##### 









UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





Form 10-K


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


|              |  |                                                                                                                      |    |      |    |  |  | 
|------------- |  | -------------------------------------------------------------------------------------------------------------------- | -- | ---- | -- |  |  | 
|Item No.      |  | Caption                                                                                                              |    | Page
|              |  |                                                                                                                      |    |     
|PART I       
|1.            |  | Business                                                                                                             |    |      | 2  | 
|2.            |  | Properties                                                                                                           |    |      | 12 | 
|3.            |  | Legal Proceedings                                                                                                    |    |      | 12 | 
|4.            |  | Submission of Matters to a Vote of Security
    Holders                                                              |    |      | 13 | 
|             
|PART II      
|5.            |  | Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities |    |      | 14 | 
|6.            |  | Selected Financial Data                                                                                              |    |      | 16 | 
|7.            |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                            |    |      | 18 | 
|7A.           |  | Quantitative and Qualitative Disclosures
    About Market Risk                                                       |    |      | 33 | 
|8.            |  | Financial Statements and Supplementary
    Data                                                                      |    |      | 34 | 
|9.            |  | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure                             |    |      | 34 | 
|9A.           |  | Controls and Procedures                                                                                              |    |      | 34 | 
|9B.           |  | Other Information                                                                                                    |    |      | 36 | 
|9C.           |  | Report of Independent Registered Public
    Accounting Firm                                                          |    |      | 36 | 
|             
|PART III     
|10.           |  | Directors and Executive Officers of the
    Registrant                                                               |    |      | 37 | 
|11.           |  | Executive Compensation                                                                                               |    |      | 37 | 
|12.           |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters                   |    |      | 37 | 
|13.           |  | Certain Relationships and Related
    Transactions                                                                   |    |      | 38 | 
|14.           |  | Principal Accountant Fees and Services                                                                               |    |      | 38 | 
|             
|PART IV      
|15.           |  | Exhibits, Financial Statement Schedules,
    and Reports on Form 8-K                                                 |    |      | 38 | 
|Signatures    |  |                                                                                                                      | 39 |     
|Exhibit Index |  |                                                                                                                      | 74 |     

1



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PART I


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







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

General






Business History










Electronic Payment Industry




2



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

World EFT Terminal
Markets  Market Size Analysis




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

3



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





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | New Security Standards. The two major security
    initiatives in the industry are EMV and PCI. EMV is a set of
    global specifications established by Europay, MasterCard
    International and Visa International (EMVCo) for cards,
    terminals, and applications to enable global smart card
    transactions and reduce fraud. Deadlines for conversion from
    magnetic stripe to chip card are set for each geographic region.
    The move to comply with EMV specifications is expected to
    significantly promote terminal sales growth especially in
    regions such as Europe, Asia/ Pacific and Latin America. Visa
    International and MasterCard International recently agreed to a
    common methodology for how PIN entry devices (PEDs) are tested
    and approved. These important initiatives, called PCI (Payment
    Card Industry) standards, supersede Visa International and
    Mastercard Internationals respective standards for PED
    security. PCI standards will drive an upgrade of the entire
    installed base of PEDs over time.
|
| |  | Internet Protocol (IP). IP connectivity provides faster
    transmission of transaction data at a lower cost, enabling more
    advanced payment and other value-added applications at the point
    of sale. Major telecommunications carriers have expanded their
    communications networks and lowered fees to allow more merchants
    to utilize IP networks cost effectively. The faster processing
    and lower costs associated with IP connectivity have opened new
    markets for electronic payment systems, many of which have
    previously been primarily cash-only industries such as quick
    service restaurants (QSRs).                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | Contactless. Contactless technology, in particular Radio
    Frequency Identification (RFID), creates a convenient way to pay
    for goods and services. It is an emerging technology and is
    rapidly gaining acceptance. It can deliver extremely fast
    transaction times, reduce waiting times and eliminate the need
    for paper receipts. It is especially suitable for access control
    and use in employee cafeterias, QSRs, gas stations and public
    transit systems.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Wireless. Wireless electronic payment solutions are being
    developed to increase transaction processing speeds and mobility
    for electronic transactions. Wireless terminals provide
    consumers with additional security by allowing them to maintain
    control of their payment card at all times. Additionally, the
    cost per transaction using wireless terminals may be lower than
    that of wired terminals in regions burdened with high
    telecommunications costs such as Europe and Asia/ Pacific. It
    also enables communications in those regions lacking an
    established landline telecommunications infrastructure.                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | Debit. Debit is the dominant payment instrument in most
    international markets and is rapidly growing in the
    U.S. Debit cards allow banks to reach a wider population of
    potential cardholders, thereby increasing the number of
    transactions. The cost of a debit transaction is generally lower
    than that of a credit transaction. As a consequence, electronic
    payment is now an affordable and convenient option in markets
    lacking a significant credit base and for small ticket
    transactions and venues.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Emerging Regions and Market Segments. Increases in the
    cardholder base and the build out of payment system
    infrastructure in China, India, Russia and other developing
    countries will result in terminal sales growth over the next
    several years. In the U.S. and Europe, consumer segments such as
    QSRs and unattended/self service verticals have started using
    POS terminal devices. These markets represent a significant
    opportunity for terminal manufacturers since they have a low
    level of terminal penetration.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Multiple Application. In addition to payment, technology
    enhanced POS and POT terminals have the capability to perform
    concurrent applications like loyalty, stored value, age
    identification, benefits authorization and transfer. The secure
    integration of these applications with payment processing
    provides a comprehensive solution that allows institutions a
    means of competitive differentiation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Non-Traditional Applications. The government sector,
    particularly in the U.S., is a significant opportunity for
    terminal manufacturers. Initiatives such as paper check
    conversion, EBT (Electronic                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

4



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| |  |                                                                                                                                                                                                                                                                                                                                                    
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Benefit Transfer) programs, and the U.S. militarys
    payment programs are all potential drivers of POS/ POT terminal
    deployment. Additionally, POS terminals and transaction
    transport technology are being utilized in the healthcare sector
    to provide fast and secure transmission of eligibility,
    authorization and payment.

Competition








Competitive Strategy






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Further Penetrate Existing Market Segments 
    continue to promote and market the functionality of our product
    portfolio to address the specific needs of key vertical markets.
    We currently provide system solutions that are customized for
    the global needs of our multi-lane and independent retail
    customers. We intend to continue to focus on these attractive
    vertical markets, as well as increase our penetration of new
    markets such as QSRs, ATMs, unattended kiosks and medical
    benefits authorization and transfer.                                                                                                                                                                                                                     
|
| |  | Capitalize on Demand for Wireless
    Transactions  accommodate the growing demand for
    reliable, secure and cost-efficient wireless devices. Potential
    users of this technology include mobile merchants such as taxi
    and delivery drivers, off-site services and merchants in the
    hospitality industry. These merchants are looking for a POS
    terminal that utilizes the convenience of wireless communication
    technologies and the security of being able to receive real-time
    authorizations with the reliability of a wired terminal.                                                                                                                                                                                                              
|
| |  | Capitalize on Terminalization Requirements of Emerging
    Geographic Regions  continue to seek
    opportunities to expand global market share by leveraging our
    product portfolio and distribution channels in emerging,
    high-growth regions in Europe, Asia/ Pacific and Latin America.
    In addition to expanding into new geographic markets, we will
    benefit from a replacement cycle that is ongoing in various
    geographic regions for a variety of reasons including,
    technology (signature capture, RFID, multi-application); new
    security standards (EMV); and newer communications technologies
    (wireless, IP connectivity).                                                                                                              
|
| |  | Focus on Market-Driven Product Development 
    continue to concentrate our R&D resources on new products
    and services that address the current and near future
    requirements of our customers and end-users. We plan to focus
    our development efforts in the following areas: enhanced
    security at both the terminal and transaction level; advanced
    communications technologies such as IP-enabled and wireless
    terminals; multiple-application; contactless technologies such
    as RFID; and products for new verticals such as unattended
    kiosks and ATMs. We will continue to work with our customers to
    ensure our products meet their needs and technical requirements
    and are brought to market in a timely and cost-effective manner.

