UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 
 ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934For the quarterly period ended June 30, 2010ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934For the transition period from ________________ to ________________
  Commission file number:  1-13521
  
 HYPERCOM CORPORATION
 (Exact name of registrant as specified in its charter)
 
 Delaware

86-0828608(State or other jurisdiction of

(I.R.S. Employerincorporation or organization)

Identification No.)8888 East Raintree Drive, Suite 300

Scottsdale, Arizona

85260(Address of principal executive offices)

(Zip Code)
  (480) 642-5000
 (Registrant’s telephone number, including area code)
 
 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
  Yes [ √ ]                                           No [   ]
 
 Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
  Yes [   ]                                           No [   ]
 
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
  Large accelerated filer [   ]                                                                                                         Accelerated filer [ √ ]
  Non-accelerated filer [   ]                                                                                                           Smaller reporting company [   ]
 (Do not check if a smaller reporting company)
 
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
  Yes [   ]No [ √ ]
 
 Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
 Class

Outstanding at August 6, 2010Common Stock, $.001 par value per share

55,219,470 shares
   
  HYPERCOM CORPORATION
 INDEX
 
 PagePART I.
FINANCIAL INFORMATIONItem 1.
Financial Statements
1Unaudited Consolidated Balance Sheets – June 30, 2010 and December 31, 2009
1Unaudited Consolidated Statements of Operations – Three and six months ended June 30, 2010 and 2009
2Unaudited Consolidated Statements of Cash Flows –Six months ended June 30, 2010 and 2009
3Notes to the Consolidated Financial Statements, June 30, 2010 (Unaudited)
4Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
16Item 3.
Quantitative and Qualitative Disclosures About Market Risk
23Item 4.
Controls and Procedures
24PART II.
OTHER INFORMATIONItem 1.
Legal Proceedings
24Item 1A.
Risk Factors
25Item 6.
Exhibits
27Signatures
28Exhibit 31.1Exhibit 31.2Exhibit 32
   - ii -
 Table of Contents
 PART I — FINANCIAL INFORMATION
 
 Item 1.  Financial Statements.
 HYPERCOM CORPORATIONCONSOLIDATED BALANCE SHEETS(Unaudited)June 30,


December 31,2010


2009Dollars in thousands, except share dataASSETSCurrent assets:Cash and cash equivalents

$
33,273

$
55,041Accounts receivable, net of allowance for doubtfulaccounts of $3,310 and $3,240, respectively


82,984


86,031Current portion of net investment in sales-type leases


4,087


5,235Inventories


34,303


29,363Prepaid expenses and other current assets


6,104


5,345Deferred income taxes


1,104


1,311Prepaid taxes


5,674


3,510Current portion of assets held for sale


5,560


5,241Total current assets


173,089


191,077Property, plant and equipment, net


21,818


24,304Net investment in sales-type leases


5,413


5,046Intangible assets, net


41,234


49,579Goodwill


23,877


28,536Other long-term assets


10,159


8,346Total assets

$
275,590

$
306,888LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities:Accounts payable

$
46,699

$
52,355Accrued payroll and related expenses


12,232


16,152Accrued sales and other taxes


5,240


8,116Product warranty liabilities


4,971


5,444Restructuring liabilities


5,746


8,265Accrued other liabilities


19,286


20,677Deferred revenue


12,967


11,559Deferred tax liabilities


23


22Income taxes payable


4,791


6,568Current portion of liabilities held for sale


1,613


1,244Total current liabilities


113,568


130,402Deferred tax liabilities


11,171


14,902Long term debt, net of discount


58,839


56,076Other liabilities


14,360


14,612Total liabilities


197,938


215,992Commitments and contingenciesStockholders' equity:Common stock, $.001 par value; 100,000,000 shares authorized;authorized; 55,219,470 and 54,622,360 shares outstandingat June 30, 2010 and December 31, 2009, respectively


58


58Additional paid-in capital


276,019


275,001Accumulated deficit


(146,994)


(146,113)Treasury stock, 3,196,353 and 3,162,248 shares (at cost) atJune 30, 2010 and December 31, 2009, respectively


(22,911
)

(22,749
)Accumulated other comprehensive loss


(28,520
)

(15,301
)Total stockholders' equity


77,652


90,896Total liabilities and stockholders' equity

$
275,590

$
306,888The accompanying notes are an integral part of these consolidated financial statements.
   - 1 -
 Table of Contents
  HYPERCOM CORPORATIONCONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)Three Months Ended

June 30,


Six Months Ended

June 30,Dollars in thousands, except share data

2010


2009


2010


2009Net revenue:Products

$
80,963


$
79,234


$
155,082


$
137,056Services


22,958



26,341



47,594



51,313Total net revenue


103,921



105,575



202,676



188,369Costs of revenue:Products


53,612



49,711



100,296



88,578Services


17,877



20,944



34,524



39,955Amortization of purchased intangible assets


315



706



1,019



1,381Total costs of revenue


71,804



71,361



135,839



129,914Gross profit


32,117



34,214



66,837



58,455Operating expenses:Research and development


10,454



10,512



22,565



21,301Selling, general and administrative


17,484



18,350



35,783



36,728Amortization of purchased intangible assets


1,281



1,500



2,821



2,929Gain on sale of real property


—



—



(674
)


—Total operating expenses


29,219



30,362



60,495



60,958Income (loss) from operations


2,898



3,852



6,342



(2,503
)Interest income


76



52



272



129Interest expense


(3,224
)


(2,526
)


(6,010
)


(4,976
)Foreign currency gain (loss)


(1,616
)


627



(2,161
)


(70
)Other income (expense)


(10
)


309



(23
)


321Income (loss) before income taxes anddiscontinued operations


(1,876
)


2,314



(1,580
)


(7,099
)Benefit (provision) for income taxes


663



(311
)


645



(752
)Income (loss) before discontinued operations


(1,213
)


2,003



(935
)


(7,851
)Income (loss) from discontinued operations


(43
)


(748
)


54



(819
)Net income (loss)

$
(1,256
)

$
1,255


$
(881
)

$
(8,670
)Basic and diluted income (loss) per share:Loss before discontinued operations

$
(0.02
)

$
0.04


$
(0.02
)

$
(0.15
)Income (loss) from discontinued operations


—



(0.02
)


—



(0.01
)Basic and diluted loss per share

$
(0.02
)

$
0.02


$
(0.02
)

$
(0.16
)Shares used in computing net income (loss) percommon share:Basic


53,853,334



53,514,573



53,749,304



53,459,082Diluted


53,853,334



53,748,345



53,749,304



53,459,082The accompanying notes are an integral part of these consolidated financial statements.
   - 2 -
 Table of Contents
  HYPERCOM CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)Six Months Ended

June 30,Dollars in thousands

2010


2009Cash flows from continuing operations:Net loss

$
(881
)

$
(8,670
)Adjustments to reconcile net lossto net cash provided by (used in) operating activities:Depreciation and amortization


5,125



4,837Amortization of purchased intangibles


3,841



4,310Interest conversion to debt


3,437



3,271Amortization of debt issuance costs


64



64Amortization of discount on notes payable


2,326



1,475Provision for doubtful accounts


240



1,034Provision for excess and obsolete inventory


1,494



1,136Provision for warranty and other product charges


2,230



2,479Foreign currency losses (gains)


1,720



(1,429
)Gain on sale of real property


(674
)


—Non-cash stock-based compensation


817



1,131Other non-cash charges


239



1,082Deferred income tax benefit


(1,055
)


(575
)Changes in operating assets and liabilities, net


(31,297
)


(3,175
)Net cash provided by (used in) operating activities


(12,374
)


6,970Cash flows from investing activities:Purchases of property, plant and equipment


(3,093
)


(3,898
)Deposit received on pending sale of real property


1,665



—Proceeds from the sale of a majority interest in a business


1,000



—Cash paid for acquisitions, net of cash acquired


(1,030
)


(37
)Software development costs capitalized


(2,198
)


(248
)Purchases of short-term investments


—



(1,376
)Proceeds from the sale or maturity of short-term investments


—



1,875Net cash used in investing activities


(3,656
)


(3,684
)Cash flows from financing activities:Borrowings on revolving line of credit


—



7,800Repayment of bank notes payable


(3,000
)


(7,985
)Purchase of treasury stock


(162
)


—Proceeds from issuance of common stock


194



90Net cash used in financing activities


(2,968
)


(95
)Effect of exchange rate changes on cash and cash equivalents


(2,889
)


1,363Net increase (decrease) in cash from continuing operations


(21,887
)


4,554Net cash provided by operating activities fromdiscontinued operations


119



74Cash and cash equivalents, beginning of the period


55,041



35,582Cash and cash equivalents, end of the period

$
33,273


$
40,210The accompanying notes are an integral part of these consolidated financial statements.
 - 3 -
 Table of Contents
  HYPERCOM CORPORATION
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2010
 (Unaudited)
 
 
 1. Basis of Presentation
  The consolidated financial statements include the accounts of Hypercom Corporation and its wholly-owned subsidiaries (“Hypercom” or the “Company”). The Company owns 100% of the outstanding stock of all of its subsidiaries with the exception of one subsidiary in Thailand. For this subsidiary, the Company owns a controlling interest and certain nominee shareholders own the remaining shares. The Company is in the process of acquiring the remaining shares from the nominee shareholders. All of the Company’s subsidiaries are included in the consolidated financial statements and all significant intercompany accounts and transactions have been eliminated in consolidation.
  The accompanying interim consolidated financial statements have been prepared in conformity with United States generally accepted accounting principles (“GAAP”), consistent in all material respects with those applied in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009. The financial information is unaudited but reflects all adjustments, consisting only of normal recurring accruals, which are, in the opinion of the Company’s management, necessary to a fair statement of the results for the interim periods presented. Interim results are not necessarily indicative of results for a full year. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009 from which the December 31, 2009 balance sheet amounts herein were derived.
 Certain prior period amounts have been reclassified to conform to the current period presentation.
 Impact of Recently Issued Accounting Pronouncements
  In October 2009, the Financial Accounting Standards Board (“FASB”) issued amendments to the accounting and disclosure for revenue recognition. These amendments, effective for fiscal years beginning on or after June 15, 2010, modify the criteria for recognizing revenue in multiple element arrangements and the scope of what constitutes a non-software deliverable. The Company will adopt this guidance on January 1, 2011, and adoption is not expected to have a material impact on the Company’s results of operations or financial condition.
  In March 2010, the FASB reached a consensus to issue an amendment to the accounting for revenue arrangements under which a vendor satisfies its performance obligations to a customer over a period of time, when the deliverable or unit of accounting is not within the scope of other authoritative literature, and when the arrangement consideration is contingent upon the achievement of a milestone. The amendment defines a milestone and clarifies whether an entity may recognize consideration earned from the achievement of a milestone in the period in which the milestone is achieved. This amendment is effective for fiscal years beginning on or after June 15, 2010, with early adoption permitted. The amendment may be applied retrospectively to all arrangements or prospectively for milestones achieved after the effective date. The Company will adopt this guidance on January 1, 2011, and adoption is not expected to have a material impact on the Company’s results of operations or financial condition.
 
