installed equipment. Some public carriers have
equipment that does not fully meet current industry standards.
We must address this issue in designing enterprise-networking
products. Although we believe our products currently meet all
applicable industry standards, we cannot guarantee that our
products will comply with future standards. In addition,
carriers set the tariffs that govern rates for public
telecommunications services, including their features and
capacity. These tariffs are subject to regulatory approval.
Changes in the tariffs could have a material adverse effect on
our business and financial condition.

10



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##### Table of Contents



Employees

As of December 31, 2003, we employed 1,059
persons, including 444 in the U.S. (50 in manufacturing,
88 in service and support, 62 in sales and marketing,
147 in research and development and 97 in finance and
administration). The remaining 615 employees were in
international locations.

None of our employees is represented by a labor
union, and we consider our relations with our employees to be
positive. We have experienced no work stoppages.

Competition for technical personnel in our
industry is intense. To date, we have been successful in
recruiting and retaining qualified employees, but there is no
assurance that we will continue to be successful in doing so in
the future. Our future success depends in part on our continued
ability to hire, assimilate and retain qualified personnel.

Executive Officers of the Registrant

The following are the executive officers of the
Company as of March 1, 2004:

Christopher S. Alexander, 55:Chairman of the Board of Directors
since July 2002;President and Chief Executive Officer
since November 2000; July 1999 to October 2000, President of
Hypercom Transaction Systems Group; 1998 to 1999, Chief
Operating Officer, Hypercom Corporation; 1993 to 1998 Chief
Operating Officer of Hypercom International.

John W. Smolak, 55:Executive Vice President, Chief
Financial and Administrative Officer since April 2002; September
2000 to March 2001, Chief Financial Officer of Suburban Propane
L.L.P., a distributor, Whippany, New Jersey; January 1999 to
September 2000, Senior Vice President Finance and Administration
and Chief Financial Officer of 1-800 Flowers.com, a retailer,
Westbury, New York; and February 1995 to May 1998, Senior Vice
President and Chief Financial Officer of Lechters, Inc., a
retailer, Harrison, New Jersey.

William A. Dowlin, 57:Executive Vice President, Product
Development and Manufacturing, since November 14, 2003;
President, Hypercom Manufacturing Resources, Inc., since
July 1, 1997.

Guilherme Blumenthal, 43:Executive Vice President, Sales and
Operations, since November 14, 2003. October 2000 to
October 2003, Senior Vice President, Finance and Operations,
Transaction Systems Group, Hypercom Corporation; August 1999 to
September 2000, Senior Vice President and General Manager,
Hypercom Latin America; January 1999 to July 1999, Chief
Operations Officer, Hypercom Latin America; August 1997 to
January 1999, Chief Operations Officer, Hypercom Brazil; January
1997 to July 1997, General Manager of Netset, a services company
in Brazil, following its acquisition by Hypercom; March 1995 to
December 1996, founder and operator of Netset in Brazil.

Douglas J. Reich,
60:Senior Vice President since
January 2004; Chief Compliance Officer since May 2003; General
Counsel and Secretary since November 2001; and July 1996 to
January 2001, Senior Vice President, General Counsel and
Secretary of Wavo Corporation, a digital media services
provider, Phoenix, Arizona.




Item 2.     Properties

Our corporate headquarters are located in
Phoenix, Arizona, where we own an approximate 142,000 square
foot building that is also utilized for research and
development, design, prototype manufacturing, testing, and
repair. We lease an adjacent 23,800 square foot building, which
is used primarily for our network solutions products and
services, pursuant to a lease that expires August 31, 2011.

We own an approximate 23,000 square foot office
floor in Hong Kong that is utilized for administrative, sales
and support, and manufacturing support services. We own an
approximate 102,000 square foot facility in Brazil that is
utilized for administrative, warehouse, distribution, and sales
and support services that is currently being held for sale.

We utilize a third party contract manufacturer in
Shenzhen, China for the manufacture and sub-assembly of certain
of our products. This manufacturer also provides space in its
facility for use by us in conducting the final assembly of these
products.

11



---



##### Table of Contents



We also lease various facilities in Arizona,
Florida, Georgia, Texas, Australia, Chile, China, Hungary,
Japan, Latvia, Mexico, Puerto Rico, Russia, Singapore, Sweden,
and the United Kingdom, 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.




Item 3.Legal
Proceedings

The Company currently is a party to various legal
proceedings, including those noted below. While management
presently believes that the ultimate outcome of these
proceedings, individually and in the aggregate, will not have a
material adverse effect on our financial position or overall
trends in results of operations, litigation is subject to
inherent uncertainties, and unfavorable rulings could occur. An
unfavorable ruling could include money damages or, in cases for
which injunctive relief is sought, an injunction. Were an
unfavorable ruling to occur, there exists the possibility of a
material adverse impact on the net income of the period in which
the ruling occurs or future periods.

Brazilian Central Bank Administrative
Proceeding.In May 2002, the Brazilian
Central Bank Foreign Capital and Exchange Department (Bank)
commenced an administrative proceeding against the
Companys subsidiary, Hypercom do Brasil Industria e
Comercio Ltda. (HBI), alleging that it is subject to
a fine totaling R$197,317,538 (equivalent of U.S. $68,233,466 as
of December 31, 2003) for failing to pay Hypercom, as the
parent company shipper and seller, for imported inventory items
during the applicable 180 day period established for
payment in the respective Statements of Importation. We
understand that the Bank has also instituted similar actions
against the Brazil subsidiaries of other U.S. corporations. In
July 2002, HBI petitioned the Federal Civil Court in Sao Paulo,
Brazil to have the administrative proceeding suspended and the
applicable provision of the Brazilian law declared
unconstitutional. In August 2002, the Court rejected HBIs
motion for an injunction and HBI filed an interlocutory appeal.
In September 2002, the Judge reviewing the interlocutory appeal
issued a preliminary decision granting a stay of the
administrative proceeding. Also in July 2002, HBI filed an
administrative defense with the Bank, which is presently under
review and subject to no deadline. In May 2003, the Federal
Civil Court rendered judgment dismissing HBIs petition for
a Writ of Mandamus. In June 2003, HBI appealed this judgment.
HBIs counsel in both proceedings has advised the Company
that, in their opinion, the fine is confiscatory in nature and
illegal, and does not believe that such fine will be charged on
the amount established by the Bank.

Colleen E. Ryan v. Hypercom Corporation, et
al.In June 2002, the Arizona Court of
Appeals ruled on the appeal of this former employee from a
decision of the Superior Court of Maricopa County which had
granted summary judgment in favor of the Company and dismissed
the employees sexual misconduct claims against the
Company, a former executive, and a current executive, based on
the enforceability of a settlement agreement with such employee.
The Court of Appeals reversed the lower courts ruling and
held that the factual issues related to the Companys
motion to enforce the settlement agreement must be decided by a
jury, rather than the court, and remanded the case back to the
trial court for further proceedings. The Company sought review
of that decision by the Arizona Supreme Court, which denied the
petition in January 2003. The case was then remanded to the
trial court for further proceedings. A jury trial with regard to
the enforceability of the settlement agreement has been set for
April 2004. If required, a separate jury trial will be held at a
later date with regard to the other claims of the
plaintiffs complaint.




Item 4.     Submission
of Matters to a Vote of Security Holders

The Company did not submit any matters to a vote
of shareholders during the fourth quarter of 2003.

12



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##### Table of Contents






PART II




Item 5.Market
for Registrants Common Equity and Related Shareholder
Matters

The Companys 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 the common
stock as reported on the NYSE.

|                    |  |      |      |     |  |   |      | 
|------------------- |  | ---- | ---- | --- |  | - | ---- | 
|                    |  | High |      | Low
|                    |  |      |      |    
|Year Ended 12/31/03 |  |      |      |     |  |   |      | 
|First Quarter       |  | $    | 4.37 |     |  | $ | 2.75 | 
|Second Quarter      |  |      | 4.98 |     |  |   | 3.84 | 
|Third Quarter       |  |      | 5.68 |     |  |   | 4.00 | 
|Fourth Quarter      |  |      | 5.59 |     |  |   | 4.50 | 
|Year Ended 12/31/02 |  |      |      |     |  |   |      | 
|First Quarter       |  | $    | 7.95 |     |  | $ | 5.05 | 
|Second Quarter      |  |      | 7.70 |     |  |   | 5.85 | 
|Third Quarter       |  |      | 7.41 |     |  |   | 2.86 | 
|Fourth Quarter      |  |      | 4.01 |     |  |   | 1.53 | 

The Company has not paid any cash dividends on
its Common Stock. The Company currently intends to retain its
earnings for its business and does not anticipate paying any
cash dividends on its 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.

As of March 5, 2004, we had approximately 87
stockholders of record and approximately 4,963 beneficial
shareholders.

ISSUER PURCHASES OF EQUITY
SECURITIES

|         |                                          |                  |  |             |        |                     |   |                        |      |  |  |        |        |  |   |           |           | 
|-------- | ---------------------------------------- | ---------------- |  | ----------- | ------ | ------------------- | - | ---------------------- | ---- |  |  | ------ | ------ |  | - | --------- | --------- | 
|         |                                          |                  |  |             |        | (c) Total Number of |   | (d) Approximate Dollar
|         |                                          |                  |  |             |        | Shares Purchased    |   | Value of Shares       
|         |                                          | (a) Total        |  | (b) Average |        | as Part of          |   | that May Yet Be       
|         |                                          | Number of        |  | Price Paid  |        | Publicly Announced  |   | Purchased Under the   
|Period   |                                          | Shares Purchased |  | per Share   |        | Plans or Programs   |   | Plans or Programs     
|         |                                          |                  |  |             |        |                     |   |                       
|Month #1 |                                          |                  |  |             |        |                     |   |                        |      |  |  |        |        |  |   |          
|         | October 1, 2003 to October 31, 2003      |                  |  |            |        |                     |   |                       |      |  |  |       |        |  |   |          |          
|Month #2 |                                          |                  |  |             |        |                     |   |                        |      |  |  |        |        |  |   |          
|         | November 1, 2003 to November 30, 2003    |                  |  |            |        |                     |   |                       |      |  |  |       |        |  |   |          |          
|Month #3 |                                          |                  |  |             |        |                     |   |                        |      |  |  |        |        |  |   |          
|         | December 1, 2003 to December 31, 2003(1) |                  |  | 60,000      |        |                     | $ | 4.50                   |      |  |  | 60,000 |        |  | $ | 9,730,080 |          
|         |                                          |                  |  |             |        |                     |   |                        |      |  |  |        |        |  |   |          
|         |                                          | Total            |  |             | 60,000 |                     |   | $                      | 4.50 |  |  |        | 60,000 |  |   | $         | 9,730,080 | 
|         |                                          |                  |  |             |        |                     |   |                        |      |  |  |        |        |  |   |          



---



|    |                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Purchase made pursuant to repurchase program
    announced on August 15, 2003. Under the terms of the plan,
    the Company is authorized to purchase up to $10 million of
    common stock.

13



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##### Table of Contents






Item 6.Selected
Financial Data

In 1999, we changed our fiscal year end to
December 31 from June 30. This change was effective
December 31, 1999. The following table contains selected
consolidated financial data for the year ended June 30,
1999, the six months ended December 31, 1999 and the years
ended December 31, 2000, 2001, 2002 and 2003, derived from
our audited consolidated financial statements. The selected
consolidated financial data for the twelve months ended
December 31, 1999 was unaudited, but was derived from the
audited consolidated financial statements for the six months
ended December 31, 1999, combined with our unaudited
financial statements for the six months ended June 30,
1999. The selected financial data should be read in conjunction
with our consolidated financial statements, related notes and
the section of this annual report 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. (In thousands, except share data and percentages).

|                                                                                                                  |  |            |         |                  |  |               |         |                          |  |            |         |            |  |      |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|----------------------------------------------------------------------------------------------------------------- |  | ---------- | ------- | ---------------- |  | ------------- | ------- | ------------------------ |  | ---------- | ------- | ---------- |  | ---- | ------- | - |  | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                                                                                  |  |            |         | Six Month Period |  | Twelve Months |         |                         
|                                                                                                                  |  | Year Ended |         | Ended            |  | Ended         |         | Years Ended December 31,
|                                                                                                                  |  | June 30,   |         | December 31,     |  | December 31,  |         |                         
|                                                                                                                  |  | 1999       |         | 1999             |  | 1999          |         | 2000                     |  | 2001       |         | 2002       |  | 2003
|                                                                                                                  |  |            |         |                  |  |               |         |                          |  |            |         |            |  |     
|                                                                                                                  |  |            |         | (restated)       |  | (restated)    |         | (restated)               |  | (restated) |         | (restated) |  |     
|Statements of Operations Data:(9)                                                                                 |  |            |         |                  |  |               |         |                          |  |            |         |            |  |      |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|Net revenue                                                                                                       |  | $          | 238,722 |                  |  | $             | 133,228 |                          |  | $          | 243,026 |            |  | $    | 269,214 |   |  | $ | 236,773 |   |  | $ | 244,965 |   |  | $ | 231,514 |  
|Costs of revenue(1)                                                                                               |  |            | 121,549 |                  |  |               | 67,650  |                          |  |            | 126,524 |            |  |      | 164,149 |   |  |   | 145,292 |   |  |   | 153,609 |   |  |   | 135,484 |  
|                                                                                                                  |  |            |         |                  |  |               |         |                          |  |            |         |            |  |      |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|Gross profit                                                                                                      |  | $          | 117,173 |                  |  | $             | 65,578  |                          |  | $          | 116,502 |            |  | $    | 105,065 |   |  | $ | 91,481  |   |  | $ | 91,356  |   |  | $ | 96,030  |  
|                                                                                                                  |  |            |         |                  |  |               |         |                          |  |            |         |            |  |      |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|Percent of net revenue                                                                                            |  |            | 49.1    | %                |  |               | 49.2    | %                        |  |            | 47.9    | %          |  |      | 39.0    | % |  |   | 38.6    | % |  |   | 37.3    | % |  |   | 41.5    | %
|Research and development                                                                                          |  | $          | 30,249  |                  |  | $             | 19,637  |                          |  | $          | 34,036  |            |  | $    | 38,666  |   |  | $ | 28,107  |   |  | $ | 24,744  |   |  | $ | 24,163  |  
|Selling, general, and administrative                                                                              |  |            | 72,250  |                  |  |               | 41,990  |                          |  |            | 80,126  |            |  |      | 82,078  |   |  |   | 63,547  |   |  |   | 57,888  |   |  |   | 58,832  |  
|Restructuring charges(1)                                                                                          |  |            |        |                  |  |               |        |                          |  |            |        |            |  |      |        |   |  |   |        |   |  |   | 4,434   |   |  |   |        |  
|                                                                                                                  |  |            |         |                  |  |               |         |                          |  |            |         |            |  |      |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|Total expenses                                                                                                    |  | $          | 102,499 |                  |  | $             | 61,627  |                          |  | $          | 114,162 |            |  | $    | 120,744 |   |  | $ | 91,654  |   |  | $ | 87,066  |   |  | $ | 82,995  |  
|                                                                                                                  |  |            |         |                  |  |               |         |                          |  |            |         |            |  |      |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|Income (loss) from continuing operations                                                                          |  | $          | 14,674  |                  |  | $             | 3,951   |                          |  | $          | 2,340   |            |  | $    | (15,679 | ) |  | $ | (173    | ) |  | $ | 4,290   |   |  | $ | 13,035  |  
|                                                                                                                  |  |            |         |                  |  |               |         |                          |  |            |         |            |  |      |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|Income (loss) before discontinued operations
    and cumulative effect of change in accounting principle(2)(3)(4) |  | $          | 9,186   |                  |  | $             | 4,495   |                          |  | $          | 1,500   |            |  | $    | (25,751 | ) |  | $ | (11,668 | ) |  | $ | (24,502 | ) |  | $ | 3,965   |  
|                                                                                                                  |  |            |         |                  |  |               |         |                          |  |            |         |            |  |      |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|Income (loss) from discontinued
    operations(5)(6)                                                              |  |            | (13     | )                |  |               | (258    | )                        |  |            | (449    | )          |  |      | (5,840  | ) |  |   | (8,240  | ) |  |   | (14,816 | ) |  |   | 7,233   |  
|Cumulative effect of change in accounting
    principle(7)                                                        |  |            |        |                  |  |               |        |                          |  |            |        |            |  |      |        |   |  |   |        |   |  |   | (21,766 | ) |  |   |        |  
|                                                                                                                  |  |            |         |                  |  |               |         |                          |  |            |         |            |  |      |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|Net income (loss)                                                                                                 |  | $          | 9,173   |                  |  | $             | 4,237   |                          |  | $          | 1,051   |            |  | $    | (31,591 | ) |  | $ | (19,908 | ) |  | $ | (61,084 | ) |  | $ | 11,198  |  
|                                                                                                                  |  |            |         |                  |  |               |         |                          |  |            |         |            |  |      |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|Income (loss) per share:(8)                                                                                       |  |            |         |                  |  |               |         |                          |  |            |         |            |  |      |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|Income (loss) before discontinued operations
    and cumulative effect of change in accounting principle          |  | $          | 0.27    |                  |  | $             | 0.13    |                          |  | $          | 0.04    |            |  | $    | (0.75   | ) |  | $ | (0.32   | ) |  | $ | (0.53   | ) |  | $ | 0.08    |  
|Income (loss) from discontinued operations                                                                        |  |            |        |                  |  |               | (0.01   | )                        |  |            | (0.01   | )          |  |      | (0.17   | ) |  |   | (0.22   | ) |  |   | (0.32   | ) |  |   | 0.14    |  
|Cumulative effect of change in accounting
    principle                                                           |  |            |        |                  |  |               |        |                          |  |            |        |            |  |      |        |   |  |   |        |   |  |   | (0.47   | ) |  |   |        |  
|                                                                                                                  |  |            |         |                  |  |               |         |                          |  |            |         |            |  |      |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|Net income (loss) per share(8)                                                                                    |  | $          | 0.27    |                  |  | $             | 0.12    |                          |  | $          | 0.03    |            |  | $    | (0.92   | ) |  | $ | (0.54   | ) |  | $ | (1.32   | ) |  | $ | 0.22    |  
|                                                                                                                  |  |            |         |                  |  |               |         |                          |  |            |         |            |  |      |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|Shares used in calculations                                                                                       |  |            | 34,428  |                  |  |               | 34,446  |                          |  |            | 34,414  |            |  |      | 34,184  |   |  |   | 36,644  |   |  |   | 46,142  |   |  |   | 50,351  |  
|Balance Sheet Data:                                                                                               |  |            |         |                  |  |               |         |                          |  |            |         |            |  |      |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|Cash and cash equivalents                                                                                         |  | $          | 36,727  |                  |  | $             | 26,093  |                          |  | $          | 26,093  |            |  | $    | 13,008  |   |  | $ | 19,769  |   |  | $ | 23,069  |   |  | $ | 65,415  |  
|Marketable securities                                                                                             |  |            | 26,731  |                  |  |               | 23,015  |                          |  |            | 23,015  |            |  |      | 2,110   |   |  |   |        |   |  |   |        |   |  |   | 17,400  |  
|Working capital                                                                                                   |  |            | 162,152 |                  |  |               | 155,843 |                          |  |            | 155,843 |            |  |      | 73,429  |   |  |   | 126,088 |   |  |   | 128,179 |   |  |   | 156,742 |  
|Total assets                                                                                                      |  |            | 276,280 |                  |  |               | 296,629 |                          |  |            | 296,629 |            |  |      | 367,448 |   |  |   | 336,552 |   |  |   | 258,860 |   |  |   | 264,568 |  
|Short and long-term debt                                                                                          |  |            | 10,878  |                  |  |               | 10,830  |                          |  |            | 10,830  |            |  |      | 100,391 |   |  |   | 67,888  |   |  |   | 25,025  |   |  |   | 9,857   |  
|Total shareholders equity                                                                                        |  |            | 226,023 |                  |  |               | 230,586 |                          |  |            | 230,586 |            |  |      | 207,004 |   |  |   | 210,226 |   |  |   | 187,972 |   |  |   | 204,297 |  

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---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | During the third quarter of 2002, we committed to
    a profit improvement plan which included the closure of offices
    around the world in favor of a more cost-effective distributor
    sales model and the termination of our direct manufacturing
    operations in Brazil. Restructuring charges in cost of sales
    include $2.0 million related to the write-down of
    inventories and other related costs. Restructuring charges of
    $4.4 million, which are separately stated, include
    $3.6 million related to the write-down of a building and
    other fixed assets to their estimated fair value and
    $0.8 million related to termination costs and other
    charges. See note 12 to the financial statements.
|   
|(2) | During the third quarter of 2000, we wrote-off
    our remaining $4.1 million investment in Cirilium
    Corporation, a joint corporate venture that we had formed in
    late 1999 with Inter-Tel Incorporated. Through
    September 30, 2000, we had accounted for our investment in
    Cirilium on the equity method and had reported $5.8 million
    in losses in connection with this investment. This write-off and
    the reporting of these losses, in the total amount of
    $9.9 million, contributed to our net loss for the year
    ended December 31, 2000.                                                                                                                                                              
|   
|(3) | In connection with the early retirement of two
    term loans, we recorded a $2.6 million loss on early
    extinguishment of debt. The loss resulted from the write-off of
    unamortized debt issuance costs and a loan discount associated
    with our term loans.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|(4) | During 2002, we increased the valuation allowance
    on our deferred tax assets by $20.0 million, of which
    $16.0 million contributed to our loss before discontinued
    operations and cumulative effect of change in accounting
    principle and $4.0 million was recorded in discontinued
    operations related to Golden Eagle for the period ending
    December 31, 2002.                                                                                                                                                                                                                                                                                                                                                      
|   
|(5) | During the third quarter of 2002, the Company
    identified certain unprofitable businesses and, effective with
    the decision to hold these operating units for sale, recorded a
    loss of $8.0 million to write-down the assets to their
    estimated fair value. For comparative purposes, all prior
    operating results of these unprofitable businesses have been
    reclassified to reflect the results of operations in
    discontinued operations.                                                                                                                                                                                                                                                                        



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



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(6) | Consistent with the Companys strategy of
    disposing of operating units not aligned with its core business,
    the Company sold its direct finance lease subsidiary, Golden
    Eagle, effective October 1, 2003, for $30.0 million
    gross cash proceeds, and recorded a $7.0 million gain net
    of severance and other exit costs. As a result of the
    disposition, the net operating results of Golden Eagle have been
    reported within discontinued operations for all periods
    presented.                                                                                                                                                                                                                                                                                                                                                                                               
|   
|(7) | During 2002, we adopted SFAS No. 142,
    Goodwill and Other Intangible Assets. Under the transition
    provisions of SFAS 142, we evaluated our reporting units for
    impairment of goodwill and recorded a $21.8 million
    write-off primarily attributable to goodwill associated with the
    2000 acquisition of Golden Eagle Leasing.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|(8) | Per share data is diluted per share, except for
    the years ended December 31, 2000, 2001, and 2002, as the effect
    of common stock equivalents in those years was anti-dilutive.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(9) | Subsequent to the release of its operating
    results for the third quarter ended September 30, 2003, and
    prior to the filing of its Form 10-Q for the period, the
    Company identified $1.1 million of prepaid taxes at a
    foreign subsidiary not expected to be recoverable. Upon review
    of the transactions that gave rise to the amounts, the Company
    determined that these prepaid amounts related to transactions
    which had occurred in 1999 and 2000, and were not correctly
    interpreted by the personnel responsible for financial reporting
    and, as a result, were not correctly recorded in light of
    information that was available at that time. The Company has
    determined that this is an accounting error and should be
    corrected by restating the amounts previously reflected in the
    1999 and 2000 financial statements. Accordingly, the Decem-

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | ber 31, 2002 balance sheet has been restated
    to reduce prepaid expenses and other current assets and increase
    accumulated deficit by $1.1 million, respectively. The
    Company reflected the results of this restatement in the 1999
    and 2000 information presented. The correction resulted in the
    reduction of six months ended December 31, 1999 sales and
    net income by $1.1 million, respectively, and reduced
    earnings per share by $0.04. The year ended 2000 sales were
    reduced by $0.6 million, the net loss increased by
    $0.6 million, and net loss per share increased by $0.01
    (see Note 2).

For a presentation of certain of the above
information on a quarterly basis for each of our four quarters
refer to note 21 of our audited consolidated financial
statements for the year ended December 31, 2003 and 2002
appearing elsewhere in this Annual Report on Form 10-K.




Item 7.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, 2003. 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 Exhibit 99.1 of this Annual Report on
Form 10-K entitled Cautionary Statement Regarding
Forward-Looking Statements and Risk Factors, in the
discussion below and elsewhere in 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
United States. 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.

Revenue
Recognition and Accounts Receivable

Our sales relate to product shipments, which are
recognized upon shipment of product pursuant to Staff Accounting
Bulletin No. 101 and No. 104 Revenue Recognition
in Financial Statements (SAB 101 and 104). Service
revenues and revenues from long-term contracts are each less
than 10% of our revenues. Although we meet the requirements of
SAB 101 and 104 upon shipment of product and the recording of
revenue, we continually evaluate our accounts receivable for any
bad debts or product returns and make estimates for any bad debt
allowances or product return reserves as the specific situations
dictate.

We maintain an allowance for doubtful accounts
for estimated losses resulting from the inability of our
customers to make required payments. We compute such allowance
based upon a specific customer account review of our larger
customers and balances in excess of 90 days old. Our
assessment of our customers ability to pay generally
includes direct contact with the customer, investigation into
our customers financial status, as well as consideration
of our customers payment history with us. If the financial
condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional
allowances may be required. 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 accounts
receivable.

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We record reductions to revenue based on
estimates of product returns. The estimate of product returns is
based on historical return trends as well as our assessment of
individual customer orders and shipments. Such returns can
result from customer nonpayment, in which we request that our
product be returned, or a decision on the part of the customer
to return the product.

Direct-Financing
Leases

Direct-financing lease activity was reported in
our direct-financing lease subsidiary, Golden Eagle. We sold
Golden Eagle in the fourth quarter of 2003, recognizing a gain
on sale of approximately $7.0 million. The gain and
operating results of Golden Eagle for all prior periods
presented have been recorded and reclassified, respectively,
into discontinued operations in the consolidated statements of
operations. The net investment in direct financing leases
reported in the consolidated balance sheets at December 31,
2002 relates solely to Golden Eagle. In addition to the lease
contract receivables and initial direct costs, the balance of
net investment in direct financing leases contains an allowance
for credit losses and an amount representing an estimate of the
unguaranteed residual value of the equipment under finance
lease. The balance of net investment in financing leases was
subsequently realized at the time of sale, October 1, 2003.

Sales-Type
Leases

Certain sales of product are sold under a capital
lease arrangement, recorded as a sales-type lease in accordance
with SFAS No. 13 Accounting for Leases, as amended.
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. We maintain an allowance for
estimated uncollectible sales type lease receivables at an
amount that we believe is sufficient to provide adequate
protection against losses in our sales-type lease portfolio. Our
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 credit conditions at our customers deteriorate, we
may need to increase our allowance for uncollectible sales-type
leases.