5



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Improve Total Cost Structure  continue to
    reduce our cost of business to enhance our profitability and
    competitiveness. We intend to further reduce our product costs
    through design improvements and shifting certain high-volume
    production to lower-cost manufacturing regions, such as China.
    We will continue to maintain a market-centric approach to our
    research and product development activities, thus ensuring that
    our efforts are directed at commercially feasible opportunities.
    As our current infrastructure is suitable to our current and
    foreseeable business requirements, our incremental investment
    requirements should be nominal and our existing cost structure
    leverageable at higher volumes. We continue to evaluate our
    direct sales channel infrastructure and will pursue alternate
    channels, such as distributors, in regions where it makes
    economic sense to do so. We also intend to continue to refine
    our foreign exchange hedging program and global tax strategy.
|
| |  | Continue to Pursue Recurring Revenue
    Opportunities  identify and pursue opportunities
    that are complementary to our existing product and service
    offerings and provide recurring revenue. HBNet, our new
    transaction delivery business, is expected to generate long-term
    contracts that will result in recurring revenue. We also are
    expanding our service business in Brazil that provides repair,
    deployment, help-desk and other post-sale services. We will
    continue to pursue similar opportunities that will help us
    transition from our primary business of terminal manufacturing
    to a more dynamic business model that includes both one-time and
    recurring revenue streams.                                                                                                                                                                                                                                                                                                                                   

Product Lines and Services






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





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Optimumtm 
    includes the L4100, a compact, high-performance signature
    capture and PIN entry card payment terminal specifically
    designed for multilane retailers; the T4100, a powerful 32-bit
    desktop terminal for true multi-application; the T2100, a
    handover desktop terminal specifically designed to perform fast
    EMV transactions; the M2100, a mobile terminal that leverages
    the latest wireless communication technologies; and the P2100, a
    EMV-compliant PIN pad for integrated retail environments. Both
    the L4100 and T4100 are RFID-ready.
|
| |  | ICEtm 
    includes the ICE 5500M and the ICE 6000Plusfor the
    multi-lane retail environment; ICE 5500Plusand
    5700Plus, countertop terminals.                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | T7  the T7P and the T7Plus, the best
    combination of features and functions for merchants who need a
    reliable, low-cost POS device.                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Peripherals  includes printers, PIN pads,
    check readers, receipt capture devices, identity verification
    devices and external modems. Our family of durable,
    high-security PIN pads and card acceptance devices are designed
    for either indoor or outdoor use. The products include the S9
    and S9Plus, secure PIN pads built for indoor use, and the
    S1200 and S1300, the outdoor components to our QSR drive-thru
    solution.                                                                                                                                     



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

tact tm


6



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









| |                                                    
| | ---------------------------------------------------
| | NetSet Brazil, NetSet Chile, and Hypercom de Mexico







| |      
| | -----
| | HBNet







7



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Marketing




Sales and Distribution






| |   |                                       
| | - | --------------------------------------
| |  | Payment Processors                    
|
| |  | Distributors/ Resellers               
|
| |  | Large Retailers                       
|
| |  | Financial Institutions                
|
| |  | Independent Sales Organizations (ISOs)









| |   |                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Global Presence. We are one of the largest worldwide
    providers of electronic payment system solutions for use at the
    point of sale. We have developed a global network of sales,
    support and

8



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | development centers. We believe that our experience and global
    presence enable us to market, distribute and service our
    products more effectively, and in more markets than most of our
    competitors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Comprehensive Product Portfolio. We offer a full range of
    products that fulfill the spectrum of market needs. Our product
    portfolio ranges from the low-cost, established and reliable T7
    family of terminals to the recently released, high-performance
    32-bit Optimum family. Our terminals are further complemented by
    peripherals that enhance their capabilities.                                                                                                                                                                                                                                                                                      
|
| |  | Low Total Cost of Ownership. The total cost of ownership
    includes the following costs: deployment, implementation,
    application certification, maintenance and product obsolescence.
    We continue to support and focus on providing our customers with
    a clear migration strategy for new technologies versus a buy
    today, replace tomorrow strategy.                                                                                                                                                                                                                                                                                                         
|
| |  | Technology Adoption. Our technological advances have
    continued to support industry adoption of value-added features,
    such as electronic receipt capture, smart cards, electronic
    signature capture, positive identification and
    multi-application. Our engineering has consistently focused on
    quality and performance, including speed of the transaction,
    number of and type of completed transactions, the speed of
    application download and the user interface. Our modular design
    allows our customers to only select the features that meet their
    specific needs, thereby minimizing their costs and increasing
    their flexibility.

Research and Development






| |   |                                                                       
| | - | ----------------------------------------------------------------------
| |  | Identification of the applicable market and development
    parameters
|
| |  | Development of engineering specifications, including target costs     
|
| |  | Design and engineering                                                
|
| |  | Testing                                                               
|
| |  | Quality assurance                                                     
|
| |  | Pilot production                                                      







9



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Manufacturing and Resource Procurement










Standards, Specifications and Certification Requirements








| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Security Standards. Security standards in our industry
    are promulgated largely by government, regional bank
    associations and card associations. These standards ensure the
    integrity of the payment process and protect the privacy of
    consumers using electronic transaction systems. New standards
    are continually being adopted or proposed as a result of
    worldwide fraud prevention initiatives, increasing the need for
    new security solutions and technologies. We have developed a
    security architecture that incorporates physical, electronic,
    operating system, encryption and application-level security
    measures in order for us to remain compliant with the growing
    variety of international requirements. This architecture is
    particularly successful in countries that have stringent and
    specific security requirements.
|
| |  | EMV Standards. EMVCos goal with the EMV standards
    has been to develop specifications that define a set of
    requirements to ensure interoperability between chip cards and
    terminals on a global basis, regardless of the manufacturer, the
    financial institution, or where the card is used or issued.
    Specific certifications are required for all electronic payment
    systems and their application software. We maintain EMV
    certifications across our applicable product lines.                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Payment Processor/ Financial Institution Requirements. In
    the U.S., we are required to certify our products with payment
    processors. We actively perform the essential Class B and
    Class A product certifications with all the major payment
    processors in the U.S. and international markets. The
    Class B certification process pertains to successful
    testing of the integrity of the host (interface) message                                                                                                                                                                                                                                                                                                                                                                                                                                                       

10



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | formats with the payment processors requirements and
    specifications. Once the Class B certification process is
    completed, the payment processor may elect to take the software
    application and the hardware for additional in-house testing and
    support. Class A certification (which may take up to
    12 months or more) includes more intensive functional and
    user-acceptance testing in order to establish their help-desk
    infrastructure. Class A Certification enables payment
    processors to provide direct support, deploy and promote the new
    products with their merchant base and sales force. We have
    significant experience in attaining these critical payment
    processor certifications and have a large portfolio of
    Class A certifications with major U.S. payment
    processors. We also have obtained certifications from
    international financial institutions and payment processors so
    that our products can be used to process transactions on their
    specific networks.                                            
|
| |  | Telecommunications Regulatory Authority and Carrier
    Requirements. Our products must comply with government
    regulations, including those imposed by the Federal
    Communications Commission and similar telecommunications
    authorities worldwide regarding emissions, hazardous materials,
    radiation, safety and connections with telephone lines and radio
    networks. Our products must also comply with recommendations of
    quasi-regulatory authorities and of standards-setting
    committees. Our products have been certified as compliant with a
    large number of national requirements, including those of the
    Federal Communications Commission and Underwriters Laboratory in
    the U.S., and similar local requirements in other countries.
    Wireless network carriers have standards with which systems
    connected to their networks must comply. In addition to national
    requirements for telecommunications systems, many wireless
    network carriers have their own certification process for
    devices to be used on their networks.

