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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C.
20549


FORM 10-K

|    |  |                                                                                     
|--- |  | ------------------------------------------------------------------------------------
|/X/ |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2002

OR

|     |  |                                                                                         
|---- |  | ----------------------------------------------------------------------------------------
|/  / |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 1-13521

HYPERCOM CORPORATION

(Exact name of registrant as specified in its charter)


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

2851 West Kathleen Road

Phoenix, Arizona 85053
(Address of principal executive offices) (Zip Code)


(602) 504-5000

(Registrants telephone number, including area code)


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

|                                                   |  |                                                                   
|-------------------------------------------------- |  | ------------------------------------------------------------------
|Title of Each Class

Common Stock, $.001 par value |  | Name of Each Exchange on Which Registered

New York Stock Exchange

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

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

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

The aggregate market value of the voting stock held by non-affiliates of
the registrant was $183,187,890 as of June 28, 2002 (based on the closing price
of the common stock on the New York Stock Exchange on that date).

Number of shares of the registrants common stock, $.001 par value per
share, outstanding as of March 19, 2003, was 48,050,109.

Documents Incorporated By Reference

Material from the Companys Proxy Statement relating to its 2003 Annual
Meeting of Stockholders has been incorporated by reference into Part III, Items
10, 11, 12, 13 and 15.

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|              |                                                                                                         |  |  |  |  |  |  | 
|------------- | ------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I       
|              | Item 1. Business                                                                                       
|              | Item 2. Properties                                                                                     
|              | Item 3. Legal Proceedings                                                                              
|              | Item 4. Submission of Matters to a Vote of Security Holders                                            
|PART II      
|              | Item 5. Market for Registrants Common Equity and Related Shareholder Matters                          
|              | Item 6. Selected Financial Data                                                                        
|              | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations          
|              | Item 7a. Quantitative and Qualitative Disclosures About Market Risk [TO BE UPDATED]                    
|              | Item 8. Financial Statements and Supplementary Data                                                    
|              | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.          
|PART III     
|              | Item 10. Directors and Executive Officers of the Registrant                                            
|              | Item 11. Executive Compensation                                                                        
|              | Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|              | Item 13. Certain Relationships and Related Transactions                                                
|              | Item 14. Controls and Procedures                                                                       
|              | Item 15. Principal
Accountant Fees and Services.                                                       
|PART IV      
|              | Item 16. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                              
|SIGNATURES   
|CERTIFICATION
|EXHIBIT INDEX
|EX-10.6      
|EX-10.17     
|EX-10.18     
|EX-10.19     
|EX-10.21     
|EX-10.23     
|EX-10.29     
|EX-21.1      
|EX-23.1      
|EX-24.1      
|EX-99.1      
|EX-99.2      
|EX-99.3      



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TABLE OF CONTENTS

|         |     |                                       |                                                                                                |      |    |    |  |  | 
|-------- | --- | ------------------------------------- | ---------------------------------------------------------------------------------------------- | ---- | -- | -- |  |  | 
|Item No. |     | Caption                               |                                                                                                | Page
|         |     |                                       |                                                                                                |     
|PART I   |     |                                       |                                                                                                |      |    |    |  | 
|         | 1.  |                                       | Business                                                                                       |      |    | 3  | 
|         | 2.  |                                       | Properties                                                                                     |      |    | 14 | 
|         | 3.  |                                       | Legal Proceedings                                                                              |      |    | 14 | 
|         | 4.  |                                       | Submission of Matters to a Vote of Security Holders                                            |      |    | 14 | 
|PART II  |     |                                       |                                                                                                |      |    |    |  | 
|         | 5.  |                                       | Market for
Registrants Common Equity and Related Stockholder Matters                          |      |    | 15 | 
|         | 6.  |                                       | Selected Financial Data                                                                        |      |    | 15 | 
|         | 7.  |                                       | Managements Discussion and Analysis of Financial Condition and Results of Operations          |      |    | 18 | 
|         | 7A. |                                       | Quantitative and Qualitative Disclosures About Market Risk                                     |      |    | 30 | 
|         | 8.  |                                       | Financial Statements and Supplementary Data                                                    |      |    | 30 | 
|         | 9.  |                                       | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           |      |    | 30 | 
|PART III |     |                                       |                                                                                                |      |    |    |  | 
|         | 10. |                                       | Directors and Executive Officers of the Registrant                                             |      |    | 31 | 
|         | 11. |                                       | Executive Compensation                                                                         |      |    | 31 | 
|         | 12. |                                       | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |      |    | 31 | 
|         | 13. |                                       | Certain Relationships and Related Transactions                                                 |      |    | 31 | 
|         | 14. |                                       | Controls and Procedures                                                                        |      |    | 31 | 
|         | 15. |                                       | Principal Accountant
Fees and Services                                                         |      |    | 31 | 
|PART
IV  |     |                                       |                                                                                                |      |    |    |  | 
|         | 16. |                                       | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                               |      |    | 32 | 
|         |     | Signatures                            |                                                                                                |      | 33 |   
|         |     | Certification-Chief Executive Officer |                                                                                                |      | 34 |   
|         |     | Certification-Chief Financial Officer |                                                                                                |      | 35 |   
|         |     | Exhibit Index                         |                                                                                                |      | 70 |   

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PART I




Item 1.Business

General Description

We are a leading global provider of electronic payment solutions that add
value at the point-of-sale (POS) for consumers, merchants and acquirers, such
as banks and processing companies. Our products include secure card payment
terminals and peripheral devices, specialized networking equipment, software
applications for e-commerce, mobile commerce, smart cards and traditional
credit, charge and debit card transactions, and related support and services.
Increasingly, our more advanced terminals are being deployed in support of
non-payment applications and new markets, including government, education and
healthcare. We are also engaged in micro-ticket leasing of payment terminals
and other equipment.

Our principal executive offices are located at 2851 West Kathleen Road,
Phoenix, Arizona, 85053, and our telephone number is (602) 504-5000. Our
website is located at www.hypercom.com. We make available free of charge,
through our website, our annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act as
soon as reasonably practicable after we electronically file such material with,
or furnish it to, the Securities and Exchange Commission. The information on
our website is neither incorporated by reference into, nor a part of, this
Report.

History and Business Profile

We are the successor to an Australian company founded in 1978 by George
Wallner. Our operations were primarily focused on Asian markets until 1987 when
the company expanded its operations into the United States as a result of being
awarded contracts to supply advanced technology POS terminals and related
network systems to American Express. Commencing in the early 1990s, we
expanded our operations into Latin America and Europe to take advantage of
their increasing usage of credit and debit cards and the successful performance
of our POS products in a less developed telecommunications environment. In
2002, international revenues accounted for approximately 59% of our total
revenues.

On June 5, 1996, we reincorporated in Delaware, and shortly thereafter,
through a series of corporate restructurings, became a U.S. holding company for
the operations of the Australian company and its subsidiaries and affiliates.
In 1997, we completed an initial public offering of our common stock, which is
listed on the New York Stock Exchange as HYC.

In April 1999, we acquired Hypercom Financial Terminals AB, which
manufactures POS terminals, personal identification number (PIN) pads, and
related equipment, that we have integrated into our worldwide product
offerings.

In January 2000, we acquired Golden Eagle Leasing, Inc. (Golden Eagle),
which provides micro-ticket leases for POS and other equipment, the sale of
which is generally originated through banks, processors, acquirers and
Independent Sales Organizations (ISOs).

We operate through various divisions and more than 20 subsidiaries. These
business units include:

POS/Network Services Segment:



| |  |  | Hypercom Transactions Systems Group, which is responsible
for our POS payment system operations in North America, Latin
America, Asia/Pacific and Europe/Middle East/Africa (EMEA);
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Hypercom Network Systems, which is responsible for our
enterprise networking operations in North America, Latin America,
Asia/Pacific and EMEA;                                    
|
| |  |  | Hypercom Manufacturing Resources, which is responsible for all of our manufacturing operations.                                                                                    

Leasing
Segment:



| |  |  | Golden Eagle, which is responsible for micro-ticket leasing of POS terminals and other equipment.
| | - |  | -------------------------------------------------------------------------------------------------

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

Recent Financial Developments

During 2002, we took a number of steps to improve our long-term
profitability and reduce the risks inherent in our balance sheet. During the
first quarter of 2002, we completed a private placement of 7,870,000 shares of
our common stock to select institutional investors and high net worth
individuals. We used the net proceeds of $36.5 million from the offering to
repay two high-cost term loans under our primary credit facility, to repay an
outstanding loan from a director and principal shareholder, and to pay down the
then current principal and interest under our revolving credit facility.

In the second quarter of 2002, we commenced foreign currency hedging
transactions for the purpose of attempting to protect the U.S. dollar
denominated value of our offshore assets. We also wrote-off $21.8 million of
goodwill in accordance with the adoption of Statement of Financial Accounting
Standards No. 142.

In the third quarter of 2002, we completed a restructuring of the
operations of our Transaction Systems Group to improve operating efficiencies,
reduce financial exposure in Latin America and discontinue activities that were
unprofitable and non-essential to our core products and services. As a part of
the restructuring, we terminated our direct manufacturing operations in Brazil
in favor of the economies of scale, expertise and enhanced cash flow available
on a contracted basis with a leading electronics manufacturing services
provider. Additionally, we modified our sales and marketing approach in Latin
America, Canada and Germany, where the level of activity was indicative of a
local distributor network versus a dedicated direct sales organization. We
also reduced general, administrative and other overhead expenses in the Latin
America region. Also during the quarter, we established a $20 million
valuation allowance on our deferred tax asset to fully reserve the then
remaining balance.

For further information concerning these recent financial developments see
the Notes to Consolidated Financial Statements included in this Report.

POS Terminal Industry Overview

Over the past several decades, consumers worldwide have increasingly
utilized card-based payment methods, such as credit and debit cards, to replace
traditional forms of payment, such as checks and cash. Until the early 1980s,
most point-of-sale credit card transactions were processed manually using
paper-based systems and requiring a telephone call for credit authorization or
verification. This costly, time-consuming method resulted in delays in the
completion of the transaction and in the receipt of funds by merchants. In
order to accommodate the increasing use of card-based payments and to
facilitate electronic online processing of these transactions, stand-alone
payment terminals were introduced in the early 1980s to authorize credit card
payments. This function requires the use of a POS terminal capable of reading a
cardholders account information from the cards magnetic stripe and combining
this information with the amount of the sale entered via a POS terminal keypad.
The terminal electronically transmits this transaction information over a
communications network to an authorized computer data center and then displays
the returned authorization or verification response on the POS terminal.

In recent years, POS terminals have evolved from authorization only
devices into small computers capable of accommodating various means of
electronic payment, back office and marketing applications, and fraud
prevention. Basic card payments through transaction terminals remain a
critical application and require specialized and secure payment devices that
will continue to occupy a place on the merchant countertop. However, the
industry trend is for terminals to not just have the ability to process credit
card transactions, but also facilitate other multiple applications for the
merchant, the processor, and the consumer. Thus, the POS terminal is rapidly
becoming a dual-function platform  both an interactive payment device and a
front-end to a complete transaction solution for the point of sale/transaction.
The ability to quickly and seamlessly handle, transport and route the
increased amount of data to multiple locations without increasing the
transaction time is also critical. We have continually focused on the entire
transaction from initiation to completion, and in doing so have designed our
POS products to take advantage of the latest in

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technology, connectivity, and applications, without sacrificing speed or
security. Our solutions are designed to minimize the total cost of ownership
giving consideration to the needs of processors, acquirers, merchants and
consumers.

The evolution of POS technology has been accompanied by a demand for
additional value-added applications at the point of sale/transaction.
These include
gift and loyalty cards, pre-paid phone card activation, on-screen signature,
electronic receipt capture, electronic check truncation or conversion,
electronic processor statements, e-mail, interactive coupon and loyalty
programs, logos and advertising, virtual store and connectivity, positive
identification and enhanced security. Other developments facilitated by these
new technologies include the increased adoption, particularly in
Europe and more recently in Latin America and Asia, of
computer chip or smart cards that store value and information or secure
token, the increased popularity of debit cards, the adoption of card payment in
the quick service restaurant (QSR) industry, and the use of POS systems in
vertical industries, such as health care and the electronic payment of
government benefits.

As the infrastructures of China, India, Russia and other underdeveloped
counties are built out to levels sufficient to support electronic transactions
and services, they are expected to result in further growth opportunities for
the POS industry. China, in particular, is rapidly developing and is projected
to surpass the U.S. in the number of debit and credit cards issued within the
next several years.

The market for our terminals is generally comprised of the following
segments:



| |  |  | Basic functionality  low cost/low price, high volume potential
in the traditional point-of-sale environment.                 
| | - |  | ------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Enriched applications  lower total cost of ownership at higher
price point, Internet enabled, specialized and extended niche.
|
| |  |  | Mobile and remote.                                                                                                            
|
| |  |  | Non-payment transactions  Government, Education and Healthcare niche applications.                                           

We estimate that up to 60% of the installed base of terminals in the
industry is incapable of supporting the more enhanced functionality and product
features increasingly demanded in the marketplace. Thus, the opportunity to
replace or upgrade the existing terminal base is significant and increasing.
Additionally, the industrys card associations, including Europay
International, MasterCard International and Visa International, have prescribed
new and more rigorous standards that all new and existing terminals must meet
in order to be certified for use in their respective systems. These standards
govern interoperability, backwards compatibility, interconnectivity, security
and other operating features.

EMVCo, the smart card standards organization, was established in February
1999 by Europay International, MasterCard International and Visa International
to administer, maintain, and promote the EMV Integrated Circuit Card,
Terminal, and Application Specifications for Payment Systems (commonly referred
to as the EMV Specifications). The EMV Specifications, originally developed
jointly by the three organizations, define a set of requirements that ensure
interoperability for credit and debit payment applications between smart cards
and terminals on a global basis, regardless of where the card is used. The EMV
Specifications serve as the global framework for smart card and terminal
manufacturers worldwide. EMVCo ensures a single terminal approval process at a
level that allows cross payment system interoperability through compliance with
the EMV Specifications.

EMVCo established the terminal Type Approval process to create a mechanism
to test compliance with the EMV Specifications. Type Approval provides an
increased level of confidence that interoperability and consistent logical
behavior between compliant applications have been achieved.

EMVCo Type Approval testing is divided into two levels. The Level 1 Type
Approval process tests compliance with electromechanical characteristics,
logical interface, and transmission protocol requirements. Level 2 Type
Approval tests compliance with debit/credit application requirements.

The EMVCo Type Approval process exclusively addresses terminal Type
Approval. Card Type Approval is the responsibility of the Europay, MasterCard
and Visa payment systems. Hypercom was one of the first POS terminal providers
to receive the EMVCo Level 1 and 2 certifications necessary to fully support
the conversion to smart card transactions and the first to pass all of the
EMVCo Level 2 tests through Europay. Hypercom has worked closely with EMVCo to
develop and ensure an EMV-stable platform, with each Hypercom region having a
dedicated EMV team. Our EMEA regional office houses our Global

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Certifications team, which provides support, implementation and
certification for roll-out throughout the world. Based on our expertise in
this area, we believe Hypercom is well positioned to capitalize on these
opportunities.

Class B and Class A certifications of our POS hardware and Software by
card processors are essential for deploying our terminals in the U.S.
marketplace. Class B certification tests the content of the host message
(interface) formats for integrity and fulfillment between the terminal and the
processor. Upon receiving Class B certification, we then train third party
help desks to support merchants regarding the new product. Class B
certification is a prerequisite to applying for Class A certification. In
Class A certification, the processor or large customer assumes full
responsibility for completing the certification process, deploying the product,
and providing direct help desk support for their merchants.

Successful completion of the EMVCo certification process, the processors
Class B and Class A certifications, and compliance with other applicable
standards set by international payment bodies, regulatory authorities and
banking associations, is a pre-requisite to the timely introduction of new
terminal technology.

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

The POS terminal manufacturing industry is extremely fragmented.
Including Hypercom, there are but a few global providers as the majority of
participants compete on either a regional or local country basis, within
specific market segments or with a limited range of products and services.
According to The Nilson Report(November 2002), the top three manufacturers
(Hypercom, VeriFone and Ingenico) accounted for approximately 66% of POS
terminals shipped in 2001, while 46 other manufacturers accounted for the
remaining 34%.

Products and Services

Point of Sale / Point of Transaction Terminals

Hypercom provides system-level products and services to our electronic
transaction customers, including point-of-sale/ point-of-transaction terminals,
peripheral devices that effectively extend terminal capabilities, network
access controllers, transaction environment software and a host of pre and post
sale services. Our end-to-end solutions capability and global presence is a
competitive advantage in servicing the broad range of customer and end-user
requirements worldwide.

Our terminal products include stand-alone terminals, terminals integrated
with host server or PC based systems, and wireless terminals. These terminals
service a number of end-user environments, including that of the stand-alone
merchant countertop, multi-lane retailer, temporary merchant locations and
kiosks, outdoor drive-thru, mobile units and operations requiring on-site
portability such as rental car lots and restaurants. Our terminal products are
designed to accept magnetic stripe cards, smart or chip cards, check
truncation, conversion and imaging, and radio frequency (RF) transmitting
devices. Terminal functionality ranges from routine tasks, such as credit or
debit authorization, electronic draft capture and electronic batch submission
and settlement, to more advanced functions, such as interactive customer coupon
and loyalty programs, issuance of prepaid cards, signature capture, email, time
and attendance, internet store expansion, electronic benefits transfer and
identification verification. These products feature a modular design to allow
for easy maintenance and upgrading and may be centrally managed through our
proprietary Term Master® software program.

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

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

Hypercom
ICE.Our Interactive Customer Environment (ICE) family of
products consists of high performance, multi-function touch-screen terminals
incorporating a high-speed thermal printer and our Hypercom FastPOS modem
technology. Our

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ICE terminals provide financial transaction technology incorporated with a
highly interactive and intuitive user interface to support sophisticated
transactions with minimal user training.

ICE terminals support multiple payment options such as magnetic-stripe
charge, credit and debit cards, smart cards and paper check conversion. They
enable such value-added benefits as electronic signature capture, prepaid card
activation, interactive customer coupons and loyalty programs, logos and
advertising, virtual stores and positive identification. They also support
administrative activities such as electronic receipt capture, time and
attendance, email and electronic statements. The advanced technology and
breadth of the ICE product line not only accommodates the aforementioned
expanded applications at the POS, but also enables the deployment of our
terminals in non-traditional markets, such as government, education and health.

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

Hypercom
Financial Terminals(HFT). Our HFT family of products protects
the entry of PINs and secures both data input and data transmission according
to standards set by international payment bodies, regulatory authorities and
banking associations. The HFT 500 family of high-security PIN pads and card
acceptance devices can be used either indoors or out, are easy to operate and
enable fast, secure verification of both card and cardholder. Currently, the
HFT 500 series is the outdoor component to our quick service restaurant (QSR)
drive-thru solution for this rapidly developing segment of the POS market.

HypercomPlus. Our Plus family of products consists of enhanced versions
of our T series and ICE product lines. These products incorporate the Hypercom SureLoad
printer, a new thermal printer that incorporates fast, easy loading of paper
rolls. The Plusproducts also have integrated PIN pads and the ability to read
traditional magnetic stripe and the new smart cards. The T7Plusis the next
generation of the Hypercom T7P. The ICE 5500Plusincludes all of the features
and functionality of the ICE 5500, with the addition of the SureLoad printer
and an integrated PIN pad. The ICE 5700Pluscombines the ability to do check
conversion and credit/debit/chip card transactions in one, convenient,
easy-to-use device.

The ICE product family accounted for 34% of our terminals shipped in 2002,
with the T series and HFT product line comprising the other 66%.

Secure Systems and Transactions Group.In August 2002, we created the
Secure Systems and Transactions Group as a new division within our POS/Network
Systems Segment to target growth opportunities that are extensions of our core
competencies but beyond the traditional payments markets. Specifically, we
are exploring approaches to address, directly and/or in partnership, newly
emerging federal, state and local identity verification initiatives and
Homeland Security requirements. Our product offerings include biometrics,
secure identification, age verification and transaction security products and
systems.

Network Solutions and Equipment

Our Hypercom Network Services products and services are customized to
support the unique requirements of both high volume and high value transaction
based networks, whether they are the traditional retail point-of-sale or other
industry verticals such as financial, petroleum, gaming/lotteries and
government. Regardless of end use, all Hypercom networks are designed for
speed, reliability and security. In contrast to the standard IP-based network
solutions offered by our competitors, our networks address the needs of
customers having a substantial investment in legacy systems and protocols. Our
solutions not only sustain the value and extend the life of those networks, but
also provide a clear migration path to TCP/IP applications.

Our transaction and network systems product lines are complemented by a
host of services that include terminal encryption and deployment, terminal
repair and maintenance, customer training, help desk support, network design,
network installation and management. We also offer a suite of proprietary
software for systems development and management (both terminals and networks),
along with formal training programs for engineers, developers and systems
administrators.

Our Integrated Enterprise Networking (IEN) family of products consists of
Network Access Controllers (NACs) that provide the networking hardware
technology and communications infrastructure necessary to achieve connectivity
in the POS environment. NACs are intelligent communications devices that
provide a wide range of digital and analog interfaces, line concentration,
protocol conversion, data concentration, transaction routing, backup
transmission paths and multiple device interface capabilities that allow access
to high-performance data communications networks. Our IEN products have been
shown to reduce operating costs and protect

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our customers investments in current legacy networks. They afford an
array of network technologies, such as X.25, frame relay, and Integrated Services Digital Network (ISDN) and protocol interfaces,
including SNA and TCP/IP. The NAC product line also includes the IEN 100, which
connects automated teller machines, POS terminals and PC or in-store
controllers to existing hosts utilizing standard dial-up access.

Services and Software

Hypercom provides a broad range of services related to our POS payment
systems and networking products. We provide consulting services to:



| |  |  | assist with strategies and alternatives for POS payment systems,                          
| | - |  | ------------------------------------------------------------------------------------------
|
| |  |  | assist in the design, installation, integration and management of POS payment systems, and
|
| |  |  | design customized software applications.                                                  

We also provide deployment, training, technical assistance, help desk,
maintenance and leasing services for our products.

Terminal Application Software.We work closely with our customers to
develop standard and customized applications that operate on our terminals. To
date, we have developed over 80 terminal software applications, ranging from
entry-level credit and debit solutions to complex systems that support a
comprehensive range of electronic payment and medical transaction functions.
Among these software applications are specialized applications for specific
markets such as lodging, restaurants, multi-lane retail and health care.

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

Global Alliance Channel.Our Global Alliance Channel (formerly VAR
Relations Channel) is comprised of over 100 value-added resellers and
developers, and supports over 19 vertical or specialty markets that include
retail/restaurant, e-commerce and gaming. Using our Visual Hypercom
Developers Toolkit (VHDT), the Global Alliance Channel creates unique and
innovative applications that enhance the point of sale, open new vertical
markets for Hypercom, as well as provide incremental hardware sales. In 2003,
we expect that the Global Alliance Channel will continue its expansion to our
international regions in EMEA, Asia, Australia, and Latin America. The
applications being developed by our Global Alliance partners are a complement
to that developed internally and effectively extend our market penetration
while also reducing our cost of software development.

ePic®
Our comprehensive Internet-based retail countertop commerce and
information system, called ePOS-infocommerce, or ePic, is the industrys first
Internet-enabled POS payment terminal and server system. ePic allows merchants
to support a range of Internet-based functions via our ICE series of
touch-screen terminals. In addition to traditional secure payment processing
functions, ePic supports electronic receipt capture, advertising at the point
of sale, interactive electronic coupons, branding programs, customer loyalty
programs, e-mail, and e-commerce. With our electronic receipt capture
software, the receipt and signature are captured at the point of sale and
stored electronically. This creates a completely paperless environment, which
improves merchant efficiency and service, and reduces charge-backs.
Charge-back handling is completely automated as receipts are accessed
electronically for satisfactory settlement. Merchants can view and retrieve
receipts through the Internet with a standard browser, print the data or send
it electronically to the appropriate destination.

To support advertising at the point of sale, the touch-screen on the ICE
terminals can display the merchant logo, promotions or other advertising. ICE
Media delivers onscreen messages, such as our pilot program, which displays and
prints the pictures of missing children on screen and on receipt. Point of
purchase advertising can also be used to cross-sell, motivate and build the
brand image. Customized receipts with the merchant logo or advertising message
may offer discounts for future purchases, extend advertising impact and
encourage repeat business.

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Loyalty programs keep merchants in touch with their customers and inform
customers of new rewards, alert them to special offers or simply remind them to
use their credit or debit cards. Data secured with loyalty cards can be used to
make personalized customer service improvements.

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

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

Customers

Our POS Systems customers are predominantly large domestic and
international financial institutions, electronic payment processors,
independent sales organizations, distributors and resellers. These customers
generally have substantial POS payment system requirements. We place special
emphasis on offering high-performance, technologically-advanced POS payment
system solutions and networking products to enable our customers to increase
revenues, sustain revenues and/or reduce costs.

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

In any given year, select customers may account for a significant
percentage of net revenue. For the year ended December 31, 2002, First Data
Corporation and its affiliates accounted for 10.9% of our consolidated net
revenue. Including First Data Corporation, our two and five largest
customers accounted for 17.7% and 29.7% of our
consolidated net revenue, respectively.

Sales, Marketing and Distribution

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

Our general marketing strategy is coordinated from our Phoenix, Arizona
headquarters; however, each region develops programs that meet the needs of
their local markets. Our marketing programs include trade shows, press
releases, press interviews, speaker engagements, training and technology
seminars, sales collateral and white papers, print advertising, articles and
newsletters supported by our marketing and technical publications group.

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

Customer Service and Support

We are committed to providing a high level of service and support to our
customers in a cost-effective manner. We provide a wide range of support
services that contribute to the increased profitability of our customers and
meet their individual needs.

We provide pre- and post-sales consulting and application software
development, and value-added services such as deployment and customized
packaging services, PIN pad encryption, equipment and asset management,
merchant training, system

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upgrades and conversions, help desk services and terminal repair and
refurbishing. We also work with third party merchant service providers that
provide support services to our customers.

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

We provide up to a five-year warranty on our POS terminal products and a
one-year warranty on other products. We believe our five-year warranty on POS
terminal products results in a lower total cost of ownership than competitors
products and contributes significantly to our reputation for providing
high-quality, reliable products.

Manufacturing

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

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

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

Research and Product Development

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



| | Our product development process generally involves the following:
| | -----------------------------------------------------------------
|
| |                                                                 
|
| |                                                                 
|
| |                                                                 
|
| |                                                                 

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| |  |  | Quality assurance with respect to the components and product performance.
| | - |  | -------------------------------------------------------------------------
|
| |  |  | Certification of the hardware and software by applicable organizations.  
|
| |  |  | Production.                                                              

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

In the periods ended December 31, 2002, 2001 and 2000, our research and
development expenditures from continuing operations were $24.7 million, $28.1
million, and $38.7 million, respectively. To date, a substantial majority of
our research and development costs have been expensed as incurred.

Seasonality

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



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

Competition

The markets in which we operate are highly competitive. With respect to
our POS payment system products, we compete primarily on the basis of
ease-of-use, product performance, price, features, quality, the availability of
application software programs, the number of third-party network host and
telecommunication system certifications we have obtained for our products and
application programs, rapid development, release and delivery of software
products and customer support and responsiveness. Software products compete on
the basis of functionality, scalability, quality and support.

In the POS terminal segment, our global competitors are Ingenico, a
France-based company, VeriFone, Inc., a privately-held domestic company, and
Lipman, an Israel-based company. In any particular market, we may also find
ourselves in competition with local or regional manufacturers and distributors.

In the electronic cash register market, we compete with companies such as
IBM, Siemens, NCR, ICL and Micros.

In the specialty network products niche of the marketplace, our primary
competitors are Cisco, CommWorks, Motorola and Suntec all of which are U.S.-based.

Marketing
in foreign countries poses additional challenges, the more common
being a customer preference for a national vendor, difficulties in obtaining
necessary certifications, and an ability to accommodate government
imposed policy requirements. See Risk Factors  The markets in which we compete are highly
competitive and subject to rapid technological change and price erosion in
Exhibit 99.1 which is attached hereto and incorporated herein by reference into
this Report.

Proprietary Rights

Our success is attributable in part to our proprietary technology. We rely
upon patents, copyrights, trademarks and trade secret laws to establish and
maintain our proprietary rights in our technology and products.

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We currently hold patents issued in the U.S. and several other countries
relating to POS terminal products. We also have a number of pending U.S. and
foreign patent applications relating to our POS terminal products, as well as
our Integrated Enterprise Networking product family.

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

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

There can be no assurance that other parties will not develop products or
technologies that are equivalent or superior to those of Hypercom, or that any
patents, trademarks, copyrights, confidentiality agreements and internal
safeguards upon which we rely will be adequate to protect our interests. See
Risk Factors  If we are unable to adequately protect our proprietary
technology, our competitors may develop products substantively similar to our
products and use similar technologies, which may result in the loss of
customers in Exhibit 99.1 which is attached hereto and incorporated herein by
reference into this Report.

Industry Standards and Government Regulation



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

We must also comply with state, federal, and international laws governing
such areas as occupational health and safety, minimum wages, work hours and
overtime, retirement and profit-sharing plans and severance payments, and the
use, storage, handling, and disposal of dangerous chemicals. Before completing
sales in foreign countries, our products must comply with local
telecommunications standards, recommendations of quasi-regulatory authorities,
and recommendations of standards-setting committees. In addition, public
carriers require that equipment connected to their networks comply with their
own standards. These standards in part reflect their currently installed
equipment. Some public carriers have equipment that does not fully meet
current industry standards. We must address this issue in designing
enterprise-networking products. Although we believe our products currently
meet all applicable industry standards, we cannot guarantee that our products
will comply with future standards. In addition, carriers set the tariffs that
govern rates for public telecommunications services, including their features
and capacity. These tariffs are subject to regulatory approval. Changes in
the tariffs could have a material adverse effect on our business and financial
condition.

Equipment Leasing

Golden Eagle Leasing, Inc., our equipment leasing subsidiary, is focused
on providing micro-ticket leasing (generally less than $5,000) through nation-wide vendors of
equipment in defined niche markets that are not served by traditional lessors.
These markets are generally characterized by less competition and price
sensitivity than the more traditional small and middle ticket leasing markets.
Golden Eagles primary market is that of POS equipment, the leases for which
currently account for nearly its entire portfolio. It also originates leases
in other commercial-use microticket markets, such as computer and office
equipment, and is actively exploring expansion into these and other lines of
equipment having similar dollar value and credit risk profiles. Golden Eagle targets
banks, processors, acquirers, and Independent Sales Organizations (ISOs) that
provide credit card authorization equipment such as our terminals and printers,
and other non-bank ATM equipment. This market is large, specialized and
generally under-served.

Golden Eagle originates its leases directly with the equipment end-user, which
for POS equipment is most often a merchant. Golden Eagle originates leases not
only on Hypercom POS equipment but also that of our competitors. In all
markets served, Golden Eagle adheres to strict underwriting guidelines to
ensure a competitive risk-adjusted rate of return on its portfolio of leases.
It

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competes on the basis of its ability to customize, efficiently fund and
subsequently service small individual or large multiple-unit transactions.

