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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-K

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

OR

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

For the fiscal year ended December 31, 2001.

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(g) of the Act:

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

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

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 BOX)

The aggregate market value of the voting stock held by non-affiliates of
the registrant was $121,427,138 as of March 25, 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 25, 2002, was 47,760,309.

Documents Incorporated By Reference

Material from the Companys Proxy Statement relating to its 2002 Annual
Meeting of Stockholders has been incorporated by reference into Part III, Items
10, 11, 12 and 13.



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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                          
|                                                                  | Item 8. Financial Statements and Supplementary Data                                          
|                                                                  | Item 9. Changes in and Disagreement 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                      
|                                                                  | Item 13. Certain Relationships and Related Transactions                                      
|PART IV                                                          
|                                                                  | Item 10. Directors and Executive Officers of the Registrant                                  
|SIGNATURES                                                       
|REPORT OF INDEPENDENT AUDITORS                                   
|REPORT OF INDEPENDENT ACCOUNTANTS                                
|CONSOLIDATED BALANCE SHEETS                                      
|CONSOLIDATED STATEMENTS OF OPERATIONS                            
|CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY                  
|CONSOLIDATED STATEMENTS OF CASH FLOWS                            
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                       
|REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
|                                                                  |                                                                                               | EXHIBIT INDEX
|EX-3.2                                                           
|EX-10.18                                                         
|Ex-10.27                                                         
|Ex-23.1                                                          
|Ex-23.2                                                          
|Ex-24.1                                                          
|Ex-99.1                                                          



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TABLE OF CONTENTS

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|Item No. |  | Caption                                                                               |  | Page
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|PART I   |  |                                                                                       |  |     
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|1.       |  | Business                                                                              |  | 3   
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|2.       |  | Properties                                                                            |  | 11  
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|3.       |  | Legal Proceedings                                                                     |  | 11  
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|4.       |  | Submission of Matters to a Vote of Security Holders                                   |  | 11  
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|         |  |                                                                                       |  |     
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|PART II  |  |                                                                                       |  |     
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|5.       |  | Market for Common Equity and Related Shareholder Matters                              |  | 12  
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|6.       |  | Selected Financial Data                                                               |  | 12  
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|7.       |  | Managements Discussion and Analysis of Financial Condition
and Results of Operations |  | 14  
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|8.       |  | Financial Statements and Supplementary Data                                           |  | 28  
|        
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|9.       |  | Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure  |  | 28  
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|         |  |                                                                                       |  |     
|        
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|PART III |  |                                                                                       |  |     
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|10.      |  | Directors and Executive Officers of the Company                                       |  | 29  
|        
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|11.      |  | Executive Compensation                                                                |  | 29  
|        
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|12.      |  | Security Ownership of Certain Beneficial Owners and Management                        |  | 29  
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|13.      |  | Certain Relationships and Related Transactions                                        |  | 29  
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|         |  |                                                                                       |  |     
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|PART IV  |  |                                                                                       |  |     
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|14.      |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                      |  | 30  
|        
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|         |  | Signatures                                                                            |  | 31  
|        
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|         |  | Exhibit Index                                                                         |  | 63  

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PART I




Item 1.Business

Hypercom

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 web appliances, networking equipment and software applications
for e-commerce, mobile commerce, smart cards and traditional credit, charge and
debit card payment applications. Card Technology Magazine ranked us as the
industry leader of point-of-sale terminals, based on unit shipments, in 2000.

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. The information on our website is neither
incorporated by reference into, nor a part of, this Report.

The Company

We are a leading global provider of electronic payment solutions that add
value at the point-of-sale for consumers, merchants and acquirers. Our
products include secure card payment terminals and web appliances, networking
equipment and software applications for e-commerce, mobile commerce, smart
cards and traditional payment applications, and micro-ticket leasing
of terminals.

We operate through numerous divisions and more than 30 subsidiaries. Our
principal divisions include:



| |  |  | Hypercom POS USA/Canada, which is responsible for our POS payment
system operations in the U.S. and Canada;                                                    
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Hypercom International, which is responsible for international
marketing, sales and distribution of our POS payment systems and
enterprise networking products;
|
| |  |  | Hypercom Network Systems, which is responsible for our enterprise networking operations;                                                                       
|
| |  |  | Hypercom Manufacturing
Resources which is responsible for all of our manufacturing
operations; and                                                             
|
| |  |  | Golden Eagle Leasing, Inc.,
which is responsible for micro-ticket leasing of terminals.                                                                        

With worldwide headquarters in Phoenix, Arizona, we market our products in
more than 100 countries through a global network of affiliates and offices in
Argentina, Australia, Brazil, Chile, China, Germany, Hong Kong, Hungary,
Mexico, Russia, Singapore, Sweden, the United Kingdom and Venezuela.

We believe that we are the leading provider of POS terminals in the world,
have the largest installed base in Latin America and are the third largest
provider in Asia/Pacific. In 2001, Card Technology Magazine ranked us as the
industry leader based on unit shipments in 2000. Our total card payment systems
provide a fast, flexible and secure global transaction environment. Card-based
payment systems enable users to engage in payment and non-payment activities
such as credit, debit and charge payments, electronic benefit transfers,
loyalty systems, coupon programs and medical claims and payments.

Our Network Systems unit develops, manufactures, markets and supports both
standard and customized networking solutions to support POS systems. Network
Systems also provides custom solutions for general networking purposes.

We are the successor to an Australian company founded in 1978 by George
Wallner, our Chairman and Chief Strategist. The companys operations were
primarily focused on Asian markets until 1987 when the company expanded its
operations into the United States. 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.

During 2001, we entered into a series of significant financing
transactions.

In May 2001, our leasing subsidiary, Golden Eagle Leasing, Inc,
securitized approximately $45 million of its lease receivables through the sale
of those receivables to Golden Eagle Funding Corp, its newly-formed bankruptcy
remote subsidiary.

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In June and July, 2001, we obtained various bridge loans totaling $18.4
million, $10.9 of which subsequently was converted into shares of our common
stock, and sold shares of our common stock to several investors, including some
of the lenders in the bridge loans. In August 2001, we 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 totaling
$20 million, and paid off the remaining $ 7.5 million of the bridge loans with a
portion of the proceeds.

In March 2002, we sold shares of our common stock in a private offering to
select institutional investors and high net worth individuals. We used the net
proceeds of approximately $36,150,000 from the offering to repay $18,750,000 of
outstanding principal and accrued interest on the two term loans under the
credit facility, to repay $3.4 million of outstanding principal and accrued
interest on loans from a director and principal shareholder, and to paydown
$5,035,000 of outstanding principal and accrued interest under the revolving
credit facility. We will use the balance of the net proceeds for general
corporate purposes.

Industry Background

Stand-alone payment terminals were introduced over 18 years ago to provide
the simple task of authorizing a credit card payment. Over the years, they have
evolved from authorization-only devices into small computers capable of
performing numerous applications, such as debit transactions and loyalty
programs.

In recent years, consumers demanding fast, convenient and secure methods
of payment have increasingly preferred card-based payments. The increasing use
of debit, credit and charge cards and the proliferation of new electronic
payment methods and programs are driving the need for POS payment systems
which:



| |  |  | support a wide array of payment and program options,                                               
| | - |  | ---------------------------------------------------------------------------------------------------
|
| |  |  | are scalable, flexible and cost-effective,                                                         
|
| |  |  | provide fast, secure data transmission, and                                                        
|
| |  |  | can work with existing legacy systems, which form the backbone of the electronic payments industry.

Many of todays installed base of POS terminals are relatively old and, we
believe, need to be replaced to handle the increased volume and data-intensive
applications which are projected for the POS market. In addition, the
components of current POS payment systems typically are supplied by multiple
vendors, which may affect interoperability, scalability and upgradeability.

New electronic payment technologies are expected to facilitate the
introduction of additional electronic payment applications. These include
sophisticated customer loyalty programs and stored value (or smart) cards,
and the use of POS systems in new vertical industries, such as health care and
the electronic payment of government benefits, which is already available in
several states and is required to be available for federal programs.

In addition, merchants and banks are working together to eliminate
processes which are costly and time consuming by combining legacy and new POS
systems, including the use of the POS terminal for processing checks (check
truncation) and retrieval of electronic signatures or receipts. In addition,
the developing infrastructures of emerging markets, such as those in Eastern
Europe, Russia and China, are expected to contribute to the increasing demand
for electronic payment products.

Today, the emerging trend in payment processing is toward
customer-activated transaction terminals. As a result, the personal
identification number entry device or PIN pad is being replaced by a
touch-screen terminal that faces the customer. In addition to traditional
financial transactions, the touch-screen terminal supports many new
customer-activated applications such as loyalty programs. Management believes
that this trend will initiate and sustain a replacement cycle as merchants will
be motivated to upgrade their existing terminals.

According to the Nilson Report newsletter, based in Oxnard, California,
four card-based systems  credit, debit, stored value and electronic benefits
transfer  accounted for 25.6% of total consumer payments in 1998 up from 24.0%
in 1997. By 2010, their share will increase to 47.1%. The biggest gain in
market share of card payments will come from debit cards whose steadily
increasing usage has the biggest effect on the declining use of checks and cash
at the point of sale. Between 1998 and 2010 debit card volume will grow by
780%, credit card volume will increase by 163%, electronic benefit transfer
card volumes will increase by 444% (as these cards

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replace paper food stamps), and stored-value cards (prepaid) card volume
will increase by 481%. By 2005, stored-value and electronic benefit transfer
cards will become larger payment systems than travelers checks and official
checks are now.

Card payments through transaction terminals remain a critical application
and they require specialized and secure payment devices that will continue to
occupy a place on the merchant countertop. But the trend is toward
cardholder-activated transactions. There is also an increased demand for
electronic receipt capture. Additionally, the Internet has generated more
e-commerce opportunities for merchant websites, advertising and loyalty
programs. The combination of these demands has created the need for POS
terminals to do more than just process payments with cards. The POS terminal is
becoming a dual-function delivery platform  both an interactive payment device
and an Internet appliance.

Products and Services

We provide system-level products and services to our electronic
transaction customers, including POS terminals and peripherals, PIN pads,
network access controllers and Internet-enabled, value-added applications. We
offer our customers a full range of functionality, from the basic to advanced,
and can also provide networking and Internet functionality. In addition, we
provide POS support services.

Our terminal products include stand-alone terminals, compact terminals
that have integrated printers and wireless terminals for specific industry
applications, such as automobile rental, restaurants and temporary merchant
locations. Our terminal products are designed for use with magnetic stripe
cards, such as typical credit, debit or charge cards, as well as with smart or
chip cards. Terminal functionality ranges from routine tasks, such as credit or
debit authorization, electronic draft capture and electronic batch submission
and settlement, to high level functions, such as customer loyalty programs,
eligibility checking for health insurance or government benefits, time and
attendance data collection reporting and Internet access through the terminal.
These products feature a modular design to allow for easy upgrades as new
technologies become available.

The principal peripheral products that interface with our terminals
include printers, PIN pads, receipt capture devices and communications
products. Printers enable printing of customer receipts. PIN pads allow
acceptance of magnetic-stripe and chip card-based debit cards and other forms
of payment requiring a personal identification number, and allow for support of
customer-activated stored value.

Point-of-Sale

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 lets merchants 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 e-mail, on-screen advertising,
interactive electronic coupons, interactive loyalty programs, electronic
receipt capture, branding programs and e-commerce.

Hypercom
ICE Products.Our ICE family of products consist of
powerful, multi-function touch-screen terminals incorporating a high-speed
thermal printer, paper cutter, and our FastPOS modem technology. Our ICE
terminal provides financial transaction technology incorporated with
Internet-enabled functions and a highly interactive and intuitive user
interface to support complex transactions with minimal user training.

In addition to traditional credit and debit functions, the ICE terminal is
designed to support payment options such as smart cards, and develop new
business opportunities through customer loyalty management systems. Products in
this family include the ICE 5000 and ICE 5500, 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.

These ICE models utilize FastPOS, our 9600 bits per second (bps) modem
technology, which facilitates transactions in approximately 6 seconds or less,
and accommodates new, data-intensive applications such as electronic receipt
capture. The ICE terminals are also used in conjunction with proprietary
transaction software, which, among other features, includes functionality for
secure Internet payments.

FastPOS. FastPOS is a fast-train modem that operates at 9600 bps,
which is four to eight times faster than the 1200/2400 bps industry standard,
thus providing a competitive advantage.

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ePicPortz Software.ICE terminals and ePicPortz (formerly called
Ascendent), a comprehensive family of front-end client/server payment and data
transaction processing software, supports electronic receipt capture,
advertising at the point of sale and customer loyalty programs.

With
our ePicPortz 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.
Onscreen messages can inform, 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.

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.

ePicPortz RealPay is e-commerce payment processing software that
enables Internet acquirers to cost effectively engage in secure online payment
and transaction processing. RealPay helps Internet acquirers deploy and manage
complex electronic and advanced financial applications. By using an advanced,
modular design, RealPay provides a comprehensive set of financial interfaces
that can be integrated into the existing technical infrastructure of a legacy
system.

ePicNetz

ePicNetz, Inc. is our application service provider unit and is integral to
our overall ePic corporate initiative. ePicNetz services are currently
offered in two packages. The basic merchant service package has electronic
receipt capture, an e-mail product, and an idle screen feature, which allows
the merchant, bank or processor to take advantage of idle time on the terminal
and project ads at the point of sale. The other package seeks to join the
e-commerce world with the physical point of sale. The terminal can be tied
directly to an e-commerce storefront. The merchant will be able to access the
webstore through the terminal, print out a tear sheet, and distribute the
products that have been purchased at their website.

Services and Other Software

We provide 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 clients 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 terminal application software program
produced by us 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 supports

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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.

Networking and Connectivity

Our Integrated Enterprise Networking family of products are Network
Access Controllers that provide the networking hardware technology and
communications infrastructure necessary to achieve, connectivity in the POS
environment. Network Access Controllers 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 Integrated Enterprise
Networking products greatly reduce operating costs, protect investments in
current legacy networks and offer a wide range of network technologies, such as
X.25, frame relay, asynchronous transfer mode, and Integrated Services Digital
Network and protocol interfaces, including SNA and TCP/IP. We deliver
networking solutions for POS systems as well as design and deliver custom
networks. The Network Access Controller product line also includes the
MiniNAC2, which connects automated teller machines, POS terminals and PC or
in-store controllers to existing hosts utilizing standard dial-up access.

Customers

Our POS Systems customers are predominantly large domestic and
international financial institutions, electronic payment processors,
independent sales organizations and resellers. These customers generally have
substantial POS payment system requirements. Our Network Systems customers
generally consist of large financial institutions, retailers, electronic
payment processors, resellers and other enterprises that have substantial
branch networking requirements spanning an average of 200 sites. In any given
year, select customers may account for a significant percentage of net revenue.
Although no one customer accounted for more than 10% of our net revenue for the
year ended December 31, 2001, the two largest customers accounted for 12.7% of
our net revenue and the five largest customers accounted for 22.0% of our net
revenue.

We place special emphasis on offering high-performance,
technologically-advanced POS payment system solutions and networking products
to enable our customers to gain market share in their respective industries.