 In January 2010, the FASB issued new guidance for additional disclosures regarding fair value measurements and also clarified certain existing disclosure requirements. Under the new guidance, the Company is required to: (1) disclose separately the amounts of significant transfers between Level 1 and Level 2 of the fair value hierarchy, (2) disclose activity in Level 3 fair value measurements including transfers into and out of Level 3 and the reasons for such transfers, and (3) present separately in its reconciliation of recurring Level 3 measurements information about purchases, sales, issuances and settlements on a gross basis. This guidance does not change any accounting requirements, but is expected to have a significant effect on the disclosures of entities that measure assets and liabilities at fair value. These amendments became effective for the Company’s fiscal quarter ending June 30, 2010, except for the requirements described in item (3) above, which will be effective for the Company’s fiscal year beginning January 1, 2011. The Company’s adoption of this guidance did not, and is not expected to, impact the Company’s consolidated results of operations or financial condition.
  - 4 -
 Table of Contents
   
 2.  Business Acquisitions and Other
 
 Sale of Majority Interest in HBNet, Inc.
 
 On February 17, 2010, the Company and The McDonnell Group formed a new venture, Phoenix Managed Networks, LLC, which equips payment processors, banks and retailers worldwide with highly reliable and cost-effective data communications services for transaction-based applications. In accordance with the formation of this venture, the Company sold 60% of its interest in HBNet, Inc., formerly a wholly owned subsidiary of Hypercom, to The McDonnell Group for $1.0 million. The Company also contributed its remaining interest in HBNet to Phoenix Managed Networks in return for a 40% interest in the venture.
 
 HBNet’s net book value prior to the transaction was $0.5 million, resulting in a gain of $0.7 million during the six months ended June 30, 2010 from the sale of the 60% interest to The McDonnell Group for $1.0 million. The Company deferred $0.3 million of the cash received and reduced the net book value of HBNet to $0.2 million. Upon contribution of the 40% interest in HBNet to Phoenix Managed Networks, the Company transferred the remaining net book value to an equity investment that represents the Company’s basis of its 40% equity investment in Phoenix Managed Networks. The investment is included in other long-term assets in the Company’s consolidated balance sheet as of June 30, 2010.
  Thales e-Transactions
 
 On December 18, 2009, the Company agreed to settle amounts owed under the Thales e-Transactions (“TeT”) acquisition agreement for a cash payment of approximately $4.1 million. The Company included $3.1 million as part of the purchase price and $1.0 million of professional fees for accounting and tax services provided to Thales SA had been expensed as incurred in 2008. On December 28, 2009, the Company paid $2.1 million of the settlement amount and the remaining $2.0 million was paid on January 8, 2010.
   3.  Intangible Assets and Goodwill
 
 Intangible assets consist of the following at June 30, 2010 and December 31, 2009 (dollars in thousands):
 June 30, 2010








December 31, 2009Gross








GrossCarrying


Accumulated





Carrying


AccumulatedAmount


Amortization


Net


Amount


Amortization


NetCapitalized software

$
5,748


$
(2,310
)

$
3,438


$
3,327


$
(1,874
)

$
1,453Customer and supplier relationships


48,272



(13,130
)


35,142



56,692



(11,875
)


44,817Unpatented technology


2,613



(2,613
)


—



3,078



(2,694
)


384Trademarks, trade names


3,422



(1,661
)


1,761



3,636



(1,687
)


1,949Service know-how


1,330



(454
)


876



1,330



(388
)


942Other


149



(132
)


17



150



(116
)


34$
61,534


$
(20,300
)

$
41,234


$
68,213


$
(18,634
)

$
49,579
  Amortization expense related to intangible assets used in continuing operations was $4.3 and $4.6 million for the six months ended June 30, 2010 and 2009, respectively. Based on the intangible assets recorded at June 30, 2010 and assuming no subsequent impairment of the underlying assets or changes in foreign currency rates, the annual amortization expense for each period is expected to be as follows: $3.5 million for the remainder of 2010, $6.5 million for 2011, $6.5 million for 2012, $5.6 million for 2013 and $5.6 million for 2014.
 
  - 5 -
 Table of Contents
 Balance at beginning of the year

$
28,536Currency translation adjustment


(4,659
)Balance, end of period

$
23,877
 4.  Restructuring and Other Charges
 
 2009 Restructuring
 
 In 2009 and 2010, the Company incurred employee severance and benefits-related charges as a result of the following initiatives:
 
 ·
Reorganization of the Company’s services businesses in Australia and Brazil;
 ·
Consolidation of the Company’s United Kingdom operations in the Salisbury facility, resulting in the closing of the Woking facility;
 ·
Reorganization of the Company’s operations in its Asia-Pacific segment;
 ·
Reorganization of the Company’s management team in the Company’s offices in Arizona, Mexico and the Caribbean; and
 ·
Reorganization of the Company’s research and development (“R&D”) activities in Europe.
 
 As a result of these actions, the Company incurred charges of $0.4 million and $0.7 million during the three and six month periods ended June 30, 2010. Of the $0.4 million recorded during the three months ended June 30, 2010, $0.1 million was recorded to cost of revenue and $0.3 million was recorded in operating expenses. Of the $0.7 million recorded during the six months ended June 30, 2010, $0.3 million was recorded to cost of revenue and $0.4 million was recorded in operating expenses. Of the $0.4 million incurred charges during the three months ended June 30, 2010, $0.1 million was recorded in the Asia-Pacific segment and $0.3 million in the Americas. Of the $0.7 million charges incurred during the six months ended June 30, 2010, $0.3 million was recorded in the Asia-Pacific segment, $0.3 million in the Americas and $0.1 million in Shared Cost Centers.
 
 The following table summarizes these charges and activities during the six month periods ended June 30, 2010 and 2009 (dollars in thousands):  Balance at






Balance atDecember 31,



Cash


June 30,2009

Additions

Payments

2010Severance and other terminationbenefits

$
1,010

$
660

$
(785)

$
885Total

$
1,010

$
660

$
(785)

$
885
 Balance at






Currency

Balance atDecember 31,



Cash


Translation

June 30,2008

Additions

Payments

Adjustment

2009Severance and other terminationbenefits

$
—

$
1,905

$
(360)

$
42

$
1,587Total

$
—

$
1,905

$
(360)

$
42

$
1,587
 The Company expects to pay the amounts accrued in 2010 and the Company also expects to incur additional restructuring charges of approximately $0.3 million during the remainder of 2010. The amounts recorded, the timing of the payments and the additional restructuring charges the Company expects to incur are subject to change based on the negotiation of severance with employees and related work groups.
 
  - 6 -
 Table of Contents
  Thales e-Transactions Restructuring
  On April 1, 2008, the Company completed the acquisition of TeT and began formulating a restructuring plan. At the acquisition date, the Company accrued into the purchase price allocation restructuring costs related to reduction in workforce and future facilities lease obligations of approximately $9.1 million as part of its restructuring plan.
  Activities related to the TeT acquisition restructuring plan are as follows (dollars in thousands):
  Balance at






Currency

Balance atDecember 31,



Cash


Translation

June 30,2009

Additions

Payments

Adjustment

2010Severance and other terminationbenefits

$
7,255

$
—

$
(1,416)

$
(978)

$
4,861Total

$
7,255

$
—

$
(1,416)

$
(978)

$
4,861
  The Company expects the remaining amounts accrued to be paid in 2010. The restructuring plan and the amounts recorded are subject to change based on the negotiation of severance and other workforce reduction plans with employees and related work groups. Accordingly, additional restructuring expenses may be incurred and recorded as an expense in the period of the estimated change in amounts to be paid. Any decrease in the estimated restructuring amounts to be paid will be recorded as a reduction of goodwill and any associated deferred tax accounts.
 
 5.  Assets Held for Sale
 
 European Lease and Services Operations
 
 In 2009, the Company decided to sell its European lease and services operations, which qualifies as discontinued operations. Accordingly, the lease and services business operating results have been classified as discontinued operations in the statements of operations and cash flows for all periods presented.
 
 A summary of the assets and liabilities held for sale related to this European lease and services operations is as follows (dollars in thousands):
 
 June 30,


December 31,2010


2009ASSETSCash and cash equivalents

$
215

$
56Accounts receivable, net


423


688Net investment in sales-type leases


2,050


2,298Inventories


143


326Prepaid expenses and other assets

839


5Total assets

$
3,670

$
3,373LIABILITIESAccounts payable

$
900

$
1,172Accrued sales and other taxes


649


—Accrued payroll and related expenses


64


72Total liabilities

$
1,613

$
1,244
 Brazilian Building Sale
 
 On April 19, 2010, the Company sold its Brazilian building for consideration of R$8.6 million Brazilian Reais (approximately $4.6 million U.S. Dollars), receiving R$2.9 million Brazilian Reais, or $1.4 million, upon execution of the sales agreement. The remainder will be received in installments of 40% and 30% within 180 days and 270 days, respectively, of the signing of the sales agreement. The Company entered into a leaseback transaction with the buyer to allow for a transition of the Company’s services operations for a period of three months that ended on July 19, 2010.
  - 7 -
 Table of Contents
  The Company has deferred the gain related to the sale as of June 30, 2010. The gain will be recognized once the Company no longer has continuing involvement in the building, the buyer’s initial and continuing investments are adequate to demonstrate a commitment to pay for the property, and collectability of the remaining amounts due are reasonably assured either by collection of  the majority of the receivable or when the Company is assured the amounts due are not subject to future subordination from a bank or other lender. The net book value of the building was $1.9 million and was classified as assets held for sale in the Company’s consolidated balance sheets as of June 30, 2010 and December 31, 2009, respectively. The $1.4 million received has been recorded as deferred revenue in the Company’s consolidated balance sheet as of June 30, 2010.
 