Golden Eagle operates as a financing principal, underwriting, approving
and funding all lease transactions in its portfolio. Golden Eagles financing
strategy is to maintain sufficient liquidity through its revolving credit and
term loan facilities to initially finance all new leases. When the aggregate
of such funding reaches a critical mass, Golden Eagle refinances a pool of
leases utilizing sales or securitizations of its lease receivables. Based on
the preference of the lender, Golden Eagle continues to provide all, or a
portion of the lease servicing, and retains its interest in the renewal income
and residual value of the equipment.

Golden Eagle has established and maintained strong lending relationships
with a number of banks and other lenders. Golden Eagle currently has revolving
credit facilities with Webster Bank ($15 million maximum) and Congress
Financial Corporation ($10 million maximum).

In
May 2001, Golden Eagle securitized approximately $45.6 million of its
equipment leases. The securitization was accounted for as a financing
transaction and under SFAS No. 140 Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of
Liabilities, both the assets and the related liability are
carried on Golden Eagles consolidated balance sheet. In connection with the
securitization, Golden Eagle, through a special purpose subsidiary, Golden
Eagle Funding Corp., issued $32 million of contract-backed term notes rated
triple-B by Moodys. The notes are collateralized by equipment leases acquired
from Golden Eagle, a security interest in the leased equipment, cash collateral
and reserve accounts, as well as other contractual rights and residual
proceeds.

Golden Eagles primary competitors are MicroFinancial (Leasecomm), Ladco
Leasing, CIT Lease Finance Group, Northern Leasing and Integrated leasing Corp.

Employees

As of February 28, 2003, we employed 1,418 persons, including 573 in the
U.S. (62 in manufacturing, 150 in service and support, 72 in sales and
marketing, 149 in research and development and 140 in finance and
administration). The remaining 845 employees were in international locations.

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

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

Executive Officers of the Registrant

The following are the executive officers of the Company as of March 27,
2003:

Christopher S. Alexander, 54:Chairman of the Board of Directors since
July 2002;President and Chief Executive Officer since November 2000; July 1999
- October 2000, President of Hypercom Transaction Systems Group; 1998-1999,
Chief Operating Officer, Hypercom Corporation; 1993-1998 Chief Operating
Officer of Hypercom International.

John W. Smolak, 54:Executive Vice President, Chief Financial and
Administrative Officer since April 2002; September 2000 to March 2001; Chief
Financial Officer of Suburban Propane L.L.P., a distributor, Whippany, New
Jersey; January 1999 - September 2000; Senior Vice President Finance and
Administration and Chief Financial Officer of 1-800 Flowers.com, a retailer,
Westbury, New York; and February 1995 - May 1998, Senior Vice President and
Chief Financial Officer of Lechters, Inc., a retailer, Harrison, New Jersey.

Jairo E. Gonzalez, 40:President of Hypercom Transaction Systems Group
since November 2000; President of Hypercoms Emerging Markets group, 1999-2000,
and interim President of ePicNetz, Inc., an applications service provider (ASP)
unit of Hypercom Corporation; 1990 - 1999 President, Hypercom International.

Douglas J. Reich, 59: Vice President, General Counsel and Secretary since
November, 2001; and July 1996 to January 2001, Senior Vice President, General
Counsel and Secretary of Wavo Corporation, a digital media services provider,
Phoenix, Arizona.

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Item 2.Properties

Our corporate headquarters is located in Phoenix, Arizona, where we own an
approximate 142,000 square foot building that is also utilized for research and
development, design, prototype manufacturing, testing, and repair. We lease an
adjacent 23,800 square foot building for Hypercom Network Systems pursuant to a
lease that expires August 31, 2011.

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

We
lease an approximate 9,607 square foot facility in Ridgefield,
Connecticut that is utilized by Golden Eagle pursuant to leases that
expire on December 31, 2004 and January 14, 2005. We also lease various facilities in Arizona, Florida, Georgia, Missouri,
New York, Texas, Argentina, Australia, Chile, China, Hungary, Japan, Latvia,
Mexico, Russia, Singapore, Sweden, the United Kingdom, and Venezuela, for
sales, support, representation, and research and development activities.

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




Item 3.Legal Proceedings

The Company from time to time is subject to routine litigation that arises
in the ordinary course of business. The matter set forth herein is the only
matter that is required to be disclosed in this item under the applicable
rules.

Brazilian Central Bank Administrative Proceeding.In May 2002, the
Brazilian Central Bank Foreign Capital and Exchange Department (Bank) commenced
an administrative proceeding against the Companys subsidiary, Hypercom do
Brasil Industria e Comercio Ltda. (HBI), alleging that it is subject to a
fine totaling R$197,317,538 (equivalent of U.S. $55,742,567 as of December 31,
2002) for failing to pay Hypercom, as the parent company shipper and
seller, for imported inventory items during the applicable 180 day
period established for payment in the respective Statements of Importation. We
understand that the Bank has also instituted similar actions against the
Brazilian subsidiaries of other U.S. corporations. In July 2002, HBI
petitioned the Federal Civil Court in Sao Paulo, Brazil to have the
administrative proceeding suspended and the applicable provision of the
Brazilian law declared unconstitutional. In August 2002, the Court rejected
HBIs motion for an injunction and HBI filed an interlocutory appeal. In
September 2002, the Judge reviewing the interlocutory appeal issued a
preliminary decision granting a stay of the administrative proceeding. Also in
July 2002, HBI filed an administrative defense with the Bank, which is
presently under review and subject to no deadline. HBIs counsel in both
proceedings has advised the Company that, in their opinion, the fine is
confiscatory in nature and illegal, and does not believe that such fine will be
charged on the amount established by the Bank. Although there can be no
assurance in this regard, given the nature of this matter, we do not believe
that its outcome will have a material adverse effect on our financial condition
or results of operations.




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

The Company did not submit any matters to a vote of shareholders during
the fourth quarter of 2002.

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PART II




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

The Companys common stock trades on the New York Stock Exchange (NYSE)
under the symbol HYC. The following table sets forth, for the fiscal quarters
indicated, the high and low sales prices for the common stock as reported on
the NYSE.

|                    |  |      |       |     |  |   |       | 
|------------------- |  | ---- | ----- | --- |  | - | ----- | 
|                    |  | High |       | Low
|                    |  |      |       |    
|Year Ended 12/31/02 |  |      |       |     |  |   |       | 
|First Quarter       |  | $    | 7.950 |     |  | $ | 5.050 | 
|Second Quarter      |  |      | 7.700 |     |  |   | 5.850 | 
|Third Quarter       |  |      | 7.410 |     |  |   | 2.860 | 
|Fourth Quarter      |  |      | 4.300 |     |  |   | 1.530 | 
|Year Ended 12/31/01 |  |      |       |     |  |   |       | 
|First Quarter       |  | $    | 7.250 |     |  | $ | 3.350 | 
|Second Quarter      |  |      | 5.500 |     |  |   | 2.700 | 
|Third Quarter       |  |      | 6.490 |     |  |   | 3.900 | 
|Fourth Quarter      |  |      | 7.500 |     |  |   | 3.350 | 

The Company has not paid any cash dividends on its Common Stock. The
Company currently intends to retain its earnings for its business and does not
anticipate paying any cash dividends on its Common Stock in the foreseeable
future. The Companys ability to pay cash dividends on its common stock is also
limited by certain covenants contained in a loan agreement to which the Company
is a party. See Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations  Liquidity and Capital Resources.

As of March 19, 2003, we had approximately 77 stockholders of record and
approximately 3334 beneficial shareholders.




Item 6.Selected Financial Data

The following table presents selected historical consolidated financial
data of Hypercom at the dates and for each of the periods indicated. In 1999,
we changed our fiscal year end to December 31 from June 30. This change was
effective December 31, 1999. The selected financial data should be read in
conjunction with our consolidated financial statements, related notes and the
section of this Annual Report on Form 10-K entitled Managements Discussion
and Analysis of Financial Condition and Results of Operations. Historical
consolidated financial data may not be indicative of our future performance. (in thousands except per
share data and percentages).

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|                                                                                                                                  |  |                     |         |              |  |              |         |                         |  |                  |         |               |  |      |         |      |  |   |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------- |  | ------------------- | ------- | ------------ |  | ------------ | ------- | ----------------------- |  | ---------------- | ------- | ------------- |  | ---- | ------- | ---- |  | - | ------- | - |  | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                                                                                                  |  |                     |         |              |  |              |         |                         |  | Six Month Period |         | Twelve Months |  |      |         |      |  |   |         |   |  |   |         |  
|                                                                                                                                  |  |                     |         |              |  |              |         |                         |  | Ended            |         | Ended         |  |      |         |      |  |   |         |   |  |   |         |  
|                                                                                                                                  |  | Year Ended June 30, |         | December 31, |  | December 31, |         | Year Ended December 31,
|                                                                                                                                  |  |                     |         |              |  |              |         |                        
|                                                                                                                                  |  | 1998                |         | 1999         |  | 1998         |         | 1999                    |  | 1999             |         | 2000          |  | 2001 |         | 2002
|                                                                                                                                  |  |                     |         |              |  |              |         |                         |  |                  |         |               |  |      |         |     
|Statements of Operations Data:                                                                                                    |  |                     |         |              |  |              |         |                         |  |                  |         |               |  |      |         |      |  |   |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|Net revenue                                                                                                                       |  | $                   | 257,227 |              |  | $            | 238,722 |                         |  | $                | 128,924 |               |  | $    | 134,376 |      |  | $ | 244,174 |   |  | $ | 295,212 |   |  | $ | 265,338 |   |  | $ | 270,651 |  
|Costs of revenue (1) (2)                                                                                                          |  |                     | 130,475 |              |  |              | 121,549 |                         |  |                  | 62,675  |               |  |      | 67,650  |      |  |   | 126,524 |   |  |   | 182,841 |   |  |   | 170,181 |   |  |   | 169,214 |  
|                                                                                                                                  |  |                     |         |              |  |              |         |                         |  |                  |         |               |  |      |         |      |  |   |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|Gross profit                                                                                                                      |  | $                   | 126,752 |              |  | $            | 117,173 |                         |  | $                | 66,249  |               |  | $    | 66,726  |      |  | $ | 117,650 |   |  | $ | 112,371 |   |  | $ | 95,157  |   |  | $ | 101,437 |  
|                                                                                                                                  |  |                     |         |              |  |              |         |                         |  |                  |         |               |  |      |         |      |  |   |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|Percent of net revenue                                                                                                            |  |                     | 49.3    | %            |  |              | 49.1    | %                       |  |                  | 51.4    | %             |  |      | 49.7    | %    |  |   | 48.2    | % |  |   | 38.1    | % |  |   | 35.9    | % |  |   | 37.5    | %
|Research and development                                                                                                          |  | $                   | 23,495  |              |  | $            | 30,249  |                         |  | $                | 15,850  |               |  | $    | 19,637  |      |  | $ | 34,036  |   |  | $ | 38,666  |   |  | $ | 28,107  |   |  | $ | 24,744  |  
|Selling, general, and administrative                                                                                              |  |                     | 72,506  |              |  |              | 72,250  |                         |  |                  | 34,115  |               |  |      | 41,990  |      |  |   | 80,126  |   |  |   | 93,140  |   |  |   | 74,599  |   |  |   | 65,191  |  
|Non-cash compensation (3)                                                                                                         |  |                     | 10,963  |              |  |              |        |                         |  |                  |        |               |  |      |        |      |  |   |        |   |  |   |        |   |  |   |        |   |  |   |        |  
|Restructuring charges (2)                                                                                                         |  |                     |        |              |  |              |        |                         |  |                  |        |               |  |      |        |      |  |   |        |   |  |   |        |   |  |   |        |   |  |   | 4,434   |  
|                                                                                                                                  |  |                     |         |              |  |              |         |                         |  |                  |         |               |  |      |         |      |  |   |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|Total
Expenses                                                                                                                    |  | $                   | 106,964 |              |  | $            | 102,499 |                         |  | $                | 49,965  |               |  | $    | 61,627  |      |  | $ | 114,162 |   |  | $ | 131,806 |   |  | $ | 102,706 |   |  | $ | 94,369  |  
|                                                                                                                                  |  |                     |         |              |  |              |         |                         |  |                  |         |               |  |      |         |      |  |   |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|Income (loss) from continuing
operations                                                                                          |  | $                   | 19,788  |              |  | $            | 14,674  |                         |  | $                | 16,284  |               |  | $    | 5,099   |      |  | $ | 3,488   |   |  | $ | (19,435 | ) |  | $ | (7,549  | ) |  | $ | 7,068   |  
|                                                                                                                                  |  |                     |         |              |  |              |         |                         |  |                  |         |               |  |      |         |      |  |   |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|Income (loss) before discontinued
operations, extraordinary item,
and cumulative effect of change
in accounting principle (4) (5) |  | $                   | 13,989  |              |  | $            | 9,186   |                         |  | $                | 12,180  |               |  | $    | 5,643   |      |  | $ | 2,648   |   |  | $ | (28,308 | ) |  | $ | (16,874 | ) |  | $ | (23,057 | )
|                                                                                                                                  |  |                     |         |              |  |              |         |                         |  |                  |         |               |  |      |         |      |  |   |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|Income (loss) from discontinued
operations (6)                                                                                    |  |                     |        |              |  |              | (13     | )                       |  |                  | 179     |               |  |      | (258    | )    |  |   | (449    | ) |  |   | (2,642  | ) |  |   | (3,034  | ) |  |   | (13,643 | )
|Extraordinary item (7)                                                                                                            |  |                     |        |              |  |              |        |                         |  |                  |        |               |  |      |        |      |  |   |        |   |  |   |        |   |  |   |        |   |  |   | (2,618  | )
|Cumulative effect of change in
accounting principle (8)                                                                           |  |                     |        |              |  |              |        |                         |  |                  |        |               |  |      |        |      |  |   |        |   |  |   |        |   |  |   |        |   |  |   | (21,766 | )
|                                                                                                                                  |  |                     |         |              |  |              |         |                         |  |                  |         |               |  |      |         |      |  |   |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|Net income (loss)                                                                                                                 |  | $                   | 13,989  |              |  | $            | 9,173   |                         |  | $                | 12,359  |               |  | $    | 5,385   |      |  | $ | 2,199   |   |  | $ | (30,950 | ) |  | $ | (19,908 | ) |  | $ | (61,084 | )
|                                                                                                                                  |  |                     |         |              |  |              |         |                         |  |                  |         |               |  |      |         |      |  |   |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|Income (loss) per share: (9)                                                                                                      |  |                     |         |              |  |              |         |                         |  |                  |         |               |  |      |         |      |  |   |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|                                                                                                                                 
|Loss before discontinued operations,
extraordinary item, and cumulative
effect of change in accounting
principle                  |  | $                   | 0.44    |              |  | $            | 0.27    |                         |  | $                | 0.35    |               |  | $    | 0.16    |      |  | $ | 0.08    |   |  | $ | (0.83   | ) |  | $ | (0.46   | ) |  | $ | (0.50   | )
|Loss from discontinued operations                                                                                                 |  |                     |        |              |  |              | (0.00   | )                       |  |                  | 0.01    |               |  |      | (0.00   | )    |  |   | (0.02   | ) |  |   | (0.08   | ) |  |   | (0.08   | ) |  |   | (0.29   | )
|Extraordinary item                                                                                                                |  |                     |        |              |  |              |        |                         |  |                  |        |               |  |      |        |      |  |   |        |   |  |   |        |   |  |   |        |   |  |   | (0.06   | )
|Cumulative effect of change in
accounting principle                                                                               |  |                     |         |              |  |              |         |                         |  |                  |         |               |  |      |         |      |  |   |         |   |  |   |         |   |  |   |         |   |  |   | (0.47   | )
|                                                                                                                                  |  |                     |         |              |  |              |         |                         |  |                  |         |               |  |      |         |      |  |   |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|Net income (loss) per share (9)                                                                                                   |  | $                   | 0.44    |              |  | $            | 0.27    |                         |  | $                | 0.36    |               |  | $    | 0.16    |      |  | $ | 0.06    |   |  | $ | (0.91   | ) |  | $ | (0.54   | ) |  | $ | (1.32   | )
|                                                                                                                                  |  |                     |         |              |  |              |         |                         |  |                  |         |               |  |      |         |      |  |   |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|Shares used in calculations                                                                                                       |  |                     | 31,830  |              |  |              | 34,428  |                         |  |                  | 34,549  |               |  |      | 34,446  |      |  |   | 34,446  |   |  |   | 34,184  |   |  |   | 36,644  |   |  |   | 46,142  |  
|Balance Sheet Data:                                                                                                               |  |                     |         |              |  |              |         |                         |  |                  |         |               |  |      |         |      |  |   |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|Cash and equivalents                                                                                                              |  | $                   | 55,659  |              |  | $            | 36,727  |                         |  | $                | 37,795  |               |  | $    | 26,093  |      |  | $ | 26,093  |   |  | $ | 13,008  |   |  | $ | 13,402  |   |  | $ | 23,069  |  
|Working capital                                                                                                                   |  |                     | 186,799 |              |  |              | 162,152 |                         |  |                  | 178,879 |               |  |      | 156,991 |      |  |   | 156,991 |   |  |   | 75,218  |   |  |   | 127,232 |   |  |   | 129,322 |  
|Total assets                                                                                                                      |  |                     | 259,577 |              |  |              | 276,280 |                         |  |                  | 270,410 |               |  |      | 297,777 |      |  |   | 297,777 |   |  |   | 369,237 |   |  |   | 337,694 |   |  |   | 260,003 |  
|Short and long-term debt                                                                                                          |  |                     | 1,797   |              |  |              | 10,878  |                         |  |                  | 2,188   |               |  |      | 10,830  |      |  |   | 10,830  |   |  |   | 100,391 |   |  |   | 67,888  |   |  |   | 25,025  |  
|Total shareholders equity                                                                                                        |  |                     | 220,431 |              |  |              | 226,023 |                         |  |                  | 228,323 |               |  |      | 231,734 |      |  |   | 231,734 |   |  |   | 208,147 |   |  |   | 211,369 |   |  |   | 189,115 |  
|Other Data on Direct-Finance
Leases:                                                                                              |  |                     |         |              |  |              |         |                         |  |                  |         |               |  |      |         |      |  |   |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|Average net investment in direct
finance leases (10)                                                                              |  |                     |         |              |  |              |         |                         |  |                  |         |               |  |      |         |      |  |   |         |   |  | $ | 51,428  |   |  | $ | 50,782  |   |  | $ | 36,405  |  
|Gross direct finance lease
originations (11)                                                                                      |  |                     |         |              |  |              |         |                         |  |                  |         |               |  |      |         |      |  |   |         |   |  |   | 67,488  |   |  |   | 27,656  |   |  |   | 13,905  |  
|Net cash fundings of direct-finance
leases (12)                                                                                   |  |                     |         |              |  |              |         |                         |  |                  |         |               |  |      |         |      |  |   |         |   |  |   | 42,310  |   |  |   | 18,061  |   |  |   | 8,591   |  
|Average yield on direct-finance
leases (13)                                                                                       |  |                     |         |              |  |              |         |                         |  |                  |         |               |  |      |         |      |  |   |         |   |  |   | 27.4    | % |  |   | 27.6    | % |  |   | 30.2    | %
|Provision for losses on direct-
finance leases (14)                                                                               |  |                     |         |              |  |              |         |                         |  |                  |         |               |  |      |         |      |  |   |         |   |  |   | 11,681  |   |  |   | 18,075  |   |  |   | 8,377   |  
|Net charge-offs (15)                                                                                                              |  |                     |         |              |  |              |         |                         |  |                  |         |               |  |      |         |      |  |   |         |   |  |   | 5,713   |   |  |   | 11,288  |   |  |   | 5,544   |  
|Net charge-offs as a percentage
of average net investment in direct-
finance leases (16)                                          |  |                     |         |              |  |              |         |                         |  |                  |         |               |  |      |         |      |  |   |         |   |  |   | 11.1    | % |  |   | 22.2    | % |  |   | 15.2    | %
|Provision for credit losses on direct
finance leases as a percentage
of average net investment in
direct-finance leases (16)      |  |                     |         |              |  |              |         |                         |  |                  |         |               |  |      |         |      |  |   |         |   |  |   | 22.7    | % |  |   | 36.2    | % |  |   | 23.0    | %
|Allowance for credit losses as a
percentage of net investment in
direct-finance leases (16)                                       |  |                     |         |              |  |              |         |                         |  |                  |         |               |  |      |         |      |  |   |         |   |  |   | 3.5     | % |  |   | 12.1    | % |  |   | 15.7    | %

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|(1)  |  | During the year ended December 31, 2001, Golden Eagle Leasing recorded,
in costs of revenue, an incremental charge to strengthen credit reserves for
certain segments of its receivables in the amount of $7.2 million in
addition to its normal loan loss provisions. This incremental charge
represents managements estimate of potential loan losses that exceed its
historical rate of loan losses.                                                                                                                                                                                                                                                                            
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(2)  |  | In the third quarter of 2002, we committed to a profit improvement plan
which included the closure of offices around the world in favor of a more
cost-effective distributor sales model and the termination of our direct
manufacturing operations in Brazil. Restructuring charges in cost of
sales include $2.0 million related to the write-down of inventories and
other related costs. Restructuring charges of $4.4 million which are
separately stated, include $3.6 million related to the write-down of a
building and other fixed assets to fair value and $0.9 million related to
one-time termination costs and other charges. See note 12 to the
financial statements.
|    
|(3)  |  | Non-cash compensation was charged in connection with stock options
granted to an executive officer. Upon completion of our initial public
offering in November 1997, this form of compensation ceased.                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    
|(4)  |  | In the quarter ended September 30, 2000, we wrote-off our remaining $4.1
million investment in Cirilium Corporation, a joint corporate venture that
we had formed in late 1999 with Inter-Tel Incorporated. Through September
30, 2000, we had accounted for our investment in Cirilium on the equity
method and had reported $5.8 million in losses in connection with this
investment. This write-off and the reporting of these losses, in the total
amount of $9.9 million, contributed to our net loss for the year ended
December 31, 2000.                                                                                                                                   
|    
|(5)  |  | During 2002, we increased the valuation allowance on our deferred tax
assets by $20.0 million contributing to our loss before discontinued
operations, extraordinary item, and cumulative effect of change in
accounting principle for the period ending December 31, 2002.                                                                                                                                                                                                                                                                                                                                                                                                         
|    
|(6)  |  | In the third quarter of 2002, we identified certain unprofitable
businesses and, effective with the decision to hold these operating units
for sale, recorded a loss of $8.0 million to write-down the assets to fair
value. For comparative purposes, all prior year figures have been restated
to reflect the activity of these unprofitable businesses in discontinued
operations.                                                                                                                                                                                                                                                                                               
|    
|(7)  |  | In connection with the early retirement of two term loans, we recorded
a $2.6 million extraordinary loss on early extinguishment of debt. The
extraordinary loss resulted from the write-off of unamortized debt issuance
costs and a loan discount associated with our term loans.                                                                                                                                                                                                                                                                                                                                                                                                 
|    
|(8)  |  | During 2002, we adopted SFAS
No. 142, Goodwill and Other Intangible Assets.
Under the transition provisions of SFAS 142, we evaluated our reporting
units for impairment of goodwill and recorded a $21.8 million write-off
primarily attributable to goodwill associated with the 2000 acquisition of
Golden Eagle Leasing.                                                                                                                                                                                                                                                                                                                                                        
|    
|(9)  |  | Per share data is diluted per share, except for the years ended
December 31, 2000, 2001, and 2002, as the effect of common stock equivalents
in those years was anti-dilutive.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    
|(10) |  | Represents the average of the net investment in direct-finance leases,
excluding initial direct costs and the allowance for credit losses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    
|(11) |  | Represents the amount paid out upon funding leases plus the associated
unearned income.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    
|(12) |  | Represents the amount paid out upon funding leases.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    
|(13) |  | Represents the aggregate of the implied interest rate on each lease,
inclusive of the residual value, during the period, weighted by the amount
funded at the origination of each such lease.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    
|(14) |  | The provision for losses on direct-finance leases is included in costs
of revenues as a direct cost of leasing. The increase in the provision for
the year ended December 31, 2001 is a result of the special charge taken in
the first quarter of 2001 as described in note (1) above. See Managements
Discussion and Analysis of Financial Condition and Results of Operations
elsewhere in this Annual Report on Form 10-K.                                                                                                                                                                                                                                                   

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|(15) |  | Represents write-offs of uncollectible leases, net of unearned income,
and net of recoveries from prior write-offs. Recoveries generally take the
form of a final settlement and buy out of the lease by the lessee, and are
included in net revenues. We write off the net investment balance of leases
that are more than 120 days past due.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(16) |  | The increase in percentage for the year ended December 31, 2001 is a
result of the special charge taken in the first quarter of 2001 as described
in note (1) above. See Managements Discussion and Analysis of Financial
Condition and Results of Operations elsewhere in this Report.                                                    

For a presentation of certain of the above information on a quarterly
basis for each of our four quarters refer to note 22 of our audited
consolidated financial statements for the year ended December 31, 2001 and 2002
appearing elsewhere in this Annual Report on Form 10-K.




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

The following sets forth a discussion and analysis of our financial
condition and results of operations for the three years ended December 31,
2002. This discussion and analysis should be read in conjunction with our
consolidated financial statements appearing elsewhere in this Annual Report on
Form 10-K. The following discussion contains forward-looking statements. Our
actual results may differ significantly from the results discussed in such
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in Exhibit 99.1 of
this Annual Report on Form 10-K entitled Cautionary Statement Regarding
Forward-Looking Statements and Risk Factors, in the discussion below and
elsewhere in this Annual Report on Form 10-K.

Critical Accounting Policies And Estimates

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

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

Revenue Recognition and Accounts Receivable

In general, we do not have a complex revenue recognition environment
requiring significant judgment in order to record revenue. Most of our sales
relate to product shipments, which are recognized upon shipment of product
pursuant to Staff Accounting Bulletin No. 101 Revenue Recognition in Financial
Statements (SAB 101). Service revenues and revenues from long-term contracts
are each less than 10% of our revenues and we do not have significant judgments
or estimates involved in the recording of such revenues. Although we meet the
requirements of SAB 101 upon shipment of product and the recording of revenue,
we continually evaluate our accounts receivable for any bad debts or product
returns and make estimates for any bad debt allowances or product return
reserves.

We maintain an allowance for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. We
compute such allowance based upon a specific customer account review of our
larger customers and balances in excess of 90 days old. Our assessment of our
customers ability to pay generally includes direct contact with the customer,
investigation into our customers financial status, as well as consideration of
our customers payment history with us. If the financial condition of our
customers were to deteriorate, resulting in an impairment of their ability to
make payments, additional allowances may be required. If we determine, based
on our assessment, that it is more likely than not that our customers will be
unable to pay, we will charge off the accounts receivable.

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

Direct-Financing Leases

Direct-financing lease activity is reported in Golden Eagle. Golden
Eagles micro-ticket leasing business is characterized by high incidences of
delinquencies, which in turn can lead to significant levels of loan losses. We
maintain an allowance for credit losses at an amount that we believe is
sufficient to provide adequate protection against losses in our lease
portfolio. Our allowance is determined principally on the basis of historical
loss experience and managements assessment of the credit quality of the loan
portfolio. We also generally establish a full reserve for customers having a
payment past due in excess of 90 days. If loss rates increase or the credit
mix of our portfolio weakens, we may need to increase our allowance for credit
losses.

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

Sales-Type Leases

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

Any unguaranteed residual value accruing to us at the completion of the
sales-type lease is recognized at the time the product is returned to us or
payment is received to purchase the product. The residual value for products
returned to us is recorded at fair value. Our estimate of fair value is based
on an evaluation of market information, including specific evidence of
like-kind sales where possible.

Long-term contract revenue

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

Revenues under this contract have been less than 10% of total revenues for
each of the fiscal years 2000 through 2002. The estimated gross profit
recorded upon the attainment of scheduled milestones is based upon our estimate
of the total gross profit to be recognized over the life of the long-term
contract. Our gross profit estimates rely on our continuous estimates of total
contract costs compared to contract revenue and any claims in excess of
contract revenue where it is both probable the claims will result in additional
contract revenue and the amount of the excess claim can be reliably estimated.
Previously recognized gross profits and the valuation of deferred contract
costs are subject to revisions as the contract progresses to completion and any
claims for revenues in excess of the original contract are settled. Revisions
in profit estimates and the valuation of deferred contract costs are charged to
income in the period in which the facts that give rise to the revision become
known.

Goodwill and Other Intangible Assets

On
January 1, 2002 we adopted SFAS No. 142, Goodwill and Other Intangible Assets, (SFAS 142). The adoption of
SFAS 142 resulted in the complete write-off of goodwill balances, existing at
January 1, 2002, in the amount of $21.8 million during the second quarter 2002.
In accordance with SFAS 142 this write-off was reported as a cumulative effect
of an accounting change in the statement of operations for 2002.

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In accordance with SFAS 142, we amortize our intangible assets over their
estimated useful life and assess the recoverability of our intangible assets
based on certain assumptions regarding estimated future cash flows and other
factors to determine the fair value of the respective assets. If these
estimates or their related assumptions change in the future, we may be required
to record impairment charges for these intangible assets.

Inventory

We write down inventory for estimated obsolescence or slow moving
inventory equal to the difference between the cost of inventory and the
estimated market value based upon assumptions about future demand and market
conditions generally over a twelve-month period on an item by item basis. If
actual market conditions are less favorable than those projected by management,
additional inventory write-downs may be required.

Deferred Taxes

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

Foreign Currency

A significant portion of our operations is conducted through our
international subsidiaries operating in foreign countries. Net revenue from
international subsidiaries amounted to 59.8% for the year ended December 31,
2002. In accordance with the relevant accounting standards we are required to
translate the financial statements of our foreign subsidiaries from the
currency in which they keep their accounting records, generally the local
currency, into the United States dollar. The treatment of such translation in
our financial statements is dependent upon our determination of the functional
currency of the foreign subsidiary. The functional currency is determined
based on economic and operational aspects of the foreign subsidiary.
Generally, the currency in which the subsidiary transacts a majority of its
transactions, including billings, financing, payroll and other expenditures, as
well as any dependency upon the parent and the nature of the operations are
considered in determining the functional currency. Based on our assessment, we
have determined that the functional currency, at this time, is the United
States dollar in all of our foreign subsidiaries. This is principally based on
the billing arrangements, dependency on the parent and nature of the
operations. As a result of the functional currency being the United States
dollar, any translation gains or losses are recorded in our statements of
operations.