Sales, Marketing and Distribution

We sell our POS payment system solutions through our direct sales force
and through independent third-party resellers, including financial
institutions, electronic payment processors and service providers. In fiscal
1999, we merged our domestic and international sales, marketing and operations
personnel, which are now managed from our Phoenix, Arizona headquarters.

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.

Financial Information about Industry and Geographic Segments

For detailed financial information concerning our industry segments and
foreign and domestic operations and export sales, refer to Note 16 of the
Consolidated Financial Statements included in this Report.

Leasing Company

In January 2000, our wholly-owned subsidiary, Hypercom Financial, Inc.,
completed the purchase of substantially all of the assets and business and the
assumption of certain liabilities of Golden Eagle LLC, a micro-ticket leasing
organization for POS terminals. Hypercom Financial subsequently changed its
name to Golden Eagle Leasing, Inc. (Golden Eagle). The purchase price paid at
closing was $18.5 million in cash and $4.0 million in our common stock.

Golden Eagle is focused on providing micro-ticket leasing (under $5,000)
through nation-wide vendors of equipment in defined niche markets that are not
served by traditional lessors. Golden Eagle has identified two broad
categories with less competition and price sensitivity than traditional small
ticket markets as its target markets. Credit card authorization equipment is
the primary market serviced by Golden Eagle. The credit card authorization
market targets Independent Sales Organizations (ISOs) and banks which

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provide credit card authorization equipment such as our terminals and
printers, and other non-bank ATM equipment. This market is potentially large,
relatively new and less competitive than other equipment markets.

Golden Eagle also targets distributors and manufacturers of emerging
technology micro-ticket equipment, with a particular focus on its ability to
efficiently fund and service small individual or large multiple transactions
for micro ticket equipment.

Our Golden Eagle leasing business is largely
financed by a lease warehousing facility and the securitization of its lease receivables. See Managements
Discussion and Analysis of Financial Condition and Results of
Operations in
Item 7 of this Report.

Cirilium Corporation

Hypercom Network Systems also designed carrier class gateway products for
the VoIP (Voice over Internet Protocol) market. In December 1999, we and
Inter-Tel Incorporated, a Phoenix-based provider of business telephone systems,
call, voice and data software, services and products, formed a joint-venture
company called Cirilium Corporation to address service provider applications in
the VoIP market. Hypercom Network Systems transferred VoIP assets, technology
and 46 staff resources to Cirilium Corporation. During the third quarter 2000,
we and Inter-Tel became minority owners of Cirilium, and we discontinued
accounting for our investment under the equity method. Under the equity method,
we reported losses arising out of our investment in Cirilium through the nine
months ended September 30, 2000 of $5.8 million. In the quarter ended September
30, 2000, we took a $4.1 million charge, writing off the balance of this
investment. During 2001, Cirilium ceased business operations.

Customer Service and Support

Through our facilities in Phoenix, Arizona, we provide pre- and post-sales
consulting and application software development. In addition, through our
Horizon subsidiary, we provide support, installation services, deployment and
customer support in addition to comprehensive repair facilities for our
products in St. Louis, Missouri.

We provide a five-year warranty on our POS terminal products and one- to
five-year warranties on other products. We believe that our five-year warranty
on POS terminal products has contributed significantly to our reputation for
manufacturing high quality, reliable products, and that this warranty results
in a lower total cost of ownership than competitors products.

Manufacturing

Our primary manufacturing facility is in China, where we manufacture POS
payment systems. We also manufacture POS products at our facilities in Arizona
and Brazil. We also rely on third-party suppliers for certain components of our
POS payment system products.

To control product costs, we centrally manage our material requirements
planning and bills of material from our Phoenix facility on an integrated
computer system, which is networked to all Hypercom manufacturing centers. By
managing our purchasing centrally, we are able to obtain discounts on volume
purchases. We also strive to maintain sufficient flexibility in our purchasing
to allow us to take advantage of favorable pricing in regional markets. Central
management of purchases also assists us in ensuring that quality components are
used in our products. Increased competition and pricing pressure, as well as
rising manufacturing costs, have affected and may continue to affect margins.

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.

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 Australia, Dallas, Texas, Hong
Kong, Singapore, Sweden, Brazil, Russia and the United Kingdom.

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The markets for our products are characterized by changing technology,
evolving industry standards and frequent product introductions. Our management
believes that our future success depends in large part upon our ability to
continue to enhance our existing products and develop new products. We are
dedicated to complying with industry standards and supporting important new
standards as they emerge.

In the periods ended December 31, 2001 and 2000, our research and
development expenditures were $29.1 million and
$41.0 million, respectively. To
date, a substantial majority of our research and development costs have been
expensed as incurred. Beginning in the third quarter of fiscal 1999, we began
capitalizing costs in relation to the development of specific software
enhancements related to our ePicPortz software products. For the years ended
December 31, 2001 and 2000, the six months ended December 31, 1999 and fiscal
1999, we capitalized approximately $0, $0.2 million, $0.7 million, and $2.0
million, respectively, related to ePicPortz software products. Additionally,
during the years ended December 31, 2001 and 2000 and the six months ended
December 31, 1999, we capitalized $0.6 million, $2.3 million and $0.8 million,
respectively, of development costs related to the development of our Windows
CE, Web Browser and multi-lane products. Amortization of software development
costs amounted to $1.4 million, $0.9 million, $0.4 million, and $0 for the
years ended December 31, 2001 and 2000, the six months ended December 31, 1999
and for the fiscal year ended June 30, 1999, respectively. During 2001 we
significantly reduced our expenditures for research and product development.

Seasonality

We continue to experience some degree of seasonality. For this reason, net
revenue and results of operations are stronger from July to December
reflecting:



| |  |  | 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 and are becoming
increasingly more 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 telephone 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.

We compete with companies such as IBM, Siemens, NCR, ICL and Micros in the
overall POS marketplace. In the POS terminal portion of the marketplace our
primary competitors are VeriFone, Inc., a privately held domestic company, and
Ingenico, a France-based company.

Many of our current and potential competitors have significantly greater
financial, technical and marketing resources than us, as well as better name
recognition and a larger customer base. As a result, they may be able to devote
greater resources to the development, promotion, sale and support of their
products than us. We often face additional competitive factors in foreign
countries, including preferences for national vendors and difficulties in
obtaining necessary certifications and in meeting the requirements of
government policies. 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.

We currently hold patents issued in the U.S. and several other countries
relating to a POS terminal configured with a substantial portion of its
functionality at a remote processor and to a POS terminal with replaceable
printer cartridge. We have determined to abandon our United States and foreign
patents relating to the POS terminal with replaceable printer cartridge. The
remote processor-related patents will expire: (i) in 2015 in the United States
and the Philippines (ii) in 2016 in Australia, Canada, Japan, Mexico, New

9



---



##### Table of Contents



Zealand, the Czech Republic, Hungary, Poland, the Russian Federation,
Singapore, South Africa and Turkey, and (iii) in 2017 in South Korea. 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.

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, 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:



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

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

Employees

As of December 31, 2001, we employed 1,209 persons, including, in the
U.S., 104 in manufacturing, 109 in service and support, 57 in sales and
marketing, 117 in research and development and 114 in finance and
administration. The remaining 708 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.

10



---



##### Table of Contents



Executive Officers of the Registrant

The following are the executive officers of the Company as of March 25,
2002:

George Wallner, 50:Chairman of the Board of Directors and Chief
Strategist since November 1, 2000; July 1, 1999  October 31, 2000, Chief
Executive Officer and President; 1978  June 30, 1999, Chairman of the Board of
Directors and Chief Technologist.

Christopher S. Alexander, 53:President and Chief Executive Officer since
November 1, 2000; July 1, 1999  October 31, 2000, President of Hypercom
Transaction Systems Group; 1998-1999, Chief Operating Officer, Hypercom
Corporation; 1993-1998 Chief Operating Officer of Hypercom International.

Jonathon E. Killmer, 60:Chief Operating Officer since November 1, 2000
as well as Chief Financial Officer and Chief Administrative Officer of Hypercom
Corporation since January, 1999; Senior Vice President, Chief Financial Officer
and Treasurer of Digi International Inc. from October 1996 to October 1998;
Managing Partner of the Minneapolis/St. Paul Coopers & Lybrand L.L.P., (now
PricewaterhouseCoopers) office from October 1990 to September 1996.

Jairo E. Gonzalez, 39:President of Hypercom Transaction Systems Group
since November 1, 2000; President of Hypercoms Emerging Markets group,
1999-2000, also served as interim President of ePicNetz, Inc., an applications
service provider (ASP) unit of Hypercom Corporation; 1990 to 1999 President,
Hypercom International.




Item 2.Properties

Our principal administrative facility is located in Phoenix, Arizona,
where we own an approximate 142,000 square foot building. We lease an adjacent
23,800 square foot building for Hypercom Network Systems. The lease expires
August 31, 2011.

We lease an approximate 15,000 square foot facility in Sydney, Australia,
own an approximate 23,000 square foot office floor in Hong Kong, and occupy an
approximately 17,000 square foot facility in Brazil pending the closing of our
purchase of an approximately 102,000 square foot facility in Brazil. The Brazil
facility is utilized for additional POS manufacturing capacity.

We also lease office space in Arizona, Connecticut, Florida, Georgia,
Maryland, Missouri and New York. Facilities in Texas, China, Singapore, Sweden,
Japan, Chile, Argentina, Venezuela, Mexico, Russia, Hungary and the United
Kingdom, all are dedicated primarily to POS sales and support, with the
exception of China, which contains our primary manufacturing facility. We
believe that our facilities are adequate for our operations and will be
sufficient for the foreseeable future.




Item 3.Legal Proceedings

From time to time, we may become involved in routine litigation.
Currently, we are not a party to any material legal proceedings.




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 2001.

11



---



##### Table of Contents






PART II




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

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

|                    |  |      |        |     |  |   |        | 
|------------------- |  | ---- | ------ | --- |  | - | ------ | 
|                    |  | High |        | Low
|                    |  |      |        |    
|Year Ended 12/31/01 |  |      |        |     |  |   |        | 
|                   
|                   
|                   
|                   
|First Quarter       |  | $    | 7.250  |     |  | $ | 3.350  | 
|Second Quarter      |  |      | 5.500  |     |  |   | 2.700  | 
|Third Quarter       |  |      | 6.490  |     |  |   | 3.900  | 
|Fourth Quarter      |  |      | 7.500  |     |  |   | 3.350  | 
|                   
|                   
|                   
|                   
|Year Ended 12/31/00 |  |      |        |     |  |   |        | 
|                   
|                   
|                   
|                   
|First Quarter       |  | $    | 18.625 |     |  | $ | 10.000 | 
|Second Quarter      |  |      | 17.000 |     |  |   | 12.188 | 
|Third Quarter       |  |      | 14.500 |     |  |   | 9.188  | 
|Fourth Quarter      |  |      | 10.750 |     |  |   | 2.750  | 

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 6. Managements Discussion and Analysis of Financial
Condition and Results of Operations  Liquidity and Capital Resources.

As of March 24, 2002, we had approximately 66 stockholders of record and
approximately 3000 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 prospectus 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.