Proprietary Rights








Employees




|                           |  |      |     |  |               |  |       |       |  |  |       | 
|-------------------------- |  | ---- | --- |  | ------------- |  | ----- | ----- |  |  | ----- | 
|                           |  | U.S. |     |  | International |  |       | Total | 
|                           |  |      |     |  |               |  |       |       | 
|Sales and Marketing        |  |      | 84  |  |               |  | 44    |       |  |  | 128   | 
|Operations                 |  |      | 150 |  |               |  | 720   |       |  |  | 870   | 
|Research and Development   |  |      | 144 |  |               |  | 154   |       |  |  | 298   | 
|Finance and Administration |  |      | 75  |  |               |  | 117   |       |  |  | 192   | 
|                           |  |      |     |  |               |  |       |       | 
|Total Employees            |  |      | 453 |  |               |  | 1,035 |       |  |  | 1,488 | 



11



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Available Information









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
















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



Shareholder Class Actions.


Shareholder Derivative Action.


12



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Verve Matters.


Brazilian Central Bank Administrative Proceeding.


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







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



13



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Executive Officers of the Registrant




Christopher S. Alexander


John W. Smolak


William A. Dowlin


Guilherme Blumenthal


Douglas J. Reich





PART II





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




|                    |  |      |      |  |     |   |      | 
|------------------- |  | ---- | ---- |  | --- | - | ---- | 
|                    |  | High |      |  | Low |  
|                    |  |      |      |  |     |  
|Year Ended 12/31/04 |  |      |      |  |     |   |      | 
|First Quarter       |  | $    | 7.96 |  |     | $ | 4.55 | 
|Second Quarter      |  |      | 8.51 |  |     |   | 6.41 | 
|Third Quarter       |  |      | 8.46 |  |     |   | 6.57 | 
|Fourth Quarter      |  |      | 7.45 |  |     |   | 5.25 | 
|Year Ended 12/31/03 |  |      |      |  |     |   |      | 
|First Quarter       |  | $    | 4.37 |  |     | $ | 2.75 | 
|Second Quarter      |  |      | 4.98 |  |     |   | 3.84 | 
|Third Quarter       |  |      | 5.68 |  |     |   | 4.00 | 
|Fourth Quarter      |  |      | 5.59 |  |     |   | 4.50 | 



14



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ISSUER PURCHASES OF EQUITY SECURITIES




15



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



|                                                                                                                  |                                          |                          |            |        |      |   |            |        |   |   |            |         |   |      |            |         |   |   |            |         |  
|----------------------------------------------------------------------------------------------------------------- | ---------------------------------------- | ------------------------ | ---------- | ------ | ---- | - | ---------- | ------ | - | - | ---------- | ------- | - | ---- | ---------- | ------- | - | - | ---------- | ------- | -
|                                                                                                                  |                                          | Years Ended December 31, |           
|                                                                                                                  |                                          |                          |           
|                                                                                                                  |                                          | 2004                     |            |        | 2003 |   |            | 2002   |   |   | 2001       |         |   | 2000 |           
|                                                                                                                  |                                          |                          |            |        |      |   |            |        |   |   |            |         |   |      |           
|Statements of Operations Data:                                                                                    |                                          |                          |            |        |      |   |            |        |   |   |            |         |   |      |            |         |   |   |            |        
|Net revenue                                                                                                       |                                          | $                        | 255,155    |        |      | $ | 231,514    |        |   | $ | 244,965    |         |   | $    | 236,773    |         |   | $ | 269,214    |        
|Costs of revenue(1)                                                                                               |                                          |                          | 151,754    |        |      |   | 135,484    |        |   |   | 153,609    |         |   |      | 145,292    |         |   |   | 164,149    |        
|Write-off of deferred contract costs(2)                                                                           |                                          |                          | 11,305     |        |      |   |           |        |   |   |           |         |   |      |           |         |   |   |           |        
|                                                                                                                  |                                          |                          |            |        |      |   |            |        |   |   |            |         |   |      |           
|                                                                                                                  | Gross profit                             |                          |            | 92,096 |      |   |            | 96,030 |   |   |            | 91,356  |   |      |            | 91,481  |   |   |            | 105,065 |  
|                                                                                                                  |                                          |                          |            |        |      |   |            |        |   |   |            |         |   |      |           
|                                                                                                                  | Percent of net revenue                   |                          |            | 36.1   | %    |   |            | 41.5   | % |   |            | 37.3    | % |      |            | 38.6    | % |   |            | 39.0    | %
|                                                                                                                  |                                          |                          |            |        |      |   |            |        |   |   |            |         |   |      |           
|Research and development                                                                                          |                                          |                          | 27,188     |        |      |   | 24,163     |        |   |   | 24,744     |         |   |      | 28,107     |         |   |   | 38,666     |        
|Selling, general, and administrative                                                                              |                                          |                          | 66,313     |        |      |   | 58,832     |        |   |   | 57,888     |         |   |      | 63,547     |         |   |   | 82,078     |        
|Restructuring charges(1)                                                                                          |                                          |                          |           |        |      |   |           |        |   |   | 4,434      |         |   |      |           |         |   |   |           |        
|                                                                                                                  |                                          |                          |            |        |      |   |            |        |   |   |            |         |   |      |           
|                                                                                                                  | Total expenses                           |                          |            | 93,501 |      |   |            | 82,995 |   |   |            | 87,066  |   |      |            | 91,654  |   |   |            | 120,744 |  
|                                                                                                                  |                                          |                          |            |        |      |   |            |        |   |   |            |         |   |      |           
|                                                                                                                  | Income (loss) from continuing operations |                          | $          | (1,405 | )    |   | $          | 13,035 |   |   | $          | 4,290   |   |      | $          | (173    | ) |   | $          | (15,679 | )
|                                                                                                                  |                                          |                          |            |        |      |   |            |        |   |   |            |         |   |      |           
|Income (loss) before discontinued operations and cumulative
    effect of change in accounting principle(3)(4)(5) |                                          | $                        | (8,662     | )      |      | $ | 3,965      |        |   | $ | (24,502    | )       |   | $    | (11,668    | )       |   | $ | (25,751    | )      
|Income (loss) from discontinued operations(6)(7)                                                                  |                                          |                          |           |        |      |   | 7,233      |        |   |   | (14,816    | )       |   |      | (8,240     | )       |   |   | (5,840     | )      
|Cumulative effect of change in accounting principle(8)                                                            |                                          |                          |           |        |      |   |           |        |   |   | (21,766    | )       |   |      |           |         |   |   |           |        
|                                                                                                                  |                                          |                          |            |        |      |   |            |        |   |   |            |         |   |      |           
|                                                                                                                  | Net income (loss)                        |                          | $          | (8,662 | )    |   | $          | 11,198 |   |   | $          | (61,084 | ) |      | $          | (19,908 | ) |   | $          | (31,591 | )
|                                                                                                                  |                                          |                          |            |        |      |   |            |        |   |   |            |         |   |      |           
|Income (loss) per share:                                                                                          |                                          |                          |            |        |      |   |            |        |   |   |            |         |   |      |            |         |   |   |            |        
|Diluted income (loss) before discontinued operations and
    cumulative effect of change in accounting principle  |                                          | $                        | (0.17      | )      |      | $ | 0.08       |        |   | $ | (0.53      | )       |   | $    | (0.32      | )       |   | $ | (0.75      | )      
|Income (loss) from discontinued operations                                                                        |                                          |                          |           |        |      |   | 0.14       |        |   |   | (0.32      | )       |   |      | (0.22      | )       |   |   | (0.17      | )      
|Cumulative effect of change in accounting principle                                                               |                                          |                          |           |        |      |   |           |        |   |   | (0.47      | )       |   |      |           |         |   |   |           |        
|                                                                                                                  |                                          |                          |            |        |      |   |            |        |   |   |            |         |   |      |           
|                                                                                                                  | Diluted net income (loss) per share      |                          | $          | (0.17  | )    |   | $          | 0.22   |   |   | $          | (1.32   | ) |      | $          | (0.54   | ) |   | $          | (0.92   | )
|                                                                                                                  |                                          |                          |            |        |      |   |            |        |   |   |            |         |   |      |           
|Weighted average diluted shares                                                                                   |                                          |                          | 51,251,975 |        |      |   | 50,350,849 |        |   |   | 46,141,894 |         |   |      | 36,643,819 |         |   |   | 34,183,803 |        
|Balance Sheet Data:                                                                                               |                                          |                          |            |        |      |   |            |        |   |   |            |         |   |      |            |         |   |   |            |        
|Cash and cash equivalents                                                                                         |                                          | $                        | 23,445     |        |      | $ | 65,415     |        |   | $ | 23,069     |         |   | $    | 19,769     |         |   | $ | 13,008     |        
|Marketable securities                                                                                             |                                          |                          | 69,962     |        |      |   | 17,400     |        |   |   |           |         |   |      |           |         |   |   | 2,110      |        
|Working capital                                                                                                   |                                          |                          | 159,789    |        |      |   | 155,048    |        |   |   | 128,179    |         |   |      | 126,088    |         |   |   | 73,429     |        
|Total assets(9)                                                                                                   |                                          |                          | 277,260    |        |      |   | 265,870    |        |   |   | 260,400    |         |   |      | 337,409    |         |   |   | 367,888    |        
|Short and long-term debt                                                                                          |                                          |                          | 8,829      |        |      |   | 9,857      |        |   |   | 25,025     |         |   |      | 67,888     |         |   |   | 100,391    |        
|Total stockholders equity                                                                                        |                                          |                          | 205,372    |        |      |   | 204,297    |        |   |   | 187,972    |         |   |      | 210,226    |         |   |   | 207,004    |        