As a policy, we hedge the translation of our net investments in foreign
subsidiaries in an attempt to neutralize the effect of translation gains or
losses on our statements of operations. Financial hedging
instruments are limited by Company policy to foreign-currency forward
or option contracts and foreign-currency debt. We enter into forward
or option contracts with our banks or other financial institutions to accomplish our
hedging strategy. During 2001, we did not enter into any forward contracts or
other instruments to hedge our net investments in foreign subsidiaries as a
result of credit limitations imposed on us by our banks. We also attempt to
use natural hedges (offsetting local currency assets against liabilities) to
mitigate our translation losses. During 2002, we resumed entering into
financial instruments to hedge our net investments in foreign subsidiaries. To
the extent the amounts of such currencies hedged differ from the actual amounts
exposed to such fluctuations, gains or losses will result in our financial
statements. To the extent our hedging vehicles are not fully effective and/or
are costly the full benefit may not be achieved and greater fluctuation in our
statements of operations will occur. In addition, to the extent our lenders do
not permit us to enter into hedging contracts, we may experience greater
levels of gains or losses in our statements of operations as a result
of translation.

Contingencies and Litigation

On an ongoing basis management monitors the need to provide an estimated
loss contingency arising from normal operations or litigation matters. There
are no such contingencies provided for at December 31, 2002. We rely on our
in-house counsel and outside counsel to advise us about ongoing litigation
matters. Based upon information available at this time, we believe our current
litigation matters will not have a material adverse effect on the results of
operations and our financial condition.

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Overview of Financial Results

During the past three years, 2000, 2001 and 2002 we have incurred
substantial net losses. The following overview will highlight certain key
events and factors impacting our financial performance over the past three
years:

| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Year 2000                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | The year 2000 was most notably
affected by our efforts surrounding the full
launch of our ICE family of products, our ePic initiative, the integration
and financing efforts associated with our acquisition of Golden Eagle
Leasing Inc., and our decision to write-off our investment in a corporate
joint venture, Cirilium Corporation. We also encountered banking
restrictions as a result of the significant losses incurred in 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | We expended significant amounts in research and development in connection
with the ICE family of products and ePic. Such efforts contributed to our
total expenditures in research and development of $38.7 million in 2000.
Subsequent to 2000, due to the completion of the core ICE and ePic
development efforts and a shift in focus to product cost reduction efforts
over new product introductions, R&D spending has been reduced
significantly. By comparison, R&D expense in 2002 was
$24.7 million, or
a 36.2% reduction from 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | We incurred significant manufacturing costs during the latter half of 2000
related to the introduction of the new ICE products; higher cost to
manufacture in the United States, the transition of manufacturing these
products in China, and product reworking and stabilization. In addition, we
were carrying significant amounts of inventory to support both our T-series
terminal products and the new ICE family of products. The higher inventory
levels contributed to increased borrowings and greater interest charges.
The ICE family of products has since stabilized and further enhanced with
the introduction of our new Plus series of terminals. Additionally,
inventory levels have decreased from a high during 2000 of approximately
$89 million to $46.4 million as of December 31, 2002. We have, with the
full completion of this major product transition, gained better visibility
and predictability into our inventory requirements for our full product
offering.                                                                       
|
| |  | In January 2000, we acquired Golden Eagle. This operation required
significantly more cash than anticipated, did not perform as expected, and
hampered both our liquidity and profitability during 2000. Golden Eagles
operating loss for 2000 was $4.4 million. During 2001, we addressed Golden
Eagles operating deficiencies and effected a securitization transaction to
alleviate some of the liquidity pressures relating to this business.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | At the end of 1999, we formed a corporate joint venture, Cirilium
Corporation, with another publicly traded company, Inter-Tel Incorporated.
In connection with the joint venture, we contributed $5.0 million and
networking technology, and Inter-Tel contributed $6.0 million and certain
telephony technology, all with a goal of creating a company to address
service provider applications in the Voice over Internet Protocol (VoIP)
market. As a result of changes in market conditions relating to technology
companies in general and VoIP companies in particular, we wrote off our
entire investment in Cirilium and took a $4.1 million charge in the quarter
ended September 30, 2000. Through September 30, 2000, we had accounted for
this investment on the equity method, and had recognized $5.8 million in
losses as a result of our interest in Cirilium. This investment was fully
written off during 2000 and, therefore, we have not recorded any further
losses in conjunction with this investment, nor do we have any future
obligations.
|
| |  | As a result of losses incurred during the third quarter of 2000, we fell
out of compliance with certain covenants in our principal credit
agreements. We became constrained from a liquidity standpoint, which
impeded our ability to buy raw materials on a timely basis and required
that we move to more expensive sources of raw materials that effectively
financed us for longer periods of time. We also incurred substantially
increased interest costs through the imposition of higher interest rates
and the payment of forbearance fees. As discussed further in this
overview, we completed a series of financing and equity measures during the
first and second quarters of 2001 in order to alleviate our liquidity
constraints.                                                                                                                                                                                                                                                                                                                     
|
| |  | Year 2001                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | The year 2001 was highlighted by our focus on the performance deficiencies
at Golden Eagle and our debt and equity activity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | One of our main objectives was to improve the financial performance of
Golden Eagle. As a result of our continued focus on Golden Eagle, we
recorded an incremental charge of $7.2 million in the first quarter of 2001
to strengthen credit reserves for certain segments of Golden Eagles direct
finance lease receivables that had been specifically impacted by certain
events of that                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

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| |  | economic period. This charge was recorded in costs of revenue and is
further discussed in our comparison of the years ended December 31, 2001
and 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Our debt and equity activity in 2001 began with a series of interim
measures to raise cash in anticipation of refinancing our primary credit
facility. These interim measures included the issuance of common stock,
and certain bridge borrowings that were ultimately converted to common
stock through conversion rights attached to the borrowings, or from the
repayment of the bridge borrowings with our common stock. Such financing
and equity measures amounted to $25.9 million. We completed a refinancing
of our principal credit facility in August 2001 with a new $45 million
senior secured credit facility including a line of credit and two term
loans. Although this new facility provided us with increased liquidity, it
was a relatively expensive source of capital. Consequently, and as more
fully described in our consolidated financial statements, we paid off a
significant portion of these facilities with proceeds from a private equity
offering completed in March 2002. The bridge borrowings and new credit
facility included the issuance of stock warrants, which further contributed
to our higher interest costs in 2001.
|
| |  | Year 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | The year 2002 was highlighted by the completion of a private placement of
our common stock, significant charges related to the carrying value of
goodwill and deferred tax assets, the implementation of a profit
improvement plan and a significant improvement in income from continuing
operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | In the first quarter of 2002, we completed the issuance and sale of common
stock in a private equity offering. Net proceeds from the offering of
$36.5 million were used principally to pay off high cost debt. As a result
of the early extinguishment of debt, we recorded an extraordinary charge
for the write-off of debt issuance costs in the amount of $2.6 million in
the first quarter of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | On January 1, 2002, we
adopted SFAS
No. 142 Goodwill and Other Intangible Assets. The adoption
of SFAS 142 resulted in the complete write-off of goodwill balances,
existing at January 1, 2002, in the amount of $21.8 million in the second
quarter. In accordance with SFAS 142, this write-off was reported as a
cumulative effect of change in accounting principle in the statement of
operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | During the third quarter of 2002, we increased our valuation allowance on
our then remaining deferred tax assets by $20.0 million. The increase in the valuation
allowance has increased our tax expense by $20 million. There are no remaining
balances of deferred tax assets reported on the balance sheet as of
December 31, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | As discussed further in Managements Discussion and Analysis and in the
Notes to the consolidated Financial Statements, we undertook a profit
improvement plan in 2002, which resulted in restructuring certain
operations and holding other operations for sale as discontinued
operations. The restructuring costs element of the plan were reported as
expenses within income from continuing operations, while the losses from
the discontinued operations are reported separately as part of our net
loss. The restructuring charges totaling $6.4 million included write-downs
to assets, including inventories and fixed assets, as well as accruals for
severance and other operating expenses. Losses from discontinued
operations totaling $13.6 million included the initial write-down of assets
to fair value, as well as operating results of the discontinued operations
during 2002.                                                                                                                                                                                                                                                                
|
| |  | Income (loss) from continuing operations amounted to $7.1 million, ($7.5)
million, and ($19.4) million for year 2002, 2001 and 2000 respectively,
which included the total restructuring charges of $6.4 million in 2002 and
the special direct finance lease charge of $7.2 million in 2001. Excluding
such charges, income (loss) from continuing operations would have amounted
to $13.5 million, ($0.3) million, and ($19.4) million for year 2002, 2001
and 2000 respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

The following should be read in light of the matters highlighted in the
Overview.

Results of Continuing Operations

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

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|                                                                                                                        |  |                         |       |      |  |      |       |    |  |  |       |   
|----------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ----- | ---- |  | ---- | ----- | -- |  |  | ----- | --
|                                                                                                                        |  | Year Ended December 31,
|                                                                                                                        |  |                        
|                                                                                                                        |  | 2002                    |       | 2001 |  | 2000
|                                                                                                                        |  |                         |       |      |  |     
|Net revenue                                                                                                             |  |                         | 100.0 | %    |  |      | 100.0 | %  |  |  | 100.0 | % 
|Costs of revenue                                                                                                        |  |                         | 62.5  |      |  |      | 64.1  |    |  |  | 61.9  |   
|                                                                                                                        |  |                         |       |      |  |      |       |    |  |  |       |   
|Gross profit                                                                                                            |  |                         | 37.5  |      |  |      | 35.9  |    |  |  | 38.1  |   
|Research and development                                                                                                |  |                         | 9.1   |      |  |      | 10.6  |    |  |  | 13.1  |   
|Selling, general and administrative                                                                                     |  |                         | 24.1  |      |  |      | 28.1  |    |  |  | 31.6  |   
|Restructuring charges                                                                                                   |  |                         | 1.6   |      |  |      |      |    |  |  |      |   
|                                                                                                                        |  |                         |       |      |  |      |       |    |  |  |       |   
|Income (loss) from continuing operations                                                                                |  |                         | 2.6   |      |  |      | (2.8  | )  |  |  | (6.6  | ) 
|Interest and other income net of
interest and other expense                                                             |  |                         | (1.4  | )    |  |      | (4.0  | )  |  |  | (0.7  | ) 
|Foreign currency loss                                                                                                   |  |                         | (2.2  | )    |  |      | (1.0  | )  |  |  | (0.6  | ) 
|Loss from investment in equity affiliate                                                                                |  |                         |      |      |  |      |      |    |  |  | (3.3  | ) 
|                                                                                                                        |  |                         |       |      |  |      |       |    |  |  |       |   
|Loss before taxes, discontinued operations,
extraordinary item, and cumulative effect
of
change in accounting principle |  |                         | (1.0  | )    |  |      | (7.8  | )  |  |  | (11.2 | ) 
|(Provision) benefit for income taxes                                                                                    |  |                         | (7.5  | )    |  |      | 1.4   |    |  |  | 1.7   |   
|                                                                                                                        |  |                         |       |      |  |      |       |    |  |  |       |   
|Loss before discontinued operations,
extraordinary item, and cumulative effect
of
change in accounting principle        |  |                         | (8.5  | )    |  |      | (6.4  | )  |  |  | (9.6  | ) 
|Loss from discontinued operations                                                                                       |  |                         | (5.0  | )    |  |      | (1.1  | )  |  |  | (0.9  | ) 
|Extraordinary item                                                                                                      |  |                         | (1.0  | )    |  |      |      |    |  |  |      |   
|Cumulative effect of change in accounting
principle                                                                     |  |                         | (8.0  | )    |  |      |      |    |  |  |      |   
|                                                                                                                        |  |                         |       |      |  |      |       |    |  |  |       |   
|Net loss                                                                                                                |  |                         | (22.6 | )%   |  |      | (7.5  | )% |  |  | (10.5 | )%
|                                                                                                                        |  |                         |       |      |  |      |       |    |  |  |       |   

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

|                                |        |      |                         |      |   |      |      |     |   |  |      |     |  
|------------------------------- | ------ | ---- | ----------------------- | ---- | - | ---- | ---- | --- | - |  | ---- | --- | -
|                                |        |      | Year Ended December 31,
|                                |        |      |                        
|Revenues by Region              |        | 2002 |                         | 2001 |   | 2000
|                                |        |      |                         |      |   |     
|United States                   |        |      | 40.2                    | %    |   |      | 43.6 | %   |   |  | 42.8 | %  
|Latin America, including Mexico |        |      | 24.1                    |      |   |      | 26.3 |     |   |  | 24.9 |    
|Asia/Pacific                    |        |      | 14.2                    |      |   |      | 12.9 |     |   |  | 13.5 |    
|Europe                          |        |      | 21.5                    |      |   |      | 17.2 |     |   |  | 18.8 |    
|                                |        |      |                         |      |   |      |      |     |   |  |      |    
|                                | Totals |      |                         | 100  | % |      |      | 100 | % |  |      | 100 | %
|                                |        |      |                         |      |   |      |      |     |   |  |      |    

The results of continuing operations discussed herein exclude the
operations of the operating units being reported as discontinued operations
(see Note 12 to the consolidated financial statements). Prior years results
of continuing operations have been restated to reflect the discontinued
operations on a consistent basis with 2002.

Comparison of Years Ended December 31, 2002 and 2001

Net revenue for the year ended December 31, 2002 increased $5.4 million or
2.0% to $270.7 million from $265.3 million in the same period in the prior
year. As discussed in our comparison of 2001 to 2000, net revenues for 2001
include the effects of a $7.5 million reserve for a sales return. Exclusive of
the sales return, 2001 net revenues would have been $272.8. Further, 2002 net
revenues include the attainment of a performance milestone under our Brazilian
Health Ministry contract resulting in revenue of $8.6 million during the first
quarter of 2002, versus $1.6 million in revenue recognized under the same
contract in 2001. Exclusive of the revenues for the Brazil Health Ministry
contract in both years and the sales return in 2001, net revenues declined
during the year ended December 31, 2002 by $9.1 million compared to 2001. This
decline is due principally to a decline in revenues from Golden Eagle of $2.9
million and a decline in Network Systems revenues of $6.0 million, while the
POS product group remained relatively

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flat compared to 2001. Revenue for Golden Eagle declined as they funded
fewer leases in 2002 compared to 2001  a result of managements decision to
move from lower-quality, high-volume, high-risk lease programs to
higher-quality, lower-volume, less-risk lease programs. While Golden Eagle is
dedicated to growing their funding levels, there can be no assurances Golden
Eagle will increase its funding levels in the future given the prevailing
market for qualifying leases. Network Systems revenues declined principally
as a result of fulfilling substantial orders under one its largest contracts
throughout 2001. Deliveries under such contract declined during 2002 as the
contract neared completion. There can be no assurance that Network Systems
will be able to replace this contract in the future with one of equal size or
duration.

The remaining milestones under the Brazilian Health Ministry contract are
expected to be substantially less than the milestone achieved in the first
quarter of 2002, as we are now entering the maintenance phase of this contract.
However, as of December 31, 2002, we have identified and made a claim for
approximately $6.5 million of revenue in excess of the agreed contract. We
believe it is probable our claim will result in additional revenue and have
reasonably estimated such amount in accordance with Statement of Position 81-1,
Accounting for Performance of Construction-Type and Certain Production-Type
Contracts. While the revenue related to these claims has not been recorded
under our percentage-of-completion milestone approach, contract costs
attributed to these revenue claims amounting to approximately $5.9 million have
been deferred within other long-term assets at December 31, 2002 and treated as
normal costs of contract performance. If our revenue claim is denied or
results in revenue less than our associated costs, our operating results would
be significantly impacted.

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

Our cost of revenue includes the cost of raw materials, manufacturing
labor, overhead and subcontracted manufacturing costs, as well as interest
expense and loan loss provisions with respect to direct financing leases. The
costs of revenue for the year ended December 31, 2002 decreased $1.0 million or
less than 1% to $169.2 million from $170.2 million for the year ended December
31, 2001. Gross margin for the year ended December 31, 2002 was 37.5% compared
to 35.9% in the same period in the prior year.

Both
the change in cost of revenue and the gross margin were affected by
various events in both 2002 and 2001. As discussed previously, 2002 included
$8.6 million in revenue from the Brazilian Health Ministry contract versus $1.6
million recognized in 2001. This contract carries a fully absorbed operating
margin currently estimated at 9.1% and thus can impact the overall margin
percentage when revenues are inconsistent between periods. Further, 2001
costs of revenues included the effects of a $7.2 million incremental charge to
the Golden Eagle loan loss provision (as discussed further in our comparison of
year 2001 to 2000). Additionally, cost of revenues for 2002 includes the
effects of restructuring charges in the amount of $2.0 million relative to our
restructuring activity discussed below. Further, in connection with the
Companys transition of its manufacturing operations in Brazil to a contract
manufacturer, certain sales orders in the Brazilian market were supplied from
our factory in China for which importation and tax costs had the effect of
decreasing the margin by approximately $0.8 million in 2002. The Company also
wrote down inventory and incurred other incremental charges relative to
assessments of net realizable value amounting to $0.7 million during the third
quarter of 2002.

Exclusive of the Brazilian Health Ministry revenues and related cost of
revenues, the Golden Eagle incremental charge in 2001 and the restructuring and
other charges incurred during 2002, as noted above, the gross margin for the
year ended December 31, 2002 and 2001 would be 39.8% and 38.7%, respectively.
The increase in 2002 is a result of our continued manufacturing and product
cost reductions and improved pricing in certain service operations.

Research and development expenses consist mainly of software and hardware
engineering costs and the cost of development personnel. Research and
development expenses for the year ended December 31, 2002 decreased $3.4
million or 12.0% to $24.7 million from $28.1 million in the same period in the
prior year. The decreases over prior year are directly attributable to a more
focused and cost efficient approach to research and development. Since
substantially all development activities related to the introduction of the ICE
product family and the ePic initiative are complete, the overall level of
research and development activities has been reduced. Present development
activities are primarily focusing on reducing the component costs of existing
product and to select new product introductions having a commercially feasible
market demand.

Selling, general and administrative expenses consist of sales and
marketing expenses, administrative personnel costs, facilities operations and
other corporate overhead. These expenses decreased $9.4 million or 12.6% to
$65.2 million for the year ended December 31, 2002 compared to $74.6 million in
2001. This decrease reflects significant cost containment measures put into
place during the third quarter of 2001 and carrying forward for all of 2002,
along with restructuring related savings identified in the

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third quarter and realized, in part, during the fourth quarter of 2002.
The cost containment measures and restructuring activities involve both a
reduction in staffing as well as the curtailment of discretionary expenses.

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

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

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

There were no restructuring charges incurred in 2001.

Income from continuing operations for the year ended December 31, 2002
increased $14.6 million to $7.1 million compared to a loss from continuing
operations of $7.5 million for the same period in the prior year. The
improvement in operating results is principally from the aforementioned
improvement in gross margins coupled with the cost containment measures
impacting both research and development and selling, general and administrative
expenses.

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

Other income (expense) in the amount of $0.3 million for the year ended
December 31, 2002 consisted principally of losses on fixed asset sales of ($0.4) million,
net of credits relating to corporate overhead charges allocated to discontinued
operations of $0.5 million. Income and (expense) in the amount of ($1.5)
million for the year ended December 31, 2001 consisted primarily of charges
associated with requirements under our debt forbearance agreements and other
default related costs of $1.7 million and corporate overhead charges to
discontinued operations of $0.8 million. During 2002 the Company was not in
default with its lenders and accordingly did not incur similar default related
charges. The corporate overhead charges to discontinued operations were ceased
at the time the discontinued operations were declared held for sale in
September 2002.

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

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

In addition to deferred tax expenses which principally relate to our
valuation allowance increases, the income tax provision for the year ended
December 31, 2002 is comprised of income tax expenses from foreign locations
with taxable income and a current tax benefit for certain U.S. losses that can
be carried back for refunds. As a result of this combination of occurrences
the effective tax rate for the Company in 2002 is not meaningful. The Companys
effective rate of income tax benefit was 18.4% for the year ended December 31,
2001. The income tax benefit rate in 2001 differed from the U.S. statutory
rate principally due to foreign taxes attributable to foreign operations that
are less than the U.S. statutory rate, research and experimentation credits,
the non-recognition of tax benefit on foreign currency translation losses and
valuation reserves.

Comparison of Years Ended December 31, 2001 and 2000.

Net revenue for the year ended December 31, 2001, decreased $29.9 million
or 10.1% to $265.3 million from $295.2 million for the year ended December 31,
2000. This decrease was principally due to the combined effect of a delay in
the receipt of certain key components during the nine-month period ended
September 30, 2001, caused by constraints on cash relative to our default
position with our primary bank group and the tragic events of September 11, and
an unusually high level of orders received from Latin American customers in the
nine-month period ended September 30, 2000, which did not recur in 2001. In
addition, we reduced sales during the fourth quarter ended December 31, 2001 by
$7.5 million to reflect a reserve for product returns. This reserve for
product returns related to one particular customer whereby we decided to take
back product for the purpose of providing additional product features and
enhancements. These new features and enhancements were not included in the
specifications at the date of the original sales, and we were not required to
make the modifications under the terms of the original sale. We elected to
make a customer concession and provide the enhancements and have recorded this
as a product return. Gross profit was reduced by $2.0 million dollars during
the fourth quarter ended December 31, 2001 as a result of this sales return.
As the product is modified and determined to meet the customers revised
requirements, we will record sales when all requirements of SAB 101 are met.

Net revenues from services activities, principally derived from POS
support services and from our long-term contract with the Brazilian Health
Ministry, each comprised less than 10% of total net revenue in each of the
years ended December 31, 2001 and 2000.

Our cost of revenue includes the cost of raw materials, manufacturing
labor, overhead and subcontracted manufacturing costs, as well as interest
expense and loan loss provisions with respect to direct financing leases. For
the year ended December 31, 2001, costs of revenue decreased $12.7 million or
6.9% to $170.2 million from $182.8 million for the year ended December 31,
2000. Interest expense included in cost of revenues amounted to $3.8 million
and $4.9 million, respectively, for the years ended December 31, 2001 and 2000.
Loan loss provisions included in cost of revenue amounted to $18.1 million and
$11.7 million, respectively, for the years ended December 31, 2001 and 2000.

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Gross margin for the year ended December 31, 2001 was 35.9% compared to
38.1% in the same period in the prior year. This decrease in gross margin was
primarily attributed to the lower revenues, including the effects of our sales
return discussed as part of the decrease in net revenues from 2000 to 2001, and
an incremental charge of $7.2 million to strengthen credit reserves for certain
segments of Golden Eagles direct finance lease receivables. This incremental
charge represents managements estimate of potential loan losses that exceed
its historical rate of loan losses.

The following factors contributed to Golden Eagles decision in the first
quarter of 2001 to strengthen credit reserves:



| |  |  | Several new vendor programs that were established in 2000 and
that contributed significantly to funding volume in 2000, were
experiencing losses at higher levels than historic loss levels for
other vendor programs. These programs involved independent sales
organizations providing additional services to the merchants (lessees)
as part of the lease program. If service levels were not as the
merchants expected, the likelihood of their making required lease
payments was reduced. Losses for these programs began to exceed
historical levels for the quarter ended March 31, 2001;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Leases funded for electronic payments software, such as payment
software loaded into a personal computer without the need for a
terminal, were at higher funding levels in 2000 than in previous
years. Performance on these leases worsened in the first quarter of
2001;                                                                                                                                                                                                                                                                                                                       
|
| |  |  | The overall credit mix of the portfolio was slightly skewed by a
few percentage points toward higher risk credits, commonly described
as C and D rated credits. C and D credit leases booked in the year
2000 appeared to be performing significantly worse than C and D
credits in previous years as we analyzed activity through March 31,
2001; and                                                                                                                                                                                                                                           
|
| |  |  | The overall softening of the economy at the start of 2001,
coupled with the results of our analysis of collection status and
default trends as of March 31, 2001, also contributed to the
conclusion that the increase in reserves would be appropriate.                                                                                                                                                                                                                                                                                                                                         

Golden Eagles micro ticket leasing business is characterized by high
incidences of delinquencies, which in turn can lead to significant levels of
loan losses. However, based on historical default rates and our credit
assessments, we believe collectibility of the minimum lease payments is
reasonably predictable.

Exclusive of the $7.2 million incremental credit reserve, the gross margin
percentage for the year ended December 31, 2001 increased to 38.6%. This
increase was primarily attributable to the stabilization of the ICE product
family during 2001. During the year ended December 31, 2000, we experienced
margins of approximately 41% through June 30, 2000 due to a larger portion of
sales from the higher margin legacy products. This higher margin through June
30, 2000 was offset during the third quarter of 2000 by the shift in product
mix toward the lower margin ICE product, increased manufacturing costs due to
the greater than anticipated manufacturing volumes in the U.S. versus China,
transition costs of moving the production for the ICE product family to China,
higher component costs resulting from increased purchases from distributors
(who offered extended credit terms but at higher prices) and costs related to
reworking and stabilizing the new screen-based family of terminals.

Our research and development expenses consist mainly of software and
hardware engineering costs and the cost of development personnel. Our research
and development expenses decreased $10.6 million or 27.3% from $38.7 million
for the year ended December 31, 2000 to $28.1 million for the year ended
December 31, 2001. This decrease was directly attributable to our cost cutting
efforts of reducing personnel and curtailing spending for research and
development materials. Since substantially all development activities related
to the introduction of the interactive consumer environment (ICE) product
family and the ePic initiative were completed in 2000, the overall level of
research and development activities has been reduced. Present development
activities are primarily focusing on reducing the component costs of existing
products and to a much lesser extent, new product introductions.

Selling, general and administrative expenses consist of sales and
marketing expenses, administrative personnel costs, facilities operations, and
other corporate overheads. These expenses totaled $74.6 million for the year
ended December 31, 2001, compared to $93.1 million for the year ended December
31, 2000. This $18.5 million or 19.9% decrease is attributable to lower revenue
related expense savings and other cost containment measures.

For the year ended December 31, 2001, the loss from continuing operations
of $7.5 million compares to a loss of $19.4 million for the prior year. This
improvement results primarily from reductions in research and development and
selling, general and administrative expenses of $29.1 million offset in part by
the decrease in gross margin of $17.2 million.

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For the year ended December 31, 2001, interest income of $0.5 million
consisted primarily of returns on short and long-term investments. We incurred
interest expense of $9.6 million which consisted primarily of interest expense
on borrowings for notes payable, long-term debt, amortization of debt issuance
costs and loan discounts on warrants issued, and the amortization of a
beneficial conversion feature on convertible notes payable. Other income
(expense) in the amount of ($1.5) million consisted primarily of charges
associated with the requirements under the Forbearance and Modification
Agreement between us and our principal lenders and other related costs
associated with being in default with our lenders. Foreign currency losses of
$2.6 million resulted principally from the unfavorable translation of our net
foreign investments in Brazil and the United Kingdom. Further, as a result of
being in default with our lenders, we were unable to continue our hedging
strategies during the year ended December 31, 2001.

For the year ended December 31, 2001, the income tax benefit for federal,
state and foreign taxes was $3.8 million, or 18.4% of our loss before income
taxes. The benefit for federal, state and foreign taxes was $4.9 million, or
14.7% of our loss before income taxes for the year ended December 31, 2000.
Our income tax benefit is different than the U.S. federal statutory rate due to
the mix in which jurisdictions certain taxable income or losses were incurred,
the impact of research and experimentation credits, and charges relating to the
estimated portion of certain deferred tax assets that management estimates may
not be recoverable.

Liquidity and Capital Resources

The Company has historically financed its operations primarily through
cash generated from operations and from borrowings under a line of credit. The
Company has also used securitization conduits to finance lease receivables
generated by its subsidiary Golden Eagle Leasing, as well as borrowings under
notes payable to fund working capital requirements and reduce its bank debt.

Cash provided by continuing operations increased $8.3 million to $25.4
million for the year ended December 31, 2002 from $17.1 million for the year
ended December 31, 2001. The principal reason for the change in operating cash
flow between 2002 and 2001 was our improved results from continuing operations
offset in part by a net increase in working capital. Our working capital
increase during 2002 resulted from decreases in accounts payable from December
31, 2001. The accounts payable balances at December 31, 2001 were higher than
normal stemming from our refinancing activities and conservation of cash
efforts necessary in 2001.

Cash used in investing activities decreased $3.6 million to $4.5 million
for the year ended December 31, 2002 from cash used in investing activities of
$8.1 million in the same period a year ago. This decrease is primarily related
to a decrease in cash required to fund the Companys direct financing leases in
the amount of $9.5 million resulting from a continued focus on higher quality
leases at less volume, offset by an increase in purchases of property, plant
and equipment of $2.9 million. Increases in property, plant and equipment
relate to leasehold improvements and software upgrades.

Cash used in financing activities was $10.6 million for the year ended
December 31, 2002, compared to cash used in financing activities of $7.5
million in the same period a year ago. This change is principally attributable
to the net advances to the operating units in discontinued operations in the
amount of $4.7 million. Excluding such advances financing activities have
improved due to the Companys ability to utilize its $25 million revolving
credit facility, which was significantly restricted in 2001 due to
non-compliance with certain financial covenants. Additionally, the Company was
able to significantly reduce its long-term debt to $25.0 million from $67.9
million at December 31, 2001, with proceeds from the private issuance and sale
of stock in the first quarter of 2002, as discussed below. At December 31,
2002 working capital and cash were $129.3 and $23.1 million, respectively,
compared to $127.2 and $13.4 million at December 31, 2001, respectively.

On March 22, 2002, the Company completed the issuance and sale of
7,870,000 shares of its common stock, par value $0.001 per share (the
Shares), at a price of $5.00 per Share. The shares were sold in a private
transaction exempt from registration under Section 4(2) of the Securities Act
of 1933, as amended. The shares were subsequently registered with the
Securities and Exchange Commission effective May 2, 2002.

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

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

The Company continues to accelerate cash generation through aggressively
pursuing collection of trade receivables, reducing inventories and controlling
expenses. We believe that our cash flow from operations, and the net
cash provided by our direct-financing leases, together with our
current cash reserves, will be sufficient to fund our projected
liquidity and capital resource requirements through 2003. If
operating results are unfavorable or our direct-financing lease
fundings exceed direct-financing lease receipts, we may need to use
additional capital sources to meet our short-term liquidity and
capital resource requirements. These additional sources would include
our existing credit facilities, including our $25 million revolving
line of credit, which is available based on certain accounts
receivable and inventory balances, or our direct-financing lease
credit facilities with approximately $29.3 million of credit
available at December 31, 2002.

Backlog

As of December 31, 2002, our backlog was $77.4 million, compared to $113.4
million at December 31, 2001. This decrease is due to deliveries under prior
sales orders, particularly, our Brazilian Heath Ministry contract.