 6.  Leases
 
 Sales-Type Leases
 
 The Company’s net investments in sales-type leases consist of the following at June 30, 2010 and December 31, 2009 (dollars in thousands):
  June 30,


December 31,2010


2009Lease contracts receivable

$
12,423

$
13,523Unearned revenue


(2,254
)

(2,360
)Allowance for bad debt


(669
)

(882
)Net investment in sales-type leases

$
9,500

$
10,281
  7. Fair Value Measurements
 
 The FASB’s accounting guidance provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:
 
 Level 1: Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.
 Level 2: Inputs to the valuation methodology include:
 
 ·
Quoted prices for similar assets or liabilities in active markets;
 
 ·
Quoted prices for identical or similar assets or liabilities in inactive markets;
 
 ·
Inputs other than quoted prices that are observable for the asset or liability; and
 
 ·
Inputs that are derived principally from or corroborated by observable market data by correlation or other means.
 
 Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
 
 The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.
 
 The Company’s assets and liabilities with carrying amounts approximating fair value include cash and cash equivalents, accounts receivable, accounts payable and accrued expenses and current other liabilities. The carrying amount of the Company’s long-term debt and other long-term liabilities approximate fair value in the Company’s consolidated balance sheets at June 30, 2010 and December 31, 2009.
 
  - 8 -
 Table of Contents
  
 Level 1


Level 2


Level 3


TotalMoney market funds

$
6,508


$
—


$
—


$
6,508Cash


26,765



—



—



26,765$
33,273


$
—


$
—


$
33,273
 
 8.  Inventories
 
 Inventories consist of the following at June 30, 2010 and December 31, 2009 (dollars in thousands):
  June 30,


December 31,2010


2009Purchased parts

$
10,903

$
8,850Work in progress


232


292Finished goods


23,168


20,221$
34,303

$
29,363
 9.  Product Warranty Liability
 
 The following table reconciles the changes to the product warranty liability for the three- and six-month periods ended June 30, 2010 and 2009 (dollars in thousands):
  Three Months Ended

June 30,


Six Months Ended

June 30,2010


2009


2010


2009Balance at beginning of period

$
4,997


$
6,445


$
5,444


$
6,597Warranty charges from operations


1,335



1,341



2,230



2,479Utilization of warranty liability


(603
)


(1,412
)


(1,649
)


(2,531
)Currency translation adjustment


(758
)


292



(1,054
)


121Balance at end of period

$
4,971


$
6,666


$
4,971


$
6,666
 Deferred revenue associated with the Company’s extended warranty programs was $3.7 million and $3.5 million as of June 30, 2010 and December 31, 2009, respectively.
 
 10.  Long-term Debt
 
 Revolving Credit Facilities
 
 On January 15, 2008, certain of the Company’s subsidiaries (the “Borrowers”) entered into a Loan and Security Agreement (the “Loan Agreement”) with a bank and other financial institutions. The Company and certain other subsidiaries are guarantors (together with the Borrowers, the “Obligors”) of the Borrowers’ obligations under the Loan Agreement. The bank also serves as agent for the lenders under the Loan Agreement (the “Agent”). The Loan Agreement provides for a revolving credit facility of up to $25.0 million. Under the Loan Agreement, if certain conditions are met, the Borrowers may request an increase in the credit facility to an aggregate total of up to $40.0 million. Amounts borrowed under the Loan Agreement and repaid or prepaid during the term may be reborrowed. Outstanding amounts under the Loan Agreement will bear interest, at the Borrower’s option, at either (i) LIBOR plus 175 basis points or (ii) the bank’s prime rate. All amounts outstanding under the Loan Agreement are due on January 15, 2011.
 
 No amounts were borrowed against the revolving credit facility as of June 30, 2010. The Borrowers had availability of $12.9 million as of June 30, 2010, less the amount of outstanding letters of credit totaling $3.1 million as of June 30, 2010.
 
 Availability of borrowings and the issuance of letters of credit under the Loan Agreement are subject to a borrowing base calculation based upon a valuation of the Company’s eligible inventories (including raw materials, finished and semi-finished goods, and certain in-transit inventory) and eligible accounts receivable, each multiplied by an applicable advance rate.
  - 9 -
 Table of Contents
  On February 10, 2010, the Loan Agreement was amended to allow the Company to enter into a transaction between its former subsidiary, HBNet, and The McDonnell Group, as well as making additional changes, including, among others, providing for the outstanding amounts under the Loan Agreement to now bear interest, at the Company’s option, at either: (i) LIBOR plus 200 or 250 basis points; or (ii) the bank’s prime rate plus 50 or 75 basis points depending on certain financial ratios. In addition, the borrowing base was amended to eliminate inventory from the borrowing base calculation. All amounts outstanding under the Loan Agreement continue to be due on January 15, 2011.
 
 In addition to representations and warranties, covenants, conditions and other terms customary for instruments of this type, the Loan Agreement includes negative covenants that prohibit the Obligors from, among other things, incurring certain types of indebtedness (excluding indebtedness secured by certain assets of the Company and its subsidiaries in an aggregate amount not to exceed $50.0 million for working capital purposes), making annual capital expenditures in excess of prescribed amounts, or disposing of certain assets. The Loan Agreement provides for customary events of default, including failure to pay any principal or interest when due, failure to comply with covenants, failure of any representation made by the Borrowers to be correct in any material respect, certain defaults relating to other material indebtedness, certain insolvency and receivership events affecting the Obligors, judgments in excess of $2.5 million in the aggregate being rendered against the Obligors, and the incurrence of certain liabilities under the Employee Retirement Income Security Act (“ERISA”) in excess of $1.0 million in the aggregate.
 
 In the event of a default by the Borrowers, the Agent may, at the direction of the lenders, terminate the lenders’ commitments to make loans under the Loan Agreement, declare the obligations under the Loan Agreement immediately due and payable and enforce any and all rights of the lenders or Agent under the Loan Agreement and related documents. For certain events of default related to insolvency and receivership, the commitments of the lenders are automatically terminated and all outstanding obligations become immediately due and payable. The obligations of the Obligors under the Loan Agreement are secured by inventory and accounts receivable of certain of the Company’s subsidiaries in the United States and the United Kingdom. The remaining balance of the Company’s consolidated assets, including the subsidiaries acquired in connection with the TeT acquisition, is unencumbered under the Loan Agreement and, if needed, may be used as collateral for additional debt. The Company’s obligations as guarantor under the Loan Agreement are unsecured.
 
 Acquisition Financing
 
 In February 2008, in connection with the acquisition of TeT, the Company entered into the Credit Agreement with FP II pursuant to a commitment letter dated December 20, 2007 between the Company and FP II. The Credit Agreement provided for a loan of up to $60.0 million to partially fund the acquisition at closing. The loan under the Credit Agreement bears interest at 10% per annum, provided that, at the election of the Company, interest may be capitalized and added to the principal of the loan to be repaid at maturity on April 1, 2012. The Company can voluntary make prepayments in increments of $5.0 million without premium or penalty.
 
 On funding of the loan under the Credit Agreement and the closing of the acquisition, FP II was granted a five-year warrant (the “Warrant”) to purchase approximately 10.5 million shares of the Company’s common stock at $5.00 per share. The estimated fair value of the Warrant at the date issued was $1.68 per share using a Black-Scholes option pricing model. The valuation date for the Warrant was February 14, 2008, when all relevant terms and conditions of the debt agreement had been reached.The total fair value of the Warrant of $17.8 million was recorded as a discount to the acquisition financing and has been recognized in equity as additional paid in capital. The loan discount is being amortized as interest expense over the life of the loan and amounted to $2.3 million and $1.5 for the six months ended June 30, 2010 and 2009, respectively.
 
 Long-term debt consists of the following at June 30, 2010 and December 31, 2009 (dollars in thousands):
 June 30,


December 31,2010


2009Credit agreement

$
60,000

$
60,000Interest conversion to debt


14,758


11,321Repayment of debt


(6,000
)

(3,000
)Other


1


168,759


68,322Discounts on warrants issued to FP II, net

(9,920
)

(12,246
)Long-term debt, net of discount

$
58,839

$
56,076
 On April 30, 2010, the Company made a repayment of $3.0 million to FP II and recorded $0.4 million of interest expense to write-off a portion of unamortized warrant discount related to the amount paid.
  - 10 -
 Table of Contents
  11.  Share Based Compensation
 
 The following table summarizes share-based compensation expense included in the consolidated statements of operations for the three- and six-month periods ended June 30, 2010 and 2009 (dollars in thousands):
  Three Months Ended

June 30,


Six Months Ended

June 30,2010


2009


2010


2009Costs of revenue

$
54


$
54


$
62


$
123Research and development


22



6



52



24Selling, general and administrative


431



397



703



984Total

$
507


$
457


$
817


$
1,131
 As of June 30, 2010, total unrecognized compensation cost, net of forfeitures, related to stock-based options and restricted stock awards was $5.5 million and the related weighted-average period over which it is expected to be recognized is approximately 1.8 years.
 
 Stock Options
 
 At June 30, 2010, the Company had one active share-based employee compensation plan. Stock option awards granted from this plan are granted at the fair market value on the date of grant, and vest over a period determined at the time the options are granted, generally ranging from one to five years, and generally have a maximum term of ten years. For stock options with graded vesting terms, the Company recognizes compensation cost using the accelerated method over the requisite service period.
 
 The Hypercom Corporation 2010 Equity Incentive Plan became effective on June 10, 2010. The plan allocated a total of 5.1 million shares of common stock for issuance, as well as the addition of up to 0.9 million shares that remained available for issuance under the Company’s predecessor plans.
 