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | During the 2002 third quarter, we committed to a profit
    improvement plan which included the closure of offices around
    the world in favor of a more cost-effective distributor sales
    model and the termination of our direct manufacturing operations
    in Brazil. Restructuring charges in cost of sales include
    $2.0 million related to the write-down of inventories and
    other related costs. Restructuring charges of $4.4 million,
    which are separately stated, include $3.6 million related
    to the write-down of a building and other fixed

16



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##### 



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | assets to their estimated fair value and $0.8 million
    related to termination costs and other charges. See Note 10
    to the Consolidated Financial Statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|(2) | During the 2004 second quarter, we recorded an
    $11.3 million charge to cost of revenue to write-off all
    costs previously deferred under our long-term contract with the
    Brazilian Health Ministry. Our decision was principally due to
    the lack of timely acknowledgement and acceptance of the pending
    claim, the expiration of the contract during April 2004 and the
    delay in the negotiation of the extension of the maintenance
    element of the contract. We believe that the delay was due to an
    internal scandal within the Brazilian Health Ministry, which in
    no way relates to Hypercom or our pending claim, but
    nevertheless, cast doubt and concern over the ability to
    recover, timely, the amounts owed under the contract. See
    Note 11 to the Consolidated Financial Statements.
|   
|(3) | During the third quarter of 2000, we wrote-off our remaining
    $4.1 million investment in Cirilium Corporation (Cirilium),
    a joint corporate venture that we had formed in late 1999 with
    Inter-Tel Inc. Through September 30, 2000, we had accounted
    for our investment in Cirilium on the equity method and had
    reported $5.8 million in losses in connection with this
    investment. This write-off and the reporting of these losses, in
    the total amount of $9.9 million, contributed to our net
    loss for the year ended December 31, 2000.                                                                                                                                                                                                                                                                   
|   
|(4) | During 2002, we recorded a $2.6 million loss on early
    extinguishment of debt in connection with the early retirement
    of two term loans. The loss resulted from the write-off of
    unamortized debt issuance costs and a loan discount associated
    with our term loans.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|(5) | During 2002, we increased the valuation allowance on our
    deferred tax assets by $20.0 million, of which
    $16.0 million contributed to our loss before discontinued
    operations and cumulative effect of change in accounting
    principle and $4.0 million was recorded in discontinued
    operations related to Golden Eagle Leasing for the period ending
    December 31, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(6) | During September 2002, we identified certain unprofitable
    businesses and, effective with the decision to hold these
    operating units for sale, recorded a loss of $8.0 million
    to write-down the assets to their estimated fair value. For
    comparative purposes, all prior operating results of these
    unprofitable businesses have been reclassified to reflect the
    results of operations in discontinued operations.                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|    | During 2003, we completed the disposition of all remaining
    operating units identified and initially held for sale in
    September 2002. In connection with the disposition of these
    operating units, we recorded a loss on sale of the units
    totaling $3.2 million during 2003 comprised of a
    $0.3 million cash infusion made by us in accordance with
    the terms of the sale, non-cash inventory and fixed asset
    write-downs of $1.4 million, severance costs of
    $0.5 million, the write-off of $0.8 million in
    uncollectible accounts receivable, and facility lease and other
    exit costs of $0.2 million.                                                                                                                                                                                               
|   
|(7) | Consistent with our strategy of disposing of operating units not
    aligned with its core business, we sold our direct finance lease
    subsidiary, Golden Eagle Leasing, effective October 1,
    2003, for $30.0 million gross cash proceeds, and recorded a
    $7.0 million gain net of severance and other exit costs. As
    a result of the disposition, the net operating results of Golden
    Eagle Leasing have been reported within discontinued operations
    for all periods presented.                                                                                                                                                                                                                                                                                                                                       
|   
|(8) | During 2002, we adopted SFAS No. 142, Goodwill and
    Other Intangible Assets. Under the transition provisions of
    SFAS 142, we evaluated our reporting units for impairment
    of goodwill and recorded a $21.8 million write-off
    primarily attributable to goodwill associated with the 2000
    acquisition of Golden Eagle Leasing.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   
|(9) | Certain amounts have been reclassified to conform to the current
    year presentation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        



17



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






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







| |                                
| | -------------------------------
| | Revenue and Accounts Receivable

Revenue Recognition in Financial Statements






18



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##### 





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

Accounting for Leases






| |                           
| | --------------------------
| | Long-term Contract Revenue







| |          
| | ---------
| | Inventory







| |               
| | --------------
| | Deferred Taxes

Accounting for Income
Tax


19



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##### 







| |                             
| | ----------------------------
| | Contingencies and Litigation