12



---



##### Table of Contents



|                                                                                                                             |  |                                       |         |              |  |              |         |              |  |              |         |      |  |                  |         |               |  |   |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|---------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------- | ------- | ------------ |  | ------------ | ------- | ------------ |  | ------------ | ------- | ---- |  | ---------------- | ------- | ------------- |  | - | ------- | - |  | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                                                                                             |  |                                       |         |              |  |              |         |              |  |              |         |      |  | Six Month Period |         |               |  |   |         |   |  |   |         |   |  |  
|                                                                                                                             |  |                                       |         |              |  |              |         |              |  |              |         |      |  | Ended            |         | Twelve Months |  |   |         |   |  |   |         |  
|                                                                                                                             |  | Years Ended June 30,                  |         | December 31, |  | Ended        |         | Year Ended   |  | Year Ended  
|                                                                                                                             |  |                                       |         |              |  | December 31, |         | December 31, |  | December 31,
|                                                                                                                             |  | 1997                                  |         | 1998         |  | 1999         |         | 1998         |  | 1999         |         | 1999 |  | 2000             |         | 2001         
|                                                                                                                             |  |                                       |         |              |  |              |         |              |  |              |         |      |  |                  |         |              
|                                                                                                                             |  | (in thousands, except per share data)
|Statements of
Operations Data:                                                                                               |  |                                       |         |              |  |              |         |              |  |              |         |      |  |                  |         |               |  |   |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|Net revenue                                                                                                                  |  | $                                     | 196,742 |              |  | $            | 257,227 |              |  | $            | 261,515 |      |  | $                | 136,577 |               |  | $ | 149,282 |   |  | $ | 274,220 |   |  | $ | 327,560 |   |  | $ | 291,704 |  
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|Costs of revenue(1)                                                                                                          |  |                                       | 103,672 |              |  |              | 130,475 |              |  |              | 141,831 |      |  |                  | 68,884  |               |  |   | 81,177  |   |  |   | 154,124 |   |  |   | 212,156 |   |  |   | 193,573 |  
|                                                                                                                             |  |                                       |         |              |  |              |         |              |  |              |         |      |  |                  |         |               |  |   |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|Gross profit                                                                                                                 |  | $                                     | 93,070  |              |  | $            | 126,752 |              |  | $            | 119,684 |      |  | $                | 67,693  |               |  | $ | 68,105  |   |  | $ | 120,096 |   |  | $ | 115,404 |   |  | $ | 98,131  |  
|                                                                                                                             |  |                                       |         |              |  |              |         |              |  |              |         |      |  |                  |         |               |  |   |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|Percent of net
revenue                                                                                                       |  |                                       | 47.3    | %            |  |              | 49.3    | %            |  |              | 45.8    | %    |  |                  | 49.6    | %             |  |   | 45.6    | % |  |   | 43.8    | % |  |   | 35.2    | % |  |   | 33.6    | %
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|Research and
development                                                                                                     |  | $                                     | 12,926  |              |  | $            | 23,495  |              |  | $            | 30,249  |      |  | $                | 15,850  |               |  | $ | 19,637  |   |  | $ | 34,036  |   |  | $ | 41,039  |   |  | $ | 29,107  |  
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|Selling, general and
administrative                                                                                          |  |                                       | 52,530  |              |  |              | 72,506  |              |  |              | 74,772  |      |  |                  | 35,253  |               |  |   | 43,505  |   |  |   | 83,024  |   |  |   | 97,408  |   |  |   | 79,971  |  
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|Non-cash
compensation(2)                                                                                                     |  |                                       | 4,784   |              |  |              | 10,963  |              |  |              |        |      |  |                  |        |               |  |   |        |   |  |   |        |   |  |   |        |   |  |   |        |  
|                                                                                                                             |  |                                       |         |              |  |              |         |              |  |              |         |      |  |                  |         |               |  |   |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|                                                                                                                             |  | $                                     | 70,240  |              |  | $            | 106,964 |              |  | $            | 105,021 |      |  | $                | 51,103  |               |  | $ | 63,142  |   |  | $ | 117,060 |   |  | $ | 138,447 |   |  | $ | 109,078 |  
|                                                                                                                             |  |                                       |         |              |  |              |         |              |  |              |         |      |  |                  |         |               |  |   |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|Income (loss) from
operations(3)                                                                                             |  | $                                     | 22,830  |              |  | $            | 19,788  |              |  | $            | 14,663  |      |  | $                | 16,590  |               |  | $ | 4,963   |   |  | $ | 3,036   |   |  | $ | (23,043 | ) |  | $ | (10,947 | )
|                                                                                                                             |  |                                       |         |              |  |              |         |              |  |              |         |      |  |                  |         |               |  |   |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|Net income (loss)(3)                                                                                                         |  | $                                     | 15,562  |              |  | $            | 13,989  |              |  | $            | 9,173   |      |  | $                | 12,359  |               |  | $ | 5,385   |   |  | $ | 2,199   |   |  | $ | (30,950 | ) |  | $ | (19,908 | )
|                                                                                                                             |  |                                       |         |              |  |              |         |              |  |              |         |      |  |                  |         |               |  |   |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|Net income (loss) per
share(4)                                                                                               |  | $                                     | 0.60    |              |  | $            | 0.44    |              |  | $            | 0.27    |      |  | $                | 0.36    |               |  | $ | 0.16    |   |  | $ | 0.06    |   |  | $ | (0.91   | ) |  | $ | (0.54   | )
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|Shares used in
calculations                                                                                                  |  |                                       | 25,754  |              |  |              | 31,830  |              |  |              | 34,428  |      |  |                  | 34,549  |               |  |   | 34,446  |   |  |   | 34,436  |   |  |   | 34,184  |   |  |   | 36,643  |  
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|Balance Sheet
Data:                                                                                                          |  |                                       |         |              |  |              |         |              |  |              |         |      |  |                  |         |               |  |   |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|Cash and equivalents                                                                                                         |  | $                                     | 16,318  |              |  | $            | 55,659  |              |  | $            | 36,727  |      |  | $                | 37,795  |               |  | $ | 26,093  |   |  | $ | 26,093  |   |  | $ | 13,008  |   |  | $ | 13,402  |  
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|Working capital                                                                                                              |  |                                       | 61,972  |              |  |              | 186,799 |              |  |              | 162,152 |      |  |                  | 178,879 |               |  |   | 156,991 |   |  |   | 156,991 |   |  |   | 75,218  |   |  |   | 133,806 |  
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|Total assets                                                                                                                 |  |                                       | 138,741 |              |  |              | 259,577 |              |  |              | 276,280 |      |  |                  | 270,410 |               |  |   | 297,777 |   |  |   | 297,777 |   |  |   | 369,237 |   |  |   | 337,694 |  
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|Short and long term
debt                                                                                                     |  |                                       | 24,570  |              |  |              | 1,797   |              |  |              | 10,878  |      |  |                  | 2,188   |               |  |   | 10,830  |   |  |   | 10,830  |   |  |   | 100,391 |   |  |   | 67,888  |  
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|Total shareholders
equity                                                                                                   |  |                                       | 60,894  |              |  |              | 220,431 |              |  |              | 226,023 |      |  |                  | 228,323 |               |  |   | 231,734 |   |  |   | 231,734 |   |  |   | 208,147 |   |  |   | 211,369 |  
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|Other Data on
Direct-Finance
Leases:                                                                                         |  |                                       |         |              |  |              |         |              |  |              |         |      |  |                  |         |               |  |   |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|Average net investment
in direct-finance
leases(5)                                                                           |  |                                       |         |              |  |              |         |              |  |              |         |      |  |                  |         |               |  |   |         |   |  |   |         |   |  | $ | 51,428  |   |  | $ | 50,782  |  
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|Gross direct-finance
lease
originations(6)                                                                                   |  |                                       |         |              |  |              |         |              |  |              |         |      |  |                  |         |               |  |   |         |   |  |   |         |   |  |   | 67,488  |   |  |   | 27,656  |  
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|Net cash fundings of
direct-finance
leases(7)                                                                                |  |                                       |         |              |  |              |         |              |  |              |         |      |  |                  |         |               |  |   |         |   |  |   |         |   |  |   | 42,310  |   |  |   | 18,061  |  
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|Average yield on
direct-finance
leases(8)                                                                                    |  |                                       |         |              |  |              |         |              |  |              |         |      |  |                  |         |               |  |   |         |   |  |   |         |   |  |   | 27.4    | % |  |   | 27.6    | %
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|Provision for losses on
direct-finance
leases(9)                                                                             |  |                                       |         |              |  |              |         |              |  |              |         |      |  |                  |         |               |  |   |         |   |  |   |         |   |  |   | 11,682  |   |  |   | 18,371  |  
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|Net charge-offs(10)                                                                                                          |  |                                       |         |              |  |              |         |              |  |              |         |      |  |                  |         |               |  |   |         |   |  |   |         |   |  |   | 5,713   |   |  |   | 11,288  |  
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|Net charge-offs as a
percentage of average
net investment in
direct- finance
leases(11)                                      |  |                                       |         |              |  |              |         |              |  |              |         |      |  |                  |         |               |  |   |         |   |  |   |         |   |  |   | 11.1    | % |  |   | 22.2    | %
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|Provision for credit
losses on direct
finance leases as a
percentage of average
net investment in
direct- finance
leases(11) |  |                                       |         |              |  |              |         |              |  |              |         |      |  |                  |         |               |  |   |         |   |  |   |         |   |  |   | 22.7    | % |  |   | 36.2    | %
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|Allowance for credit
losses as a
percentage of net
investment in direct-
finance leases(11)                                  |  |                                       |         |              |  |              |         |              |  |              |         |      |  |                  |         |               |  |   |         |   |  |   |         |   |  |   | 3.5     | % |  |   | 12.1    | %



---

|(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.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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##### Table of Contents



|(2)  |  | 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 and no charge
was incurred in the third and fourth quarters of fiscal 1998.                                                                                                                                                                                                                                                                
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
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|(3)  |  | 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.
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|(4)  |  | Per share data is diluted per share, except for the years ended December
31, 2000 and 2001, as the effect of common stock equivalents in those
years was anti-dilutive.                                                                                                                                                                                                                                                                                                                                                                          
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|(5)  |  | Represents the average of the net investment in direct-finance leases,
excluding initial direct costs and the allowance for credit losses.                                                                                                                                                                                                                                                                                                                                                                                                       
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|(6)  |  | Represents the amount paid out upon funding leases plus the associated
unearned income.                                                                                                                                                                                                                                                                                                                                                                                                                                                          
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|(7)  |  | Represents the amount paid out upon funding leases.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
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|(8)  |  | 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.                                                                                                                                                                                                                                                                                                                                                    
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|(9)  |  | 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 Report.                                                                                                                                    
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|(10) |  | 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.                                                                                                                                                                                                   
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|(11) |  | 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 in fiscal 1999, each of our two quarters in
the six months ended December 31, 1999 and each of our four
quarters in the years ended
December 31, 2000 and 2001, refer to note 19 of our audited consolidated
financial statements for the year ended December 31, 2001 appearing elsewhere
in this Report.




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,
2001. 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.

For comparability purposes, certain portions of the following discussion
make reference to comparisons between the year ended December 31, 2000 and both
the twelve months ended December 31, 1999 and the fiscal year ended June 30,
1999. The comparison to the fiscal year ended June 30, 1999 is required
pursuant to Item 303 of Regulation S-K. Although both represent twelve month
periods, we believe that a comparison to the twelve months ended December 31,
1999 is meaningful as it is a more recent period and it represents an identical
year-over-year comparison.

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Results of operations for the twelve months ended December 31, 1999 are
unaudited. We changed our year end to December 31 and reported audited results
for the six-month period ended December 31, 1999, in our Transition Report on
Form 10-K. The amounts for the twelve months ended December 31, 1999,
referenced below were derived by combining the final six months of the year
ended June 30, 1999 (as were presented in Forms 10-Q and 10-K for the
respective periods), with the six-month period ended December 31, 1999.

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 judgements and our
estimates, including those related to bad debts, product returns, long-term
contracts, inventories, goodwill and other intangible assets, income taxes,
warranty obligations, financing operations, 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. 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.

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.

Long-term contracts

We are involved in one long-term contract with the Brazil Health Ministry
requiring substantial performance of customized software and hardware, the
revenues of which, have been less than 10% of total revenues for fiscal years
2001 and 2000. We recognize revenues and an estimated gross profit upon the
attainment of scheduled performance milestones. The estimated gross profit 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 the agreed upon
contract revenue. 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.
Recognized gross profits are subject to revisions as the contract progresses to
completion. Revisions in profit estimates are charged to income in the period
in which the facts that give rise to the revision become known.

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Goodwill and Other Intangible Assets

In assessing the recoverability of our goodwill and other intangibles we
must make 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 assets. On January 1, 2002 we adopted
Statement of Financial Accounting Standards No. 142 Goodwill and Other
Intangible Assets, (SFAS No. 142) and will be required to analyze our goodwill for impairment
issues during the first six months of 2002, and then on a periodic basis
thereafter. Our most significant concentration of goodwill relates to Golden
Eagle, in the net amount of $20.4 million at December 31, 2001. There could be
an impairment charge as a result of adopting SFAS No. 142.

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

Deferred Taxes

The carrying value of our net deferred tax assets assumes that we will be
able to generate sufficient future taxable income in certain tax jurisdictions,
based on estimates and assumptions. If these estimates and related assumptions
change in the future, we may be required to record additional valuation
allowances against our deferred tax assets resulting in additional income tax
expense in our consolidated statement of operations. We evaluate the
realizability of the deferred tax assets and need for additional valuation
allowances quarterly.

Warranty obligations

We provide for the estimated cost of product warranties at the time
revenue is recognized. While we engage in extensive product quality inspections
and processes, our warranty obligation is affected by product failure rates and
repair costs to correct product failures. Should actual product failure rates,
or repair costs differ from our estimates, revisions to the estimated warranty
liability would be required. The warranty liability is included in accrued
liabilities in our consolidated balance sheets.

Financing Operations

Financing operations include the activities of our direct-finance lease
subsidiary, 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. 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 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.

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 52.4% for the year ended December 31,
2001.

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

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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 currently in
our statements of operations.

As a policy, we hedge the translation of our net investments in foreign
subsidiaries. Generally we will enter into forward contracts with our banks 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
attempted, when possible, to use natural hedges (offsetting local currency
assets against liabilities) to mitigate our translation losses. As soon as
practicable, we will again enter into financial instruments to hedge our net
investments in foreign subsidiaries.

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, 2001. We rely on our
in-house counsel and outside counsel to advise us about ongoing litigation
matters. Based upon information available at this time, we believe our current
litigation matters will not have a material adverse effect on the results of
operations and our financial condition.

Overview

We are a leading global provider of point-of-sale terminals and electronic
payment solutions for consumers, merchants, and acquirers, such as banks and
processing companies. In recent periods, our financial performance has been
affected by a number of factors, including most notably the following:



| |  |  | Over the past few years, until recently, our industry has been
characterized by relatively limited technological advances. In 1998, we
began development of a new generation of screen-based terminals that
provide significant enhancements over legacy products. Our new products
use our proprietary ePic platform, which enables vendors to provide
loyalty programs, capture receipts electronically, accept mail orders
via e-mail and provide other value added services or features at the
point-of-sale. We expended significant amounts in research and
development in connection with this platform. We also absorbed
significant manufacturing costs during the latter half of 2000 related
to the introduction of these new products, their initial higher cost to
manufacture in the United States, the transition of manufacturing to
China, and product reworking and stabilization. We believe that our
ePic products are gaining rapidly in market acceptance, that margins
on these products should continue to improve, and that research and
development costs as a percentage of sales should decline.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | 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
million and networking technology, and Inter-Tel contributed $6 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 will not record any further losses in conjunction
with this investment.                                                                                                      
|
| |  |  | In January 2000, we acquired Golden Eagle LLC (now Golden Eagle
Leasing, Inc.), a micro-ticket leasing operation which provides lease
financing to merchants for point-of-sale terminals and other small
business products. This operation required significantly more cash than
anticipated, did not perform as expected, and hampered both our
liquidity and profitability during 2000. In the second quarter of 2001,
we effected a securitization transaction to alleviate some of the
liquidity pressures relating to this business.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  |  | As a result of losses during 2000, in the third quarter of that year,
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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

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| |   |  | 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. We completed a series of financing and equity
measures during the first and second quarters of 2001 in order to alleviate
our liquidity constraints. These 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 payment of the interim borrowings with our common stock. Such
financing and equity measures amounted to $25.9 million. The borrowings
also included the issuance of stock warrants, which contributed to our
higher interest costs. In addition, we completed a refinancing of our
principal credit facility in August 2001, the terms of which are described
in Liquidity and Capital Resources below. Although these facilities
provided us with increased liquidity, they were relatively expensive
sources of capital. Consequently, and as more fully described in Note 20
to our consolidated financial statements, we paid off a significant portion
of these facilities with proceeds from a private equity offering completed
in March 2002.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | During 2001, one of our 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. This charge was
recorded in costs of revenue and is further discussed in our comparison
of the years ended December 31, 2001 and 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

The following should be read in light of these matters.

