##### 









UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549








Form 10-K/A








Amendment No. 1





|   |  |                                                                                             
|-- |  | --------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934    
|  
|   |  | For the fiscal year ended December 31, 2004                                                 
|  
|or
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934

Commission file number: 1-13521





Hypercom Corporation


(Exact name of registrant as specified in its charter)


|                                                                   |  |                                            
|------------------------------------------------------------------ |  | -------------------------------------------
|Delaware                                                           |  | 86-0828608                                 
|(State or other jurisdiction of
    incorporation or organization) |  | (I.R.S. Employer
    Identification 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                  

þ o


þ o


þ o






DOCUMENTS INCORPORATED BY REFERENCE












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##### 



Explanatory Note


This Amendment No. 1 to Hypercom Corporations Annual
Report on Form 10-K for the year ended December 31,
2004, which was filed with the Securities and Exchange
Commission on March 16, 2005, is being filed to correct a
typographical printing error in Item 9C (the omission of
Ernst & Young LLP at the end of their Report)
and a correction to Note 5 to the Consolidated Financial
Statements under Operating Leases to provide the
correct amount of minimum future rental revenue contractually
due under operating leases. No other changes have been made to
the Form 10-K. Accordingly, pursuant to Rule 12b-15
under the Securities and Exchange Act of 1934, this Amendment
contains the complete text of the Consolidated Financial
Statements and Supplementary Data required by Item 8,
the complete text of Item 9C, and currently dated certifications of
Hypercom Corporationss chief executive officer and chief
financial officer.



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##### 








|         |                                                            
|-------- | -----------------------------------------------------------
|Item 9C. | Report of Independent Registered Public Accounting
    Firm


















36



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##### 










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






















---



##### 






SIGNATURES






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



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

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

















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##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
















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





40



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##### 



HYPERCOM CORPORATION


CONSOLIDATED BALANCE SHEETS


|                                           |                                                                                                                                                                             |                        |         |         |      |   |         |         |  
|------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------- | ------- | ------- | ---- | - | ------- | ------- | -
|                                           |                                                                                                                                                                             | December 31,           |        
|                                           |                                                                                                                                                                             |                        |        
|                                           |                                                                                                                                                                             | 2004                   |         |         | 2003 |  
|                                           |                                                                                                                                                                             |                        |         |         |      |  
|                                           |                                                                                                                                                                             | (Amounts in thousands, |        
|                                           |                                                                                                                                                                             | except share data)     |        
|ASSETS                                    
|Current assets:                            |                                                                                                                                                                             |                        |         |         |      |   |         |        
|                                           | Cash and cash equivalents                                                                                                                                                   |                        | $       | 23,445  |      |   | $       | 65,415  |  
|                                           | Marketable securities                                                                                                                                                       |                        |         | 69,962  |      |   |         | 17,400  |  
|                                           | Accounts receivable, net of allowance for doubtful accounts of
    $2,390 and $993 at December 31, 2004 and 2003, respectively                                              |                        |         | 59,776  |      |   |         | 55,252  |  
|                                           | Current portion of net investment in sales-type leases                                                                                                                      |                        |         | 9,441   |      |   |         | 8,783   |  
|                                           | Inventories                                                                                                                                                                 |                        |         | 44,455  |      |   |         | 42,262  |  
|                                           | Prepaid expenses and other current assets                                                                                                                                   |                        |         | 12,955  |      |   |         | 15,071  |  
|                                           | Long-lived assets held for sale                                                                                                                                             |                        |         |        |      |   |         | 852     |  
|                                           |                                                                                                                                                                             |                        |         |         |      |  
|Total current assets                       |                                                                                                                                                                             |                        | 220,034 |         |      |   | 205,035 |        
|Property, plant and equipment, net         |                                                                                                                                                                             |                        | 29,920  |         |      |   | 28,217  |        
|Net investment in sales-type leases        |                                                                                                                                                                             |                        | 17,668  |         |      |   | 20,236  |        
|Intangible assets, net                     |                                                                                                                                                                             |                        | 4,475   |         |      |   | 3,731   |        
|Other long-term assets                     |                                                                                                                                                                             |                        | 5,163   |         |      |   | 8,651   |        
|                                           |                                                                                                                                                                             |                        |         |         |      |  
|Total assets                               |                                                                                                                                                                             | $                      | 277,260 |         |      | $ | 265,870 |        
|                                           |                                                                                                                                                                             |                        |         |         |      |  
|                                          
|LIABILITIES AND STOCKHOLDERS EQUITY      
|Current liabilities:                       |                                                                                                                                                                             |                        |         |         |      |   |         |        
|                                           | Accounts payable                                                                                                                                                            |                        | $       | 27,817  |      |   | $       | 21,733  |  
|                                           | Accrued payroll and related expenses                                                                                                                                        |                        |         | 8,679   |      |   |         | 8,267   |  
|                                           | Accrued sales and other taxes                                                                                                                                               |                        |         | 8,792   |      |   |         | 8,332   |  
|                                           | Accrued liabilities                                                                                                                                                         |                        |         | 8,308   |      |   |         | 7,534   |  
|                                           | Deferred revenue                                                                                                                                                            |                        |         | 2,768   |      |   |         | 1,373   |  
|                                           | Income taxes payable                                                                                                                                                        |                        |         | 3,411   |      |   |         | 1,690   |  
|                                           | Current portion of long-term debt                                                                                                                                           |                        |         | 470     |      |   |         | 1,058   |  
|                                           |                                                                                                                                                                             |                        |         |         |      |  
|Total current liabilities                  |                                                                                                                                                                             |                        | 60,245  |         |      |   | 49,987  |        
|Long-term debt                             |                                                                                                                                                                             |                        | 8,359   |         |      |   | 8,799   |        
|Other non-current liabilities              |                                                                                                                                                                             |                        | 3,284   |         |      |   | 2,787   |        
|                                           |                                                                                                                                                                             |                        |         |         |      |  
|Total liabilities                          |                                                                                                                                                                             |                        | 71,888  |         |      |   | 61,573  |        
|Stockholders equity:                      |                                                                                                                                                                             |                        |         |         |      |   |         |        
|                                           | Common stock, $.001 par value; 100,000,000 shares
    authorized; 52,254,935 and 49,930,803 shares outstanding at
    December 31, 2004 and December 31, 2003, respectively |                        |         | 52      |      |   |         | 50      |  
|                                           | Additional paid-in capital                                                                                                                                                  |                        |         | 228,567 |      |   |         | 219,983 |  
|                                           | Receivables from stockholders                                                                                                                                               |                        |         |        |      |   |         | (1,056  | )
|                                           | Accumulated deficit                                                                                                                                                         |                        |         | (19,969 | )    |   |         | (11,307 | )
|                                           | Unearned deferred compensation                                                                                                                                              |                        |         | (505    | )    |   |         | (600    | )
|                                           | Treasury stock, 290,211 shares (at cost)                                                                                                                                    |                        |         | (2,773  | )    |   |         | (2,773  | )
|                                           |                                                                                                                                                                             |                        |         |         |      |  
|Total stockholders equity                 |                                                                                                                                                                             |                        | 205,372 |         |      |   | 204,297 |        
|                                           |                                                                                                                                                                             |                        |         |         |      |  
|Total liabilities and stockholders equity |                                                                                                                                                                             | $                      | 277,260 |         |      | $ | 265,870 |        
|                                           |                                                                                                                                                                             |                        |         |         |      |  