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





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



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | For 2004, we recorded a net loss of $8.7 million ($0.17
    loss per share) on revenues of $255.2 million. Our 10.2%
    revenue growth in 2004 was primarily due to bringing our new
    32-bit products to market, expanding our multi-lane and quick
    service restaurant customer (QSR) base, and serving the
    growing European market led by tightening security standards.
    The 2004 results include a second quarter charge of
    $11.3 million to write-off all costs previously deferred
    under our contract with the Brazilian Health Ministry. We
    continue to actively pursue the claim with the Brazilian Health
    Ministry, although ultimate recovery cannot be assured.                                                                                                                                                                                                       
|
| | The increase in revenues was tempered by a decline in gross
    profit as a percent of revenues resulting primarily from the
    aforementioned deferred contract charge in Brazil. To a lesser
    degree, the 2004 gross profit percentage was negatively impacted
    by pricing pressures in certain markets, a lower margin on a
    high volume contract with a domestic processor, sales to high
    volume multi-lane and quick service restaurant customers, and
    incremental inventory reserves attributable to technology
    obsolescence induced by our new product offerings and altered
    market demand for dated products and components. Additionally,
    the 2004 gross profit percentage was negatively impacted by the
    reclassification of certain leases as operating leases rather
    than sales-type leases. See Notes 2 and 19 to the
    Consolidated Financial Statements.
|
| | Operating expenses increased by $10.5 million in 2004, from
    $83.0 million in 2003 to $93.5 million in 2004.
    Operating expenses represented 36.7% of net revenues in 2004
    versus 35.8% in 2003. This increase was primarily due to costs
    for Section 404 of the Sarbanes-Oxley Act compliance and
    higher selling expenses principally related to accelerating
    expansion into certain markets in response to 2005 market
    opportunities and pre-selling costs related to longer sales
    cycle multi-lane contracts.                                                                                                                                                                                                                                                                                                                                                                 
|
| | Non-operating expenses (net interest expense, foreign currency
    losses and other income/ loss) decreased by $1.5 million in
    2004. This decrease is primarily due to higher interest income
    as a result of our increased cash balance and rising interest
    rates and lower interest expense as a result of reduced debt
    fees and the cessation of amortization of debt issuance costs in
    2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

20



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##### 





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We continued to build our cash reserves, increasing our total
    cash, cash equivalents and marketable securities from
    $82.8 million at December 31, 2003 to
    $93.4 million at December 31, 2004. During 2004, our
    working capital increased by $4.7 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| | In 2005, we believe that technology requirements in the various
    marketplaces will continue to shift towards a 32-bit
    architecture driven by market requirements for enhanced
    multi-application and internet protocol (IP) enabling devices
    that significantly reduce transaction processing time. We
    believe our 2005 revenue will exceed the 2004 amount as
    shipments of our 32-bit technology terminals gain momentum led
    by our multi-lane and unattended terminal product lines. We
    anticipate that the average selling price of our products will
    decline in 2005 due to pricing pressures from our competitors
    and we intend to offset, at least partially, the reduction in
    selling price by reducing production costs of our terminals. We
    intend to further reduce our product costs through design
    improvements and shifting certain high-volume production to
    lower-cost manufacturing regions, such as China. We also intend
    to have a market-centric approach to our research and product
    development activities such that we will not incur expenses that
    do not represent known revenue opportunities. We do not
    anticipate any significant further fixed costs and therefore
    expect to leverage both our selling, general and administrative
    expenses on anticipated higher revenues. We continue to evaluate
    our direct sales channel infrastructure and will pursue
    alternate channels, such as distributors, in regions where it
    makes economic sense to do so. We also intend to continue to
    refine our global tax strategy and foreign exchange hedging
    program to lower expenses in these areas. Our projected revenue
    growth, engineered cost reductions and expense savings can not
    be ultimately assured.



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



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



| |          
| | ---------
| | Year 2002



| |                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The year 2002 was highlighted by the completion of a private
    placement of our common stock, significant charges related to
    the carrying value of goodwill and deferred tax assets, the
    implementation of a profit improvement plan and a significant
    improvement in income from continuing operations.
|
| | In the first quarter of 2002, we completed the issuance and sale
    of common stock in a private equity offering. Net proceeds from
    the offering of $36.5 million were used principally to pay
    off high-cost debt.                                                                                           

21



---



##### 



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





| |                                 
| | --------------------------------
| | Results of Continuing Operations



|                                                            |                                                                                                                 |                         |       |      |      |  |       |      |   |  |       |       |   
|----------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------- | ----------------------- | ----- | ---- | ---- |  | ----- | ---- | - |  | ----- | ----- | --
|                                                            |                                                                                                                 | Year Ended December 31, |      
|                                                            |                                                                                                                 |                         |      
|                                                            |                                                                                                                 | 2004                    |       |      | 2003 |  |       | 2002 |  
|                                                            |                                                                                                                 |                         |       |      |      |  |       |      |  
|Net revenue                                                 |                                                                                                                 |                         | 100.0 | %    |      |  | 100.0 | %    |   |  | 100.0 | %    
|Costs of revenue                                            |                                                                                                                 |                         | 59.5  |      |      |  | 58.5  |      |   |  | 62.7  |      
|Write-off of deferred contract costs                        |                                                                                                                 |                         | 4.4   |      |      |  |      |      |   |  |      |      
|                                                            |                                                                                                                 |                         |       |      |      |  |       |      |  
|                                                            | Gross profit                                                                                                    |                         |       | 36.1 |      |  |       | 41.5 |   |  |       | 37.3  |   
|Research and development                                    |                                                                                                                 |                         | 10.7  |      |      |  | 10.4  |      |   |  | 10.1  |      
|Selling, general and administrative                         |                                                                                                                 |                         | 26.0  |      |      |  | 25.4  |      |   |  | 23.6  |      
|Restructuring charges                                       |                                                                                                                 |                         |      |      |      |  |      |      |   |  | 1.8   |      
|                                                            |                                                                                                                 |                         |       |      |      |  |       |      |  
|                                                            | Income (loss) from continuing operations                                                                        |                         |       | (0.6 | )    |  |       | 5.7  |   |  |       | 1.8   |   
|Interest and other income net of interest and other expense |                                                                                                                 |                         |      |      |      |  | (1.0  | )    |   |  | (1.5  | )    
|Foreign currency loss                                       |                                                                                                                 |                         | (1.3  | )    |      |  | (1.2  | )    |   |  | (2.5  | )    
|Loss on early extinguishment of debt                        |                                                                                                                 |                         |      |      |      |  |      |      |   |  | (1.1  | )    
|                                                            |                                                                                                                 |                         |       |      |      |  |       |      |  
|                                                            | Income (loss) before taxes, discontinued operations and
    cumulative effect of change in accounting principle |                         |       | (1.9 | )    |  |       | 3.5  |   |  |       | (3.3  | ) 
|Provision for income taxes                                  |                                                                                                                 |                         | (1.5  | )    |      |  | (1.8  | )    |   |  | (6.7  | )    
|                                                            |                                                                                                                 |                         |       |      |      |  |       |      |  
|                                                            | Income (loss) before discontinued operations and cumulative
    effect of change in accounting principle        |                         |       | (3.4 | )    |  |       | 1.7  |   |  |       | (10.0 | ) 
|Income (loss) from discontinued operations                  |                                                                                                                 |                         |      |      |      |  | 3.1   |      |   |  | (6.0  | )    
|Cumulative effect of change in accounting principle         |                                                                                                                 |                         |      |      |      |  |      |      |   |  | (8.9  | )    
|                                                            |                                                                                                                 |                         |       |      |      |  |       |      |  
|                                                            | Net income (loss)                                                                                               |                         |       | (3.4 | )%   |  |       | 4.8  | % |  |       | (24.9 | )%
|                                                            |                                                                                                                 |                         |       |      |      |  |       |      |  