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

New and Proposed Pronouncements

Effective
January 1, 2002, the Company adopted SFAS No. 141, Business
Combinations, SFAS No. 142, Goodwill and Intangible
Assetsand SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets. SFAS 141 eliminated the
pooling-of-interests method of accounting for business combinations and changed
the criteria to recognize intangible assets apart from goodwill.
Implementation of SFAS 141 did not have an effect on the Companys financial
statements. SFAS 142 sets forth the accounting for goodwill and intangible
assets already recorded. The impact of adopting SFAS 142 resulted in a charge
for the cumulative effect of this accounting change and is discussed further in
Note 10 of the Financial Statements. SFAS 144 addresses the accounting and
reporting for the impairment or disposal of long-lived assets. The initial
adoption of SFAS 144 as of January 1, 2002 did not have an effect on the
Companys financial statements, however during the third quarter of 2002 the
Company has applied the principles set forth in SFAS 144 as discussed in Note
12 to the Financial Statements.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No.4, 44 and 64, amendment of FASB Statement No.13, and Technical Corrections,
which among other things, restricts the classification of gains and losses from
extinguishment of debt as extraordinary to only those transactions that are
unusual and infrequent in nature as defined by APB Opinion No. 30. SFAS 145 is
effective January 1, 2003. Upon adoption, gains and losses on certain future
debt extinguishment, if any, will be recorded in pre-tax income. In addition,
the $2.6 million extraordinary loss from early extinguishment of debt for the
twelve months ended December 31, 2002 will be reclassified to income before
extraordinary loss to conform to the requirements under SFAS 145 upon adoption
in 2003.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities,which addresses financial accounting and
reporting for costs associated with exit or disposal activities. SFAS 146 also
nullifies Emerging Issues Task Force (EITF) No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring).The principal
difference between SFAS 146 and EITF No. 94-3 relates to the requirement in
SFAS 146 to recognize a liability for a cost associated with an exit or
disposal when the liability is incurred versus at the date of an entitys
commitment to an exit plan. SFAS 146 is effective for exit or disposal
activities initiated after December 31, 2002, with early application
encouraged. As discussed in Note 12 to the Financial Statements, the Company
has applied the principles set forth in SFAS 146 relative to the exit and
disposal plans consummated during the third quarter of 2002.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure.SFAS 148 amends
SFAS No. 123, Accounting
for Stock-Based Compensation, to provide alternative methods of transition to
SFAS No. 123s fair value method of accounting for stock-based employee
compensation. Statement 148 also amends the disclosure provisions of SFAS 123
and APB Opinion 28, Interim Financial Reporting,to require disclosure in the
summary of significant accounting policies of the effects of an entitys
accounting policy with respect to stock-based employee compensation on reported
net income and earnings per share in annual and interim financial statements
effective for the Company December 31, 2002. While SFAS 148 does not amend
SFAS 123 to require companies to account for employee stock options using the
fair value method, the disclosure provisions by SFAS 148 are applicable to all
companies with stock-based employee compensation, regardless of whether they
account for that compensation using the fair value method of SFAS 123 or the
intrinsic value method of APB Opinion 25. As allowed by

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SFAS 123, we have elected to continue to utilize the accounting method
prescribed by APB Opinion 25 and have adopted the disclosure requirements of
SFAS 123 as amended.




Item 7a.Quantitative and Qualitative Disclosures About Market Risk

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

A substantial portion of our revenue and capital spending is transacted in
U.S. dollars. However, we do at times enter into these transactions in other
currencies, such as the Hong Kong dollar, Australian dollar,
Brazilian real, British pound  and
other Asian and European currencies. Beginning in June 2002, the
Company resumed its foreign currency risk management strategy, which
had been suspended starting the fourth quarter of 2000 due to
credit limitations imposed by the Company's banks. As a policy, the Company hedges the
translation of its net investment in foreign subsidiaries in an
attempt to neutralize the effect of translation gains or losses in
the statement of operations. Financial hedging instruments are
limited by Company policy to foreign-currency forward or option
contracts and foreign-currency debt. The Company enters into forward
or option contracts with its bank or other financial institutions to
accomplish its hedging strategy. At December 31, 2002, the
Company had foreign currency forward contracts outstanding in the
amount of $25 million, denominated principally in the Brazilian
real and British pound. Gains and losses on these contracts
principally consist of mark-to-market adjustments, recorded in
earnings as foreign currency gains or losses.

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




Item 8.Financial Statements and Supplementary Data

The financial statements and supplementary data required by Regulation S-X
are included in Part IV, Item 16 of this Annual Report on Form 10-K.




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

None.

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PART III




Item 10.Directors and Executive Officers of the Registrant

(a) Identification of Directors: The information set forth in our 2003
Proxy Statement under the caption Board of Directors is incorporated herein
by reference.

(b) Identification of Executive Officers: See Part I of this Report.

(c) Compliance with Section 16(a) of the Securities Exchange Act of 1934:
The information set forth in our 2003 Proxy Statement under the caption
Section 16(a) Beneficial Ownership Reporting Compliance is incorporated
herein by reference.




Item 11.Executive Compensation

The information set forth in our 2003 Proxy Statement under the caption
Executive Compensation is incorporated herein by reference. The sections
captioned Report of the Compensation Committee on Executive Compensation and
Stock Price Performance Graph in the Companys 2003 Proxy Statement are not
incorporated herein by reference.




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

The information set forth in our 2003 Proxy Statement under the caption
Security Ownership of Principal Stockholders and Management is incorporated
herein by reference.




Item 13.Certain Relationships and Related Transactions

The information set forth in our 2003 Proxy Statement under the caption
Certain Transactions and Relationships is incorporated herein by reference.




Item 14. Controls
and Procedures

We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our periodic reports filed with
the Securities and Exchange Commission is recorded, processed, summarized, and
reported within the time periods specified in the rules and forms of the
Commission and that such information is accumulated and communicated to our
management. In designing and evaluating the disclosure controls and
procedures, our management recognized that any controls and procedures, no
matter how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives and management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.

Based on their most recent evaluation, which was completed within 90 days
of the filing of this Annual Report on Form 10-K, our Chief Executive Officer
and Chief Financial Officer believe that our disclosure controls and procedures
(as defined in Rules 13a-14 and 15d-14 of Securities Exchange Act of 1934, as
amended) are effective. There were not any significant changes in internal
controls or in other factors that could significantly affect these internal
controls subsequent to the date of their most recent evaluation.




Item 15. Principal
Accountant Fees and Services

The
information set forth in our 2003 Proxy Statement under the
caption Principal Accountant Fees and Services is
incorporated herein by reference.

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PART IV




Item 16.Exhibits, Financial Statement Schedules, and Reports on Form 8-K



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

|    |  |                                                                                                                                                                                                                            
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) |  | Audited Consolidated Financial Statements                                                                                                                                                                                  
|    |  |                                                                                                                                                                                                                            
|    |  | Report of Independent Auditors                                                                                                                                                                                             
|    |  |                                                                                                                                                                                                                            
|    |  | Consolidated Balance Sheets at December 31, 2002 and 2001                                                                                                                                                                  
|    |  |                                                                                                                                                                                                                            
|    |  | Consolidated Statements of Operations for the years ended December 31,
2002, 2001, and 2000.                                                                                                                               
|    |  |                                                                                                                                                                                                                            
|    |  | Consolidated Statements of Stockholders Equity for the years ended
December 31, 2002, 2001, and 2000.                                                                                                                     
|    |  |                                                                                                                                                                                                                            
|    |  | Consolidated Statements of Cash Flows for the years ended December 31,
2002, 2001, and 2000.                                                                                                                               
|    |  |                                                                                                                                                                                                                            
|    |  | Notes to Consolidated Financial Statements                                                                                                                                                                                 
|    |  |                                                                                                                                                                                                                            
|(2) |  | Financial Statement Schedule                                                                                                                                                                                               
|    |  |                                                                                                                                                                                                                            
|    |  | Schedule II Valuation and Qualifying Accounts
(All other financial statement schedules have been omitted since they
are not required, not applicable, or the information is otherwise
included in the financial statements)



| | b. |  | We filed no Form 8-K Reports during the last quarter of 2002.                                   
| | -- |  | ------------------------------------------------------------------------------------------------
|
| | c. |  | The Exhibit Index and required Exhibits are included following the
Financial Statement Schedule.

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SIGNATURES

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

| |                      |                                                                                      
| | -------------------- | -------------------------------------------------------------------------------------
| | Hypercom Corporation
| |                      |                                                                                      
| | By                   | /s/ CHRISTOPHER S. ALEXANDER                                                         
| |                      |                                                                                      
| |                      | Christopher S. Alexander
Chairman of the Board,
Chief Executive Officer and President

Date: March 28, 2003

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 28, 2003.

|                                                           |  |                                                                     
|---------------------------------------------------------- |  | --------------------------------------------------------------------
|Signature                                                  |  | Title                                                               
|                                                           |  |                                                                     
|(1) Principal Executive, Financial and Accounting Officers |  |                                                                     
|                                                           |  |                                                                     
|/s/ CHRISTOPHER S. ALEXANDER

Christopher S. Alexander     |  | Chairman of the Board, Chief Executive
Officer and President        
|                                                           |  |                                                                     
|/s/ JOHN W. SMOLAK

John W. Smolak                         |  | Executive Vice President, Chief Financial
and Administrative Officer
|                                                           |  |                                                                     
|(2) Directors                                              |  |                                                                     
|                                                           |  |                                                                     
|*

George Wallner                                          |  | Director                                                            
|                                                           |  |                                                                     
|*

Daniel D. Diethelm                                      |  | Director                                                            
|                                                           |  |                                                                     
|*

Jane Evans                                              |  | Director                                                            
|                                                           |  |                                                                     
|*

Albert Irato                                            |  | Director                                                            
|                                                           |  |                                                                     
|*

William Keiper                                          |  | Director                                                            
|                                                           |  |                                                                     
|*

Jock Patton                                             |  | Director                                                            

Christopher S. Alexander, by signing his name hereto, does sign and execute this
Annual Report on Form 10-K on behalf of such of the above named officers and
directors of the registrant on this 28th day of March, 2003, pursuant to the
power of attorney executed by each of such officers and directors filed as
Exhibit 24.1 to this Report.

| |      |  |                             
| | ---- |  | ----------------------------
| | *By: |  | /s/ Christopher S. Alexander
| |      |  |                             
| |      |  |                             
| |      |  | Attorney-in-Fact            

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CERTIFICATION

I, Christopher S. Alexander, certify that:

1.     I have reviewed this annual report on Form 10-K of Hypercom Corporation;

2.     Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.     The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



| |  | a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | b) Evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the Evaluation Date); and                                                                                                  
|
| |  | c) Presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;                                                                                                                        

5.     The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):



| |  | a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal
controls; and                                                                                                                                        

6.     The registrants other certifying officer and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

|                     |  |  |  |                                                                                 
|-------------------- |  |  |  | --------------------------------------------------------------------------------
|Date: March 28, 2003 |  |  |  | By: /s/ Christopher S. AlexanderChristopher S. Alexander
Chief Executive Officer

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CERTIFICATION

I, John W. Smolak, certify that:

1.     I have reviewed this annual report on Form 10-K of Hypercom Corporation;

2.     Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.     The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



| |  | a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | b) Evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the Evaluation Date); and                                                                                                  
|
| |  | c) Presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;                                                                                                                        
|

5.     The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):

|
|
|
|
|

6.     The registrants other certifying officer and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

|                     |  |  |  |                                                               
|-------------------- |  |  |  | --------------------------------------------------------------
|Date: March 28, 2003 |  |  |  | By: /s/ John W. Smolak

John W. Smolak
Chief Financial Officer

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REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and
Stockholders of Hypercom Corporation

We have audited the accompanying consolidated balance sheets of Hypercom
Corporation and subsidiaries as of December 31, 2002 and 2001, and the related
consolidated statements of operations, stockholders equity, and cash flows for
each of the three years in the period ended December 31, 2002. Our audits also
included the financial statement schedule listed in item 16(a)(2). These
financial statements and schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Hypercom
Corporation and subsidiaries as of December 31, 2002 and 2001, and the
consolidated results of their operations and their cash flows for each of the three
years in the period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.

As discussed in Note 2 of the consolidated financial statements, in 2002
the Company changed its method of accounting for goodwill.

|                                  |  |                      
|--------------------------------- |  | ---------------------
|                                  |  | /s/ ERNST & YOUNG LLP
|                                 
|Phoenix, Arizona
February 6, 2003 |  |                      

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HYPERCOM CORPORATION
CONSOLIDATED BALANCE SHEETS

|                                           |                                                                                                                                                        |                                                                                  |         |              |        |   |         |         |        | 
|------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------------------------------------------------------------- | ------- | ------------ | ------ | - | ------- | ------- | ------ | 
|                                           |                                                                                                                                                        |                                                                                  |         | December 31,
|                                           |                                                                                                                                                        |                                                                                  |         |             
|(amounts in thousands, except share data)  |                                                                                                                                                        | 2002                                                                             |         | 2001        
|                                           |                                                                                                                                                        |                                                                                  |         |             
|ASSETS                                     |                                                                                                                                                        |                                                                                  |         |              |        |   |         |        
|Current assets:                            |                                                                                                                                                        |                                                                                  |         |              |        |   |         |        
|                                           |                                                                                                                                                        | Cash and cash equivalents                                                        |         | $            | 23,069 |   |         | $       | 13,402 | 
|                                           |                                                                                                                                                        | Restricted cash                                                                  |         |              | 6,777  |   |         |         | 6,367  | 
|                                           |                                                                                                                                                        | Accounts receivable, net of allowance for doubtful
accounts of $3,282 and $3,422 |         |              | 56,007 |   |         |         | 71,467 | 
|                                           |                                                                                                                                                        | Current portion of net investment in direct financing leases                     |         |              | 11,812 |   |         |         | 16,242 | 
|                                           |                                                                                                                                                        | Current portion of net investment in sales-type leases                           |         |              | 9,774  |   |         |         | 7,341  | 
|                                           |                                                                                                                                                        | Inventories, net                                                                 |         |              | 46,406 |   |         |         | 62,411 | 
|                                           |                                                                                                                                                        | Deferred income taxes                                                            |         |              |       |   |         |         | 16,090 | 
|                                           |                                                                                                                                                        | Income tax receivable                                                            |         |              | 9,118  |   |         |         |       | 
|                                           |                                                                                                                                                        | Prepaid taxes                                                                    |         |              | 425    |   |         |         | 762    | 
|                                           |                                                                                                                                                        | Prepaid expenses and other current assets                                        |         |              | 14,857 |   |         |         | 18,937 | 
|                                           |                                                                                                                                                        | Long lived assets - held for sale                                                |         |              | 660    |   |         |         |       | 
|                                           |                                                                                                                                                        | Assets of discontinued operations - held for sale                                |         |              | 8,834  |   |         |         |       | 
|                                           |                                                                                                                                                        |                                                                                  |         |              |        |   |         |         |        | 
|Total current assets                       |                                                                                                                                                        |                                                                                  | 187,739 |              |        |   | 213,019 |        
|                                           |                                                                                                                                                        | Property, plant and equipment, net                                               |         |              | 30,214 |   |         |         | 37,964 | 
|                                           |                                                                                                                                                        | Long-term marketable securities, at market                                       |         |              | 152    |   |         |         | 155    | 
|                                           |                                                                                                                                                        | Net investment in direct financing leases                                        |         |              | 15,392 |   |         |         | 24,761 | 
|                                           |                                                                                                                                                        | Net investment in sales-type leases                                              |         |              | 11,213 |   |         |         | 8,004  | 
|                                           |                                                                                                                                                        | Deferred income taxes                                                            |         |              |       |   |         |         | 10,003 | 
|                                           |                                                                                                                                                        | Goodwill,
net of amortization of $3,473                                          |         |              |       |   |         |         | 21,766 | 
|                                           |                                                                                                                                                        | Intangible assets, net                                                           |         |              | 4,633  |   |         |         | 13,537 | 
|                                           |                                                                                                                                                        | Other long-term assets                                                           |         |              | 10,660 |   |         |         | 8,485  | 
|                                           |                                                                                                                                                        |                                                                                  |         |              |        |   |         |         |        | 
|Total assets                               |                                                                                                                                                        | $                                                                                | 260,003 |              |        | $ | 337,694 |        
|                                           |                                                                                                                                                        |                                                                                  |         |              |        |   |         |         |        | 
|LIABILITIES AND STOCKHOLDERS EQUITY       |                                                                                                                                                        |                                                                                  |         |              |        |   |         |        
|                                           |                                                                                                                                                        | Revolving line of credit                                                         |         | $            |       |   |         | $       | 6,891  | 
|                                           |                                                                                                                                                        | Accounts payable                                                                 |         |              | 20,553 |   |         |         | 31,761 | 
|                                           |                                                                                                                                                        | Accrued
payroll and related expenses                                             |         |              | 6,419  |   |         |         | 6,107  | 
|                                           |                                                                                                                                                        | Accrued sales and other taxes                                                    |         |              | 7,187  |   |         |         | 5,605  | 
|                                           |                                                                                                                                                        | Accrued liabilities                                                              |         |              | 6,572  |   |         |         | 11,032 | 
|                                           |                                                                                                                                                        | Deferred revenue                                                                 |         |              | 1,999  |   |         |         | 2,180  | 
|                                           |                                                                                                                                                        | Income taxes payable                                                             |         |              | 1,707  |   |         |         | 1,495  | 
|                                           |                                                                                                                                                        | Current
portion of long-term debt                                                |         |              | 13,331 |   |         |         | 20,716 | 
|                                           |                                                                                                                                                        | Liabilities of discontinued operations - held for sale                           |         |              | 649    |   |         |         |       | 
|                                           |                                                                                                                                                        |                                                                                  |         |              |        |   |         |         |        | 
|Total current liabilities                  |                                                                                                                                                        |                                                                                  | 58,417  |              |        |   | 85,787  |        
|                                           |                                                                                                                                                        | Long-term debt                                                                   |         |              | 11,694 |   |         |         | 40,281 | 
|                                           |                                                                                                                                                        | Other non-current liabilities                                                    |         |              | 777    |   |         |         | 257    | 
|                                           |                                                                                                                                                        |                                                                                  |         |              |        |   |         |         |        | 
|Total liabilities                          |                                                                                                                                                        |                                                                                  | 70,888  |              |        |   | 126,325 |        
|Stockholders equity:                      |                                                                                                                                                        |                                                                                  |         |              |        |   |         |        
|                                           | Common stock, $.001 par value; 100,000,000 shares
authorized; 48,014,350 and 39,795,554 shares outstanding
at December 31, 2002 and 2001, respectively |                                                                                  |         | 27           |        |   |         | 19      |       
|                                           | Additional paid-in capital                                                                                                                             |                                                                                  |         | 214,008      |        |   |         | 175,628 |       
|                                           | Receivables from stockholders                                                                                                                          |                                                                                  |         | (1,056       | )      |   |         | (1,498  | )     
|                                           | Accumulated (deficit) earnings                                                                                                                         |                                                                                  |         | (21,362      | )      |   |         | 39,722  |       
|                                           |                                                                                                                                                        |                                                                                  |         |              |        |   |         |         |        | 
|                                           |                                                                                                                                                        |                                                                                  | 191,617 |              |        |   | 213,871 |        
|                                           | Treasury stock, 230,088 shares (at cost)                                                                                                               |                                                                                  |         | (2,502       | )      |   |         | (2,502  | )     
|                                           |                                                                                                                                                        |                                                                                  |         |              |        |   |         |         |        | 
|Total stockholders equity                 |                                                                                                                                                        |                                                                                  | 189,115 |              |        |   | 211,369 |        
|                                           |                                                                                                                                                        |                                                                                  |         |              |        |   |         |         |        | 
|Total liabilities and stockholders equity |                                                                                                                                                        | $                                                                                | 260,003 |              |        | $ | 337,694 |        
|                                           |                                                                                                                                                        |                                                                                  |         |              |        |   |         |         |        | 

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

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HYPERCOM CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                                                                                        |                                                                                                                    |                          |         |                         |         |      |         |         |         |   |         |         |         | 
|----------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------ | ------------------------ | ------- | ----------------------- | ------- | ---- | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                                                                                                                        |                                                                                                                    |                          |         | Year
Ended December 31,
|                                                                                                                        |                                                                                                                    |                          |         |                        
|(amounts in thousands, except per share data)                                                                           |                                                                                                                    | 2002                     |         | 2001                    |         | 2000
|                                                                                                                        |                                                                                                                    |                          |         |                         |         |      |         |         |         |   |         |        
|Net revenue                                                                                                             |                                                                                                                    | $                        | 270,651 |                         |         | $    | 265,338 |         |         | $ | 295,212 |        
|Costs and expenses:                                                                                                     |                                                                                                                    |                          |         |                         |         |      |         |         |         |   |         |        
|                                                                                                                        | Costs of revenue                                                                                                   |                          |         | 169,214                 |         |      |         | 170,181 |         |   |         | 182,841 |        
|                                                                                                                        | Research and development                                                                                           |                          |         | 24,744                  |         |      |         | 28,107  |         |   |         | 38,666  |        
|                                                                                                                        | Selling, general and administrative                                                                                |                          |         | 65,191                  |         |      |         | 74,599  |         |   |         | 93,140  |        
|                                                                                                                        | Restructuring charges                                                                                              |                          |         | 4,434                   |         |      |         |        |         |   |         |        |        
|                                                                                                                        |                                                                                                                    |                          |         |                         |         |      |         |         |         |   |         |        
|                                                                                                                        |                                                                                                                    | Total costs and expenses |         |                         | 263,583 |      |         |         | 272,887 |   |         |         | 314,647 | 
|                                                                                                                        |                                                                                                                    |                          |         |                         |         |      |         |         |         |   |         |        
|Income (loss) from continuing operations                                                                                |                                                                                                                    |                          | 7,068   |                         |         |      | (7,549  | )       |         |   | (19,435 | )      
|                                                                                                                        | Interest income                                                                                                    |                          |         | 253                     |         |      |         | 540     |         |   |         | 1,848   |        
|                                                                                                                        | Interest expense                                                                                                   |                          |         | (4,207                  | )       |      |         | (9,585  | )       |   |         | (5,434  | )      
|                                                                                                                        | Other income (expense)                                                                                             |                          |         | 294                     |         |      |         | (1,519  | )       |   |         | 1,511   |        
|                                                                                                                        | Foreign currency loss                                                                                              |                          |         | (6,062                  | )       |      |         | (2,577  | )       |   |         | (1,818  | )      
|                                                                                                                        | Loss in equity affiliate                                                                                           |                          |         |                        |         |      |         |        |         |   |         | (9,855  | )      
|                                                                                                                        |                                                                                                                    |                          |         |                         |         |      |         |         |         |   |         |        
|Loss before taxes, discontinued operations, extraordinary
item, and cumulative effect of change in accounting principle |                                                                                                                    |                          | (2,654  | )                       |         |      | (20,690 | )       |         |   | (33,183 | )      
|                                                                                                                        | (Provision) benefit for income taxes                                                                               |                          |         | (20,403                 | )       |      |         | 3,816   |         |   |         | 4,875   |        
|                                                                                                                        |                                                                                                                    |                          |         |                         |         |      |         |         |         |   |         |        
|Loss before discontinued operations, extraordinary
item, and cumulative effect of change in accounting principle        |                                                                                                                    |                          | (23,057 | )                       |         |      | (16,874 | )       |         |   | (28,308 | )      
|                                                                                                                        | Loss from discontinued operations, net of related tax benefit
of $1,161 and $1,773 for 2001 and 2000, respectively |                          |         | (13,643                 | )       |      |         | (3,034  | )       |   |         | (2,642  | )      
|                                                                                                                        | Extraordinary item                                                                                                 |                          |         | (2,618                  | )       |      |         |        |         |   |         |        |        
|                                                                                                                        | Cumulative effect of change in accounting principle                                                                |                          |         | (21,766                 | )       |      |         |        |         |   |         |        |        
|                                                                                                                        |                                                                                                                    |                          |         |                         |         |      |         |         |         |   |         |        
|Net loss                                                                                                                |                                                                                                                    | $                        | (61,084 | )                       |         | $    | (19,908 | )       |         | $ | (30,950 | )      
|                                                                                                                        |                                                                                                                    |                          |         |                         |         |      |         |         |         |   |         |        
|Loss per share - basic and diluted:                                                                                     |                                                                                                                    |                          |         |                         |         |      |         |         |         |   |         |        
|Loss before discontinued operations, extraordinary item,
and cumulative effect of change in accounting principle        |                                                                                                                    | $                        | (0.50   | )                       |         | $    | (0.46   | )       |         | $ | (0.83   | )      
|                                                                                                                        | Loss from discontinued operations                                                                                  |                          |         | (0.29                   | )       |      |         | (0.08   | )       |   |         | (0.08   | )      
|                                                                                                                        | Extraordinary item                                                                                                 |                          |         | (0.06                   | )       |      |         |        |         |   |         |        |        
|                                                                                                                        | Cumulative effect of change in accounting principle                                                                |                          |         | (0.47                   | )       |      |         |        |         |   |         |        |        
|                                                                                                                        |                                                                                                                    |                          |         |                         |         |      |         |         |         |   |         |        
|Loss per share                                                                                                          |                                                                                                                    | $                        | (1.32   | )                       |         | $    | (0.54   | )       |         | $ | (0.91   | )      
|                                                                                                                        |                                                                                                                    |                          |         |                         |         |      |         |         |         |   |         |        
|Weighted average common shares - basic and diluted                                                                      |                                                                                                                    |                          | 46,142  |                         |         |      | 36,644  |         |         |   | 34,184  |        
|                                                                                                                        |                                                                                                                    |                          |         |                         |         |      |         |         |         |   |         |        

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

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HYPERCOM CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

|                                          |                                      |        |              |           |                   |         |                 |              |                      |          |          |        |                    |        |        |     |  |   |         |         |   |   |        |     |  |   |         |         |  
|----------------------------------------- | ------------------------------------ | ------ | ------------ | --------- | ----------------- | ------- | --------------- | ------------ | -------------------- | -------- | -------- | ------ | ------------------ | ------ | ------ | --- |  | - | ------- | ------- | - | - | ------ | --- |  | - | ------- | ------- | -
|                                          |                                      |        | Common Stock |           | AdditionalPaid-in |         | Receivablesfrom |              | Accumulated(Deficit) |          | Treasury |        | TotalStockholders
|(amounts in thousands, except share data) |                                      | Shares |              | Balance   |                   | Capital |                 | Stockholders |                      | Earnings |          | Stock  |                    | Equity
|                                          |                                      |        |              |           |                   |         |                 |              |                      |          |          |        |                    |        |       
|Balance as of December 31, 1999           |                                      |        | 33,234,525   |           |                   | $       | 13              |              |                      | $        | 146,040  |        |                    | $      | (1,498 | )   |  | $ | 90,873  |         |   | $ | (3,694 | )   |  | $ | 231,734 |        
|                                          | Issuance of common stock             |        |              | 432,871   |                   |         |                 |             |                      |          |          | 4,000  |                    |        |        |    |  |   |         |        |   |   |        |    |  |   |         | 4,000   |  
|                                          | Issuance of treasury stock           |        |              | 83,641    |                   |         |                 |             |                      |          |          | 22     |                    |        |        |    |  |   |         |        |   |   |        | 744 |  |   |         | 766     |  
|                                          | Exercise of options                  |        |              | 548,962   |                   |         |                 | 1            |                      |          |          | 2,596  |                    |        |        |    |  |   |         |        |   |   |        |    |  |   |         | 2,597   |  
|                                          | Net loss                             |        |              |          |                   |         |                 |             |                      |          |          |       |                    |        |        |    |  |   |         | (30,950 | ) |   |        |    |  |   |         | (30,950 | )
|                                          |                                      |        |              |           |                   |         |                 |              |                      |          |          |        |                    |        |        |     |  |   |         |         |   |   |        |     |  |   |         |        
|Balance as of December 31, 2000           |                                      |        | 34,299,999   |           |                   |         | 14              |              |                      |          | 152,658  |        |                    |        | (1,498 | )   |  |   | 59,923  |         |   |   | (2,950 | )   |  |   | 208,147 |        
|                                          | Issuance of common stock             |        |              | 5,449,143 |                   |         |                 | 5            |                      |          |          | 22,992 |                    |        |        |    |  |   |         |        |   |   |        |    |  |   |         | 22,997  |  
|                                          | Issuance of treasury stock           |        |              | 46,412    |                   |         |                 |             |                      |          |          | (22    | )                  |        |        |    |  |   |         | (293    | ) |   |        | 448 |  |   |         | 133     |  
|                                          | Net loss                             |        |              |          |                   |         |                 |             |                      |          |          |       |                    |        |        |    |  |   |         | (19,908 | ) |   |        |    |  |   |         | (19,908 | )
|                                          |                                      |        |              |           |                   |         |                 |              |                      |          |          |        |                    |        |        |     |  |   |         |         |   |   |        |     |  |   |         |        
|Balance as of December 31, 2001           |                                      |        | 39,795,554   |           |                   |         | 19              |              |                      |          | 175,628  |        |                    |        | (1,498 | )   |  |   | 39,722  |         |   |   | (2,502 | )   |  |   | 211,369 |        
|                                          | Issuance of common stock             |        |              | 8,218,796 |                   |         |                 | 8            |                      |          |          | 38,380 |                    |        |        |    |  |   |         |        |   |   |        |    |  |   |         | 38,388  |  
|                                          | Decrease in stockholders receivable |        |              |          |                   |         |                 |             |                      |          |          |       |                    |        |        | 442 |  |   |         |        |   |   |        |    |  |   |         | 442     |  
|                                          | Net loss                             |        |              |          |                   |         |                 |             |                      |          |          |       |                    |        |        |    |  |   |         | (61,084 | ) |   |        |    |  |   |         | (61,084 | )
|                                          |                                      |        |              |           |                   |         |                 |              |                      |          |          |        |                    |        |        |     |  |   |         |         |   |   |        |     |  |   |         |        
|Balance as of December 31, 2002           |                                      |        | 48,014,350   |           |                   | $       | 27              |              |                      | $        | 214,008  |        |                    | $      | (1,056 | )   |  | $ | (21,362 | )       |   | $ | (2,502 | )   |  | $ | 189,115 |        
|                                          |                                      |        |              |           |                   |         |                 |              |                      |          |          |        |                    |        |        |     |  |   |         |         |   |   |        |     |  |   |         |        