 A summary of the Company’s stock option balances at June 30, 2010 is as follows:
  Weighted

Weighted

Average

AggregateAverage

Remaining

IntrinsicNumber of

Exercise

Contractual

Value (InOptions

Price

Term

Thousands)Outstanding at June 30, 2010


5,242,485

$
4.66


7.38

$
3,244Vested and expected to vest at June 30, 2010


5,029,012

$
4.72


7.29

$
3,058Exercisable at June 30, 2010


3,492,706

$
5.16


6.27

$
1,725
 The aggregate intrinsic value of options exercised during the six-month periods ended June 30, 2010 and 2009 was $0.2 million and $0.0 million, respectively.
 
 The key assumptions used in the Black-Scholes valuation model to calculate the fair value of options granted during such periods are as follows:
  Three Months Ended

June 30,


Six Months Ended

June 30,2010


2009


2010


2009Weighted average risk free interest rate


2.76
%


1.96
%


2.75
%


1.83
%Expected life of the options (in years)


5.28



4.91



5.30



5.19Expected stock price volatility


74.3
%


73.2
%


74.3
%


71.2
%Expected dividend yield


—



—



—



—
    - 11 -
 Table of Contents
 The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. The risk-free interest rate is based on the U.S. treasury security rate in effect as of the date of grant. The expected lives of options and stock price volatility are based on historical data of the Company. The weighted average fair value of options granted in the six-month periods ended June 30, 2010 and 2009 was $2.79 and $0.66, respectively.
 
 Restricted Stock Awards
 
 The Company grants restricted stock awards to certain employees. Restricted stock awards are valued at the closing market value of the Company’s common stock on the date of grant, and the total value of the award is expensed ratably over the service period of the employees receiving the grants. Share-based compensation expense related to all restricted stock awards outstanding for the six–month periods ended June 30, 2010 and 2009 was approximately $0.2 million and $0.1 million, respectively. As of June 30, 2010, the total amount of unrecognized compensation cost related to nonvested restricted stock awards was $1.7 million, which is expected to be recognized over a weighted-average period of 1.86 years. Compensation expense with respect to the grants could be reduced or reversed to the extent employees receiving the grants leave the Company prior to vesting in the award.
 
 A summary of nonvested restricted stock activity for the six-month period ended June 30, 2010 is as follows:
  WeightedAverageNonvested

Grant DateShares

Fair ValueOutstanding

per ShareBalance at December 31, 2009


990,000


1.23Shares granted


567,000


4.58Shares vested


(328,311
)

1.14Shares forfeited


(31,667
)

2.29Balance at June 30, 2010


1,197,022


2.81
 The total fair value of restricted shares granted during the six-month periods ended June 30, 2010 and 2009 was $2.6 million and $0.3 million, respectively.
 12. Equity
 
 Treasury Stock
 
 During the second quarter of 2010, the Company elected to allow employees to have a net-settlement option when restricted stock awards vest, whereby the Company buys from the employee the net common shares equal to the minimum statutory tax withholding requirement. The cash value of these awards is then remitted to the taxing authorities to satisfy the minimum statutory withholding requirements of the taxing authorities on the employees’ behalf. The Company bought 34,105 shares at a cost of $0.2 million, which was included in treasury stock at June 30, 2010.
 
 13. Income Taxes
 
 Income tax benefit (expense) before discontinued operations for federal, state and foreign taxes was $0.7 million and $(0.3) million, respectively, for the three month periods ended June 30, 2010 and 2009, and $0.6 million and $(0.8) million, respectively, for the six month periods ended June 30, 2010 and 2009. The Company’s consolidated effective tax rates for the three month and six month periods ended June 30, 2010 were 35.3% and 40.8%, respectively. The Company’s effective tax rate is determined by the level and composition of pre-tax income subject to varying foreign, state and local taxes and other items. The Company’s consolidated effective tax rate for the three and six month periods ended June 30, 2010 is not meaningful due to the Company’s cumulative net operating loss position and its provision for a full valuation reserve against the deferred tax assets. The Company continues to provide a full valuation reserve against substantially all of its deferred tax asset balances as of June 30, 2010. The valuation reserve is subject to reversal in future years at such time that the benefits are actually utilized or the operating profits in the United States become sustainable at a level that meets the recoverability criteria.
  - 12 -
 Table of Contents
  The total amount of unrecognized tax benefits at June 30, 2010 was $38.6 million, of which $3.2 million would impact the Company’s effective tax rate were it to be recognized.
 
 The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various U.S. state and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations for years prior to 2000. The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits as part of the tax provision. Accrued interest and penalties at June 30, 2010 and December 31, 2009 were $1.4 million. The Company believes that it has appropriate support for the income tax positions taken and to be taken on its tax returns and that its accruals for tax liabilities are adequate for all open years based on an assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter.
 
 
 14. Commitments and Contingencies
 
 Litigation
 The Company is currently a party to various legal proceedings, including those noted below. While the Company presently believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not have a material adverse affect on the Company’s financial position, results of operations or cash flows, litigation is subject to inherent uncertainties, and unfavorable rulings could occur. An unfavorable ruling could include monetary damages or, in cases where injunctive relief is sought, an injunction. Were an unfavorable ruling to occur, it is possible such a ruling could have a material adverse impact on the Company’s consolidated results of operations or financial position in the period in which the ruling occurs or in future periods.
 SPA Syspatronic AG v. Hypercom Corporation, et al. (United States District Court for the Eastern District of Texas, Marshall Division, Civil Action No. 2:07-CV-416 (LED), filed on September 18, 2007). SPA Syspatronic AG (“Syspatronic”) commenced this action against the Company and others, alleging that certain of the Company’s products infringe U.S. Patent No. 5,093,862, entitled “Data Carrier – Controlled Terminal in a Data Exchange System”, issued on March 3, 1992 (the “‘862 Patent”) allegedly owned by Syspatronic. The plaintiff is seeking a judgment of infringement, an injunction against further infringement, damages, interest and attorneys’ fees. The Company filed an answer denying liability on the basis of a lack of infringement, invalidity of the ‘862 Patent, laches, waiver, equitable estoppel and unclean hands, lack of damages, failure to state a claim, and inequitable conduct during the prosecution of the ‘862 Patent. The Company also counterclaimed seeking a declaratory judgment of non-infringement and invalidity of the ‘862 Patent, and seeking attorneys’ fees and costs as an exceptional case due to the plaintiff’s inequitable conduct during the prosecution of the ‘862 Patent. In April 2008, the U.S. Patent and Trademark Office (the “Patent Office”) granted the request by certain of the defendants for re-examination of the ‘862 Patent. Thereafter, the Court stayed proceedings in this case until the Patent Office completed its re-examination. The Patent Office ultimately confirmed the patentability of the claims of the ‘862 Patent based on the construction advanced by Syspatronic of a key term in the only two independent claims of the ‘862 Patent. In light of that construction, the Company believes that its accused products do not infringe the ‘862 Patent. The Court lifted the stay it ordered during the reexamination proceedings. A Markman hearing is set for November 10, 2010, and the case is set for trial on May 30, 2011. By agreement, this case will be tried in Tyler, Texas. This action is currently in the discovery stage. On June 22, 2010, the Court denied Syspatronic’s Motion to Dismiss Defendants’ Inequitable Conduct Counterclaims and Defenses and held that Defendants’ allegations of inequitable conduct state a plausible claim for relief that satisfies the applicable pleading requirements. Court ordered mediation is expected to be held in the third quarter when the Defendants also expect to file a motion for summary judgment.
 
 CardSoft, Inc., et al. v. Hypercom Corporation, et al. (United States District Court for the Eastern District of Texas, Marshall Division, Civil Action No. 2:08-CV-00098, filed on March 6, 2008). CardSoft, Inc. and CardSoft (Assignment for the Benefit of Creditors), LLC (collectively “CardSoft”) filed this action against the Company and others in March 2008, alleging that certain of the Company’s terminal products infringe two patents allegedly owned by CardSoft: U.S. Patent No. 6,934,945 (the “‘945 Patent”), entitled “Method and Apparatus for Controlling Communications,” issued on August 23, 2005, and U.S. Patent No. 7,302,683 (the “‘683 Patent”), also entitled “Method and Apparatus for Controlling Communications,” issued on November 27, 2007, which is a continuation of the ‘945 patent. CardSoft is seeking a judgment of infringement, an injunction against further infringement, damages, interest and attorneys’ fees. In June 2008, the Company filed its answer, denying liability on the basis of a lack of infringement, invalidity of the ‘945 Patent and the ‘683 Patent, laches, waiver, equitable estoppel and unclean hands, lack of damages and failure to state a claim. The Company also counterclaimed seeking a declaratory judgment of non-infringement and invalidity of the ‘945 Patent and the ‘683 Patent. A Markman hearing is scheduled for July 20, 2011 and trial is scheduled for November 7, 2011. This action is currently in the discovery stage.
  - 13 -
 Table of Contents
  Lisa Shipley v. Hypercom Corporation. (United States District Court for the Northern District of Georgia, Civil Action No. 1:09-CV-0265, filed on January 30, 2009). Lisa Shipley (“Shipley”), a former employee, filed this action against the Company in January 2009, alleging that the Company violated Title VII of the Civil Rights Act by discriminating against her on the basis of her gender, violated the Georgia Wage Payment laws, the Equal Pay Act and Georgia law by paying her lower compensation based on her gender. Ms. Shipley is seeking compensatory damages for emotional distress, damage to reputation, embarrassment, lost wages, back pay, accrued interest, punitive damages, attorneys’ fees and expenses, and interest. In February 2009, the Company filed a motion to dismiss based on improper venue or, in the alternative, to transfer venue to the United States District Court for the District of Arizona. In June 2009, the Court denied the motion. In June 2009, the Company filed its answer, generally denying the material allegations of Ms. Shipley’s complaint. In October 2009, Ms. Shipley filed an amended complaint adding an allegation that the Company unlawfully retaliated against her. In November 2009, the Company filed its answer, denying the material allegations of the amended complaint. In February 2010, the Company filed a Motion for Judgment on the Pleadings as to Ms. Shipley's retaliation claim, which the Court subsequently denied. This action is currently in the discovery stage. On July 19, 2010, the Company filed a motion for summary judgment that is currently pending.
 