41



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HYPERCOM CORPORATION


CONSOLIDATED STATEMENTS OF OPERATIONS


|                                                                                                                        |                                                                                                                           |                                           |            |         |      |   |            |         |  |   |            |         |  
|----------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------- | ---------- | ------- | ---- | - | ---------- | ------- |  | - | ---------- | ------- | -
|                                                                                                                        |                                                                                                                           | Year Ended December 31,                   |           
|                                                                                                                        |                                                                                                                           |                                           |           
|                                                                                                                        |                                                                                                                           | 2004                                      |            |         | 2003 |   |            | 2002    | 
|                                                                                                                        |                                                                                                                           |                                           |            |         |      |   |            |         | 
|                                                                                                                        |                                                                                                                           | (Amounts in thousands, except share data) |           
|Net revenue:                                                                                                            |                                                                                                                           |                                           |            |         |      |   |            |         |  |   |            |        
|                                                                                                                        | Product and other                                                                                                         |                                           | $          | 228,109 |      |   | $          | 208,929 |  |   | $          | 223,658 |  
|                                                                                                                        | Services                                                                                                                  |                                           |            | 27,046  |      |   |            | 22,585  |  |   |            | 21,307  |  
|                                                                                                                        |                                                                                                                           |                                           |            |         |      |   |            |         | 
|                                                                                                                        | Total net revenue                                                                                                         |                                           |            | 255,155 |      |   |            | 231,514 |  |   |            | 244,965 |  
|                                                                                                                        |                                                                                                                           |                                           |            |         |      |   |            |         | 
|Costs of revenue:                                                                                                       |                                                                                                                           |                                           |            |         |      |   |            |         |  |   |            |        
|                                                                                                                        | Product and other                                                                                                         |                                           |            | 131,033 |      |   |            | 118,676 |  |   |            | 134,893 |  
|                                                                                                                        | Services                                                                                                                  |                                           |            | 20,721  |      |   |            | 16,808  |  |   |            | 18,716  |  
|                                                                                                                        | Write-off of deferred contract costs                                                                                      |                                           |            | 11,305  |      |   |            |        |  |   |            |        |  
|                                                                                                                        |                                                                                                                           |                                           |            |         |      |   |            |         | 
|                                                                                                                        | Total costs of revenue                                                                                                    |                                           |            | 163,059 |      |   |            | 135,484 |  |   |            | 153,609 |  
|                                                                                                                        |                                                                                                                           |                                           |            |         |      |   |            |         | 
|Gross profit                                                                                                            |                                                                                                                           |                                           | 92,096     |         |      |   | 96,030     |         |  |   | 91,356     |        
|Operating expenses:                                                                                                     |                                                                                                                           |                                           |            |         |      |   |            |         |  |   |            |        
|                                                                                                                        | Research and development                                                                                                  |                                           |            | 27,188  |      |   |            | 24,163  |  |   |            | 24,744  |  
|                                                                                                                        | Selling, general and administrative                                                                                       |                                           |            | 66,313  |      |   |            | 58,832  |  |   |            | 57,888  |  
|                                                                                                                        | Restructuring charges                                                                                                     |                                           |            |        |      |   |            |        |  |   |            | 4,434   |  
|                                                                                                                        |                                                                                                                           |                                           |            |         |      |   |            |         | 
|                                                                                                                        | Total operating expenses                                                                                                  |                                           |            | 93,501  |      |   |            | 82,995  |  |   |            | 87,066  |  
|                                                                                                                        |                                                                                                                           |                                           |            |         |      |   |            |         | 
|Income (loss) from continuing operations                                                                                |                                                                                                                           |                                           | (1,405     | )       |      |   | 13,035     |         |  |   | 4,290      |        
|Interest income                                                                                                         |                                                                                                                           |                                           | 1,198      |         |      |   | 382        |         |  |   | 253        |        
|Interest expense                                                                                                        |                                                                                                                           |                                           | (1,412     | )       |      |   | (2,474     | )       |  |   | (4,207     | )      
|Foreign currency loss                                                                                                   |                                                                                                                           |                                           | (3,223     | )       |      |   | (2,751     | )       |  |   | (6,062     | )      
|Loss on early extinguishment of debt                                                                                    |                                                                                                                           |                                           |           |         |      |   |           |         |  |   | (2,618     | )      
|Other income (expense)                                                                                                  |                                                                                                                           |                                           | 13         |         |      |   | (113       | )       |  |   | 295        |        
|                                                                                                                        |                                                                                                                           |                                           |            |         |      |   |            |         | 
|Income (loss) before income taxes, discontinued operations, and
    cumulative effect of change in accounting principle |                                                                                                                           |                                           | (4,829     | )       |      |   | 8,079      |         |  |   | (8,049     | )      
|Provision for income taxes                                                                                              |                                                                                                                           |                                           | (3,833     | )       |      |   | (4,114     | )       |  |   | (16,453    | )      
|                                                                                                                        |                                                                                                                           |                                           |            |         |      |   |            |         | 
|Income (loss) before discontinued operations and cumulative
    effect of change in accounting principle                |                                                                                                                           |                                           | (8,662     | )       |      |   | 3,965      |         |  |   | (24,502    | )      
|                                                                                                                        | Income (loss) from discontinued operations, net of related tax
    expense of $3,950 for the year ended December 31, 2002 |                                           |            |        |      |   |            | 7,233   |  |   |            | (14,816 | )
|                                                                                                                        | Cumulative effect of change in accounting principle                                                                       |                                           |            |        |      |   |            |        |  |   |            | (21,766 | )
|                                                                                                                        |                                                                                                                           |                                           |            |         |      |   |            |         | 
|Net income (loss)                                                                                                       |                                                                                                                           | $                                         | (8,662     | )       |      | $ | 11,198     |         |  | $ | (61,084    | )      
|                                                                                                                        |                                                                                                                           |                                           |            |         |      |   |            |         | 
|Basic income (loss) per share:                                                                                          |                                                                                                                           |                                           |            |         |      |   |            |         |  |   |            |        
|Income (loss) before discontinued operations and cumulative
    effect of change in accounting principle                |                                                                                                                           | $                                         | (0.17      | )       |      | $ | 0.08       |         |  | $ | (0.53      | )      
|                                                                                                                        | Income (loss) from discontinued operations                                                                                |                                           |            |        |      |   |            | 0.15    |  |   |            | (0.32   | )
|                                                                                                                        | Cumulative effect of change in accounting principle                                                                       |                                           |            |        |      |   |            |        |  |   |            | (0.47   | )
|                                                                                                                        |                                                                                                                           |                                           |            |         |      |   |            |         | 
|                                                                                                                        | Basic income (loss) per share                                                                                             |                                           | $          | (0.17   | )    |   | $          | 0.23    |  |   | $          | (1.32   | )
|                                                                                                                        |                                                                                                                           |                                           |            |         |      |   |            |         | 
|Diluted income (loss) per share:                                                                                        |                                                                                                                           |                                           |            |         |      |   |            |         |  |   |            |        
|Income (loss) before discontinued operations and cumulative
    effect of change in accounting principle                |                                                                                                                           | $                                         | (0.17      | )       |      | $ | 0.08       |         |  | $ | (0.53      | )      
|                                                                                                                        | Income (loss) from discontinued operations                                                                                |                                           |            |        |      |   |            | 0.14    |  |   |            | (0.32   | )
|                                                                                                                        | Cumulative effect of change in accounting principle                                                                       |                                           |            |        |      |   |            |        |  |   |            | (0.47   | )
|                                                                                                                        |                                                                                                                           |                                           |            |         |      |   |            |         | 
|                                                                                                                        | Diluted income (loss) per share                                                                                           |                                           | $          | (0.17   | )    |   | $          | 0.22    |  |   | $          | (1.32   | )
|                                                                                                                        |                                                                                                                           |                                           |            |         |      |   |            |         | 
|Weighted average basic shares:                                                                                          |                                                                                                                           |                                           | 51,251,975 |         |      |   | 49,145,980 |         |  |   | 46,141,894 |        
|                                                                                                                        |                                                                                                                           |                                           |            |         |      |   |            |         | 
|Weighted average diluted shares:                                                                                        |                                                                                                                           |                                           | 51,251,975 |         |      |   | 50,350,849 |         |  |   | 46,141,894 |        
|                                                                                                                        |                                                                                                                           |                                           |            |         |      |   |            |         | 



42



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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, 2001 |                                             |                                           | 39,795,554 |           |            | $ | 40 |             |  | $ | 175,607      |        |   | $        | (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 |                                             |                                           | 48,014,350 |           |            |   | 48 |             |  |   | 213,987      |        |   |          | (1,056 | )     |              |   | (22,505 | )             |   |   |       |      |   |   | (2,502 | )    |   |   | 187,972 |        
|                                | Issuance of common stock                    |                                           |            | 1,852,351 |            |   |    | 2           |  |   |              | 5,396  |   |          |        |      |              |   |         |              |   |   |        |     |   |   |        |     |   |   |         | 5,398   |  
|                                | Purchase of treasury stock                  |                                           |            | (60,122   | )          |   |    |            |  |   |              |       |   |          |        |      |              |   |         |              |   |   |        |     |   |   |        | (271 | ) |   |         | (271    | )
|                                | 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 |           |            |   | 50 |             |  |   | 219,983      |        |   |          | (1,056 | )     |              |   | (11,307 | )             |   |   | (600   | )    |   |   | (2,773 | )    |   |   | 204,297 |        
|                                | Issuance of common stock                    |                                           |            | 2,274,482 |            |   |    | 2           |  |   |              | 8,274  |   |          |        |      |              |   |         |              |   |   |        |     |   |   |        |     |   |   |         | 8,276   |  
|                                | Issuance of stock under stock award plan    |                                           |            | 60,000    |            |   |    |            |  |   |              | 360    |   |          |        |      |              |   |         |              |   |   |        | (360 | ) |   |        |     |   |   |         |        |  
|                                | Cancelation of stock under stock award plan |                                           |            | (10,350   | )          |   |    |            |  |   |              | (50    | ) |          |        |      |              |   |         |              |   |   |        | 50   |   |   |        |     |   |   |         |        |  
|                                | Recognition of deferred compensation        |                                           |            |          |            |   |    |            |  |   |              |       |   |          |        |      |              |   |         |              |   |   |        | 405  |   |   |        |      |   |   |         | 405     |  
|                                | Decrease in stockholders receivable        |                                           |            |          |            |   |    |            |  |   |              |       |   |          |        | 1,056 |              |   |         |              |   |   |        |     |   |   |        |     |   |   |         | 1,056   |  
|                                | Net loss                                    |                                           |            |          |            |   |    |            |  |   |              |       |   |          |        |      |              |   |         | (8,662        | ) |   |        |     |   |   |        |     |   |   |         | (8,662  | )
|                                |                                             |                                           |            |           |            |   |    |             |  |   |              |        |   |          |        |       |              |   |         |               |   |   |        |     
|Balance as of December 31, 2004 |                                             |                                           | 52,254,935 |           |            | $ | 52 |             |  | $ | 228,567      |        |   | $        |       |       |              | $ | (19,969 | )             |   | $ | (505   | )    |   | $ | (2,773 | )    |   | $ | 205,372 |        
|                                |                                             |                                           |            |           |            |   |    |             |  |   |              |        |   |          |        |       |              |   |         |               |   |   |        |     