In addition, as part of the initial recording of
our sales-type leases, we estimate the unguaranteed residual
value of the equipment under sales-type lease. This is the
estimated fair value of the equipment that will be returned to
or purchased from us at the end of the initial lease period. Our
estimate of the residual value is based on industry standards
and our actual experience. If market conditions change
negatively, it could have an adverse impact on the estimated
residual value amount.

Long-term
Contract Revenue

We are involved in one long-term contract with
the Brazil Health Ministry requiring substantial performance of
customized software and hardware. We recognize revenues and an
estimated gross profit upon the attainment of scheduled
performance milestones under the percentage-of-completion
method. We follow this method since the contract contains
well-defined performance milestones and we can make reasonably
dependable estimates of the costs applicable to various stages
of our contract.

Our gross profit estimates rely on our continuous
estimates of total contract costs compared to contract revenue
and any claims in excess of contract revenue where it is both
probable the claims will result in additional contract revenue
and the amount of the excess claim can be reliably estimated.
Previously recognized gross profits and the valuation of
deferred contract costs are subject to revisions as the contract
progresses to completion and any claims for revenues in excess
of the original contract are settled. Revisions in profit
estimates and the valuation of deferred contract costs are
charged to income in the period in which the facts that give
rise to the revision become known.

Inventory

We write down inventory for estimated
obsolescence or slow moving inventory equal to the difference
between the cost of inventory and the estimated market value
based upon assumptions about future demand and market conditions
generally over a twelve-month period on an item by item basis.
If actual market

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conditions are less favorable than those
projected by management, additional inventory write-downs may be
required.


Deferred
Taxes

During 2002, we recorded a full valuation
allowance on our then remaining unreserved deferred tax asset
balance due to the impact of a continued economic downturn on
our estimated U.S. sourced future income. As a result,
there are no remaining unreserved balances of deferred tax
assets reported on the balance sheets as of December 31,
2003 and 2002. The valuation allowance is subject to reversal in
future years at such time that the benefits are actually
utilized or, operating profits, in the tax jurisdictions giving
rise to the deferred tax assets, become sustainable at a level
that meets the recoverability criteria under SFAS 109
Accounting for Income Tax. The recoverability criteria in
SFAS 109 requires our judgment of whether it is more likely
than not, based on an evaluation of positive and negative
evidence, that a valuation allowance is not needed. If in the
future, positive evidence of sufficient quality and quantity
overcomes the negative evidence, we would reverse all or a
portion of the valuation allowance resulting in a decrease to
our income tax expense in our consolidated statement of
operations. We evaluate the realizability of the deferred tax
assets and need for valuation allowances quarterly.

The company does business in a number of
different countries. Tax authorities may scrutinize the various
tax structures employed by the company in these countries. We
believe that we maintain adequate tax reserves, including our
valuation reserve for deferred tax assets, to offset the
potential tax liabilities that may arise upon audit in these
countries. If such amounts ultimately prove to be unnecessary,
the resulting reversal of such reserves would result in tax
benefits being recorded in the period the reserves are no longer
deemed necessary. If such amounts ultimately prove to be less
than the ultimate assessment, a future charge to expense or
reduction to our related valuation reserve would result. In
addition, any potential tax liabilities that may arise upon
audit could affect the individual items that comprise the
companys fully-reserved deferred tax asset balance.

Contingencies
and Litigation

On an ongoing basis management monitors the need
to provide an estimated loss contingency arising from normal
operations or litigation matters. There are no such
contingencies provided for at December 31, 2003. We rely on
our in-house counsel and outside counsel to advise us about
ongoing litigation matters. Based upon information available at
this time, we believe our current litigation matters will not
have a material adverse effect on the results of operations and
our financial condition.

Overview of Financial Results

The following overview will highlight certain key
events and factors impacting our financial performance over the
past three years:

Year
2001



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The year 2001 was highlighted by our focus on the
    performance deficiencies at Golden Eagle and our debt and equity
    activity. As discussed previously, Golden Eagle was sold in the
    fourth quarter of 2003, and consequently the operating results
    of Golden Eagle have been reclassified into discontinued
    operations for all periods presented.                                                                                                                                                                                                                        
|
| | One of our main objectives was to improve the
    financial performance of Golden Eagle. As a result of our
    continued focus on Golden Eagle, we recorded an incremental
    charge of $7.2 million in the first quarter of 2001 to
    strengthen credit reserves for certain segments of Golden
    Eagles direct finance lease receivables that had been
    specifically impacted by certain events of that economic period.
    This charge was recorded in costs of revenue and is included in
    the loss from discontinued operations for the year ended
    December 31, 2001.

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our debt and equity activity in 2001 began with a
    series of interim measures to raise cash in anticipation of
    refinancing our primary credit facility. These interim measures
    included the issuance of common stock, and certain bridge
    borrowings that were ultimately converted to common stock
    through conversion rights attached to the borrowings, or from
    the repayment of the bridge borrowings with our common stock.
    Such financing and equity measures amounted to
    $25.9 million. We completed a refinancing of our principal
    credit facility in August 2001 with a new $45 million
    senior secured credit facility including a line of credit and
    two term loans. Although this new facility provided us with
    increased liquidity, it was a relatively expensive source of
    capital. Consequently, and as more fully described in our
    consolidated financial statements, we paid off a significant
    portion of these facilities with proceeds from a private equity
    offering completed in March 2002. The bridge borrowings and new
    credit facility included the issuance of stock warrants, which
    further contributed to our higher interest costs in 2001.

Year
2002



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The year 2002 was highlighted by the completion
    of a private placement of our common stock, significant charges
    related to the carrying value of goodwill and deferred tax
    assets, the implementation of a profit improvement plan and a
    significant improvement in income from continuing operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | In the first quarter of 2002, we completed the
    issuance and sale of common stock in a private equity offering.
    Net proceeds from the offering of $36.5 million were used
    principally to pay off high cost debt. As a result of the early
    extinguishment of debt, we recorded a loss on early
    extinguishment of debt relating to for the write-off of debt
    issuance costs in the amount of $2.6 million in the first
    quarter of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| | On January 1, 2002, we adopted SFAS
    No. 142 Goodwill and Other Intangible Assets. The
    adoption of SFAS 142 resulted in the complete write-off of
    goodwill balances, existing at January 1, 2002, in the
    amount of $21.8 million in the second quarter. In
    accordance with SFAS 142, this write-off was reported as a
    cumulative effect of change in accounting principle in the
    statement of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| | During the third quarter of 2002, we increased
    our valuation allowance on our then remaining deferred tax
    assets by $20.0 million. The increase in the valuation
    allowance increased our tax expense attributable to both
    continuing operations and discontinued operations by
    $20.0 million. There were no remaining balances of deferred
    tax assets reported on the balance sheet as of December 31,
    2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| | As discussed further in Managements
    Discussion and Analysis and in the Notes to the consolidated
    Financial Statements, we undertook a profit improvement plan in
    2002, which resulted in restructuring certain operations and
    holding other operations for sale as discontinued operations.
    The restructuring costs element of the plan were reported as
    expenses within income from continuing operations, while the
    losses from the discontinued operations are reported separately
    as part of our net loss. The restructuring charges totaling
    $6.4 million included write-downs to assets, including
    inventories and fixed assets, as well as accruals for severance
    and other operating expenses. Losses from discontinued
    operations totaling $14.8 million included
    $8.0 million in initial write-downs of assets to fair
    value, as well as the operating results of the discontinued
    operations during 2002.

Year
2003



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The year 2003 was highlighted by the completion
    of our profit improvement and restructuring plan initiated in
    September 2002 with a resulting improvement in operating and net
    income, strengthening of our balance sheet, and the sale of
    Golden Eagle.                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| | Completing our restructuring plan during 2003
    allowed us to focus on our core terminal and network systems
    business, which resulted in improved gross margins while
    maintaining operating expenses at levels appropriate to support
    the core business activities. Gross margins improved principally
    from continuing improvements in reducing costs in our core set
    of product offerings through reductions in material costs as
    well as improved manufacturing efficiencies. Operating expenses
    were essentially unchanged from 2002 reflecting a leveling off
    of spending to match our business model as contemplated under
    our profit improvement and restructuring plan initiated in
    September 2002.

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In addition to improving our profits, we were
    able to strengthen our balance sheet as of December 31,
    2003 compared to December 31, 2002. Improvements in our
    balance sheet are reflected in increased cash and short-term
    investment balances, elimination of current debt and increased
    working capital and stockholders equity. We continue to
    maintain a $10 million revolving line of credit, albeit
    there were no borrowings during 2003. These achievements are
    principally a result of our profit improvements, improvements in
    our accounts receivable days sales outstanding and inventory
    turnover, and the sale of Golden Eagle.
|
| | While we continued to experience improvements in
    the financial performance of Golden Eagle, we decided a
    direct-finance leasing operation was outside our core business
    and did not have a long-term role in our strategic plan.
    Consequently, we sold Golden Eagle in the fourth quarter of 2003
    resulting in a gain of $7.0 million, with gross proceeds
    received of $30.0 million.                                                                                                                                                                                                                                                                        
|
| | The following should be read in light of the
    matters highlighted in the Overview.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

Results of Continuing Operations

The following table sets forth the operating
results expressed as a percentage of net revenue for the periods
indicated. Results for any one or more periods are not
necessarily indicative of future results.

|                                                                                                                     |  |                         |       |      |  |      |       |    |  |  |       |   
|-------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ----- | ---- |  | ---- | ----- | -- |  |  | ----- | --
|                                                                                                                     |  |                        
|                                                                                                                     |  | Year Ended December 31,
|                                                                                                                     |  |                        
|                                                                                                                     |  | 2003                    |       | 2002 |  | 2001
|                                                                                                                     |  |                         |       |      |  |     
|Net revenue                                                                                                          |  |                         | 100.0 | %    |  |      | 100.0 | %  |  |  | 100.0 | % 
|Costs of revenue                                                                                                     |  |                         | 58.5  |      |  |      | 62.7  |    |  |  | 61.4  |   
|                                                                                                                     |  |                         |       |      |  |      |       |    |  |  |       |   
|Gross profit                                                                                                         |  |                         | 41.5  |      |  |      | 37.3  |    |  |  | 38.6  |   
|Research and development                                                                                             |  |                         | 10.4  |      |  |      | 10.1  |    |  |  | 11.9  |   
|Selling, general and administrative                                                                                  |  |                         | 25.4  |      |  |      | 23.6  |    |  |  | 26.8  |   
|Restructuring charges                                                                                                |  |                         |      |      |  |      | 1.8   |    |  |  |      |   
|                                                                                                                     |  |                         |       |      |  |      |       |    |  |  |       |   
|Income (loss) from continuing operations                                                                             |  |                         | 5.7   |      |  |      | 1.8   |    |  |  | (0.1  | ) 
|Interest and other expense, net of interest and
    other income                                                     |  |                         | (1.0  | )    |  |      | (1.5  | )  |  |  | (4.3  | ) 
|Loss on early extinguishment of debt                                                                                 |  |                         |      |      |  |      | (1.1  | )  |  |  |      |   
|Foreign currency loss                                                                                                |  |                         | (1.2  | )    |  |      | (2.5  | )  |  |  | (1.1  | ) 
|                                                                                                                     |  |                         |       |      |  |      |       |    |  |  |       |   
|Income (loss) before taxes, discontinued
    operations, and cumulative effect of change in accounting
    principle |  |                         | 3.5   |      |  |      | (3.3  | )  |  |  | (5.5  | ) 
|(Provision) benefit for income taxes                                                                                 |  |                         | (1.8  | )    |  |      | (6.7  | )  |  |  | 0.5   |   
|                                                                                                                     |  |                         |       |      |  |      |       |    |  |  |       |   
|Income (loss) before discontinued operations
    and cumulative effect of change in accounting principle             |  |                         | 1.7   |      |  |      | (10.0 | )  |  |  | (5.0  | ) 
|Income (loss) from discontinued operations                                                                           |  |                         | 3.1   |      |  |      | (6.0  | )  |  |  | (3.5  | ) 
|Cumulative effect of change in accounting
    principle                                                              |  |                         |      |      |  |      | (8.9  | )  |  |  |      |   
|                                                                                                                     |  |                         |       |      |  |      |       |    |  |  |       |   
|Net income (loss)                                                                                                    |  |                         | 4.8   | %    |  |      | (24.9 | )% |  |  | (8.5  | )%
|                                                                                                                     |  |                         |       |      |  |      |       |    |  |  |       |   

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Net revenue by geographic region is presented in
the following table as a percentage of net revenues for the
periods indicated:

|                                |        |                         |      |       |   |      |      |       |   |  |      |       |  
|------------------------------- | ------ | ----------------------- | ---- | ----- | - | ---- | ---- | ----- | - |  | ---- | ----- | -
|                                |        |                        
|                                |        | Year Ended December 31,
|                                |        |                        
|Revenues by Region              |        | 2003                    |      | 2002  |   | 2001
|                                |        |                         |      |       |   |     
|United States                   |        |                         | 33.0 | %     |   |      | 33.9 | %     |   |  | 36.9 | %    
|Latin America, including Mexico |        |                         | 18.5 |       |   |      | 26.6 |       |   |  | 29.5 |      
|Asia/ Pacific                   |        |                         | 17.4 |       |   |      | 15.7 |       |   |  | 14.4 |      
|Europe                          |        |                         | 31.1 |       |   |      | 23.8 |       |   |  | 19.2 |      
|                                |        |                         |      |       |   |      |      |       |   |  |      |      
|                                | Totals |                         |      | 100.0 | % |      |      | 100.0 | % |  |      | 100.0 | %
|                                |        |                         |      |       |   |      |      |       |   |  |      |      

The results of continuing operations discussed
herein exclude the operations of the operating units being
reported as discontinued operations (see Note 12 to the
consolidated financial statements). Prior years results of
continuing operations have been restated to reflect the
discontinued operations on a consistent basis with 2003.



| |                                                         
| | --------------------------------------------------------
| | Comparison of Years Ended December 31,
    2003 and 2002

Net revenue for the year ended December 31,
2003 decreased $13.5 million or 5.5% to $231.5 million
from $245.0 million in the same period in the prior year.
Net revenues for 2002 include the attainment of a performance
milestone under our Brazilian Health Ministry contract resulting
in revenue of $8.6 million during the first quarter of 2002,
versus $1.4 million in revenue recognized under the same
contract in 2003. Performance milestones under this contract
were substantially less than the milestones achieved in 2002, as
we have entered the maintenance phase of this contract. In
addition, during 2003 the company transacted the sale of
terminals that the Company had previously leased to a third
party to derive rental income under an operating lease. The sale
of these terminals was accounted for under a sales-type lease
arrangement and contributed $2.4 million in revenues.
Exclusive of the revenues for the Brazil Health Ministry
contract in both years and the revenues under the sales-type
lease arrangement in 2003, net revenues declined during the year
ended December 31, 2003 by $8.7 million compared to
2002. This decline is due principally to a decline in Network
Systems revenues associated with one of its largest contracts.
Revenues under this contract in 2003 were essentially limited to
software maintenance, while 2002 included both hardware
deliveries and software maintenance. There can be no assurance
that Network Systems will be able to replace this contract in
the future with one of equal size or duration. Additionally,
2003 revenues were impacted by a soft global economy and
uncertainties in the first half of 2003 associated with the
conflict in Iraq.

The remaining milestones under the Brazilian
Health Ministry contract are expected to be completed during
2004, as we are in the final maintenance phase of this contract.
However, as of December 31, 2003, we have identified and
made a claim for approximately $6.7 million of revenue in
excess of the agreed contract. We believe it is probable our
claim will result in additional revenue and have reasonably
estimated such amount in accordance with Statement of Position
81-1, Accounting for Performance of Construction-Type and
Certain Production-Type Contracts. While the revenue related
to these claims has not been recorded under our
percentage-of-completion milestone approach, contract costs to
be recovered by these revenue claims amounting to approximately
$4.9 million have been deferred within other long-term
assets at December 31, 2003 and 2002 and treated as normal
costs of contract performance. If our revenue claim is denied or
results in revenue less than our associated costs, our operating
results would be significantly impacted.

Net revenue from services activities, principally
derived from POS support services, and from our long-term
contract with the Brazilian Health Ministry, each comprised less
than 10% of total net revenue in each of the years ended
December 31, 2003 and 2002.

Our cost of revenue includes the cost of raw
materials, manufacturing labor, overhead and subcontracted
manufacturing costs, as well as loan loss provisions with
respect to sales-type leases. The costs of revenue for the year
ended December 31, 2003 decreased $18.1 million or
11.8% to $135.5 million from $153.6 million for

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the year ended December 31, 2002. Gross
margin for the year ended December 31, 2003 was 41.5%
compared to 37.3% in the same period in the prior year.


Both the change in cost of revenue and the gross
margin were affected by various events in both 2003 and 2002. As
discussed previously, 2003 included $1.4 million in revenue
from the Brazilian Health Ministry contract versus $8.6 million
recognized in 2002. This contract carries a fully absorbed
operating margin currently estimated at 9.1% and thus can impact
the overall margin percentage when revenues are inconsistent
between periods. Further, 2003 gross margin benefited from the
sale of fully depreciated terminals the Company had previously
leased to a third party, contributing $2.4 million to the
Companys gross margin in 2003. Additionally, cost of
revenues for 2002 includes the effects of restructuring charges
in the amount of $2.0 million relative to our restructuring
activity discussed below. Further, in connection with the
Companys transition of its manufacturing operations in
Brazil to a contract manufacturer, certain sales orders in the
Brazilian market were supplied from our factory in China for
which importation and tax costs had the effect of decreasing the
margin by approximately $0.8 million in 2002. The Company
also wrote down inventory and incurred other incremental charges
relative to assessments of net realizable value amounting to
$0.7 million during the third quarter of 2002.

Exclusive of the Brazilian Health Ministry
revenues and related cost of revenues, the sale of fully
depreciated terminals in 2003 and the restructuring and other
charges incurred during 2002, as noted above, the gross margin
for the year ended December 31, 2003 and 2002 would be
41.1% and 39.8%, respectively. The increase in 2003 is a result
of our continued manufacturing and product cost reductions and
improved pricing in certain service operations.

Research and development expenses consist mainly
of software and hardware engineering costs and the cost of
development personnel. Research and development expenses for the
year ended December 31, 2003 decreased $0.5 million or 2.0%
to $24.2 million from $24.7 million in the same period
in the prior year. The spending in research and development was
flat year over year due to our continued focus on a cost
efficient approach to research and development. Present
development activities are primarily focusing on reducing the
component costs of existing product and to select new product
introductions having a commercially feasible market demand.

Selling, general and administrative expenses
consist of sales and marketing expenses, administrative
personnel costs, facilities operations and other corporate
overhead. These expenses increased $0.9 million or 1.6% to
$58.8 million for the year ended December 31, 2003
compared to $57.9 million in 2002. The slight increase
principally represents certain additions to our direct sales
activities as we identify new markets and promote new product
offerings. The restructuring activity associated with 2002 is
discussed further in the comparison of 2002 to 2001. During
2003, there were no new restructuring charges contemplated nor
any additional restructuring charges incurred related to the
restructuring plan initiated in 2002.

The Company incurred $2.5 million in
interest expense for the year ended December 31, 2003
compared to $4.2 million in 2002. Interest expense for 2003
consists primarily of interest expense on long-term borrowings
and amortization of deferred financing charges. Interest expense
for 2002 includes essentially the same elements as 2003 plus
additional interest incurred on two term loans with principal
balances totaling $18.6 million and a $3.1 million
note from a former director and former stockholder outstanding
during the first quarter of 2002. The term loans and note were
paid off in March 2002 with proceeds we received from a private
placement of common stock.

Foreign currency losses totaling
$2.8 million for the year ended December 31, 2003 were
largely attributable to forward contract hedge premiums and
local transaction losses in our Swedish subsidiary. Foreign
currency losses for the year ended December 31, 2002 of
$6.1 million related to the devaluation of the Brazilian
real and Argentinean peso partially offset by gains in the
British pound. The reduced loss is a result of a hedging program
the Company has undertaken to mitigate foreign currency
exposures. At December 31, 2003, the Company had foreign
currency forward contracts outstanding in the amount of
$34.4 million, denominated principally in the Brazilian
real, British pound, Chilean peso and Australian dollar. Gains
and losses on these contracts principally consisted of our
mark-to-market adjustments, recorded in net earnings as foreign
currency gains or losses.

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Income tax expense before discontinued operations
and cumulative effect of change in accounting principle for
federal, state and foreign taxes was $4.1 million for the year
ended December 31, 2003 and $16.5 million for the year
ended December 31, 2002. The income tax provision for 2003
is comprised of income taxes associated with the Companys
profitable foreign locations.

As discussed in the Companys 2002 Annual
Report on Form 10-K, the Company recorded full valuation
reserves against the Companys unreserved deferred tax
asset balance existing at September 30, 2002. Consistent
with the facts and circumstances leading to our conclusion to
provide a full valuation reserve against our deferred tax assets
in 2002, we have provided a further valuation allowance against
any net increases in deferred tax assets which in 2003 consisted
principally of U.S. net operating losses generated during 2003.
Accordingly, the valuation allowances render the effective tax
rates for 2003 and 2002 not meaningful. These valuation
allowances are 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. The valuation allowances
are also subject to reduction to the extent the related net
operating loss carryforwards and other deferred tax assets
ultimately become unusable through expiration or additional
assessments that could be made by various taxing jurisdictions.

There was no income tax expense recorded in
discontinued operations for 2003, as the income tax was offset
by the reversal of valuation allowances previously placed
against deferred tax assets allocated to discontinued operations
during 2002. Income tax expense recorded in discontinued
operations for 2002 was $4.0 million, and was primarily
attributable to valuation allowances placed against Golden
Eagles deferred tax assets.



| |                                                         
| | --------------------------------------------------------
| | Comparison of Years Ended December 31,
    2002 and 2001

Net revenue for the year ended December 31,
2002 increased $8.2 million or 3.5% to $245.0 million
from $236.8 million in the same period in the prior year.
Net revenues for 2001 include the effects of a $7.5 million
reserve for a sales return. Exclusive of the sales return, 2001
net revenues would have been $244.3. Further, 2002 net revenues
include the attainment of a performance milestone under our
Brazilian Health Ministry contract resulting in revenue of
$8.6 million during the first quarter of 2002, versus
$1.6 million in revenue recognized under the same contract
in 2001. Exclusive of the revenues for the Brazilian Health
Ministry contract in both years and the sales return in 2001,
net revenues declined during the year ended December 31,
2002 by $6.3 million compared to 2001. This decline is due
principally to a decline in revenues in Network Systems revenues
which was principally due to the fulfillment of substantial
orders under one of its largest contracts throughout 2001.
Deliveries under such contract declined during 2002 as the
contract neared completion. There can be no assurance that
Network Systems will be able to replace this contract in the
future with one of equal size or duration.

Net revenues from services activities,
principally derived from POS support services, and from our
long-term contract with the Brazilian Health Ministry, each
comprised less than 10% of total net revenue in each of the
years ended December 31, 2002 and 2001.

Our cost of revenue includes the cost of raw
materials, manufacturing labor, overhead and subcontracted
manufacturing costs, as well as loan loss provisions with
respect to sales-type leases. The costs of revenue for the year
ended December 31, 2002 increased $8.3 million or 5.7%
to $153.6 million from $145.3 million for the year
ended December 31, 2001. Gross margin for the year ended
December 31, 2002 was 37.3% compared to 38.6% in the same
period in the prior year.

Both the change in cost of revenue and the gross
margin were affected by various events in both 2002 and 2001. As
discussed previously, 2002 included $8.6 million in revenue
from the Brazilian Health Ministry contract versus
$1.6 million recognized in 2001. This contract carries a
fully absorbed operating margin currently estimated at 9.1% and
thus can impact the overall margin percentage when revenues are
inconsistent between periods. Additionally, cost of revenues for
2002 includes the effects of restructuring charges in the amount
of $2.0 million relative to our restructuring activity
discussed below. Further, in connection with the Companys
transition of its manufacturing operations in Brazil to a
contract manufacturer, certain sales orders in the Brazilian
market were supplied from our factory in China for which
importation and tax costs had the

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effect of decreasing the margin by approximately
$0.8 million in 2002. The Company also wrote down inventory
and incurred other incremental charges relative to assessments
of net realizable value amounting to $0.7 million during
the third quarter of 2002.


Exclusive of the Brazilian Health Ministry
revenues and related cost of revenues and the restructuring and
other charges incurred during 2002, as noted above, the gross
margin for the year ended December 31, 2002 and 2001 would
be 39.8% and 38.8%, respectively. The increase in 2002 is a
result of our continued manufacturing and product cost
reductions and improved pricing in certain service operations.

Research and development expenses consist mainly
of software and hardware engineering costs and the cost of
development personnel. Research and development expenses for the
year ended December 31, 2002 decreased $3.4 million or
12.1% to $24.7 million from $28.1 million in the same
period in the prior year. The decreases over prior year are
directly attributable to a more focused and cost efficient
approach to research and development. Since substantially all
development activities related to the introduction of the ICE
product family and the ePic initiative are complete, the overall
level of research and development activities has been reduced.
Present development activities are primarily focused on reducing
the component costs of existing product and to select new
product introductions having a commercially feasible market
demand.

Selling, general and administrative expenses
consist of sales and marketing expenses, administrative
personnel costs, facilities operations and other corporate
overhead. These expenses decreased $5.6 million or 8.8% to
$57.9 million for the year ended December 31, 2002
compared to $63.5 million in 2001. This decrease reflects
significant cost containment measures put into place during the
third quarter of 2001 and carrying forward for all of 2002,
along with restructuring related savings identified in the third
quarter and realized, in part, during the fourth quarter of
2002. The cost containment measures and restructuring activities
involve both a reduction in staffing as well as the curtailment
of discretionary expenses.

In September 2002, the Company committed to a
plan to improve profits in its POS and Network Systems segment.
The plan entailed downsizing and outsourcing certain operations
and streamlining product offerings, changing to a distributor
sales model versus a direct sales model in certain international
locations, prioritizing and rationalizing research and
development expenditures and disposing of certain unprofitable
operations. The profit improvement plan encompassed both
restructuring activities to be accounted and reported under SFAS
146, as well as discontinued operations to be accounted and
reported under SFAS 144. See Note 12 to the Financial Statements.