Results of 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.

|                                                            |  |              |       |               |  |              |       |                |  |      |       |      |  |            |       |              |  |  |       |   |  |  |       |   |  |  |       |  
|----------------------------------------------------------- |  | ------------ | ----- | ------------- |  | ------------ | ----- | -------------- |  | ---- | ----- | ---- |  | ---------- | ----- | ------------ |  |  | ----- | - |  |  | ----- | - |  |  | ----- | -
|                                                            |  |              |       |               |  |              |       |                |  |      |       |      |  | Six Months |       | Fiscal Years
|                                                            |  | Years Ended  |       | Twelve Months |  | Ended        |       |               
|                                                            |  | December 31, |       | Ended         |  | December 31, |       | Ended June 30,
|                                                            |  |              |       | December 31,  |  |              |       |               
|                                                            |  | 2001         |       | 2000          |  | 1999         |       | 1999           |  | 1998 |       | 1999 |  | 1998      
|                                                            |  |              |       |               |  |              |       |                |  |      |       |      |  |           
|Net revenue                                                 |  |              | 100.0 | %             |  |              | 100.0 | %              |  |      | 100.0 | %    |  |            | 100.0 | %            |  |  | 100.0 | % |  |  | 100.0 | % |  |  | 100.0 | %
|                                                           
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|Costs of revenue                                            |  |              | 66.4  |               |  |              | 64.8  |                |  |      | 56.2  |      |  |            | 54.4  |              |  |  | 50.4  |   |  |  | 54.2  |   |  |  | 50.7  |  
|                                                            |  |              |       |               |  |              |       |                |  |      |       |      |  |            |       |              |  |  |       |   |  |  |       |   |  |  |       |  
|Gross profit                                                |  |              | 33.6  |               |  |              | 35.2  |                |  |      | 43.8  |      |  |            | 45.6  |              |  |  | 49.6  |   |  |  | 45.8  |   |  |  | 49.3  |  
|                                                           
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|Research and development                                    |  |              | 10.0  |               |  |              | 12.5  |                |  |      | 12.4  |      |  |            | 13.2  |              |  |  | 11.6  |   |  |  | 11.6  |   |  |  | 9.1   |  
|                                                           
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|Selling, general and administrative                         |  |              | 27.4  |               |  |              | 29.7  |                |  |      | 30.3  |      |  |            | 29.1  |              |  |  | 25.8  |   |  |  | 28.6  |   |  |  | 28.2  |  
|                                                           
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|Non-cash compensation                                       |  |              |      |               |  |              |      |                |  |      |      |      |  |            |      |              |  |  |      |   |  |  |      |   |  |  | 4.3   |  
|                                                            |  |              |       |               |  |              |       |                |  |      |       |      |  |            |       |              |  |  |       |   |  |  |       |   |  |  |       |  
|Income (loss) from operations                               |  |              | (3.8  | )             |  |              | (7.0  | )              |  |      | 1.1   |      |  |            | 3.3   |              |  |  | 12.2  |   |  |  | 5.6   |   |  |  | 7.7   |  
|                                                           
|                                                           
|                                                           
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|Interest and other income net of
interest and other expense |  |              | (3.9  | )             |  |              | (0.9  | )              |  |      | 1.3   |      |  |            | 0.8   |              |  |  | 1.7   |   |  |  | 1.8   |   |  |  | 0.7   |  
|                                                           
|                                                           
|                                                           
|                                                           
|Foreign currency loss                                       |  |              | (0.8  | )             |  |              | (0.6  | )              |  |      | (2.2  | )    |  |            | (0.2  | )            |  |  | (0.7  | ) |  |  | (2.6  | ) |  |  | (0.7  | )
|                                                           
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|                                                           
|                                                           
|Loss from investment in equity
affiliate                    |  |              |      |               |  |              | (3.0  | )              |  |      |      |      |  |            |      |              |  |  |      |   |  |  |      |   |  |  |      |  
|                                                            |  |              |       |               |  |              |       |                |  |      |       |      |  |            |       |              |  |  |       |   |  |  |       |   |  |  |       |  
|Income (loss) before income taxes                           |  |              | (8.5  | )             |  |              | (11.5 | )              |  |      | 0.2   |      |  |            | 3.9   |              |  |  | 13.2  |   |  |  | 4.8   |   |  |  | 7.7   |  
|                                                           
|                                                           
|                                                           
|                                                           
|Income tax (expense) benefit                                |  |              | 1.7   |               |  |              | 2.0   |                |  |      | 0.6   |      |  |            | (0.3  | )            |  |  | (4.1  | ) |  |  | (1.3  | ) |  |  | (2.3  | )
|                                                            |  |              |       |               |  |              |       |                |  |      |       |      |  |            |       |              |  |  |       |   |  |  |       |   |  |  |       |  
|Net income (loss)                                           |  |              | (6.8  | )%            |  |              | (9.5  | )%             |  |      | 0.8   | %    |  |            | 3.6   | %            |  |  | 9.1   | % |  |  | 3.5   | % |  |  | 5.4   | %
|                                                            |  |              |       |               |  |              |       |                |  |      |       |      |  |            |       |              |  |  |       |   |  |  |       |   |  |  |       |  

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

|                                |        |      |              |      |               |      |              |      |                    |      |      |      |   |      |            |     |   |  |      |     |   |  |      |     |   |  |      |     |  
|------------------------------- | ------ | ---- | ------------ | ---- | ------------- | ---- | ------------ | ---- | ------------------ | ---- | ---- | ---- | - | ---- | ---------- | --- | - |  | ---- | --- | - |  | ---- | --- | - |  | ---- | --- | -
|                                |        |      |              |      |               |      |              |      |                    |      |      |      |   |      | Six Months |     |   |  |      |     |   |  |     
|                                |        |      | Years Ended  |      | Twelve Months |      | Ended        |      | Fiscal Years Ended
|                                |        |      | December 31, |      | Ended         |      | December 31, |      | June 30,          
|                                |        |      |              |      | December 31,  |      |              |      |                   
|Revenues by Region              |        | 2001 |              | 2000 |               | 1999 |              | 1999 |                    | 1998 |      | 1999 |   | 1998
|                                |        |      |              |      |               |      |              |      |                    |      |      |      |   |     
|United States                   |        |      | 47.6         | %    |               |      | 47.6         | %    |                    |      | 49.1 | %    |   |      | 44.4       | %   |   |  | 53.2 | %   |   |  | 53.7 | %   |   |  | 42.9 | %  
|                               
|                               
|                               
|                               
|Latin America (includes Mexico) |        |      | 25.1         |      |               |      | 23.3         |      |                    |      | 23.2 |      |   |      | 26.8       |     |   |  | 26.3 |     |   |  | 22.7 |     |   |  | 29.0 |    
|                               
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|                               
|                               
|Asia/Pacific                    |        |      | 11.7         |      |               |      | 12.2         |      |                    |      | 13.6 |      |   |      | 14.2       |     |   |  | 13.2 |     |   |  | 13.4 |     |   |  | 22.5 |    
|                               
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|                               
|Europe                          |        |      | 15.6         |      |               |      | 16.9         |      |                    |      | 14.1 |      |   |      | 14.6       |     |   |  | 7.3  |     |   |  | 10.2 |     |   |  | 5.6  |    
|                                |        |      |              |      |               |      |              |      |                    |      |      |      |   |      |            |     |   |  |      |     |   |  |      |     |   |  |      |    
|                                | Totals |      |              | 100  | %             |      |              | 100  | %                  |      |      | 100  | % |      |            | 100 | % |  |      | 100 | % |  |      | 100 | % |  |      | 100 | %
|                                |        |      |              |      |               |      |              |      |                    |      |      |      |   |      |            |     |   |  |      |     |   |  |      |     |   |  |      |    

18



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Comparison of Years Ended December 31, 2001 and 2000.

Net revenue for the year ended December 31, 2001, decreased $35.9 million
or 10.9% to $291.7 million from $327.6 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 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, comprised less than 10% of total net revenue in each of the
years ended December 31, 2001 and 2000. Long-term contract revenues during
these periods were derived solely from our contract with the Brazilian Health
Ministry, which commenced in the second half of 2000. Net revenues from this
contract amounted to 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 $18.6 million or
8.8% to $193.6 million from $212.2 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. Gross margin
decreased $17.3 million for the year ended December 31, 2001, compared to 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, in addition to the normal loan loss
provisions recorded in cost of revenues. 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.                                                                                                                                                                                                                                                                                                                                                        

19



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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. However, based on historical default rates and our credit
assessments, we believe collectibility of the minimum lease payments is
reasonably predictable.

Continued losses that exceed historical trends could result in the
substantial impairment of Golden Eagles goodwill, which amounted to $20.4
million, net as of December 31, 2001.

As a percentage of revenue, gross margin decreased from 35.2% for the year
ended December 31, 2000 to 33.6% for the year ended December 31, 2001.
Exclusive of the $7.2 million incremental credit reserve, the gross margin
percentage for the year ended December 31, 2001 increased to 36.1%. 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 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 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 $11.9 million or 29.1% from $41.0 million
for the year ended December 31, 2000 to $29.1 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.

Our sales and marketing expenses, administrative personnel costs, and
facilities operations make up the selling, general and administrative expenses.
These expenses totaled $80.0 million for the year ended December 31, 2001,
compared to $97.4 million for the year ended December 31, 2000. This $17.4
million or 17.9% decrease is attributable to worldwide cost containment
measures, including the reduction of personnel, closing of certain offices
throughout the world and the lowering of administration costs, associated with
having reduced personnel levels, such as employee benefits, recruitment and
information technology, together with the decreased revenue relative to the
same period in the prior year, which results in lower sales commission
expenses.

For the year ended December 31, 2001, the loss from operations of $10.9
million compares to a loss of $23.0 million for the prior year. This
improvement results primarily from reductions in research and development and
selling, general and administrative expenses of $29.3 million offset by the
decrease in gross margin of $17.3 million.

For the year ended December 31, 2001, interest income of $0.6 million
consisted primarily of returns on short and long-term investments. We incurred
interest expense of $9.7 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 and
expense in the amount of $2.4 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 $2.4 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 $5.0 million, or 20.0% of our loss before
income taxes. The benefit for federal state and foreign taxes was
$6.6 million, or 17.7% 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.

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Comparison of year ended December 31, 2000 and the twelve months ended December
31, 1999

Revenues for the year ended December 31, 2000 were $327.6 million, a 19.5%
increase or $53.3 million over the twelve months ended December 31, 1999 and a
25.3% increase or $66.1 million over the fiscal year ended June 30, 1999. The
increase over the twelve months ended December 31, 1999 was due primarily to
increased POS Systems revenue of $34.5 million and $25.4 million of revenue
that resulted from the acquisition of Golden Eagle Leasing, offset by a decline
in revenues of Network Systems of $6.4 million due to the transfer of this
units VoIP operation to Cirilium Corporation, a joint venture formed with
Inter-Tel Incorporated. The increase for the year ended December 31, 2000 over
the fiscal year ended June 30, 1999 was due to increased POS Systems revenue of
$52.9 million, and the $25.4 million of revenues from Golden Eagle Leasing,
offset in part by the decline in revenues of Network Systems by $11.7 million,
as previously explained.

The increase in POS Systems revenue in 2000 reflected continued strong
growth in Europe ($16.9 million increase over the twelve months ended December
31, 1999 and $28.8 million increase over the fiscal year ended June 30, 1999)
and in Latin America ($12.8 million increase over the twelve months ended
December 31, 1999 and $16.9 million increase over the fiscal year ended June
30, 1999). Asia showed a slight decline in growth, while the U.S. remained
flat.

Net revenues from services activities, principally derived from POS
support services, comprised less than 10% of total net revenue in the years
ended December 31, 2000 and 1999. In 1999, none of our net revenues were
attributable to long-term contracts. Our only revenues from long-term contracts
in 2000 were derived from our contract with the Brazilian Health Ministry,
which commenced in the second half of 2000. Net revenues from this contract
accounted for less than 10% of total net revenue in the year ended December 31,
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 Golden Eagles direct
financing leases. Interest expense included in cost of revenues amounted to
$4.9 million for the year ended December 31, 2000. Loan loss provisions
included in cost of revenues amounted to $11.7 million for the year ended
December 31, 2000. Such loan loss provisions represent systematic charges for
uncollectible loans based on historical default rates and managements
assessment of the credit quality of the loan portfolio. 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. The provision amount
for year 2000 was consistent with historical trends and considered ordinary
relative to the quantity and quality of direct finance lease activity through
December 31, 2000.

Gross profit as a percentage of net revenue for the year ended December
31, 2000 decreased to 35.2% for the year ended December 31, 2000 from 43.8% for
the twelve months ended December 31,1999 and from 45.8% for the fiscal year
ended June 30, 1999. This decline in gross margins occurred throughout 2000,
principally due to certain higher component costs, changes in product mix and
competitive pricing pressures. During the year ended December 31, 2000, a
worldwide shortage in key electronic components, such as memory chips, resulted
in an increase in the cost of our raw material terminal components of up to 6%
over 1999. Margins were particularly weak in the three months ended September
30, 2000, due to a significant shift in product mix resulting from the sale of
our new screen-based family of terminals, which at this time produce
significantly lower gross margins than our legacy products. This shift was
directly attributed to the timing at which we could produce the new
screen-based terminals at higher volume levels. The competitive pricing
pressures stem principally from the expanding presence of other terminal and
electronic payment devise vendors throughout the world primarily directed
toward our legacy terminal product line. In addition, due to the introduction
of a significantly expanded product line, we increased our warranty reserves
during the year ended December 31, 2000. We also experienced higher
manufacturing expenses during the year ended December 31, 2000 due to increased
production in the United States, as the new products were initially introduced.
By the end of 2000, substantially all production of the new products had been
moved to our manufacturing facility in China.

Selling, general and administrative expenses for the year ended December
31, 2000 were $97.4 million, or an increase of $14.4 million or 17.3% over the
twelve months ended December 31, 1999 and an increase of $22.6 million or 30.3%
over the fiscal year ended June 30, 1999. This increase is due to our ePicNetz
development activity, overall increased sales activity, plus the impact of the
Golden Eagle Leasing acquisition, including goodwill amortization of
approximately $1.5 million.

Research and development expenses consist primarily of software and
hardware engineering costs and the cost of development personnel. For the year
ended December 31, 2000, research and development expense amounted to $41.0
million, as compared to $34.0 million for the twelve months ended December 31,
1999 or a 20.6% increase, and $30.2 million for the fiscal year ended June 30,
1999 or a 35.7% increase. This increase was due to the planned investment in
new product development intended to maintain our

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competitive edge. Additionally, the impact of various acquisitions for a
full year has resulted in new research and development expenditures relative to
the prior periods.

Income from operations decreased $26.1 million and $37.7 million from the
twelve months ended December 31, 1999 and the fiscal year ended June 30, 1999,
respectively, as the results for the year ended December 31, 2000 produced an
operating loss of $23.0 million. The principal contributors to this reversal
from the operating income of $3.0 million and $14.7 million achieved in the
twelve months ended December 31,1999 and the fiscal year ended June 30, 1999,
respectively, were the decline in gross profit, the increase in research and
development costs and the increase in selling, general and administrative
expenses, including goodwill.

Net interest expense for the twelve months ended December 31, 2000
amounted to $2.8 million, reflecting both higher borrowings to meet working
capital needs and higher interest costs. During 2000, we entered into a $60
million revolving credit agreement provided by a syndicate of banks. The
increased borrowings were required to fund operating losses and to meet demands
for funds from Golden Eagle Leasing, our newly acquired leasing company. Net
interest income for the twelve months ended December 31, 1999 and the fiscal
year ended June 30, 1999 was $3.5 million and $4.7 million, respectively,
reflecting income from short and long-term investments, net of interest expense
incurred related to short term bank borrowings.

The loss from Cirilium of $9.9 million represents our equity share of
Cirilium losses for the year ended December 31, 2000 plus an additional charge
of $4.1 million, related to reserves against operating advances made to
Cirilium and inventory have used for Cirilium production recorded during the
three months ended September 30, 2000. As of December 31, 2000, we have no
remaining basis in our investment in Cirilium. The write-offs were taken as a
result of Ciriliums continuing operating losses. In addition, as a result of
an investment made by Ciriliums CEO, we have become less than a 20% owner of
Cirilium and have discontinued, after September 30, 2000, accounting for our
investment under the equity method.

The foreign currency loss for the year ended December 31, 2000 amounted to
$1.9 million compared to a loss of $6.2 million and $6.8 million for the twelve
months ended December 31, 1999 and the fiscal year ended June 30, 1999,
respectively. The decrease is due in part to the stabilization of the Brazilian
Real as well as to the employment of hedging strategies, which began in the
second quarter of 1999 and are used to mitigate the impact of future foreign
currency fluctuations.

For the year ended December 31, 2000, the income tax benefit for federal,
state and foreign taxes was $6.6 million. The benefit for federal, state and
foreign taxes was $1.8 million for the year ended December 31, 1999 and the
provision for income taxes for the fiscal year ended June 30, 1999 was $3.4
million. Our tax benefit provision 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 in Australia
and the United States, and sales in jurisdictions with lower taxes, or tax
holidays.