43



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HYPERCOM CORPORATION


CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                                                  |                                                                                                                     |                                                         |                                                     |         |        |         |        |         |        |        |        |          |         |        |  
|----------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------- | --------------------------------------------------- | ------- | ------ | ------- | ------ | ------- | ------ | ------ | ------ | -------- | ------- | ------ | -
|                                                                  |                                                                                                                     | Year Ended December 31,                                 |                                                    
|                                                                  |                                                                                                                     |                                                         |                                                    
|                                                                  |                                                                                                                     | 2004                                                    |                                                     |         | 2003   |         |        | 2002    |       
|                                                                  |                                                                                                                     |                                                         |                                                     |         |        |         |        |         |       
|                                                                  |                                                                                                                     | (Amounts in thousands)                                  |                                                    
|Cash flows from continuing operations:                            |                                                                                                                     |                                                         |                                                     |         |        |         |        |         |        |        |        |         
|                                                                  | Net income (loss) from continuing operations                                                                        |                                                         | $                                                   | (8,662  | )      |         | $      | 3,965   |        |        | $      | (46,268  | )      
|                                                                  | Adjustments to reconcile net income (loss) from continuing
    operations to cash provided by operating activities: |                                                         |                                                     |         |        |         |        |         |        |        |        |          |        
|                                                                  |                                                                                                                     | Amortization of deferred financing costs                |                                                     |         | 529    |         |        |         | 869    |        |        |          | 1,165   |       
|                                                                  |                                                                                                                     | Depreciation/amortization                               |                                                     |         | 9,244  |         |        |         | 8,883  |        |        |          | 10,528  |       
|                                                                  |                                                                                                                     | Bad debt expense                                        |                                                     |         | 1,915  |         |        |         | 1,972  |        |        |          | 538     |       
|                                                                  |                                                                                                                     | Provision for losses on sales-type leases               |                                                     |         | 203    |         |        |         | 705    |        |        |          | 691     |       
|                                                                  |                                                                                                                     | Write-down of excess and obsolete inventory             |                                                     |         | 8,320  |         |        |         | 4,668  |        |        |          | 5,957   |       
|                                                                  |                                                                                                                     | Foreign currency (gains) losses                         |                                                     |         | (1,568 | )       |        |         | (3,423 | )      |        |          | 5,225   |       
|                                                                  |                                                                                                                     | Write-off of deferred contract costs                    |                                                     |         | 11,305 |         |        |         |       |        |        |          |        |       
|                                                                  |                                                                                                                     | Non-cash stock compensation                             |                                                     |         | 405    |         |        |         |       |        |        |          |        |       
|                                                                  |                                                                                                                     | Non-cash write-off of marketing rights intangible asset |                                                     |         | 698    |         |        |         |       |        |        |          |        |       
|                                                                  |                                                                                                                     | Deferred income taxes                                   |                                                     |         |       |         |        |         |       |        |        |          | 22,356  |       
|                                                                  |                                                                                                                     | Cumulative effect of change in accounting principle     |                                                     |         |       |         |        |         |       |        |        |          | 21,766  |       
|                                                                  |                                                                                                                     | Loss on early extinguishment of debt                    |                                                     |         |       |         |        |         |       |        |        |          | 2,618   |       
|                                                                  |                                                                                                                     | Non-cash restructuring charges                          |                                                     |         |       |         |        |         |       |        |        |          | 3,572   |       
|                                                                  |                                                                                                                     | Other non-cash                                          |                                                     |         | 594    |         |        |         |       |        |        |          | 485     |       
|                                                                  |                                                                                                                     | Changes in operating assets and liabilities, net        |                                                     |         | (8,899 | )       |        |         | 5,901  |        |        |          | (15,980 | )     
|                                                                  |                                                                                                                     |                                                         |                                                     |         |        |         |        |         |       
|                                                                  |                                                                                                                     |                                                         | Net cash provided by operating activities           |         |        | 14,084  |        |         |        | 23,540 |        |          |         | 12,653 |  
|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                                                                           |                                                         |                                                     | (6,549  | )      |         |        | (4,319  | )      |        |        | (6,017   | )      
|                                                                  | Acquisition of other assets                                                                                         |                                                         |                                                     | (2,173  | )      |         |        | (38     | )      |        |        | (2,436   | )      
|                                                                  | Software development costs capitalized                                                                              |                                                         |                                                     | (2,953  | )      |         |        | (1,552  | )      |        |        | (368     | )      
|                                                                  | Purchase of marketable securities                                                                                   |                                                         |                                                     | (90,239 | )      |         |        | (76,696 | )      |        |        |         |        
|                                                                  | Proceeds from the sale or maturity of marketable securities                                                         |                                                         |                                                     | 37,900  |        |         |        | 59,323  |        |        |        |         |        
|                                                                  | Payments received on notes receivable                                                                               |                                                         |                                                     |        |        |         |        |        |        |        |        | 349      |        
|                                                                  |                                                                                                                     |                                                         |                                                     |         |        |         |        |         |       
|                                                                  |                                                                                                                     |                                                         | Net cash (used in) provided by investing activities |         |        | (64,014 | )      |         |        | 9,230  |        |          |         | (8,472 | )
|Cash flows from financing activities:                             |                                                                                                                     |                                                         |                                                     |         |        |         |        |         |        |        |        |         
|                                                                  | Borrowings on revolving line of credit                                                                              |                                                         |                                                     |        |        |         |        |        |        |        |        | 153,864  |        
|                                                                  | Repayments on revolving line of credit                                                                              |                                                         |                                                     |        |        |         |        |        |        |        |        | (160,754 | )      
|                                                                  | Repayment of bank notes payable and other debt instruments                                                          |                                                         |                                                     | (995    | )      |         |        | (2,415  | )      |        |        | (23,797  | )      
|                                                                  | Advances from/(to) discontinued operations                                                                          |                                                         |                                                     |        |        |         |        | 294     |        |        |        | (2,872   | )      
|                                                                  | Repayment of advances to stockholders                                                                               |                                                         |                                                     | 1,056   |        |         |        |        |        |        |        | 321      |        
|                                                                  | Proceeds from issuance of common stock                                                                              |                                                         |                                                     | 8,276   |        |         |        | 5,398   |        |        |        | 37,555   |        
|                                                                  | Purchase of treasury stock                                                                                          |                                                         |                                                     |        |        |         |        | (271    | )      |        |        |         |        
|                                                                  |                                                                                                                     |                                                         |                                                     |         |        |         |        |         |       
|                                                                  |                                                                                                                     |                                                         | Net cash provided by financing activities           |         |        | 8,337   |        |         |        | 3,006  |        |          |         | 4,317  |  
|Effect of exchange rate changes on cash                           |                                                                                                                     |                                                         | 407                                                 |         |        |         | 728    |         |        |        | (504   | )       
|                                                                  |                                                                                                                     |                                                         |                                                     |         |        |         |        |         |       
|Net (decrease) increase in cash flow from continuing operations   |                                                                                                                     |                                                         | (41,186                                             | )       |        |         | 36,504 |         |        |        | 7,994  |         
|Net (decrease) increase in cash flow from discontinued operations |                                                                                                                     |                                                         | (784                                                | )       |        |         | 5,842  |         |        |        | 1,673  |         
|Cash and cash equivalents, beginning of year                      |                                                                                                                     |                                                         | 65,415                                              |         |        |         | 23,069 |         |        |        | 13,402 |         
|                                                                  |                                                                                                                     |                                                         |                                                     |         |        |         |        |         |       
|Cash and cash equivalents, end of year                            |                                                                                                                     | $                                                       | 23,445                                              |         |        | $       | 65,415 |         |        | $      | 23,069 |         
|                                                                  |                                                                                                                     |                                                         |                                                     |         |        |         |        |         |       