The restructuring charges encompassed write downs
of fixed assets and inventory, one-time termination benefits and
other miscellaneous accruals incurred in connection with the
Companys profit improvement plan. The following table sets
forth the expected costs to be incurred with the activity, the
amount incurred during the period and the ending liability as of
December 31, 2002 (in thousands):

|                                           |                                             |                                              |   |               |       |              |   |       |       |  |   |     |     | 
|------------------------------------------ | ------------------------------------------- | -------------------------------------------- | - | ------------- | ----- | ------------ | - | ----- | ----- |  | - | --- | --- | 
|                                           |                                             | 2002 Expected                                |   | 2002 Incurred |       | 2002 Accrued
|                                           |                                             |                                              |   |               |       |             
|Restructuring charges in Cost of
    Sales |                                             |                                              |   |               |       |              |   |       |       |  |   |    
|                                           | Write down of inventories and related costs |                                              | $ | 2,033         |       |              | $ | 2,033 |       |  | $ | 100 |    
|                                           |                                             |                                              |   |               |       |              |   |       |       |  |   |    
|                                           |                                             | Total restructuring charges in cost of sales |   | $             | 2,033 |              |   | $     | 2,033 |  |   | $   | 100 | 
|                                           |                                             |                                              |   |               |       |              |   |       |       |  |   |    
|Restructuring charges                      |                                             |                                              |   |               |       |              |   |       |       |  |   |    
|                                           | Write down of building to fair value        |                                              | $ | 2,184         |       |              | $ | 2,184 |       |  | $ |    |    
|                                           | Write down of fixed assets to fair value    |                                              |   | 1,388         |       |              |   | 1,388 |       |  |   |    |    
|                                           | Write down of other assets to fair value    |                                              |   | 233           |       |              |   | 233   |       |  |   |    |    
|                                           | One-time termination benefits               |                                              |   | 482           |       |              |   | 482   |       |  |   | 134 |    
|                                           | Miscellaneous operating accruals            |                                              |   | 147           |       |              |   | 147   |       |  |   | 25  |    
|                                           |                                             |                                              |   |               |       |              |   |       |       |  |   |    
|                                           |                                             | Total restructuring charges                  |   | $             | 4,434 |              |   | $     | 4,434 |  |   | $   | 159 | 
|                                           |                                             |                                              |   |               |       |              |   |       |       |  |   |    

There were no restructuring charges incurred in
2001.

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Income from continuing operations for the year
ended December 31, 2002 increased $4.5 million to
$4.3 million compared to a loss from continuing operations
of $0.2 million for the same period in the prior year. The
improvement in operating results is principally from the
aforementioned improvement in gross margins coupled with the
cost containment measures impacting both research and
development and selling, general and administrative expenses.

The Company incurred $4.2 million in
interest expense for the year ended December 31, 2002
compared to $9.6 million for in the prior year. Interest
expense for 2002 consists primarily of interest expense on
long-term borrowings and amortization of deferred financing
charges. Interest expense for 2001 includes essentially the same
elements as 2002 and also includes amortization of
$2.2 million in loan discounts from warrants issued and
amortization of $0.7 million relating to a beneficial notes
payable conversion feature, both related to our refinancing
activity during 2001. In addition to these amortization charges,
the reduction in interest expense in 2002 compared to 2001 is
related to the repayment of two term loans totaling
$18.6 million and a $3.1 million note from a director
and principal stockholder during the first quarter of 2002. The
repayment was facilitated by proceeds we received from a private
placement of common stock in the first quarter of 2002. Relative
to the decrease in interest expense, our total long-term debt
decreased from $67.9 million at December 31, 2001 to
$25.0 million at December 31, 2002.

Other income (expense) in the amount of
$0.3 million for the year ended December 31, 2002
consisted principally of losses on fixed asset sales and net
credits relating to corporate overhead charges allocated to
discontinued operations. Income and (expense) in the amount
of ($1.2) million for the year ended December 31, 2001
consisted primarily of charges associated with requirements
under our debt forbearance agreements and other default related
costs of $1.4 million and net credits relating to corporate
overhead charges to discontinued operations. During 2002, the
Company was not in default with its lenders and accordingly did
not incur similar default related charges. The corporate
overhead charges to discontinued operations were ceased at the
time the discontinued operations were declared held for sale in
September 2002.

Foreign currency losses totaling
$6.1 million for the year ended December 31, 2002 were
largely attributable to the devaluation of the Brazilian real
and Argentinean peso partially offset by gains in the British
pound. Foreign currency losses for the year ended
December 31, 2001 of $2.6 million related to general
currency declines in Europe and South America. There was no
significant devaluation of currencies impacting 2001. Beginning
in June of 2002, the Company resumed its foreign currency risk
management strategy, which had been suspended starting in 2000
due to financial restrictions. At December 31, 2002, the
Company had foreign currency forward contracts outstanding in
the amount of $25 million, denominated principally in the
Brazilian real and British pound. Gains and losses on these
contracts principally consisted of our mark-to-market
adjustments, recorded in net earnings as foreign currency gains
or losses.

During the third quarter of 2002, we recorded a
full valuation allowance on our then remaining unreserved
deferred tax asset balance of approximately $20.0 million.
We further increased our valuation allowance in 2002 for net
increases in deferred tax assets that occurred principally by
2002 charges to expense that are not currently deductible or
recoverable. The increase in the valuation allowance was based
on the weight of all available evidence, principally influenced
by the continued U.S. derived losses in the third quarter of
2002 coupled with a continuing extension of the U.S. recession
as well as cumulative U.S. derived losses in recent years. The
U.S. derived losses in the third quarter of 2002 and
cumulatively over recent years together with an uncertain
economic outlook for the U.S., were deemed to be significant
negative evidence. As a result, the Company determined it did
not meet the more likely than not recoverability
criteria in SFAS No. 109, Accounting for Income Tax,
requiring positive evidence of sufficient quality and quantity
to overcome the negative evidence in order to support a
conclusion that a valuation allowance is not needed. The
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. There were no
remaining unreserved balances of deferred tax assets reported on
the balance sheet at December 31, 2002.

In addition to deferred tax expenses, which
principally relate to our valuation allowance increases, the
income tax provision for the year ended December 31, 2002
was comprised of income tax expenses from

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foreign locations with taxable income and a
current tax benefit for certain U.S. losses that can be carried
back for refunds. As a result of this combination of
occurrences, the effective tax rate for the Company in 2002 is
not meaningful. The Companys effective rate of income tax
benefit on continuing operations was 9.9% for the year ended
December 31, 2001. The income tax benefit rate in 2001
differed from the U.S. statutory rate principally due to foreign
taxes attributable to profitable foreign operations that are
less than the U.S. statutory rate, research and experimentation
credits, the non-recognition of tax benefit on foreign currency
translation losses and valuation reserves.


Liquidity and Capital Resources

The Company has historically financed its
operations primarily through cash generated from operations and
from borrowings under a line of credit. The Company has also
used borrowings under notes payable to fund working capital
requirements and reduce its bank debt.

Cash provided by continuing operations increased
$10.8 million to $23.5 million for the year ended
December 31, 2003 from $12.7 million for the year
ended December 31, 2002. The increase in operating cash
flow between 2003 and 2002 is principally due to the
Companys continued focus on maintaining its decreased
working capital requirements as well as the receipt of a
$9.1 million income tax refund related to a U.S. net
operating loss carry back claim filed during the first quarter
2003. The decrease in working capital requirements principally
relates to net changes in accounts receivable, inventory and
accounts payable during 2003, which more favorably impacted
operating cash compared to net changes in those same working
capital items during 2002. The change in inventory and its
favorable impact on operating cash flow reflects a decline in
inventory levels due to manufacturing efficiencies and
maintaining inventory levels to support our core products.
Accounts receivable and accounts payable changes during the
twelve-month period ending December 31, 2003 compared to
2002 reflect normal variations in the customer collection and
vendor payment process. Offsetting those events and factors
increasing operating cash flows, the Company continues to
experience growth in its sales-type lease portfolio requiring
the use of operating cash flow. The Company is currently
evaluating financing or outside funding source alternatives to
augment the use of operating cash flows to fund the sales-type
lease activity.

Cash provided by investing activities increased
$17.7 million to $9.2 million for the year ended
December 31, 2003 as compared to cash used in investing
activities of $8.5 million in the same period a year ago.
This increase is principally related to $32.5 million in
cash proceeds received from the sale of the Companys
direct finance leasing business and other discontinued
operations net of $17.4 million in excess cash reinvested
in marketable securities during the 2003. Our current marketable
securities primarily consist of various government agency debt
securities and preferred equity securities. We classify these
short-term investments as available-for-sale. As our cash flow
from operations continues to grow, we may increase these
investment balances. Capital expenditures declined
$1.7 million from $6.0 million in 2002 to
$4.3 million in 2003. Capital expenditures were higher in
2002 due to leasehold improvements incurred as a result of the
relocation of the Companys Brazilian manufacturing
facility. During 2003, capital expenditures were principally for
upgrades to computer software and equipment purchases. We
currently intend to spend approximately $4.0 to
$5.0 million during the next twelve months in capital
expenditures principally to continue to upgrade computer
software and hardware.

Cash provided by financing activities was
$3.0 million for the year ended December 31, 2003,
compared to cash provided by financing activities of
$4.3 million in the same period a year ago. This
$1.3 million decrease is primarily attributable to the
Companys on-going efforts to reduce long-term debt. During
2003, the Company was able to significantly reduce its long-term
debt to $9.9 million from $25.0 million at
December 31, 2002, principally as a result of the sale of
Golden Eagle. At December 31, 2003, working capital and
cash were $156.7 and $65.4 million, respectively, compared
to $128.2 and $23.1 million at December 31, 2002,
respectively.

On March 22, 2002, the Company completed the
issuance and sale of 7,870,000 shares of its common stock, par
value $0.001 per share (the Shares), at a price of
$5.00 per Share. The Shares were sold in a

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private offering transaction exempt from
registration under Section 4(2) of the Securities Act of
1933, as amended. The Shares were subsequently registered with
the Securities and Exchange Commission effective May 2,
2002.


The net proceeds of the private offering amounted
to $36.5 million and were used to repay two term loans with
principal balances of $15.3 million and $3.3 million,
respectively, under the Companys credit facility,
$3.1 million in outstanding loans from a director and
principal stockholder and to reduce the outstanding borrowings
under the Companys $25 million revolving credit
facility. The remaining proceeds were used for general corporate
purposes.

In connection with the early retirement of the
term loans, the Company recorded an extraordinary loss on
retirement of debt of $2.6 million during the first quarter
of 2002. In accordance with SFAS 145, Rescission of FASB
Statements No.4, 44 and 64, amendment of FASB Statement No.13,
and Technical Corrections, the Company has reclassified its
$2.6 million extraordinary loss from early extinguishment
of debt for the twelve months ended December 31, 2002 to
pre-tax income (see Note 11).

Further, in connection with the private offering,
the Company entered into an agreement with its principal lenders
relating to its revolving credit facility which waived any
default or event of default with respect to the delivery of
certain collateral documents that the Company was obligated to
deliver under the facility and permitted the Company to repay
the term loans. The effective date of the Amendment was
March 13, 2002.

Effective December 31, 2003, the Senior
Secured Credit Facility was amended and restated to a fully cash
secured arrangement in an effort to reduce costs and to further
match the Companys current liquidity needs. Under the
terms of the amended and restated agreement, the Company is
required to maintain a $25 million unrestricted cash
balance and is limited on the amount of certain additional debt
the Company can incur. Any borrowings under the revolving line
of credit must be fully secured by an equal amount of cash. All
other financial covenants and most of the restrictions under the
former agreement were removed. The available credit on the
revolving line of credit, which was previously reduced to
$15 million during March 2003, was further reduced to
$10 million under the amended and restated Senior Secured
Credit Facility. The interest rate was reduced from the greater
of 8% or prime plus 2%, to the greater of 4% or prime plus 1%.
The amended and restated Senior Secured Credit Facility expires
July 31, 2005. The Company had no advances on the revolving
line of credit during 2003 and no outstanding balance under the
Senior Secured Credit Facility at December 31, 2003.

The Company continues to accelerate cash
generation through aggressively pursuing collection of trade
receivables, reducing inventories and controlling expenses. We
believe that our cash flow from operations, together with our
current cash reserves, will be sufficient to fund our projected
liquidity and capital resource requirements through 2004. If
operating results are unfavorable, we may need to use additional
capital sources to meet our short-term liquidity and capital
resource requirements.

Stock
Repurchase

In June 1998, the Board of Directors authorized
the repurchase, at managements discretion, of up to
1,000,000 shares of the Companys common stock in the open
market or in privately negotiated transactions. In addition,
during August 2003, the Companys Board of Directors
authorized the repurchase of an additional $10 million in
common stock to maximize shareholder value. During 2003, the
Company purchased 60,000 shares of its common stock for
$0.3 million. The repurchased shares were recorded as
treasury stock and result in a reduction in stockholders
equity. The timing and amount of any future repurchases will
depend on market conditions and corporate considerations.

Off-Balance
Sheet Arrangements

As part of our on-going business, we do not
participate in transactions that generate relationships with
unconsolidated entities or financial partnerships, such as
entities often referred to as structured finance or special
purpose entities (SPEs), which would have been
established for the purpose of facilitating off-balance sheet

27



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##### Table of Contents



arrangements or other contractually narrow or
limited purposes. As of December 31, 2003, we are not
involved in any unconsolidated SPE transaction.




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

The Company had certain cash obligations at
December 31, 2003 due as follows (dollars in thousands):

|                                |       |       |        |           |  |       |       |        |  |         |       |        |  |   |       |       |  |   |     |       | 
|------------------------------- | ----- | ----- | ------ | --------- |  | ----- | ----- | ------ |  | ------- | ----- | ------ |  | - | ----- | ----- |  | - | --- | ----- | 
|                                |       |       |        | Less than |  | 1-3   |       | 4-5    |  | After  
|                                |       | Total |        | 1 Year    |  | Years |       | Years  |  | 5 Years
|                                |       |       |        |           |  |       |       |        |  |        
|Long-term debt                  |       | $     | 10,870 |           |  | $     | 1,361 |        |  | $       | 9,509 |        |  | $ |      |       |  | $ |    |      
|Capital lease obligations       |       |       | 413    |           |  |       | 349   |        |  |         | 49    |        |  |   | 15    |       |  |   |    |      
|Operating leases                |       |       | 5,183  |           |  |       | 1,615 |        |  |         | 1,769 |        |  |   | 1,142 |       |  |   | 657 |      
|Minimum purchase obligations(1) |       |       | 7,642  |           |  |       | 7,642 |        |  |         |      |        |  |   |      |       |  |   |    |      
|Other long-term liabilities     |       |       | 2,787  |           |  |       |      |        |  |         | 1,417 |        |  |   | 566   |       |  |   | 804 |      
|                                |       |       |        |           |  |       |       |        |  |         |       |        |  |   |       |       |  |   |     |      
|                                | Total |       | $      | 26,895    |  |       | $     | 10,967 |  |         | $     | 12,744 |  |   | $     | 1,723 |  |   | $   | 1,461 | 
|                                |       |       |        |           |  |       |       |        |  |         |       |        |  |   |       |       |  |   |     |      



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Minimum purchase obligations include all
    outstanding obligations to purchase goods or services at
    December 31, 2003 including agreements that are cancelable
    without penalty and agreements which are enforceable and legally
    binding. The Company estimates that approximately 5% or less of
    the outstanding purchase obligations at December 31, 2003
    are noncancellable due to the customized nature of the order.

Backlog

As of December 31, 2003, our backlog was
$57.0 million, compared to $77.4 million at
December 31, 2002. The decrease in backlog is primarily
related to the fulfillment of orders for major customers within
the United States that are subject to a customer approved
delivery schedule.

The Company includes in its backlog all revenue
specified in signed contracts and purchase orders to the extent
that the Company contemplates recognition of the related revenue
within one year. There can be no assurance that the contracts
included in backlog will actually generate the specified
revenues or that the actual revenues will be generated within
the one-year period.

Recent Accounting Pronouncements

Effective January 1, 2003 the Company
adopted SFAS 145, Rescission of FASB Statements No. 4,
44 and 64, amendment of FASB Statement No. 13, and
Technical Corrections, which among other things, restricts
the classification of gains and losses from extinguishment of
debt as extraordinary to only those transactions that are
unusual and infrequent in nature as defined by APB Opinion
No. 30. Upon adoption, gains and losses on certain future
debt extinguishment, if any, will be recorded in pre-tax income.
In accordance with the provisions of SFAS 145, the Company
reclassified its $2.6 million extraordinary loss from early
extinguishment of debt for the twelve months ended
December 31, 2002 to pre-tax loss (see Note 11).

In January 2003, the FASB issued FIN No. 46,
Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51, which addresses
consolidation by business enterprises of variable interest
entities (VIEs) either: (1) that do not have sufficient
equity investment at risk to permit the entity to finance its
activities without additional subordinated financial support, or
(2) in which the equity investors lack an essential
characteristic of a controlling financial interest. In December
2003, the FASB completed deliberations of proposed modifications
to FIN 46 (Revised Interpretations) resulting in multiple
effective dates based on the nature as well as the creation date
of the VIE. VIEs created after January 31, 2003, but prior
to January 1, 2004, may be accounted for either based on
the original interpretation or the Revised Interpretations. For
VIEs created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim
or annual period ending after December 15, 2003. Certain
disclosures are effective immediately. VIEs created after
January 1, 2004 must be accounted for under the Revised
Interpretations. The Company currently has no contractual
relationship or other business relationship with a variable
interest entity and

28



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##### Table of Contents



therefore the adoption of FIN No. 46 did not
have a material effect on the Companys consolidated
financial position, results of operations or cash flows.


In April 2003, the Financial Accounting Standards
Board issued SFAS 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities.This statement
amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under
SFAS 133. SFAS 149 is effective for contracts entered
in to or modified after June 30, 2003. The Company has only
limited involvement with derivative financial instruments, does
not use them for trading purposes and is not a party to any
leveraged derivatives. However, the Company periodically enters
into forward exchange contracts to hedge some of its foreign
currency exposure. The Companys adoption of SFAS 149 did
not have a material effect on its consolidated financial
position, results of operations, or cash flows.

In May 2003, the FASB issued SFAS 150,
Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity. This
Statement requires that certain instruments that were previously
classified as equity on a companys statement of financial
position now be classified as liabilities. The Statement is
effective for financial instruments entered into or modified
after May 31, 2003, and to all other instruments that exist
as of the beginning of the first interim financial reporting
period beginning after June 15, 2003. The Company currently
has no instruments impacted by the adoption of this statement
and therefore the adoption did not have an effect on the
Companys consolidated financial position, results of
operations or cash flows.






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

At December 31, 2003, 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. 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.

Our investment portfolio, consisting of fixed
income securities, was $17.4 million as of
December 31, 2003. 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, 2003, the decline in the fair value of our
investment portfolio would not be material given that the our
investments typically have interest rate reset features that
regularly adjust to current market 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 foreign operations and
markets. Nevertheless, the fair value of our investment
portfolio or related income would not be significantly impacted
by either 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.

A substantial portion of our revenue and capital
spending is transacted in U.S. dollars. However, we do at
times enter into these transactions in other currencies, such as
the Hong Kong dollar, Australian dollar, Brazilian real, British
pound and other Asian and European currencies. Beginning in June
2002, the Company resumed its foreign currency risk management
strategy, which had been suspended starting the fourth quarter
of 2000 due to credit limitations imposed by the Companys
banks. As a policy, the Company hedges the translation of its
net investment in foreign subsidiaries in an attempt to
neutralize the effect of translation gains or losses in the
statement of operations. Financial hedging instruments are
limited by Company policy to foreign-currency forward or option
contracts and foreign-currency debt. The Company enters into
forward or option contracts with its bank or other financial
institutions to accomplish its hedging strategy. At
December 31, 2003, the Company had foreign currency forward
contracts outstanding in the amount of $34.4 million,
denominated principally in the Brazilian real and British pound.
Gains and losses on these contracts principally consist of
mark-to-market adjustments, recorded in earnings as foreign
currency gains or losses.

29



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##### Table of Contents



We do not purchase or hold any such derivative
financial instruments for the purpose of speculation or
arbitrage. See Risk Factors  If we cannot
manage additional challenges presented by our international
operations, our revenues and profitability may suffer
elsewhere in this Report.

At present, we have $9.9 million in debt
obligations and there are no borrowings under our line of credit
facility at December 31, 2003. As such, our interest rate
risk is limited with respect to existing debt.

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 collectibility 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.






|        |                                                
|------- | -----------------------------------------------
|Item 8. | 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.

30



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##### Table of Contents








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

None.






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

As of the end of the period covered by this
report, Hypercom management conducted an evaluation, under the
supervision and with the participation of the Companys
Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Companys
disclosure controls and procedures. Based on this evaluation,
the Chief Executive Officer and Chief Financial Officer
concluded that the Companys disclosure controls and
procedures are effective in alerting them in a timely manner to
material information required to be included in the
Companys SEC reports. In addition, Hypercom management,
including the Companys Chief Executive Officer and Chief
Financial Officer, reviewed our internal controls, and there
have been no significant changes in the Companys internal
controls or in other factors that could significantly affect
those controls subsequent to the date of our last evaluation.




PART III






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

The information under the headings Board of
Directors and Section 16(a) Beneficial
Ownership Reporting Compliance, in the Companys 2004
Proxy Statement is incorporated herein by reference. See
Part I of this Report for information regarding the
Companys executive officers.

The Company has adopted a Code of Ethics
applicable to the Companys Directors, officers (including
the Companys principal executive officer, principal
financial officer and controller) and employees. The Code of
Ethics is available on the Companys website and is also
attached to this Report as Exhibit 14. In the event that we
amend or waive any of the provisions of the Code of Ethics
applicable to our principal executive officer, principal
financial officer or controller, we intend to disclose the same
on the Companys website at www.hypercom.com.






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

The information set forth in our 2004 Proxy
Statement under the caption Executive Compensation
is incorporated herein by reference. The sections captioned
Report of the Compensation Committee on Executive
Compensation and Stock Price Performance Graph
in the Companys 2004 Proxy Statement are not incorporated
herein by reference.






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

The information set forth in our 2004 Proxy
Statement under the caption Security Ownership of
Principal Stockholders and Management is incorporated
herein by reference.






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

The information set forth in our 2004 Proxy
Statement under the caption Certain Transactions and
Relationships is incorporated herein by reference.






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

The information set forth in our 2004 Proxy
Statement under the caption Principal Accountant Fees and
Services is incorporated herein by reference.

31



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##### Table of Contents






PART IV






|         |                                                                     
|-------- | --------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules,
    and Reports on Form 8-K

a. The following documents are filed as part
of this Report:



| |                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) Audited Consolidated Financial
    Statements                                                                                                                                    
|
| | Report of Independent Auditors                                                                                                                                                       
|
| | Consolidated Balance Sheets at December 31,
    2003 and 2002                                                                                                                        
|
| | Consolidated Statements of Operations for the
    years ended December 31, 2003, 2002, and 2001                                                                                      
|
| | Consolidated Statements of Stockholders
    Equity for the years ended December 31, 2003, 2002, and 2001                                                                            
|
| | Consolidated Statements of Cash Flows for the
    years ended December 31, 2003, 2002, and 2001                                                                                      
|
| | 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. We filed the following Form 8-K
Reports during the fourth quarter of 2003:



| |    |                                                                                                                                                                             
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1) | Form 8-K dated October 10, 2003,
    announcing the sale of the Companys micro-ticket leasing
    business, Golden Eagle Leasing, Inc. to Northern Leasing Systems
    Inc.
|
| | 2) | Form 8-K/ A dated October 22, 2003,
    providing certain pro forma financial information related to the
    sale of Golden Eagle Leasing, Inc.                             
|
| | 3) | Form 8-K dated October 24, 2003,
    announcing the Companys results of operations for the
    quarter ended September 30, 2003.                                           
|
| | 4) | Form 8-K dated November 19, 2003,
    announcing that Jane Evans, a member of the Companys Board
    of Directors, passed away in Buenos Aires, Argentina.                 

c. The Exhibit Index and required
Exhibits are included following the Financial Statement Schedule.

32



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##### 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 Report to be signed on its behalf by the
undersigned, thereunto duly authorized.



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



| |    |                    
| | -- | -------------------
| | By | /s/ C. S. ALEXANDER

| |                                          
| | -----------------------------------------
| |                                          
| | Christopher S. Alexander                 
| | Chairman of the Board,                   
| | Chief Executive Officer and
    President

Date: March 15, 2004

Pursuant to the requirements of the Securities
Exchange Act of 1934, this Report has been signed below by the
following persons on behalf of the Registrant and in the
capacities indicated on March 15, 2004.

|                                                                                                                                                                                                                                                                                                                                                                       |  |                                                                          |  | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------ |  | 
|                                                                                                                                                                                                                                                                                                                                                                       |  |                                                                         
|Signature                                                                                                                                                                                                                                                                                                                                                              |  | Title                                                                   
|                                                                                                                                                                                                                                                                                                                                                                       |  |                                                                         
|                                                                                                                                                                                                                                                                                                                                                                      
|(1) Principal Executive, Financial and Accounting
    Officers                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                      
|/s/ C. S. ALEXANDERChristopher S. Alexander                                                                                                                                                                                                                                                                                                                            |  | Chairman of the Board, Chief Executive Officer
    and President        
|                                                                                                                                                                                                                                                                                                                                                                      
|/s/ JOHN W. SMOLAKJohn W. Smolak                                                                                                                                                                                                                                                                                                                                       |  | Executive Vice President, Chief Financial and
    Administrative Officer
|                                                                                                                                                                                                                                                                                                                                                                      
|(2) Directors                                                                                                                                                                                                                                                                                                                                                          |  |                                                                         
|                                                                                                                                                                                                                                                                                                                                                                      
|*Daniel D. Diethelm                                                                                                                                                                                                                                                                                                                                                    |  | Director                                                                
|                                                                                                                                                                                                                                                                                                                                                                      
|*William Keiper                                                                                                                                                                                                                                                                                                                                                        |  | Director                                                                
|                                                                                                                                                                                                                                                                                                                                                                      
|*Jock Patton                                                                                                                                                                                                                                                                                                                                                           |  | Director                                                                
|                                                                                                                                                                                                                                                                                                                                                                      
|*Norman Stout                                                                                                                                                                                                                                                                                                                                                          |  | Director                                                                
|                                                                                                                                                                                                                                                                                                                                                                      
|Christopher S. Alexander, by signing his name
    hereto, does sign and execute this Annual Report on
    Form 10-K on behalf of such of the above named officers and
    directors of the registrant on this 15th day of March,
    2004, pursuant to the power of attorney executed by each of such
    officers and directors filed as Exhibit 24.1 to this Report.
|                                                                                                                                                                                                                                                                                                                                                                      
|*By:                                                                                                                                                                                                                                                                                                                                                                   |  | /s/ C. S. ALEXANDERAttorney-in-Fact                                      |  | 

33



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##### Table of Contents



REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and

Stockholders of Hypercom Corporation


We have audited the accompanying consolidated
balance sheets of Hypercom Corporation and subsidiaries as of
December 31, 2003 and 2002, and the related consolidated
statements of operations, stockholders equity, and cash
flows for each of the three years in the period ended
December 31, 2003. Our audits also included the financial
statement schedule listed 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
auditing standards generally accepted in the 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 and
subsidiaries as of December 31, 2003 and 2002, and the
consolidated results of their operations and their cash flows
for each of the three years in the period ended
December 31, 2003, in conformity with accounting principles
generally accepted in the United States. 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.