Comparison of Six Months Ended December 31, 1999 and 1998

For the six months ended December 31, 1999 and 1998, net revenues
increased 9.3% or $12.7 million from $136.6 million to $149.3 million,
principally due to revenue growth in Europe ($11.8 million), Asia ($3.2
million) and Latin America ($4.1 million). The significant increase in European
sales was due to a rapid expansion of the customer base in an emerging market
for us as well as the acquisition of ICL Financial Terminals in Sweden.
Additionally, new product releases such as the ICE 5000 stimulated increased
sales particularly in the United Kingdom, Turkey, and Eastern Europe. Net
revenue increases in Asia and Latin America are primarily related to the
stabilization of those foreign economies and currencies.

For the six months ended December 31, 1999 and 1998, Network Systems
revenue decreased $5.3 million or 33.3% from $15.9 million to $10.6 million.
The decrease was primarily due to the transfer of this units VoIP operations
to Cirilium. Revenue from Voice over Internet Protocol customers declined in
anticipation of the formation of the new joint venture. In addition, Network
Systems personnel spent significant time planning the reorganization of the
business unit and refocusing the sales and development efforts which
contributed to the reduced revenue from Network Systems for the six-month
period.

Net revenues from service activities, principally derived from POS support
services, during the six months ended December 31, 1999 and 1998 amounted to
less than 10% of total net revenue.

Gross profit as a percentage of net revenue decreased from 49.6% to 45.6%
for the six months ended December 31, 1999 compared to the six months ended
December 31, 1998. The decrease was related to the impact of the acquisition of
substantially all the assets of the Horizon Group Inc. (Horizon). Horizon
typically operates on a much lower gross margin percentage than historical
Hypercom gross margin percentages and, as a result, has a dilutive effect on
overall gross margin. Horizon was acquired on October 1,

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1998 and thus we only included three months of Horizon financial results
in the six-month period ended December 31, 1998. As a result, Horizons
dilutive impact on our gross margin (1.8%) for the six months ended December
31, 1998 was less than for the six months ended December 31, 1999. Horizons
financial results for the six-months ended December 31, 1999 included net
revenue of $14.9 million resulting in a gross margin of $1.4 million or 9.3%.
These results had a much more significant effect (4.0%) on our overall gross
margin for the six months ended December 31, 1999. Additionally, increased
competition and pricing pressure, as well as rising manufacturing costs related
to some electronic component supply shortages have affected, and may continue
to affect, margins.

Selling, general and administrative expense increased 23.4% or $8.2
million to $43.5 million for the six months ended December 31, 1999, compared
to $35.3 million for the comparable six-month period ended December 31, 1998.
These increases were primarily due to additional basic corporate infrastructure
in Phoenix, Arizona related to accounting, legal and human resources and
information systems. Additionally, we incurred significant increases in U.S.,
Asian, and Australian selling expenses, as well as additional overhead related
to the acquisitions of Horizon and ICL Financial Terminals and the
establishment of the ePicNetz services group.

Research and development expense increased 23.9% or $3.8 million to $19.6
million for the six months ended December 31, 1999 compared to $15.8 million
for the six months ended December 31, 1998. This increase was consistent with
our planned investment in new product development intended to maintain our
competitive edge.

Income from operations decreased 70.1% or $11.6 million from $16.6 million
for the six months ended December 31, 1998 to $5.0 million for the six months
ended December 31, 1999. The decrease is directly related to the reduced gross
margins, higher selling, general and administrative expenses, and increased
research and development activities described above.

Net interest income decreased 47.8% or $1.1 million from $2.3 million for
the six months ended December 31, 1998 to $1.2 million for the six months ended
December 31, 1999. The decrease is due to declining cash and short term
investment balances. Interest income consisted primarily of returns on
short-and long-term investments net of interest expense incurred related to
short term bank borrowings.

Foreign currency losses resulted from operating in volatile markets,
principally Brazil. During the six months ended December 31, 1999, we recorded
a $0.4 million loss compared to $1.0 million for the six months ended December
31, 1998. We entered into hedging strategies to mitigate the impact of foreign
currency fluctuations, which resulted in the significant decrease in the loss
for the six months ended December 31, 1999.

The provisions for federal, state and foreign income taxes were $0.4
million and $5.6 million for the six-month periods ended December 31, 1999 and
1998, respectively. Our effective tax rate was approximately 7% and 31% for the
six months ended December 31, 1999 and 1998, respectively. Our tax rate is
typically lower than the US federal statutory rate due to:



| |  |  | sales in foreign jurisdictions with lower rates (particularly in the six months ended December 31, 1999);
| | - |  | ---------------------------------------------------------------------------------------------------------
|
| |  |  | research and experimentation credits in Australia and the US; and                                        
|
| |  |  | the use of foreign sales corporations offering lower taxes on certain international sales.               

Comparison of Fiscal Years Ended June 30, 1999 and 1998

Net revenue in fiscal 1999 increased $4.3 million or 1.7% primarily due to
the acquisition of Horizon in fiscal 1999. The increase in revenue reflected
growth in the United States and Europe where we have been establishing new
sales and service operations. Revenues in Asia and Latin America slowed due to
regional economic conditions and currency devaluation. Net revenues from
service activities, principally derived from POS support services, during the
fiscal years ended June 30, 1999 and 1998 amounted to less than 10% of total
net revenue.

Gross profit as a percentage of net revenue decreased from 49.3% in fiscal
1998 to 45.8% in fiscal 1999. This decrease was due in part to the impact of
Horizon which is a national distributor of equipment for Hypercom and other POS
manufacturers. Horizon historically operates at margins significantly less
(12%-15%) than our historical gross profit margin. In addition, gross profit
also declined due to reduced selling prices as a result of increased worldwide
competitive factors as well as declining economic conditions in some foreign
countries.

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Selling, general and administrative expense increased $2.3 million, or
3.1%, to $74.8 million in fiscal 1999 as we continued to invest in our
worldwide operations, including expanding its headquarters in Phoenix, Arizona,
adding a new distribution center, opening new international sales and support
offices, and expanding and improving our worldwide administrative, financial,
and information technology-related infrastructure.

Research and development expense increased $6.7 million, or 28.7%, to
$30.2 million in fiscal 1999. The increase was primarily for POS product
development as we prepared to introduce in fiscal 1999 our new ICE terminal
products, FastPOS 9600 bps terminals, and ePicPortz client/server software.
Beginning in the third quarter of fiscal 1999, we began capitalizing costs in
relation to the development of specific software enhancements related to its
ePicPortz software products. The amount capitalized in fiscal 1999 was
approximately $2.0 million.

Non-cash compensation was previously charged in connection with a grant of
stock options which included a stock repurchase arrangement. We recorded a
non-cash compensation charge of $11.0 million in the first half of fiscal 1998
and incurred no further charge during the year as the repurchase arrangement
terminated upon the closing of our initial public offering in November 1997.
There was no non-cash compensation charge for fiscal 1999.

Income from operations decreased $5.1 million, or 25.9%, to $14.7 million
in fiscal 1999 due primarily to reduced gross margins, higher selling, general
and administrative expenses and higher research and development expense.

Net interest income for fiscal 1999 increased $2.8 million to $4.6 million
from $1.8 million in fiscal 1998. Interest income consisted primarily of
returns on short and long-term investments net of interest expense incurred
related to short term bank borrowings.

Foreign currency losses resulted from operating in volatile markets,
principally Brazil. During fiscal 1999 we recorded a $4.4 million loss related
to the net monetary asset exposure in Brazil. We have entered into hedging
strategies to mitigate the impact of future foreign currency fluctuations.

The provisions for federal, state, and foreign income taxes were $3.4
million and $5.9 million for the fiscal years ended June 30, 1999 and 1998,
respectively. Our effective rate of tax was 27% and 30% for the fiscal years
ended June 30, 1999 and 1998. Our tax rate is typically lower than the US
federal statutory rate due to:



| |  |  | research and experimentation credits in Australia and the US;                             
| | - |  | ------------------------------------------------------------------------------------------
|
| |  |  | sales in foreign jurisdictions with lower tax rates; and                                  
|
| |  |  | the use of foreign sales corporations offering lower taxes on certain international sales.

Liquidity and Capital Resources

We have historically financed our operations primarily through cash
generated from operations and from borrowings under a line of credit. During
2001 and 2000, we also used securitization conduits to finance lease
receivables generated by our Golden Eagle Leasing subsidiary as well as
borrowings under notes payable to fund working capital requirements and reduce
our bank debt. In August, 2001, we refinanced our primary credit facilities.
See Financing Events During 2001 below. In March 2002, we paid off a
significant portion of our new credit facilities with proceeds from an equity
offering (See Note 20 to the consolidated financial statements). There are
no off balance sheet financings at December 31, 2001.

Year Ended December 31, 2001

As a result of our efforts to cut costs and increase cash flows, cash
flows from operations improved from a negative $25.2 million for the year ended
December 31, 2000, to a positive cash flow from operations of $17.4 million for
the year ended December 31, 2001. This improvement was primarily a result of
cuts in research and development expenses as previously described, and
reductions in accounts receivable balances. Accounts receivable decreased $5.3
million in 2001, net of foreign currency translation, compared to a net
increase of $24.4 million, for the year 2000, as a result of our emphasis on
lowering accounts receivable balances through stricter enforcement of credit
policies and increased collection efforts. Payment terms on our terminal
product sales generally range from net 30 to 60 days depending on the
circumstances of each order. We used $8.1 million in investing activities.
Long-term debt decreased $32.5 million to $67.9 million at December 31, 2001,
from $100.4 million at December 31, 2000. Working capital and cash was

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$133.8 million and $13.4 million, respectively at December 31, 2001,
compared to $75.2 and $13.0 million, respectively at December 31, 2000.

Capital expenditures totaled $3.2 million for the year ended December 31,
2001, compared to $13.8 million for the year ended December 31, 2000.
Depreciation expense was $9.6 million and $8.3 million for the years ended
December 31, 2001 and 2000, respectively. The anticipated capital expenditures
for 2002 are approximately $2.5 million. These expenditures will be primarily
for systems upgrades and office equipment.

We
believe that our existing cash and cash equivalents together with
funds generated from operations and availability under our credit
facility should be sufficient to meet our operating requirements. In
addition, and as further discussed hereafter, we have undertaken
numerous financing measures to address our short and long-term
liquidity and capital needs.

Financing Events During 2001 and Thereafter

On May 24, 2001, our leasing subsidiary, Golden Eagle Leasing, Inc.
securitized approximately $45 million of its equipment leases, based on total
discounted contract balances on the closing date. The securitization was
accomplished through the sale by Golden Eagle Leasing of these receivables on a
non-recourse basis to Golden Eagle Funding Corp., a newly formed bankruptcy
remote company. Golden Eagle Funding issued notes in the principal amount of
approximately $32 million, which are secured by the lease receivables. The
interest rate on the notes is 8.58% per annum and the notes mature on November
16, 2006.

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 March
31, 2002.

In June 2001, we entered into certain interim financing arrangements
pending the completion of the refinancing of our credit facilities. On June 4,
2001, we entered into a Loan Agreement with a group of eight investors pursuant
to which we 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 our 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, we issued to the lenders Series B
Warrants to purchase up to 460,000 shares of our common stock in the aggregate
at an exercise price of $3.16 per share. In addition, on July 30, we 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 our common stock at a price of $4.2975 per share.

On June 6, 2001, we 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, we granted to Michelle Investments a Series A Warrant to
purchase up to 1.0 million shares of our common stock, subject to certain
adjustments, at an exercise price of $3.19 per share. On July 31, 2001, we and
Michelle Investments entered into a Stock Purchase Agreement under which
Michelle Investments purchased 2,475,248 shares of our 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, we repaid the remaining
balance of the loan out of funds available under our new credit facility.

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 Chairman and Chief Strategist and our principal
stockholder, agreed to loan us $3.1 million, of which $1.5 million was loaned
to us in December 2000, and to subordinate these loans to our other
indebtedness, including our new lending facility. This loan was paid off in
full in March 2002 in conjunction with our private placement of common stock
completed on March 22, 2002.

In August 2001, we 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 our private placement of
common stock completed on March 22, 2002. 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
of our domestic subsidiaries, and the guarantors consist of Golden Eagle
Leasing and two of our foreign subsidiaries.

The revolving credit facility, which has a term of three years, bears
interest at the greater of 8% per annum or the prime rate plus 1%, and includes
a $6 million letter of credit sub-facility. At closing, $12 million was
available under the revolving credit facility, after repayment of existing debt
and payment of closing costs. The $5 million term loan bore interest at the
greater of 10% per annum

25



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##### Table of Contents



or the prime rate plus 3%. The $15 million term loan bore interest at the
greater of 14% per annum or the prime rate plus 7%. 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, we have agreed
to, among other things, maintain certain specified financial ratios and
consolidated net worth, not make certain distributions with respect to our
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 us from:



| |  |  | incurring any additional indebtedness;                                                                                       
| | - |  | -----------------------------------------------------------------------------------------------------------------------------
|
| |  |  | incurring or permitting to exist any additional liens on our assets;                                                         
|
| |  |  | engaging in a change of control transaction or other fundamental change, such as a merger, recapitalization or liquidation;  
|
| |  |  | disposing of our assets, including equipment and inventory, outside the ordinary course of business;                         
|
| |  |  | prepaying or modifying the terms of our existing indebtedness, except in connection with a permitted financing;              
|
| |  |  | redeeming, repurchasing or paying dividends or other distributions on our capital stock;                                     
|
| |  |  | engaging in certain transactions with our affiliates;                                                                        
|
| |  |  | failing to maintain specified levels of EBITDA and tangible net worth
and ratios of senior debt and total debt to EBITDA; and
|
| |  |  | issuing or selling any prohibited preferred stock.                                                                           

As partial consideration for the senior secured credit facility, we issued
to Ableco Holding LLC, an affiliate of one of our lenders, a Series C Warrant
to purchase up to 375,000 shares of our common stock at an exercise price of
$4.00 per share. 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.
We also paid to Roth Capital Partners LLC, which assisted us in obtaining our
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. The Series D Warrant is exercisable over a period of five
years. This fee and the value of the Series C and D Warrants will be amortized
as part of the loan costs, and effectively increase our interest rate.

On March 22, 2002, the Company completed a private placement of 7,870,000
shares of its common stock, raising $39.4 million in gross proceeds before
deducting commissions and expenses of the offering of approximately $3.2
million. The shares were not registered with the SEC in reliance upon the
exemption from registration contained in Section 4(2) of the Securities Act of
1933, as amended, as well as similar exemptions contained in the securities
laws, rules and regulations of the applicable states. The shares may not be
re-offered or resold in the United States absent registration, or an applicable
exemption from registration requirements of the 1933 Act. The Company has used
the proceeds to pay off and cancel its term loans from the senior credit
facility, paydown to zero the balance on the revolving line of credit from the
senior credit facility, payoff the balance due to the director and stockholder.
Remaining proceeds will be used for general corporate purposes.

26



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##### Table of Contents



Backlog

As of December 31, 2001, we had backlog of $113.4 million, compared to
$108.0 million at the same date in 2000. Backlog at December 31, 1999 was $89
million.

We include in our backlog all revenue specified in signed contracts and
purchase orders to the extent that we contemplate 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 such one-year period.