44



---



##### 



HYPERCOM CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2004




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









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



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





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







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





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



45



---



##### 



HYPERCOM CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


December 31, 2004




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





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

Disclosures about Fair Value of
Financial Instruments




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









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



46



---



##### 



HYPERCOM CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


December 31, 2004






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

Accounting for Leases






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





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



|                                |  |            
|------------------------------- |  | -----------
|Building                        |  | 25-50 years
|Computer equipment and software |  | 3-5 years  
|Machinery and equipment         |  | 2-10 years 
|Equipment leased to customers   |  | 1-5 years  
|Furniture and fixtures          |  | 3-10 years 

47



---



##### 



HYPERCOM CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


December 31, 2004






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

Business Combinations Goodwill and Other Intangible
Assets




Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed






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





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



48



---



##### 



HYPERCOM CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


December 31, 2004




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

Revenue Recognition
in Financial Statements






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







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





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





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





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

Accounting for Stock-Based
Compensation


49



---



##### 



HYPERCOM CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


December 31, 2004


Accounting for Stock issued to Employees




|                                                                                                        |  |                         |            |   |      |   |            |      |  |   |            |  
|------------------------------------------------------------------------------------------------------- |  | ----------------------- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                                                        |  | Year Ended December 31, |           
|                                                                                                        |  |                         |           
|                                                                                                        |  | 2004                    |            |   | 2003 |   |            | 2002 | 
|                                                                                                        |  |                         |            |   |      |   |            |      | 
|Net income (loss), as reported                                                                          |  | $                       | (8,662     | ) |      | $ | 11,198     |      |  | $ | (61,084    | )
|Add: Stock-based employee compensation expense included in
    reported net income (loss)               |  |                         | 405        |   |      |   |           |      |  |   |           |  
|Deduct: Total stock-based employee compensation expense
    determined under fair value methods for all |  |                         | (2,407     | ) |      |   | (3,969     | )    |  |   | (8,539     | )
|                                                                                                        |  |                         |            |   |      |   |            |      | 
|Pro forma net income (loss)                                                                             |  | $                       | (10,664    | ) |      | $ | 7,229      |      |  | $ | (69,623    | )
|                                                                                                        |  |                         |            |   |      |   |            |      | 
|Net income (loss) per share:                                                                            |  |                         |            |   |      |   |            |      |  |   |            |  
|Basic, as reported                                                                                      |  | $                       | (0.17      | ) |      | $ | 0.23       |      |  | $ | (1.32      | )
|Basic, pro forma                                                                                        |  | $                       | (0.21      | ) |      | $ | 0.15       |      |  | $ | (1.51      | )
|Diluted, as reported                                                                                    |  | $                       | (0.17      | ) |      | $ | 0.22       |      |  | $ | (1.32      | )
|Diluted, pro forma                                                                                      |  | $                       | (0.21      | ) |      | $ | 0.14       |      |  | $ | (1.51      | )
|Weighted average shares used in pro forma computation:                                                  |  |                         |            |   |      |   |            |      |  |   |            |  
|Basic                                                                                                   |  |                         | 51,251,975 |   |      |   | 49,145,980 |      |  |   | 46,141,894 |  
|Diluted                                                                                                 |  |                         | 51,251,975 |   |      |   | 50,350,849 |      |  |   | 46,141,894 |  



|                                         |  |      |     |   |      |  |     |      |  |  |     |  
|---------------------------------------- |  | ---- | --- | - | ---- |  | --- | ---- |  |  | --- | -
|                                         |  | 2004 |     |   | 2003 |  |     | 2002 | 
|                                         |  |      |     |   |      |  |     |      | 
|Weighted average risk free interest rate |  |      | 3.3 | % |      |  | 2.7 | %    |  |  | 3.8 | %
|Expected life of the options (in years)  |  |      | 5   |   |      |  | 5   |      |  |  | 5   |  
|Expected stock price volatility          |  |      | 84  | % |      |  | 87  | %    |  |  | 87  | %
|Expected dividend yield                  |  |      |    |   |      |  |    |      |  |  |    |  



50



---



##### 



HYPERCOM CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


December 31, 2004


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




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





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







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



51



---



##### 



HYPERCOM CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


December 31, 2004




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



|                                                                                                         |  |                         |            |   |      |   |            |      |  |   |            |  
|-------------------------------------------------------------------------------------------------------- |  | ----------------------- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                                                         |  | Year Ended December 31, |           
|                                                                                                         |  |                         |           
|                                                                                                         |  | 2004                    |            |   | 2003 |   |            | 2002 | 
|                                                                                                         |  |                         |            |   |      |   |            |      | 
|NUMERATOR:                                                                                               |  |                         |            |   |      |   |            |      |  |   |            |  
|Income (loss) before discontinued operations and cumulative
    effect of change in accounting principle |  | $                       | (8,662     | ) |      | $ | 3,965      |      |  | $ | (24,502    | )
|Income (loss) from discontinued operations                                                               |  |                         |           |   |      |   | 7,233      |      |  |   | (14,816    | )
|Cumulative effect of change in accounting principle                                                      |  |                         |           |   |      |   |           |      |  |   | (21,766    | )
|                                                                                                         |  |                         |            |   |      |   |            |      | 
|Net income (loss)                                                                                        |  | $                       | (8,662     | ) |      | $ | 11,198     |      |  | $ | (61,084    | )
|                                                                                                         |  |                         |            |   |      |   |            |      | 
|DENOMINATOR:                                                                                             |  |                         |            |   |      |   |            |      |  |   |            |  
|Denominator for basic income (loss) per share 
    weighted average common shares outstanding           |  |                         | 51,251,975 |   |      |   | 49,145,980 |      |  |   | 46,141,894 |  
|Effect of dilutive securities:                                                                           |  |                         |            |   |      |   |            |      |  |   |            |  
|Common stock options and warrants                                                                        |  |                         |           |   |      |   | 1,204,869  |      |  |   |           |  
|                                                                                                         |  |                         |            |   |      |   |            |      | 
|Denominator for diluted income (loss) per share                                                          |  |                         | 51,251,975 |   |      |   | 50,350,849 |      |  |   | 46,141,894 |  
|                                                                                                         |  |                         |            |   |      |   |            |      | 
|INCOME (LOSS) PER SHARE:                                                                                 |  |                         |            |   |      |   |            |      |  |   |            |  
|Basic:                                                                                                   |  |                         |            |   |      |   |            |      |  |   |            |  
|Income (loss) before discontinued operations and cumulative
    effect of change in accounting principle |  | $                       | (0.17      | ) |      | $ | 0.08       |      |  | $ | (0.53      | )
|Income (loss) from discontinued operations                                                               |  |                         |           |   |      |   | 0.15       |      |  |   | (0.32      | )
|Cumulative effect of change in accounting principle                                                      |  |                         |           |   |      |   |           |      |  |   | (0.47      | )
|                                                                                                         |  |                         |            |   |      |   |            |      | 
|Basic income (loss) per share                                                                            |  | $                       | (0.17      | ) |      | $ | 0.23       |      |  | $ | (1.32      | )
|                                                                                                         |  |                         |            |   |      |   |            |      | 
|Diluted:                                                                                                 |  |                         |            |   |      |   |            |      |  |   |            |  
|Income (loss) before discontinued operations and cumulative
    effect of change in accounting principle |  | $                       | (0.17      | ) |      | $ | 0.08       |      |  | $ | (0.53      | )
|Income (loss) from discontinued operations                                                               |  |                         |           |   |      |   | 0.14       |      |  |   | (0.32      | )
|Cumulative effect of change in accounting principle                                                      |  |                         |           |   |      |   |           |      |  |   | (0.47      | )
|                                                                                                         |  |                         |            |   |      |   |            |      | 
|Diluted income (loss) per share                                                                          |  | $                       | (0.17      | ) |      | $ | 0.22       |      |  | $ | (1.32      | )
|                                                                                                         |  |                         |            |   |      |   |            |      | 





| |                                                    
| | ---------------------------------------------------
| | Impact of Recently Issued Accounting Pronouncements

Share-Based Payment Accounting for Stock-Based Compensation


52



---



##### 



HYPERCOM CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


December 31, 2004


Accounting for Stock Issued to
Employees


Inventory Costs, an amendment of ARB 43, Chapter 4


Exchanges of Non-monetary Assets, an amendment of APB
No. 29, Accounting for Non-monetary Transactions


Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within
the American Jobs Creation Act of 2004


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


53



---



##### 



HYPERCOM CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


December 31, 2004






|   |                                         
|-- | ----------------------------------------
|3. | Concentrations of Credit and Other Risks