As discussed in Note 1 of the consolidated
financial statements, in 2002 the Company changed its method of
accounting for goodwill.



| |                      
| | ---------------------
| | /s/ ERNST & YOUNG LLP

Phoenix, Arizona

February 6, 2004


34



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##### Table of Contents



HYPERCOM CORPORATION

CONSOLIDATED BALANCE SHEETS

|                                           |                                                                                                                                                                             |              |         |            |   |   |         |         |  
|------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------ | ------- | ---------- | - | - | ------- | ------- | -
|                                           |                                                                                                                                                                             |             
|                                           |                                                                                                                                                                             | December 31,
|                                           |                                                                                                                                                                             |             
|                                           |                                                                                                                                                                             | 2003         |         | 2002      
|                                           |                                                                                                                                                                             |              |         |           
|(In thousands, except share data)          |                                                                                                                                                                             |              |         | (Restated)
|ASSETS                                    
|Current assets:                            |                                                                                                                                                                             |              |         |            |   |   |         |        
|                                           | Cash and cash equivalents                                                                                                                                                   |              | $       | 65,415     |   |   | $       | 23,069  |  
|                                           | Restricted cash                                                                                                                                                             |              |         |           |   |   |         | 6,777   |  
|                                           | Marketable securities                                                                                                                                                       |              |         | 17,400     |   |   |         |        |  
|                                           | Accounts receivable, net of allowance for
    doubtful accounts of $993 and $3,282 at December 31, 2003
    and 2002, respectively                                          |              |         | 55,252     |   |   |         | 54,320  |  
|                                           | Current portion of net investment in direct
    financing leases                                                                                                            |              |         |           |   |   |         | 11,812  |  
|                                           | Current portion of net investment in sales-type
    leases                                                                                                                  |              |         | 10,477     |   |   |         | 9,774   |  
|                                           | Inventories                                                                                                                                                                 |              |         | 42,262     |   |   |         | 46,406  |  
|                                           | Income tax receivable                                                                                                                                                       |              |         |           |   |   |         | 9,118   |  
|                                           | Prepaid expenses and other current assets                                                                                                                                   |              |         | 13,769     |   |   |         | 15,826  |  
|                                           | Long-lived assets held for sale                                                                                                                                             |              |         | 852        |   |   |         | 660     |  
|                                           | Assets of discontinued operations held for sale                                                                                                                             |              |         |           |   |   |         | 8,834   |  
|                                           |                                                                                                                                                                             |              |         |            |   |   |         |        
|Total current assets                       |                                                                                                                                                                             |              | 205,427 |            |   |   | 186,596 |        
|                                           | Property, plant and equipment, net                                                                                                                                          |              |         | 28,217     |   |   |         | 30,214  |  
|                                           | Long-term marketable securities                                                                                                                                             |              |         | 153        |   |   |         | 152     |  
|                                           | Net investment in direct financing leases                                                                                                                                   |              |         |           |   |   |         | 15,392  |  
|                                           | Net investment in sales-type leases                                                                                                                                         |              |         | 18,542     |   |   |         | 11,213  |  
|                                           | Intangible assets, net                                                                                                                                                      |              |         | 3,731      |   |   |         | 4,633   |  
|                                           | Other long-term assets                                                                                                                                                      |              |         | 8,498      |   |   |         | 10,660  |  
|                                           |                                                                                                                                                                             |              |         |            |   |   |         |        
|Total assets                               |                                                                                                                                                                             | $            | 264,568 |            |   | $ | 258,860 |        
|                                           |                                                                                                                                                                             |              |         |            |   |   |         |        
|LIABILITIES AND STOCKHOLDERS
    EQUITY  
|Current liabilities:                       |                                                                                                                                                                             |              |         |            |   |   |         |        
|                                           | Accounts payable                                                                                                                                                            |              | $       | 21,733     |   |   | $       | 20,553  |  
|                                           | Accrued payroll and related expenses                                                                                                                                        |              |         | 8,267      |   |   |         | 6,419   |  
|                                           | Accrued sales and other taxes                                                                                                                                               |              |         | 6,359      |   |   |         | 7,187   |  
|                                           | Accrued liabilities                                                                                                                                                         |              |         | 7,534      |   |   |         | 6,572   |  
|                                           | Deferred revenue                                                                                                                                                            |              |         | 2,044      |   |   |         | 1,999   |  
|                                           | Income taxes payable                                                                                                                                                        |              |         | 1,690      |   |   |         | 1,707   |  
|                                           | Current portion of long-term debt                                                                                                                                           |              |         | 1,058      |   |   |         | 13,331  |  
|                                           | Liabilities of discontinued operations held for
    sale                                                                                                                    |              |         |           |   |   |         | 649     |  
|                                           |                                                                                                                                                                             |              |         |            |   |   |         |        
|Total current liabilities                  |                                                                                                                                                                             |              | 48,685  |            |   |   | 58,417  |        
|                                           | Long-term debt                                                                                                                                                              |              |         | 8,799      |   |   |         | 11,694  |  
|                                           | Other non-current liabilities                                                                                                                                               |              |         | 2,787      |   |   |         | 777     |  
|                                           |                                                                                                                                                                             |              |         |            |   |   |         |        
|Total liabilities                          |                                                                                                                                                                             |              | 60,271  |            |   |   | 70,888  |        
|Stockholders equity:                      |                                                                                                                                                                             |              |         |            |   |   |         |        
|                                           | Common stock, $.001 par value; 100,000,000 shares
    authorized; 49,930,803 and 48,014,350 shares outstanding at
    December 31, 2003 and December 31, 2002, respectively |              |         | 29         |   |   |         | 27      |  
|                                           | Additional paid-in capital                                                                                                                                                  |              |         | 220,004    |   |   |         | 214,008 |  
|                                           | Receivables from stockholders                                                                                                                                               |              |         | (1,056     | ) |   |         | (1,056  | )
|                                           | Accumulated deficit                                                                                                                                                         |              |         | (11,307    | ) |   |         | (22,505 | )
|                                           | Unearned deferred compensation                                                                                                                                              |              |         | (600       | ) |   |         |        |  
|                                           | Treasury stock, 290,211 and 230,088 shares (at
    cost) at December 31, 2003 and 2002, respectively                                                                        |              |         | (2,773     | ) |   |         | (2,502  | )
|                                           |                                                                                                                                                                             |              |         |            |   |   |         |        
|Total stockholders equity                 |                                                                                                                                                                             |              | 204,297 |            |   |   | 187,972 |        
|                                           |                                                                                                                                                                             |              |         |            |   |   |         |        
|Total liabilities and stockholders equity |                                                                                                                                                                             | $            | 264,568 |            |   | $ | 258,860 |        
|                                           |                                                                                                                                                                             |              |         |            |   |   |         |        

The accompanying notes are an integral part of
these consolidated financial statements.

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HYPERCOM CORPORATION

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                                                                            |                                                                                                                                                                                           |                          |         |         |         |      |         |         |         |   |         |         |         | 
|--------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------ | ------- | ------- | ------- | ---- | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                                                                                                                            |                                                                                                                                                                                           |                         
|                                                                                                                            |                                                                                                                                                                                           | Year Ended December 31, 
|                                                                                                                            |                                                                                                                                                                                           |                         
|                                                                                                                            |                                                                                                                                                                                           | 2003                     |         | 2002    |         | 2001
|(Amounts in thousands, except per share data)                                                                               |                                                                                                                                                                                           |                          |         |         |         |     
|Net revenue                                                                                                                 |                                                                                                                                                                                           | $                        | 231,514 |         |         | $    | 244,965 |         |         | $ | 236,773 |        
|Costs and expenses:                                                                                                         |                                                                                                                                                                                           |                          |         |         |         |      |         |         |         |   |         |        
|                                                                                                                            | Costs of revenue                                                                                                                                                                          |                          |         | 135,484 |         |      |         | 153,609 |         |   |         | 145,292 |        
|                                                                                                                            | Research and development                                                                                                                                                                  |                          |         | 24,163  |         |      |         | 24,744  |         |   |         | 28,107  |        
|                                                                                                                            | Selling, general and administrative                                                                                                                                                       |                          |         | 58,832  |         |      |         | 57,888  |         |   |         | 63,547  |        
|                                                                                                                            | Restructuring charges                                                                                                                                                                     |                          |         |        |         |      |         | 4,434   |         |   |         |        |        
|                                                                                                                            |                                                                                                                                                                                           |                          |         |         |         |      |         |         |         |   |         |        
|                                                                                                                            |                                                                                                                                                                                           | Total costs and expenses |         |         | 218,479 |      |         |         | 240,675 |   |         |         | 236,946 | 
|                                                                                                                            |                                                                                                                                                                                           |                          |         |         |         |      |         |         |         |   |         |        
|Income (loss) from continuing operations                                                                                    |                                                                                                                                                                                           |                          | 13,035  |         |         |      | 4,290   |         |         |   | (173    | )      
|                                                                                                                            | Interest income                                                                                                                                                                           |                          |         | 382     |         |      |         | 253     |         |   |         | 540     |        
|                                                                                                                            | Interest expense                                                                                                                                                                          |                          |         | (2,474  | )       |      |         | (4,207  | )       |   |         | (9,585  | )      
|                                                                                                                            | Loss on early extinguishment of debt                                                                                                                                                      |                          |         |        |         |      |         | (2,618  | )       |   |         |        |        
|                                                                                                                            | Other (expense) income                                                                                                                                                                    |                          |         | (113    | )       |      |         | 295     |         |   |         | (1,153  | )      
|                                                                                                                            | Foreign currency loss                                                                                                                                                                     |                          |         | (2,751  | )       |      |         | (6,062  | )       |   |         | (2,576  | )      
|                                                                                                                            |                                                                                                                                                                                           |                          |         |         |         |      |         |         |         |   |         |        
|Income (loss) before income taxes,
    discontinued operations, and cumulative effect of change in
    accounting principle |                                                                                                                                                                                           |                          | 8,079   |         |         |      | (8,049  | )       |         |   | (12,947 | )      
|                                                                                                                            | (Provision) benefit for income taxes                                                                                                                                                      |                          |         | (4,114  | )       |      |         | (16,453 | )       |   |         | 1,279   |        
|                                                                                                                            |                                                                                                                                                                                           |                          |         |         |         |      |         |         |         |   |         |        
|Income (loss) before discontinued operations
    and cumulative effect of change in accounting principle                    |                                                                                                                                                                                           |                          | 3,965   |         |         |      | (24,502 | )       |         |   | (11,668 | )      
|                                                                                                                            | Income (loss) from discontinued operations,
    net of related tax (expense) benefit of $0, ($3,950) and
    $3,698 for the year ended December 31, 2003, 2002 and 2001,
    respectively |                          |         | 7,233   |         |      |         | (14,816 | )       |   |         | (8,240  | )      
|                                                                                                                            | Cumulative effect of change in accounting
    principle                                                                                                                                   |                          |         |        |         |      |         | (21,766 | )       |   |         |        |        
|                                                                                                                            |                                                                                                                                                                                           |                          |         |         |         |      |         |         |         |   |         |        
|Net income (loss)                                                                                                           |                                                                                                                                                                                           | $                        | 11,198  |         |         | $    | (61,084 | )       |         | $ | (19,908 | )      
|                                                                                                                            |                                                                                                                                                                                           |                          |         |         |         |      |         |         |         |   |         |        
|Basic income (loss) per share:                                                                                              |                                                                                                                                                                                           |                          |         |         |         |      |         |         |         |   |         |        
|Income (loss) before discontinued operations
    and cumulative effect of change in accounting principle                    |                                                                                                                                                                                           | $                        | 0.08    |         |         | $    | (0.53   | )       |         | $ | (0.32   | )      
|                                                                                                                            | Income (loss) from discontinued operations                                                                                                                                                |                          |         | 0.15    |         |      |         | (0.32   | )       |   |         | (0.22   | )      
|                                                                                                                            | Cumulative effect of change in accounting
    principle                                                                                                                                   |                          |         |        |         |      |         | (0.47   | )       |   |         |        |        
|                                                                                                                            |                                                                                                                                                                                           |                          |         |         |         |      |         |         |         |   |         |        
|                                                                                                                            | Basic income (loss) per share                                                                                                                                                             |                          | $       | 0.23    |         |      | $       | (1.32   | )       |   | $       | (0.54   | )      
|                                                                                                                            |                                                                                                                                                                                           |                          |         |         |         |      |         |         |         |   |         |        
|Diluted income (loss) per share:                                                                                            |                                                                                                                                                                                           |                          |         |         |         |      |         |         |         |   |         |        
|Income (loss) before discontinued operations
    and cumulative effect of change in accounting principle                    |                                                                                                                                                                                           | $                        | 0.08    |         |         | $    | (0.53   | )       |         | $ | (0.32   | )      
|                                                                                                                            | Income (loss) from discontinued operations                                                                                                                                                |                          |         | 0.14    |         |      |         | (0.32   | )       |   |         | (0.22   | )      
|                                                                                                                            | Cumulative effect of change in accounting
    principle                                                                                                                                   |                          |         |        |         |      |         | (0.47   | )       |   |         |        |        
|                                                                                                                            |                                                                                                                                                                                           |                          |         |         |         |      |         |         |         |   |         |        
|                                                                                                                            | Diluted income (loss) per share                                                                                                                                                           |                          | $       | 0.22    |         |      | $       | (1.32   | )       |   | $       | (0.54   | )      
|                                                                                                                            |                                                                                                                                                                                           |                          |         |         |         |      |         |         |         |   |         |        
|Weighted average basic shares:                                                                                              |                                                                                                                                                                                           |                          | 49,146  |         |         |      | 46,142  |         |         |   | 36,644  |        
|                                                                                                                            |                                                                                                                                                                                           |                          |         |         |         |      |         |         |         |   |         |        
|Weighted average diluted shares:                                                                                            |                                                                                                                                                                                           |                          | 50,351  |         |         |      | 46,142  |         |         |   | 36,644  |        
|                                                                                                                            |                                                                                                                                                                                           |                          |         |         |         |      |         |         |         |   |         |        

The accompanying notes are an integral part of
these consolidated financial statements.

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HYPERCOM CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

|                                                  |                                          |              |            |            |   |             |    |              |  |          |         |              |   |               |        |        |  |   |         |         |   |   |      |      |   |   |        |      |   |   |         |         |  
|------------------------------------------------- | ---------------------------------------- | ------------ | ---------- | ---------- | - | ----------- | -- | ------------ |  | -------- | ------- | ------------ | - | ------------- | ------ | ------ |  | - | ------- | ------- | - | - | ---- | ---- | - | - | ------ | ---- | - | - | ------- | ------- | -
|                                                  |                                          |              |            |            |   |             |    |              |  |          |         |              |   |              
|                                                  |                                          | Common Stock |            | Additional |   | Receivables |    | Accumulated  |  | Unearned |         |              |   | Total        
|                                                  |                                          |              |            | Paid-in    |   | from        |    | (Deficit)    |  | Deferred |         | Treasury     |   | Stockholders
|                                                  |                                          | Shares       |            | Balance    |   | Capital     |    | Stockholders |  | Earnings |         | Compensation |   | Stock         |        | Equity
|                                                  |                                          |              |            |            |   |             |    |              |  |          |         |              |   |               |        |       
|                                                  |                                          |             
|(Amounts in thousands, except share data)         |                                          |             
|Balance as of December 31, 2000 
    as restated |                                          |              | 34,299,999 |            |   | $           | 14 |              |  | $        | 152,658 |              |   | $             | (1,498 | )      |  | $ | 58,780  |         |   | $ |     |      |   | $ | (2,950 | )    |   | $ | 207,004 |        
|                                                  | Issuance of common stock                 |              |            | 5,449,143  |   |             |    | 5            |  |          |         | 22,992       |   |               |        |       |  |   |         |        |   |   |      |     |   |   |        |     |   |   |         | 22,997  |  
|                                                  | Issuance of treasury stock               |              |            | 46,412     |   |             |    |             |  |          |         | (22          | ) |               |        |       |  |   |         | (293    | ) |   |      |     |   |   |        | 448  |   |   |         | 133     |  
|                                                  | Net loss                                 |              |            |           |   |             |    |             |  |          |         |             |   |               |        |       |  |   |         | (19,908 | ) |   |      |     |   |   |        |     |   |   |         | (19,908 | )
|                                                  |                                          |              |            |            |   |             |    |              |  |          |         |              |   |               |        |        |  |   |         |         |   |   |      |      |   |   |        |      |   |   |         |        
|Balance as of December 31, 2001 
    as restated |                                          |              | 39,795,554 |            |   |             | 19 |              |  |          | 175,628 |              |   |               | (1,498 | )      |  |   | 38,579  |         |   |   |     |      |   |   | (2,502 | )    |   |   | 210,226 |        
|                                                  | Issuance of common stock                 |              |            | 8,218,796  |   |             |    | 8            |  |          |         | 38,380       |   |               |        |       |  |   |         |        |   |   |      |     |   |   |        |     |   |   |         | 38,388  |  
|                                                  | Decrease in stockholders receivable     |              |            |           |   |             |    |             |  |          |         |             |   |               |        | 442    |  |   |         |        |   |   |      |     |   |   |        |     |   |   |         | 442     |  
|                                                  | Net loss                                 |              |            |           |   |             |    |             |  |          |         |             |   |               |        |       |  |   |         | (61,084 | ) |   |      |     |   |   |        |     |   |   |         | (61,084 | )
|                                                  |                                          |              |            |            |   |             |    |              |  |          |         |              |   |               |        |        |  |   |         |         |   |   |      |      |   |   |        |      |   |   |         |        
|Balance as of December 31, 2002 
    as restated |                                          |              | 48,014,350 |            |   |             | 27 |              |  |          | 214,008 |              |   |               | (1,056 | )      |  |   | (22,505 | )       |   |   |     |      |   |   | (2,502 | )    |   |   | 187,972 |        
|                                                  | Issuance of common stock                 |              |            | 1,852,351  |   |             |    | 2            |  |          |         | 5,396        |   |               |        |       |  |   |         |        |   |   |      |     |   |   |        |     |   |   |         | 5,398   |  
|                                                  | Purchase of treasury stock               |              |            | (60,122    | ) |             |    |             |  |          |         |             |   |               |        |       |  |   |         |        |   |   |      |     |   |   |        | (271 | ) |   |         | (271    | )
|                                                  | Issuance of stock under stock award plan |              |            | 124,224    |   |             |    |             |  |          |         | 600          |   |               |        |       |  |   |         |        |   |   |      | (600 | ) |   |        |     |   |   |         |        |  
|                                                  | Net income                               |              |            |           |   |             |    |             |  |          |         |             |   |               |        |       |  |   |         | 11,198  |   |   |      |     |   |   |        |     |   |   |         | 11,198  |  
|                                                  |                                          |              |            |            |   |             |    |              |  |          |         |              |   |               |        |        |  |   |         |         |   |   |      |      |   |   |        |      |   |   |         |        
|Balance as of December 31, 2003                   |                                          |              | 49,930,803 |            |   | $           | 29 |              |  | $        | 220,004 |              |   | $             | (1,056 | )      |  | $ | (11,307 | )       |   | $ | (600 | )    |   | $ | (2,773 | )    |   | $ | 204,297 |        
|                                                  |                                          |              |            |            |   |             |    |              |  |          |         |              |   |               |        |        |  |   |         |         |   |   |      |      |   |   |        |      |   |   |         |        

The accompanying notes are an integral part of
these consolidated financial statements.

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HYPERCOM CORPORATION

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                                                            |                                              |                                                                                          |                                                         |       |         |        |        |         |          |        |        |         |          |        |  
|--------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------- | ---------------------------------------------------------------------------------------- | ------------------------------------------------------- | ----- | ------- | ------ | ------ | ------- | -------- | ------ | ------ | ------- | -------- | ------ | -
|                                                                                                                            |                                              |                                                                                         
|                                                                                                                            |                                              | Year Ended December 31,                                                                 
|                                                                                                                            |                                              |                                                                                         
|                                                                                                                            |                                              | 2003                                                                                     |                                                         | 2002  |         | 2001  
|(Amounts in thousands)                                                                                                      |                                              |                                                                                          |                                                         |       |         |       
|Cash flows from continuing operations:                                                                                      |                                              |                                                                                          |                                                         |       |         |        |        |         |          |        |        |        
|                                                                                                                            | Net income (loss) from continuing operations |                                                                                          | $                                                       | 3,965 |         |        | $      | (46,268 | )        |        | $      | (11,668 | )       
|Adjustments to reconcile net income (loss) from
    continuing operations to net cash provided by operating
    activities: |                                              |                                                                                          |                                                         |       |         |        |        |         |          |        |        |        
|                                                                                                                            |                                              | Amortization of deferred financing costs                                                 |                                                         |       | 869     |        |        |         | 1,165    |        |        |         | 807      |       
|                                                                                                                            |                                              | Amortization of discount on notes payable                                                |                                                         |       |        |        |        |         | 83       |        |        |         | 2,160    |       
|                                                                                                                            |                                              | Amortization of beneficial notes payable
    conversion feature                          |                                                         |       |        |        |        |         |         |        |        |         | 667      |       
|                                                                                                                            |                                              | Depreciation/amortization                                                                |                                                         |       | 8,883   |        |        |         | 10,528   |        |        |         | 10,216   |       
|                                                                                                                            |                                              | Bad debt expense                                                                         |                                                         |       | 1,972   |        |        |         | 538      |        |        |         | 1,056    |       
|                                                                                                                            |                                              | Provision for losses on sales-type leases                                                |                                                         |       | 705     |        |        |         | 691      |        |        |         | 607      |       
|                                                                                                                            |                                              | Provision for excess and obsolete inventory                                              |                                                         |       | 4,668   |        |        |         | 5,957    |        |        |         | 3,716    |       
|                                                                                                                            |                                              | Foreign currency loss                                                                    |                                                         |       | 2,751   |        |        |         | 6,062    |        |        |         | 2,577    |       
|                                                                                                                            |                                              | Deferred income taxes                                                                    |                                                         |       |        |        |        |         | 22,356   |        |        |         | (1,586   | )     
|                                                                                                                            |                                              | Cumulative effect of change in accounting
    principle                                  |                                                         |       |        |        |        |         | 21,766   |        |        |         |         |       
|                                                                                                                            |                                              | Loss on early extinguishment of debt                                                     |                                                         |       |        |        |        |         | 2,618    |        |        |         |         |       
|                                                                                                                            |                                              | Non-cash restructuring charges                                                           |                                                         |       |        |        |        |         | 3,572    |        |        |         |         |       
|                                                                                                                            |                                              | Other                                                                                    |                                                         |       |        |        |        |         | 402      |        |        |         | (83      | )     
|                                                                                                                            | Changes in operating assets and liabilities  |                                                                                          |                                                         | (273  | )       |        |        | (16,817 | )        |        |        | (2,412  | )       
|                                                                                                                            |                                              |                                                                                          |                                                         |       |         |        |        |         |          |        |        |        
|                                                                                                                            |                                              |                                                                                          | Net cash provided by operating activities               |       |         | 23,540 |        |         |          | 12,653 |        |         |          | 6,057  |  
|Cash flows from investing activities:                                                                                       |                                              |                                                                                          |                                                         |       |         |        |        |         |          |        |        |        
|                                                                                                                            |                                              | Proceeds from the sale of discontinued
    operations, net of purchase price adjustments |                                                         |       | 32,512  |        |        |         |         |        |        |         |         |       
|                                                                                                                            |                                              | Purchase of property, plant and equipment                                                |                                                         |       | (4,319  | )      |        |         | (6,017   | )      |        |         | (3,100   | )     
|                                                                                                                            |                                              | Proceeds from disposal of property, plant, and
    equipment                             |                                                         |       |        |        |        |         | 113      |        |        |         | 399      |       
|                                                                                                                            |                                              | Acquisition of other assets                                                              |                                                         |       | (1,590  | )      |        |         | (2,917   | )      |        |         | (912     | )     
|                                                                                                                            |                                              | Purchase of marketable securities                                                        |                                                         |       | (76,696 | )      |        |         |         |        |        |         |         |       
|                                                                                                                            |                                              | Proceeds from the sale or maturity of marketable
    securities                          |                                                         |       | 59,323  |        |        |         |         |        |        |         | 2,775    |       
|                                                                                                                            |                                              | Payments received on notes receivable                                                    |                                                         |       |        |        |        |         | 349      |        |        |         | 997      |       
|                                                                                                                            |                                              |                                                                                          |                                                         |       |         |        |        |         |          |        |        |        
|                                                                                                                            |                                              |                                                                                          | Net cash provided by (used in) investing
    activities |       |         | 9,230  |        |         |          | (8,472 | )      |         |          | 159    |  
|Cash flows from financing activities:                                                                                       |                                              |                                                                                          |                                                         |       |         |        |        |         |          |        |        |        
|                                                                                                                            |                                              | Borrowings on revolving line of credit                                                   |                                                         |       |        |        |        |         | 153,864  |        |        |         | 74,500   |       
|                                                                                                                            |                                              | Repayments on revolving line of credit                                                   |                                                         |       |        |        |        |         | (160,754 | )      |        |         | (116,567 | )     
|                                                                                                                            |                                              | Proceeds from bank notes payable and other debt
    instruments                          |                                                         |       |        |        |        |         |         |        |        |         | 40,326   |       
|                                                                                                                            |                                              | Repayment of bank notes payable and other debt
    instruments                           |                                                         |       | (2,415  | )      |        |         | (23,797  | )      |        |         | (12,074  | )     
|                                                                                                                            |                                              | Advances from/(to) discontinued operations                                               |                                                         |       | 294     |        |        |         | (2,872   | )      |        |         | (1,766   | )     
|                                                                                                                            |                                              | Payment of advances to stockholders                                                      |                                                         |       |        |        |        |         | 321      |        |        |         |         |       
|                                                                                                                            |                                              | Proceeds from issuance of common stock                                                   |                                                         |       | 5,398   |        |        |         | 37,555   |        |        |         | 7,803    |       
|                                                                                                                            |                                              | Purchase of treasury stock                                                               |                                                         |       | (271    | )      |        |         |         |        |        |         |         |       
|                                                                                                                            |                                              |                                                                                          |                                                         |       |         |        |        |         |          |        |        |        
|                                                                                                                            |                                              |                                                                                          | Net cash provided by (used in) financing
    activities |       |         | 3,006  |        |         |          | 4,317  |        |         |          | (7,778 | )
|Effect of exchange rate changes on cash                                                                                     |                                              |                                                                                          | 728                                                     |       |         |        | (504   | )       |          |        | (604   | )      
|                                                                                                                            |                                              |                                                                                          |                                                         |       |         |        |        |         |          |        |        |        
|Net increase (decrease) in cash flow from
    continuing operations                                                         |                                              |                                                                                          | 36,504                                                  |       |         |        | 7,994  |         |          |        | (2,166 | )      
|Net increase in cash flow from discontinued
    operations                                                                  |                                              |                                                                                          | 5,842                                                   |       |         |        | 1,673  |         |          |        | 2,560  |        
|Cash and cash equivalents, beginning of period                                                                              |                                              |                                                                                          | 23,069                                                  |       |         |        | 13,402 |         |          |        | 13,008 |        
|                                                                                                                            |                                              |                                                                                          |                                                         |       |         |        |        |         |          |        |        |        
|Cash and cash equivalents, end of period                                                                                    |                                              | $                                                                                        | 65,415                                                  |       |         | $      | 23,069 |         |          | $      | 13,402 |        
|                                                                                                                            |                                              |                                                                                          |                                                         |       |         |        |        |         |          |        |        |        

The accompanying notes are an integral part of
these consolidated financial statements.

38



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##### Table of Contents



HYPERCOM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2003


1.     Description of
Business

Hypercom Corporation (with its subsidiaries, the
Company) is a single-source global provider of
end-to-end electronic payment solutions, including card payment
terminals, peripherals, network products, software and
e-commerce payment solutions that add value at the point-of-sale
(POS) for consumers, merchants and acquirers.