New and Proposed Pronouncements

In June 1998, the Financial Accounting Standards Board issued a Statement
of Financial Accounting Standards No. 133, (FAS 133), Accounting for
Derivative Instruments and Hedging Activities. This statement provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. In July 1999, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 137 (FAS
137), which deferred the effective date of FAS 133 for one year. In June 2000,
the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 138, (FAS 138), Accounting for Certain Derivative
Instruments and Certain Hedging Activities-an amendment to FASB Statement No.
133. This statement amended certain provisions of FAS 133. Accordingly, we
have adopted FAS 133, as amended by FAS 138, effective the first quarter of
fiscal 2001. This statement did not have a material effect on our financial
statements.

In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 141, Business Combinations, and No.
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. We are currently
reviewing the impact of SFAS Nos. 141 and 142 and will be performing a
fair-value analysis at a later date in connection with the adoption of SFAS No.
142 on January 1, 2002.

In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (FAS 144), which addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and
supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of, and the accounting and reporting
provisions of APB Opinion No. 30, Reporting the Results of Operations for a
disposal of a segment of a business. FAS 144 is effective for fiscal years
beginning after December 15, 2001, with earlier application encouraged. We are
currently reviewing the impact of FAS 144 and have not determined the effect,
if any, the adoption of FAS 144 will have on our financial position and results
of operations.




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 and
other Asian and European currencies. We were unable to continue our hedging
strategies during the year ended December 31, 2001 as a result of being in
default with our lenders and limitations on the amount of available credit
under our new credit facility. We have established revenue and balance sheet
hedging programs to protect against reductions in value and cash flow
volatility caused by changes in foreign exchange rates. Such programs are
intended to reduce market risks, but do not always eliminate the impact of
foreign currency exchange volatility. We incurred translation losses of $2.4
million during the year ended December 31, 2001, principally from the
unfavorable translation of our net foreign investments in Brazil and the United
Kingdom.

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.

27



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##### Table of Contents






Item 8.Financial Statements and Supplementary Data

The financial statements and supplementary data required by Regulation S-X
are included in Part IV, Item 14 of this Annual Report on Form 10-K.




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

Effective as of February 4, 2000, PricewaterhouseCoopers LLP was dismissed
as our independent accountants. On February 9, 2000, we engaged Ernst & Young
LLP as our independent accountants to audit our consolidated financial
statements for the fiscal six months ended December 31, 1999. The decision to
change independent accountants was approved by the Audit Committee of our Board
of Directors. At our 2000 annual meeting, Ernst & Young was approved to audit
our consolidated financial statements for the year ended December 31, 2000.

PricewaterhouseCoopers report on our consolidated financial statements as
of June 30, 1999 did not contain an adverse opinion or a disclaimer of opinion,
nor was it qualified or modified as to uncertainty, audit scope, or accounting
principles.

During our fiscal year ended June 30, 1999, and for the period from July
1, 1999 through February 4, 2000, there were no disagreements between us and
PricewaterhouseCoopers on any matter of accounting principles or practices,
financial statements disclosure, or auditing scope or procedure, which
disagreement, if not resolved to the satisfaction of PricewaterhouseCoopers,
would have caused it to make reference to the subject matter of the
disagreement in connection with its report. In addition, during our fiscal year
ended June 30, 1999, and for the period from July 1, 1999 through February 4,
2000, we did not experience any kind of event listed in paragraphs (a)(1)(v)(A)
through (D) of Regulation S-K, Item 304.

In connection with our engagement of Ernst & Young as our independent
accountants for the fiscal six months ended December 31, 1999, neither we nor
any person acting on our behalf, consulted Ernst & Young regarding (i) the
application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
our consolidated financial statements; or (ii) any matter that was either the
subject of a disagreement (as defined in paragraph (a)(1) (iv) of Regulation
S-K, Item 304, and the related instructions) or a reportable event as described
in paragraph (a)(1) (v) of Regulation S-K, Item 304.

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##### Table of Contents






PART III




Item 10.Directors and Executive Officers of the Registrant

(a)  Identification of Directors: The information set forth in our 2002
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 2002 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 2002 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 2002 Proxy Statement are not
incorporated herein by reference.




Item 12.Security Ownership of Certain Beneficial Owners and Management

The information set forth in our 2002 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 2002 Proxy Statement under the caption
Certain Transactions and Relationships is incorporated herein by reference.

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##### Table of Contents






PART IV




Item 14.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                                                                                                                                                |  |  | 32 | 
|                                                                                                                                                                             
|                                                                                                                                                                             
|                                                                                                                                                                             
|                                                                                                                                                                             
|Report of Independent Accountants                                                                                                                                             |  |  | 33 | 
|                                                                                                                                                                             
|                                                                                                                                                                             
|                                                                                                                                                                             
|                                                                                                                                                                             
|Consolidated
Balance Sheets at December 31, 2001 and 2000                                                                                                                     |  |  | 34 | 
|                                                                                                                                                                             
|                                                                                                                                                                             
|                                                                                                                                                                             
|                                                                                                                                                                             
|Consolidated Statements of Operations for the years ended December
31, 2001 and 2000, the six-month period ended December 31, 1999 and
the year ended June 30, 1999           |  |  | 35 | 
|                                                                                                                                                                             
|                                                                                                                                                                             
|                                                                                                                                                                             
|                                                                                                                                                                             
|Consolidated Statements of Stockholders Equity for the years ended
December 31, 2001 and 2000, the six-month period ended December 31,
1999 and the year ended June 30, 1999 |  |  | 36 | 
|                                                                                                                                                                             
|                                                                                                                                                                             
|                                                                                                                                                                             
|                                                                                                                                                                             
|Consolidated Statements of Cash Flows for the years ended
December 31, 2001 and 2000, the six-month period ended
December 31, 1999 and the year ended June 30, 1999           |  |  | 37 | 
|                                                                                                                                                                             
|                                                                                                                                                                             
|                                                                                                                                                                             
|                                                                                                                                                                             
|Notes to Consolidated Financial Statements                                                                                                                                    |  |  | 38 | 
|                                                                                                                                                                             
|                                                                                                                                                                             
|                                                                                                                                                                             
|                                                                                                                                                                             
|Report of Independent Accountants on Financial Statement
Schedule                                                                                                             |  |  | 61 | 

(2)   Financial Statement Schedule

|                                                                                                                                                                              |  |  |    | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | -- | 
|Schedule II Valuation and Qualifying Accounts                                                                                                                                 |  |  | 62 | 
|                                                                                                                                                                             
|                                                                                                                                                                             
|                                                                                                                                                                             
|                                                                                                                                                                             
|(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 2001.

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
President and Chief Executive Officer

Date: March 29, 2002

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 29, 2002.

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

Christopher S. Alexander     |  | President, Chief Executive Officer and Director                                  
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           |  |                                                                                  
|                                                          
|                                                          
|                                                          
|                                                          
|/s/ JONATHON E. KILLMER

Jonathon E. Killmer               |  | Chief Operating Officer, Chief Financial Officer
and Chief Administrative Officer
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           |  |                                                                                  
|                                                          
|                                                          
|                                                          
|                                                          
|(2) Directors                                              |  |                                                                                  
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           |  |                                                                                  
|                                                          
|                                                          
|                                                          
|                                                          
|/s/ GEORGE WALLNER *
George Wallner                        |  | Chairman of the Board                                                            
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           |  |                                                                                  
|                                                          
|                                                          
|                                                          
|                                                          
|/s/ ALBERT IRATO *
Albert Irato                            |  | Vice Chairman of the Board                                                       
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           |  |                                                                                  
|                                                          
|                                                          
|                                                          
|                                                          
|/s/ WILLIAM KEIPER *
William Keiper                        |  | Director                                                                         
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           |  |                                                                                  
|                                                          
|                                                          
|                                                          
|                                                          
|/s/ JOCK PATTON *
Jock Patton                              |  | Director                                                                         
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           |  |                                                                                  
|                                                          
|                                                          
|                                                          
|                                                          
|/s/ JANE EVANS *
Jane Evans                                |  | Director                                                                         
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           |  |                                                                                  
|                                                          
|                                                          
|                                                          
|                                                          
|/s/ DANIEL D. DIETHELM *

Daniel D. Diethelm               |  | Director                                                                         

Jonathon E. Killmer, 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 29th day of March, 2002, pursuant to the
power of attorney executed by each of such officers and directors filed as
Exhibit 24.1 to this Report.

|     |  |                                                              
|---- |  | -------------------------------------------------------------
|*By: |  | /s/ JONATHON E. KILLMER

Jonathon E. Killmer
Attorney-in-Fact

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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, 2001 and 2000, and the
related consolidated statements of operations, stockholders equity, and cash
flows for the years ended December 31, 2001 and 2000 and for the six-month
period ended December 31, 1999. Our audits also included the financial
statement schedule listed in item 14(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, 2001 and 2000, and the
consolidated results of their operations and their cash flows for the years
ended December 31, 2001 and 2000 and for the six month period ended December
31, 1999, 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.

/s/ ERNST & YOUNG LLP



Phoenix, Arizona
February 13, 2002, except for Note 20
as to which the date is March 22, 2002

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##### Table of Contents






REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and
Stockholders of Hypercom Corporation

In
our opinion, the consolidated statements of operations,
stockholders equity, and of cash flows for the year ended
June 30, 1999 present fairly, in all material respects,
the results of operations and cash flows of Hypercom Corporation and its
subsidiaries for the year ended June 30, 1999, in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Companys management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States of America, which
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, assessing the accounting principles
used and significant estimates made by management and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion. We have not audited the consolidated
financial statements of Hypercom Corporation for any period subsequent to June
30, 1999.

/s/ PRICEWATERHOUSECOOPERS LLP



Phoenix, Arizona
July 20, 1999

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HYPERCOM CORPORATION

CONSOLIDATED BALANCE SHEETS

|                                           |                                                                                                                                                        |   |         |              |   |      |         |         |   | 
|------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------ | - | ------- | ------------ | - | ---- | ------- | ------- | - | 
|                                           |                                                                                                                                                        |   |         | December 31,
|                                           |                                                                                                                                                        |   |         |             
|                                           |                                                                                                                                                        |   |         | 2001         |   | 2000
|                                           |                                                                                                                                                        |   |         |              |   |     
|(amounts in thousands, except share data) 
|ASSETS                                     |                                                                                                                                                        |   |         |              |   |      |         |        
|                                          
|                                          
|                                          
|                                          
|Current assets:                            |                                                                                                                                                        |   |         |              |   |      |         |        
|                                          
|                                          
|                                          
|                                          
|                                           | Cash and cash equivalents                                                                                                                              |   | $       | 13,402       |   |      | $       | 13,008  |  
|                                          
|                                          
|                                          
|                                          
|                                           | Restricted cash                                                                                                                                        |   |         | 6,367        |   |      |         |        |  
|                                          
|                                          
|                                          
|                                          
|                                           | Marketable securities, at market                                                                                                                       |   |         |             |   |      |         | 2,110   |  
|                                          
|                                          
|                                          
|                                          
|                                           | Accounts receivable, net of allowance for doubtful
accounts of $4,029 and $3,655                                                                       |   |         | 70,860       |   |      |         | 79,010  |  
|                                          
|                                          
|                                          
|                                          
|                                           | Current portion of net investment in direct financing
leases                                                                                           |   |         | 16,242       |   |      |         | 20,023  |  
|                                          
|                                          
|                                          
|                                          
|                                           | Inventories, net                                                                                                                                       |   |         | 62,411       |   |      |         | 70,358  |  
|                                          
|                                          
|                                          
|                                          
|                                           | Deferred income taxes                                                                                                                                  |   |         | 16,090       |   |      |         | 12,946  |  
|                                          
|                                          
|                                          
|                                          
|                                           | Prepaid taxes                                                                                                                                          |   |         | 762          |   |      |         | 3,035   |  
|                                          
|                                          
|                                          
|                                          
|                                           | Prepaid expenses and other current assets                                                                                                              |   |         | 26,568       |   |      |         | 19,059  |  
|                                           |                                                                                                                                                        |   |         |              |   |      |         |        
|Total current assets                       |                                                                                                                                                        |   | 212,702 |              |   |      | 219,549 |        
|                                          
|                                          
|                                          
|                                          
|                                           | Property, plant and equipment, net                                                                                                                     |   |         | 37,964       |   |      |         | 42,164  |  
|                                          
|                                          
|                                          
|                                          
|                                           | Investment in equity affiliate                                                                                                                         |   |         |             |   |      |         |        |  
|                                          
|                                          
|                                          
|                                          
|                                           | Long-term marketable securities, at market                                                                                                             |   |         | 155          |   |      |         | 820     |  
|                                          
|                                          
|                                          
|                                          
|                                           | Long-term portion of net investment in direct
financing leases                                                                                         |   |         | 24,761       |   |      |         | 42,102  |  
|                                          
|                                          
|                                          
|                                          
|                                           | Deferred income taxes                                                                                                                                  |   |         | 10,003       |   |      |         | 9,024   |  
|                                          
|                                          
|                                          
|                                          
|                                           | Goodwill,
net of amortization of $3,293 and $1,649                                                                                                     |   |         | 21,706       |   |      |         | 22,608  |  
|                                          
|                                          
|                                          
|                                          
|                                           | Intangible
assets, net of amortization of $9,873 and $5,419                                                                                            |   |         | 13,597       |   |      |         | 15,957  |  
|                                          
|                                          
|                                          
|                                          
|                                           | Other assets                                                                                                                                           |   |         | 16,806       |   |      |         | 17,013  |  
|                                           |                                                                                                                                                        |   |         |              |   |      |         |        
|Total assets                               |                                                                                                                                                        | $ | 337,694 |              |   | $    | 369,237 |        
|                                           |                                                                                                                                                        |   |         |              |   |      |         |        
|LIABILITIES AND STOCKHOLDERS EQUITY       |                                                                                                                                                        |   |         |              |   |      |         |        
|                                          
|                                          
|                                          
|                                          
|Current liabilities:                       |                                                                                                                                                        |   |         |              |   |      |         |        
|                                          
|                                          
|                                          
|                                          
|                                           | Accounts payable                                                                                                                                       |   | $       | 31,761       |   |      | $       | 32,531  |  
|                                          
|                                          
|                                          
|                                          
|                                           | Accrued liabilities                                                                                                                                    |   |         | 22,744       |   |      |         | 22,137  |  
|                                          
|                                          
|                                          
|                                          
|                                           | Deferred revenue                                                                                                                                       |   |         | 2,180        |   |      |         | 2,390   |  
|                                          
|                                          
|                                          
|                                          
|                                           | Income taxes payable                                                                                                                                   |   |         | 1,495        |   |      |         | 3,237   |  
|                                          
|                                          
|                                          
|                                          
|                                           | Current portion of long-term debt                                                                                                                      |   |         | 20,716       |   |      |         | 84,036  |  
|                                           |                                                                                                                                                        |   |         |              |   |      |         |        
|Total current liabilities                  |                                                                                                                                                        |   | 78,896  |              |   |      | 144,331 |        
|                                          
|                                          
|                                          
|                                          
|                                           | Long-term debt                                                                                                                                         |   |         | 47,172       |   |      |         | 16,355  |  
|                                          
|                                          
|                                          
|                                          
|                                           | Other non-current liabilities                                                                                                                          |   |         | 257          |   |      |         | 404     |  
|                                           |                                                                                                                                                        |   |         |              |   |      |         |        
|Total liabilities                          |                                                                                                                                                        |   | 126,325 |              |   |      | 161,090 |        
|                                          
|                                          
|                                          
|                                          
|                                          
|                                          
|                                          
|                                          
|Commitments and contingencies              |                                                                                                                                                        |   |         |              |   |      |         |        
|                                          
|Stockholders equity:                      |                                                                                                                                                        |   |         |              |   |      |         |        
|                                          
|                                          
|                                          
|                                          
|                                           | Common stock, $.001 par value; 100,000,000 shares
authorized; 39,795,554 and 34,299,999 shares outstanding at
December 31, 2001 and 2000,
respectively |   |         | 19           |   |      |         | 14      |  
|                                          
|                                          
|                                          
|                                          
|                                           | Additional paid-in capital                                                                                                                             |   |         | 175,628      |   |      |         | 152,658 |  
|                                          
|                                          
|                                          
|                                          
|                                           | Receivables from stockholders                                                                                                                          |   |         | (1,498       | ) |      |         | (1,498  | )
|                                          
|                                          
|                                          
|                                          
|                                           | Retained earnings                                                                                                                                      |   |         | 39,722       |   |      |         | 59,923  |  
|                                           |                                                                                                                                                        |   |         |              |   |      |         |        
|                                           |                                                                                                                                                        |   | 213,871 |              |   |      | 211,097 |        
|                                          
|                                          
|                                          
|                                          
|                                           | Treasury
stock, 230,088 and 276,500 shares
(at cost) at December 31, 2001 and 2000, respectively                                                       |   |         | (2,502       | ) |      |         | (2,950  | )
|                                           |                                                                                                                                                        |   |         |              |   |      |         |        
|Total stockholdersequity                  |                                                                                                                                                        |   | 211,369 |              |   |      | 208,147 |        
|                                           |                                                                                                                                                        |   |         |              |   |      |         |        
|Total liabilities and stockholders equity |                                                                                                                                                        | $ | 337,694 |              |   | $    | 369,237 |        
|                                           |                                                                                                                                                        |   |         |              |   |      |         |        