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

39



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Hypercom Corporation
Consolidated Statements of Cash Flows

|                                                                                          |                                             |                                                                           |                                                     |         |          |         |        |         |          |        |         |         |          |         |  
|----------------------------------------------------------------------------------------- | ------------------------------------------- | ------------------------------------------------------------------------- | --------------------------------------------------- | ------- | -------- | ------- | ------ | ------- | -------- | ------ | ------- | ------- | -------- | ------- | -
|                                                                                          |                                             | Year
Ended December 31,                                                  
|                                                                                          |                                             |                                                                          
|(amounts in thousands)                                                                    |                                             | 2002                                                                      |                                                     | 2001    |          | 2000   
|                                                                                          |                                             |                                                                           |                                                     |         |          |        
|Cash flows from continuing operations:                                                    |                                             |                                                                           |                                                     |         |          |         |        |         |          |        |         |        
|                                                                                          | Net loss                                    |                                                                           | $                                                   | (47,441 | )        |         | $      | (16,874 | )        |        | $       | (28,308 | )       
|Adjustments to reconcile net loss to net cash provided by
(used in) operating activities: |                                             |                                                                           |                                                     |         |          |         |        |         |          |        |         |        
|                                                                                          |                                             | Amortization of discount on notes payable                                 |                                                     |         | 83       |         |        |         | 2,160    |        |         |         |         |        
|                                                                                          |                                             | Amortization of beneficial notes payable conversion feature               |                                                     |         |         |         |        |         | 667      |        |         |         |         |        
|                                                                                          |                                             | Amortization of deferred financing costs                                  |                                                     |         | 1,835    |         |        |         | 1,152    |        |         |         |         |        
|                                                                                          |                                             | Depreciation/amortization                                                 |                                                     |         | 11,172   |         |        |         | 12,913   |        |         |         | 10,861   |        
|                                                                                          |                                             | Bad debt expense                                                          |                                                     |         | 874      |         |        |         | 1,056    |        |         |         | 2,674    |        
|                                                                                          |                                             | Deferred components of direct financing leases                            |                                                     |         | (249     | )       |        |         | (621     | )      |         |         | (2,285   | )      
|                                                                                          |                                             | Provision for losses on direct financing leases                           |                                                     |         | 8,377    |         |        |         | 18,075   |        |         |         | 11,681   |        
|                                                                                          |                                             | Provision for losses on sales-type leases                                 |                                                     |         | 691      |         |        |         | 607      |        |         |         |         |        
|                                                                                          |                                             | Provision for excess and obsolete inventory                               |                                                     |         | 5,957    |         |        |         | 3,716    |        |         |         | 3,093    |        
|                                                                                          |                                             | Equity loss in affiliates                                                 |                                                     |         |         |         |        |         |         |        |         |         | 9,855    |        
|                                                                                          |                                             | Non-cash restructuring charges                                            |                                                     |         | 3,572    |         |        |         |         |        |         |         |         |        
|                                                                                          |                                             | Deferred income taxes                                                     |                                                     |         | 26,093   |         |        |         | (4,123   | )      |         |         | (7,385   | )      
|                                                                                          |                                             | Cumulative effect of change in accounting principle                       |                                                     |         | 21,766   |         |        |         |         |        |         |         |         |        
|                                                                                          |                                             | Extraordinary loss on early retirement of debt                            |                                                     |         | 2,618    |         |        |         |         |        |         |         |         |        
|                                                                                          |                                             | Foreign currency loss                                                     |                                                     |         | 6,062    |         |        |         | 2,577    |        |         |         | 1,894    |        
|                                                                                          |                                             | Other                                                                     |                                                     |         | 402      |         |        |         | 50       |        |         |         | 103      |        
|                                                                                          | Changes in operating assets and liabilities |                                                                           |                                                     | (16,424 | )        |         |        | (4,266  | )        |        |         | (25,131 | )       
|                                                                                          |                                             |                                                                           |                                                     |         |          |         |        |         |          |        |         |         |         
|                                                                                          |                                             |                                                                           | Net cash provided by (used in) operating activities |         |          | 25,388  |        |         |          | 17,089 |         |         |          | (22,948 | )
|Cash flows from investing activities:                                                     |                                             |                                                                           |                                                     |         |          |         |        |         |          |        |         |        
|                                                                                          |                                             | Advances to and investment in equity affiliate and related parties        |                                                     |         |         |         |        |         |         |        |         |         | (2,005   | )      
|                                                                                          |                                             | Payments received on notes receivable                                     |                                                     |         | 349      |         |        |         | 997      |        |         |         | 1,269    |        
|                                                                                          |                                             | Principal payments received on direct financing leases                    |                                                     |         | 12,985   |         |        |         | 12,587   |        |         |         | 10,019   |        
|                                                                                          |                                             | Funding of direct financing leases                                        |                                                     |         | (8,591   | )       |        |         | (18,061  | )      |         |         | (42,310  | )      
|                                                                                          |                                             | Increase in restricted cash                                               |                                                     |         | (410     | )       |        |         | (2,726   | )      |         |         |         |        
|                                                                                          |                                             | Acquisition of other assets                                               |                                                     |         | (2,917   | )       |        |         | (912     | )      |         |         | (2,710   | )      
|                                                                                          |                                             | Proceeds from disposal of property, plant, and equipment                  |                                                     |         | 113      |         |        |         | 399      |        |         |         | 91       |        
|                                                                                          |                                             | Purchase
of property, plant and equipment                                 |                                                     |         | (6,049   | )       |        |         | (3,130   | )      |         |         | (13,020  | )      
|                                                                                          |                                             | Purchase of marketable securities                                         |                                                     |         |         |         |        |         |         |        |         |         | (935     | )      
|                                                                                          |                                             | Proceeds from maturity of marketable securities                           |                                                     |         |         |         |        |         | 2,775    |        |         |         | 34,782   |        
|                                                                                          |                                             | Acquisition of controlling interest in subsidiaries, net of cash acquired |                                                     |         |         |         |        |         |         |        |         |         | (24,134  | )      
|                                                                                          |                                             |                                                                           |                                                     |         |          |         |        |         |          |        |         |         |         
|                                                                                          |                                             |                                                                           | Net cash used in investing activities               |         |          | (4,520  | )      |         |          | (8,071 | )       |         |          | (38,953 | )
|Cash flows from financing activities:                                                     |                                             |                                                                           |                                                     |         |          |         |        |         |          |        |         |        
|                                                                                          |                                             | Borrowings on revolving line of credit                                    |                                                     |         | 173,560  |         |        |         | 83,657   |        |         |         | 109,490  |        
|                                                                                          |                                             | Repayments on revolving line of credit                                    |                                                     |         | (180,450 | )       |        |         | (125,724 | )      |         |         | (60,533  | )      
|                                                                                          |                                             | Repayment of bank notes payable and other debt instruments                |                                                     |         | (36,862  | )       |        |         | (51,696  | )      |         |         | (106,701 | )      
|                                                                                          |                                             | Proceeds from bank notes payable and other debt instruments               |                                                     |         |         |         |        |         | 69,715   |        |         |         | 106,872  |        
|                                                                                          |                                             | Advances (to)/from discontinued operations                                |                                                     |         | (4,722   | )       |        |         | 795      |        |         |         | (2,907   | )      
|                                                                                          |                                             | Payment of advances to stockholders                                       |                                                     |         | 321      |         |        |         |         |        |         |         |         |        
|                                                                                          |                                             | Proceeds from sale of lease receivables                                   |                                                     |         |         |         |        |         | 7,977    |        |         |         |         |        
|                                                                                          |                                             | Proceeds from issuance of common stock                                    |                                                     |         | 37,555   |         |        |         | 7,803    |        |         |         | 3,363    |        
|                                                                                          |                                             |                                                                           |                                                     |         |          |         |        |         |          |        |         |         |         
|                                                                                          |                                             |                                                                           | Net cash (used in) provided by financing activities |         |          | (10,598 | )      |         |          | (7,473 | )       |         |          | 49,584  |  
|Effect of exchange rate changes on cash                                                   |                                             |                                                                           | (504                                                | )       |          |         | (604   | )       |          |        | (687    | )      
|                                                                                          |                                             |                                                                           |                                                     |         |          |         |        |         |          |        |         |         |         
|Net increase (decrease) in cash flows from continuing operations                          |                                             |                                                                           | 9,766                                               |         |          |         | 941    |         |          |        | (13,004 | )      
|Net decrease in cash flows from discontinued operations                                   |                                             |                                                                           | (99                                                 | )       |          |         | (547   | )       |          |        | (81     | )      
|Cash
and cash equivalents, beginning of period                                            |                                             |                                                                           | 13,402                                              |         |          |         | 13,008 |         |          |        | 26,093  |        
|                                                                                          |                                             |                                                                           |                                                     |         |          |         |        |         |          |        |         |         |         
|Cash
and cash equivalents, end of period                                                  |                                             | $                                                                         | 23,069                                              |         |          | $       | 13,402 |         |          | $      | 13,008  |        
|                                                                                          |                                             |                                                                           |                                                     |         |          |         |        |         |          |        |         |         |         

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

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HYPERCOM CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002

1. Description of Business

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

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

2. Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements are comprised of the accounts of
Hypercom Corporation and all subsidiaries in which a controlling interest is
held. All significant intercompany balances and transactions have been
eliminated.

Reclassification

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

Use of Estimates

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

Foreign Currency

The foreign subsidiaries and divisions use the U.S. dollar as the
functional currency. Their local currency financial statements are re-measured
as follows: monetary assets and liabilities at year-end exchange rates, and
inventories, property and non-monetary assets and liabilities at historical
rates. During the years ended December 31, 2002, 2001 and 2000 the Company
recorded net gains (losses) on re-measurement of approximately ($4,915,000),
($2,179,000), and ($2,736,000), respectively. For the same periods, the
Company recorded net gains (losses) on transactions denominated in foreign
currencies of approximately $(1,147,000), ($398,000), and $918,000,
respectively. These amounts are included in the results of operations.

Cash and Cash Equivalents

The Company considers all investment instruments with a remaining maturity
of three months or less when purchased, to be cash equivalents.

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Restricted Cash

In connection with the securitization of direct finance leases (see Note
11), the Companys Equipment Leasing segment, Golden Eagle Leasing, is required
to establish restricted cash collection, collateral and reserve accounts. The
Company initially funded the restricted cash accounts with $3.6 million from
the proceeds of the securitization. The accounts are principally used for the
collection of monthly equipment lease payments, remittance of funds to service
the related debt, and to maintain certain credit enhancement and liquidity
levels.

Accounts receivable

Trade accounts receivable are recorded at the time we have met the
criteria for revenue recognition of products, services and long-term contracts.
Payment terms for product and service trade receivables generally range from
30 to 60 days depending on the circumstances of each order or service contract.
Payment on trade receivables from long-term contracts is generally received
within four months of the milestone approval date. Any payments not received
within the agreed upon due date are considered past due accounts.

We maintain an allowance for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. We
compute such allowance based upon a specific customer account review of our
larger customers and balances in excess of 90 days old. Our assessment of our
customers ability to pay generally includes direct contact with the customer,
investigation into our customers financial status, as well as consideration of
our customers payment history with us. If the financial condition of our
customers were to deteriorate, resulting in an impairment of their ability to
make payments, additional allowances may be required. If we determine, based
on our assessment, that it is more likely than not that our customers will be
unable to pay, we will charge off the accounts receivable.

Marketable Securities

Management determines the appropriate classification of its investments in
tradable debt and equity securities at the time of purchase. Securities for
which the Company does not have the intent or ability to hold to maturity are
classified as available for sale and are carried at fair value, with the
unrealized holding gain and losses, net of tax, reported in a separate
component of stockholders equity, if material. Cost is determined based on
specific identification. Securities classified as available for sale include
both securities due within one year and securities with maturity dates beyond
one year. Securities with a maturity date within one year are classified as
Marketable Securities as a part of Current Assets. Securities with a maturity
date beyond one year are classified as Long-Term Marketable Securities.

Fair Value of Financial Instruments

The Company values financial instruments as required by Statement of
Financial Accounting Standards No. 107, Disclosures about Fair Value of
Financial Instruments(SFAS No. 107). The carrying amounts of cash and cash
equivalents and bank notes payable approximate fair value due to the short
maturity of those instruments. The fair value of marketable securities and
long-term marketable securities is determined based on quoted market prices.
The fair value of direct financing and sales-type leases and long-term
obligations is estimated by discounting the future cash flows required under
the terms of each respective lease or debt agreement by current market rates
for the same or similar issues of leases or debt with similar remaining
maturities. The fair value of
financial hedge instruments are based on quotes from brokers using market
prices for those or similar instruments. The Corporation does not acquire,
hold, or issue derivative financial instruments for trading purposes.
Derivative financial instruments are used to manage foreign exchange and
interest rate risks that arise out of the Companys core business activities.

Derivative Financial Instruments

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

Derivative financial instruments used to manage foreign exchange risk are
designated as hedging instruments for hedges of foreign currency exposure of
our net investment in foreign operations. The primary objective of our hedging
strategy is to protect our net investments in foreign subsidiaries that are
exposed to volatility in foreign currency exchange rates. Financial hedging
instruments used in this strategy are limited by Company policy to foreign
currency forward or option contracts and foreign currency debt. Changes in the
fair value of foreign-currency forward contracts are reported as foreign
currency gains or losses in the statement of

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operations. At December 31, 2002 the Company had two
forward contracts in place to hedge its foreign currency denominated net
monetary assets in Brazil and the United Kingdom. The
U.S. dollar amount of the contracts was approximately $25.0 million and the
total payable recorded under the contracts was approximately $310,000. The
Company did not hedge its foreign currency exposure during 2001 due to
liquidity and financing restrictions.

The Company has one derivative financial instrument to manage interest
rate risk in the form of an interest rate swap (See Note 11). The fair value
of this instrument is not considered material to the Companys financial
position.

Inventories

Inventories are stated at the lower of standard cost or market. Standard
costs approximate first-in, first-out (FIFO) costs. Reserves for estimated
excess and/or obsolete inventory are established on a part-level basis and
netted against the related inventory item.

Investment in Equity Affiliate

The Company uses the equity method of accounting for restricted share
investments held in entities for which it holds greater than 20% equity
interest yet does not have financial control as defined by Statement of
Financial Accounting Standards No. 94, Consolidation of all Majority-Owned
Subsidiaries. Under this method the Company will record its proportionate
share of the operating results of the investee.

At December 31, 1999, the first such investment was made by contribution
of certain assets and intellectual property with a net book value of $776,000
and through an advance of funds totaling $5,000,000 to Cirilium Corporation. In
addition, in the quarter ended June 2000, the Company contributed certain
foreign assets with a net book value of $229,000 to Cirilium Corporation.

The Company reported its initial 45% investment in Cirilium on the equity
method and reported a loss of $9,855,000 for the year ended December 31, 2000.
During the quarter ended September 30, 2000, as a result of continuing losses
by Cirilium, the Company fully reserved operating advances made to Cirilium and
also established a 100% reserve on all inventory dedicated to Cirilium
production. The total of the charges related to these actions, which are
included in the $9,855,000 loss, amounted to $4,100,000. The Company has no
remaining basis in this investment.

Capitalized Software

Statement
of Financial Accounting Standards No. 86, Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise
Marketed (SFAS 86), requires capitalization of certain software development costs subsequent
to the establishment of technological feasibility. Accordingly certain
development costs incurred between the establishment of technological
feasibility and when the product is available for general release to customers
have been capitalized. The amounts capitalized in the years ended December 31,
2002, 2001, and 2000, were approximately $0.4 million, $1.5 million, and $2.5
million, respectively. The Company amortizes capitalized software development
costs in accordance with SFAS 86 once the product is available for general
release to customers.

Property, Plant and Equipment

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

|                                |  |             |  | 
|------------------------------- |  | ----------- |  | 
|Building                        |  | 30-40 years
|Computer equipment and software |  | 3-5 years  
|Machinery and equipment         |  | 5-7 years  
|Furniture and fixtures          |  | 5-7 years  
|Leasehold improvements          |  | 2-15 years 

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Goodwill

In September 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 141 (SFAS 141), Business
Combinations, and No. 142 (SFAS 142), Goodwill and Other Intangible Assets,
effective for fiscal years beginning after December 15, 2001. Under the new
rules, goodwill and intangible assets deemed to have indefinite lives will no
longer be amortized, but will be subject to annual impairment tests in
accordance with the statements. Other intangible assets will continue to be
amortized over their useful lives.

The company adopted the standard effective January 1, 2002. In accordance
with SFAS 142, the Company ceased amortizing goodwill totaling $21.8 million as
of that date. See Note 10.

Impairment of Long-Lived Assets

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

Self-Insurance

The Company self-insures, with certain stop loss insurance coverage, for
employee dental care. Claims expense is recorded in the year of occurrence
through the accrual of claim reserves based on estimates of ultimate claims
costs. Claims incurred but not yet reported are estimated and reserved for
based on historical claims data.

Income Taxes

Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax laws (including rates) is recognized
in income in the period that includes the enactment date. See Note 14
regarding a full valuation reserve against deferred tax assets.

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

Revenue Recognition

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

The Company generally recognizes product revenue, including sales to
distributors and sales under sales-type leases, upon shipment of product.
Revenue from service obligations is recognized over the lives of the contracts.
Revenues from long-term contracts that require substantial performance of
customized software and hardware over an extended period are recorded based
upon the attainment of scheduled performance milestones.

Direct finance lease income and the interest portion of sales-type leases
is amortized to lease income over the lease term in a manner that produces a
constant rate of return on the net investment in the direct finance or
sales-type lease.

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

Stock-Based Compensation

Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation, (SFAS 123) defines a fair value based method of
accounting for employee stock options or similar equity instruments. However,
it also allows an entity to

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continue to account for these plans according to
Accounting Principles Board Opinion No. 25 (APB 25) and related
interpretations, provided pro forma disclosures of net income are made as if
the fair value based method of accounting, defined by SFAS 123, had been
applied.

The Company has elected to continue to measure compensation expense
related to employee stock purchase options using APB 25 and related
interpretations. The following table represents the effect on net losses and
loss per share if the Company had applied the fair value method and recognition
provisions of SFAS 123 to stock based employee compensation (amounts
in thousands, except share data):

|                                             |                                                                                                                                                         |   |                         |        |      |   |         |        |   |   |         |        |  
|-------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ----------------------- | ------ | ---- | - | ------- | ------ | - | - | ------- | ------ | -
|                                             |                                                                                                                                                         |   | Year Ended December 31,
|                                             |                                                                                                                                                         |   |                        
|                                             |                                                                                                                                                         |   | 2002                    |        | 2001 |   | 2000   
|                                             |                                                                                                                                                         |   |                         |        |      |   |        
|Net loss, as reported                        |                                                                                                                                                         | $ | (61,084                 | )      |      | $ | (19,908 | )      |   | $ | (30,950 | )     
|                                             | Deduct: Total stock-based employee
compensation expense determined under
fair value methods for all awards,
net of related tax effects in 2001
and 2000 |   |                         | (4,992 | )    |   |         | (3,625 | ) |   |         | (5,590 | )
|                                             |                                                                                                                                                         |   |                         |        |      |   |         |        |   |   |         |       
|Pro forma net loss                           |                                                                                                                                                         | $ | (66,076                 | )      |      | $ | (23,533 | )      |   | $ | (36,540 | )     
|                                             |                                                                                                                                                         |   |                         |        |      |   |         |        |   |   |         |       
|Net loss per share:                          |                                                                                                                                                         |   |                         |        |      |   |         |        |   |   |         |       
|                                             | Basic and diluted, as reported                                                                                                                          |   | $                       | (1.32  | )    |   | $       | (0.54  | ) |   | $       | (0.91  | )
|                                             | Basic and diluted, pro forma                                                                                                                            |   | $                       | (1.43  | )    |   | $       | (0.64  | ) |   | $       | (1.07  | )
|Weighted average shared used in computation: |                                                                                                                                                         |   |                         |        |      |   |         |        |   |   |         |       
|                                             | Basic and diluted                                                                                                                                       |   |                         | 46,142 |      |   |         | 36,644 |   |   |         | 34,184 |  

The fair value of each option grant is estimated on the date of grant
using the Black-Scholes valuation method with the following assumptions: risk
free interest rates of 3.8%, 4.5%, and 6.0%; an average expected time to
exercise of five years; expected stock volatility of 87%, 83%, and 77%; and no
dividends for the years ended December 31, 2002, 2001, and 2000, respectively.

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

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Earnings (Loss) Per Share

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

|                                                                                                                 |                                                     |   |         |                         |   |      |         |        |   |   |         |        |   | 
|---------------------------------------------------------------------------------------------------------------- | --------------------------------------------------- | - | ------- | ----------------------- | - | ---- | ------- | ------ | - | - | ------- | ------ | - | 
|                                                                                                                 |                                                     |   |         | Year Ended December 31,
|                                                                                                                 |                                                     |   |         |                        
|                                                                                                                 |                                                     |   |         | 2002                    |   | 2001 |         | 2000  
|                                                                                                                 |                                                     |   |         |                         |   |      |         |       
|NUMERATOR:                                                                                                       |                                                     |   |         |                         |   |      |         |        |   |   |         |       
|Loss before discontinued operations, extraordinary item,
and cumulative effect of change in accounting principle |                                                     | $ | (23,057 | )                       |   | $    | (16,874 | )      |   | $ | (28,308 | )     
|                                                                                                                 | Loss from discontinued operations                   |   |         | (13,643                 | ) |      |         | (3,034 | ) |   |         | (2,642 | )
|                                                                                                                 | Extraordinary item                                  |   |         | (2,618                  | ) |      |         |       |   |   |         |       |  
|                                                                                                                 | Cumulative effect of change in accounting principle |   |         | (21,766                 | ) |      |         |       |   |   |         |       |  
|                                                                                                                 |                                                     |   |         |                         |   |      |         |        |   |   |         |       
|Net loss                                                                                                         |                                                     | $ | (61,084 | )                       |   | $    | (19,908 | )      |   | $ | (30,950 | )     
|                                                                                                                 |                                                     |   |         |                         |   |      |         |        |   |   |         |       
|DENOMINATOR:                                                                                                     |                                                     |   |         |                         |   |      |         |        |   |   |         |       
|Denominator for basic loss per share -
weighted average common shares outstanding                                |                                                     |   | 46,142  |                         |   |      | 36,644  |        |   |   | 34,184  |       
|Effect of dilutive securities:                                                                                   |                                                     |   |         |                         |   |      |         |        |   |   |         |       
|Common stock options and warrants                                                                                |                                                     |   |        |                         |   |      |        |        |   |   |        |       
|                                                                                                                 |                                                     |   |         |                         |   |      |         |        |   |   |         |       
|Denominator for diluted loss per share                                                                           |                                                     |   | 46,142  |                         |   |      | 36,644  |        |   |   | 34,184  |       
|                                                                                                                 |                                                     |   |         |                         |   |      |         |        |   |   |         |       
|LOSS PER SHARE:                                                                                                  |                                                     |   |         |                         |   |      |         |        |   |   |         |       
|Basic
and diluted:                                                                                               |                                                     |   |         |                         |   |      |         |        |   |   |         |       
|Loss before discontinued operations, extraordinary item,
and cumulative effect of change in accounting principle |                                                     | $ | (0.50   | )                       |   | $    | (0.46   | )      |   | $ | (0.83   | )     
|                                                                                                                 | Loss from discontinued operations                   |   |         | (0.29                   | ) |      |         | (0.08  | ) |   |         | (0.08  | )
|                                                                                                                 | Extraordinary item                                  |   |         | (0.06                   | ) |      |         |       |   |   |         |       |  
|                                                                                                                 | Cumulative effect of change in accounting principle |   |         | (0.47                   | ) |      |         |       |   |   |         |       |  
|                                                                                                                 |                                                     |   |         |                         |   |      |         |        |   |   |         |       
|Net loss per share                                                                                               |                                                     | $ | (1.32   | )                       |   | $    | (0.54   | )      |   | $ | (0.91   | )     
|                                                                                                                 |                                                     |   |         |                         |   |      |         |        |   |   |         |       

Weighted average shares issuable upon the exercise of stock options which
are not included in the calculation of diluted (loss) per share because they
were anti-dilutive amounted to 2,284,306, 1,701,235 and 1,711,817 for the years
ended December 31, 2002, 2001 and 2000, respectively.

Treasury Stock

In June 1998, the Board of Directors authorized the repurchase, at
managements discretion, of up to 1,000,000 shares of the Companys stock.
Shares repurchased under this authorization were used to offset dilution caused
by the Employees Stock Purchase Plan and Stock Option Plan. The Companys
repurchases of shares of common stock are recorded as treasury stock and result
in a reduction of stockholders equity. When treasury shares are issued, the
Company uses a first-in, first-out method and any excess of

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repurchase costs
over the reissue price is treated as a reduction of paid in capital. Any excess
of reissue price over repurchase cost is treated as an increase to paid in
capital.

Operating Segments

The accounting policies of the reportable segments are the same as those
used for the consolidated entity. Performance is evaluated based on profit or
loss from operations. Intersegment sales and transfers are accounted for based
on defined transfer prices.

New and Proposed Pronouncements

Effective
January 1, 2002, the Company adopted SFAS No. 141, Business
Combinations, SFAS No. 142, Goodwill and Intangible
Assetsand SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets. SFAS 141 eliminated the
pooling-of-interests method of accounting for business combinations and changed
the criteria to recognize intangible assets apart from goodwill.
Implementation of SFAS 141 did not have an effect on the Companys financial
statements. SFAS 142 sets forth the accounting for goodwill and intangible
assets already recorded. The impact of adopting SFAS 142 resulted in a change
for the cumulative effect of this accounting change and is discussed further in
Note 10 of the Financial Statements. SFAS 144 addresses the accounting and
reporting for the impairment or disposal of long-lived assets. The initial
adoption of SFAS 144 as of January 1, 2002 did not have an effect on the
Companys financial statements, however during the third quarter of 2002 the
Company has
applied the principles set forth in SFAS 144 as discussed in Note 12 to
the Financial Statements.

In April
2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No.4, 44 and 64, amendment of FASB Statement No.13, and Technical
Corrections, which among other things, restricts the classification of gains
and losses from extinguishment of debt as extraordinary to only those
transactions that are unusual and infrequent in nature as defined by APB
Opinion No. 30. SFAS 145 is effective January 1, 2003. Upon adoption, gains and
losses on certain future debt extinguishment, if any, will be recorded in
pre-tax income. In addition, the $2.6 million extraordinary loss from early
extinguishment of debt for the twelve months ended December 31, 2002 will be
reclassified to income before extraordinary loss to conform to the requirements
under SFAS 145 upon adoption in 2003.

In June
2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities,which addresses financial accounting and
reporting for costs associated with exit or disposal activities. SFAS 146 also
nullifies Emerging Issues Task Force (EITF) No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring).The principal
difference between SFAS 146 and EITF No. 94-3 relates to the requirement in
SFAS 146 to recognize a liability for a cost associated with an exit or
disposal when the liability is incurred versus at the date of an entitys
commitment to an exit plan. SFAS 146 is effective for exit or disposal
activities initiated after December 31, 2002, with early application
encouraged. As discussed in Note 12 to the Financial Statements, the Company
has applied the principles set forth in SFAS 146 relative to the exit and
disposal plans consummated during the third quarter of 2002.

In
December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure.SFAS 148 amends
SFAS No. 123, Accounting
for Stock-Based Compensation, to provide alternative methods of transition to
SFAS 123s fair value method of accounting for stock-based employee
compensation. Statement 148 also amends the disclosure provisions of SFAS 123
and APB Opinion 28, Interim Financial Reporting,to require disclosure in the
summary of significant accounting policies of the effects of an entitys
accounting policy with respect to stock-based employee compensation on reported
net income and earnings per share in annual and interim financial statements
effective for the Company December 31, 2002. While SFAS 148 does not amend
SFAS 123 to require companies to account for employee stock options using the
fair value method, the disclosure provisions of SFAS 148 are applicable to all
companies with stock-based employee compensation, regardless of whether they
account for that compensation using the fair value method of SFAS 123 or the
intrinsic value method of APB Opinion 25. As allowed by SFAS 123, we have
elected to continue to utilize the accounting method prescribed by APB Opinion
25 and have adopted the disclosure requirements of SFAS 123 as amended.

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3. Concentrations of Credit and Other Risks

Financial Instruments

The Companys financial instruments that are exposed to concentrations of
credit risk consist primarily of cash and cash equivalents, accounts
receivable, marketable securities, and long-term marketable securities.

The Companys cash and cash equivalents are in high quality securities
placed with major international banks and financial institutions. The Company,
in the normal course of business, maintains balances in excess of the Federal
Deposit Insurance Corporations insurance limit. The balance in excess of the
insurance limit at December 31, 2002 and 2001 was approximately $13.3 million
and $6.9 million, respectively. The Company also maintains balances in foreign
banks that are used for current operations of subsidiaries located abroad.
Foreign deposits that are uninsured amounted to approximately $8.1 million and
$8.2 million as of December 31, 2002 and 2001, respectively.

The Companys accounts receivable result primarily from credit sales to a
broad customer base, both nationally and internationally, with a concentration
generally existing among 5 to 10 customers. During 2002, within our
POS/Network Systems segment, one customer amounted to 10.9% of net revenues,
while the top five customers amounted to 29.7% of net revenue.

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

Inventories

Most components used in the Companys systems are purchased from outside
sources. Certain components are purchased from single suppliers. The failure of
any such supplier to meet its commitment on schedule could have a material
adverse effect on the Companys business, operating results and financial
condition. If a sole-source supplier were to go out of business or otherwise
become unable to meet its supply commitments, the process of locating and
qualifying alternate sources could require up to several months, during which
time the Companys production could be delayed. Such delays could have a
material adverse effect on the Companys business, operating results and
financial condition.

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

International Operations

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

The Company conducts manufacturing operations in China and relies on a
third party manufacturer in Brazil. Foreign manufacturing is subject to certain
risks, including the imposition of tariffs and import and export controls,
together with changes in governmental policies. The occurrence of any of these
events could have a material adverse effect on the Companys business,
operating results and financial condition.

As of December 31, 2002, the Company maintained significant accounts
receivable balances in the Europe and Latin America regions, which are subject
to the economic risks inherent to those regions.

4. Marketable Securities

As of December 31, 2002 and 2001, the difference between amortized cost
and fair market value of the Companys marketable securities and long-term
marketable securities was not material. Accordingly, the Company has not
disclosed unrealized gains and losses. The Companys municipal bonds and
corporate notes have maturities that range from three months to two years. As

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of December 31, 2002 and 2001, long-term marketable securities consisted
entirely of municipal bonds and government securities totaling $152,000 and
$155,000, respectively.

5. Net Investment in Direct Financing Leases

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

Interest expense associated with the debt incurred to fund direct
financing leases and provisions for credit losses are recorded in costs of
revenue in the accompanying statements of operations. Interest expense and
provisions for credit losses included in the costs of revenue amounted to $2.4
and $8.4 million, $3.8 and $18.1 million, and $4.9 and $11.7 million
respectively, for the years ended December 31, 2002, 2001, and 2000.

During the year ended December 31, 2001, Golden Eagle Leasing recorded, in
costs of revenue, an incremental charge to strengthen credit reserves for
certain segments of its receivables in the amount of $7.2 million in addition
to its normal loan loss provisions. This incremental charge represents
managements estimate of potential loan losses that exceed its historical rate
of loan losses.