22



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##### 





|                                |        |                         |      |       |      |  |      |       |   |  |      |       |  
|------------------------------- | ------ | ----------------------- | ---- | ----- | ---- |  | ---- | ----- | - |  | ---- | ----- | -
|                                |        | Year Ended December 31, |     
|                                |        |                         |     
|Revenues by Region              |        | 2004                    |      |       | 2003 |  |      | 2002  |  
|                                |        |                         |      |       |      |  |      |       |  
|United States                   |        |                         | 32.2 | %     |      |  | 33.0 | %     |   |  | 33.9 | %    
|Europe                          |        |                         | 33.6 |       |      |  | 31.1 |       |   |  | 23.8 |      
|Latin America, including Mexico |        |                         | 17.3 |       |      |  | 18.5 |       |   |  | 26.6 |      
|Asia/ Pacific                   |        |                         | 16.9 |       |      |  | 17.4 |       |   |  | 15.7 |      
|                                |        |                         |      |       |      |  |      |       |  
|                                | Totals |                         |      | 100.0 | %    |  |      | 100.0 | % |  |      | 100.0 | %
|                                |        |                         |      |       |      |  |      |       |  







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

|                                         |                                      |                          |        |         |         |  |      |       |      |   |         |          |  |            |      |       |   |   |         |        |  
|---------------------------------------- | ------------------------------------ | ------------------------ | ------ | ------- | ------- |  | ---- | ----- | ---- | - | ------- | -------- |  | ---------- | ---- | ----- | - | - | ------- | ------ | -
|                                         |                                      | Years Ended December 31, |       
|                                         |                                      |                          |       
|                                         |                                      |                          |        | % of    |         |  |      |       | % of |   |         | Increase | 
|                                         |                                      | 2004                     |        |         | Revenue |  |      | 2003  |      |   | Revenue |          |  | (Decrease) |     
|                                         |                                      |                          |        |         |         |  |      |       |      |   |         |          |  |            |     
|                                         |                                      | (Dollars in thousands)   |       
|Net revenue:                             |                                      |                          |        |         |         |  |      |       |      |   |         |          |  |            |      |       |   |   |         |       
|                                         | Product and other                    |                          | $      | 228,109 |         |  |      | 89.4  | %    |   | $       | 208,929  |  |            |      | 90.2  | % |   |         | 19,180 |  
|                                         | Services                             |                          |        | 27,046  |         |  |      | 10.6  |      |   |         | 22,585   |  |            |      | 9.8   |   |   |         | 4,461  |  
|                                         |                                      |                          |        |         |         |  |      |       |      |   |         |          |  |            |     
|                                         | Total net revenue                    |                          |        | 255,155 |         |  |      | 100.0 |      |   |         | 231,514  |  |            |      | 100.0 |   |   |         | 23,641 |  
|                                         |                                      |                          |        |         |         |  |      |       |      |   |         |          |  |            |     
|Costs of revenue:                        |                                      |                          |        |         |         |  |      |       |      |   |         |          |  |            |      |       |   |   |         |       
|                                         | Product and other                    |                          |        | 131,033 |         |  |      | 57.4  |      |   |         | 118,676  |  |            |      | 56.8  |   |   |         | 12,357 |  
|                                         | Write-off of deferred contract costs |                          |        | 11,305  |         |  |      | 5.0   |      |   |         |         |  |            |      |      |   |   |         | 11,305 |  
|                                         | Services                             |                          |        | 20,721  |         |  |      | 76.6  |      |   |         | 16,808   |  |            |      | 74.4  |   |   |         | 3,913  |  
|                                         |                                      |                          |        |         |         |  |      |       |      |   |         |          |  |            |     
|                                         | Total costs of revenue               |                          |        | 163,059 |         |  |      | 63.9  |      |   |         | 135,484  |  |            |      | 58.5  |   |   |         | 27,575 |  
|                                         |                                      |                          |        |         |         |  |      |       |      |   |         |          |  |            |     
|Gross Profit:                            |                                      |                          |        |         |         |  |      |       |      |   |         |          |  |            |      |       |   |   |         |       
|                                         | Product and other                    |                          |        | 85,771  |         |  |      | 37.6  |      |   |         | 90,253   |  |            |      | 43.2  |   |   |         | (4,482 | )
|                                         | Services                             |                          |        | 6,325   |         |  |      | 23.4  |      |   |         | 5,777    |  |            |      | 25.6  |   |   |         | 548    |  
|                                         |                                      |                          |        |         |         |  |      |       |      |   |         |          |  |            |     
|                                         | Gross profit                         |                          |        | 92,096  |         |  |      | 36.1  |      |   |         | 96,030   |  |            |      | 41.5  |   |   |         | (3,934 | )
|Research and development                 |                                      |                          | 27,188 |         |         |  | 10.7 |       |      |   | 24,163  |          |  |            | 10.4 |       |   |   | 3,025   |       
|Selling, general and administrative      |                                      |                          | 66,313 |         |         |  | 26.0 |       |      |   | 58,832  |          |  |            | 25.4 |       |   |   | 7,481   |       
|                                         |                                      |                          |        |         |         |  |      |       |      |   |         |          |  |            |     
|Income (loss) from continuing operations |                                      | $                        | (1,405 | )       |         |  | (0.6 | )%    |      | $ | 13,035  |          |  |            | 5.7  | %     |   | $ | (14,440 | )     
|                                         |                                      |                          |        |         |         |  |      |       |      |   |         |          |  |            |     



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



23



---



##### 















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





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





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



24



---



##### 









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

tact




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





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





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







25



---



##### 







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

|                                    |                        |                          |         |         |         |  |      |       |      |   |         |          |  |            |      |       |   |   |         |         |  
|----------------------------------- | ---------------------- | ------------------------ | ------- | ------- | ------- |  | ---- | ----- | ---- | - | ------- | -------- |  | ---------- | ---- | ----- | - | - | ------- | ------- | -
|                                    |                        | Years Ended December 31, |        
|                                    |                        |                          |        
|                                    |                        |                          |         | % of    |         |  |      |       | % of |   |         | Increase | 
|                                    |                        | 2003                     |         |         | Revenue |  |      | 2002  |      |   | Revenue |          |  | (Decrease) |     
|                                    |                        |                          |         |         |         |  |      |       |      |   |         |          |  |            |     
|                                    |                        | (Dollars in thousands)   |        
|Net revenue:                        |                        |                          |         |         |         |  |      |       |      |   |         |          |  |            |      |       |   |   |         |        
|                                    | Product and other      |                          | $       | 208,929 |         |  |      | 90.2  | %    |   | $       | 223,658  |  |            |      | 91.3  | % |   | $       | (14,729 | )
|                                    | Services               |                          |         | 22,585  |         |  |      | 9.8   |      |   |         | 21,307   |  |            |      | 8.7   |   |   |         | 1,278   |  
|                                    |                        |                          |         |         |         |  |      |       |      |   |         |          |  |            |     
|                                    | Total net revenue      |                          |         | 231,514 |         |  |      | 100.0 |      |   |         | 244,965  |  |            |      | 100.0 |   |   |         | (13,451 | )
|                                    |                        |                          |         |         |         |  |      |       |      |   |         |          |  |            |     
|Costs of revenue:                   |                        |                          |         |         |         |  |      |       |      |   |         |          |  |            |      |       |   |   |         |        
|                                    | Product and other      |                          |         | 118,676 |         |  |      | 56.8  |      |   |         | 134,893  |  |            |      | 60.3  |   |   |         | (16,217 | )
|                                    | Services               |                          |         | 16,808  |         |  |      | 74.4  |      |   |         | 18,716   |  |            |      | 87.8  |   |   |         | (1,908  | )
|                                    |                        |                          |         |         |         |  |      |       |      |   |         |          |  |            |     
|Total costs of revenue              |                        |                          | 135,484 |         |         |  | 58.5 |       |      |   | 153,609 |          |  |            | 62.7 |       |   |   | (18,125 | )      
|                                    |                        |                          |         |         |         |  |      |       |      |   |         |          |  |            |     
|Gross profit:                       |                        |                          |         |         |         |  |      |       |      |   |         |          |  |            |      |       |   |   |         |        
|                                    | Product and other      |                          |         | 90,253  |         |  |      | 43.2  |      |   |         | 88,765   |  |            |      | 39.7  |   |   |         | 1,488   |  
|                                    | Services               |                          |         | 5,777   |         |  |      | 25.6  |      |   |         | 2,591    |  |            |      | 12.2  |   |   |         | 3,186   |  
|                                    |                        |                          |         |         |         |  |      |       |      |   |         |          |  |            |     
|                                    | Total costs of revenue |                          |         | 96,030  |         |  |      | 41.5  |      |   |         | 91,356   |  |            |      | 37.3  |   |   |         | 4,674   |  
|Research and development            |                        |                          | 24,163  |         |         |  | 10.4 |       |      |   | 24,744  |          |  |            | 10.1 |       |   |   | (581    | )      
|Selling, general and administrative |                        |                          | 58,832  |         |         |  | 25.4 |       |      |   | 57,888  |          |  |            | 23.6 |       |   |   | 944     |        
|Restructuring charges               |                        |                          |        |         |         |  |     |       |      |   | 4,434   |          |  |            | 1.8  |       |   |   | (4,434  | )      
|                                    |                        |                          |         |         |         |  |      |       |      |   |         |          |  |            |     
|Income from continuing operations   |                        | $                        | 13,035  |         |         |  | 5.7  | %     |      | $ | 4,290   |          |  |            | 1.8  | %     |   | $ | 8,745   |        
|                                    |                        |                          |         |         |         |  |      |       |      |   |         |          |  |            |     