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

34



---



##### Table of Contents






HYPERCOM CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

|                                              |                                        |   |              |         |              |   |            |         |      |   |         |        |  |   |         |         | 
|--------------------------------------------- | -------------------------------------- | - | ------------ | ------- | ------------ | - | ---------- | ------- | ---- | - | ------- | ------ |  | - | ------- | ------- | 
|                                              |                                        |   | Year Ended   |         | Six Months   |   |            |         |     
|                                              |                                        |   | December 31, |         | Ended        |   | Year Ended
|                                              |                                        |   |              |         | December 31, |   | June 30,  
|                                              |                                        |   | 2001         |         | 2000         |   | 1999       |         | 1999
|                                              |                                        |   |              |         |              |   |            |         |     
|(amounts in thousands, except per share data)
|Net revenue                                   |                                        | $ | 291,704      |         |              | $ | 327,560    |         |      | $ | 149,282 |        |  | $ | 261,515 |        
|                                             
|                                             
|                                             
|                                             
|Costs and expenses:                           |                                        |   |              |         |              |   |            |         |      |   |         |        |  |   |         |        
|                                             
|                                             
|                                             
|                                             
|                                              | Costs of revenue                       |   |              | 193,573 |              |   |            | 212,156 |      |   |         | 81,177 |  |   |         | 141,831 | 
|                                             
|                                             
|                                             
|                                             
|                                              | Research and development               |   |              | 29,107  |              |   |            | 41,039  |      |   |         | 19,637 |  |   |         | 30,249  | 
|                                             
|                                             
|                                             
|                                             
|                                              | Selling, general and administrative    |   |              | 79,971  |              |   |            | 97,408  |      |   |         | 43,505 |  |   |         | 74,772  | 
|                                              |                                        |   |              |         |              |   |            |         |      |   |         |        |  |   |         |        
|Total costs and expenses                      |                                        |   | 302,651      |         |              |   | 350,603    |         |      |   | 144,319 |        |  |   | 246,852 |        
|                                              |                                        |   |              |         |              |   |            |         |      |   |         |        |  |   |         |        
|Income (loss) from operations                 |                                        |   | (10,947      | )       |              |   | (23,043    | )       |      |   | 4,963   |        |  |   | 14,663  |        
|                                             
|                                             
|                                             
|                                             
|Interest income                               |                                        |   | 569          |         |              |   | 1,919      |         |      |   | 2,355   |        |  |   | 5,888   |        
|                                             
|                                             
|                                             
|                                             
|Interest expense                              |                                        |   | (9,667       | )       |              |   | (5,470     | )       |      |   | (1,196  | )      |  |   | (941    | )      
|                                             
|                                             
|                                             
|                                             
|Other income and (expense)                    |                                        |   | (2,402       | )       |              |   | 718        |         |      |   | 41      |        |  |   | (287    | )      
|                                             
|                                             
|                                             
|                                             
|Foreign currency loss                         |                                        |   | (2,438       | )       |              |   | (1,867     | )       |      |   | (392    | )      |  |   | (6,757  | )      
|                                             
|                                             
|                                             
|                                             
|Loss from investment in equity affiliate      |                                        |   |             |         |              |   | (9,855     | )       |      |   |        |        |  |   |        |        
|                                              |                                        |   |              |         |              |   |            |         |      |   |         |        |  |   |         |        
|Income (loss) before income taxes             |                                        |   | (24,885      | )       |              |   | (37,598    | )       |      |   | 5,771   |        |  |   | 12,566  |        
|                                             
|                                             
|                                             
|                                             
|(Provision) benefit for income taxes          |                                        |   | 4,977        |         |              |   | 6,648      |         |      |   | (386    | )      |  |   | (3,393  | )      
|                                              |                                        |   |              |         |              |   |            |         |      |   |         |        |  |   |         |        
|Net income (loss)                             |                                        | $ | (19,908      | )       |              | $ | (30,950    | )       |      | $ | 5,385   |        |  | $ | 9,173   |        
|                                              |                                        |   |              |         |              |   |            |         |      |   |         |        |  |   |         |        
|Net income (loss) per share:                  |                                        |   |              |         |              |   |            |         |      |   |         |        |  |   |         |        
|                                             
|                                             
|                                             
|                                             
|                                              | Basic earnings (loss) per share        |   | $            | (0.54   | )            |   | $          | (0.91   | )    |   | $       | 0.16   |  |   | $       | 0.28    | 
|                                              |                                        |   |              |         |              |   |            |         |      |   |         |        |  |   |         |        
|                                              | Weighted average basic common shares   |   |              | 36,643  |              |   |            | 34,184  |      |   |         | 33,232 |  |   |         | 33,148  | 
|                                              |                                        |   |              |         |              |   |            |         |      |   |         |        |  |   |         |        
|                                              | Diluted earnings (loss) per share      |   | $            | (0.54   | )            |   | $          | (0.91   | )    |   | $       | 0.16   |  |   | $       | 0.27    | 
|                                              |                                        |   |              |         |              |   |            |         |      |   |         |        |  |   |         |        
|                                              | Weighted average diluted common shares |   |              | 36,643  |              |   |            | 34,184  |      |   |         | 34,446 |  |   |         | 34,428  | 
|                                              |                                        |   |              |         |              |   |            |         |      |   |         |        |  |   |         |        

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

35



---



##### Table of Contents






HYPERCOM CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

|                                          |                            |  |              |           |            |   |             |   |              |   |          |        |               |   |        |   |       |   |        |         |   |   |        |        |   |   |         |         |  
|----------------------------------------- | -------------------------- |  | ------------ | --------- | ---------- | - | ----------- | - | ------------ | - | -------- | ------ | ------------- | - | ------ | - | ----- | - | ------ | ------- | - | - | ------ | ------ | - | - | ------- | ------- | -
|                                          |                            |  | Common Stock |           | Additional |   | Receivables |   |              |   |          |        |               |   |        |   | Total
|                                          |                            |  |              |           | Paid-in    |   | from        |   | Retained     |   | Treasury |        | Stockholders'
|                                          |                            |  | Shares       |           | Balance    |   | Capital     |   | Stockholders |   | Earnings |        | Stock         |   | Equity
|                                          |                            |  |              |           |            |   |             |   |              |   |          |        |               |   |       
|(amounts in thousands, except share data) |                            |  |              |           |            |   |             |   |              |   |          |        |               |   |        |   |       |   |       
|                                         
|                                         
|                                         
|                                         
|Balance as of June 30, 1998               |                            |  | 33,548,625   |           |            | $ | 13          |   |              | $ | 145,601  |        |               | $ | (1,498 | ) |       | $ | 76,315 |         |   | $ |       |        |   | $ | 220,431 |        
|                                         
|                                         
|                                         
|                                         
|                                          | Purchase of treasury stock |  |              | (587,700  | )          |   |             |  |              |   |          |       |               |   |        |  |       |   |        |        |   |   |        | (5,396 | ) |   |         | (5,396  | )
|                                         
|                                         
|                                         
|                                         
|                                          | Issuance of common stock   |  |              | 45,541    |            |   |             |  |              |   |          | 410    |               |   |        |  |       |   |        |        |   |   |        |       |   |   |         | 410     |  
|                                         
|                                         
|                                         
|                                         
|                                          | Issuance of treasury stock |  |              | 189,301   |            |   |             |  |              |   |          |       |               |   |        |  |       |   |        |        |   |   |        | 1,369  |   |   |         | 1,369   |  
|                                         
|                                         
|                                         
|                                         
|                                          | Exercise of options        |  |              | 3,750     |            |   |             |  |              |   |          |       |               |   |        |  |       |   |        |        |   |   |        | 36     |   |   |         | 36      |  
|                                         
|                                         
|                                         
|                                         
|                                          | Net income                 |  |              |          |            |   |             |  |              |   |          |       |               |   |        |  |       |   |        | 9,173   |   |   |        |       |   |   |         | 9,173   |  
|                                          |                            |  |              |           |            |   |             |   |              |   |          |        |               |   |        |   |       |   |        |         |   |   |        |        |   |   |         |        
|Balance as of June 30, 1999               |                            |  | 33,199,517   |           |            |   | 13          |   |              |   | 146,011  |        |               |   | (1,498 | ) |       |   | 85,488 |         |   |   | (3,991 | )      |   |   | 226,023 |        
|                                         
|                                         
|                                         
|                                         
|                                          | Issuance of treasury stock |  |              | 34,508    |            |   |             |  |              |   |          | 24     |               |   |        |  |       |   |        |        |   |   |        | 297    |   |   |         | 321     |  
|                                         
|                                         
|                                         
|                                         
|                                          | Exercise of options        |  |              | 500       |            |   |             |  |              |   |          | 5      |               |   |        |  |       |   |        |        |   |   |        |       |   |   |         | 5       |  
|                                         
|                                         
|                                         
|                                         
|                                          | Net income                 |  |              |          |            |   |             |  |              |   |          |       |               |   |        |  |       |   |        | 5,385   |   |   |        |       |   |   |         | 5,385   |  
|                                          |                            |  |              |           |            |   |             |   |              |   |          |        |               |   |        |   |       |   |        |         |   |   |        |        |   |   |         |        
|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 |        
|                                          |                            |  |              |           |            |   |             |   |              |   |          |        |               |   |        |   |       |   |        |         |   |   |        |        |   |   |         |        