 
 15. Segment, Geographic, and Customer Information
 
 The Company’s Chief Operating Decision Maker (“CODM”) has been identified as the CEO of the Company. For each of the segments described below, the CODM has access to discrete financial information regarding the revenues, gross margins (using fully burdened manufacturing costs), direct local service costs, direct operating expenses consisting of expenses directly associated with the business segment and indirect operating expenses consisting of global Shared Cost Centers such as global R&D, marketing, corporate general and administrative expenses, and stock-based compensation. The Company’s operations are managed by Managing Directors for each region that report directly to the CODM. These Managing Directors have responsibility for all business activities and combined operating results of their regions and these individuals are compensated and evaluated based on the performance (Direct Trading Profit) of their respective regions (the Americas, Northern EMEA (“NEMEA”), Southern EMEA (“SEMEA”), and Asia-Pacific)
 
 The Company’s four business segments are follows: (i) the Americas, (ii) NEMEA, (iii) SEMEA and (iv) Asia-Pacific. The Americas segment consists of the United States, Canada, Mexico, the Caribbean, Central America, and South America. The NEMEA segment consists of Belgium, Sweden, Turkey, Austria and Germany. The SEMEA segment consists of France, Spain, the United Kingdom., Western and Central Eastern Europe, Russia, Hungary, the Middle East, and Africa. The Asia-Pacific segment consists of China, Hong Kong, Indonesia, the Philippines, Singapore, Thailand, Australia and New Zealand. Prior year segment data has been restated for comparative purposes as follows (dollars in thousands): Three Months Ended

June 30,

Six Months Ended

June 30,2010


2009


2010


2009Net RevenueAmericas

$
32,893


$
36,245


$
56,395


$
61,257NEMEA


23,047



24,215



50,582



44,272SEMEA


33,844



31,561



69,301



59,395Asia-Pacific


14,137



13,554



26,398



23,445$
103,921


$
105,575


$
202,676


$
188,369Three Months Ended

June 30,

Six Months Ended

June 30,2010



2009



2010



2009Operating IncomeAmericas

$
5,505


$
5,970


$
10,939


$
8,329NEMEA


5,052



5,355



11,201



8,352SEMEA


6,522



6,251



14,262



11,480Asia-Pacific


3,139



3,629



5,823



5,128Shared cost centers


(17,320
)


(17,353
)


(35,883
)


(35,792
)Total segment income (loss)

$
2,898


$
3,852


$
6,342


$
(2,503
)Interest income


76



52



272



129Interest expense


(3,224
)


(2,526
)


(6,010
)


(4,976
)Foreign currency gain (loss)


(1,616
)


627



(2,161
)


(70
)Other income (expense)


(10
)


309



(23
)


321Income (loss) before income taxesand discontinued operations

$
(1,876
)

$
2,314


$
(1,580
)

$
(7,099
)   - 14 -
 Table of Contents
 June 30,


December 31,2010


2009Total AssetsAmericas

$
60,254

$
55,858NEMEA


77,292


110,670SEMEA


88,809


83,957Asia-Pacific


32,112


26,597Shared cost centers


17,123


29,806$
275,590

$
306,888
 16. Comprehensive Income (loss)
 
 Comprehensive income (loss) for the three- and six-month periods ended June 30, 2010 and 2009 consists of the following (dollars in thousands):
 Three Months Ended

June 30,


Six Months Ended

June 30,2010


2009


2010


2009Net income (loss)

$
(1,256
)

$
1,255


$
(881
)

$
(8,670
)Foreign currency translation adjustment


(8,025
)


5,202



(13,219
)


1,918Total comprehensive income (loss)

$
(9,281
)

$
6,457


$
(14,100
)

$
(6,752
)
    - 15 -
 Table of Contents
  17.      Earnings per Share
 
 Basic income (loss) per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted income (loss) per share reflects the potential dilution that could occur if the income were divided by the weighted-average number of common shares outstanding and potentially dilutive common shares from outstanding stock options and warrants. Potentially dilutive common shares are calculated using the treasury stock method and represent incremental shares issuable upon exercise of the Company’s outstanding options and warrants. Potentially dilutive securities are not considered in the calculation of dilutive loss per share as their impact would not be dilutive. The following table reconciles the weighted average shares used in computing basic and diluted income (loss) per share for the three and six month periods ended June 30, 2010 and 2009:  Three Months Ended

June 30,


Six Months Ended

June 30,2010


2009


2010


2009Shares used in basic income (loss) per sharecomputation (weighted average commonshares oustanding)


53,853,334



53,514,573



53,749,304



53,459,082Dilutive effect of stock options and warrants


—



233,772



—



—Shares used in diluted income (loss)per share computation


53,853,334



53,748,345



53,749,304



53,459,082Options, stock awards and warrants that couldpotentially dilute income per share in the futurethat were not included in the computationof diluted income per share


15,734,147



16,154,554



16,003,761



16,238,507
 
 For the three months ended June 30, 2010 and for the six months ended June 30, 2010 and 2009, respectively, outstanding stock options, restricted stock awards and warrants were not included in the computation of diluted loss per share because they were anti-dilutive.
 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
 Cautionary Statements Regarding Forward-looking Statements
  This report includes statements that may constitute forward-looking statements (including financial projections) that we believe are subject to the safe harbor provisions of Section 27A of the Securities Act of 1933 as amended, and Section 21G of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The words “believe,” “expect,” “anticipate,” “estimate,” “will,” “project,” and other similar expressions identify forward-looking statements.
  Our actual results may differ materially from those set forth in our forward-looking statements. We refer you to documents filed by us with the SEC, specifically our most recent Annual Report on Form 10-K for the year ended December 31, 2009, as well as our subsequent reports on Form 10-Q and Form 8-K, as may be amended from time to time, which identify events and important risk factors that could cause actual results to differ materially from those contained in our forward-looking statements. Other factors could also materially affect our actual results.
  Information about our Business
  Hypercom Corporation is one of the largest global providers of complete electronic payment solutions and value-added services at the point of transaction. Our vision is to be the world’s most recognized and trusted brand for electronic transaction solutions through a suite of secure and certified, end-to-end electronic payment products and software, as well as through a wide range of support and maintenance services. Our customers include domestic and international financial institutions, electronic payment processors, retailers, independent sales organizations (“ISOs”) and distributors. We also sell our products to companies in the hospitality, transportation, healthcare, prepaid card and restaurant industries. Customers around the globe select us because of our proven leadership and expertise in the global electronic payments industry, commitment to our customers’ success, continued support of past and future technologies and the quality and reliability of our products and services. We deliver convenience and value to businesses that require reliable, secure, high-speed and high-volume information/data transfers. Approximately 60% of our sales are denominated in a currency other than the U.S. Dollar, with approximately 40% of our sales denominated in Euros. Changes in currency rates, especially that of the Euro, could cause our future financial results to differ materially from our previously reported historical results.
  - 16 -
 Table of Contents
  Result of Operations
 
 Net Revenue
 
 The following tables sets forth our product revenue and services revenue for the three and six months ended June 30, 2010 and 2009 (dollars in thousands):
 Three Months Ended June 30,Change2010


2009


Amount


PercentNet product revenue

$
80,963


$
79,234


$
1,729



2.18
%Net service revenue


22,958



26,341



(3,383
)


(12.8
)%Total

$
103,921


$
105,575


$
(1,654
)


(1.6
)%
  Six Months Ended June 30,Change2010


2009


Amount


PercentNet product revenue

$
155,082


$
137,056


$
18,026



13.2
%Net service revenue


47,594



51,313



(3,719
)


(7.2
)%Total

$
202,676


$
188,369


$
14,307



7.6
%
 Product Revenue
  The increase in product revenue for the three months ended June 30, 2010 compared to the same period in 2009 was principally due to increased countertop sales in the Middle East, the United Kingdom and France of $2.6 million in the aggregate and additional product sales in Brazil of $2.9 million. The increase was partially offset by a negative impact of foreign exchange rates of $2.6 million.
  The overall increase in product revenue for the six months ended June 30, 2010 compared to the same period in 2009 was principally due to an improved global economic climate resulting in increased sales into the Central and Eastern European markets. Countertop product sales increased approximately $15.3 million during the six months ended June 30, 2010 compared to the same period in 2009. In addition, sales of mobile products and pin pads in Europe and Australia increased approximately $3.0 million and $1.7 million, respectively, during the three and six months ended June 30, 2010 compared to the same periods in 2009. This increase was partially offset by $4.6 million of negative impact of foreign exchange rates during the six months ended June 30, 2010 compared to the same period in 2009.
  Services Revenue
  Services revenue decreased by $3.4 million and $3.7 million, respectively, for the three and six months ended June 30, 2010, compared to the same periods in 2009, due to a decision to exit a marginally profitable services contract with a large customer in Brazil during the third quarter of 2009, which was partially offset by higher volume of services and by a positive impact of foreign exchange rates in Brazil and Australia during the first half of 2010.
  Segment Revenue
  Our four business segments are as follows: (i) the Americas, (ii) NEMEA, (iii) SEMEA and (iv) Asia-Pacific. The Americas segment consists of the United States, Canada, Mexico, the Caribbean, Central America, and South America. The NEMEA segment consists of Belgium, Turkey, Sweden, Austria and Germany. The SEMEA segment consists of France, Spain, the United Kingdom, Western and Central Eastern Europe, Russia, Hungary, the Middle East, and Africa. The Asia-Pacific segment consists of China, Hong Kong, Indonesia, the Philippines, Singapore, Thailand, Australia and New Zealand. Prior year segment data has been restated for comparative purposes for changes made within our four segments.
  - 17 -
 Table of Contents
  The following table sets forth the revenues by business segment for the three and six months ended June 30, 2010 and 2009 (dollars in thousands):
  Three Months Ended June 30,Change2010


2009


Amount


PercentAmericas

$
32,893


$
36,245


$
(3,352
)


(9.2
)%NEMEA


23,047



24,215



(1,168
)