The following factors contributed to Golden Eagles decision in the first
quarter of 2001 to strengthen credit reserves:



| |  |  | We identified several new vendor programs that were established in
2000 and contributed significantly to funding volume in 2000, which
were experiencing losses at higher levels than historic loss levels for
other vendor programs. These programs involved independent sales
organizations providing additional services to the merchants (lessees)
as part of the lease program. If service levels were not as the
merchants expected, the likelihood of their making required lease
payments was reduced. Losses for these programs began to exceed
historical levels for the quarter ended March 31, 2001;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Leases funded for electronic payments software, such as payment
software loaded into a personal computer without the need for a
terminal, were at higher funding levels in 2000 than in previous years.
Performance on these leases worsened in the first quarter of 2001;                                                                                                                                                                                                                                                                                                                                      
|
| |  |  | The overall credit mix of the portfolio was slightly skewed by a
few percentage points toward higher risk credits, commonly described as
C and D rated credits. C and D credit leases booked in the year 2000
appeared to be performing significantly worse than C and D credits in
previous years as we analyzed activity through March 31, 2001; and                                                                                                                                                                                                                                                          
|
| |  |  | The overall softening of the economy at the start of 2001, coupled
with the results of our analysis of collection status and default
trends as of March 31, 2001, also contributed to the conclusion that
the increase in reserves would be appropriate.                                                                                                                                                                                                                                                                                                                                                        

Net investment in direct financing leases consist of the following
(dollars in thousands):

|                                      |  |              |         |      |  |   |         |  
|------------------------------------- |  | ------------ | ------- | ---- |  | - | ------- | -
|                                      |  | December 31,
|                                      |  |             
|                                      |  | 2002         |         | 2001
|                                      |  |              |         |     
|Lease contracts receivable            |  | $            | 33,242  |      |  | $ | 49,923  |  
|Allowance for credit losses           |  |              | (4,861  | )    |  |   | (5,306  | )
|Estimated unguaranteed residual value |  |              | 8,162   |      |  |   | 11,433  |  
|Initial direct costs                  |  |              | 1,421   |      |  |   | 2,627   |  
|Unearned income                       |  |              | (10,760 | )    |  |   | (17,674 | )
|                                      |  |              |         |      |  |   |         |  
|Net investment                        |  | $            | 27,204  |      |  | $ | 41,003  |  
|                                      |  |              |         |      |  |   |         |  

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Golden Eagles micro ticket leasing business is characterized by high
incidences of delinquencies, which in turn can lead to significant levels of
loan losses. The Company maintains an allowance for credit losses at an amount
that it believes is sufficient to provide adequate protection against losses in
its portfolio. The allowance is determined principally on the basis of
historical loss experience and managements assessment of the credit quality of
the loan portfolio at period end. Based on the historical loss experience and
our credit assessments, the Company believes collectibility of the minimum
lease payments is reasonably predictable.

Minimum rentals on the direct financing leases are contractually due as
follows (dollars in thousands):

|                          |  |   |        | 
|------------------------- |  | - | ------ | 
|Years Ending December 31,
|                         
|2003                      |  | $ | 17,159 | 
|2004                      |  |   | 10,072 | 
|2005                      |  |   | 4,749  | 
|2006                      |  |   | 1,262  | 
|                          |  |   |        | 
|                          |  | $ | 33,242 | 
|                          |  |   |        | 

6. Net Investment in Sales-Type Leases

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

Any unguaranteed residual value accruing to us at the completion of the
sales-type lease is recognized at the time the product is returned to us or
payment is received to purchase the product. The residual value for products
returned to us is recorded at fair value. Our estimate of fair value is based
on an evaluation of market information, including specific evidence of
like-kind sales where possible.

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

|                            |  |              |        |      |  |   |        |  
|--------------------------- |  | ------------ | ------ | ---- |  | - | ------ | -
|                            |  | December 31,
|                            |  |             
|                            |  | 2002         |        | 2001
|                            |  |              |        |     
|Lease contracts receivable  |  | $            | 31,865 |      |  | $ | 23,346 |  
|Allowance for credit losses |  |              | (1,418 | )    |  |   | (607   | )
|Unearned income             |  |              | (9,460 | )    |  |   | (7,394 | )
|                            |  |              |        |      |  |   |        |  
|Net investment              |  | $            | 20,987 |      |  | $ | 15,345 |  
|                            |  |              |        |      |  |   |        |  

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

|                          |  |   |        | 
|------------------------- |  | - | ------ | 
|Years Ending December 31,
|                         
|2003                      |  | $ | 16,137 | 
|2004                      |  |   | 8,693  | 
|2005                      |  |   | 5,383  | 
|2006                      |  |   | 1,652  | 
|                          |  |   |        | 
|                          |  | $ | 31,865 | 
|                          |  |   |        | 

7. Fair Value of Financial Instruments

The Companys financial instruments consist of cash and cash equivalents,
marketable securities, net investment in direct financing leases and long-term
debt. As of December 31, 2002 and 2001 the fair value (see Note 2) of these
financial instruments approximated their respective carrying values.

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8. Inventories

Inventories consist of the following (dollars in thousands):

|                |  |              |        |      |  |   |        | 
|--------------- |  | ------------ | ------ | ---- |  | - | ------ | 
|                |  | December 31,
|                |  |             
|                |  | 2002         |        | 2001
|                |  |              |        |     
|Purchased parts |  | $            | 15,715 |      |  | $ | 21,502 | 
|Work in process |  |              | 4,986  |      |  |   | 8,560  | 
|Finished goods  |  |              | 25,704 |      |  |   | 32,349 | 
|                |  |              |        |      |  |   |        | 
|                |  | $            | 46,406 |      |  | $ | 62,411 | 
|                |  |              |        |      |  |   |        | 

9. Property, Plant and Equipment

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

|                                |  |              |         |      |  |   |         |  
|------------------------------- |  | ------------ | ------- | ---- |  | - | ------- | -
|                                |  | December 31,
|                                |  |             
|                                |  | 2002         |         | 2001
|                                |  |              |         |     
|Land and improvements           |  | $            | 4,691   |      |  | $ | 4,701   |  
|Building                        |  |              | 14,665  |      |  |   | 16,729  |  
|Computer equipment and software |  |              | 19,130  |      |  |   | 18,175  |  
|Machinery and equipment         |  |              | 19,471  |      |  |   | 22,604  |  
|Furniture and fixtures          |  |              | 5,531   |      |  |   | 5,919   |  
|Leasehold improvements          |  |              | 3,066   |      |  |   | 2,985   |  
|                                |  |              |         |      |  |   |         |  
|                                |  |              | 66,554  |      |  |   | 71,113  |  
|Less accumulated depreciation   |  |              | (36,340 | )    |  |   | (33,149 | )
|                                |  |              |         |      |  |   |         |  
|                                |  | $            | 30,214  |      |  | $ | 37,964  |  
|                                |  |              |         |      |  |   |         |  

Depreciation expense from continuing operations was $8.0 million and $9.2
million for the years ended December 31, 2002 and 2001, respectively.

10. Goodwill and Intangible Assets

The carrying amount of goodwill upon the adoption of SFAS 142 was $21.8
million at January 1, 2002, of which $20.3 million was attributed to Golden
Eagle, which comprises all of the equipment leasing segment, with the remaining
amount of $1.5 million attributed to the POS/Network Systems segment.
Under the transitional provisions of SFAS 142, the Company evaluated its
reporting units for impairment of goodwill as of January 1, 2002, completing
the evaluations by June 30, 2002. The impairment test relative to Golden
Eagles goodwill was performed by an independent third party valuation firm
using market multiple, comparable transaction and discounted net earnings
methodologies, with the remaining amount of goodwill evaluated internally using
similar valuation methodologies.

The results of the impairment tests resulted in a full write-off of the
carrying value of goodwill of $21.8 million. In accordance with the transition
provisions of SFAS 142, the write-off is reported as a cumulative effect of a
change in accounting principle impacting the first quarter of 2002. The
following table reflects the impact of the cumulative effect of a change in
accounting principle on the reported results for the Companys first quarter
ended March 31, 2002:

|                                                                                                                       |  |                              |         |   | 
|---------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | ------- | - | 
|                                                                                                                       |  | Quarter Ended
March 31, 2002
|Net
income before discontinued operations, extraordinary item, and
cumulative effect of change in accounting principle |  | $                            | 927     |  
|Loss
from discontinued operations                                                                                      |  |                              | (1,736  | )
|Extraordinary
item, net                                                                                                |  |                              | (1,833  | )
|                                                                                                                       |  |                              |         |  
|Net
loss, as reported                                                                                                  |  |                              | (2,642  | )
|Cumulative
effect of change in accounting principle                                                                    |  |                              | (21,766 | )
|                                                                                                                       |  |                              |         |  
|Net
loss, as adjusted                                                                                                  |  | $                            | (24,408 | )
|                                                                                                                       |  |                              |         |  
|Basic
loss per share:                                                                                                  |  |                              |         |  
|Net
income before discontinued operations, extraordinary item, and
cumulative effect of change in accounting principle |  | $                            | 0.02    |  
|Loss
from discontinued operations                                                                                      |  |                              | (0.04   | )
|Extraordinary
item, net                                                                                                |  |                              | (0.04   | )
|                                                                                                                       |  |                              |         |  
|Net
loss per share, as reported                                                                                        |  |                              | (0.06   | )
|Cumulative
effect of change in accounting principle                                                                    |  |                              | (0.54   | )
|                                                                                                                       |  |                              |         |  
|Net
loss per share, as adjusted                                                                                        |  | $                            | (0.60   | )
|                                                                                                                       |  |                              |         |  
|Diluted
loss per share:                                                                                                |  |                              |         |  
|Net
income before discontinued operations, extraordinary item, and
cumulative effect of change in accounting principle |  | $                            | 0.02    |  
|Loss
from discontinued operations                                                                                      |  |                              | (0.04   | )
|Extraordinary
item, net                                                                                                |  |                              | (0.04   | )
|                                                                                                                       |  |                              |         |  
|Net
loss per share, as reported                                                                                        |  |                              | (0.06   | )
|Cumulative
effect of change in accounting principle                                                                    |  |                              | (0.49   | )
|                                                                                                                       |  |                              |         |  
|Net
loss per share, as adjusted                                                                                        |  | $                            | (0.55   | )
|                                                                                                                       |  |                              |         |  

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The Company provided a full valuation reserve against the deferred tax
benefit attributed to the write-off of the goodwill that has tax basis, and
accordingly has not reported the cumulative effect of a change in accounting
principle net of tax. Due to the goodwill balances that have tax basis with
amortizable lives extending up to 13 years, the Company was uncertain as to
whether the tax benefits would be realized over such an extended time period.
Although the Company has not provided a tax benefit attributed to the write off
of goodwill, the tax benefit would be available to the Company in the future to
the extent sufficient taxable income is recognized in the United States.

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

|                                                                                                                         |                                                                                                                          |      |                         |      |  |      |         |         |   |   |         |         |   |   |         |         |  
|------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------ | ---- | ----------------------- | ---- |  | ---- | ------- | ------- | - | - | ------- | ------- | - | - | ------- | ------- | -
|                                                                                                                         |                                                                                                                          |      | Year
Ended December 31,
|                                                                                                                         |                                                                                                                          |      |                        
|                                                                                                                         |                                                                                                                          | 2002 |                         | 2001 |  | 2000
|                                                                                                                         |                                                                                                                          |      |                         |      |  |     
|Net loss                                                                                                                 |                                                                                                                          |      |                         |      |  |      |         |         |   |   |         |         |   |   |         |        
|Reported loss before discontinued operations,
extraordinary item and cumulative effect of change in
accounting principle |                                                                                                                          |      |                         |      |  | $    | (23,057 | )       |   | $ | (16,874 | )       |   | $ | (28,308 | )      
|Add back: Goodwill amortization, net of tax                                                                              |                                                                                                                          |      |                         |      |  |      |        |         |   |   | 1,354   |         |   |   | 1,277   |        
|                                                                                                                         |                                                                                                                          |      |                         |      |  |      |         |         |   |   |         |         |   |   |         |        
|Adjusted loss before discontinued operations,
extraordinary item and cumulative effect of change in
accounting principle |                                                                                                                          |      |                         |      |  |      | (23,057 | )       |   |   | (15,520 | )       |   |   | (27,031 | )      
|Loss from discontinued operations                                                                                        |                                                                                                                          |      |                         |      |  |      | (13,643 | )       |   |   | (3,034  | )       |   |   | (2,643  | )      
|Extraordinary item                                                                                                       |                                                                                                                          |      |                         |      |  |      | (2,618  | )       |   |   |        |         |   |   |        |        
|Cumulative effect of change in accounting principle                                                                      |                                                                                                                          |      |                         |      |  |      | (21,766 | )       |   |   |        |         |   |   |        |        
|                                                                                                                         |                                                                                                                          |      |                         |      |  |      |         |         |   |   |         |         |   |   |         |        
|                                                                                                                         | Adjusted net loss                                                                                                        |      |                         |      |  |      | $       | (61,084 | ) |   | $       | (18,554 | ) |   | $       | (29,672 | )
|                                                                                                                         |                                                                                                                          |      |                         |      |  |      |         |         |   |   |         |         |   |   |         |        
|Per share of common stock                                                                                                |                                                                                                                          |      |                         |      |  |      |         |         |   |   |         |         |   |   |         |        
|Basic and diluted:                                                                                                       |                                                                                                                          |      |                         |      |  |      |         |         |   |   |         |         |   |   |         |        
|                                                                                                                         | Reported loss before discontinued operations,
extraordinary item and cumulative effect of change in
accounting principle |      |                         |      |  |      | $       | (0.50   | ) |   | $       | (0.46   | ) |   |         | (0.83   | )
|                                                                                                                         | Add back: Goodwill amortization, net of tax                                                                              |      |                         |      |  |      |         |        |   |   |         | 0.03    |   |   |         | 0.04    |  
|                                                                                                                         | Loss from discontinued operations                                                                                        |      |                         |      |  |      |         | (0.29   | ) |   |         | (0.08   | ) |   |         | (0.08   | )
|                                                                                                                         | Extraordinary item                                                                                                       |      |                         |      |  |      |         | (0.06   | ) |   |         |        |   |   |         |        |  
|                                                                                                                         | Cumulative effect of change in accounting principle                                                                      |      |                         |      |  |      |         | (0.47   | ) |   |         |        |   |   |         |        |  
|                                                                                                                         |                                                                                                                          |      |                         |      |  |      |         |         |   |   |         |         |   |   |         |        
|                                                                                                                         | Adjusted loss per share                                                                                                  |      |                         |      |  |      | $       | (1.32   | ) |   | $       | (0.51   | ) |   | $       | (0.87   | )
|                                                                                                                         |                                                                                                                          |      |                         |      |  |      |         |         |   |   |         |         |   |   |         |        

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

|                              |  |              |        |      |  |   |        |  
|----------------------------- |  | ------------ | ------ | ---- |  | - | ------ | -
|                              |  | December 31,
|                              |  |             
|                              |  | 2002         |        | 2001
|                              |  |              |        |     
|Capitalized software          |  | $            | 6,904  |      |  | $ | 6,911  |  
|Unpatented technology         |  |              | 2,943  |      |  |   | 13,319 |  
|Other                         |  |              | 2,352  |      |  |   | 3,000  |  
|                              |  |              |        |      |  |   |        |  
|                              |  |              | 12,199 |      |  |   | 23,230 |  
|Less accumulated amortization |  |              | (7,566 | )    |  |   | (9,693 | )
|                              |  |              |        |      |  |   |        |  
|                              |  | $            | 4,633  |      |  | $ | 13,537 |  
|                              |  |              |        |      |  |   |        |  

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Other
intangible assets represents acquired customer lists, marketing
rights, and covenants not to compete.
Intangible assets are amortized in a straight-line basis over periods ranging
from 3 to 7.5 years. Amortization expense from continuing operations was $3.2
million and $3.7 million for the years ended December 31, 2002 and 2001,
respectively. The estimated amortization expense for the next five years is as
follows (dollars in thousands):

|                          |  |   |       | 
|------------------------- |  | - | ----- | 
|Years Ending December 31,
|                         
|2003                      |  | $ | 2,400 | 
|2004                      |  |   | 1,200 | 
|2005                      |  |   | 400   | 
|2006                      |  |   | 400   | 
|2007                      |  |   | 200   | 
|Thereafter                |  |   | 33    | 
|                          |  |   |       | 
|                          |  | $ | 4,633 | 
|                          |  |   |       | 

11. Long-term Debt

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

|                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                       |   |              |   |      |   |        |        | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ------------ | - | ---- | - | ------ | ------ | 
|                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                       |   | December 31,
|                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                       |   |             
|                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                       |   | 2002         |   | 2001
|                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                       |   |              |   |     
|Floating Rate Option note payable to Bank One,
Arizona; payable in semi-annual installments plus
interest at a variable rate, due April 1, 2019;
collateralized by unconditional, irrevocable,
direct pay letter of credit                                                     |                                                                                                                                                                                                                                                                                                                       | $ | 9,305        |   |      | $ | 9,585  |       
|Loan and Security agreement ($45 million senior
secured credit facility consisting of revolving
line of credit and two separate term loans for $5
million and $15 million, respectively
collateralized by substantially all of the assets
of the borrowers to the agreement): |                                                                                                                                                                                                                                                                                                                       |   |              |   |      |   |        |       
|                                                                                                                                                                                                                                                                               | Revolving line of credit bears interest at
the greater of 8% per annum or the prime
rate plus 2%, if amounts are outstanding
under the term loans, or the prime rate plus
1% if there are no amounts outstanding under
the term loans, and includes a $6 million
letter of credit sub-facility, matures July
31, 2004 |   |              |  |      |   |        | 6,891  | 
|                                                                                                                                                                                                                                                                               | Term Loan A paid in 2002                                                                                                                                                                                                                                                                                              |   |              |  |      |   |        | 4,008  | 
|                                                                                                                                                                                                                                                                               | Term Loan B paid in 2002                                                                                                                                                                                                                                                                                              |   |              |  |      |   |        | 14,291 | 
|Contract-backed term notes to Rothschild, (the
Notes), payable on a monthly basis including
interest at 8.58% based on a twenty-nine month amortization
schedule,
 notes mature November 2006                                                                                |                                                                                                                                                                                                                                                                                                                       |   | 11,774       |   |      |   | 24,839 |       
|Note payable to third party, collateralized by
building in Brazil, payable in 51 installments
including interest at 11.5% plus a variable
inflation rate factor, matures February 2005                                                                                         |                                                                                                                                                                                                                                                                                                                       |   | 673          |   |      |   | 1,440  |       
|Note payable to Dao Heng Bank, collateralized by
building, payable in 84 equal monthly
installments including interest at the banks
prime rate minus 1% per annum, matures December
2007                                                                                      |                                                                                                                                                                                                                                                                                                                       |   | 1,212        |   |      |   | 1,434  |       
|Note payable to director and stockholder paid in
2002 (see Note 15)                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                       |   |             |   |      |   | 3,100  |       
|Lease payable to Banc One Leasing, collateralized
by equipment, payable in 48 equal monthly
installments including interest at 8.62%, matures
June 2004                                                                                                                        |                                                                                                                                                                                                                                                                                                                       |   | 678          |   |      |   | 1,084  |       

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|                                                                                                                                                              |  |              |         |      |  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | ---- |  | - | ------- | -
|Long-term Debt (continued)                                                                                                                                    |  | December 31,
|                                                                                                                                                              |  |             
|                                                                                                                                                              |  | 2002         |         | 2001
|                                                                                                                                                              |  |              |         |     
|Loan and Security agreement with Webster Bank,
interest at Companys option of prime rate plus
1.75% or 30 day LIBOR plus 470 basis points, due
February 2004 |  |              | 750     |      |  |   | 750     |  
|Other capital leases                                                                                                                                          |  |              | 633     |      |  |   | 341     |  
|Other debt                                                                                                                                                    |  |              |        |      |  |   | 125     |  
|                                                                                                                                                              |  |              |         |      |  |   |         |  
|                                                                                                                                                              |  |              | 25,025  |      |  |   | 67,888  |  
|Current portion of long-term debt and revolving
line of credit                                                                                                |  |              | (13,331 | )    |  |   | (27,607 | )
|                                                                                                                                                              |  |              |         |      |  |   |         |  
|Long-term debt                                                                                                                                                |  | $            | 11,694  |      |  | $ | 40,281  |  
|                                                                                                                                                              |  |              |         |      |  |   |         |  

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

In August 2000, the Company entered into a $60 million revolving credit
agreement (Credit Agreement) provided by a syndicate of banks, including Bank
One, expiring in August 2002. At the Companys option, the facility bore
interest at either prime or LIBOR based rates payable on a monthly basis. The
loan agreement was collateralized by domestic trade receivables, inventories
and marketable securities. Concurrent with this agreement, the Company also
entered into a $50 million Receivables Purchase Agreement (the Conduit) that
allowed the Company to borrow against certain lease receivables generated
through its wholly owned subsidiary, Golden Eagle Leasing. This agreement
expired in August 2001, and at the Companys option, bore interest at either
prime or LIBOR based rates, payable monthly. These agreements were replaced in
2001 by the $45 million senior secured credit facility discussed hereafter.

On May 24, 2001, Golden Eagle securitized approximately $45.6 million of
its equipment leases. The securitization was accounted for as a financing
transaction in accordance with Statement of Financial Accounting Standards No.
140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. In connection with the securitization, Golden
Eagle, through a special purpose subsidiary, Golden Eagle Funding Corp. issued
$32 million of contract-backed term notes (the Notes). The Notes are
collateralized by equipment leases acquired from Golden Eagle, security
interest in the leased equipment, cash collateral and reserve accounts, as well
as other contractual rights and residual proceeds. The Notes bear interest at
an annual rate of 8.58%. Principal and interest is payable monthly based on a
twenty-nine month amortization schedule. The principal balance outstanding on
the Notes at December 31, 2002 amounted to $11.8 million. The net carrying
amount of the securitized equipment leases, included in the net investment in
direct financing leases at December 31, 2002, amounted to $17.8 million.

To secure the payment of the principal and interest on the Notes, and to
maintain certain credit enhancement and liquidity levels, an indenture trustee
maintains possession of the contracts, and receives all payments on the
contracts and the receivables for the benefit of the noteholders. For this
purpose, a segregated trust account was established at the corporate trust
office of the indenture trustee in the name of the indenture trustee for the
benefit of the noteholders. At December 31, 2002 there was $6.8 million in
deposits, restricted for use in the cash collections, collateral and reserve
accounts.

Under the terms of securitization, Golden Eagle retained the right to act
as servicer of the contract assets. The initial measure of the servicing
assets net of servicing liabilities retained in the securitization was
determined to be zero, and as such, no servicing asset or liability was
recorded.

Cash flows from the securitized assets are used to satisfy the servicing
fees, administration expenses and debt payments, including any provision for
funding the reserve and cash collateral accounts, related to the Notes on a
priority basis. After all parties to the agreement have been satisfied in
order of priority, any excess funds are returned to Golden Eagle on a monthly
basis.

The securitization agreements provide for additional credit enhancements,
including excess collateralization and the funding of a reserve account. In
addition, the covenants under these agreements, among other things, require
Golden Eagle Leasing to maintain certain financial ratios and to maintain
credit facilities in an aggregate amount of at least $30 million after April
30, 2002. Golden Eagle was in compliance with such covenants as of December
31, 2002.

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

The estimated fair value of the Series B stock warrants at the date issued
was $1.44 per share using a Black-Scholes option pricing model. The total fair
value of these stock warrants of $0.7 million was recorded as additional paid
in capital and loan discount. The loan discount was written off to interest
expense during 2001 when the related loan agreements were converted to common
stock. During 2002, 93,750 Series B Warrants were exercised. No warrants were
exercised during 2001.

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

The estimated fair value of the Series A stock warrant at the date issued
was $1.36 per share using a Black-Scholes option pricing model. The total fair
value of these stock warrants of $1.4 million was recorded as additional paid
in capital and loan discount. The loan discount was written off to interest
expense during 2001 when the related loan agreement was paid off. No warrants
were exercised during 2002 or 2001.

As a condition to obtaining forbearance from our principal lenders under
our pre-existing loan agreements, and to secure the $3.4 million in loans
above, George Wallner, our Chief Strategist and our principal stockholder,
agreed to loan the Company $3.1 million and to subordinate these loans to our
other indebtedness, including our new lending facility.

In August 2001, the Company replaced our principal credit facility with a
new $45 million senior secured credit facility comprised of a $25 million
revolving credit facility and two separate term loans for $5 million and $15
million. The two separate term loans were paid off and the revolving credit
facility paid down to zero in March 2002 in conjunction with the private
placement of common stock completed on March 22, 2002 (see Note 20). The
maximum borrowing capacity under this facility is based on inventory and
receivables levels and other factors. The borrowers under the new credit
facility are Hypercom Corporation and seven domestic subsidiaries, and the
guarantors consist of Golden Eagle Leasing and two foreign subsidiaries. At
December 31, 2001, the prime rate used to compute interest rates under the new
credit facility was 4.75%.

Under the covenant provisions of the new credit facility, the Company has
agreed to, among other things, maintain certain specified financial ratios and
consolidated net worth, not make certain distributions with respect to capital
stock (including cash dividends), not make certain investments and not allow
our subsidiaries to incur certain types and amounts of debt. In particular,
subject to special exceptions, these covenants prohibit the Company from:



| |  |  | incurring any additional indebtedness;                                                                                     
| | - |  | ---------------------------------------------------------------------------------------------------------------------------
|
| |  |  | incurring or permitting to exist any additional liens on assets;                                                           
|
| |  |  | engaging in a change of control transaction or other fundamental change, such as a merger, recapitalization or liquidation;
|
| |  |  | disposing of assets, including equipment and inventory, outside the ordinary course of business;                           
|
| |  |  | prepaying or modifying the terms of existing indebtedness, except in connection with a permitted financing;                

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| |  |  | redeeming, repurchasing or paying dividends or other distributions on capital stock;                                         
| | - |  | -----------------------------------------------------------------------------------------------------------------------------
|
| |  |  | engaging in certain transactions with affiliates;                                                                            
|
| |  |  | failing to maintain specified levels of EBITDA and tangible net worth and ratios of senior debt and total debt to EBIDTA; and
|
| |  |  | issuing or selling any prohibited preferred stock.                                                                           

As of December 31, 2001 the Company had not met a covenant requiring the
pledge of certain assets as collateral to the term loans of the senior credit
facility. However, on March 13, 2002 the Company obtained a waiver of any
event of default related to this pledge.

As partial consideration for the senior secured credit facility, the
Company issued to Ableco Holding LLC, an affiliate of one of the Companys
lenders, a Series C Warrant to purchase up to 375,000 shares of common stock at
an exercise price of $4.00 per share (adjusted to $3.907 as discussed below). The Series
C Warrant is exercisable over a period of five years. The Series C Warrant may
be exercised, at the same exercise price, for an additional 350,000 shares at
every six-month anniversary of the issue date of the term loans while there
remain amounts outstanding under the term loans. During 2002, prior to the
payoff of the term loans, an additional 350,000 Series C Warrant shares were
issued. The estimated fair value of the Series C stock warrant to purchase
375,000 and 350,000 shares of the Companys common stock, at the date issued
and at the first six-month anniversary was $2.64 and $2.21 per share,
respectively, using a Black-Scholes option pricing model. No warrants were
exercised during 2002 or 2001. The total fair value of these stock warrants of
$1.8 million was recorded as additional paid in capital and loan discount. The
remaining loan discount of $1.6 million was written off in 2002 in connection
with the pay-off of the term loans in March 2002 as discussed below.

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

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

In connection with the early retirement of our term loans, we recorded
an extraordinary loss on retirement of debt of $2.6 million. The extraordinary
loss resulted from the write-off of unamortized debt issuance costs and the
loan discount associated with the term loans.

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

At
December 31, 2002, the Company has a $2.0 million letter of credit
issued by a bank to cover a performance bond requirement from a contractual
sale agreement in Brazil. Amounts drawn against this letter of credit bear
interest at the banks prime rate. The letter of credit expires on November 30,
2003. There were no amounts outstanding on this letter of credit as of December
31, 2002.

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

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|                          |  |   |        | 
|------------------------- |  | - | ------ | 
|Years Ending December 31,
|                         
|2003                      |  | $ | 13,331 | 
|2004                      |  |   | 2,060  | 
|2005                      |  |   | 800    | 
|2006                      |  |   | 8,579  | 
|2007                      |  |   | 255    | 
|                          |  |   |        | 
|                          |  | $ | 25,025 | 
|                          |  |   |        | 

12. Restructuring Charges and Discontinued Operations

In September 2002, the Company committed to a plan to improve profits in
its POS/Network Systems segment. The plan entailed downsizing certain
operations and streamlining their product offerings, changing to a distributor
sales model versus a direct sales model in certain international locations and
disposing of unprofitable operations around the world. The profit improvement
plan encompasses both restructuring activities to be accounted and reported
under SFAS 146, as well as discontinued operations to be accounted and reported
under SFAS 144.

The downsizing activities principally focused on the Companys
manufacturing operations in Brazil. Such activities entailed moving to a
contract manufacturer, reducing the number of personnel and holding for sale
certain long-lived assets such as buildings and production equipment, which
supported the manufacturing operations. Inventories were also written down to
support a more streamlined product offering. These activities were
substantially complete as of September 30, 2002, with final completion
occurring during the fourth quarter of 2002. The Company anticipates selling
the assets held for sale within one year.

In addition, the Company identified certain sales offices around the world
to close in favor of a more cost-effective distributor arrangement in those
locations. Costs associated with closing these sales offices principally
included employee severance, inventory write downs and costs associated with
exiting office space and disposing of office fixed assets. These activities
were substantially complete as of September 30, 2002, with final completion
occurring during the fourth quarter of 2002.

The Company also identified certain under-performing operating units
around the world whose activities were not closely aligned with the core
business and made a decision to hold these operations for sale. The results of
operations for these operating units held for sale have been classified as
discontinued operations and prior periods have been restated to present these
operating units as discontinued operations. At the time the Company determined
to hold these operations for sale the carrying amounts of their assets were
written down to fair value less costs to sell. Assets written down consisted
principally of accounts receivable, inventories, intangible assets and fixed
assets. The operations held for sale are being actively marketed to certain
potential buyers. The sales transactions are expected to be sales of the
operating units shares of stock and sales of assets plus the transfer of
liabilities and completed within one year of September 30, 2002.

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Restructuring charges

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

|                                       |                                             |                                              |   |                         |       |                    |   |     |     | 
|-------------------------------------- | ------------------------------------------- | -------------------------------------------- | - | ----------------------- | ----- | ------------------ | - | --- | --- | 
|                                       |                                             |                                              |   | Expected and Actual     |       |                    |   |    
|                                       |                                             |                                              |   | Costs of
the Activity   |       |                    |   |    
|                                       |                                             |                                              |   | Incurred During Year    |       | Unpaid Balances at
|                                       |                                             |                                              |   | Ended December 31, 2002 |       | December 31, 2002 
|                                       |                                             |                                              |   |                         |       |                   
|Restructuring charges in Cost of Sales |                                             |                                              |   |                         |       |                    |   |    
|                                       | Write down of inventories and related costs |                                              | $ | 2,033                   |       |                    | $ | 100 |    
|                                       |                                             |                                              |   |                         |       |                    |   |     |    
|                                       |                                             | Total restructuring charges in cost of sales |   | $                       | 2,033 |                    |   | $   | 100 | 
|                                       |                                             |                                              |   |                         |       |                    |   |     |    
|Restructuring charges                  |                                             |                                              |   |                         |       |                    |   |    
|                                       | Write down of building to fair value        |                                              | $ | 2,184                   |       |                    | $ |    |    
|                                       | Write down of fixed assets to fair value    |                                              |   | 1,388                   |       |                    |   |    |    
|                                       | Write down of other assets to fair value    |                                              |   | 233                     |       |                    |   |    |    
|                                       | One-time termination benefits               |                                              |   | 482                     |       |                    |   | 134 |    
|                                       | Miscellaneous operating accruals            |                                              |   | 147                     |       |                    |   | 25  |    
|                                       |                                             |                                              |   |                         |       |                    |   |     |    
|                                       |                                             | Total restructuring charges                  |   | $                       | 4,434 |                    |   | $   | 159 | 
|                                       |                                             |                                              |   |                         |       |                    |   |     |    

There were no restructuring charges incurred in 2001.