The U.S. operations, headquartered in
Phoenix, Arizona, primarily consist of product development,
manufacturing, sales and marketing, distribution and customer
service. The European operations consist of product distribution
through the Companys sales and support offices located in
the United Kingdom, Russia, Sweden, and Hungary. Latin American
operations engage primarily in product distribution through the
Companys subsidiaries in Miami, Brazil, Mexico, and Chile.
Additionally third party manufacturing operations exist in
Brazil and Sweden. The Companys primary manufacturing is
performed in China and is coordinated by the Hong Kong office.
The Asia/ Pacific operations are also engaged in product
development and product distribution through the Companys
subsidiaries or business units in Singapore, Hong Kong and
Australia.

During 2003, the Company disposed of Golden Eagle
Leasing, which comprised the Companys entire
direct-finance leasing segment (see Note 12).

2.     Significant
Accounting Policies



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

The consolidated financial statements are
comprised of the accounts of Hypercom Corporation and all
subsidiaries in which a controlling interest is held. We do not
have any subsidiaries in which we do not own 100% of the
outstanding stock. All significant intercompany balances and
transactions have been eliminated.



| |                                     
| | ------------------------------------
| | Reclassification and
    Restatement

Certain amounts in the prior-year financial
statements have been reclassified to conform to the current year
presentation, including the results of operations and cash flows
of the Companys discontinued operations.

Subsequent to the release of the Companys
operating results for the third quarter ended September 30,
2003 and prior to the filing of the Companys
Form 10-Q for the period, the Company identified a prior
period accounting error in the amount of $1.1 million
regarding certain prepaid sales related taxes at its Brazilian
subsidiary. Upon review of the transactions that gave rise to
the accounting error, the Company determined that these prepaid
sales related tax amounts pertained to transactions that
occurred in 1999 and 2000. In 1999 and 2000, the Company engaged
in manufacturing activities that under Brazilian law permitted
the Company to enjoy the benefit of a lower transaction tax rate
on qualifying sales. To receive this benefit, approvals were
required from both the Brazilian Ministry of Science and
Technology (received in August of 1999) and the Ministry of
Finance (received in August of 2000). During the quarters ended
September 30 and December 31, 1999 (the Companys
transition period), and the first quarter of year 2000, the
Company offset certain transactional sales taxes by recording a
sales tax refund receivable (i.e., prepaid tax) and increasing
its net revenue, operating income and net income. The offset was
recorded beginning in August 1999 in anticipation of
subsequently receiving approval and the related benefit of the
lower transaction tax rate.

In 2003, the Company commenced a review of the
process required to obtain a refund of this tax. This review was
due, in part, to a robust evaluation of the Companys
documentation of controls and procedures as it prepares to
address compliance with Section 404 of the Sarbanes-Oxley
Act of 2002, and in part due to efforts on the part of the
subsidiarys controller to monetize transaction tax related
assets. Although the Company was approved to manufacture and
sell its product in August 1999, and the Company received
its

39



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##### Table of Contents



HYPERCOM CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

official beneficial tax reduction status in
August 2000, the Company was advised subsequent to the
quarter ended September 30, 2003, that Brazilian tax law
would not allow application of the tax benefit prior to August
2000. As such, the Company determined that recording the offset
to sales taxes and increasing revenue under the assumption of a
reduced transaction tax rate for the period between August 1999
and August 2000 was in error, and incorrectly recorded based
upon information available at that time. As a result, the years
affected were restated. Accordingly, the December 31, 2002
balance sheet has been restated to reduce prepaid expenses and
other current assets and increase accumulated deficit by
$1.1 million, respectively.



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

The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual
results could differ from those estimates.



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

The foreign subsidiaries and divisions use the
U.S. dollar as the functional currency. Their local currency
financial statements are re-measured as follows: monetary assets
and liabilities at year-end exchange rates, and inventories,
property and non-monetary assets and liabilities at historical
rates. During the years ended December 31, 2003, 2002 and
2001 the Company recorded net gains (losses) on re-measurement
of approximately $4.4 million, ($4.9) million, and
($2.2) million, respectively. For the same periods, the
Company recorded net gains (losses) on transactions denominated
in foreign currencies of approximately ($7.2) million,
($1.2) million, and ($0.4) million, respectively.
These amounts are included in the results of operations.



| |                          
| | -------------------------
| | 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.



| |                
| | ---------------
| | Restricted Cash

In connection with the securitization of direct
finance leases (see Note 11), the Companys former
Equipment Leasing segment, Golden Eagle Leasing, was required to
establish restricted cash collection, collateral and reserve
accounts. The Company initially funded the restricted cash
accounts with $3.6 million from the proceeds of the
securitization. The accounts were principally used for the
collection of monthly equipment lease payments, remittance of
funds to service the related debt, and to maintain certain
credit enhancement and liquidity levels. During 2003, the
Company disposed of all of the assets and liabilities of Golden
Eagle Leasing, (see Note 12). Accordingly, the Company has
no restricted cash balances at December 31, 2003.



| |                    
| | -------------------
| | Accounts Receivable

Trade accounts receivable are recorded at the
time we have met the criteria for revenue recognition of
products, services and long-term contracts. Payment terms for
product and service trade receivables generally range from
30 to 60 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 accounts.

40



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##### Table of Contents



HYPERCOM CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

We maintain an allowance for doubtful accounts
for estimated losses resulting from the inability of our
customers to make required payments. We compute such allowance
based upon a specific customer account review of our larger
customers and balances in excess of 90 days old. Our
assessment of our customers ability to pay generally
includes direct contact with the customer, investigation into
our customers financial status, as well as consideration
of our customers payment history with us. If the financial
condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional
allowances may be required. 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 accounts
receivable.



| |                        
| | -----------------------
| | Direct Financing Leases

The Companys net investment in direct
financing leases at December 31, 2002 consisted of lease
contracts receivable, plus the estimated unguaranteed residual
value of the equipment at the lease termination date, plus
initial direct costs less unearned income. Lease contracts
receivable represented the total rent to be received over the
term of the lease reduced by rent already collected. Estimated
unguaranteed residual value of the equipment at the lease
termination date represented an estimate, using industry
standards, of the fair value of the leased equipment at lease
termination. Initial direct costs (IDC) represented those costs
incurred to originate the leases and consisted primarily of
salaries and associated general and administrative costs of
those personnel directly involved in lease origination
activities. IDC were amortized over the lease term in a manner
that produced a constant rate of return on the net investment in
the lease. Unearned income was the amount by which the original
sum of the lease contract receivable and the estimated residual
value exceeded the original cost of the leased equipment.
Unearned income was amortized to lease income over the lease
term in a manner that produced a constant rate of return on the
net investment in the lease.

During 2003, the Company disposed of its direct
financing lease subsidiary, Golden Eagle Leasing. Accordingly,
the Company did not have any direct finance leases at
December 31, 2003.



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

Certain sales of product are sold under a capital
lease arrangement, recorded as a sales-type lease in accordance
with SFAS No. 13, Accounting for Leases, as amended.
Lease contract receivable represents the total lease payments to
be received reduced by lease payments already collected.
Sales-type lease revenues consists of the initial sale of the
product shipped and the interest and maintenance elements of the
lease payments as they are earned. We maintain an allowance for
estimated uncollectible sales-type lease receivables at an
amount that we believe is sufficient to provide adequate
protection against losses in our sales-type lease portfolio. Our
allowance is determined principally on the basis of historical
loss experience and managements assessment of the credit
quality of the sale-type lease customer base. If loss rates
increase or credit conditions at our customers deteriorate, we
may need to increase our allowance for uncollectible sales-type
leases. 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.

In addition, as part of the initial recording of
our sales-type leases, we estimate the unguaranteed residual
value of the equipment under sales-type lease. This is the
estimated fair value of the equipment that will be returned to
or purchased from us at the end of the initial lease period. Our
estimate of the residual value is based on industry standards
and our actual experience. If market conditions change
negatively, it could have an adverse impact on the estimated
residual value amount.

41



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##### Table of Contents



HYPERCOM CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



| |                      
| | ---------------------
| | Marketable Securities

Management determines the appropriate
classification of its investments in tradable 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 gain and losses, net of tax,
reported in a separate component of stockholders equity,
if material. Cost is determined based on specific
identification. Gains and losses on securities sold are
determined based on the specific identification method and are
included in other income. Securities classified as available for
sale include both securities due within one year and securities
with maturity dates beyond one year. Securities with a maturity
date within one year, or securities that are reasonably expected
to be sold within a normal operating cycle, are classified as
Marketable Securities as a part of Current Assets. Securities
with a maturity date beyond one year that are not reasonably
expected to be sold within a normal operating cycle are
classified as Long-Term Marketable Securities.



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

The Company values financial instruments as
required by Statement of Financial Accounting Standards
No. 107, Disclosures about Fair Value of Financial
Instruments(SFAS No. 107). 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 and long-term marketable securities is
determined based on quoted market prices. The fair value of
direct financing and 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.



| |                                     
| | ------------------------------------
| | 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 our net investment in
foreign operations. The primary objective of our hedging
strategy is to protect our 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 statement of operations. During 2003 and 2002, the
Company had forward contracts in place to hedge its foreign
currency denominated net monetary assets in various foreign
countries, including Brazil, the United Kingdom, Chile,
Australia and Sweden. The U.S. dollar amount of the contracts at
December 31, 2003 and 2002 was approximately $34.4 and
$25.0 million, respectively, and the total payable recorded
under the contracts was approximately $1.3 million and
$0.3 million, respectively.

The Company has one derivative financial
instrument to manage interest rate risk in the form of an
interest rate swap. The fair value of this instrument is not
considered material to the Companys financial position.



| |            
| | -----------
| | 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.

42



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##### Table of Contents



HYPERCOM CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Reserves for estimated excess and/or obsolete
inventory are established on a part-level basis based upon
future demand and historical usage and establishes a new cost
basis for the respective parts.



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

The Company generally sells products with a
limited warranty of product quality and a limited
indemnification of customers against intellectual property
infringement claims related to the Companys products. The
accrual and the related expense for known issues were not
significant as of and for the fiscal years presented. Due to
product testing, the short time between product shipment and the
detection and correction of product failures, and a low
historical rate of payments on indemnification claims, the
accrual based on historical activity and the related expense
were not significant as of and for the fiscal years presented.



| |                              
| | -----------------------------
| | 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                        |  |  | 30-40 years | 
|Computer equipment and software |  |  | 3-5 years   | 
|Machinery and equipment         |  |  | 5-7 years   | 
|Furniture and fixtures          |  |  | 5-7 years   | 

Leasehold improvements are amortized over the
life of the lease or the life of the asset, whichever is shorter.



| |                         
| | ------------------------
| | Goodwill and Intangibles

In September 2001, the Financial Accounting
Standards Board issued Statement of Financial Accounting
Standards No. 141 (SFAS 141), Business Combinations,
and No. 142 (SFAS 142), Goodwill and Other Intangible
Assets, effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill and
intangible assets deemed to have indefinite lives will no longer
be amortized, but will be subject to annual impairment tests in
accordance with the statements. Other intangible assets will
continue to be amortized over their useful lives. The Company
adopted the standard effective January 1, 2002. In
accordance with SFAS 142, the Company ceased amortizing goodwill
totaling $21.8 million as of that date (see Note 10).

The Companys intangible assets consist of
capitalized software, unpatented technology, acquired customer
list, marketing rights and covenants not to compete. Except for
capitalized software, which is discussed below, the
Companys intangible assets are amortized on a
straight-line basis over their useful life over periods ranging
from 3 to 7.5 years.

Statement of Financial Accounting Standards
No. 86, Accounting for the Costs of Computer Software to
be Sold, Leased or Otherwise Marketed(SFAS 86),
requires capitalization of certain software development costs
subsequent to the establishment of technological feasibility.
Accordingly, certain development costs incurred between the
establishment of technological feasibility and when the product
is available for general release to customers have been
capitalized. The amounts capitalized in the years ended
December 31, 2003, 2002, and 2001, were approximately
$1.6 million, $0.4 million, and $1.5 million,
respectively. The Company amortizes capitalized software
development costs in accordance with SFAS 86 once the product is
available for general release to customers.

The Company assesses the recoverability of
intangible assets based on certain assumptions regarding
estimated future cash flows. If these estimates or their related
assumptions change in the future, the Company may be required to
record impairment charges.

43



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##### Table of Contents



HYPERCOM CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



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

The Company periodically evaluates its long-lived
assets used in operations for impairment. Impairment losses
would be recorded when events and circumstances indicate that an
asset might be impaired and the undiscounted cash flows to be
generated by that asset are less than the carrying amounts of
the asset (see Note 12).



| |             
| | ------------
| | 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 14
regarding a full valuation reserve against 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.



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

The Company recognizes revenue pursuant to Staff
Accounting Bulletin No. 101 and 104 Revenue
Recognition in Financial Statements. Accordingly, revenue
is recognized when all four of the following criteria are met:
(i) persuasive evidence that an arrangement exists;
(ii) delivery of the products and/or services has occurred;
(iii) the selling price is both fixed and determinable, and
(iv) collectibility is reasonably assured.

The Company generally recognizes product revenue,
including sales to distributors and sales under sales-type
leases, upon shipment of product. Revenue from service
obligations is recognized over the lives of the contracts.
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.

The Company accrues for warranty costs, sales
returns and other allowances at the time of shipment.



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

The Company recognizes revenues and an estimated
gross profit upon the attainment of scheduled performance
milestones under the percentage-of-completion method. The
Company follows this method since the contract contains
well-defined performance milestones and the Company can make
reasonably dependable estimates of the costs applicable to
various stages of the contract.

Revenues under this contract have been less than
10% of total revenues for each of the fiscal years 2001, 2002
and 2003. The estimated gross profit recorded upon the
attainment of scheduled milestones is based upon the
Companys estimate of the total gross profit to be
recognized over the life of the long-term contract. The
Companys gross profit estimates rely on our continuous
estimates of total contract costs compared to contract revenue
and any claims in excess of contract revenue where it is both
probable the claims will result in additional contract revenue
and the amount of the excess claim can be reliably estimated.
Previously recognized gross profits and the valuation of
deferred contract costs are subject to revisions as the contract
progresses to completion and any claims for revenues in excess
of the original contract are settled. Revisions in

44



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##### Table of Contents



HYPERCOM CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

profit estimates and the valuation of deferred
contract costs are reflected in income in the period in which
the facts that give rise to the revision become known.



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

Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation,
(SFAS 123) defines a fair value based method of accounting
for employee stock options or similar equity instruments.
However, it also allows an entity to continue to account for
these plans according to Accounting Principles Board Opinion
No. 25 (APB 25) and related interpretations, provided
pro forma disclosures of net income are made as if the fair
value based method of accounting, defined by SFAS 123, had
been applied.

The Company has elected to continue to measure
compensation expense related to employee stock purchase options
using APB 25 and related interpretations, and as a result,
no compensation expense is recognized for stock options granted
at 100% of the market value of the Companys stock at the
date of grant. The following table represents the effect on net
income (loss) and income (loss) per share if the Company had
applied the fair value method and recognition provisions of
SFAS 123 to stock based employee compensation (amounts in
thousands, except share data):

|                                                           |                                                                                                                                                        |                         |        |        |   |      |         |        |   |   |         |        |  
|---------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------ | ----------------------- | ------ | ------ | - | ---- | ------- | ------ | - | - | ------- | ------ | -
|                                                           |                                                                                                                                                        |                        
|                                                           |                                                                                                                                                        | Year Ended December 31,
|                                                           |                                                                                                                                                        |                        
|                                                           |                                                                                                                                                        | 2003                    |        | 2002   |   | 2001
|                                                           |                                                                                                                                                        |                         |        |        |   |     
|Net income (loss), as reported                             |                                                                                                                                                        | $                       | 11,198 |        |   | $    | (61,084 | )      |   | $ | (19,908 | )     
|                                                           | Deduct: Total stock-based employee compensation
    expense determined under fair value methods for all awards, net
    of related tax effects in 2001 |                         |        | (3,787 | ) |      |         | (8,320 | ) |   |         | (3,625 | )
|                                                           |                                                                                                                                                        |                         |        |        |   |      |         |        |   |   |         |       
|Pro forma net income (loss)                                |                                                                                                                                                        | $                       | 7,411  |        |   | $    | (69,404 | )      |   | $ | (23,533 | )     
|                                                           |                                                                                                                                                        |                         |        |        |   |      |         |        |   |   |         |       
|Net income (loss) per share:                               |                                                                                                                                                        |                         |        |        |   |      |         |        |   |   |         |       
|                                                           | Basic, as reported                                                                                                                                     |                         | $      | 0.23   |   |      | $       | (1.32  | ) |   | $       | (0.54  | )
|                                                           | Basic, pro forma                                                                                                                                       |                         | $      | 0.15   |   |      | $       | (1.50  | ) |   | $       | (0.64  | )
|                                                           | Diluted, as reported                                                                                                                                   |                         | $      | 0.22   |   |      | $       | (1.32  | ) |   | $       | (0.54  | )
|                                                           | Diluted, pro forma                                                                                                                                     |                         | $      | 0.15   |   |      | $       | (1.50  | ) |   | $       | (0.64  | )
|Weighted average shares used in pro forma
    computation: |                                                                                                                                                        |                         |        |        |   |      |         |        |   |   |         |       
|                                                           | Basic                                                                                                                                                  |                         |        | 49,146 |   |      |         | 46,142 |   |   |         | 36,644 |  
|                                                           | Diluted                                                                                                                                                |                         |        | 50,351 |   |      |         | 46,142 |   |   |         | 36,644 |  

The fair value of each option grant is estimated
on the date of grant using the Black-Scholes valuation method
with the following assumptions: weighted average risk free
interest rates of 2.7%, 3.8%, and 4.5%; an average expected time
to exercise of five years; an average expected stock volatility
of 87%, 87%, and 83%; and no dividends for the years ended
December 31, 2003, 2002, and 2001, respectively.

As required, the pro forma disclosures above
include options granted since January 1, 1995.
Consequently, the effects of applying SFAS 123 for
providing pro forma disclosures may not be representative of the
effects on reported net income for future years until all
options outstanding are included in the pro forma disclosures.
For purposes of pro forma disclosures, the estimated fair value
of stock-based compensation plans and other options is amortized
to expense primarily over the vesting period. See Note 16 for
further discussion of the Companys stock-based employee
compensation.

45



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##### Table of Contents



HYPERCOM CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



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

The following table sets forth the computation of
basic and diluted income (loss) per share (in thousands,
except per share amounts):

|                                                                                                         |                                                         |                         |        |       |  |      |         |         |   |   |         |        |  
|-------------------------------------------------------------------------------------------------------- | ------------------------------------------------------- | ----------------------- | ------ | ----- |  | ---- | ------- | ------- | - | - | ------- | ------ | -
|                                                                                                         |                                                         |                        
|                                                                                                         |                                                         | Year Ended December 31,
|                                                                                                         |                                                         |                        
|                                                                                                         |                                                         | 2003                    |        | 2002  |  | 2001
|                                                                                                         |                                                         |                         |        |       |  |     
|NUMERATOR:                                                                                               |                                                         |                         |        |       |  |      |         |         |   |   |         |       
|Income (loss) before discontinued operations
    and cumulative effect of change in accounting principle |                                                         | $                       | 3,965  |       |  | $    | (24,502 | )       |   | $ | (11,668 | )     
|                                                                                                         | Income (loss) from discontinued operations              |                         |        | 7,233 |  |      |         | (14,816 | ) |   |         | (8,240 | )
|                                                                                                         | Cumulative effect of change in accounting
    principle |                         |        |      |  |      |         | (21,766 | ) |   |         |       |  
|                                                                                                         |                                                         |                         |        |       |  |      |         |         |   |   |         |       
|Net income (loss)                                                                                        |                                                         | $                       | 11,198 |       |  | $    | (61,084 | )       |   | $ | (19,908 | )     
|                                                                                                         |                                                         |                         |        |       |  |      |         |         |   |   |         |       
|DENOMINATOR:                                                                                             |                                                         |                         |        |       |  |      |         |         |   |   |         |       
|Denominator for basic income (loss) per
    share  weighted average common shares outstanding           |                                                         |                         | 49,146 |       |  |      | 46,142  |         |   |   | 36,644  |       
|Effect of dilutive securities:                                                                           |                                                         |                         |        |       |  |      |         |         |   |   |         |       
|Common stock options and warrants                                                                        |                                                         |                         | 1,205  |       |  |      |        |         |   |   |        |       
|                                                                                                         |                                                         |                         |        |       |  |      |         |         |   |   |         |       
|Denominator for diluted income (loss) per
    share                                                      |                                                         |                         | 50,351 |       |  |      | 46,142  |         |   |   | 36,644  |       
|                                                                                                         |                                                         |                         |        |       |  |      |         |         |   |   |         |       
|INCOME (LOSS) PER SHARE:                                                                                 |                                                         |                         |        |       |  |      |         |         |   |   |         |       
|Basic:                                                                                                   |                                                         |                         |        |       |  |      |         |         |   |   |         |       
|Income (loss) before discontinued operations
    and cumulative effect of change in accounting principle |                                                         | $                       | 0.08   |       |  | $    | (0.53   | )       |   | $ | (0.32   | )     
|                                                                                                         | Income (loss) from discontinued operations              |                         |        | 0.15  |  |      |         | (0.32   | ) |   |         | (0.22  | )
|                                                                                                         | Cumulative effect of change in accounting
    principle |                         |        |      |  |      |         | (0.47   | ) |   |         |       |  
|                                                                                                         |                                                         |                         |        |       |  |      |         |         |   |   |         |       
|Basic income (loss) per share                                                                            |                                                         | $                       | 0.23   |       |  | $    | (1.32   | )       |   | $ | (0.54   | )     
|                                                                                                         |                                                         |                         |        |       |  |      |         |         |   |   |         |       
|Diluted:                                                                                                 |                                                         |                         |        |       |  |      |         |         |   |   |         |       
|Income (loss) before discontinued operations
    and cumulative effect of change in accounting principle |                                                         | $                       | 0.08   |       |  | $    | (0.53   | )       |   | $ | (0.32   | )     
|                                                                                                         | Income (loss) from discontinued operations              |                         |        | 0.14  |  |      |         | (0.32   | ) |   |         | (0.22  | )
|                                                                                                         | Cumulative effect of change in accounting
    principle |                         |        |      |  |      |         | (0.47   | ) |   |         |       |  
|                                                                                                         |                                                         |                         |        |       |  |      |         |         |   |   |         |       
|Diluted income (loss) per share                                                                          |                                                         | $                       | 0.22   |       |  | $    | (1.32   | )       |   | $ | (0.54   | )     
|                                                                                                         |                                                         |                         |        |       |  |      |         |         |   |   |         |       

Options and warrants that could potentially
dilute income (loss) per share in the future that were not
included in the computation of diluted income (loss) per
share because they were anti-dilutive amounted to 5,876,417,
12,423,062, and 5,658,771 for the years ended December 31,
2003, 2002 and 2001, respectively.



| |               
| | --------------
| | Treasury Stock

In June 1998, the Board of Directors authorized
the repurchase, at managements discretion, of up to
1,000,000 shares of the Companys stock. Shares repurchased
under this authorization were used to offset dilution caused by
the Employees Stock Purchase Plan and Stock Option Plan. In
addition, during August 2003, the Companys Board of
Directors authorized the repurchase of an additional
$10 million in common stock to maximize shareholder value.
The Companys repurchases of shares of common stock are
recorded as treasury stock and result in a reduction of
stockholders equity. When treasury shares are issued, the
Company

46



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##### Table of Contents



HYPERCOM CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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.



| |                   
| | ------------------
| | Operating Segments

The accounting policies of the reportable
segments are the same as those used for the consolidated entity.
Performance is evaluated based on profit or loss from
operations. Intersegment sales and transfers are accounted for
based on defined transfer prices. As a result of the sale of
Golden Eagle Leasing effective October 1, 2003
(Note 12), which comprised the Companys entire
Direct-Finance Leasing segment, the Companys continuing
operations consist solely of one segment: Point-of-Sale
(POS)/Network Systems.



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

Effective January 1, 2003, the Company
adopted SFAS 145, Rescission of FASB Statements
No. 4, 44 and 64, amendment of FASB Statement No. 13,
and Technical Corrections, which among other things,
restricts the classification of gains and losses from
extinguishment of debt as extraordinary to only those
transactions that are unusual and infrequent in nature as
defined by APB Opinion No. 30. Upon adoption, gains and
losses on certain future debt extinguishment, if any, will be
recorded in pre-tax income. In accordance with the provisions of
SFAS 145, the Company reclassified its $2.6 million
extraordinary loss from early extinguishment of debt for the
year ended December 31, 2002 to pre-tax loss (see
Note 12).

In January 2003, the FASB issued FIN No. 46,
Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51, which addresses
consolidation by business enterprises of variable interest
entities (VIEs) either: (1) that do not have sufficient
equity investment at risk to permit the entity to finance its
activities without additional subordinated financial support, or
(2) in which the equity investors lack an essential
characteristic of a controlling financial interest. In December
2003, the FASB completed deliberations of proposed modifications
to FIN 46 (Revised Interpretations) resulting in multiple
effective dates based on the nature as well as the creation date
of the VIE. VIEs created after January 31, 2003, but prior
to January 1, 2004, may be accounted for either based on
the original interpretation or the Revised Interpretations. For
VIEs created or acquired prior to February 1, 2003, the
provisions of FIN 46 must be applied for the first interim
or annual period ending after December 15, 2003. Certain
disclosures are effective immediately. VIEs created after
January 1, 2004 must be accounted for under the Revised
Interpretations. The Company currently has no contractual
relationship or other business relationship with a variable
interest entity and therefore the adoption of FIN No. 46
did not have a material effect on the Companys
consolidated financial position, results of operations or cash
flows.

In April 2003, the Financial Accounting Standards
Board issued SFAS 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities.This statement
amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under
SFAS 133. SFAS 149 is effective for contracts entered
in to or modified after June 30, 2003. The Company has only
limited involvement with derivative financial instruments, does
not use them for trading purposes and is not a party to any
leveraged derivatives. However, the Company periodically enters
into forward exchange contracts to hedge some of its foreign
currency exposure. The Companys adoption of SFAS 149 did
not have a material effect on its consolidated financial
position, results of operations, or cash flows.

In May 2003, the FASB issued SFAS 150,
Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity. This
Statement requires that certain instruments that were previously
classified as equity on a companys statement of financial
position now be classified as liabilities. The Statement is
effective for financial instruments entered into or modified
after May 31, 2003, and to all other instruments that exist
as of the beginning of the first interim financial reporting
period beginning after

47



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HYPERCOM CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

June 15, 2003. The Company currently has no
instruments impacted by the adoption of this statement and
therefore the adoption did not have an effect on the
Companys consolidated financial position, results of
operations or cash flows.



|   |                                             
|-- | --------------------------------------------
|3. | 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, marketable
securities, and long-term marketable securities.

The Companys cash and cash equivalents and
marketable securities 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
F.D.I.C 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 5 to 10 customers. The Companys top five
customers amounted to 24.6%, 32.8% and 21.7% of the
Companys total revenues for the years ended 2003, 2002 and
2001, respectively, and approximately 22% and 28% of the
Companys net accounts receivable balance at
December 31, 2003 and 2002, 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

Most components used in the Companys
systems are purchased from outside sources. Certain components
are purchased from single suppliers. The failure of any such
supplier 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.