(4.8
)%SEMEA


33,844



31,561



2,283



7.2
%Asia-Pacific


14,137



13,554



583



4.3
%Total

$
103,921


$
105,575


$
(1,654
)


(1.6
)%
  Six Months Ended June 30,Change2010


2009


Amount


PercentAmericas

$
56,395


$
61,257


$
(4,862
)


(7.9
)%NEMEA


50,582



44,272



6,310



14.3
%SEMEA


69,301



59,395



9,906



16.7
%Asia-Pacific


26,398



23,445



2,953



12.6
%Total

$
202,676


$
188,369


$
14,307



7.6
%
 Net revenue for the Americas segment decreased by $3.4 million for the three months ended June 30, 2010 from the same period in 2009, principally as a result of a decrease in multilane sales of $2.8 million in North America and by $2.8 million due to our exit of a marginally profitable services contract with a large customer in Brazil during the third quarter of 2009.  This was partially offset by $2.9 million of increased countertop sales in Brazil.
  Net revenue for the Americas segment decreased by $4.9 million for the six months ended June 30, 2010 from the same period in 2009, principally as a result of a decrease in multilane sales of $4.0 million in North America and by $5.8 million due to our exit of a marginally profitable services contract with a large customer in Brazil during the third quarter of 2009.  This was partially offset by $3.2 million of increased countertop sales in Brazil.
  Net revenue for the NEMEA segment decreased by $1.2 million for the three months ended June 30, 2010 from the same period in 2009, principally due to the negative impact of foreign exchange rates.
  Net revenue for the NEMEA segment increased by $6.3 million for the six months ended June 30, 2010 from the same period in 2009, principally due to strong sales of our countertop products in Austria and as a result of improved global economic conditions.  This was partially offset by the negative impact of foreign exchange rates.
  Net revenue for the SEMEA segment increased by $2.3 million and $9.9 million, respectively, for the three and six month periods ended June 30, 2010 from the same periods in 2009, principally due to higher sale of countertop products in Eastern Europe, Middle East and Africa as well as an increase of mobile products sales in Spain and Portugal. This was offset by the negative impact of foreign exchange rates.
  Net revenue for the Asia-Pacific segment increased by $0.5 million and $3.0 million, respectively, for the three and six month periods ended June 30, 2010 from the same periods in 2009, principally due to higher mobile product sales in Australia as result of improvement in the economic environment in the region and the positive impact of foreign exchange rates.
  - 18 -
 Table of Contents
 Gross Profit Our costs of revenue include the cost of raw materials, manufacturing, supply chain, service labor, overhead and subcontracted manufacturing costs, telecommunications costs, inventory valuation provisions and loan loss provisions with respect to sales-type leases included in continuing operations.
 
 The following table sets forth the product and services gross profit for the three and six months ended June 30, 2010 and 2009 (dollars in thousands):  Three Months Ended June 30,Gross Margin





Gross Margin



Change2010


Percentage


2009


Percentage


Amount


PercentProduct gross profit

$
27,351



33.8
%

$
29,523



37.3
%

$
(2,172
)


(3.5
)%Service gross profit


5,081



22.1
%


5,397



20.5
%


(316
)


1.6
%Amortization of purchasedintangible assets


(315
)


(0.3
)%


(706
)


(0.7
)%


391



0.4
%Gross profit

$
32,117



30.9
%

$
34,214



32.4
%

$
(2,097
)


(1.5
)%
  Six Months Ended June 30,Gross Margin





Gross Margin



Change2010


Percentage


2009


Percentage


Amount


PercentProduct gross profit

$
54,786



35.3
%

$
48,478



35.4
%

$
6,308



(0.1
)%Service gross profit


13,070



27.5
%


11,358



22.1
%


1,712



5.4
%Amortization of purchasedintangible assets


(1,019
)


(0.5
)%


(1,381
)


(0.7
)%


362



0.2
%Gross profit

$
66,837



33.0
%

$
58,455



31.0
%

$
8,382



2.0
%
 Product Gross Margin The decrease in product gross margin for the three months ended June 30, 2010 was principally due to lower margins on our mobile and pin pad products in NEMEA as a result of differences in product mix and lower average selling prices, as well as low margins on new products sales in Brazil. The product gross margin for the six months ended June 30, 2010 was virtually unchanged from the same period in 2009. This resulted from increased sales volume reflective of improved economic conditions, favorable product and geographic mix, and contract manufacturing cost improvements being offset by decreases in average selling prices in NEMEA and low margins on new products sales in Brazil.
 
 Services Gross Margin The increase in services gross margin for the three and six month periods ended June 30, 2010 and 2009,was principally due to the exit of a marginally profitable services contract with a large customer in Brazil during the third quarter of 2009. The increase was also do in part to maintenance revenue mix and volume increases in Europe and North America, a software sale of $0.3 million in North America in the first quarter of 2010, which did not occur in the first quarter of 2009, as well as the resolution of a $0.4 million favorable sales tax position in Brazil during the first quarter of 2010. This favorable sales tax position is not expected to continue at the same level as recorded in the first quarter of 2010 and although management will continue to take steps to improve services gross margins, we cannot give any assurances that sales mix and volume will continue to improve, or be sustained during the remainder of 2010.
  - 19 -
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  Operating Expenses—Research and Development  Three Months Ended June 30,Change2010


2009


Amount


PercentResearch and development

$
10,454


$
10,512


$
(58
)


(0.6
)%
  Six Months Ended June 30,Change2010


2009


Amount


PercentResearch and development

$
22,565


$
21,301


$
1,264



5.9
%
 
 R&D expenses consist mainly of software and hardware engineering costs and the cost of development personnel.
 
 R&D expenses were virtually flat for the three months ended June 30, 2010 compared to the same period in 2009.
 
 R&D expenses increased $1.3 million for the six months ended June 30, 2010 compared to the same period in 2009. The increase was primarily due to development work for our planned next generation of products within a joint development manufacturing model. The increased development expenses are expected to continue for the remainder of 2010.
 
 Operating Expenses—Selling, General and Administrative
  Three Months Ended June 30,Change2010


2009


Amount


PercentSelling, general and administrative

$
17,484


$
18,350


$
(866
)


(4.7
)%
  Six Months Ended June 30,Change2010


2009


Amount


PercentSelling, general and administrative

$
35,783


$
36,728


$
(945
)


(2.6
)%
 Selling, general and administrative (“SG&A”) expenses consist primarily of sales and marketing expenses, administrative personnel costs, and facilities operations.
 
 SG&A expenses for each of the three and six months ended June 30, 2010 decreased by $0.9 million compared to the same periods in 2009. The reduction consists of a $1.0 million decrease in sales commissions due to lower sales and operating profit in the Americas. Legal expenses related to additional patent and labor work increased by $0.3 million, which was partially offset by $0.2 million of lower accounting and audit related expenses. Operating Expenses—Gain on sale of assets
 
 During the first quarter of 2010, we recorded a gain of $0.7 million from the sale of a majority interest in HBNet, Inc.
 
 Brazilian Building Sale
  On April 19, 2010, we sold our Brazilian building for consideration of R$8.6 million Brazilian Reais (approximately $4.6 million U.S. Dollars), receiving R$2.9 million Brazilian Reais upon execution of the sales agreement. The remainder will be received in installments of 40% and 30% within 180 days and 270 days, respectively, of the signing of the sales agreement.
  - 20 -
 Table of Contents
  We expect to record a gain of approximately $2.0 million related to the sale once we no longer have continuing involvement in the building, the buyer’s initial and continuing investments are adequate to demonstrate a commitment to pay for the property, and collectability of the remaining amounts due are reasonably assured either by collection of  the majority of the receivable or when we are assured the amounts due are not subject to future subordination from a bank or other lender. Given the variables noted above, we cannot provide any assurance as to the amount of gain or the timing of the recognition given that the final payment is not due until the first quarter of 2011.
  Segment Operating Income
  Three Months Ended June 30,Change2010


2009


Amount


PercentAmericas

$
5,505


$
5,970


$
(465
)


(7.8
)%NEMEA


5,052



5,355



(303
)


(5.7
)%SEMEA


6,522



6,251



271



4.3
%Asia-Pacific


3,139



3,629



(490
)


(13.5
)%Shared Cost Centers


(17,320
)


(17,353
)


33



0.2
%Total

$
2,898


$
3,852


$
(954
)


(24.8
)%
  Six Months Ended June 30,Change2010


2009


Amount


PercentAmericas

$
10,939


$
8,329


$
2,610



31.3
%NEMEA


11,201



8,352



2,849



34.1
%SEMEA


14,262



11,480



2,782



24.2
%Asia-Pacific


5,823



5,128



695



13.6
%Shared Cost Centers


(35,883
)


(35,792
)


(91
)


(0.3
)%Total

$
6,342


$
(2,503
)

$
8,845



353.4
%
  Operating income in the Americas segment decreased by $0.5 million for the three month period ended June 30, 2010 from the same period in 2009, principally as a result of lower multilane sales and by our exit of a marginally profitable services contract with a large customer in Brazil during the third quarter of 2009.
  Operating income in the Americas segment increased by $2.6 million for the six month period ended June 30, 2010 from the same period in 2009, principally as a result of higher gross margin due to a favorable sales mix and by a gain on the one-time sale of assets.
  Operating income in the NEMEA segment decreased by $0.3 million for the three month period ended June 30, 2010 from the same period in 2009. The decrease was principally due to lower margins on our mobile and pin pad products and by a negative impact of foreign exchange rates.
  Operating income in the NEMEA segment increased by $2.9 million for the six month period ended June 30, 2010 from the same period in 2009. The increase was principally due to higher sales volume and favorable product mix in the first quarter offset by lower margins on our mobile and pin pad products and by a negative impact of foreign exchange rates in the second quarter of 2010.
  Operating income in the SEMEA segment increased by $0.3 and $2.8 million, respectively, for the three and six month periods ended June 30, 2010 compared to the same periods in 2009, principally due to higher sales volume and product mix, partially offset by a negative impact of foreign exchange rates.
  Operating income in the Asia-Pacific segment decreased by $0.5 million for the three month period ended June 30, 2010 compared to the same period in 2009, principally due to lower revenue in our networking products.
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  Operating income in the Asia-Pacific segment increased by $0.7 million for the six month period ended June 30, 2010 compared to the same period in 2009, principally due to improved margin in our mobile products and higher volume in our services operation.
 