Discontinued Operations

In conjunction with the Companys decision to hold certain operations for
sales as discontinued operations the Company recognized a loss on the initial
write down of the assets to fair value as discussed above. The initial write
off amounted to $8.0 million and is included as part of the results of the
discontinued operations for the year ended December 31, 2002. Net revenue of
the operating units classified as discontinued operations for the year ended
December 31, 2002, 2001 and 2002 were $22.7, $26.4 and $32.3 million,
respectively. Pretax losses of the operating units classified as discontinued
operations, including initial write downs of assets to fair value, for the
years ended December 31, 2002, 2001 and 2000 were $13.6, $4.2 and $4.4 million,
respectively.

During 2002 two operating units held for sale commencing in September,
were sold as of December 31, 2002. The sales did not result in material gains
or losses.

The assets and liabilities of the remaining operating units classified as
discontinued operations are separately reported in the balance sheet under the
captions Net assets of discontinued operations held for sale and Liabilities
of discontinued operations held for sale. Both captions are classified as
current due to the expected sale of these operations within one year of
September 30, 2002. The assets and liabilities of discontinued operations held
for sale consist of the following:

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

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In accordance with SFAS 144, the operating results of the discontinued
operating units will be classified as discontinued operations as they are
incurred.

13. Contract Accounting

The Company is involved in one long-term contract with the Brazil Health
Ministry requiring substantial performance of customized software and hardware.
The Company recognizes revenues and an estimated gross profit upon the
attainment of scheduled performance milestones. The Company follows this method
since the contract contains well-defined performance milestones and the Company
can make reasonably dependable estimates of the costs applicable to various
stages of the contract.

Revenues under this contract have been less than 10% of total revenues for
each of the fiscal years 2000 through 2002. The estimated gross profit
recorded upon the attainment of scheduled milestones is based upon the
Companys estimate of the total gross profit to be recognized over the life of
the long-term contract. The Companys gross profit estimates rely on our
continuous estimates of total contract costs compared to contract revenue and
any claims in
excess of contract revenue where it is both probable the claims will
result in additional contract revenue and the amount of the excess claim can be
reliably estimated. Previously recognized gross profits and the valuation of
deferred contract costs are subject to revisions as the contract progresses to
completion and any claims for revenues in excess of the original contract are
settled. Revisions in profit estimates and the valuation of deferred contract
costs are reflected in income in the period in which the facts that give rise to
the revision become known.

As of December 31, 2002, the Company has identified and made a claim for
approximately $6.5 million of revenue in excess of the agreed contract. The
Company believes it is probable the claim will result in additional revenue and
have reasonably estimated such amount in accordance with Statement of Position
81-1, Accounting for Performance of Construction-Type and Certain
Production-Type Contracts. While the revenue related to these claims has not
been recorded under the percentage-of-completion milestone approach, contract
costs attributed to these revenue claims amounting to approximately $5.9
million have been deferred within other long-term assets and treated as normal
costs of contract performance. If the revenue claim is denied or results in
revenue less than the associated costs, the operating results would be
significantly impacted.

14. Income Taxes

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

|                                   |               |   |                         |         |      |   |         |         |   |   |         |         |  
|---------------------------------- | ------------- | - | ----------------------- | ------- | ---- | - | ------- | ------- | - | - | ------- | ------- | -
|                                   |               |   | Year Ended December 31,
|                                   |               |   |                        
|                                   |               |   | 2002                    |         | 2001 |   | 2000   
|                                   |               |   |                         |         |      |   |        
|Income (loss) before income taxes: |               |   |                         |         |      |   |         |         |   |   |         |        
|                                   | United States |   | $                       | (55,956 | )    |   | $       | (30,586 | ) |   | $       | (29,039 | )
|                                   | Foreign       |   |                         | 15,275  |      |   |         | 5,701   |   |   |         | (8,559  | )
|                                   |               |   |                         |         |      |   |         |         |   |   |         |        
|                                   |               | $ | (40,681                 | )       |      | $ | (24,885 | )       |   | $ | (37,598 | )      
|                                   |               |   |                         |         |      |   |         |         |   |   |         |         |  

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

|                                                |                                  |                                      |   |              |   |      |   |        |        | 
|----------------------------------------------- | -------------------------------- | ------------------------------------ | - | ------------ | - | ---- | - | ------ | ------ | 
|                                                |                                  |                                      |   | December 31,
|                                                |                                  |                                      |   |             
|                                                |                                  |                                      |   | 2002         |   | 2001
|                                                |                                  |                                      |   |              |   |     
|Deferred tax assets, current:                   |                                  |                                      |   |              |   |      |   |       
|                                                | Inventory valuation and reserves |                                      | $ | 3,286        |   |      | $ | 8,386  |       
|                                                | Compensation accruals            |                                      |   | 3,238        |   |      |   | 6,756  |       
|                                                | Allowance for doubtful accounts  |                                      |   | 3,032        |   |      |   | 3,367  |       
|                                                | Other                            |                                      |   |             |   |      |   |       |       
|                                                | Valuation allowance              |                                      |   | (9,556       | ) |      |   | (2,419 | )     
|                                                |                                  |                                      |   |              |   |      |   |        |       
|                                                |                                  | Deferred tax assets, current         |   | $            | 0 |      |   | $      | 16,090 | 
|                                                |                                  |                                      |   |              |   |      |   |        |       
|Deferred tax assets (liabilities), non-current: |                                  |                                      |   |              |   |      |   |       
|                                                | Tax loss carry forwards          |                                      | $ | 24,282       |   |      | $ | 10,759 |       
|                                                | Intangibles                      |                                      |   | 9,743        |   |      |   | 1,069  |       
|                                                | Property, plant and equipment    |                                      |   | (484         | ) |      |   | (781   | )     
|                                                | Other                            |                                      |   | 3,472        |   |      |   | 3,400  |       
|                                                | Valuation allowance              |                                      |   | (37,013      | ) |      |   | (4,444 | )     
|                                                |                                  |                                      |   |              |   |      |   |        |       
|                                                |                                  | Net deferred tax assets, non-current |   | $            | 0 |      |   | $      | 10,003 | 
|                                                |                                  |                                      |   |              |   |      |   |        |       

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

|          |         |   |                         |         |      |   |        |        |   |   |        |        |  
|--------- | ------- | - | ----------------------- | ------- | ---- | - | ------ | ------ | - | - | ------ | ------ | -
|          |         |   | Year Ended
December 31,
|          |         |   |                        
|          |         |   | 2002                    |         | 2001 |   | 2000  
|          |         |   |                         |         |      |   |       
|Current:  |         |   |                         |         |      |   |        |        |   |   |        |       
|          | Federal |   |                         | (10,125 | )    |   | $      | (2,302 | ) |   | $      | 8      |  
|          | State   |   |                         | 15      |      |   |        | 15     |   |   |        | 9      |  
|          | Foreign |   |                         | 4,420   |      |   |        | 1,433  |   |   |        | 720    |  
|          |         |   |                         |         |      |   |        |        |   |   |        |       
|          |         |   | (5,690                  | )       |      |   | (854   | )      |   |   | 737    |       
|Deferred: |         |   |                         |         |      |   |        |        |   |   |        |       
|          | Federal |   |                         | 21,999  |      |   |        | (4,274 | ) |   |        | (7,409 | )
|          | State   |   |                         | 3,143   |      |   |        | (510   | ) |   |        | (775   | )
|          | Foreign |   |                         | 951     |      |   |        | 661    |   |   |        | 799    |  
|          |         |   |                         |         |      |   |        |        |   |   |        |       
|          |         |   | 26,093                  |         |      |   | (4,123 | )      |   |   | (7,385 | )     
|          |         |   |                         |         |      |   |        |        |   |   |        |       
|          |         | $ | 20,403                  |         |      | $ | (4,977 | )      |   | $ | (6,648 | )     
|          |         |   |                         |         |      |   |        |        |   |   |        |        |  

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

|                                                                                  |  |      |                         |      |  |      |       |    |  |  |       |   
|--------------------------------------------------------------------------------- |  | ---- | ----------------------- | ---- |  | ---- | ----- | -- |  |  | ----- | --
|                                                                                  |  |      | Year Ended
December 31,
|                                                                                  |  |     
|                                                                                  |  | 2002 |                         | 2001 |  | 2000
|                                                                                  |  |      |                         |      |  |     
|Tax expense (benefit) at the federal statutory rate                               |  |      | (35.0                   | )%   |  |      | (35.0 | )% |  |  | (35.0 | )%
|State income taxes (benefit), net of federal income
tax effect                    |  |      |                        |      |  |      | (2.0  | )  |  |  | (2.0  | ) 
|Foreign taxes attributable to foreign operations less
than federal statutory rate |  |      | 13.2                    |      |  |      | (0.3  | )  |  |  | 12.0  |   
|Tax credits                                                                       |  |      |                        |      |  |      | (2.0  | )  |  |  | (5.3  | ) 
|Translation loss                                                                  |  |      |                        |      |  |      | 1.0   |    |  |  | 1.5   |   
|Change in valuation allowance                                                     |  |      | 73.7                    |      |  |      | 18.6  |    |  |  | 5.9   |   
|Capital loss from investment in equity affiliate                                  |  |      |                        |      |  |      | 0.4   |    |  |  | 0.9   |   
|Other                                                                             |  |      | (1.7                    | )    |  |      | (0.7  | )  |  |  | 4.3   |   
|                                                                                  |  |      |                         |      |  |      |       |    |  |  |       |   
|Effective tax rate                                                                |  |      | 50.2                    | %    |  |      | (20.0 | )% |  |  | (17.7 | )%
|                                                                                  |  |      |                         |      |  |      |       |    |  |  |       |   

During
the third quarter of 2002 we recorded a full valuation allowance on our then remaining
unreserved deferred tax asset balance of approximately $20.0 million. We
further increased our valuation allowance in 2002 by $19.7 million for net
increases in deferred tax assets that occurred principally by 2002 charges to
expense that are not currently deductible or recoverable, a significant portion
of which related to our $21.8 million change in accounting principle charge for
goodwill write-off, a majority of which has tax basis. The increase in the
valuation allowance was based on the weight of all available evidence,
principally influenced by the continued U.S. derived losses in the third
quarter of 2002 coupled with a continuing extension of the U.S. recession as
well as cumulative U.S. derived losses in recent years. The U.S. derived
losses in the third quarter of 2002 and cumulatively over recent years together
with an uncertain economic outlook for the U.S., were deemed to be significant
negative evidence. As a result, the Company determined it did not meet the
more likely than not recoverability criteria in SFAS 109 Accounting for
Income Tax, requiring positive evidence of sufficient quality and quantity to
overcome the negative evidence in order to support a conclusion that a
valuation allowance is not needed. The valuation allowance is subject to
reversal in future years at such time that the benefits are actually utilized
or, the operating profits in the U.S. become sustainable at a level that meets
the recoverability criteria under SFAS 109. There are no remaining balances of
deferred tax assets reported on the balance sheet as of December 31, 2002.

The 2002 current Federal tax benefit relates principally to loss
carrybacks that are refundable against reported taxable U.S. income five years
ago, under special tax law changes applicable to losses generated in 2002.

As of December 31, 2002 and 2001, the Company had not provided deferred
income tax benefits on cumulative losses of certain individual international
subsidiaries of $30.1 million and $26.6 million, respectively. If deferred
income tax assets were recognized for these net operating losses, they would be
approximately $6.0 million and $5.3 million, respectively. Upon distribution of
earnings in the form of dividends or otherwise, the Company may be subject to
both U.S. income taxes and withholding taxes in its various international
jurisdictions. As a result of certain employment actions and capital
investments undertaken by Hypercom, income from manufacturing activities in
certain countries is subject to reduced tax rates, and in some cases is wholly
exempt from taxes, for years through 2005.

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At December 31, 2002, the Company has U.S. Federal and State net operating
loss carryforwards of approximately $69.0 million. These Federal and State net
operating loss carryforwards will begin to expire beginning in 2020 and 2005,
respectively, if not previously utilized.

15. Profit Sharing Plans

The Company has a 401(k) profit sharing plan, which commenced in fiscal
1998, covering all eligible full-time employees of the Company. Contributions
to the 401(k) plan are made by the participants to their individual accounts
through payroll withholding. Additionally, the plan provides for the
Company to make profit sharing contributions to the plan in amounts at the
discretion of management. The employer contribution for the years ended
December 31, 2002 and 2001 was approximately $146,000 and $165,000,
respectively.

16. Stockholders Equity

Stock Options

During fiscal 1997, the Companys board of directors approved the Hypercom
Corporation Long-Term Incentive Plan (the 1997 Plan), which allocates
5,000,000 shares of common stock for issuance at the Companys discretion. The
1997 Plan authorizes issuance of incentive stock options (as defined by the
Internal Revenue Code of 1986), non-qualified stock options, stock appreciation
rights, restricted stock awards, performance share awards, dividend equivalent
awards and other stock-based awards. Stock options issued under the 1997 Plan
become exercisable over a period determined by the Board of Directors
(generally over five years) and expire ten years after the date of grant.

In July 2000, the Companys Board of Directors approved the Hypercom
Corporation 2000 Broad-Based Stock Incentive Plan (the 2000 Plan), which
allocates 5,000,000 shares of common stock for issuance at the Companys
discretion. The 2000 Plan authorizes the issuance of non-qualified stock
options and restricted stock awards, the majority of which must be issued to
employees of the Company who are not officers or directors. Non-qualified stock
options issued under the 2000 Plan become exercisable over a period determined
by the Board of Directors, and expire after a period determined by the Board of
Directors.

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

|                              |           |  |                         |           |          |   |          |      |          |  |            |            |          |   |      |       |  |  |           |           |   |   |      |       | 
|----------------------------- | --------- |  | ----------------------- | --------- | -------- | - | -------- | ---- | -------- |  | ---------- | ---------- | -------- | - | ---- | ----- |  |  | --------- | --------- | - | - | ---- | ----- | 
|                              |           |  | Year
Ended December 31,
|                              |           |  | 2002                    |           | 2001     |   | 2000    
|                              |           |  |                         |           |          |   |         
|                              |           |  |                         |           |          |   | Weighted |      |          |  |            |            | Weighted |   |      |       |  |  | Weighted 
|                              |           |  | Shares                  |           | Average  |   | Shares   |      | Average  |  | Shares     |            | Average 
|                              |           |  | Under                   |           | Exercise |   | Under    |      | Exercise |  | Under      |            | Exercise
|                              |           |  | Option                  |           | Price    |   | Option   |      | Price    |  | Option     |            | Price   
|                              |           |  |                         |           |          |   |          |      |          |  |            |            |         
|Beginning balance
outstanding |           |  | 10,663,352              |           |          | $ | 6.32     |      |          |  | 7,057,043  |            |          | $ | 8.67 |       |  |  | 5,639,684 |           |   | $ | 7.14 |      
|                              | Granted   |  |                         | 1,046,000 |          |   |          | 5.64 |          |  |            | 5,653,600  |          |   |      | 3.75  |  |  |           | 2,830,850 |   |   |      | 11.62 | 
|                              | Exercised |  |                         | (154,475  | )        |   |          | 3.88 |          |  |            | (80        | )        |   |      | 10.38 |  |  |           | (548,962  | ) |   |      | 4.73  | 
|                              | Forfeited |  |                         | (772,404  | )        |   |          | 6.50 |          |  |            | (2,047,211 | )        |   |      | 7.29  |  |  |           | (864,529  | ) |   |      | 10.83 | 
|                              |           |  |                         |           |          |   |          |      |          |  |            |            |          |   |      |       |  |  |           |           |   |   |      |      
|Ending balance
outstanding    |           |  | 10,782,473              |           |          | $ | 6.28     |      |          |  | 10,663,352 |            |          | $ | 6.32 |       |  |  | 7,057,043 |           |   | $ | 8.67 |      
|                              |           |  |                         |           |          |   |          |      |          |  |            |            |          |   |      |       |  |  |           |           |   |   |      |      
|Exercisable at end
of year    |           |  | 6,502,702               |           |          | $ | 6.42     |      |          |  | 4,054,616  |            |          | $ | 6.83 |       |  |  | 2,682,934 |           |   | $ | 5.89 |      
|                              |           |  |                         |           |          |   |          |      |          |  |            |            |          |   |      |       |  |  |           |           |   |   |      |      

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The following table summarizes additional information about the Companys
stock options outstanding as of December 31, 2002:

|                         |  |        |              |                  |  |                     |            |           |  |          |      |                     |  |          |       |  |  |          |           |  |  |   |       | 
|------------------------ |  | ------ | ------------ | ---------------- |  | ------------------- | ---------- | --------- |  | -------- | ---- | ------------------- |  | -------- | ----- |  |  | -------- | --------- |  |  | - | ----- | 
|                         |  |        |              |                  |  | Options Outstanding |            |           |  |          |      | Options Exercisable
|                         |  |        |              |                  |  |                     |            |           |  |          |      |                    
|                         |  |        |              |                  |  |                     |            |           |  | Weighted |      | Weighted            |  |          |       |  |  | Weighted
|                         |  |        |              |                  |  | Shares              |            | Average   |  | Average  |      | Shares              |  | Average 
|                         |  |        |              |                  |  | Under               |            | Remaining |  | Exercise |      | Under               |  | Exercise
|Range of Exercise Prices |  | Option |              | Contractual Life |  | Price               |            | Option    |  | Price   
|                         |  |        |              |                  |  |                     |            |           |  |         
|                         |  | $      | 1.10 - 2.66  |                  |  |                     | 783,000    |           |  |          | 1.4  |                     |  | $        | 1.93  |  |  |          | 777,500   |  |  | $ | 1.93  | 
|                         |  | $      | 3.00 - 3.50  |                  |  |                     | 3,202,413  |           |  |          | 8.13 |                     |  |          | 3.49  |  |  |          | 1,618,214 |  |  |   | 3.49  | 
|                         |  | $      | 3.60 - 6.40  |                  |  |                     | 3,472,450  |           |  |          | 6.90 |                     |  |          | 5.67  |  |  |          | 1,998,144 |  |  |   | 6.05  | 
|                         |  | $      | 6.81 - 15.00 |                  |  |                     | 3,324,610  |           |  |          | 7.08 |                     |  |          | 10.64 |  |  |          | 2,108,844 |  |  |   | 10.68 | 
|                         |  |        |              |                  |  |                     |            |           |  |          |      |                     |  |          |       |  |  |          |           |  |  |   |       | 
|                         |  |        |              |                  |  |                     | 10,782,473 |           |  |          |      |                     |  |          |       |  |  |          | 6,502,702 |  |  |   |       | 
|                         |  |        |              |                  |  |                     |            |           |  |          |      |                     |  |          |       |  |  |          |           |  |  |   |       | 

Pro forma information regarding net income and net income per share as
disclosed in Note 2, has been determined as if the Company had accounted for
its stock option plans under the fair value based method of SFAS 123. The fair
value of these options was estimated at the date of grant using a Black-Scholes
option pricing model. The Black-Scholes option valuation model was developed
for use in estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions, including the expected
stock price volatility. Because changes in the subjective input assumptions
can materially affect the fair value estimate, in managements opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock options. The weighted average fair value of
options granted in the years ended December 31, 2002, 2001 and 2000 was $5.64,
$2.87, and $8.90, respectively.

Employee Stock Purchase Plan

On September 8, 1997, the Companys Board of Directors adopted and the
stockholders of the Company approved the Hypercom Corporation 1997 Employee
Stock Purchase Plan (the Purchase Plan). The Purchase Plan allows eligible
employees of the Company to purchase shares of the Common Stock through
periodic payroll deductions. The initial offering period commenced immediately
following the IPO and extended through June 30, 1998, with subsequent offering
periods beginning every six months thereafter (every three months effective
November 16, 1999). At the end of each offering period, payroll deductions for
the offering period are used to purchase shares of Common Stock for each
participants account at a price equal to 90% (85% effective November 16, 1999)
of the fair market value of the Common Stock on either the first or last day of
the offering period, whichever is less. Payroll deductions under the Purchase
Plan are limited to 10% of each eligible employees earnings during the
offering period, and no single participant will be granted an option to
purchase shares with a value in excess of $25,000 for each calendar year. The
Board has reserved 625,000 shares of Common Stock for issuance under the
Purchase Plan, subject to adjustment in the event of a stock split, reverse
stock split, stock dividend or similar event. Under the plan, for the years
ended December 31, 2002, 2001, and 2000 the Company sold 90,571, 156,765, and
83,641 shares to employees at weighted average prices of $3.68, $2.84, and
$9.16 per share, respectively.

Preferred Stock

On September 8, 1997, the Companys board of directors authorized
10,000,000 shares of $0.001 par value preferred stock. As of December 31, 2002
and 2001, there were no shares outstanding.

Directors Stock Plan

On September 8, 1997, the Companys Board of Directors adopted and the
stockholders of the Company approved the Hypercom Corporation Directors Stock
Plan (the Director Plan). The Director Plan is administered by a committee
appointed by the Board and provides for an initial grant to each Director of an
option to purchase 6,250 shares of Common Stock immediately following the
Offering. In addition, each individual who first becomes a Director after the
date of the initial grant of options will be granted an option to purchase
6,250 shares of Common Stock, and will receive an annual grant of options to
purchase 6,250 shares of Common Stock. The aggregate number of shares of Common
Stock subject to the Director Plan may not exceed 93,750, subject to adjustment
in the event of a stock split, reverse stock split, stock dividend or similar
event. Options granted under the Director Plan

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are fully vested and become
fully exercisable on the first anniversary of the date of grant and have a term
of ten years. The exercise price per share under the Director Plan is equal to
the fair market value of such shares upon the date of grant. In general,
options may be exercised by payment in cash or a cash equivalent,
and/or previously
acquired shares having a fair market value at the time of exercise equal to the
total option exercise price.

17. Commitments and Contingencies

Lease Commitments

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

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

|                          |  |   |       | 
|------------------------- |  | - | ----- | 
|Years Ending December 31, | 
|                         
|2003                      |  | $ | 2,522 | 
|2004                      |  |   | 1,430 | 
|2005                      |  |   | 715   | 
|2006                      |  |   | 253   | 
|2007                      |  |   | 247   | 
|Thereafter                |  |   | 133   | 
|                          |  |   |       | 
|                          |  | $ | 5,300 | 
|                          |  |   |       | 

Rental expense amounted to $3.4 million, $4.5 million, and $4.4 million
for the years ended December 31, 2002, 2001, and 2000, respectively.

Litigation

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

18. Related Party Transactions

Receivables from and Payable to Stockholders

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

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

19. Segment Information

As of December 31, 2002, the Company had two segments: Point-of-Sale
(POS)/Network Systems and Direct-Finance Leasing. POS Systems develops,
manufactures, markets, and supports products that automate electronic payment
transactions at the point of sale in merchant establishments. Network Systems
develops, manufactures, markets, and supports enterprise-networking systems.
Direct-finance leasing includes the activities of our direct finance lease
subsidiary, Golden Eagle.

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The Companys reportable segments are strategic business units that market
distinctly different products and services to a respectively different group of
customers. Their business models vary and each is separately managed given
their unique marketing, operations and financing strategies. The POS/Network
Systems segment information excludes the results of the operating units that
have been discontinued as more fully described in Note 12. The following table
presents certain segment financial information for the years ended December 31,
2002, 2001, 2000 (dollars in thousands):

|                                         |  |             |         |                |  |           |        |       |  |   |         |   |  |   |         | 
|---------------------------------------- |  | ----------- | ------- | -------------- |  | --------- | ------ | ----- |  | - | ------- | - |  | - | ------- | 
|                                         |  | 2002       
|                                         |  |            
|                                         |  | POS/Network |         | Direct-Finance |  |           |        |       |  |   |         |  
|                                         |  | Systems     |         | Leasing        |  | Corporate |        | Total
|                                         |  |             |         |                |  |           |        |      
|Revenue from external customers          |  | $           | 244,965 |                |  | $         | 25,686 |       |  | $ |        |   |  | $ | 270,651 | 
|Total restructuring costs*               |  |             | 6,467   |                |  |           |       |       |  |   |        |   |  |   | 6,467   | 
|Income (loss) from continuing operations |  |             | 22,333  |                |  |           | 2,777  |       |  |   | (18,042 | ) |  |   | 7,068   | 
|Depreciation and amortization expense    |  |             | 8,145   |                |  |           | 644    |       |  |   | 2,383   |   |  |   | 11,172  | 
|Segment assets                           |  |             | 179,590 |                |  |           | 42,337 |       |  |   | 38,076  |   |  |   | 260,003 | 

*Amount includes $2,033 recognized in cost of sales. See Note 12.

|                                         |  |             |         |                |  |           |        |       |  |   |         |   |  |   |         |  
|---------------------------------------- |  | ----------- | ------- | -------------- |  | --------- | ------ | ----- |  | - | ------- | - |  | - | ------- | -
|                                         |  | 2001       
|                                         |  |            
|                                         |  | POS/Network |         | Direct-Finance |  |           |        |       |  |   |         |  
|                                         |  | Systems     |         | Leasing        |  | Corporate |        | Total
|                                         |  |             |         |                |  |           |        |      
|Revenue from external customers          |  | $           | 236,773 |                |  | $         | 28,565 |       |  | $ |        |   |  | $ | 265,338 |  
|Income (loss) from continuing operations |  |             | 17,203  |                |  |           | (7,376 | )     |  |   | (17,376 | ) |  |   | (7,549  | )
|Depreciation and amortization expense    |  |             | 8,278   |                |  |           | 2,590  |       |  |   | 2,045   |   |  |   | 12,913  |  
|Segment assets                           |  |             | 212,078 |                |  |           | 74,804 |       |  |   | 50,812  |   |  |   | 337,694 |  

|                                         |  |             |         |                |  |           |        |       |  |   |         |   |  |   |         |  
|---------------------------------------- |  | ----------- | ------- | -------------- |  | --------- | ------ | ----- |  | - | ------- | - |  | - | ------- | -
|                                         |  | 2000       
|                                         |  |            
|                                         |  | POS/Network |         | Direct-Finance |  |           |        |       |  |   |         |  
|                                         |  | Systems     |         | Leasing        |  | Corporate |        | Total
|                                         |  |             |         |                |  |           |        |      
|Revenue from external customers          |  | $           | 269,855 |                |  | $         | 25,357 |       |  | $ |        |   |  | $ | 295,212 |  
|Income (loss) from continuing operations |  |             | 9,719   |                |  |           | (4,397 | )     |  |   | (24,757 | ) |  |   | (19,435 | )
|Depreciation and amortization expense    |  |             | 7,133   |                |  |           | 1,799  |       |  |   | 1,929   |   |  |   | 10,861  |  
|Segment assets                           |  |             | 234,659 |                |  |           | 87,103 |       |  |   | 47,475  |   |  |   | 369,237 |  

There were no intersegment revenues or intersegment operating profits for the
years ended December 31, 2002, 2001, and 2000.