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 conducts final assembly operations in
China and relies on third party manufacturers in Brazil, China
and Sweden. Foreign manufacturing is 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.

48



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##### Table of Contents



HYPERCOM CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The Company maintained significant accounts
receivable balances in the Europe and Latin America regions,
comprising 57% and 59%, respectively, of the Companys net
accounts receivable balance at December 31, 2003 and 2002.
These balances are subject to the economic risks inherent to
those regions.



|   |                      
|-- | ---------------------
|4. | Marketable Securities

The Companys marketable securities and
long-term marketable securities consist of municipal bonds,
preferred equity securities, and corporate bonds, all of which
are classified as available-for-sale and recorded at fair market
value. As of December 31, 2003 and 2002, the difference
between amortized cost and fair market value of the
Companys marketable securities was not material.
Accordingly, the Company has not disclosed unrealized gains and
losses. The Companys municipal bonds and corporate bonds
have maturity dates that exceed ten years.

Proceeds from the sale of available-for-sale
securities amounted to $59.3 million and $2.8 million,
respectively, for the years ended December 31, 2003 and
2001. There were no proceeds from the sale of securities during
2002. Gross realized gains and losses were not material for the
years ended December 31, 2003, 2002 and 2001.

The Companys marketable securities and
long-term marketable securities consisted of the following at
December 31, 2003 and 2002 (dollars in thousands):

|                                 |  |      |        |      |  |   |     | 
|-------------------------------- |  | ---- | ------ | ---- |  | - | --- | 
|                                 |  | 2003 |        | 2002
|                                 |  |      |        |     
|Marketable securities:           |  |      |        |      |  |   |     | 
|Municipal bonds                  |  | $    | 9,900  |      |  | $ |    | 
|Preferred equity securities      |  |      | 7,500  |      |  |   |    | 
|                                 |  |      |        |      |  |   |     | 
|Marketable securities            |  | $    | 17,400 |      |  | $ |    | 
|                                 |  |      |        |      |  |   |     | 
|Long-term marketable securities: |  |      |        |      |  |   |     | 
|Corporate bond                   |  | $    | 153    |      |  | $ | 152 | 
|                                 |  |      |        |      |  |   |     | 
|Long-term marketable securities  |  | $    | 153    |      |  | $ | 152 | 
|                                 |  |      |        |      |  |   |     | 

5.     Net Investment
in Direct Financing Leases

During 2003, the Company disposed of Golden Eagle
Leasing, which comprised the Companys entire
direct-finance leasing segment (see Note 12). Accordingly,
the Company had no direct financing leases at December 31,
2003. All operating results and cash flows for Golden Eagle
Leasing have been reclassified to discontinued operations for
all periods presented.

Interest expense associated with the debt
incurred to fund direct financing leases and provisions for
credit losses are all reflected in discontinued operations in
the accompanying statements of operations. Interest expense and
provisions for credit losses included in the costs of revenue
amounted to $0.9 and $4.2 million, $2.4 and
$8.4 million, $3.8 and $18.1 million, respectively,
for the years ended December 31, 2003, 2002 and 2001.

49



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##### Table of Contents



HYPERCOM CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Net investment in direct financing leases
consisted of the following at December 31, 2002 (dollars in
thousands):

|                                          |                       |      |         |         |  
|----------------------------------------- | --------------------- | ---- | ------- | ------- | -
|                                          |                       | 2002
|                                          |                       |     
|Lease contracts receivable                |                       | $    | 33,242  |        
|Allowance for credit losses               |                       |      | (4,861  | )      
|Estimated unguaranteed residual value     |                       |      | 8,162   |        
|Initial direct costs                      |                       |      | 1,421   |        
|Unearned income                           |                       |      | (10,760 | )      
|                                          |                       |      |         |        
|Net investment in direct financing leases |                       |      | 27,204  |        
|                                          | Less: current portion |      |         | (11,812 | )
|                                          |                       |      |         |        
|Long-term portion                         |                       | $    | 15,392  |        
|                                          |                       |      |         |        

6.     Net Investment
in Sales-Type Leases

Net investment in sales-type leases consist of
the following (dollars in thousands):

|                                      |                       |              |         |         |   |   |        |        |  
|------------------------------------- | --------------------- | ------------ | ------- | ------- | - | - | ------ | ------ | -
|                                      |                       |             
|                                      |                       | December 31,
|                                      |                       |             
|                                      |                       | 2003         |         | 2002   
|                                      |                       |              |         |        
|Lease contracts receivable            |                       | $            | 35,030  |         |   | $ | 27,769 |       
|Allowance for credit losses           |                       |              | (1,694  | )       |   |   | (1,418 | )     
|Estimated unguaranteed residual value |                       |              | 6,381   |         |   |   | 4,096  |       
|Unearned revenue                      |                       |              | (10,698 | )       |   |   | (9,460 | )     
|                                      |                       |              |         |         |   |   |        |       
|Net investment in sales-type leases   |                       |              | 29,019  |         |   |   | 20,987 |       
|                                      | Less: current portion |              |         | (10,477 | ) |   |        | (9,774 | )
|                                      |                       |              |         |         |   |   |        |       
|Long-term portion                     |                       | $            | 18,542  |         |   | $ | 11,213 |       
|                                      |                       |              |         |         |   |   |        |       

Minimum rentals on the sales-type leases are
contractually due as follows (dollars in thousands):

|                          |  |   |        | 
|------------------------- |  | - | ------ | 
|Years Ending December 31, |  |  
|                          |  |  
|2004                      |  | $ | 15,407 | 
|2005                      |  |   | 10,171 | 
|2006                      |  |   | 6,653  | 
|2007                      |  |   | 2,799  | 
|                          |  |   |        | 
|                          |  | $ | 35,030 | 
|                          |  |   |        | 



|   |                                    
|-- | -----------------------------------
|7. | Fair Value of Financial Instruments

The Companys financial instruments consist
of cash and cash equivalents, marketable securities, net
investment in sales-type leases and long-term debt. As of
December 31, 2003 and 2002, the fair value (see
Note 2) of these financial instruments approximated their
respective carrying values.

50



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##### Table of Contents



HYPERCOM CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|   |            
|-- | -----------
|8. | Inventories

Inventories consist of the following (dollars in
thousands):

|                |  |              |        |      |  |   |        | 
|--------------- |  | ------------ | ------ | ---- |  | - | ------ | 
|                |  |             
|                |  | December 31,
|                |  |             
|                |  | 2003         |        | 2002
|                |  |              |        |     
|Purchased parts |  | $            | 17,990 |      |  | $ | 16,917 | 
|Work in process |  |              | 4,581  |      |  |   | 4,987  | 
|Finished goods  |  |              | 19,691 |      |  |   | 24,502 | 
|                |  |              |        |      |  |   |        | 
|                |  | $            | 42,262 |      |  | $ | 46,406 | 
|                |  |              |        |      |  |   |        | 



|   |                              
|-- | -----------------------------
|9. | Property, Plant and Equipment

Property, plant and equipment consist of the
following (dollars in thousands):

|                                |  |              |         |      |  |   |         |  
|------------------------------- |  | ------------ | ------- | ---- |  | - | ------- | -
|                                |  |             
|                                |  | December 31,
|                                |  |             
|                                |  | 2003         |         | 2002
|                                |  |              |         |     
|Land and improvements           |  | $            | 4,691   |      |  | $ | 4,691   |  
|Building                        |  |              | 14,064  |      |  |   | 14,665  |  
|Computer equipment and software |  |              | 19,217  |      |  |   | 19,130  |  
|Machinery and equipment         |  |              | 19,979  |      |  |   | 19,471  |  
|Furniture and fixtures          |  |              | 6,021   |      |  |   | 5,531   |  
|Leasehold improvements          |  |              | 2,999   |      |  |   | 3,066   |  
|Construction in process         |  |              | 499     |      |  |   |        |  
|                                |  |              |         |      |  |   |         |  
|                                |  |              | 67,470  |      |  |   | 66,554  |  
|Less accumulated depreciation   |  |              | (39,253 | )    |  |   | (36,340 | )
|                                |  |              |         |      |  |   |         |  
|                                |  | $            | 28,217  |      |  | $ | 30,214  |  
|                                |  |              |         |      |  |   |         |  

Depreciation expense from continuing operations
was $6.4 million, $7.4 million and $8.2 million
for the years ended December 31, 2003, 2002 and 2001,
respectively.



|    |                               
|--- | ------------------------------
|10. | Goodwill and Intangible Assets

The carrying amount of goodwill upon the adoption
of SFAS 142 was $21.8 million at January 1, 2002, of
which $20.3 million was attributed to Golden Eagle, which
comprised all of the Direct-Finance Leasing segment, with the
remaining amount of $1.5 million attributed to the POS/
Network Systems segment. Under the transitional provisions of
SFAS 142, the Company evaluated its reporting units for
impairment of goodwill as of January 1, 2002, completing
the evaluations by June 30, 2002. The impairment test
relative to Golden Eagles goodwill was performed by an
independent third party valuation firm using market multiple,
comparable transaction and discounted net earnings
methodologies, with the remaining amount of goodwill evaluated
internally using similar valuation methodologies. The results of
the impairment tests resulted in a full write-off of the
carrying value of goodwill of $21.8 million. In accordance
with the transition provisions of SFAS 142, the write-off
was reported as a cumulative effect of change in accounting
principle.

At December 31, 2002, the Company provided a
full valuation reserve against the deferred tax benefit
attributed to the write-off of the goodwill that had tax basis,
and accordingly did not report the cumulative effect of a change
in accounting principle net of tax. Due to the fact that the
goodwill balances that had tax basis with amortizable lives
extending up to 13 years, the Company was uncertain as to
whether the tax benefits would be realized over such an extended
time period.

51



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HYPERCOM CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

When Golden Eagle was disposed of in 2003, the
remaining goodwill balance, attributable to Golden Eagle, that
had tax basis was deducted for U.S. federal income tax purposes.
This amount is part of the Companys federal net operating
loss carryforward at December 31, 2003, for which the
Company has provided a full valuation allowance.

The following table reflects the reconciliation
of reported net income (loss) and income (loss) per share to
adjust for the exclusion of goodwill amortization in 2001 (in
thousands except per share data).

|                                                                                                                      |                                                                                                                       |                         |       |        |  |      |         |         |   |   |         |         |  
|--------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------- | ----------------------- | ----- | ------ |  | ---- | ------- | ------- | - | - | ------- | ------- | -
|                                                                                                                      |                                                                                                                       |                        
|                                                                                                                      |                                                                                                                       | Year Ended December 31,
|                                                                                                                      |                                                                                                                       |                        
|                                                                                                                      |                                                                                                                       | 2003                    |       | 2002   |  | 2001
|                                                                                                                      |                                                                                                                       |                         |       |        |  |     
|Net income (loss)                                                                                                     |                                                                                                                       |                         |       |        |  |      |         |         |   |   |         |        
|Reported income (loss) before discontinued
    operations and cumulative effect of change in accounting
    principle |                                                                                                                       | $                       | 3,965 |        |  | $    | (24,502 | )       |   | $ | (11,668 | )      
|Reported income (loss) from discontinued
    operations                                                               |                                                                                                                       |                         | 7,233 |        |  |      | (14,816 | )       |   |   | (8,240  | )      
|Add back: Goodwill amortization, net of tax                                                                           |                                                                                                                       |                         |      |        |  |      |        |         |   |   | 1,354   |        
|                                                                                                                      |                                                                                                                       |                         |       |        |  |      |         |         |   |   |         |        
|                                                                                                                      | Adjusted income (loss) from discontinued
    operations, net of tax                                                   |                         |       | 7,233  |  |      |         | (14,816 | ) |   |         | (6,886  | )
|Cumulative effect of change in accounting
    principle                                                               |                                                                                                                       |                         |      |        |  |      | (21,766 | )       |   |   |        |        
|                                                                                                                      |                                                                                                                       |                         |       |        |  |      |         |         |   |   |         |        
|                                                                                                                      | Adjusted net income (loss)                                                                                            |                         | $     | 11,198 |  |      | $       | (61,084 | ) |   | $       | (18,554 | )
|                                                                                                                      |                                                                                                                       |                         |       |        |  |      |         |         |   |   |         |        
|Per share of common stock                                                                                             |                                                                                                                       |                         |       |        |  |      |         |         |   |   |         |        
|Basic:                                                                                                                |                                                                                                                       |                         |       |        |  |      |         |         |   |   |         |        
|                                                                                                                      | Reported income (loss) before discontinued
    operations and cumulative effect of change in accounting
    principle |                         | $     | 0.08   |  |      | $       | (0.53   | ) |   | $       | (0.32   | )
|                                                                                                                      | Income (loss) from discontinued operations                                                                            |                         |       | 0.15   |  |      |         | (0.32   | ) |   |         | (0.22   | )
|                                                                                                                      | Add back: Goodwill amortization, net of tax                                                                           |                         |       |       |  |      |         |        |   |   |         | 0.03    |  
|                                                                                                                      | Cumulative effect of change in accounting
    principle                                                               |                         |       |       |  |      |         | (0.47   | ) |   |         |        |  
|                                                                                                                      |                                                                                                                       |                         |       |        |  |      |         |         |   |   |         |        
|                                                                                                                      | Adjusted basic income (loss) per share                                                                                |                         | $     | 0.23   |  |      | $       | (1.32   | ) |   | $       | (0.51   | )
|                                                                                                                      |                                                                                                                       |                         |       |        |  |      |         |         |   |   |         |        
|Diluted:                                                                                                              |                                                                                                                       |                         |       |        |  |      |         |         |   |   |         |        
|                                                                                                                      | Reported income (loss) before discontinued
    operations and cumulative effect of change in accounting
    principle |                         | $     | 0.08   |  |      | $       | (0.53   | ) |   | $       | (0.32   | )
|                                                                                                                      | Income (loss) from discontinued operations                                                                            |                         |       | 0.14   |  |      |         | (0.32   | ) |   |         | (0.22   | )
|                                                                                                                      | Add back: Goodwill amortization, net of tax                                                                           |                         |       |       |  |      |         |        |   |   |         | 0.03    |  
|                                                                                                                      | Cumulative effect of change in accounting
    principle                                                               |                         |       |       |  |      |         | (0.47   | ) |   |         |        |  
|                                                                                                                      |                                                                                                                       |                         |       |        |  |      |         |         |   |   |         |        
|                                                                                                                      | Adjusted diluted income (loss) per share                                                                              |                         | $     | 0.22   |  |      | $       | (1.32   | ) |   | $       | (0.51   | )
|                                                                                                                      |                                                                                                                       |                         |       |        |  |      |         |         |   |   |         |        

52



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HYPERCOM CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Intangible assets consist of the following
(dollars in thousands):

|                              |  |              |        |      |  |   |        |  
|----------------------------- |  | ------------ | ------ | ---- |  | - | ------ | -
|                              |  |             
|                              |  | December 31,
|                              |  |             
|                              |  | 2003         |        | 2002
|                              |  |              |        |     
|Capitalized software          |  | $            | 8,456  |      |  | $ | 6,904  |  
|Unpatented technology         |  |              | 2,783  |      |  |   | 2,943  |  
|Other                         |  |              | 1,396  |      |  |   | 2,352  |  
|                              |  |              |        |      |  |   |        |  
|                              |  |              | 12,635 |      |  |   | 12,199 |  
|Less accumulated amortization |  |              | (8,904 | )    |  |   | (7,566 | )
|                              |  |              |        |      |  |   |        |  
|                              |  | $            | 3,731  |      |  | $ | 4,633  |  
|                              |  |              |        |      |  |   |        |  

Other intangible assets represents acquired
customer lists, marketing rights, and covenants not to compete.
Amortization expense from continuing operations was
$2.5 million, $3.2 million and $2.2 million for
the years ended December 31, 2003, 2002 and 2001,
respectively. The estimated amortization expense for all
intangibles for the next five years is as follows (dollars in
thousands):

|                          |  |   |       | 
|------------------------- |  | - | ----- | 
|Years Ending December 31, |  |  
|                          |  |  
|2004                      |  | $ | 1,300 | 
|2005                      |  |   | 900   | 
|2006                      |  |   | 900   | 
|2007                      |  |   | 600   | 
|2008                      |  |   | 31    | 
|                          |  |   |       | 
|                          |  | $ | 3,731 | 
|                          |  |   |       | 

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HYPERCOM CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

11.     Long-term
Debt

Long-term debt consists of the following (dollars
in thousands):

|                                                                                                                                                                                                                                                                                                                                                                                                                                              |  |              |        |      |  |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------ | ---- |  | - | ------- | -
|                                                                                                                                                                                                                                                                                                                                                                                                                                              |  |             
|                                                                                                                                                                                                                                                                                                                                                                                                                                              |  | December 31,
|                                                                                                                                                                                                                                                                                                                                                                                                                                              |  |             
|                                                                                                                                                                                                                                                                                                                                                                                                                                              |  | 2003         |        | 2002
|                                                                                                                                                                                                                                                                                                                                                                                                                                              |  |              |        |     
|Floating Rate Option Note payable to Bank One,
    Arizona:payable in semi-annual
    installments plus interest at a variable rate, due April 1,
    2019; collateralized by unconditional, irrevocable, direct pay
    letter of credit                                                                                                                                                                                                     |  | $            | 9,003  |      |  | $ | 9,305   |  
|Senior Secured Credit Facility, as Amended and
    Restated:consisting of a
    $10 million fully cash secured revolving line of credit
    (formerly a $45 million credit facility consisting of a
    $25 million revolving line of credit and two separate terms
    loans for $5 million and $15 million, respectively).
    The revolving line of credit bears interest at the greater of 4%
    or prime plus 1%, matures July 31, 2005 |  |              |       |      |  |   |        |  
|Contract-backed term notes to Rothschild
    (Notes):payable on a
    monthly basis including interest at 8.58% based on a twenty-nine
    month amortization schedule, fully repaid in 2003                                                                                                                                                                                                                                                |  |              |       |      |  |   | 11,774  |  
|Note payable to third party:collateralized by building in Brazil,
    payable in 51 installments including interest at 11.5% plus a
    variable inflation rate factor, matures February 2005                                                                                                                                                                                                                                                 |  |              | 465    |      |  |   | 673     |  
|Note payable to Dao Heng Bank:collateralized by building, payable in
    84 equal monthly installments including interest at the
    banks prime rate minus 1% per annum, fully repaid in
    2003                                                                                                                                                                                                                                           |  |              |       |      |  |   | 1,212   |  
|Lease payable to Banc One Leasing:collateralized by equipment, payable
    in 48 equal monthly installments including interest at
    8.62%, matures June 2004                                                                                                                                                                                                                                                                                |  |              | 236    |      |  |   | 678     |  
|Loan and Security Agreement with Webster Bank:interest at Companys option of
    prime rate plus 1.75% or 30 day LIBOR plus 470 basis
    points, fully repaid in 2003                                                                                                                                                                                                                                                                       |  |              |       |      |  |   | 750     |  
|Other capital leases                                                                                                                                                                                                                                                                                                                                                                                                                          |  |              | 153    |      |  |   | 633     |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                              |  |              |        |      |  |   |         |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                              |  |              | 9,857  |      |  |   | 25,025  |  
|Current portion of long-term debt                                                                                                                                                                                                                                                                                                                                                                                                             |  |              | (1,058 | )    |  |   | (13,331 | )
|                                                                                                                                                                                                                                                                                                                                                                                                                                              |  |              |        |      |  |   |         |  
|Long-term debt                                                                                                                                                                                                                                                                                                                                                                                                                                |  | $            | 8,799  |      |  | $ | 11,694  |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                              |  |              |        |      |  |   |         |  

In connection with the Floating Rate Option Note,
the related letter of credit is subject to renewal on
April 1, 2006. If the letter of credit is not renewed, the
entire remaining principal balance will become due and payable.
The letter of credit is collateralized by land and buildings.
The Company is required to make increasing monthly deposits of
$18,490 up to $81,752 over the life of the note into a sinking
fund to provide periodic repayment of the notes. The Company has
entered into an interest rate swap agreement to fix the
effective interest rate at 7.895%. The interest rate swap
agreement matures at the time the related note matures. The
Company is exposed to credit loss in the event of
non-performance by the other parties to the interest rate swap
agreement. However, the Company does not anticipate
nonperformance by the counter-parties.

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HYPERCOM CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

On May 24, 2001, Golden Eagle securitized
approximately $45.6 million of its equipment leases. The
securitization was accounted for as a financing transaction in
accordance with Statement of Financial Accounting Standards No.
140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities. In connection
with the securitization, Golden Eagle, through a special purpose
subsidiary, Golden Eagle Funding Corp., issued $32 million
of contract-backed term notes. The principal balance was
$11.8 million at December 31, 2002 and was repaid in
full prior to the disposition of Golden Eagle in 2003.

In June 2001, the Company entered into certain
interim financing arrangements pending the completion of the
refinancing of credit facilities. On June 4, 2001, the
Company entered a Loan Agreement with a group of eight investors
pursuant to which the Company borrowed an aggregate of
$3.4 million. The loans bore interest at 7.5% per annum and
had a maturity date of September 5, 2001. The promissory
notes evidencing the loans were convertible into shares of
common stock at a conversion rate of $3.16 per share. On
July 30, 2001, all of the notes plus accrued interest were
converted into an aggregate of 1,088,342 shares of common stock.
In connection with this borrowing, the Company issued to the
lenders Series B Warrants to purchase up to 460,000 shares
of common stock in the aggregate at an exercise price of $3.16
per share exercisable through June 4, 2003. In addition, on
July 30, 2001, the Company entered into a Stock Purchase
Agreement with several investors, including four of the
Series B Warrant holders, under which they purchased an
aggregate of 1,745,201 shares of common stock at a price of
$4.2975 per share.

The estimated fair value of the Series B
stock warrants at the date issued was $1.44 per share using a
Black-Scholes option pricing model. The total fair value of
these stock warrants of $0.7 million was recorded as
additional paid in capital and loan discount. The loan discount
was written off to interest expense during 2001 when the related
loan agreements were converted to common stock. During 2002,
93,750 Series B Warrants were exercised and the remaining
366,250 Series B Warrants were exercised during 2003.

On June 6, 2001, the Company borrowed
$15 million from Michelle Investments LLC pursuant to a
Loan and Security Agreement. The loan bore interest at
7.5% per annum and had a maturity date of June 6,
2002. In connection with the Michelle Investments loan, the
Company granted to Michelle Investments a Series A Warrant
to purchase up to 1.0 million shares of common stock,
subject to certain adjustments, at an exercise price of $3.19
per share exercisable through June 6, 2003. On
July 31, 2001, the Company and Michelle Investments entered
into a Stock Purchase Agreement under which Michelle Investments
purchased 2,475,248 shares of common stock at a price of
$3.03 per share. Michelle Investments paid for the stock
through a $7.5 million reduction of the outstanding balance
under this loan. Concurrently with the issuance of these shares
to Michelle Investments, the Company repaid the remaining
balance of the loan out of funds available under a new Senior
Secured Credit Facility.

The estimated fair value of the Series A
stock warrant at the date issued was $1.36 per share using
a Black-Scholes option pricing model. The total fair value of
these stock warrants of $1.4 million was recorded as
additional paid in capital and loan discount. The loan discount
was written off to interest expense during 2001 when the related
loan agreement was paid off. All Series A warrants were
exercised during 2003.

As a condition to obtaining forbearance from our
principal lenders under our pre-existing loan agreements, and to
secure the $3.4 million in loans above, George Wallner, a
former director and former principal stockholder, agreed to loan
the Company $3.1 million and to subordinate these loans to
our other indebtedness, including our new lending facility. This
balance was repaid during the first quarter of 2002 as discussed
hereafter.

In August 2001, the Company replaced its
principal Credit Agreement with a new $45 million Senior
Secured Credit Facility comprised of a $25 million
revolving credit facility and two separate term loans for
$5 million and $15 million. The two separate term
loans were paid off and the revolving credit facility paid down
to zero in March 2002 in conjunction with the private placement
of common stock completed on March 22, 2002. The maximum
borrowing capacity under this facility is based on inventory and
receivables

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HYPERCOM CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

levels and other factors. Under the covenant
provisions of the credit facility, the Company agreed to, among
other things, maintain certain specified financial ratios and
consolidated net worth, not make certain distributions with
respect to capital stock (including cash dividends), not make
certain investments and not allow our subsidiaries to incur
certain types and amounts of debt.

As partial consideration for the Senior Secured
Credit Facility, the Company issued to Ableco Holding LLC, an
affiliate of one of the Companys lenders, a Series C
Warrant to purchase up to 375,000 shares of common stock at an
exercise price of $4.00 per share (adjusted to $3.907 as
discussed below). The Series C Warrant is exercisable over
a period of five years. During 2002, prior to the payoff of the
term loans, an additional 350,000 Series C Warrant shares
were issued under the terms of the agreement. The estimated fair
value of the Series C stock warrant to purchase 375,000 and
350,000 shares of the Companys common stock, at the date
issued and at the first six-month anniversary was $2.64 and
$2.21 per share, respectively, using a Black-Scholes option
pricing model. No warrants were exercised during 2003 or 2002.
The total fair value of these stock warrants of
$1.8 million was recorded as additional paid in capital and
loan discount. The remaining loan discount of $1.6 million
was written off in 2002 in connection with the pay-off of the
term loans in March 2002 as discussed below.

The Company also paid to Roth Capital Partners
LLC, which assisted the Company in obtaining the new Senior
Secured Credit Facility, a fee of $2.5 million and issued
to it a Series D Warrant to purchase up to 312,477 shares
of our common stock at an exercise price of $5.33 per share
(adjusted to $5.207 per below). The Series D Warrant
is exercisable over a period of five years. The estimated fair
value of the Series D stock warrant at the date issued was
$2.24 per share using a Black-Scholes option pricing model. No
warrants were exercised during 2003 or 2002. The total fair
value of these stock warrants of $0.7 million was recorded
as additional paid in capital and debt issuance costs.
Amortization of the debt issuance costs, including both the fair
value of the Series D stock warrant and the cash fee paid,
in the amount of $0.5 million was recorded as interest
expense in 2001. This fee and the value of the Series C and
D Warrants will be amortized as part of the loan costs.

On March 22, 2002, the Company completed the
issuance and sale of 7,870,000 shares of its common stock, par
value $0.001 per share (the Shares), at a price of
$5.00 per Share. The Shares were sold in a private offering
transaction exempt from registration under Section 4(2) of
the Securities Act of 1933, as amended. The Shares were
subsequently registered with the Securities and Exchange
Commission effective May 2, 2002. The net proceeds of the
private offering amounted to $36.5 million and were used to
repay the two term loans noted above with principal balances of
$15.3 million and $3.3 million, respectively,
$3.1 million in outstanding loans from a former director
and former principal stockholder and to reduce the outstanding
borrowings under the Companys $25 million revolving
credit facility. The remaining proceeds were used for general
corporate purposes.

In connection with the early retirement of the
term loans, the Company recorded an extraordinary loss on
retirement of debt of $2.6 million during the first quarter
of 2002. In accordance with SFAS 145, Rescission of FASB
Statements No. 4, 44 and 64, amendment of FASB Statement
No. 13, and Technical Corrections, the Company has
reclassified its $2.6 million extraordinary loss from early
extinguishment of debt for the twelve months ended
December 31, 2002 to pre-tax income.