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











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







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



54



---



##### 



HYPERCOM CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


December 31, 2004








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







|                                           |  |      |        |  |      |   |        | 
|------------------------------------------ |  | ---- | ------ |  | ---- | - | ------ | 
|                                           |  | 2004 |        |  | 2003 |  
|                                           |  |      |        |  |      |  
|Municipal debt securities                  |  | $    | 14,900 |  |      | $ | 9,900  | 
|U.S. government and agency debt securities |  |      | 35,962 |  |      |   |       | 
|Preferred equity securities                |  |      | 19,100 |  |      |   | 7,500  | 
|                                           |  |      |        |  |      |  
|                                           |  | $    | 69,962 |  |      | $ | 17,400 | 
|                                           |  |      |        |  |      |  





|   |       
|-- | ------
|5. | Leases



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





55



---



##### 



HYPERCOM CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


December 31, 2004




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



|                                      |  |              |        |   |      |   |         |  
|------------------------------------- |  | ------------ | ------ | - | ---- | - | ------- | -
|                                      |  | December 31, |       
|                                      |  |              |       
|                                      |  | 2004         |        |   | 2003 |  
|                                      |  |              |        |   |      |  
|Lease contracts receivable            |  | $            | 31,983 |   |      | $ | 35,030  |  
|Allowance for credit losses           |  |              | (1,198 | ) |      |   | (1,694  | )
|Estimated unguaranteed residual value |  |              | 6,039  |   |      |   | 6,381   |  
|Unearned revenue                      |  |              | (9,715 | ) |      |   | (10,698 | )
|                                      |  |              |        |   |      |  
|Net investment in sales-type leases   |  |              | 27,109 |   |      |   | 29,019  |  
|Less: current portion                 |  |              | (9,441 | ) |      |   | (8,783  | )
|                                      |  |              |        |   |      |  
|Long-term portion                     |  | $            | 17,668 |   |      | $ | 20,236  |  
|                                      |  |              |        |   |      |  



|                          |  |   |        | 
|------------------------- |  | - | ------ | 
|Years Ending December 31, |  |  
|                          |  |  
|2005                      |  | $ | 14,763 | 
|2006                      |  |   | 9,585  | 
|2007                      |  |   | 5,753  | 
|2008                      |  |   | 1,882  | 
|                          |  |   |       
|                          |  | $ | 31,983 | 
|                          |  |   |       



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











|   |            
|-- | -----------
|6. | Inventories



|                 |  |              |        |  |      |   |        | 
|---------------- |  | ------------ | ------ |  | ---- | - | ------ | 
|                 |  | December 31, |       
|                 |  |              |       
|                 |  | 2004         |        |  | 2003 |  
|                 |  |              |        |  |      |  
|Purchased parts  |  | $            | 23,268 |  |      | $ | 17,990 | 
|Work in progress |  |              | 5,918  |  |      |   | 4,581  | 
|Finished goods   |  |              | 15,269 |  |      |   | 19,691 | 
|                 |  |              |        |  |      |  
|                 |  | $            | 44,455 |  |      | $ | 42,262 | 
|                 |  |              |        |  |      |  

56



---



##### 



HYPERCOM CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


December 31, 2004




|   |                              
|-- | -----------------------------
|7. | Property, Plant and Equipment



|                                |  |              |         |   |      |   |         |  
|------------------------------- |  | ------------ | ------- | - | ---- | - | ------- | -
|                                |  | December 31, |        
|                                |  |              |        
|                                |  | 2004         |         |   | 2003 |  
|                                |  |              |         |   |      |  
|Land and improvements           |  | $            | 4,711   |   |      | $ | 4,691   |  
|Buildings                       |  |              | 14,883  |   |      |   | 14,064  |  
|Computer equipment and software |  |              | 18,620  |   |      |   | 19,217  |  
|Machinery and equipment         |  |              | 20,571  |   |      |   | 18,630  |  
|Equipment leased to customers   |  |              | 3,609   |   |      |   | 1,349   |  
|Furniture and fixtures          |  |              | 5,657   |   |      |   | 6,021   |  
|Leasehold improvements          |  |              | 2,942   |   |      |   | 2,999   |  
|Construction in process         |  |              | 1,386   |   |      |   | 499     |  
|                                |  |              |         |   |      |  
|                                |  |              | 72,379  |   |      |   | 67,470  |  
|Less accumulated depreciation   |  |              | (42,459 | ) |      |   | (39,253 | )
|                                |  |              |         |   |      |  
|                                |  | $            | 29,920  |   |      | $ | 28,217  |  
|                                |  |              |         |   |      |  







|   |                               
|-- | ------------------------------
|8. | Goodwill and Intangible Assets



| |         
| | --------
| | Goodwill



57



---



##### 



HYPERCOM CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


December 31, 2004




| |                  
| | -----------------
| | Intangible Assets



|                              |  |              |        |   |      |   |        |  
|----------------------------- |  | ------------ | ------ | - | ---- | - | ------ | -
|                              |  | December 31, |       
|                              |  |              |       
|                              |  | 2004         |        |   | 2003 |  
|                              |  |              |        |   |      |  
|Capitalized software          |  | $            | 11,050 |   |      | $ | 8,456  |  
|Unpatented technology         |  |              | 2,783  |   |      |   | 2,783  |  
|Other                         |  |              | 29     |   |      |   | 1,396  |  
|                              |  |              |        |   |      |  
|                              |  |              | 13,862 |   |      |   | 12,635 |  
|Less accumulated amortization |  |              | (9,387 | ) |      |   | (8,904 | )
|                              |  |              |        |   |      |  
|                              |  | $            | 4,475  |   |      | $ | 3,731  |  
|                              |  |              |        |   |      |  





|                          |  |   |       | 
|------------------------- |  | - | ----- | 
|Years Ending December 31, |  |  
|                          |  |  
|2005                      |  | $ | 1,620 | 
|2006                      |  |   | 1,620 | 
|2007                      |  |   | 1,235 | 
|Thereafter                |  |   |      | 
|                          |  |   |      
|                          |  | $ | 4,475 | 
|                          |  |   |      

58



---



##### 



HYPERCOM CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


December 31, 2004




|   |               
|-- | --------------
|9. | Long-term Debt



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



|                                                                                                                                                                                                                                             |  |              |       |   |      |   |        |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ----- | - | ---- | - | ------ | -
|                                                                                                                                                                                                                                             |  | December 31, |      
|                                                                                                                                                                                                                                             |  |              |      
|                                                                                                                                                                                                                                             |  | 2004         |       |   | 2003 |  
|                                                                                                                                                                                                                                             |  |              |       |   |      |  
|Floating Rate Option Note payable to Bank One, Arizona:payable in semi-annual installments plus interest at a
    variable rate, due April 1, 2019; collateralized by
    unconditional, irrevocable, direct pay letter of credit            |  | $            | 8,677 |   |      | $ | 9,003  |  
|Foothill Senior Secured Credit Facility, as Amended and
    Restated:consisting of a $10 million fully cash
    secured revolving line of credit which bears interest at the
    greater of 4% or prime plus 1%, terminated January 31, 2005 |  |              |      |   |      |   |       |  
|Note payable to third party:collateralized by building
    in Brazil, payable in 51 installments including interest at
    11.5% plus a variable inflation rate factor, matures February
    2005                                            |  |              | 75    |   |      |   | 465    |  
|Lease payable to Banc One Leasing:collateralized by
    equipment, payable in 48 equal monthly installments including
    interest at 8.62%, matured June 2004                                                                               |  |              |      |   |      |   | 236    |  
|Other capital leases                                                                                                                                                                                                                         |  |              | 77    |   |      |   | 153    |  
|                                                                                                                                                                                                                                             |  |              |       |   |      |  
|                                                                                                                                                                                                                                             |  |              | 8,829 |   |      |   | 9,857  |  
|Current portion of long-term debt                                                                                                                                                                                                            |  |              | (470  | ) |      |   | (1,058 | )
|                                                                                                                                                                                                                                             |  |              |       |   |      |  
|Long-term debt                                                                                                                                                                                                                               |  | $            | 8,359 |   |      | $ | 8,799  |  
|                                                                                                                                                                                                                                             |  |              |       |   |      |  







59



---



##### 



HYPERCOM CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


December 31, 2004






|                          |  |   |       | 
|------------------------- |  | - | ----- | 
|Years Ending December 31, |  |  
|                          |  |  
|2005                      |  | $ | 470   | 
|2006                      |  |   | 8,343 | 
|2007                      |  |   | 16    | 
|                          |  |   |      
|                          |  | $ | 8,829 | 
|                          |  |   |      



| |                                     
| | ------------------------------------
| | Loss on Early Extinguishment of Debt





|    |                                                  
|--- | -------------------------------------------------
|10. | Restructuring Charges and Discontinued Operations

Accounting for Costs Associated with
Exit or Disposal Activities, Accounting for the Impairment or
Disposal of Long-Lived Assets.




| |                      
| | ---------------------
| | Restructuring Charges



60



---



##### 



HYPERCOM CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


December 31, 2004




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





| |                        
| | -----------------------
| | Discontinued Operations









61



---



##### 



HYPERCOM CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


December 31, 2004






|    |                    
|--- | -------------------
|11. | Contract Accounting

Accounting for
Performance of Construction-Type and Certain Production-Type
Contracts.