Net revenues to external customers are based on the location of the
customer. Geographic information as of and for each of the years ended December
31, 2002, 2001, and 2000 is presented in the table below (dollars in
thousands):

|                              |  |               |         |               |  |              |        |        |  |   |        |  |  |       |        |  |  |  |  |  |  |   |         | 
|----------------------------- |  | ------------- | ------- | ------------- |  | ------------ | ------ | ------ |  | - | ------ |  |  | ----- | ------ |  |  |  |  |  |  | - | ------- | 
|                              |  | United States |         | Latin America |  | Asia/Pacific |        | Europe |  |   |        |  |  | Total
|                              |  |               |         |               |  |              |        |        |  |   |        |  |  |      
|Year ending December 31, 2002 |  |               |         |               |  |              |        |        |  |   |        |  |  |       |        |  |  |  |  |  |  |   |         | 
|Revenues                      |  | $             | 108,724 |               |  | $            | 65,318 |        |  | $ | 38,422 |  |  | $     | 58,187 |  |  |  |  |  |  | $ | 270,651 | 
|Long-lived assets             |  |               | 26,121  |               |  |              | 15,210 |        |  |   | 2,334  |  |  |       | 1,842  |  |  |  |  |  |  |   | 45,507  | 
|Year ending December 31, 2001 |  |               |         |               |  |              |        |        |  |   |        |  |  |       |        |  |  |  |  |  |  |   |         | 
|Revenues                      |  | $             | 115,786 |               |  | $            | 69,855 |        |  | $ | 34,143 |  |  | $     | 45,554 |  |  |  |  |  |  | $ | 265,338 | 
|Long-lived assets             |  |               | 57,974  |               |  |              | 18,257 |        |  |   | 3,343  |  |  |       | 2,178  |  |  |  |  |  |  |   | 81,752  | 
|Year ending December 31, 2000 |  |               |         |               |  |              |        |        |  |   |        |  |  |       |        |  |  |  |  |  |  |   |         | 
|Revenues                      |  | $             | 126,419 |               |  | $            | 73,403 |        |  | $ | 39,908 |  |  | $     | 55,482 |  |  |  |  |  |  | $ | 295,212 | 
|Long-lived assets             |  |               | 61,036  |               |  |              | 20,232 |        |  |   | 6,405  |  |  |       | 2,837  |  |  |  |  |  |  |   | 90,510  | 

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20. Supplemental Cash Flow Information (in thousands)

|                                                     |                                                                                      |  |                         |         |      |  |      |        |   |  |   |         |  
|---------------------------------------------------- | ------------------------------------------------------------------------------------ |  | ----------------------- | ------- | ---- |  | ---- | ------ | - |  | - | ------- | -
|                                                     |                                                                                      |  | Year Ended December 31,
|                                                     |                                                                                      |  |                        
|                                                     |                                                                                      |  | 2002                    |         | 2001 |  | 2000
|                                                     |                                                                                      |  |                         |         |      |  |     
|Changes in operating assests and liabilities:        |                                                                                      |  |                         |         |      |  |      |        |   |  |   |        
|                                                     | Accounts receivable                                                                  |  | $                       | 8,880   |      |  | $    | 6,000  |   |  | $ | (23,747 | )
|                                                     | Net investment in sales-type leases                                                  |  |                         | (6,453  | )    |  |      | (2,947 | ) |  |   | (4,416  | )
|                                                     | Inventories                                                                          |  |                         | 5,732   |      |  |      | (29    | ) |  |   | (1,281  | )
|                                                     | Income tax receivable                                                                |  |                         | (9,118  | )    |  |      |       |   |  |   |        |  
|                                                     | Prepaid taxes                                                                        |  |                         | 337     |      |  |      | 2,273  |   |  |   | 2,408   |  
|                                                     | Prepaid expenses and other current assets                                            |  |                         | 3,251   |      |  |      | (5,908 | ) |  |   | 1,312   |  
|                                                     | Other assets                                                                         |  |                         | (4,572  | )    |  |      | (1,476 | ) |  |   | (3,958  | )
|                                                     | Accounts payable                                                                     |  |                         | (13,726 | )    |  |      | (960   | ) |  |   | 4,250   |  
|                                                     | Accrued
payroll and related expenses                                                 |  |                         | 696     |      |  |      | (244   | ) |  |   | 277     |  
|                                                     | Accrued
sales and other tax                                                          |  |                         | 1,602   |      |  |      | 1,080  |   |  |   | (995    | )
|                                                     | Accrued liabilities                                                                  |  |                         | (4,079  | )    |  |      | (158   | ) |  |   | 2,327   |  
|                                                     | Deferred revenue                                                                     |  |                         | 101     |      |  |      | (210   | ) |  |   | (2,380  | )
|                                                     | Income taxes payable                                                                 |  |                         | 298     |      |  |      | (1,574 | ) |  |   | 909     |  
|                                                     | Other liabilities                                                                    |  |                         | 627     |      |  |      | (113   | ) |  |   | 163     |  
|                                                     |                                                                                      |  |                         |         |      |  |      |        |   |  |   |         |  
|                                                     | Net decrease in operating assets and liabilities                                     |  | $                       | (16,424 | )    |  | $    | (4,266 | ) |  | $ | (25,131 | )
|                                                     |                                                                                      |  |                         |         |      |  |      |        |   |  |   |        
|Cash paid during the year for:                       |                                                                                      |  |                         |         |      |  |      |        |   |  |   |        
|                                                     | Interest                                                                             |  | $                       | (4,629  | )    |  | $    | (8,614 | ) |  | $ | (8,979  | )
|                                                     |                                                                                      |  |                         |         |      |  |      |        |   |  |   |        
|                                                     | Income taxes                                                                         |  | $                       | (3,048  | )    |  | $    | (2,340 | ) |  | $ | (368    | )
|                                                     |                                                                                      |  |                         |         |      |  |      |        |   |  |   |        
|Noncash investing activities:                        |                                                                                      |  |                         |         |      |  |      |        |   |  |   |        
|                                                     | Acquisition of plant and equipment through
capital leases                            |  | $                       | 523     |      |  | $    |       |   |  | $ | 1,630   |  
|                                                     |                                                                                      |  |                         |         |      |  |      |        |   |  |   |        
|                                                     | Changes in accounts payable related to
the purchase of property, plant and equipment |  | $                       | (477    | )    |  | $    | 471    |   |  | $ | (36     | )
|                                                     |                                                                                      |  |                         |         |      |  |      |        |   |  |   |        
|Noncash financing activities:                        |                                                                                      |  |                         |         |      |  |      |        |   |  |   |        
|                                                     | Issuance of stock to pay off notes payable                                           |  | $                       |        |      |  | $    | (7,500 | ) |  | $ |        |  
|                                                     |                                                                                      |  |                         |         |      |  |      |        |   |  |   |        
|                                                     | Issuance of common stock warrants at fair value                                      |  | $                       | (833    | )    |  | $    | (3,722 | ) |  | $ |        |  
|                                                     |                                                                                      |  |                         |         |      |  |      |        |   |  |   |        
|                                                     | Beneficial conversion feature                                                        |  | $                       |        |      |  | $    | (667   | ) |  | $ |        |  
|                                                     |                                                                                      |  |                         |         |      |  |      |        |   |  |   |        
|                                                     | Conversion of notes payable and accrued
interest into common stock                   |  | $                       |        |      |  | $    | (3,438 | ) |  | $ |        |  
|                                                     |                                                                                      |  |                         |         |      |  |      |        |   |  |   |        
|Acquisition of controlling interest in subsidiaries: |                                                                                      |  |                         |         |      |  |      |        |   |  |   |        
|                                                     | Assets acquired (net of seller financing)                                            |  | $                       |        |      |  | $    |       |   |  | $ | 69,512  |  
|                                                     | Liabilities assumed                                                                  |  |                         |        |      |  |      |       |   |  |   | (41,378 | )
|                                                     |                                                                                      |  |                         |         |      |  |      |        |   |  |   |         |  
|                                                     | Net assets acquired                                                                  |  |                         |        |      |  |      |       |   |  |   | 28,134  |  
|                                                     | Less issuance of common stock                                                        |  |                         |        |      |  |      |       |   |  |   | (4,000  | )
|                                                     |                                                                                      |  |                         |         |      |  |      |        |   |  |   |         |  
|                                                     | Net cash paid for acquisition of controlling
interest in subsidiaries                |  | $                       |        |      |  | $    |       |   |  | $ | 24,134  |  
|                                                     |                                                                                      |  |                         |         |      |  |      |        |   |  |   |        

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21. Interim Financial Results (Unaudited)

The following tables set forth certain unaudited consolidated financial
information for each of the four quarters in the years ended December 31, 2002
and 2001. In managements opinion, this unaudited quarterly information has
been prepared on the same basis as the audited consolidated financial
statements and includes all necessary adjustments, consisting only of normal
recurring adjustments, that management considers necessary for a fair
presentation of the unaudited quarterly results when read in conjunction with
the Consolidated Financial Statements and Notes. The Company believes that
quarter-to-quarter comparisons of its financial results are not necessarily
meaningful and should not be relied upon as an indication of future
performance. (Dollars in thousands, except per share amounts. Certain amounts
do not sum due to rounding.)

|                                                                                                                          |  |            |         |            |  |         |        |         |  |             |         |   |  |   |        |   |  |   |         |  
|------------------------------------------------------------------------------------------------------------------------- |  | ---------- | ------- | ---------- |  | ------- | ------ | ------- |  | ----------- | ------- | - |  | - | ------ | - |  | - | ------- | -
|                                                                                                                          |  | 2002      
|                                                                                                                          |  |           
|                                                                                                                          |  | First(1)   |         | Second     |  | Third   |        | Fourth  |  |             |         |  
|                                                                                                                          |  | Quarter(2) |         | Quarter(1) |  | Quarter |        | Quarter |  | Fiscal Year
|                                                                                                                          |  |            |         |            |  |         |        |         |  |            
|Net revenue                                                                                                               |  | $          | 70,773  |            |  | $       | 67,848 |         |  | $           | 64,050  |   |  | $ | 67,980 |   |  | $ | 270,651 |  
|Gross profit                                                                                                              |  |            | 27,520  |            |  |         | 26,664 |         |  |             | 22,216  |   |  |   | 25,037 |   |  |   | 101,437 |  
|Income (loss) from continuing operations                                                                                  |  |            | 4,413   |            |  |         | 4,529  |         |  |             | (6,097  | ) |  |   | 4,223  |   |  |   | 7,068   |  
|Income (loss) before discontinued
operations, extraordinary item,
and cumulative effect of
change in accounting principle |  |            | 927     |            |  |         | 1,266  |         |  |             | (27,601 | ) |  |   | 2,351  |   |  |   | (23,057 | )
|Loss from discontinued operations                                                                                         |  |            | (1,736  | )          |  |         | (886   | )       |  |             | (9,888  | ) |  |   | (1,133 | ) |  |   | (13,643 | )
|Extraordinary item                                                                                                        |  |            | (1,833  | )          |  |         |       |         |  |             | (785    | ) |  |   |       |   |  |   | (2,618  | )
|Cumulative effect of change in
accounting principle                                                                       |  |            | (21,766 | )          |  |         |       |         |  |             |        |   |  |   |       |   |  |   | (21,766 | )
|                                                                                                                          |  |            |         |            |  |         |        |         |  |             |         |   |  |   |        |   |  |   |         |  
|Net income (loss)                                                                                                         |  | $          | (24,408 | )          |  | $       | 380    |         |  | $           | (38,274 | ) |  | $ | 1,218  |   |  | $ | (61,084 | )
|                                                                                                                          |  |            |         |            |  |         |        |         |  |             |         |   |  |   |        |   |  |   |         |  
|Earnings (loss) per share - basic:                                                                                        |  |            |         |            |  |         |        |         |  |             |         |   |  |   |        |   |  |   |         |  
|Income (loss) before discontinued
operations, extraordinary item,
and cumulative effect of
change in accounting principle |  | $          | 0.02    |            |  | $       | 0.03   |         |  | $           | (0.57   | ) |  | $ | 0.05   |   |  | $ | (0.50   | )
|Loss from discontinued operations                                                                                         |  |            | (0.04   | )          |  |         | (0.02  | )       |  |             | (0.21   | ) |  |   | (0.02  | ) |  |   | (0.29   | )
|Extraordinary item                                                                                                        |  |            | (0.04   | )          |  |         |       |         |  |             | (0.02   | ) |  |   |       |   |  |   | (0.06   | )
|Cumulative effect of change in
accounting principle                                                                       |  |            | (0.54   | )          |  |         |       |         |  |             |        |   |  |   |       |   |  |   | (0.47   | )
|                                                                                                                          |  |            |         |            |  |         |        |         |  |             |         |   |  |   |        |   |  |   |         |  
|Earnings (loss) per share                                                                                                 |  | $          | (0.60   | )          |  | $       | 0.01   |         |  | $           | (0.80   | ) |  | $ | 0.03   |   |  | $ | (1.32   | )
|                                                                                                                          |  |            |         |            |  |         |        |         |  |             |         |   |  |   |        |   |  |   |         |  
|Earnings
(loss) per share - diluted:                                                                                      |  |            |         |            |  |         |        |         |  |             |         |   |  |   |        |   |  |   |         |  
|Income (loss) before discontinued
operations, extraordinary item,
and cumulative effect of
change in accounting principle |  | $          | 0.02    |            |  | $       | 0.02   |         |  | $           | (0.57   | ) |  | $ | 0.05   |   |  | $ | (0.50   | )
|Loss from discontinued operations                                                                                         |  |            | (0.04   | )          |  |         | (0.01  | )       |  |             | (0.21   | ) |  |   | (0.02  | ) |  |   | (0.29   | )
|Extraordinary item                                                                                                        |  |            | (0.04   | )          |  |         |       |         |  |             | (0.02   | ) |  |   |       |   |  |   | (0.06   | )
|Cumulative effect of change in
accounting principle                                                                       |  |            | (0.49   | )          |  |         |       |         |  |             |        |   |  |   |       |   |  |   | (0.47   | )
|                                                                                                                          |  |            |         |            |  |         |        |         |  |             |         |   |  |   |        |   |  |   |         |  
|Earnings (loss) per share                                                                                                 |  | $          | (0.55   | )          |  | $       | 0.01   |         |  | $           | (0.80   | ) |  | $ | 0.03   |   |  | $ | (1.32   | )
|                                                                                                                          |  |            |         |            |  |         |        |         |  |             |         |   |  |   |        |   |  |   |         |  

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|                                               |  |            |         |            |  |            |        |               |  |             |        |   |  |   |        |   |  |   |         |  
|---------------------------------------------- |  | ---------- | ------- | ---------- |  | ---------- | ------ | ------------- |  | ----------- | ------ | - |  | - | ------ | - |  | - | ------- | -
|                                               |  | 2001      
|                                               |  |           
|                                               |  | First      |         | Second     |  | Third      |        | Fourth        |  |             |        |  
|                                               |  | Quarter(1) |         | Quarter(1) |  | Quarter(1) |        | Quarter(1)(3) |  | Fiscal Year
|                                               |  |            |         |            |  |            |        |               |  |            
|Net revenue                                    |  | $          | 64,040  |            |  | $          | 68,522 |               |  | $           | 64,714 |   |  | $ | 68,062 |   |  | $ | 265,338 |  
|Gross profit                                   |  |            | 17,161  |            |  |            | 24,621 |               |  |             | 25,955 |   |  |   | 27,420 |   |  |   | 95,157  |  
|Income (loss) from continuing operations       |  |            | (10,962 | )          |  |            | (1,684 | )             |  |             | 1,462  |   |  |   | 3,635  |   |  |   | (7,549  | )
|Income (loss) before discontinued
operations   |  |            | (12,555 | )          |  |            | (5,359 | )             |  |             | (1,397 | ) |  |   | 2,437  |   |  |   | (16,874 | )
|Loss from discontinued operations              |  |            | (698    | )          |  |            | (400   | )             |  |             | (988   | ) |  |   | (948   | ) |  |   | (3,034  | )
|                                               |  |            |         |            |  |            |        |               |  |             |        |   |  |   |        |   |  |   |         |  
|Net income (loss)                              |  | $          | (13,253 | )          |  | $          | (5,759 | )             |  | $           | (2,385 | ) |  | $ | 1,489  |   |  | $ | (19,908 | )
|                                               |  |            |         |            |  |            |        |               |  |             |        |   |  |   |        |   |  |   |         |  
|Earnings
(loss) per share - basic and diluted: |  |            |         |            |  |            |        |               |  |             |        |   |  |   |        |   |  |   |         |  
|Income (loss) before discontinued
operations   |  | $          | (0.37   | )          |  | $          | (0.16  | )             |  | $           | (0.04  | ) |  | $ | 0.06   |   |  | $ | (0.46   | )
|Loss from discontinued operations              |  |            | (0.02   | )          |  |            | (0.01  | )             |  |             | (0.02  | ) |  |   | (0.02  | ) |  |   | (0.08   | )
|                                               |  |            |         |            |  |            |        |               |  |             |        |   |  |   |        |   |  |   |         |  
|Earnings (loss) per share                      |  | $          | (0.39   | )          |  | $          | (0.17  | )             |  | $           | (0.06  | ) |  | $ | 0.04   |   |  | $ | (0.54   | )
|                                               |  |            |         |            |  |            |        |               |  |             |        |   |  |   |        |   |  |   |         |  



| | (1) |  | During the third quarter of 2002,
the Company identified certain unprofitable businesses and made the
decision to hold these operating units for sale. For comparative
purposes, all prior periods presented have been restated to reflect
the results of operations of these unprofitable businesses in
discontinued operations. See Note 12.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (2) |  | During 2002, the Company adopted
SFAS 142, Goodwill and Intangible Assets. During the second
quarter of 2002, the Company completed the evaluation of its reporting
units for impairment of goodwill and recorded a $21.8 million
write-off of goodwill primarily attributable to Golden Eagle Leasing.
Under the transitional provisions of SFAS 142, this write-off
has been reflected as a cumulative effect of change in accounting
principle. The first quarter operating results have been restated to
reflect this charge as required by SFAS No. 3, Reporting
Accounting Changes in Interim Financial Statements. See
Note 10.                                                                                                                                                                                                                                                           
| | (3) |  | During the fourth quarter of 2001 we reduced sales by
$7.5 million to reflect a reserve for product returns. This
reserve for product returns related to one particular
customer whereby we decided to take back product for the
purpose of providing additional product features and
enhancements. These new features and enhancements were not
included in the specifications at the date of the original
sales, and we were not required to make the modifications
under the terms of the original sale. We elected to make a
customer concession and provide the enhancements and have
recorded this as a product return. As a result of this sales
return, gross profit was reduced by $2.0 million during the
fourth quarter of 2001. As the product is modified and
determined to meet the customers revised requirements, we
will record sales when all requirements of SAB 101 are met.

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FINANCIAL STATEMENT SCHEDULE

SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS

|                              |                                                      |        |              |        |            |     |             |        |            |               |            |       |  |  |   |         |   |  |   |        | 
|----------------------------- | ---------------------------------------------------- | ------ | ------------ | ------ | ---------- | --- | ----------- | ------ | ---------- | ------------- | ---------- | ----- |  |  | - | ------- | - |  | - | ------ | 
|                              |                                                      |        |              |        |            |     | Additions   |        |            |               |           
|                              |                                                      |        |              |        |            |     |             |        |            |               |           
|                              |                                                      |        |              |        |            |     | Charged to  |        |            |               |            |       |  |  |   |         |  
|                              |                                                      |        |              |        |            |     | Costs and   |        |            |               |            |       |  |  |   |         |  
|                              |                                                      |        |              |        |            |     | Expenses in |        | Charged to |               |            |       |  |  |  
|                              |                                                      |        | Balance at   |        | Continuing |     | Other       |        |            |               |            |       | 
|                              |                                                      |        | Beginning of |        | Operations |     | Accounts    |        | Deductions |               | Balance at
|(amounts in thousands)        |                                                      | Period |              | (A)    |            | (A) |             | (B)    |            | End of Period
|                              |                                                      |        |              |        |            |     |             |        |            |               |           
|Year
Ended December 31, 2000: |                                                      |        |              |        |            |     |             |        |            |               |            |       |  |  |   |         |   |  |   |       
|                              | Allowance for doubtful
accounts                      |        | $            | 1,589  |            |     | $           | 2,674  |            |               | $          | 58    |  |  | $ | (666    | ) |  | $ | 3,655  | 
|                              | Inventory reserves                                   |        |              | 5,024  |            |     |             | 3,093  |            |               |            | 77    |  |  |   | (968    | ) |  |   | 7,226  | 
|                              | Allowance for credit losses
on direct finance leases |        |              |       |            |     |             | 11,681 |            |               |            | 1,600 |  |  |   | (11,157 | ) |  |   | 2,124  | 
|Year
Ended December 31, 2001: |                                                      |        |              |        |            |     |             |        |            |               |            |       |  |  |   |         |   |  |   |       
|                              | Allowance for doubtful
accounts                      |        |              | 3,655  |            |     |             | 1,056  |            |               |            | 117   |  |  |   | (1,406  | ) |  |   | 3,422  | 
|                              | Inventory reserves                                   |        |              | 7,226  |            |     |             | 3,716  |            |               |            | 328   |  |  |   | (250    | ) |  |   | 11,020 | 
|                              | Allowance for credit losses
on direct finance leases |        |              | 2,124  |            |     |             | 18,075 |            |               |            |      |  |  |   | (14,893 | ) |  |   | 5,306  | 
|                              | Allowance for credit losses
on sales-type leases     |        |              |       |            |     |             | 607    |            |               |            |      |  |  |   |        |   |  |   | 607    | 
|Year
Ended December 31, 2002: |                                                      |        |              |        |            |     |             |        |            |               |            |       |  |  |   |         |   |  |   |       
|                              | Allowance for doubtful
accounts                      |        |              | 3,422  |            |     |             | 874    |            |               |            |      |  |  |   | (1,014  | ) |  |   | 3,282  | 
|                              | Inventory reserves                                   |        |              | 11,020 |            |     |             | 5,957  |            |               |            |      |  |  |   | (7,554  | ) |  |   | 9,423  | 
|                              | Allowance for credit losses
on direct finance leases |        |              | 5,306  |            |     |             | 8,377  |            |               |            |      |  |  |   | (8,822  | ) |  |   | 4,861  | 
|                              | Allowance for credit losses
on sales-type leases     |        |              | 607    |            |     |             | 691    |            |               |            |      |  |  |   | 120     |   |  |   | 1,418  | 



---

|(A) |  | Certain amounts in the 2001 and 2000 periods relating to operations
discontinued in 2002 have been reclassified to conform with the 2002
presentation.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(B) |  | Write-offs of uncollectible amounts and recoveries of amounts previously
written off.                                                                 

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EXHIBIT INDEX

|               |  |   |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|-------------- |  | - | ------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
Number |  |   | Description of Exhibit and Method of Filing
|               |  |   |                                            
|3.1            |  |  |                                             | Amended and Restated Certificate of Incorporation of Hypercom Corporation
(incorporated by reference to Exhibit 3.1 to Hypercom Corporations
Registration Statement on Form S-1 (Registration No. 333-35461))                                                                                                                                                                                                                                                   
|               |  |   |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|3.2            |  |  |                                             | Amended and Restated Bylaws of Hypercom Corporation (incorporated by
reference to Exhibit 3.2 to Hypercom Corporations Annual Report on Form
10-K for the year ended December 31, 2001)                                                                                                                                                                                                                                                                         
|               |  |   |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|4.1            |  |  |                                             | Amended and Restated Certificate of Incorporation of Hypercom
(incorporated by reference to Exhibit 3.1 to Hypercom Corporations
Registration Statement on Form S-1 (Registration No. 333-35461))                                                                                                                                                                                                                                                               
|               |  |   |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.1           |  |  |                                             | Lease, as amended, dated June 14, 1996, by and between Estes-Samuelson
Partnership and Hypercom, Inc. (incorporated by reference to Exhibit 10.2
to Hypercom Corporations Registration Statement on Form S-1
(Registration No. 333-35461))                                                                                                                                                                                                                      
|               |  |   |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.2           |  |  |                                             | Hypercom Corporation Long-Term Incentive Plan (incorporated by reference
to Exhibit 4.3 to Hypercom Corporations Registration Statement on Form
S-8 (Registration No. 333-67440))                                                                                                                                                                                                                                                                              
|               |  |   |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.3           |  |  |                                             | Hypercom Corporation 1997 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.4 to Hypercom Corporations Registration
Statement on Form S-1 (Registration No. 333-35461))                                                                                                                                                                                                                                                                    
|               |  |   |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.4           |  |  |                                             | Hypercom Corporation 2000 Broad-Based Stock Incentive Plan (incorporated
by reference to Exhibit 10.1 to Hypercom Corporations Registration
Statement on Form S-8 (Registration No. 333-97181))                                                                                                                                                                                                                                                                
|               |  |   |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.5           |  |  |                                             | Hypercom Corporation Nonemployee Directors Stock Option Plan
(incorporated by reference to Exhibit 10.1 to Hypercom Corporations
Registration Statement on Form S-1 (Registration No. 333-97179))                                                                                                                                                                                                                                                             
|               |  |   |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.6           |  |  |                                             | Employment Agreement between Albert A. Irato and Hypercom Corporation,
dated October 23, 2002*                                                                                                                                                                                                                                                                                                                                                                  
|               |  |   |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.7           |  |  |                                             | Employment Agreement, dated May 17, 2002, between Christopher S.
Alexander and Hypercom Corporation (incorporated by reference to Exhibit
10.4 to Hypercom Corporations Quarterly Report on Form 10-Q for the
quarter ended June 30, 2002)                                                                                                                                                                                                                     
|               |  |   |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.8           |  |  |                                             | Deferred Compensation Agreement, dated June 3, 2002, between Christopher
S. Alexander and Hypercom Corporation (incorporated by reference to
Exhibit 10.5 to Hypercom Corporations Quarterly Report on Form 10-Q for
the quarter ended June 30, 2002)                                                                                                                                                                                                          
|               |  |   |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.9           |  |  |                                             | Loan and Security Agreement dated as of July 31, 2001 by and among
Hypercom Corporation, Hypercom (Arizona), Inc., Hypercom U.S.A., Inc.,
Hypercom Manufacturing Resources, Inc., Hypercom Horizon, Inc., Epicnetz,
Inc., Hypercom Latino America, Inc., Hypercom Europe Limited, Inc.,
Foothill Capital Corporation and Ableco Finance LLC (incorporated by
reference to Exhibit 10.1 to Hypercom Corporations Current Report on
Form 8-K filed August 9, 2001)
|               |  |   |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.10          |  |  |                                             | Amendment No. One, dated October 3, 2001, to Loan and Security Agreement
dated July 31, 2001 by and among Hypercom Corporation, certain of it
subsidiaries and Foothill Capital Corporation (incorporated by reference
to Exhibit 10.1 to Hypercom Corporations Quarterly Report on Form 10-Q
for the quarter ended September 30, 2001)                                                                                                                         
|               |  |   |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.11          |  |  |                                             | Amendment No. Two, dated November 13, 2001, to Loan and Security
Agreement dated July 31, 2001, by and among Hypercom Corporation, certain
of its subsidiaries and Foothill Capital Corporation (incorporated by
reference to Exhibit 10.2 to Hypercom Corporations Quarterly Report on
Form 10-Q for the quarter ended September 30, 2001)                                                                                                                     
|               |  |   |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.12          |  |  |                                             | Amendment No. Three dated February 13, 2002, to Loan and Security
Agreement dated July 31, 2001 by and among Hypercom Corporation, certain
of its subsidiaries and Foothill Capital Corporation (incorporated by
reference to Exhibit 10.1 to Hypercom Corporations Current Report on
Form 8-K filed February 19, 2002)                                                                                                                                         
|               |  |   |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.13          |  |  |                                             | Waiver and Consent dated March 13, 2002, by and among Hypercom Corporation, certain of its subsidiaries
and Foothill Capital Corporation (incorporated by reference to Exhibit 10.1 to Hypercom Corporations
Current Report on Form 8-K filed March 26, 2002)                                                                                                                                                                                                   
|               |  |   |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.14          |  |  |                                             | Waiver and Consent dated March 25, 2002, by and among Hypercom Corporation, certain of its                                                                                                                                                                                                                                                                                                                                                                       

70



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##### Table of Contents



|               |  |   |                                             |                                                                                                                                                                                                                                                                                                                                              
|-------------- |  | - | ------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
Number |  |   | Description of Exhibit and Method of Filing
|               |  |   |                                            
|               |  |   |                                             | subsidiaries
and Foothill Capital Corporation (incorporated by reference to Exhibit 10.27 to Hypercom Corporations
Annual Report on Form 10-K for the year ended December 31, 2001)                                                                                                                                                         
|               |  |   |                                             |                                                                                                                                                                                                                                                                                                                                              
|10.15          |  |  |                                             | Waiver and Consent dated June 20, 2002, by and among Hypercom Corporation, certain of its subsidiaries
and Foothill Capital Corporation (incorporated by reference to Exhibit 10.2 to Hypercom Corporations
Quarterly Report on Form 10-Q for the quarter ended June 30, 2002)                                                              
|               |  |   |                                             |                                                                                                                                                                                                                                                                                                                                              
|10.16          |  |  |                                             | Amendment No. Four dated June 24, 2002, to Loan and Security Agreement dated July 31, 2001 by and among
Hypercom Corporation, certain of its subsidiaries and Foothill Capital Corporation (incorporated by
reference to Exhibit 10.3 to Hypercom Corporations Quarterly Report on Form 10-Q for the quarter ended
June 30, 2002)           
|               |  |   |                                             |                                                                                                                                                                                                                                                                                                                                              
|10.17          |  |  |                                             | Amendment No. Five dated December 23, 2002, to Loan and Security Agreement dated July 31, 2001 by and
among Hypercom Corporation, certain of its subsidiaries and Foothill Capital Corporation*                                                                                                                                              
|               |  |   |                                             |                                                                                                                                                                                                                                                                                                                                              
|10.18          |  |  |                                             | Amendment No. Six dated March 5, 2003, to Loan and Security Agreement dated July 31, 2001 by and among
Hypercom Corporation, certain of its subsidiaries and Foothill Capital Corporation*                                                                                                                                                   
|               |  |   |                                             |                                                                                                                                                                                                                                                                                                                                              
|10.19          |  |  |                                             | Amendment
No. Seven dated March 28, 2003, to Loan and Security Agreement dated July 31, 2001 by and
among Hypercom Corporation, certain of its subsidiaries and Foothill Capital Corporation*                                                                                                                                                
|               |  |   |                                             |                                                                                                                                                                                                                                                                                                                                              
|10.20          |  |  |                                             | Loan and Security Agreement dated August 24, 2001, by and between Golden Eagle Leasing, Inc. and Webster
Bank (incorporated by reference to Exhibit 10.1 to Hypercom Corporations Current Report on Form 8-K
filed September 11, 2001)                                                                                                      
|               |  |   |                                             |                                                                                                                                                                                                                                                                                                                                              
|10.21          |  |  |                                             | First amendment, dated September 19, 2001 to Loan and Security Agreement, dated August 24, 2001, between
Golden Eagle Leasing, Inc. and Webster Bank*                                                                                                                                                                                        
|               |  |   |                                             |                                                                                                                                                                                                                                                                                                                                              
|10.22          |  |  |                                             | Second amendment, dated March 28, 2002, to Loan and Security Agreement, dated August 24, 2001, between
Golden Eagle Leasing, Inc. and Webster Bank (incorporated by reference to Exhibit 10.2 to Hypercom
Corporations Quarterly Report on Form 10-Q for the quarter ended March 31, 2002)                                                  
|               |  |   |                                             |                                                                                                                                                                                                                                                                                                                                              
|10.23          |  |  |                                             | Third amendment, dated August 28, 2002, to Loan and Security Agreement, dated August 24, 2002, between
Golden Eagle Leasing, Inc. and Webster Bank*                                                                                                                                                                                          
|               |  |   |                                             |                                                                                                                                                                                                                                                                                                                                              
|10.24          |  |  |                                             | Loan and Security Agreement dated August 28, 2001, by and between Golden Eagle Leasing, Inc. and
Congress Financial Corporation (incorporated by reference to Exhibit 10.2 to Hypercom Corporations
Current Report on Form 8-K filed September 11, 2001)                                                                                    
|               |  |   |                                             |                                                                                                                                                                                                                                                                                                                                              
|10.25          |  |  |                                             | Amendment No. 1, dated March 31, 2002, to Loan and Security Agreement and Consents, dated August 28,
2001, among Congress Financial Corporation, Golden Eagle Leasing Inc., and Hypercom Corporation
(incorporated by reference to Exhibit 10.1 to Hypercom Corporations Quarterly Report on Form 10-Q for
the quarter ended March 31, 2002)
|               |  |   |                                             |                                                                                                                                                                                                                                                                                                                                              
|10.26          |  |  |                                             | Amendment No. 2, dated June 30, 2002, to Loan and Security Agreement, dated August 28, 2001, among
Congress Financial Corporation, Golden Eagle Leasing, Inc., and Hypercom Corporation (incorporated by
reference to Exhibit 10.2 to Hypercoms Quarterly Report on Form 10-Q for the quarter ended June 30,
2002)                          
|               |  |   |                                             |                                                                                                                                                                                                                                                                                                                                              
|10.28          |  |  |                                             | Loan Agreement, dated October 12, 1996 by and between Hypercom Pty. Ltd. and Paul Wallner (incorporated
by reference to Exhibit 10.10 to Hypercom Corporations Registration Statement on Form S-1 (Registration
No. 333-35461))                                                                                                            
|               |  |   |                                             |                                                                                                                                                                                                                                                                                                                                              
|10.29          |  |  |                                             | Consulting Agreement between Hypercom Corporation and George Wallner, dated March 18, 2003 *                                                                                                                                                                                                                                                
|               |  |   |                                             |                                                                                                                                                                                                                                                                                                                                              
|21.1           |  |  |                                             | List of Subsidiaries*                                                                                                                                                                                                                                                                                                                        
|               |  |   |                                             |                                                                                                                                                                                                                                                                                                                                              
|23.1           |  |  |                                             | Consent of Ernst
& Young LLP, independent accountants*                                                                                                                                                                                                                                                                                       
|               |  |   |                                             |                                                                                                                                                                                                                                                                                                                                              
|24.1           |  |  |                                             | Powers of Attorney*                                                                                                                                                                                                                                                                                                                          
|               |  |   |                                             |                                                                                                                                                                                                                                                                                                                                              
|99.1           |  |  |                                             | Cautionary Statement Regarding Forward-Looking Statements and Risk Factors*                                                                                                                                                                                                                                                                  
|               |  |   |                                             |                                                                                                                                                                                                                                                                                                                                              
|99.2           |  |  |                                             | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002*                                                                                                                                                                                           
|               |  |   |                                             |                                                                                                                                                                                                                                                                                                                                              
|99.3           |  |  |                                             | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002*                                                                                                                                                                                           

* Filed herewith.
 Management or compensatory plan or agreement.

71