 Shared Cost Centers expenses were virtually flat for both the three and six month periods ended June 30, 2010 compared to the same periods in 2009.
 
 Non-Operating Income
 
 Non-operating income consists of net interest expense, foreign currency gains and losses, and other income and losses. For the three and six months ended June 30, 2010, our interest expense net of interest income was $3.2 million and $5.7 million, respectively, compared to $2.5 and $4.9 million, respectively, for the same periods in 2009. The increase was due to the interest conversion into additional debt. In addition, interest expense includes an additional $0.4 million unamortized warrant discount related to amounts retired early.
  Provision for Income Taxes
  Income tax benefit before discontinued operations for federal, state and foreign taxes was $0.7 million and $0.6 million, respectively, for the three and six months ended June 30, 2010, compared to income tax expense of $0.3 million and $0.8 million, respectively, for the same periods in 2009.
  Our effective tax rate is determined by the level and composition of pre-tax income subject to varying foreign, state and local taxes and other items. The consolidated effective tax rate for the three months ended June 30, 2010 was impacted by our cumulative net operating loss position and the provision of a full valuation reserve against our deferred tax assets.
  As of June 30, 2010, we continue to provide a valuation reserve against substantially all deferred tax asset balances. The valuation reserve is subject to reversal in future years at such time that the benefits are actually utilized or, the operating profits in the United States and other jurisdictions become sustainable.
  Income from Discontinued Operations
  During the three and six months ended June 30, 2010, we recorded loss from discontinued operations of zero compared to a loss of $0.8 million for each of the three and six months ended June 30, 2009, as a result of discontinuance of each of our European lease and services operations, United Kingdom leasing operations, and Australian courier business.
 
 Cash Flows, Liquidity and Capital Resources
  We have historically financed our operations primarily through cash generated from operations and from borrowings under a revolving credit facility and other debt facilities.
 
 Cash Flows
 
 Cash provided by or used in operating activities includes net income (loss) adjusted for non-cash items and changes in operating assets and liabilities. Cash used by operating activities for the three and six months ended June 30, 2010 was $6.4 million and $12.4 million, respectively, compared to cash provided by operations of $10.3 million and $7.0 million, respectively, for the same periods in 2009. The principal reason for the decrease in cash used by operations was an increase in working capital needs to cover current and expected demands and the negative impact of foreign exchange rates.
 
 Cash used in investing activities was $2.3 million and $3.7 million, respectively, for the three and six months ended June 30, 2010 compared to $2.9 million and $3.7 million, respectively, for the same periods in 2009. Cash used in investing for the three months ended June 30, 2010 consisted principally of purchases of property, plant and equipment of $1.8 million and $2.2 million of capitalized software, offset by $1.7 million of a deposit received toward the sale of our building in Brazil. Cash used in investing for the six months ended June 30, 2010 consisted principally of purchases of property, plant and equipment of $3.0 million and $2.2 million of capitalized software, offset by a $1.7 million deposit received toward the sale of our building in Brazil as well as $1.0 million cash paid for the final working capital adjustment for the TeT acquisition, offset by $1.0 million cash received from the sale of assets.
 
 Financing cash flows for the three and six months ended June 30,2010 consisted principally of repayment of debt and the issuance of common stock due to the exercise of employee stock options. On April 30, 2010, we made a repayment of $3.0 million on our long term debt obligation.
  - 22 -
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  We believe that our cash reserves, available financing and future operating cash flows will be sufficient to fund our projected liquidity and capital resource requirements through 2010. However, should operating results be unfavorable, we may need to obtain additional sources of financing to meet our short-term liquidity and capital resource requirements.
  Liquidity and Capital Resources
  At June 30, 2010, cash and cash equivalents was $33.3 million compared to $55.0 million at December 31, 2009. Working capital decreased to $59.5 million from $60.7 million at December 31, 2009. We had availability of $12.9 million under our revolving credit facility as of June 30, 2010, which was decreased by outstanding letters of credit totaling $3.1 million as of June 30, 2010.
 
 Contractual Obligations
  Other than changes in the ordinary course of business, our estimates as to future contractual obligations have not materially changed from the disclosure included under the subheading “Contractual Obligations” in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2009, except for an operating lease commitment for our operations in Brazil for which our rent obligation for each period is expected to be as follows: $0.3 million for the remainder of 2010, $0.6 million for 2011 to 2014, and $0.3 million for 2015.
 
 As of June 30, 2010, we have recorded $38.6 million of unrecognized tax benefits as liabilities in accordance with the accounting guidance, and we are uncertain as to if or when such amounts may be settled.
  Critical Accounting Policies and Estimates
  Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. On an on-going basis we evaluate past judgments and our estimates, including those related to bad debts, product returns, long-term contracts, inventories, goodwill and other intangible assets, income taxes, financing operations, foreign currency, and contingencies and litigation.
  We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The accounting policies and related risks described in our Annual Report on Form 10-K as filed with the SEC are those that depend most heavily on these judgments and estimates. As of June 30, 2010, there have been no material changes to any of the critical accounting policies contained therein. However, we have added what we consider to be a critical accounting policy for our Brazil building sale, which is described in Note 5 in the Notes to the Consolidated Financial Statements.
  Effect of Inflation
  Inflation has not had a significant effect on our operations for any period presented above.
  Quarterly Trends and Fluctuations
  We expect that our quarterly results of operations will fluctuate in the first quarter of our fiscal year versus the remaining quarters, principally due to decreased demand for our products from North American retailers in such quarter.
 Item 3.  Quantitative and Qualitative Disclosures about Market Risk.
 
 At June 30, 2010, our cash equivalent investments are primarily in money market accounts and certificates of deposit and are reflected as cash equivalents because all maturities are within 90 days from date of purchase. Our interest rate risk with respect to existing investments is limited due to the short-term duration of these arrangements and the yields earned, which approximate current interest rates for similar investments. We have no short-term investments at June 30, 2010.
 
 We are exposed to financial market risks, including changes in interest rates and foreign currency exchange rates in connection with our foreign operations and markets. Nevertheless, the fair value of our investment portfolio or related income would not be significantly impacted by a 100 basis point increase or decrease in interest rates, principally due to the short-term nature of the major portion of our investment portfolio.
 
 A substantial portion of our revenue and capital spending is transacted in either U.S. Dollars or Euros. However, we do at times enter into transactions in other currencies, such as the Hong Kong Dollar, Australian Dollar, Brazilian Real, British Pound and other Central and South American, Asian and European currencies. We are not currently engaged in hedging activities due to the cost of entering into forward contracts, the possible short term cash requirements for forward contract payables, along with the inability to repatriate cash from foreign countries on a short term basis to offset any hedge forward contract payable. We are currently reviewing our hedging strategy for the remainder of 2010. At June 30, 2010, we had no foreign currency forward contracts.
  - 23 -
 Table of Contents
  All of our long-term debt obligations are at a fixed interest rate over the term of the agreement and there are no borrowings under our revolving credit facility at June 30, 2010. However, as of June 30, 2010, we have $3.1 million outstanding against the line of credit to cover various letters of credit guarantees.
 
 During the normal course of business, we are routinely subjected to a variety of market risks, examples of which include, but are not limited to, interest rate movements and fluctuations in foreign currency exchange rates, as discussed above, and collectability of accounts receivable. We continuously assess these risks and have established policies and procedures to protect against the adverse effects of these and other potential exposures. Although we do not anticipate any material losses in these risk areas, no assurance can be made that material losses will not be incurred in these areas in the future.
 
 Item 4.  Controls and Procedures.
 
 Evaluation of Disclosure Controls and Procedures
 
 We maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act) designed to ensure information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and timely reported as specified in the SEC’s rules and forms. They are also designed to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, as appropriate, to allow timely decisions regarding required disclosure.
 
 Our management, with the participation of our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer have concluded that, as of the end of such period, our disclosure controls and procedures were effective to ensure that information we are required to disclose in reports we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported timely as specified in SEC rules and forms and (ii) accumulated and communicated to our management, including our certifying officers, as appropriate to allow timely decisions regarding required disclosures.
 
 Changes in Internal Control over Financial Reporting
 
 There were no changes in our internal control over financial reporting, as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f), that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
 
 PART II — OTHER INFORMATION
 
 Item 1.  Legal Proceedings.
 
 We are currently a party to various legal proceedings, including those noted below. While we presently believe that the ultimate outcome of these proceedings, individually and in the aggregate, will not have a material adverse effect on our financial position, results of operations or cash flows, litigation is subject to inherent uncertainties, and unfavorable rulings could occur. An unfavorable ruling could include monetary damages or, in cases where injunctive relief is sought, an injunction. Were an unfavorable ruling to occur, it is possible such a ruling could have a material adverse impact on our financial position, results of operations or cash flows in the period in which the ruling occurs or in future periods.
 
  - 24 -
 Table of Contents
 SPA Syspatronic AG v. Hypercom Corporation, et al. (United States District Court for the Eastern District of Texas, Marshall Division, Civil Action No. 2:07-CV-416 (LED), filed on September 18, 2007)
 
 SPA Syspatronic AG (“Syspatronic”) commenced this action against us and others, alleging that certain of our products infringe U.S. Patent No. 5,093,862, entitled “Data Carrier – Controlled Terminal in a Data Exchange System”, issued on March 3, 1992 (the “‘862 Patent”) allegedly owned by Syspatronic. The plaintiff is seeking a judgment of infringement, an injunction against further infringement, damages, interest and attorneys’ fees. We filed an answer denying liability on the basis of a lack of infringement, invalidity of the ‘862 Patent, laches, waiver, equitable estoppel and unclean hands, lack of damages, failure to state a claim, and inequitable conduct during the prosecution of the ‘862 Patent.We also counterclaimed seeking a declaratory judgment of non-infringement and invalidity of the ‘862 Patent, and seeking attorneys’ fees and costs as an exceptional case due to the plaintiff’s inequitable conduct during the prosecution of the ‘862 Patent. In April 2008, the U.S. Patent and Trademark Office (the “Patent Office”) granted the request by certain of the defendants for re-examination of the ‘862 Patent. Thereafter, the Court stayed proceedings in this case until the Patent Office completed its re-examination. The Patent Office ultimately confirmed the patentability of the claims of the ‘862 Patent based on the construction advanced by Syspatronic of a key term in the only two independent claims of the ‘862 Patent. In light of that construction, we believe that our accused products do not infringe the ‘862 Patent. The Court lifted the stay it ordered during the reexamination proceedings. A Markman hearing is set for November 10, 2010, and the case is set for trial on May 30, 2011. By agreement, this case will be tried in Tyler, Texas. This action is currently in the discovery stage. On June 22, 2010, the Court denied Syspatronic’s Motion to Dismiss Defendants’ Inequitable Conduct Counterclaims and Defenses and held that Defendants’ allegations of inequitable conduct state a plausible claim for relief that satisfies the applicable pleading requirements. Court ordered mediation is expected to be held in the third quarter when the Defendants also expect to file a motion for summary judgment.
 