62



---



##### 



HYPERCOM CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


December 31, 2004




|    |             
|--- | ------------
|12. | Income Taxes



|                                   |  |                         |        |   |      |   |         |      |  |   |         |  
|---------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                   |  | Year Ended December 31, |       
|                                   |  |                         |       
|                                   |  | 2004                    |        |   | 2003 |   |         | 2002 | 
|                                   |  |                         |        |   |      |   |         |      | 
|Income (loss) before income taxes: |  |                         |        |   |      |   |         |      |  |   |         |  
|United States                      |  | $                       | 1,048  |   |      | $ | (24,334 | )    |  | $ | (55,956 | )
|Foreign                            |  |                         | (5,877 | ) |      |   | 32,413  |      |  |   | 15,275  |  
|                                   |  |                         |        |   |      |   |         |      | 
|                                   |  | $                       | (4,829 | ) |      | $ | 8,079   |      |  | $ | (40,681 | )
|                                   |  |                         |        |   |      |   |         |      | 



|                  |         |                         |       |       |      |   |       |       |  |   |        |         |  
|----------------- | ------- | ----------------------- | ----- | ----- | ---- | - | ----- | ----- |  | - | ------ | ------- | -
|                  |         | Year Ended December 31, |      
|                  |         |                         |      
|                  |         | 2004                    |       |       | 2003 |   |       | 2002  | 
|                  |         |                         |       |       |      |   |       |       | 
|Current:          |         |                         |       |       |      |   |       |       |  |   |        |        
|                  | Federal |                         | $     |      |      |   | $     |      |  |   | $      | (10,125 | )
|                  | State   |                         |       | 59    |      |   |       | 74    |  |   |        | 15      |  
|                  | Foreign |                         |       | 3,774 |      |   |       | 4,040 |  |   |        | 4,420   |  
|                  |         |                         |       |       |      |   |       |       | 
|                  |         |                         | 3,833 |       |      |   | 4,114 |       |  |   | (5,690 | )      
|Deferred:         |         |                         |       |       |      |   |       |       |  |   |        |        
|                  | Federal |                         |       |      |      |   |       |      |  |   |        | 21,999  |  
|                  | State   |                         |       |      |      |   |       |      |  |   |        | 3,143   |  
|                  | Foreign |                         |       |      |      |   |       |      |  |   |        | 951     |  
|                  |         |                         |       |       |      |   |       |       | 
|                  |         |                         |      |       |      |   |      |       |  |   | 26,093 |        
|                  |         |                         |       |       |      |   |       |       | 
|Total tax expense |         | $                       | 3,833 |       |      | $ | 4,114 |       |  | $ | 20,403 |        
|                  |         |                         |       |       |      |   |       |       | 



|                                                               |  |                         |       |    |      |  |       |      |  |  |       |   
|-------------------------------------------------------------- |  | ----------------------- | ----- | -- | ---- |  | ----- | ---- |  |  | ----- | --
|                                                               |  | Year Ended December 31, |      
|                                                               |  |                         |      
|                                                               |  | 2004                    |       |    | 2003 |  |       | 2002 | 
|                                                               |  |                         |       |    |      |  |       |      | 
|Tax expense (benefit) at the federal statutory rate            |  |                         | (35.0 | )% |      |  | 35.0  | %    |  |  | (35.0 | )%
|State income taxes (benefit), net of federal income tax effect |  |                         | 1.0   |    |      |  | 0.8   |      |  |  |      |   
|Foreign taxes                                                  |  |                         | 119.0 |    |      |  | (88.1 | )    |  |  | 13.2  |   
|Tax credits                                                    |  |                         | (11.0 | )  |      |  | (4.3  | )    |  |  |      |   
|Translation gain (loss)                                        |  |                         | (4.0  | )  |      |  | (16.1 | )    |  |  |      |   
|Change in valuation allowance                                  |  |                         | (41.1 | )  |      |  | 121.2 |      |  |  | 73.7  |   
|UK loss recapture                                              |  |                         | 48.0  |    |      |  |      |      |  |  |      |   
|Other                                                          |  |                         | 2.1   |    |      |  | 1.1   |      |  |  | (1.7  | ) 
|                                                               |  |                         |       |    |      |  |       |      | 
|Effective tax rate                                             |  |                         | 79.0  | %  |      |  | 49.6  | %    |  |  | 50.2  | % 
|                                                               |  |                         |       |    |      |  |       |      | 

63



---



##### 



HYPERCOM CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


December 31, 2004




|                                                |  |              |         |   |      |   |         |  
|----------------------------------------------- |  | ------------ | ------- | - | ---- | - | ------- | -
|                                                |  | December 31, |        
|                                                |  |              |        
|                                                |  | 2004         |         |   | 2003 |  
|                                                |  |              |         |   |      |  
|Deferred tax assets, current:                   |  |              |         |   |      |   |         |  
|Inventory valuation and reserves                |  | $            | 2,552   |   |      | $ | 2,144   |  
|Compensation accruals                           |  |              | 1,059   |   |      |   | 2,628   |  
|Allowance for doubtful accounts                 |  |              | 412     |   |      |   | 264     |  
|Valuation allowance                             |  |              | (4,023  | ) |      |   | (5,036  | )
|                                                |  |              |         |   |      |  
|Deferred tax assets, current                    |  | $            |        |   |      | $ |        |  
|                                                |  |              |         |   |      |  
|Deferred tax assets (liabilities), non-current: |  |              |         |   |      |   |         |  
|Tax loss carry forwards                         |  | $            | 43,400  |   |      | $ | 45,188  |  
|Intangibles                                     |  |              |        |   |      |   | 2,879   |  
|Property, plant and equipment                   |  |              | (274    | ) |      |   | (309    | )
|Other                                           |  |              | 4,339   |   |      |   | 3,827   |  
|Valuation allowance                             |  |              | (47,465 | ) |      |   | (51,585 | )
|                                                |  |              |         |   |      |  
|Net deferred tax assets, non-current            |  | $            |        |   |      | $ |        |  
|                                                |  |              |         |   |      |  













64



---



##### 



HYPERCOM CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


December 31, 2004






|    |                     
|--- | --------------------
|13. | Profit Sharing Plans





|    |                     
|--- | --------------------
|14. | Stockholders Equity



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







|                              |  |                         |            |          |          |   |      |        |          |  |            |   |  |          |      |  |          |  |            |   |  |   |      | 
|----------------------------- |  | ----------------------- | ---------- | -------- | -------- | - | ---- | ------ | -------- |  | ---------- | - |  | -------- | ---- |  | -------- |  | ---------- | - |  | - | ---- | 
|                              |  | Year Ended December 31, |           
|                              |  |                         |           
|                              |  | 2004                    |            |          | 2003     |   |      | 2002   |         
|                              |  |                         |            |          |          |   |      |        |         
|                              |  |                         |            | Weighted |          |   |      |        | Weighted |  |            |   |  | Weighted |     
|                              |  | Shares                  |            |          | Average  |   |      | Shares |          |  | Average    |   |  | Shares   |      |  | Average  | 
|                              |  | Under                   |            |          | Exercise |   |      | Under  |          |  | Exercise   |   |  | Under    |      |  | Exercise | 
|                              |  | Option                  |            |          | Price    |   |      | Option |          |  | Price      |   |  | Option   |      |  | Price    | 
|                              |  |                         |            |          |          |   |      |        |          |  |            |   |  |          |      |  |          | 
|Beginning balance outstanding |  |                         | 10,056,327 |          |          | $ | 6.26 |        |          |  | 10,782,473 |   |  | $        | 6.28 |  |          |  | 10,663,352 |   |  | $ | 6.32 | 
|Granted                       |  |                         | 212,500    |          |          |   | 8.38 |        |          |  | 241,250    |   |  |          | 4.25 |  |          |  | 1,046,000  |   |  |   | 5.64 | 
|Exercised                     |  |                         | (1,492,686 | )        |          |   | 3.44 |        |          |  | (380,142   | ) |  |          | 1.91 |  |          |  | (154,475   | ) |  |   | 3.88 | 
|Forfeited                     |  |                         | (165,850   | )        |          |   | 8.92 |        |          |  | (587,254   | ) |  |          | 8.76 |  |          |  | (772,404   | ) |  |   | 6.50 | 
|                              |  |                         |            |          |          |   |      |        |          |  |            |   |  |          |      |  |          | 
|Ending balance outstanding    |  |                         | 8,610,291  |          |          | $ | 6.75 |        |          |  | 10,056,327 |   |  | $        | 6.26 |  |          |  | 10,782,473 |   |  | $ | 6.28 | 
|                              |  |                         |            |          |          |   |      |        |          |  |            |   |  |          |      |  |          | 
|Exercisable at end of year    |  |                         | 7,065,279  |          |          | $ | 6.98 |        |          |  | 7,382,193  |   |  | $        | 6.57 |  |          |  | 6,502,702  |   |  | $ | 6.42 | 
|                              |  |                         |            |          |          |   |      |        |          |  |            |   |  |          |      |  |          | 