Further, in connection with the sale of shares
used to extinguish debt, the Series C and D Warrants were
adjusted for an anti-dilution clause, in the warrants. The
exercise price of the Series C Warrants was changed to
$3.907 and an additional 17,257 warrant shares were issued. The
exercise price of the Series D Warrants was changed to
$5.207 and an additional 7,381 warrant shares were issued. The
financial impact of this adjustment was not material.

Effective December 31, 2003, the Senior
Secured Credit Facility was amended and restated to a fully cash
secured arrangement in an effort to reduce costs and to further
match the Companys current liquidity

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HYPERCOM CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

needs. Under the terms of the amended and
restated agreement, the Company is required to maintain a
$25 million unrestricted cash balance and is limited on the
amount of certain additional debt the Company can incur. Any
borrowings under the revolving line of credit must be fully
secured by an equal amount of cash. All other financial
covenants and most of the restrictions under the former
agreement were removed. The available credit on the revolving
line of credit, which was previously reduced to $15 million
during March 2003, was further reduced to $10 million under
the amended and restated Senior Secured Credit Facility. The
interest rate was reduced from the greater of 8% or prime plus
2%, to the greater of 4% or prime plus 1%. The amended and
restated Senior Secured Credit Facility expires July 31,
2005. The Company had no advances on the revolving line of
credit during 2003 and no outstanding balance under the Senior
Secured Credit Facility at December 31, 2003.

The aggregate principal payments due on long-term
debt are as follows (dollars in thousands):

|                          |  |   |       | 
|------------------------- |  | - | ----- | 
|Years Ending December 31, |  |  
|                          |  |  
|2004                      |  | $ | 1,058 | 
|2005                      |  |   | 444   | 
|2006                      |  |   | 8,342 | 
|2007                      |  |   | 13    | 
|                          |  |   |       | 
|                          |  | $ | 9,857 | 
|                          |  |   |       | 

12.     Restructuring
Charges and Discontinued Operations

During September 2002, the Company committed to a
plan to improve profits. The plan entailed downsizing certain
operations and streamlining their product offerings, changing to
a distributor sales model versus a direct sales model in certain
international locations and disposing of unprofitable operations
around the world. The profit improvement plan included both
restructuring activities to be accounted and reported under SFAS
No. 146, Accounting for Costs Associated with Exit or
Disposal Activities, as well as discontinued operations to
be accounted and reported under SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets.

Restructuring
Charges

The downsizing activities principally focused on
the Companys POS/ Network Systems segment, including the
Companys manufacturing operations in Brazil. Such
activities entailed moving to a contract manufacturer, reducing
the number of personnel and holding for sale certain long-lived
assets such as buildings and production equipment. Inventories
were also written down to support a more streamlined product
offering. In addition, the Company identified certain sales
offices around the world to close in favor of a more
cost-effective distributor arrangement in those locations. Costs
associated with closing these sales offices principally included
employee severance, inventory write-downs and costs associated
with exiting office space and disposing of office fixed assets.
The Company substantially completed all restructuring activities
relative to its profit improvement plan during 2002.

During 2002 and 2003, the Company was unable to
dispose of the remaining long-lived asset, the Companys
sales and distribution building in Brazil, initially held for
sale at September 30, 2002, due to unfavorable real estate
conditions. The long-lived asset continues to be actively
marketed by the Company, and accordingly, the Company has
continued to classify the long-lived asset as held for sale at
December 31, 2003. If market conditions continue to
deteriorate, further write-downs may be necessary.

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HYPERCOM CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The following table sets forth the expected costs
to be incurred with the activity, the amount incurred during the
period and the ending liability as of December 31, 2002
(amounts in thousands):

|                                           |                                             |                                              |   |               |       |              |   |       |       |  |   |     |     | 
|------------------------------------------ | ------------------------------------------- | -------------------------------------------- | - | ------------- | ----- | ------------ | - | ----- | ----- |  | - | --- | --- | 
|                                           |                                             | 2002 Expected                                |   | 2002 Incurred |       | 2002 Accrued
|                                           |                                             |                                              |   |               |       |             
|Restructuring charges in Cost of
    Sales |                                             |                                              |   |               |       |              |   |       |       |  |   |    
|                                           | Write down of inventories and related costs |                                              | $ | 2,033         |       |              | $ | 2,033 |       |  | $ | 100 |    
|                                           |                                             |                                              |   |               |       |              |   |       |       |  |   |    
|                                           |                                             | Total restructuring charges in cost of sales |   | $             | 2,033 |              |   | $     | 2,033 |  |   | $   | 100 | 
|                                           |                                             |                                              |   |               |       |              |   |       |       |  |   |    
|Restructuring charges                      |                                             |                                              |   |               |       |              |   |       |       |  |   |    
|                                           | Write down of building to fair value        |                                              | $ | 2,184         |       |              | $ | 2,184 |       |  | $ |    |    
|                                           | Write down of fixed assets to fair value    |                                              |   | 1,388         |       |              |   | 1,388 |       |  |   |    |    
|                                           | Write down of other assets to fair value    |                                              |   | 233           |       |              |   | 233   |       |  |   |    |    
|                                           | One-time termination benefits               |                                              |   | 482           |       |              |   | 482   |       |  |   | 134 |    
|                                           | Miscellaneous operating accruals            |                                              |   | 147           |       |              |   | 147   |       |  |   | 25  |    
|                                           |                                             |                                              |   |               |       |              |   |       |       |  |   |    
|                                           |                                             | Total restructuring charges                  |   | $             | 4,434 |              |   | $     | 4,434 |  |   | $   | 159 | 
|                                           |                                             |                                              |   |               |       |              |   |       |       |  |   |    

There were no restructuring charges incurred in
2003 or remaining accrued costs at December 31, 2003.

Discontinued
Operations

In connection with the profit improvement plan,
the Company identified and decided to hold for sale certain
under-performing operating units whose activities were not
closely aligned with the Companys core business. The
results of operations for these operating units held for sale
have been classified as discontinued operations and all periods
prior to September 2002 have been reclassified to present these
operating units as discontinued operations. At the time the
Company determined to hold these operations for sale, the
carrying amounts of their assets were written down to their
estimated fair value less an estimate of costs to sell. Assets
written down consisted principally of accounts receivable,
inventories, intangible assets and fixed assets. In accordance
with SFAS 144, the operating results of the discontinued
operating units, prior to sale, were classified in discontinued
operations as incurred.

In connection with the Companys decision to
hold certain operations for sale as discontinued operations, the
Company recognized a loss on the initial write-down of the
assets to their estimated fair value. The initial write-off
amounted to $8.0 million and was included as part of the results
of the discontinued operations for the year ended
December 31, 2002. Additionally, during 2002, the Company
completed the disposition of two of the operating units
initially held for sale in September 2002. The sales did not
result in material gains or losses.

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

Consistent with the Companys strategy of
disposing of operating units not aligned with its core business,
the Company sold its direct financing lease subsidiary, Golden
Eagle, effective October 1, 2003, and recorded a $7.0
million gain net of severance and other exit costs. Gross
proceeds from the sale amounted to $30.0 million. As a
result of the disposition, the net operating results of Golden
Eagle have been reported within discontinued operations for all
periods presented. Net revenues and operating income (loss)
reported in

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HYPERCOM CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

discontinued operations for Golden Eagle for the
three years ended December 31, 2003, 2002 and 2001 were
$16.8 and $5.6 million, $25.7 and $2.8 million, and $28.6
and ($7.4) million, respectively.

Assets and liabilities of the Companys
discontinued operations held for sale at December 31, 2002
consisted of the following (amounts in thousands):

|                    |                   |                   |       |       | 
|------------------- | ----------------- | ----------------- | ----- | ----- | 
|                    |                   | December 31, 2002
|                    |                   |                  
|Accounts receivable |                   | $                 | 3,097 |      
|Inventory           |                   |                   | 5,270 |      
|Other assets        |                   |                   | 467   |      
|                    |                   |                   |       |      
|                    | Total assets      |                   | $     | 8,834 | 
|                    |                   |                   |       |      
|Accounts payable    |                   | $                 | 342   |      
|Other liabilities   |                   |                   | 307   |      
|                    |                   |                   |       |      
|                    | Total liabilities |                   | $     | 649   | 
|                    |                   |                   |       |      

At December 31, 2003, the Company had no
remaining assets of discontinued operations held for sale.

Net revenues of the operating units classified as
discontinued operations for the three years ended
December 31, 2003, 2002 and 2001 were $22.6 million,
$48.4 million and $54.9 million, respectively. Pretax
income (loss) of the operating units classified as
discontinued operations for the three years ended
December 31, 2003, 2002 and 2001 was $7.2 million,
($10.9) million, and ($11.9) million. The pretax income for the
year ending December 31, 2003 includes a net gain on
disposition of discontinued operations of $3.8 million. The
pretax loss for the year ending December 31, 2002 includes
$8.0 million in initial write-downs of assets to fair
market value. The pretax loss for the year ended
December 31, 2001 includes a special charge of
$7.2 million to strengthen credit reserves for certain
segments of Golden Eagles direct finance lease receivables.

13.     Contract
Accounting

The Company is involved in one long-term contract
with the Brazilian Health Ministry requiring substantial
performance of customized software and hardware. The remaining
milestones under the Brazilian Health Ministry contract are
expected to be completed during 2004, as we are in the final
maintenance phase of this contract. However, as of
December 31, 2003, we have identified and made a claim for
approximately $6.7 million of revenue in excess of the
agreed upon contract. We believe it is probable our claim will
result in additional revenue and have reasonably estimated such
amount in accordance with Statement of Position 81-1,
Accounting for Performance of Construction-Type and Certain
Production-Type Contracts. While the revenue related to
these claims has not been recorded under our
percentage-of-completion milestone approach, contract costs to
be recovered by these revenue claims amounting to approximately
$4.9 million have been deferred within other long-term
assets at December 31, 2002 and 2003 and treated as normal
costs of contract performance. If our revenue claim is denied or
results in revenue less than our associated costs, our operating
results would be significantly impacted.

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HYPERCOM CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



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

Income (loss) before income taxes consists
of the following (dollars in thousands):

|                                   |               |                         |       |         |   |      |         |         |   |   |         |         |  
|---------------------------------- | ------------- | ----------------------- | ----- | ------- | - | ---- | ------- | ------- | - | - | ------- | ------- | -
|                                   |               |                        
|                                   |               | Year Ended December 31,
|                                   |               |                        
|                                   |               | 2003                    |       | 2002    |   | 2001
|                                   |               |                         |       |         |   |     
|Income (loss) before income taxes: |               |                         |       |         |   |      |         |         |   |   |         |        
|                                   | United States |                         | $     | (24,334 | ) |      | $       | (55,956 | ) |   | $       | (30,586 | )
|                                   | Foreign       |                         |       | 32,413  |   |      |         | 15,275  |   |   |         | 5,701   |  
|                                   |               |                         |       |         |   |      |         |         |   |   |         |        
|                                   |               | $                       | 8,079 |         |   | $    | (40,681 | )       |   | $ | (24,885 | )      
|                                   |               |                         |       |         |   |      |         |         |   |   |         |        

The tax effect of temporary differences that give
rise to significant portions of the deferred tax assets and
deferred tax liabilities are as follows (dollars in thousands):

|                                                |                                  |                                      |   |         |   |  |   |         |   | 
|----------------------------------------------- | -------------------------------- | ------------------------------------ | - | ------- | - |  | - | ------- | - | 
|                                                |                                  |                                     
|                                                |                                  | December 31,                        
|                                                |                                  |                                     
|                                                |                                  | 2003                                 |   | 2002   
|                                                |                                  |                                      |   |        
|Deferred tax assets, current:                   |                                  |                                      |   |         |   |  |   |        
|                                                | Inventory valuation and reserves |                                      | $ | 2,144   |   |  | $ | 3,286   |  
|                                                | Compensation accruals            |                                      |   | 2,628   |   |  |   | 3,238   |  
|                                                | Allowance for doubtful accounts  |                                      |   | 264     |   |  |   | 3,032   |  
|                                                | Other                            |                                      |   |        |   |  |   |        |  
|                                                | Valuation allowance              |                                      |   | (5,036  | ) |  |   | (9,556  | )
|                                                |                                  |                                      |   |         |   |  |   |        
|                                                |                                  | Deferred tax assets, current         |   | $       |  |  |   | $       |  | 
|                                                |                                  |                                      |   |         |   |  |   |        
|Deferred tax assets (liabilities), non-current: |                                  |                                      |   |         |   |  |   |        
|                                                | Tax loss carry forwards          |                                      | $ | 45,188  |   |  | $ | 24,282  |  
|                                                | Intangibles                      |                                      |   | 2,879   |   |  |   | 9,743   |  
|                                                | Property, plant and equipment    |                                      |   | (309    | ) |  |   | (484    | )
|                                                | Other                            |                                      |   | 3,827   |   |  |   | 3,472   |  
|                                                | Valuation allowance              |                                      |   | (51,585 | ) |  |   | (37,013 | )
|                                                |                                  |                                      |   |         |   |  |   |        
|                                                |                                  | Net deferred tax assets, non-current |   | $       |  |  |   | $       |  | 
|                                                |                                  |                                      |   |         |   |  |   |        

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HYPERCOM CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The components of income tax expense
(benefit) are as follows (dollars in thousands):

|          |         |                         |       |       |  |      |        |         |   |   |        |        |  
|--------- | ------- | ----------------------- | ----- | ----- |  | ---- | ------ | ------- | - | - | ------ | ------ | -
|          |         |                        
|          |         | Year Ended December 31,
|          |         |                        
|          |         | 2003                    |       | 2002  |  | 2001
|          |         |                         |       |       |  |     
|Current:  |         |                         |       |       |  |      |        |         |   |   |        |       
|          | Federal |                         | $     |      |  |      | $      | (10,125 | ) |   | $      | (2,302 | )
|          | State   |                         |       | 74    |  |      |        | 15      |   |   |        | 15     |  
|          | Foreign |                         |       | 4,040 |  |      |        | 4,420   |   |   |        | 1,433  |  
|          |         |                         |       |       |  |      |        |         |   |   |        |       
|          |         |                         | 4,114 |       |  |      | (5,690 | )       |   |   | (854   | )     
|Deferred: |         |                         |       |       |  |      |        |         |   |   |        |       
|          | Federal |                         |       |      |  |      |        | 21,999  |   |   |        | (4,274 | )
|          | State   |                         |       |      |  |      |        | 3,143   |   |   |        | (510   | )
|          | Foreign |                         |       |      |  |      |        | 951     |   |   |        | 661    |  
|          |         |                         |       |       |  |      |        |         |   |   |        |       
|          |         |                         |      |       |  |      | 26,093 |         |   |   | (4,123 | )     
|          |         |                         |       |       |  |      |        |         |   |   |        |       
|          |         | $                       | 4,114 |       |  | $    | 20,403 |         |   | $ | (4,977 | )     
|          |         |                         |       |       |  |      |        |         |   |   |        |       

The Companys effective income tax rate
differs from the U.S. federal income tax rate as shown below:

|                                                                                      |  |                         |       |      |  |      |       |    |  |  |       |   
|------------------------------------------------------------------------------------- |  | ----------------------- | ----- | ---- |  | ---- | ----- | -- |  |  | ----- | --
|                                                                                      |  |                        
|                                                                                      |  | Year Ended December 31,
|                                                                                      |  |                        
|                                                                                      |  | 2003                    |       | 2002 |  | 2001
|                                                                                      |  |                         |       |      |  |     
|Tax expense (benefit) at the federal
    statutory rate                               |  |                         | 35.0  | %    |  |      | (35.0 | )% |  |  | (35.0 | )%
|State income taxes (benefit), net of federal
    income tax effect                    |  |                         | 0.8   |      |  |      |      |    |  |  | (2.0  | ) 
|Foreign taxes attributable to foreign operations
    less than federal statutory rate |  |                         | (88.1 | )    |  |      | 13.2  |    |  |  | (0.3  | ) 
|Tax credits                                                                           |  |                         | (4.3  | )    |  |      |      |    |  |  | (2.0  | ) 
|Translation (loss) gain                                                               |  |                         | (16.1 | )    |  |      |      |    |  |  | 1.0   |   
|Change in valuation allowance                                                         |  |                         | 121.2 |      |  |      | 73.7  |    |  |  | 18.6  |   
|Capital loss from investment in equity affiliate                                      |  |                         |      |      |  |      |      |    |  |  | 0.4   |   
|Other                                                                                 |  |                         | 1.1   |      |  |      | (1.7  | )  |  |  | (0.7  | ) 
|                                                                                      |  |                         |       |      |  |      |       |    |  |  |       |   
|Effective tax rate                                                                    |  |                         | 49.6  | %    |  |      | 50.2  | %  |  |  | (20.0 | )%
|                                                                                      |  |                         |       |      |  |      |       |    |  |  |       |   

For the years ended December 31, 2003, 2002
and 2001, the Companys valuation allowance against its
deferred tax assets increased $10.0 million,
$39.7 million and $4.6 million, respectively. At
December 31, 2003 and 2002, the balance in the
Companys valuation allowance was $56.6 million and
$46.6 million, respectively. The 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. There are no remaining balances of
deferred tax assets reported on the balance sheet as of
December 31, 2003 and 2002.

As of December 31, 2003 and 2002, the
Company had not provided deferred income tax benefits on
cumulative losses of certain individual international
subsidiaries of $38.4 million and $30.1 million
respectively. If deferred income tax assets were recognized for
these net operating losses, they would be approximately
$8.9 million and $6.0 million, respectively, and would
be fully offset by a valuation allowance. Upon distribution of
earnings in the form of dividends or otherwise, the Company may
be subject to both U.S. income taxes and withholding taxes in
its various international jurisdictions. As a result of certain
employment actions and capital investments undertaken by the
Company, income from manufacturing activities in certain

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HYPERCOM CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

countries is subject to reduced tax rates, and in
some cases is wholly exempt from taxes, for years through 2005.

At December 31, 2003, the Company has U.S.
Federal and State net operating loss carryforwards of
approximately $129 million. These Federal and State net
operating loss carryforwards will begin to expire beginning in
2020 and 2005, respectively, if not previously utilized.

The Company does business in a number of
different countries. Tax authorities may scrutinize the various
tax structures employed by the Company in these countries. We
believe that we maintain adequate tax reserves, including our
valuation allowance, to offset the potential tax liabilities
that may arise upon audit in these countries. If such amounts
ultimately prove to be unnecessary, the resulting reversal of
such reserves would result in tax benefits being recorded in the
period the reserves are no longer deemed necessary. If such
amounts ultimately prove to be less than the ultimate
assessment, a future charge to expense or reduction of our
valuation allowance would result. In addition, any potential tax
liabilities that may arise upon audit could affect the
individual items that comprise the companys fully-reserved
deferred tax asset balance.



|    |                     
|--- | --------------------
|15. | Profit Sharing Plans

The Company has a 401(k) profit sharing plan
(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 for the
years ended December 31, 2003, 2002 and 2001 was
approximately $131,000, $146,000 and $165,000, respectively.



|    |                     
|--- | --------------------
|16. | Stockholders Equity



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

During fiscal 1997, the Companys Board of
Directors (Board) approved the Hypercom Corporation
Long-Term Incentive Plan (the 1997 Plan), which was
amended in 2001 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 five years) and expire
ten years after the date of grant.

In July 2000, the Companys Board approved
the Hypercom Corporation 2000 Broad-Based Stock Incentive Plan
(the 2000 Plan), which was amended in 2002 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, and expire after a period
determined by the Board.

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HYPERCOM CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

A summary of the Companys stock option
activity and related information follows:

|                              |           |                         |            |          |   |        |      |          |  |        |            |           |   |   |      |      |  |  |            |            |   |   |      |       | 
|----------------------------- | --------- | ----------------------- | ---------- | -------- | - | ------ | ---- | -------- |  | ------ | ---------- | --------- | - | - | ---- | ---- |  |  | ---------- | ---------- | - | - | ---- | ----- | 
|                              |           |                        
|                              |           | Year Ended December 31,
|                              |           |                        
|                              |           |                         |            |          |   |       
|                              |           | 2003                    |            | 2002     |   | 2001  
|                              |           |                         |            |          |   |       
|                              |           |                         |            | Weighted |   |        |      | Weighted |  |        |            | Weighted 
|                              |           | Shares                  |            | Average  |   | Shares |      | Average  |  | Shares |            | Average  
|                              |           | Under                   |            | Exercise |   | Under  |      | Exercise |  | Under  |            | Exercise 
|                              |           | Option                  |            | Price    |   | Option |      | Price    |  | Option |            | Price    
|                              |           |                         |            |          |   |        |      |          |  |        |            |          
|Beginning balance outstanding |           |                         | 10,782,473 |          |   | $      | 6.28 |          |  |        | 10,663,352 |           |   | $ | 6.32 |      |  |  | 7,057,043  |            |   | $ | 8.67 |      
|                              | Granted   |                         |            | 241,250  |   |        |      | 4.25     |  |        |            | 1,046,000 |   |   |      | 5.64 |  |  |            | 5,653,600  |   |   |      | 3.75  | 
|                              | Exercised |                         |            | (380,142 | ) |        |      | 1.91     |  |        |            | (154,475  | ) |   |      | 3.88 |  |  |            | (80        | ) |   |      | 10.38 | 
|                              | Forfeited |                         |            | (587,254 | ) |        |      | 8.76     |  |        |            | (772,404  | ) |   |      | 6.50 |  |  |            | (2,047,211 | ) |   |      | 7.29  | 
|                              |           |                         |            |          |   |        |      |          |  |        |            |           |   |   |      |      |  |  |            |            |   |   |      |      
|Ending balance outstanding    |           |                         | 10,056,327 |          |   | $      | 6.26 |          |  |        | 10,782,473 |           |   | $ | 6.28 |      |  |  | 10,663,352 |            |   | $ | 6.32 |      
|                              |           |                         |            |          |   |        |      |          |  |        |            |           |   |   |      |      |  |  |            |            |   |   |      |      
|Exercisable at end of year    |           |                         | 7,382,193  |          |   | $      | 6.57 |          |  |        | 6,502,702  |           |   | $ | 6.42 |      |  |  | 4,054,616  |            |   | $ | 6.83 |      
|                              |           |                         |            |          |   |        |      |          |  |        |            |           |   |   |      |      |  |  |            |            |   |   |      |      

The following table summarizes additional
information about the Companys stock options outstanding
as of December 31, 2003:

|                         |  |                     |            |                  |  |                     |      |        |  |          |       |  |  |  |           |  |  |   |       | 
|------------------------ |  | ------------------- | ---------- | ---------------- |  | ------------------- | ---- | ------ |  | -------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                         |  |                     |            |                  |  |                    
|                         |  | Options Outstanding |            |                  |  | Options Exercisable
|                         |  |                     |            |                  |  |                    
|                         |  |                     |            | Weighted         |  | Weighted            |      |        |  | Weighted
|                         |  | Shares              |            | Average          |  | Average             |      | Shares |  | Average 
|                         |  | Under               |            | Remaining        |  | Exercise            |      | Under  |  | Exercise
|Range of Exercise Prices |  | Option              |            | Contractual Life |  | Price               |      | Option |  | Price   
|                         |  |                     |            |                  |  |                     |      |        |  |         
|$1.90  2.66.            |  |                     | 525,750    |                  |  |                     | 0.80 |        |  | $        | 2.34  |  |  |  | 523,875   |  |  | $ | 2.34  | 
|$3.10  3.50.            |  |                     | 3,061,768  |                  |  |                     | 7.14 |        |  |          | 3.49  |  |  |  | 2,068,702 |  |  |   | 3.49  | 
|$3.52  6.40.            |  |                     | 3,528,825  |                  |  |                     | 6.04 |        |  |          | 5.62  |  |  |  | 2,367,445 |  |  |   | 5.94  | 
|$6.81  15.00.           |  |                     | 2,939,984  |                  |  |                     | 6.11 |        |  |          | 10.60 |  |  |  | 2,422,171 |  |  |   | 10.72 | 
|                         |  |                     |            |                  |  |                     |      |        |  |          |       |  |  |  |           |  |  |   |       | 
|                         |  |                     | 10,056,327 |                  |  |                     |      |        |  |          |       |  |  |  | 7,382,193 |  |  |   |       | 
|                         |  |                     |            |                  |  |                     |      |        |  |          |       |  |  |  |           |  |  |   |       | 

Pro forma information regarding net income
(loss) and net income (loss) per share as disclosed in Note
2, has been determined as if the Company had accounted for its
stock option plans under the fair value based method of
SFAS 123. The fair value of these options was estimated at
the date of grant using a Black-Scholes option pricing model.
The Black-Scholes option valuation model was developed for use
in estimating the fair value of traded options which 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 weighted average fair value of options granted in
the years ended December 31, 2003, 2002 and 2001 was $2.05,
$4.46, and $2.87, respectively.

Unearned
Deferred Compensation

In December 2003, the Company granted 124,224
restricted shares of common stock to certain employees under the
2000 Plan. The Company recorded deferred compensation of
$600,000, representing the market price of the shares at the
date of grant. The weighted average fair value of the award was
$4.83 per share. The amount of deferred compensation is
presented as a reduction of stockholders equity and is
being amortized ratably over the service period of the employees
receiving the grants. The shares vest two years after the grant
date. The Company expects to record compensation expense related
to deferred compensation beginning in January 2004 of
approximately $75,000 per quarter through December 31,
2005. Expense with

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HYPERCOM CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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. No restricted stock
awards were granted during 2002 or 2001.

Employee
Stock Purchase Plan

On September 8, 1997, the Companys
Board adopted and the stockholders of the Company approved a
non-compensatory employee stock purchase plan entitled the
Hypercom Corporation 1997 Employee Stock Purchase Plan
(Purchase Plan). The Purchase Plan allows eligible
employees of the Company to purchase shares of the
Companys common stock through periodic payroll deductions.
The initial offering period commenced immediately following the
initial public offering (IPO) and extended through
June 30, 1998, with subsequent offering periods beginning
every six months thereafter (every three months effective
November 16, 1999). 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 90% (85% effective November 16, 1999) 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, 2003, 2002, and 2001 the Company sold 105,959,
90,571, and 156,765 shares to employees at weighted average
prices of $3.06, $3.68, and $2.84 per share, respectively.

Preferred
Stock

On September 8, 1997, the Companys
Board amended and restated the Companys Certificate of
Incorporation to authorize 10,000,000 shares of $0.001 par value
preferred stock. As of December 31, 2003 and 2002, there
were no preferred shares outstanding.

Directors
Stock Plan

On September 8, 1997, the Companys
Board of Directors adopted and the stockholders of the Company
approved the Hypercom Corporation Directors Stock Plan
(the Director Plan). The Director Plan is
administered by a committee appointed by the Board and provides
for an initial grant to each Director of an option to purchase
6,250 shares of Common Stock immediately following the IPO. In
addition, each individual who first becomes a Director after the
date of the initial grant of options will be granted an option
to purchase 6,250 shares of Common Stock, and will receive an
annual grant of options to purchase 6,250 shares of Common
Stock. The aggregate number of shares of Common Stock subject to
the Director Plan may not exceed 175,000, subject to adjustment
in the event of a stock split, reverse stock split, stock
dividend or similar event. Options granted under the Director
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

In June 1998, the Board of Directors authorized
the repurchase, at managements discretion, of up to
1,000,000 shares of the Companys stock in the open market
or in privately negotiated transactions. In addition, during
August 2003, the Companys Board of Directors authorized
the repurchase of an additional $10 million in common stock
to maximize shareholder value. During 2003, the Company
purchased 60,000 shares of its common stock for
$0.3 million. The repurchased shares were recorded as
treasury stock and result

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HYPERCOM CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

in a reduction to stockholders equity. The
timing and amount of any future repurchases will depend on
market conditions and corporate considerations.