 CardSoft, Inc., et al. v. Hypercom Corporation, et al. (United States District Court for the Eastern District of Texas, Marshall Division, Civil Action No. 2:08-CV-00098, filed on March 6, 2008)
 
 CardSoft, Inc. and CardSoft (Assignment for the Benefit of Creditors), LLC (collectively “CardSoft”) filed this action against us and others in March 2008, alleging that certain of our terminal products infringe two patents allegedly owned by CardSoft: U.S. Patent No. 6,934,945 (the “‘945 Patent”), entitled “Method and Apparatus for Controlling Communications,” issued on August 23, 2005, and U.S. Patent No. 7,302,683 (the “‘683 Patent”), also entitled “Method and Apparatus for Controlling Communications,” issued on November 27, 2007, which is a continuation of the ‘945 patent. CardSoft is seeking a judgment of infringement, an injunction against further infringement, damages, interest and attorneys’ fees. In June 2008, we filed our answer, denying liability on the basis of a lack of infringement, invalidity of the ‘945 Patent and the ‘683 Patent, laches, waiver, equitable estoppel and unclean hands, lack of damages and failure to state a claim. We also counterclaimed seeking a declaratory judgment of non-infringement and invalidity of the ‘945 Patent and the ‘683 Patent. A Markman hearing is scheduled for July 20, 2011 and trial is scheduled for November 7, 2011. This action is currently in the discovery stage.
 
 Lisa Shipley v. Hypercom Corporation. (United States District Court for the Northern District of Georgia, Civil Action No. 1:09-CV-0265, filed on January 30, 2009)
 
 Lisa Shipley (“Shipley”), a former employee, filed this action against us in January 2009, alleging that we violated Title VII of the Civil Rights Act by discriminating against her on the basis of her gender, violated the Georgia Wage Payment laws, the Equal Pay Act and Georgia law by paying her lower compensation based on her gender. Ms. Shipley is seeking compensatory damages for emotional distress, damage to reputation, embarrassment, lost wages, back pay, accrued interest, punitive damages, attorney’s fees and expenses, and interest. In February 2009, we filed a motion to dismiss based on improper venue or, in the alternative, to transfer venue to the United States District Court for the District of Arizona. In June 2009, the Court denied the motion. In June 2009, we filed our answer, generally denying the material allegations of Ms. Shipley’s complaint. In October 2009, Ms. Shipley filed an amended complaint adding an allegation that we unlawfully retaliated against her. In November 2009, we filed our answer, denying the material allegations of the amended complaint. In February 2010, we filed a Motion for Judgment on the Pleadings as to Ms. Shipley's retaliation claim, which the Court subsequently denied. This action is currently in the discovery stage. On July 19, 2010, we filed a motion for summary judgment that is currently pending.
 
 Item 1A.  Risk Factors.
 We refer you to documents filed by us with the SEC, specifically “Item 1A. Risk Factors” in our most recent annual report on Form 10-K for the fiscal year ended December 31, 2009, which identify important risk factors that could materially affect our business, financial condition and future results. We also refer you to the factors and cautionary language set forth in the section entitled “Cautionary Statements Regarding Forward-looking Statements” of this quarterly report on Form 10-Q. This quarterly report on Form 10-Q, including the consolidated financial statements and related notes, should be read in conjunction with such risks and other factors for a full understanding our operations and financial condition. The risks described in our Form 10-K and herein are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or operating results. The risk factors included in our annual report on Form 10-K for the fiscal year ended December 31, 2009 have not materially changed, except as set forth below:
 
  - 25 -
 Table of Contents
 A disruption in our third-party manufacturers or suppliers would negatively impact our ability to meet customerrequirements. We currently rely on third-party manufacturers, and in the future will rely on one or more original design manufacturers as we transition to a joint development manufacturing model, to manufacture and assemble (and in the future, co-design and co-develop) substantially all of our products and subassemblies. We also depend upon third-party suppliers to timely deliver components that are free from defects, competitive in functionality and cost, and in compliance with our specifications and delivery schedules.  If we are unable to successfully manage our relationship with these third-party manufacturers, or if such manufacturers experience any significant disruption in their supply chain and manufacturing capabilities, or they experience similar economic, political and business issues that may impact their ability to fulfill their obligations to us, we may be unable to fulfill customer orders in a timely manner, which would have a material adverse effect on our business, operating results and financial condition. In addition, our use of third-party manufacturers reduces our direct control over product quality, manufacturing timing, yields, and costs. Disruption of the manufacture or supply of our products or components, or a third-party manufacturer’s or supplier’s failure to remain competitive in functionality, quality or price, could delay or interrupt our ability to deliver our products to customers on a timely basis, which would have a material adverse effect on our business, operating results and financial condition. The components used in our systems are purchased from outside sources. Certain components, such as semiconductors, wireless modules, and the like, are purchased from single suppliers. The failure of any such supplier to meet its commitment on schedule could have a material adverse effect on our business, operating results and financial condition. If a sole-source supplier were to go out of business or otherwise become unable to meet its supply commitments, the process of locating and qualifying alternate sources could take months, during which time our production could be delayed, and may, in some cases, require us to redesign our products and systems. Such delays and potential costly redesigns could have a material adverse effect on our business, operating results and financial condition. We are currently experiencing, and may in the future experience, delays in delivery of products or product components due to general market conditions creating long lead times for certain components, such as semiconductors, as well as failures on the part of some of our suppliers to timely deliver upon our previously agreed to component orders. In addition, we have occasionally experienced, and may in the future experience, delivery of products of inferior quality from component suppliers and third-party manufacturers. Although alternate manufacturers and suppliers are generally available to provide our products and product components, the number of manufacturers or suppliers of some of our products and components is limited, and qualifying, and transitioning to, a replacement manufacturer or supplier would take a significant amount of time. Such delays could have a material adverse effect on our business, operating results and financial condition.
 Fluctuations in currency exchange rates may adversely affect our financial results and cash position. A substantial part of our business consists of sales to international customers and, as a result, the majority of our revenues and expenses related to our international operations are denominated in Euros and other non-U.S. Dollar currencies. Adverse currency exchange rate fluctuations could have a material impact on our financial results in the future, including our cash position.  In addition, our balance sheet reflects non-U.S. Dollar denominated assets and liabilities, which can be adversely affected by fluctuations in currency exchange rates. In the past, we have entered into foreign currency forward contracts intended to hedge our exposure to adverse fluctuations in exchange rates, but these hedging arrangements are not always effective, particularly in the event of imprecise forecasts of non-U.S. Dollar denominated assets and liabilities and such attempts to mitigate these risks may be costly. Currently, we do not hedge against our entire foreign currency risk as it has become even more costly as a result of recent market developments. Accordingly, an adverse movement in exchange rates could have a material adverse effect on our financial results. In the year ended December 31, 2009, we incurred foreign currency gain of approximately $0.4 million and, for the six month period ended June 30, 2010, a loss of $2.2 million, net of foreign currency transaction gains or losses.
  Furthermore, we utilize contract manufacturers in various international locations, including Malaysia, Germany, Brazil, Romania, and Tunisia. While the majority of our products are purchased from these manufacturers in U.S. Dollars, we also purchase some products in local currencies. Therefore, we may be impacted by fluctuations in foreign currency exchange rates. With our transition to a joint development manufacturing model for the next generation of our products beginning throughout 2010 and into 2011, we expect that a larger proportion of our manufacturing costs may be denominated in U.S. Dollars. Therefore, our financial results, including our cash position, could be impacted by fluctuations in foreign currency exchange rates to a greater extent than in prior periods.
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  Item 6.  Exhibits.
 Exhibit Number
Description of Exhibit3.1
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. 333-35641))3.2
Second Amended and Restated Bylaws of Hypercom Corporation (incorporated by reference to Exhibit 3.1 to Hypercom Corporation’s Current Report on Form 8-K filed on November 6, 2006)4.1
Warrant to Purchase Common Stock dated April 1, 2008 (incorporated by reference to Exhibit 4.1 to Hypercom Corporation’s Current Report on Form 8-K filed on April 2, 2008, as amended by the Current Report on Form 8-K/A filed on June 16, 2008)4.2
Registration Rights Agreement, dated as of April 1, 2008, by and between Hypercom Corporation and FP Hypercom Holdco, LLC (incorporated by reference to Exhibit 4.2 to Hypercom Corporation’s Current Report on Form 8-K filed on April 2, 2008, as amended by the Current Report on Form 8-K/A filed on June 16, 2008)31.1
Certification of Chief Executive Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *31.2
Certification of Chief Financial Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *32
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 **
 * Filed herewith. ** Furnished herewith.
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  SIGNATURES
 
 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 HYPERCOM CORPORATION
 
 Date: August 9, 2010
By: /s/ Philippe Tartavull
 Philippe Tartavull
 Chief Executive Officer and President (duly authorized officer and principal executive officer)
 
 
 Date: August 9, 2010
By: /s/ Thomas B. Sabol
 Thomas B. Sabol
 Chief Financial Officer (principal financial officer)
 
 
 Date: August 9, 2010
By: /s/ Shawn C. Rathje
 Shawn C. Rathje
 Chief Accounting Officer and Controller (principal accounting officer)