65



---



##### 



HYPERCOM CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


December 31, 2004




|                         |  |                     |           |          |                  |  |                     |          |  |   |        |          |  |          |           |  |  |   |       | 
|------------------------ |  | ------------------- | --------- | -------- | ---------------- |  | ------------------- | -------- |  | - | ------ | -------- |  | -------- | --------- |  |  | - | ----- | 
|                         |  | 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    |          
|                         |  |                     |           |          |                  |  |                     |          |  |   |        |          |  |          |          
|$ 3.50                   |  |                     | 2,500,686 |          |                  |  | 6.14                |          |  | $ | 3.50   |          |  |          | 2,039,419 |  |  | $ | 3.50  | 
|$ 3.52 - 5.23            |  |                     | 890,200   |          |                  |  | 7.13                |          |  |   | 4.36   |          |  |          | 517,900   |  |  |   | 4.45  | 
|$ 5.48 - 6.25            |  |                     | 712,750   |          |                  |  | 7.39                |          |  |   | 6.08   |          |  |          | 424,625   |  |  |   | 6.10  | 
|$ 6.40                   |  |                     | 1,516,375 |          |                  |  | 2.29                |          |  |   | 6.40   |          |  |          | 1,516,375 |  |  |   | 6.40  | 
|$ 6.57 - 9.375           |  |                     | 843,750   |          |                  |  | 5.67                |          |  |   | 8.86   |          |  |          | 706,250   |  |  |   | 9.13  | 
|$ 9.56 - 10.00           |  |                     | 713,600   |          |                  |  | 5.46                |          |  |   | 9.59   |          |  |          | 550,240   |  |  |   | 9.59  | 
|$10.25 - 11.13           |  |                     | 789,710   |          |                  |  | 4.29                |          |  |   | 10.41  |          |  |          | 692,210   |  |  |   | 10.41 | 
|$11.63 - 14.88           |  |                     | 643,220   |          |                  |  | 5.38                |          |  |   | 13.81  |          |  |          | 618,260   |  |  |   | 13.81 | 
|                         |  |                     |           |          |                  |  |                     |          |  |   |        |          |  |          |          
|                         |  |                     | 8,610,291 |          |                  |  |                     |          |  |   |        |          |  |          | 7,065,279 |  |  |   |       | 
|                         |  |                     |           |          |                  |  |                     |          |  |   |        |          |  |          |          



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







| |                               
| | ------------------------------
| | Unearned Deferred Compensation



66



---



##### 



HYPERCOM CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


December 31, 2004




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





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





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





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



67



---



##### 



HYPERCOM CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


December 31, 2004




|    |                              
|--- | -----------------------------
|15. | Commitments and Contingencies



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





|                          |  |   |       | 
|------------------------- |  | - | ----- | 
|Years Ending December 31, |  |  
|                          |  |  
|2005                      |  | $ | 1,980 | 
|2006                      |  |   | 1,256 | 
|2007                      |  |   | 1,068 | 
|2008                      |  |   | 857   | 
|2009                      |  |   | 550   | 
|Thereafter                |  |   | 729   | 
|                          |  |   |      
|                          |  | $ | 6,440 | 
|                          |  |   |      





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







|    |                              
|--- | -----------------------------
|16. | Receivables from Stockholders



68



---



##### 



HYPERCOM CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


December 31, 2004




|    |                                              
|--- | ---------------------------------------------
|17. | Segment, Geographic, and Customer Information



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







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



|                          |  |               |        |  |               |   |        |              |  |   |        |  |  |       |        |  |  |   |         | 
|------------------------- |  | ------------- | ------ |  | ------------- | - | ------ | ------------ |  | - | ------ |  |  | ----- | ------ |  |  | - | ------- | 
|Years Ending December 31, |  | United States |        |  | Latin America |   |        | Asia/Pacific |  |   | Europe |  |  | Total |       
|                          |  |               |        |  |               |   |        |              |  |   |        |  |  |       |       
|2004                      |  |               |        |  |               |   |        |              |  |   |        |  |  |       |        |  |  |   |         | 
|Revenues                  |  | $             | 82,375 |  |               | $ | 44,033 |              |  | $ | 43,006 |  |  | $     | 85,741 |  |  | $ | 255,155 | 
|Long-lived assets         |  |               | 20,555 |  |               |   | 7,159  |              |  |   | 4,260  |  |  |       | 7,584  |  |  |   | 39,558  | 
|2003                      |  |               |        |  |               |   |        |              |  |   |        |  |  |       |        |  |  |   |         | 
|Revenues                  |  | $             | 76,466 |  |               | $ | 42,897 |              |  | $ | 40,193 |  |  | $     | 71,958 |  |  | $ | 231,514 | 
|Long-lived assets         |  |               | 21,307 |  |               |   | 13,624 |              |  |   | 3,450  |  |  |       | 2,218  |  |  |   | 40,599  | 
|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  | 



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





|    |                                                  
|--- | -------------------------------------------------
|18. | Supplemental Cash Flow Information (in thousands)

|                                             |                                           |                         |   |         |      |  |   |        |   |  |   |        |  
|-------------------------------------------- | ----------------------------------------- | ----------------------- | - | ------- | ---- |  | - | ------ | - |  | - | ------ | -
|                                             |                                           | Year Ended December 31, |  
|                                             |                                           |                         |  
|                                             |                                           | 2004                    |   |         | 2003 |  |   | 2002   |  
|                                             |                                           |                         |   |         |      |  |   |        |  
|Changes in operating assets and liabilities: |                                           |                         |   |         |      |  |   |        |   |  |   |       
|                                             | Accounts receivable                       |                         | $ | (8,059  | )    |  | $ | (2,213 | ) |  | $ | 7,716  |  
|                                             | Net investment in sales-type leases       |                         |   | 2,554   |      |  |   | (6,446 | ) |  |   | (4,750 | )
|                                             | Inventories                               |                         |   | (11,170 | )    |  |   | 1,243  |   |  |   | 5,732  |  
|                                             | Income tax receivable                     |                         |   |        |      |  |   | 9,118  |   |  |   | (9,118 | )
|                                             | Prepaid expenses and other current assets |                         |   | (866    | )    |  |   | 910    |   |  |   | 4,019  |  
|                                             | Other assets                              |                         |   | (1,214  | )    |  |   | (368   | ) |  |   | (5,345 | )

69



---



##### 



HYPERCOM CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


December 31, 2004


|                                                    |                                                                                          |                         |   |        |      |  |   |        |   |  |   |         |  
|--------------------------------------------------- | ---------------------------------------------------------------------------------------- | ----------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------- | -
|                                                    |                                                                                          | Year Ended December 31, |  
|                                                    |                                                                                          |                         |  
|                                                    |                                                                                          | 2004                    |   |        | 2003 |  |   | 2002   |  
|                                                    |                                                                                          |                         |   |        |      |  |   |        |  
|                                                    | Accounts payable                                                                         |                         |   | 4,712  |      |  |   | 1,587  |   |  |   | (13,562 | )
|                                                    | Accrued payroll and related expenses                                                     |                         |   | 687    |      |  |   | 1,265  |   |  |   | 696     |  
|                                                    | Accrued sales and other tax                                                              |                         |   | 369    |      |  |   | 175    |   |  |   | 2,285   |  
|                                                    | Accrued liabilities                                                                      |                         |   | 763    |      |  |   | (266   | ) |  |   | (4,491  | )
|                                                    | Deferred revenue                                                                         |                         |   | 1,410  |      |  |   | (625   | ) |  |   | 101     |  
|                                                    | Income taxes payable                                                                     |                         |   | 1,495  |      |  |   | (18    | ) |  |   | 100     |  
|                                                    | Other liabilities                                                                        |                         |   | 420    |      |  |   | 1,539  |   |  |   | 637     |  
|                                                    |                                                                                          |                         |   |        |      |  |   |        |  
|                                                    | Net decrease in operating assets and liabilities                                         |                         | $ | (8,899 | )    |  | $ | 5,901  |   |  | $ | (15,980 | )
|                                                    |                                                                                          |                         |   |        |      |  |   |        |  
|Cash paid during the year by continuing operations: |                                                                                          |                         |   |        |      |  |   |        |   |  |   |        
|                                                    | Interest                                                                                 |                         | $ | (879   | )    |  | $ | (1,064 | ) |  | $ | (2,956  | )
|                                                    | Income taxes                                                                             |                         | $ | (3,659 | )    |  | $ | (2,275 | ) |  | $ | (3,033  | )
|Noncash investing activities:                       |                                                                                          |                         |   |        |      |  |   |        |   |  |   |        
|                                                    | Changes in accounts payable related to the purchase of property,
    plant and equipment |                         | $ |       |      |  | $ |       |   |  | $ | (477    | )
|Noncash financing activities:                       |                                                                                          |                         |   |        |      |  |   |        |   |  |   |        
|                                                    | Issuance of common stock warrants at fair value                                          |                         | $ |       |      |  | $ |       |   |  | $ | (833    | )