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



26



---



##### 





| |                                  
| | ---------------------------------
| | Costs of revenue and gross profit













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





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





| |                      
| | ---------------------
| | Restructuring charges



27



---



##### 





|                                       |                                             |                                              |   |       |       | 
|-------------------------------------- | ------------------------------------------- | -------------------------------------------- | - | ----- | ----- | 
|                                       |                                             | 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 | 
|                                       |                                             |                                              |  





| |                                      
| | -------------------------------------
| | Interest expense and foreign currency







| |                                     
| | ------------------------------------
| | Loss on early extinguishment of debt





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





28



---



##### 











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





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



|                                            |  |                         |         |   |      |   |        |        |  |   |         |  
|------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------ | ------ |  | - | ------- | -
|                                            |  | Year Ended December 31, |        
|                                            |  |                         |        
|                                            |  | 2004                    |         |   | 2003 |   |        | Change | 
|                                            |  |                         |         |   |      |   |        |        | 
|Accounts receivable                         |  | $                       | (8,059  | ) |      | $ | (2,213 | )      |  | $ | (5,846  | )
|Net investment in sales-type leases         |  |                         | 2,554   |   |      |   | (6,446 | )      |  |   | 9,000   |  
|Inventories                                 |  |                         | (11,170 | ) |      |   | 1,243  |        |  |   | (12,413 | )
|Income tax receivable                       |  |                         |        |   |      |   | 9,118  |        |  |   | (9,118  | )
|Accounts payable                            |  |                         | 4,712   |   |      |   | 1,587  |        |  |   | 3,125   |  
|Other                                       |  |                         | 3,064   |   |      |   | 2,612  |        |  |   | 452     |  
|                                            |  |                         |         |   |      |   |        |        | 
|Changes in operating assets and liabilities |  | $                       | (8,899  | ) |      | $ | 5,901  |        |  | $ | (14,800 | )
|                                            |  |                         |         |   |      |   |        |        | 





29



---



##### 









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





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





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



30



---



##### 





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



|                                |       |                        |        |        |                  |   |        |           |  |   |           |        |  |               |       |       |  |   |     |       | 
|------------------------------- | ----- | ---------------------- | ------ | ------ | ---------------- | - | ------ | --------- |  | - | --------- | ------ |  | ------------- | ----- | ----- |  | - | --- | ----- | 
|                                |       | Total                  |        |        | Less than 1 Year |   |        | 1-3 Years |  |   | 4-5 Years |        |  | After 5 Years |      
|                                |       |                        |        |        |                  |   |        |           |  |   |           |        |  |               |      
|                                |       | (Dollars in Thousands) |       
|Long-term debt                  |       | $                      | 9,591  |        |                  | $ | 1,100  |           |  | $ | 8,491     |        |  | $             |      |       |  | $ |    |      
|Capital lease obligations       |       |                        | 86     |        |                  |   | 50     |           |  |   | 36        |        |  |               |      |       |  |   |    |      
|Operating leases                |       |                        | 6,440  |        |                  |   | 1,980  |           |  |   | 2,324     |        |  |               | 1,407 |       |  |   | 729 |      
|Covenant not to compete         |       |                        | 265    |        |                  |   | 265    |           |  |   |          |        |  |               |      |       |  |   |    |      
|Minimum purchase obligations(1) |       |                        | 19,225 |        |                  |   | 19,225 |           |  |   |          |        |  |               |      |       |  |   |    |      
|Other long-term liabilities     |       |                        | 3,284  |        |                  |   | 70     |           |  |   | 140       |        |  |               | 2,171 |       |  |   | 903 |      
|                                |       |                        |        |        |                  |   |        |           |  |   |           |        |  |               |      
|                                | Total |                        | $      | 38,891 |                  |   | $      | 22,690    |  |   | $         | 10,991 |  |               | $     | 3,578 |  |   | $   | 1,632 | 
|                                |       |                        |        |        |                  |   |        |           |  |   |           |        |  |               |      






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Minimum purchase obligations include all outstanding obligations
    to purchase goods or services at December 31, 2004
    including agreements that are cancelable without penalty and
    agreements which are enforceable and legally binding. We
    estimate that approximately 17% or less of the outstanding
    purchase obligations at December 31, 2004 are
    non-cancelable due to the customized nature of the order.



| |                                  
| | ---------------------------------
| | Private Placement of Common Stock









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





31



---



##### 







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





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

Consolidation of Variable Interest Entities




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







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

Share-Based Payment Accounting for Stock-Based Compensation Accounting for Stock
Issued to Employees


32



---



##### 



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







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







33



---



##### 
















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








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





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



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





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

Internal
Control  Integrated Framework.


34



---



##### 











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







| |                 
| | ----------------
| | Remediation Plan





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



35



---



##### 








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





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















36



---



##### 
















PART III







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













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








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



37



---



##### 








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








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






PART IV







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





| |                                                                                                
| | -----------------------------------------------------------------------------------------------
| | (1) Audited Consolidated Financial Statements                                                  
|
| | Report of Ernst & Young LLP, Independent Registered
    Public Accounting Firm                 
|
| | Consolidated Balance Sheets at December 31, 2004 and 2003                                      
|
| | Consolidated Statements of Operations for the years ended
    December 31, 2004, 2003, and 2002



| |                                                                                                          
| | ---------------------------------------------------------------------------------------------------------
| | Consolidated Statements of Stockholders Equity for the
    years ended December 31, 2004, 2003, and 2002



| |                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Consolidated Statements of Cash Flows for the years ended
    December 31, 2004, 2003, and 2002                                                                                      
|
| | Notes to Consolidated Financial Statements                                                                                                                                           
|
| | (2) Financial Statement Schedule                                                                                                                                                     
|
| | Schedule II Valuation and Qualifying Accounts                                                                                                                                        
|
| | (All other financial statement schedules have been omitted since
    they are not required, not applicable, or the information is
    otherwise included in the financial statements)





| |                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------
| | 1) Form 8-K dated October 7, 2004, announcing
    certain expected financial results for the quarter ended
    September 30, 2004.          
|
| | 2) Form 8-K dated October 29, 2004, announcing
    our results of operations for the quarter ended
    September 30, 2004.                  
|
| | 3) Form 8-K dated November 2, 2004, announcing
    the election of Phillip J. Riese to our Board of Directors.                              
|
| | 4) Form 8-K dated December 20, 2004, announcing
    certain expected financial results for the quarter and year
    ended December 31, 2004.