17.     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, |  |  
|                          |  |  
|2004                      |  | $ | 1,615 | 
|2005                      |  |   | 1,076 | 
|2006                      |  |   | 693   | 
|2007                      |  |   | 664   | 
|2008                      |  |   | 478   | 
|Thereafter                |  |   | 657   | 
|                          |  |   |       | 
|                          |  | $ | 5,183 | 
|                          |  |   |       | 

Rental expense from continuing operations
amounted to $3.1 million, $3.6 million, and
$3.8 million, for the years ended December 31, 2003,
2002, and 2001, respectively.

Litigation

The Company is subject to litigation, which has
arisen in the ordinary course of its business. Although there
can be no assurance as to the ultimate disposition of these
matters and the proceedings disclosed above, it is the opinion
of the Companys management, based upon the information
available at this time, that the expected outcome of these
matters, individually or in the aggregate, will not have a
material adverse effect on the results of operations or
financial condition of the Company.

18.     Related Party
Transactions

Receivables
from and Payable to Stockholders

During the year ended December 31, 2001, the
Company entered into loan agreements as amended and restated,
with George Wallner, the Companys former Chief Strategist
and former principal stockholder, in the aggregate amount of
$3.1 million. The loans bore interest at 12% annually and
were due January 31, 2003. The entire outstanding principal
balance of $3.1 million was paid in full as of
December 31, 2002.

In fiscal 1997, the Company made a loan to George
Wallner, the Companys former Chief Strategist and former
principal stockholder, in the principal amount of $749,000 and
to Paul Wallner a former principal stockholder, in the principal
amount of $749,000. The loans are non-interest bearing and are
due in full in March 2004. The outstanding balance on these
notes is included as a separate component of Stockholders
Equity. During the year ended December 31, 2002, the
Company received cash repayments of $160,500 from George Wallner
and $160,500 from Paul Wallner, for a total of $321,000.

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HYPERCOM CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

19.     Segment
Information

As a result of the sale of Golden Eagle Leasing
effective October 1, 2003, which comprised the
Companys entire Direct-Finance Leasing segment, the
Companys continuing operations consist solely of one
segment: Point-of-Sale (POS)/ Network Systems. All operating
results and cash flows for Golden Eagle Leasing have been
reclassified to discontinued operations for all periods
presented (see Note 12).

POS Systems develops, manufactures, markets, and
supports products that automate electronic payment transactions
at the point of sale in merchant establishments as well as
supporting non-payment applications and new markets, including
government, education and healthcare. Network Systems develops,
manufactures, markets, and supports transaction-networking
systems.

Net revenues to external customers are based on
the location of the customer. Geographic information as of and
for each of the years ended December 31, 2003, 2002, and
2001 is presented in the table below (dollars in thousands):

|                          |  |               |        |               |  |              |        |        |  |       |        |  |  |   |        |  |  |   |         | 
|------------------------- |  | ------------- | ------ | ------------- |  | ------------ | ------ | ------ |  | ----- | ------ |  |  | - | ------ |  |  | - | ------- | 
|Years Ending December 31, |  | United States |        | Latin America |  | Asia/Pacific |        | Europe |  | Total
|                          |  |               |        |               |  |              |        |        |  |      
|2003                      |  |               |        |               |  |              |        |        |  |       |        |  |  |   |        |  |  |   |         | 
|Revenues                  |  | $             | 76,466 |               |  | $            | 42,897 |        |  | $     | 40,193 |  |  | $ | 71,958 |  |  | $ | 231,514 | 
|Long-lived assets         |  |               | 21,307 |               |  |              | 13,624 |        |  |       | 3,297  |  |  |   | 2,218  |  |  |   | 40,446  | 
|2002                      |  |               |        |               |  |              |        |        |  |       |        |  |  |   |        |  |  |   |         | 
|Revenues                  |  | $             | 83,038 |               |  | $            | 65,318 |        |  | $     | 38,422 |  |  | $ | 58,187 |  |  | $ | 244,965 | 
|Long-lived assets         |  |               | 26,121 |               |  |              | 15,210 |        |  |       | 2,334  |  |  |   | 1,842  |  |  |   | 45,507  | 
|2001                      |  |               |        |               |  |              |        |        |  |       |        |  |  |   |        |  |  |   |         | 
|Revenues                  |  | $             | 87,221 |               |  | $            | 69,855 |        |  | $     | 34,143 |  |  | $ | 45,554 |  |  | $ | 236,773 | 
|Long-lived assets         |  |               | 57,974 |               |  |              | 18,257 |        |  |       | 3,343  |  |  |   | 2,178  |  |  |   | 81,752  | 

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HYPERCOM CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

20.     Supplemental
Cash Flow Information (in thousands)

|                                                        |                                                                                          |                         |   |        |   |      |   |         |   |  |   |        |  
|------------------------------------------------------- | ---------------------------------------------------------------------------------------- | ----------------------- | - | ------ | - | ---- | - | ------- | - |  | - | ------ | -
|                                                        |                                                                                          |                        
|                                                        |                                                                                          | Year Ended December 31,
|                                                        |                                                                                          |                        
|                                                        |                                                                                          | 2003                    |   | 2002   |   | 2001
|                                                        |                                                                                          |                         |   |        |   |     
|Changes in operating assets and
    liabilities:        |                                                                                          |                         |   |        |   |      |   |         |   |  |   |       
|                                                        | Accounts receivable                                                                      |                         | $ | (5,788 | ) |      | $ | 7,142   |   |  | $ | 6,247  |  
|                                                        | Net investment in sales-type leases                                                      |                         |   | (6,446 | ) |      |   | (4,750  | ) |  |   | (3,280 | )
|                                                        | Inventories                                                                              |                         |   | 1,243  |   |      |   | 5,732   |   |  |   | (29    | )
|                                                        | Income tax receivable                                                                    |                         |   | 9,118  |   |      |   | (9,118  | ) |  |   |       |  
|                                                        | Prepaid expenses and other current assets                                                |                         |   | 674    |   |      |   | 4,702   |   |  |   | (3,537 | )
|                                                        | Other assets                                                                             |                         |   | (368   | ) |      |   | (5,345  | ) |  |   | (239   | )
|                                                        | Accounts payable                                                                         |                         |   | (1,988 | ) |      |   | (14,135 | ) |  |   | (618   | )
|                                                        | Accrued payroll and related expenses                                                     |                         |   | 1,265  |   |      |   | 696     |   |  |   | (244   | )
|                                                        | Accrued sales and other tax                                                              |                         |   | (259   | ) |      |   | 1,602   |   |  |   | 1,080  |  
|                                                        | Accrued liabilities                                                                      |                         |   | 709    |   |      |   | (4,181  | ) |  |   | (158   | )
|                                                        | Deferred revenue                                                                         |                         |   | 46     |   |      |   | 101     |   |  |   | (210   | )
|                                                        | Income taxes payable                                                                     |                         |   | (18    | ) |      |   | 100     |   |  |   | (1,249 | )
|                                                        | Other liabilities                                                                        |                         |   | 1,539  |   |      |   | 637     |   |  |   | (175   | )
|                                                        |                                                                                          |                         |   |        |   |      |   |         |   |  |   |       
|                                                        | Net decrease in operating assets and liabilities                                         |                         | $ | (273   | ) |      | $ | (16,817 | ) |  | $ | (2,412 | )
|                                                        |                                                                                          |                         |   |        |   |      |   |         |   |  |   |       
|Cash paid during the year by continuing
    operations: |                                                                                          |                         |   |        |   |      |   |         |   |  |   |       
|                                                        | Interest                                                                                 |                         | $ | (1,064 | ) |      | $ | (2,956  | ) |  | $ | (4,870 | )
|                                                        |                                                                                          |                         |   |        |   |      |   |         |   |  |   |       
|                                                        | Income taxes                                                                             |                         | $ | (2,275 | ) |      | $ | (3,033  | ) |  | $ | (2,340 | )
|                                                        |                                                                                          |                         |   |        |   |      |   |         |   |  |   |       
|Noncash investing activities:                           |                                                                                          |                         |   |        |   |      |   |         |   |  |   |       
|                                                        | Acquisition of plant and equipment through
    capital leases                            |                         | $ | 55     |   |      | $ | 132     |   |  | $ |       |  
|                                                        |                                                                                          |                         |   |        |   |      |   |         |   |  |   |       
|                                                        | Changes in accounts payable related to the
    purchase of property, plant and equipment |                         | $ |       |   |      | $ | (477    | ) |  | $ | 471    |  
|                                                        |                                                                                          |                         |   |        |   |      |   |         |   |  |   |       
|Noncash financing activities:                           |                                                                                          |                         |   |        |   |      |   |         |   |  |   |       
|                                                        | Issuance of stock to pay off notes payable                                               |                         | $ |       |   |      | $ |        |   |  | $ | (7,500 | )
|                                                        |                                                                                          |                         |   |        |   |      |   |         |   |  |   |       
|                                                        | Issuance of common stock warrants at fair value                                          |                         | $ |       |   |      | $ | (833    | ) |  | $ | (3,722 | )
|                                                        |                                                                                          |                         |   |        |   |      |   |         |   |  |   |       
|                                                        | Beneficial conversion feature                                                            |                         | $ |       |   |      | $ |        |   |  | $ | (667   | )
|                                                        |                                                                                          |                         |   |        |   |      |   |         |   |  |   |       
|                                                        | Conversion of notes payable and accrued interest
    into common stock                   |                         | $ |       |   |      | $ |        |   |  | $ | (3,438 | )
|                                                        |                                                                                          |                         |   |        |   |      |   |         |   |  |   |       

21.     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, 2003 and 2002. 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 Company believes that
quarter-to-quarter comparisons of

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HYPERCOM CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

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
amounts.)

|                                             |  |            |        |            |  |            |        |            |  |             |        |  |  |   |        |  |  |   |         | 
|-------------------------------------------- |  | ---------- | ------ | ---------- |  | ---------- | ------ | ---------- |  | ----------- | ------ |  |  | - | ------ |  |  | - | ------- | 
|                                             |  |           
|                                             |  | 2003      
|                                             |  |           
|                                             |  | First      |        | Second     |  | 2003 Third |        | Fourth     |  |            
|                                             |  | Quarter(1) |        | Quarter(1) |  | Quarter(1) |        | Quarter(1) |  | Fiscal Year
|                                             |  |            |        |            |  |            |        |            |  |            
|Net revenue                                  |  | $          | 49,796 |            |  | $          | 58,899 |            |  | $           | 59,405 |  |  | $ | 63,414 |  |  | $ | 231,514 | 
|Gross profit                                 |  |            | 19,920 |            |  |            | 23,920 |            |  |             | 25,304 |  |  |   | 26,886 |  |  |   | 96,030  | 
|Income (loss) from continuing operations     |  |            | (948   | )          |  |            | 2,790  |            |  |             | 5,273  |  |  |   | 5,920  |  |  |   | 13,035  | 
|Income (loss) before discontinued operations |  |            | (2,800 | )          |  |            | 976    |            |  |             | 3,037  |  |  |   | 2,752  |  |  |   | 3,965   | 
|Income (loss) from discontinued operations   |  |            | 770    |            |  |            | (484   | )          |  |             | 956    |  |  |   | 5,991  |  |  |   | 7,233   | 
|                                             |  |            |        |            |  |            |        |            |  |             |        |  |  |   |        |  |  |   |         | 
|Net income (loss)                            |  | $          | (2,030 | )          |  | $          | 492    |            |  | $           | 3,993  |  |  | $ | 8,743  |  |  | $ | 11,198  | 
|                                             |  |            |        |            |  |            |        |            |  |             |        |  |  |   |        |  |  |   |         | 
|Basic income (loss) per share:               |  |            |        |            |  |            |        |            |  |             |        |  |  |   |        |  |  |   |         | 
|Income (loss) before discontinued operations |  | $          | (0.06  | )          |  | $          | 0.02   |            |  | $           | 0.06   |  |  | $ | 0.06   |  |  | $ | 0.08    | 
|Income (loss) from discontinued operations   |  |            | 0.02   |            |  |            | (0.01  | )          |  |             | 0.02   |  |  |   | 0.12   |  |  |   | 0.15    | 
|                                             |  |            |        |            |  |            |        |            |  |             |        |  |  |   |        |  |  |   |         | 
|Basic income (loss) per share                |  | $          | (0.04  | )          |  | $          | 0.01   |            |  | $           | 0.08   |  |  | $ | 0.18   |  |  | $ | 0.23    | 
|                                             |  |            |        |            |  |            |        |            |  |             |        |  |  |   |        |  |  |   |         | 
|Diluted income (loss) per
    share:         |  |            |        |            |  |            |        |            |  |             |        |  |  |   |        |  |  |   |         | 
|Income (loss) before discontinued operations |  | $          | (0.06  | )          |  | $          | 0.02   |            |  | $           | 0.06   |  |  | $ | 0.05   |  |  | $ | 0.08    | 
|Income (loss) from discontinued operations   |  |            | 0.02   |            |  |            | (0.01  | )          |  |             | 0.02   |  |  |   | 0.12   |  |  |   | 0.14    | 
|                                             |  |            |        |            |  |            |        |            |  |             |        |  |  |   |        |  |  |   |         | 
|Diluted income (loss) per share              |  | $          | (0.04  | )          |  | $          | 0.01   |            |  | $           | 0.08   |  |  | $ | 0.17   |  |  | $ | 0.22    | 
|                                             |  |            |        |            |  |            |        |            |  |             |        |  |  |   |        |  |  |   |         | 

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HYPERCOM CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

|                                                                                                         |  |               |         |            |  |            |        |            |  |             |         |   |  |   |        |  |  |   |         |  
|-------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | ---------- |  | ---------- | ------ | ---------- |  | ----------- | ------- | - |  | - | ------ |  |  | - | ------- | -
|                                                                                                         |  |              
|                                                                                                         |  | 2002         
|                                                                                                         |  |              
|                                                                                                         |  | First         |         | Second     |  | Third      |        | Fourth     |  |            
|                                                                                                         |  | Quarter(1)(2) |         | Quarter(1) |  | Quarter(1) |        | Quarter(1) |  | Fiscal Year
|                                                                                                         |  |               |         |            |  |            |        |            |  |            
|Net revenue                                                                                              |  | $             | 63,898  |            |  | $          | 61,131 |            |  | $           | 57,987  |   |  | $ | 61,949 |  |  | $ | 244,965 |  
|Gross profit                                                                                             |  |               | 25,475  |            |  |            | 24,466 |            |  |             | 19,662  |   |  |   | 21,753 |  |  |   | 91,356  |  
|Income (loss) from continuing operations                                                                 |  |               | 4,249   |            |  |            | 4,290  |            |  |             | (6,930  | ) |  |   | 2,681  |  |  |   | 4,290   |  
|Income (loss) before discontinued operations
    and cumulative effect of change in accounting principle |  |               | (1,071  | )          |  |            | 1,029  |            |  |             | (25,267 | ) |  |   | 807    |  |  |   | (24,502 | )
|Income (loss) from discontinued operations                                                               |  |               | (1,571  | )          |  |            | (649   | )          |  |             | (13,007 | ) |  |   | 411    |  |  |   | (14,816 | )
|Cumulative effect of change in accounting
    principle                                                  |  |               | (21,766 | )          |  |            |       |            |  |             |        |   |  |   |       |  |  |   | (21,766 | )
|                                                                                                         |  |               |         |            |  |            |        |            |  |             |         |   |  |   |        |  |  |   |         |  
|Net income (loss)                                                                                        |  | $             | (24,408 | )          |  | $          | 380    |            |  | $           | (38,274 | ) |  | $ | 1,218  |  |  | $ | (61,084 | )
|                                                                                                         |  |               |         |            |  |            |        |            |  |             |         |   |  |   |        |  |  |   |         |  
|Basic and diluted income (loss) per
    share:                                                           |  |               |         |            |  |            |        |            |  |             |         |   |  |   |        |  |  |   |         |  
|Income (loss) before discontinued operations
    and cumulative effect of change in accounting principle |  | $             | (0.03   | )          |  | $          | 0.02   |            |  | $           | (0.53   | ) |  | $ | 0.02   |  |  | $ | (0.53   | )
|Income (loss) from discontinued operations                                                               |  |               | (0.04   | )          |  |            | (0.01  | )          |  |             | (0.27   | ) |  |   | 0.01   |  |  |   | (0.32   | )
|Cumulative effect of change in accounting
    principle                                                  |  |               | (0.53   | )          |  |            |       |            |  |             |        |   |  |   |       |  |  |   | (0.47   | )
|                                                                                                         |  |               |         |            |  |            |        |            |  |             |         |   |  |   |        |  |  |   |         |  
|Basic and diluted income (loss) per share                                                                |  | $             | (0.60   | )          |  | $          | 0.01   |            |  | $           | (0.80   | ) |  | $ | 0.03   |  |  | $ | (1.32   | )
|                                                                                                         |  |               |         |            |  |            |        |            |  |             |         |   |  |   |        |  |  |   |         |  



---



|    |                                                                                                                                                                                                                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | During the third quarter of 2002, the Company
    identified certain unprofitable businesses and made the decision
    to hold these operating units for sale. For comparative
    purposes, all prior operating results of these unprofitable
    businesses have been reclassified to reflect the results of
    operations in discontinued operations (see Note 12).

In addition, the Company sold its direct finance
lease subsidiary, Golden Eagle, during the fourth quarter of
2003 and recorded a $7.0 million gain net of severance and
other closing costs. As a result of the disposition, the net
operating results of Golden Eagle have been reported within
discontinued operations for all periods presented (see
Note 12).



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | During 2002, the Company adopted SFAS 142,
    Goodwill and Intangible Assets. During the second quarter
    of 2002, the Company completed the evaluation of its reporting
    units for impairment of goodwill and recorded a
    $21.8 million write-off of goodwill primarily attributable
    to Golden Eagle Leasing. Under the transitional provisions of
    SFAS 142, this write-off has been reflected as a cumulative
    effect of change in accounting principle. The 2002 first quarter
    operating results have been restated to reflect this charge as
    required by SFAS No. 3, Reporting Accounting Changes in
    Interim Financial Statements.

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FINANCIAL STATEMENT SCHEDULE

SCHEDULE II VALUATION AND QUALIFYING
ACCOUNTS

|                              |                                                  |                        |  |             |  |            |  |            |  |               |  |     |  |  |  |        |   |  |  |       | 
|----------------------------- | ------------------------------------------------ | ---------------------- |  | ----------- |  | ---------- |  | ---------- |  | ------------- |  | --- |  |  |  | ------ | - |  |  | ----- | 
|                              |                                                  |                        |  |             |  |           
|                              |                                                  |                        |  | Additions   |  |           
|                              |                                                  |                        |  |             |  |           
|                              |                                                  |                        |  | Charged to  |  |            |  |           
|                              |                                                  |                        |  | Costs and   |  |            |  |           
|                              |                                                  |                        |  | Expenses in |  | Charged to |  |            |  |              
|                              |                                                  | Balance at             |  | Continuing  |  | Other      |  |            |  |              
|                              |                                                  | Beginning of           |  | Operations  |  | Accounts   |  | Deductions |  | Balance at   
|                              |                                                  | Period                 |  | (A)         |  | (A)        |  | (B)        |  | End of Period
|                              |                                                  |                        |  |             |  |            |  |            |  |              
|                              |                                                  |                       
|                              |                                                  | (Amounts in thousands)
|Year Ended December 31, 2001: |                                                  |                        |  |             |  |            |  |            |  |               |  |     |  |  |  |        |   |  |  |      
|                              | Allowance for doubtful accounts                  |                        |  | 3,655       |  |            |  | 1,056      |  |               |  | 117 |  |  |  | (1,406 | ) |  |  | 3,422 | 
|                              | Allowance for credit losses on sales-type leases |                        |  |            |  |            |  | 607        |  |               |  |    |  |  |  |       |   |  |  | 607   | 
|Year Ended December 31, 2002: |                                                  |                        |  |             |  |            |  |            |  |               |  |     |  |  |  |        |   |  |  |      
|                              | Allowance for doubtful accounts                  |                        |  | 3,422       |  |            |  | 538        |  |               |  | 336 |  |  |  | (1,014 | ) |  |  | 3,282 | 
|                              | Allowance for credit losses on sales-type leases |                        |  | 607         |  |            |  | 691        |  |               |  |    |  |  |  | 120    |   |  |  | 1,418 | 
|Year Ended December 31, 2003: |                                                  |                        |  |             |  |            |  |            |  |               |  |     |  |  |  |        |   |  |  |      
|                              | Allowance for doubtful accounts                  |                        |  | 3,282       |  |            |  | 1,972      |  |               |  |    |  |  |  | (4,261 | ) |  |  | 993   | 
|                              | Allowance for credit losses on sales-type leases |                        |  | 1,418       |  |            |  | 705        |  |               |  |    |  |  |  | (429   | ) |  |  | 1,694 | 



---



|    |                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(A) | Certain amounts in the 2002 and 2001 periods
    relating to operations discontinued in 2002 and 2003 have been
    reclassified to conform with the 2003 presentation.



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

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EXHIBIT INDEX

|        |       |  |  |                                             |  |                                                                                                                                                                                                                                                                                                           
|------- | ----- |  |  | ------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |  |  |                                            
|Number  |       |  |  | Description of Exhibit and Method of Filing
|        |       |  |  |                                            
|        | 3.1   |  |  |                                            |  | Amended and Restated Certificate of Incorporation
    of Hypercom Corporation (incorporated by reference to
    Exhibit 3.1 to Hypercom Corporations Registration
    Statement on Form S-1 (Registration No. 333-35461))                                                                                
|        | 3.2   |  |  |                                            |  | Amended and Restated Bylaws of Hypercom
    Corporation (incorporated by reference to Exhibit 3.2 to
    Hypercom Corporations Annual Report on Form 10-K for
    the year ended December 31, 2001)                                                                                                      
|        | 4.1   |  |  |                                            |  | Amended and Restated Certificate of Incorporation
    of Hypercom (incorporated by reference to Exhibit 3.1 to
    Hypercom Corporations Registration Statement on
    Form S-1 (Registration No. 333-35461))                                                                                            
|        | 10.1  |  |  |                                            |  | Lease, as amended, dated June 14, 1996, by
    and between Estes-Samuelson Partnership and Hypercom, Inc.
    (incorporated by reference to Exhibit 10.2 to Hypercom
    Corporations Registration Statement on Form S-1
    (Registration No. 333-35461))                                               
|        | 10.2  |  |  |                                            |  | Hypercom Corporation Long-Term Incentive Plan
    (incorporated by reference to Exhibit 4.3 to Hypercom
    Corporations Registration Statement on Form S-8
    (Registration No. 333-67440))                                                                                                           
|        | 10.3  |  |  |                                            |  | Hypercom Corporation 1997 Employee Stock Purchase
    Plan (incorporated by reference to Exhibit 10.4 to Hypercom
    Corporations Registration Statement on Form S-1
    (Registration No. 333-35461))                                                                                                 
|        | 10.4  |  |  |                                            |  | Hypercom Corporation 2000 Broad-Based Stock
    Incentive Plan (incorporated by reference to Exhibit 10.1
    to Hypercom Corporations Registration Statement on
    Form S-8 (Registration No. 333-97181))                                                                                             
|        | 10.5  |  |  |                                            |  | Hypercom Corporation Nonemployee Directors
    Stock Option Plan (incorporated by reference to
    Exhibit 10.1 to Hypercom Corporations Registration
    Statement on Form S-1 (Registration
    No. 333-97179))                                                                                      
|        | 10.6  |  |  |                                            |  | Employment Agreement, dated February 4,
    2004, between Christopher S. Alexander and Hypercom
    Corporation*                                                                                                                                                                                         
|        | 10.7  |  |  |                                            |  | Deferred Compensation Agreement, dated
    June 3, 2002, between Christopher S. Alexander and
    Hypercom Corporation (incorporated by reference to
    Exhibit 10.5 to Hypercom Corporations Quarterly
    Report on Form 10-Q for the quarter ended June 30,
    2002)                               
|        | 10.8  |  |  |                                            |  | Amended and Restated Loan and Security Agreement
    effective December 31, 2003, by and among Hypercom
    Corporation, Hypercom U.S.A., Inc., Hypercom Manufacturing
    Resources, Inc., Hypercom Latino America, Inc., Hypercom EMEA,
    Inc., and Wells Fargo Foothill, Inc.*                       
|        | 10.9  |  |  |                                            |  | Form of Stock Purchase Agreement by and among
    George R. Wallner, Paul Wallner, Hypercom Corporation and
    certain institutional purchasers, dated August 13, 2003
    (incorporated by reference to Exhibit 10.2 to Hypercom
    Corporations Current Report on Form 8-K filed
    August 15, 2003)
|        | 10.10 |  |  |                                            |  | Form of Registration Rights Agreement by and
    among Hypercom Corporation, George Wallner and certain
    institutional purchasers, dated August 13, 2003
    (incorporated by reference to Exhibit 10.3 to Hypercom
    Corporations Current Report on Form 8-K filed
    August 15, 2003)            
|        | 10.11 |  |  |                                            |  | Asset Purchase Agreement by and among Hypercom
    Corporation, Golden Eagle Leasing, Inc. and Northern Leasing
    Systems Inc., effective October 1, 2003 (incorporated by
    reference to Exhibit 2.1 to Hypercom Corporations
    Current Report on Form 8-K/A filed October 22, 2003)              
|        | 14    |  |  |                                            |  | Code of Ethics*                                                                                                                                                                                                                                                                                           
|        | 21.1  |  |  |                                            |  | List of Subsidiaries*                                                                                                                                                                                                                                                                                     
|        | 31.1  |  |  |                                            |  | Certification of Chief Executive Officer, as
    adopted pursuant to Section 302 of the Sarbanes-Oxley Act
    of 2002*                                                                                                                                                                                   
|        | 31.2  |  |  |                                            |  | Certification of Chief Financial Officer, as
    adopted pursuant to Section 302 of the Sarbanes-Oxley Act
    of 2002*                                                                                                                                                                                   
|        | 32.1  |  |  |                                            |  | Certification of Chief Executive Officer pursuant
    to 18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002*                                                                                                                                                



---



##### Table of Contents



|        |      |  |  |                                             |  |                                                                                                                                                           
|------- | ---- |  |  | ------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |  |  |                                            
|Number  |      |  |  | Description of Exhibit and Method of Filing
|        |      |  |  |                                            
|        | 32.2 |  |  |                                            |  | Certification of Chief Financial Officer pursuant
    to 18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002*
|        | 23.1 |  |  |                                            |  | Consent of Ernst & Young LLP,
    independent accountants*                                                                                                
|        | 24.1 |  |  |                                            |  | Powers of Attorney*                                                                                                                                       
|        | 99.1 |  |  |                                            |  | Cautionary Statement Regarding Forward-Looking
    Statements and Risk Factors*                                                                           



---



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



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