70



---



##### 



HYPERCOM CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


December 31, 2004




|    |                                      
|--- | -------------------------------------
|19. | Interim Financial Results (Unaudited)



|                                             |  |         |        |   |            |   |         |         |  |   |         |   |  |             |        |  |  |   |         |  
|-------------------------------------------- |  | ------- | ------ | - | ---------- | - | ------- | ------- |  | - | ------- | - |  | ----------- | ------ |  |  | - | ------- | -
|                                             |  | 2004    |       
|                                             |  |         |       
|                                             |  | First   |        |   | Second     |   |         | Third   |  |   | Fourth  |   |  |            
|                                             |  | Quarter |        |   | Quarter(B) |   |         | Quarter |  |   | Quarter |   |  | Fiscal Year |       
|                                             |  |         |        |   |            |   |         |         |  |   |         |   |  |             |       
|Net revenue, as reported                     |  | $       | 50,763 |   |            | $ | 64,691  |         |  | $ | 63,173  |   |  | $           | 79,703 |  |  | $ | 258,330 |  
|Restatement(A)                               |  |         | (1,121 | ) |            |   | (1,632  | )       |  |   | (422    | ) |  |             |       |  |  |   | (3,175  | )
|                                             |  |         |        |   |            |   |         |         |  |   |         |   |  |             |       
|Net revenue, as restated                     |  | $       | 49,642 |   |            | $ | 63,059  |         |  | $ | 62,751  |   |  | $           | 79,703 |  |  | $ | 255,155 |  
|                                             |  |         |        |   |            |   |         |         |  |   |         |   |  |             |       
|Gross profit, as reported                    |  | $       | 21,246 |   |            | $ | 16,643  |         |  | $ | 24,613  |   |  | $           | 31,750 |  |  | $ | 94,252  |  
|Restatement(A)                               |  |         | (748   | ) |            |   | (1,094  | )       |  |   | (314    | ) |  |             |       |  |  |   | (2,156  | )
|                                             |  |         |        |   |            |   |         |         |  |   |         |   |  |             |       
|Gross profit, as restated                    |  | $       | 20,498 |   |            | $ | 15,549  |         |  | $ | 24,299  |   |  | $           | 31,750 |  |  | $ | 92,096  |  
|                                             |  |         |        |   |            |   |         |         |  |   |         |   |  |             |       
|Net income (loss)                            |  | $       | (2,221 | ) |            | $ | (9,436  | )       |  | $ | 584     |   |  | $           | 4,528  |  |  | $ | (6,545  | )
|Restatement(A)                               |  |         | (752   | ) |            |   | (1,090  | )       |  |   | (275    | ) |  |             |       |  |  |   | (2,117  | )
|                                             |  |         |        |   |            |   |         |         |  |   |         |   |  |             |       
|Net income (loss), as restated               |  | $       | (2,973 | ) |            | $ | (10,526 | )       |  | $ | 309     |   |  | $           | 4,528  |  |  | $ | (8,662  | )
|                                             |  |         |        |   |            |   |         |         |  |   |         |   |  |             |       
|Basic income (loss) per share, as reported   |  | $       | (0.04  | ) |            | $ | (0.18   | )       |  | $ | 0.01    |   |  | $           | 0.09   |  |  | $ | (0.12   | )
|Restatement(A)                               |  |         | (0.02  | ) |            |   | (0.02   | )       |  |   |        |   |  |             |       |  |  |   | (0.05   | )
|                                             |  |         |        |   |            |   |         |         |  |   |         |   |  |             |       
|Basic income (loss) per share, as restated   |  | $       | (0.06  | ) |            | $ | (0.20   | )       |  | $ | 0.01    |   |  | $           | 0.09   |  |  | $ | (0.17   | )
|                                             |  |         |        |   |            |   |         |         |  |   |         |   |  |             |       
|Diluted income (loss) per share, as reported |  | $       | (0.04  | ) |            | $ | (0.18   | )       |  | $ | 0.01    |   |  | $           | 0.08   |  |  | $ | (0.13   | )
|Restatement(A)                               |  |         | (0.02  | ) |            |   | (0.02   | )       |  |   |        |   |  |             |       |  |  |   | (0.04   | )
|                                             |  |         |        |   |            |   |         |         |  |   |         |   |  |             |       
|Diluted income (loss) per share, as restated |  | $       | (0.06  | ) |            | $ | (0.20   | )       |  | $ | 0.01    |   |  | $           | 0.08   |  |  | $ | (0.17   | )
|                                             |  |         |        |   |            |   |         |         |  |   |         |   |  |             |       

71



---



##### 



HYPERCOM CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


December 31, 2004


|                                             |                                              |            |        |       |            |   |        |            |   |   |            |      |  |             |        |      |  |   |         |      | 
|-------------------------------------------- | -------------------------------------------- | ---------- | ------ | ----- | ---------- | - | ------ | ---------- | - | - | ---------- | ---- |  | ----------- | ------ | ---- |  | - | ------- | ---- | 
|                                             |                                              | 2003       |       
|                                             |                                              |            |       
|                                             |                                              | First      |        |       | Second     |   |        | Third      |   |   | Fourth     |      |  |            
|                                             |                                              | Quarter(C) |        |       | Quarter(C) |   |        | Quarter(C) |   |   | Quarter(C) |      |  | 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) 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 | 
|                                             |                                              |            |        |       |            |   |        |            |   |   |            |      |  |             |       






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(A) | During the fourth quarter of 2004, the Company determined that
    certain leases originated during the first three quarters of
    2004 by the Company were incorrectly accounted for as sales-type
    leases, rather than operating leases. This accounting error,
    which relates to approximately 3,200 leases, resulted in an
    overstatement of net revenue and net operating profit for the
    first three quarters of 2004. Accordingly, the first three
    quarters have been restated to properly account for the leases
    as operating leases (Note 2).



|    |  |                                                                                                                                                                                                                                                                                                                                                                                                             
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(B) |  | During the second quarter of 2004, the Company recorded an
    $12.9 million charge to operations for all remaining
    amounts recorded under the contract. The charge consisted of an
    $11.3 million write-off of deferred contract costs, which
    was recorded in cost of revenues and a $1.6 million reserve
    against accounts receivable, which was recorded in selling
    expenses (Note 11).
|   
|(C) |  | During the fourth quarter of 2003, the Company sold its direct
    finance lease subsidiary, Golden Eagle Leasing, and recorded an
    $7.0 million gain net of severance and other closing costs.
    As a result of the disposition, the net operating results of
    Golden Eagle Leasing have been reported within discontinued
    operations for all periods presented (Note 10).                     

72



---



##### 



FINANCIAL STATEMENT SCHEDULE


SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS


|                                                 |  |                        |       |            |            |   |       |          |  |   |            |  |            |        |        |   |  |   |       | 
|------------------------------------------------ |  | ---------------------- | ----- | ---------- | ---------- | - | ----- | -------- |  | - | ---------- |  | ---------- | ------ | ------ | - |  | - | ----- | 
|                                                 |  |                        |       | Additions  |            |   |      
|                                                 |  |                        |       |            |            |   |      
|                                                 |  |                        |       | Charges to |            |   |       |          | 
|                                                 |  |                        |       | Costs and  |            |   |       |          | 
|                                                 |  | Balance at             |       |            | Expense in |   |       | Charged  |  |   |            |  | Balance at |       
|                                                 |  | Beginning              |       |            | Continuing |   |       | to Other |  |   | Deductions |  |            | End of |       
|                                                 |  | of Period              |       |            | Operations |   |       | Accounts |  |   | (A)        |  |            | Period |       
|                                                 |  |                        |       |            |            |   |       |          |  |   |            |  |            |        |       
|                                                 |  | (Amounts in thousands) |      
|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 | 
|Year Ended December 31, 2004:                    |  |                        |       |            |            |   |       |          |  |   |            |  |            |        |        |   |  |   |       | 
|Allowance for doubtful accounts                  |  | $                      | 993   |            |            | $ | 1,915 |          |  | $ |           |  |            | $      | (518   | ) |  | $ | 2,390 | 
|Allowance for credit losses on sales-type leases |  |                        | 1,694 |            |            |   | 203   |          |  |   |           |  |            |        | (699   | ) |  |   | 1,198 | 






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

73