38



---



##### 






SIGNATURES






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



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

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





|                                                           |  |                                                                          |  | 
|---------------------------------------------------------- |  | ------------------------------------------------------------------------ |  | 
|Signature                                                  |  | Title                                                                   
|                                                           |  |                                                                         
|(1) Principal Executive, Financial and Accounting Officers |  |                                                                         
|                                                          
|/s/ C.S. AlexanderChristopher
    S. Alexander             |  | Chairman of the Board, Chief Executive Officer
    and President        
|                                                          
|/s/ John W. SmolakJohn
    W. Smolak                       |  | Executive Vice President, Chief Financial
    and Administrative Officer
|                                                          
|(2) Directors                                              |  |                                                                         
|                                                          
|*Daniel
    D. Diethelm                                    |  | Director                                                                
|                                                          
|*William
    Keiper                                        |  | Director                                                                
|                                                          
|*Phillip
    J. Riese                                      |  | Director                                                                
|                                                          
|*Norman
    Stout                                          |  | Director                                                                



|     |  |                                    |  | 
|---- |  | ---------------------------------- |  | 
|*By: |  | /s/ C.S. AlexanderAttorney-in-Fact |  | 

39



---



##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
















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





40



---



##### 



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



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##### 



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



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##### 



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.

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##### 






EXHIBIT INDEX


|        |    |    |  |                                             |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                 
|------- | -- | -- |  | ------------------------------------------- |  | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |    |  |                                            
|Number  |    |    |  | Description of Exhibit and Method of Filing
|        |    |    |  |                                            
|        | 3  | .1 |  |                                             |  |  |  | Amended and Restated Certificate of Incorporation of Hypercom
    Corporation (incorporated by reference to Exhibit 3.1 to
    Hypercom Corporations Registration Statement on
    Form S-1 (Registration No. 333-35461))                                                                                                                                                                      
|        | 3  | .2 |  |                                             |  |  |  | Amended and Restated Bylaws of Hypercom Corporation
    (incorporated by reference to Exhibit 3.2 to Hypercom
    Corporations Annual Report on Form 10-K for the year ended
    December 31, 2001)                                                                                                                                                                                            
|        | 4  | .1 |  |                                             |  |  |  | Amended and Restated Certificate of Incorporation of Hypercom
    Corporation (incorporated by reference to Exhibit 3.1 to
    Hypercom Corporations Registration Statement on
    Form S-1 (Registration No. 333-35461))                                                                                                                                                                      
|        | 10 | .1 |  |                                             |  |  |  | Lease, as amended, dated June 14, 1996, by and between
    Estes-Samuelson Partnership and Hypercom, Inc. (incorporated by
    reference to Exhibit 10.2 to Hypercom Corporations
    Registration Statement on Form S-1 (Registration
    No. 333-35461))                                                                                                                                     
|        | 10 | .2 |  |                                             |  |  |  | Hypercom Corporation Long-Term Incentive Plan (incorporated by
    reference to Exhibit 4.3 to Hypercom Corporations
    Registration Statement on Form S-8 (Registration
    No. 333-67440))                                                                                                                                                                                                 
|        | 10 | .3 |  |                                             |  |  |  | Amended and Restated Hypercom Corporation 1997 Employee Stock
    Purchase Plan (incorporated by reference to Exhibit 10.1 to
    Hypercom Corporations Quarterly Report on Form 10-Q for
    the quarter ended March 31, 2004)                                                                                                                                                               
|        | 10 | .4 |  |                                             |  |  |  | Hypercom Corporation 2000 Broad-Based Stock Incentive Plan
    (incorporated by reference to Exhibit 10.1 to Hypercom
    Corporations Registration Statement on Form S-8
    (Registration No. 333-97181))                                                                                                                                                                                   
|        | 10 | .5 |  |                                             |  |  |  | Hypercom Corporation Nonemployee Directors Stock Option
    Plan (incorporated by reference to Exhibit 10.1 to Hypercom
    Corporations Registration Statement on Form S-1
    (Registration No. 333-97179))                                                                                                                                                                                
|        | 10 | .6 |  |                                             |  |  |  | Employment Agreement, dated February 4, 2004, between
    Christopher S. Alexander and Hypercom Corporation (incorporated
    by reference to Exhibit 10.6 to Hypercom Corporations
    Annual Report on Form 10-K for the year ended December 31,
    2003)                                                                                                                                  
|        | 10 | .7 |  |                                             |  |  |  | Deferred Compensation Agreement, dated June 3, 2002,
    between Christopher S. Alexander and Hypercom Corporation
    (incorporated by reference to Exhibit 10.5 to Hypercom
    Corporations Quarterly Report on Form 10-Q for the quarter
    ended June 30, 2002)                                                                                                                         
|        | 10 | .8 |  |                                             |  |  |  | Amendment to Deferred Compensation Agreement, dated
    March 16, 2004, between Hypercom Corporation and
    Christopher S. Alexander (incorporated by reference to
    Exhibit 10.2 to Hypercom Corporations Quarterly
    Report on Form 10-Q for the quarter ended March 31,
    2004)                                                                                                     
|        | 10 | .8 |  |                                             |  |  |  | Factory Premises and Quarters Lease Agreement between Hypercom
    Electronic Manufacturing (Shenzhen) Co., Ltd. And Xin He
    Economic Development Company, Fu Yong Town, Boa An District,
    Shenzhen City, dated September 1, 2004 (incorporated by
    reference to Exhibit 10.1 to Hypercom Corporations
    Quarterly Report on Form 10-Q for the quarter ended
    September 30, 2004)
|        | 10 | .8 |  |                                             |  |  |  | Credit Agreement dated January 31, 2005, by and between
    Hypercom Corporation and Wells Fargo N.A. (incorporated by
    reference to Exhibit 10.1 to Hypercom Corporations
    Current Report on Form 8-K dated February 3, 2005)                                                                                                                                                           
|        | 21 | .1 |  |                                             |  |  |  | List of Subsidiaries*                                                                                                                                                                                                                                                                                                                                                                           
|        | 23 | .1 |  |                                             |  |  |  | Consent of Ernst & Young LLP, Independent Registered
    Public Accounting Firm*                                                                                                                                                                                                                                                                                                                
|        | 24 | .1 |  |                                             |  |  |  | Powers of Attorney*                                                                                                                                                                                                                                                                                                                                                                             
|        | 31 | .1 |  |                                             |  |  |  | Certification of Chief Executive Officer, as adopted pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002*                                                                                                                                                                                                                                                                             
|        | 31 | .2 |  |                                             |  |  |  | Certification of Chief Financial Officer, as adopted pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002*                                                                                                                                                                                                                                                                             

74



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##### 



|        |    |    |  |                                             |  |   |  |                                                                                                                                                           
|------- | -- | -- |  | ------------------------------------------- |  | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |    |  |                                            
|Number  |    |    |  | Description of Exhibit and Method of Filing
|        |    |    |  |                                            
|        | 32 | .1 |  |                                             |  |  |  | Certification of Chief Executive Officer pursuant to
    18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002*
|        | 32 | .2 |  |                                             |  |  |  | Certification of Chief Financial Officer pursuant to
    18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002*
|        | 99 | .1 |  |                                             |  |  |  | Cautionary Statement Regarding Forward-Looking Statements and
    Risk Factors*                                                                           






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



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

75