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

36



---



##### Table of Contents






HYPERCOM CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                  |                                                                           |                                                     |        |              |        |                  |         |            |         |      |         |         |        |   |         |          |         |  
|------------------------------------------------- | ------------------------------------------------------------------------- | --------------------------------------------------- | ------ | ------------ | ------ | ---------------- | ------- | ---------- | ------- | ---- | ------- | ------- | ------ | - | ------- | -------- | ------- | -
|                                                  |                                                                           |                                                     |        | Year Ended   |        |                  |         |            |         |      |         |        
|                                                  |                                                                           |                                                     |        | December 31, |        | Six Months Ended |         | Year Ended
|                                                  |                                                                           |                                                     |        |              |        | December 31,     |         | June 30,  
|                                                  |                                                                           |                                                     |        | 2001         |        | 2000             |         | 1999       |         | 1999
|                                                  |                                                                           |                                                     |        |              |        |                  |         |            |         |     
|(amounts in thousands)                           
|Cash flows from operating activities:             |                                                                           |                                                     |        |              |        |                  |         |            |         |      |         |         |        |   |         |         
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Net income (loss)                                                         |                                                     | $      | (19,908      | )      |                  | $       | (30,950    | )       |      | $       | 5,385   |        |   | $       | 9,173    |        
|                                                 
|                                                 
|                                                 
|                                                 
|Adjustments to reconcile net income (loss) to net |                                                                           |                                                     |        |              |        |                  |         |            |         |      |         |         |        |   |         |         
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | cash (used in) provided by operating activities:                          |                                                     |        |              |        |                  |         |            |         |      |         |         |        |   |         |          |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Amortization of discount on notes payable                                 |                                                     |        | 2,967        |        |                  |         |           |         |      |         |        |        |   |         |         |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Amortization of beneficial notes payable conversion
feature               |                                                     |        | 667          |        |                  |         |           |         |      |         |        |        |   |         |         |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Depreciation
and amortization                                             |                                                     |        | 15,745       |        |                  |         | 13,239     |         |      |         | 4,550   |        |   |         | 6,566    |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Bad debt expense (credit)                                                 |                                                     |        | 1,780        |        |                  |         | 2,732      |         |      |         | (24     | )      |   |         | 1,386    |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Deferred components of direct-financing leases                            |                                                     |        | (621         | )      |                  |         | (2,285     | )       |      |         |        |        |   |         |         |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Provision for losses on direct-financing leases                           |                                                     |        | 18,075       |        |                  |         | 11,681     |         |      |         |        |        |   |         |         |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Provision (credit) for excess and obsolete
inventory                      |                                                     |        | 3,794        |        |                  |         | 3,170      |         |      |         | (281    | )      |   |         | 2,925    |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Equity loss in affiliates                                                 |                                                     |        |             |        |                  |         | 9,855      |         |      |         |        |        |   |         |         |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Foreign currency loss                                                     |                                                     |        | 2,438        |        |                  |         | 1,867      |         |      |         | 392     |        |   |         | 6,757    |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Deferred income taxes                                                     |                                                     |        | (4,123       | )      |                  |         | (7,385     | )       |      |         | (3,009  | )      |   |         | (1,446   | )      
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Other                                                                     |                                                     |        | 225          |        |                  |         | 100        |         |      |         | 121     |        |   |         |         |        
|                                                 
|                                                 
|                                                 
|                                                 
|(Increase) decrease in:                           |                                                                           |                                                     |        |              |        |                  |         |            |         |      |         |         |        |   |         |         
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Accounts receivable                                                       |                                                     |        | 5,316        |        |                  |         | (24,387    | )       |      |         | (6,694  | )      |   |         | (9,837   | )      
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Inventories                                                               |                                                     |        | 2,123        |        |                  |         | (1,826     | )       |      |         | (15,134 | )      |   |         | 4,940    |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Prepaid taxes                                                             |                                                     |        | 2,273        |        |                  |         | 2,408      |         |      |         | (283    | )      |   |         | (1,932   | )      
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Prepaid expenses and other current assets                                 |                                                     |        | (7,510       | )      |                  |         | (1,230     | )       |      |         | (3,537  | )      |   |         | (4,567   | )      
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Other assets                                                              |                                                     |        | (2,505       | )      |                  |         | (6,050     | )       |      |         | (567    | )      |   |         | (6,767   | )      
|                                                 
|                                                 
|                                                 
|                                                 
|Increase (decrease) in:                           |                                                                           |                                                     |        |              |        |                  |         |            |         |      |         |         |        |   |         |         
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Accounts payable                                                          |                                                     |        | (1,822       | )      |                  |         | 3,291      |         |      |         | 10,065  |        |   |         | (6,647   | )      
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Accrued liabilities                                                       |                                                     |        | 607          |        |                  |         | 1,886      |         |      |         | 4,781   |        |   |         | (2,421   | )      
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Deferred revenue                                                          |                                                     |        | (210         | )      |                  |         | (2,380     | )       |      |         | 584     |        |   |         | 3,216    |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Income taxes payable                                                      |                                                     |        | (1,743       | )      |                  |         | 895        |         |      |         | (54     | )      |   |         | 25       |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Other liabilities                                                         |                                                     |        | (146         | )      |                  |         | 142        |         |      |         |        |        |   |         |         |        
|                                                  |                                                                           |                                                     |        |              |        |                  |         |            |         |      |         |         |        |   |         |         
|                                                  |                                                                           | Net cash (used in) provided by operating
activities |        |              | 17,422 |                  |         |            | (25,227 | )    |         |         | (3,705 | ) |         |          | 1,371   |  
|                                                 
|                                                 
|                                                 
|                                                 
|Cash flows from investing activities:             |                                                                           |                                                     |        |              |        |                  |         |            |         |      |         |         |        |   |         |         
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Advances to and investment in equity affiliate and
related parties        |                                                     |        |             |        |                  |         | (2,005     | )       |      |         | (5,000  | )      |   |         |         |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Repayments from related parties                                           |                                                     |        |             |        |                  |         |           |         |      |         |        |        |   |         | 294      |         |  
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Notes receivable                                                          |                                                     |        |             |        |                  |         |           |         |      |         |        |        |   |         | (3,900   | )      
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Payments received on notes receivables                                    |                                                     |        | 997          |        |                  |         | 1,269      |         |      |         | 563     |        |   |         | 723      |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Principal payments received on direct-financing
leases                    |                                                     |        | 12,587       |        |                  |         | 10,019     |         |      |         |        |        |   |         |         |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Funding of direct-financing leases                                        |                                                     |        | (18,061      | )      |                  |         | (42,310    | )       |      |         |        |        |   |         |         |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Increase in restricted cash                                               |                                                     |        | (2,726       | )      |                  |         |           |         |      |         |        |        |   |         |         |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Acquisition of controlling interest in
subsidiaries, net of cash acquired |                                                     |        |             |        |                  |         | (24,134    | )       |      |         | (3,600  | )      |   |         | (9,279   | )      
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Acquisition of other assets                                               |                                                     |        | (912         | )      |                  |         | (2,710     | )       |      |         | (1,510  | )      |   |         | (2,068   | )      
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Proceeds from disposal of property, plant and
equipment                   |                                                     |        | 399          |        |                  |         | 91         |         |      |         | 149     |        |   |         | 438      |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Purchase of property, plant and equipment                                 |                                                     |        | (3,152       | )      |                  |         | (13,847    | )       |      |         | (8,969  | )      |   |         | (12,768  | )      
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Purchase of marketable securities                                         |                                                     |        |             |        |                  |         | (935       | )       |      |         | (18,567 | )      |   |         | (247,399 | )      
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Proceeds from maturity of marketable securities                           |                                                     |        | 2,775        |        |                  |         | 34,782     |         |      |         | 29,865  |        |   |         | 252,000  |        
|                                                  |                                                                           |                                                     |        |              |        |                  |         |            |         |      |         |         |        |   |         |         
|                                                  |                                                                           | Net cash used in investing activities               |        |              | (8,093 | )                |         |            | (39,780 | )    |         |         | (7,069 | ) |         |          | (21,959 | )
|                                                 
|                                                 
|                                                 
|                                                 
|Cash flows from financing activities:             |                                                                           |                                                     |        |              |        |                  |         |            |         |      |         |         |        |   |         |         
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Proceeds of bank notes payable and other debt
instruments                 |                                                     |        | 153,372      |        |                  |         | 216,480    |         |      |         | 35,238  |        |   |         | 72,837   |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Repayment of bank notes payable and other debt
instruments                |                                                     |        | (177,483     | )      |                  |         | (167,234   | )       |      |         | (35,346 | )      |   |         | (66,465  | )      
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Proceeds from sale of lease receivables                                   |                                                     |        | 7,977        |        |                  |         |           |         |      |         |        |        |   |         |         |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Proceeds from issuance of common stock                                    |                                                     |        | 7,803        |        |                  |         | 3,363      |         |      |         | 326     |        |   |         | 746      |        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Purchase of treasury stock                                                |                                                     |        |             |        |                  |         |           |         |      |         |        |        |   |         | (5,396   | )      
|                                                  |                                                                           |                                                     |        |              |        |                  |         |            |         |      |         |         |        |   |         |         
|                                                  |                                                                           | Net
cash provided by (used in) financing activities |        |              | (8,331 | )                |         |            | 52,609  |      |         |         | 218    |   |         |          | 1,722   |  
|                                                 
|                                                 
|                                                 
|                                                 
|Effect of exchange rate changes                   |                                                                           |                                                     | (604   | )            |        |                  | (687    | )          |         |      | (78     | )       |        |   | (66     | )       
|                                                  |                                                                           |                                                     |        |              |        |                  |         |            |         |      |         |         |        |   |         |         
|Net increase (decrease) in cash                   |                                                                           |                                                     | 394    |              |        |                  | (13,085 | )          |         |      | (10,634 | )       |        |   | (18,932 | )       
|                                                 
|                                                 
|                                                 
|                                                 
|Cash and equivalents, beginning of period         |                                                                           |                                                     | 13,008 |              |        |                  | 26,093  |            |         |      | 36,727  |         |        |   | 55,659  |         
|                                                  |                                                                           |                                                     |        |              |        |                  |         |            |         |      |         |         |        |   |         |         
|Cash and equivalents, end of period               |                                                                           | $                                                   | 13,402 |              |        | $                | 13,008  |            |         | $    | 26,093  |         |        | $ | 36,727  |         
|                                                  |                                                                           |                                                     |        |              |        |                  |         |            |         |      |         |         |        |   |         |         

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, 2001

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 Brazil, Mexico,
Chile, Argentina and Venezuela; however, certain 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.

Basis of Presentation

Effective July 1, 1999, the Company changed its fiscal year from a twelve
month period ending June 30, to a twelve month period ending December 31. The
consolidated financial statements include presentation of the transition period
beginning July 1, 1999 and ending on December 31, 1999.

The following table presents certain financial information for the twelve
months ended December 31, 2001, 2000 and 1999, and the six months ended
December 31, 1999 and 1998, respectively (in thousands, except per
share amounts):

|                                     |  |                     |         |                  |  |      |         |      |  |             |         |  |  |   |         |             |  |   |         |  
|------------------------------------ |  | ------------------- | ------- | ---------------- |  | ---- | ------- | ---- |  | ----------- | ------- |  |  | - | ------- | ----------- |  | - | ------- | -
|                                     |  | Twelve Months Ended |         | Six Months Ended
|                                     |  | December 31,        |         | December 31,    
|                                     |  |                     |         |                 
|                                     |  | 2001                |         | 2000             |  | 1999 |         | 1999 |  | 1998       
|                                     |  |                     |         |                  |  |      |         |      |  |            
|                                     |  |                     |         |                  |  |      |         |      |  | (unaudited) |         |  |  |   |         | (unaudited)
|Revenues                             |  | $                   | 291,704 |                  |  | $    | 327,560 |      |  | $           | 274,220 |  |  | $ | 149,282 |             |  | $ | 136,577 |  
|                                    
|                                    
|                                    
|                                    
|Gross profit                         |  | $                   | 98,131  |                  |  | $    | 115,404 |      |  | $           | 120,096 |  |  | $ | 68,105  |             |  | $ | 67,693  |  
|                                    
|                                    
|                                    
|                                    
|Income (loss) before income tax      |  | $                   | (24,885 | )                |  | $    | (37,598 | )    |  | $           | 425     |  |  | $ | 5,771   |             |  | $ | 17,912  |  
|                                    
|                                    
|                                    
|                                    
|(Provision) benefit for income taxes |  | $                   | 4,977   |                  |  | $    | 6,648   |      |  | $           | 1,774   |  |  | $ | (386    | )           |  | $ | (5,553  | )
|                                    
|                                    
|                                    
|                                    
|Net income (loss)                    |  | $                   | (19,908 | )                |  | $    | (30,950 | )    |  | $           | 2,199   |  |  | $ | 5,385   |             |  | $ | 12,359  |  
|                                    
|                                    
|                                    
|                                    
|Diluted earnings (loss) per share    |  | $                   | (0.54   | )                |  | $    | (0.91   | )    |  | $           | 0.06    |  |  | $ | 0.16    |             |  | $ | 0.36    |  
|                                    
|                                    
|                                    
|                                    
|Weighted average common shares       |  |                     | 36,643  |                  |  |      | 34,184  |      |  |             | 34,436  |  |  |   | 34,446  |             |  |   | 34,549  |  

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.

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##### Table of Contents



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, 2001 and 2000, the six month period
ended December 31, 1999 and the year ended June 30, 1999, the Company recorded
net gains (losses) on re-measurement of approximately ($2,040,000),
($2,785,000), $81,000, and ($5,275,000), respectively. For the same periods,
the Company recorded net gains (losses) on transactions denominated in foreign
currencies of approximately ($398,000), $918,000, ($473,000), and ($1,482,000),
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.

Restricted Cash

In connection with the securitization of direct finance leases (see Note
9), the Companys Equipment Leasing segment, Golden Eagle Leasing, was required
to establish restricted cash collection, collateral and reserve
accounts. The Company initially funded the restricted cash accounts
with $3.6 million from the proceeds of the securitization. The
accounts 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.

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 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.
The Companys only significant foreign currency contracts are a three month and
a six month forward contract for the Brazilian Real which matured on January
14, 2001. The U.S. dollar amount of the contracts was approximately $13.8
million. At December 31, 2000, the total receivable recorded under all such
contracts was approximately $309,000.

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.

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##### Table of Contents



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 SFAS No. 94. 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 advance is in the form of a 8.5% note receivable due the earlier of
December 10, 2002, a qualifying initial public offering, the sale of more than
50% of the voting stock of Cirilium or the merger of Cirilium into another
Corporation. There is no proportionate share of operating results in Cirilium
as of December 31, 1999, as Cirilium effectively commenced operations on
January 3, 2000.

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. Accordingly, as of
December 31, 2000, the Company has no remaining basis in this investment. In
addition, as a result of an investment during the third quarter of year 2000 by
Ciriliums CEO, the Companys interest was diluted to less than 20% and it has
discontinued accounting for its investment under the equity method.

Capitalized Software

Statement of Financial Accounting Standards No. 86, Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed(SFAS No.
86), requires capitalization of certain software development costs subsequent
to the establishment of technological feasibility. The Companys historical
product development process was such that technological feasibility was
established upon completion of a working model. Costs incurred between
completion of the working model and the point at which the product was ready
for initial shipment were not historically significant. Accordingly, prior to
fiscal year 1999 all software development costs were expensed as incurred and
included in research and development costs. However, due to a change in certain
software development documentation during the fiscal year ended June 30, 1999,
certain software development costs required capitalization. The amounts
capitalized in the years ended December 31, 2001 and 2000, the six month period
ended December 31, 1999 and in the year ended June 30, 1999, were approximately
$1.5 million, $2.5 million, $1.5 million and $2.0 million, respectively. The
Company amortizes capitalized software development costs once the product is
available for sale over a period of three years.

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 

Goodwill

Goodwill represents the excess of purchase price and related costs over
the fair value assigned to the net tangible and identifiable intangible assets
of businesses acquired, and is being amortized on a straight-line basis over
periods ranging from 5 to 20 years. The carrying value of goodwill is evaluated
if the facts and circumstances, such as significant declines in sales, earnings
or cash flows or material adverse changes in the business climate, suggest that
it may be impaired. The evaluation is based on the projected undiscounted cash
flows of the acquired operation over the remaining useful life of the related
goodwill. To the extent such projections indicate that future undiscounted cash
flows are not sufficient to recover the carrying amounts of related goodwill an
impairment is recognized for the excess of the carrying amount over fair value.
Fair value is determined based on projected discounted

40



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##### Table of Contents



cash flows using current market interest rates. The evaluation necessarily
involves significant management judgement. No impairment has been indicated to
date.

Intangible assets

Intangible assets represent capitalized software costs, acquired customer
lists, work force, unpatented technology, technology solutions and covenants
not to compete, and are being amortized on a straight-line basis over periods
ranging from 3 to 7.5 years. As part of the Companys initial assessment of
SFAS No. 142, certain amounts previously categorized as goodwill, were
determined to represent identifiable intangibles such as unpatented technology
and related technology solutions. Accordingly, $13.3 million and $12.1 million have been reclassified from goodwill to intangible assets,
respectively, as of December 31, 2001 and 2000. The related accumulated
amortization of $5.4 million and $3.0 million have been
reclassified from goodwill to intangible assets, respectively, as of those same
dates. There was no change to the estimated lives of the assets.

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.

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, 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 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 lease (see Note 5).

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

The Company has a contract in which it provides a warranty to the customer
during the third party installation period. If the product does not function
properly during this period, the Company is obligated to repair it. At
initiation of this contract, the Company recognized revenue at the end of the
installation period due to its lack of history with the customer and contract,
and resulting inability to estimate warranty costs. During the year ended June
30, 1999, the Company began recognizing revenue upon shipment for this contract
based on the history provided by a large number of sales and its resulting
ability to accurately estimate such warranty costs. This change resulted in
incremental revenues of $4.4 million for the year ended June 30, 1999. During
the years ended December 31, 2001 and 2000, the six-month period ended December
31, 1999 and the year ended June 30, 1999, revenues recognized under this
contract totaled $8.4 million, $6.8 million, $4.2 million and $11.7 million,
respectively.

Stock-Based Compensation

Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation, (SFAS No. 123) defines a fair value based method of
accounting for employee stock options or similar equity instruments. However,
it also allows an entity to continue to account for these plans according to
Accounting Principles Board Opinion No. 25 (APB 25) and related
interpretations,

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##### Table of Contents



provided pro forma disclosures of net income are made as if the fair value
based method of accounting, defined by SFAS No. 123, had been applied.

The Company has elected to continue to measure compensation expense
related to employee stock purchase options using APB 25 and related
interpretations, and has provided the required pro forma disclosures.

Earnings (Loss) Per Share

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

|                                                     |  |              |         |              |  |            |         |      |  |   |        |  |  |   |        | 
|---------------------------------------------------- |  | ------------ | ------- | ------------ |  | ---------- | ------- | ---- |  | - | ------ |  |  | - | ------ | 
|                                                     |  | Year Ended   |         | Six Months   |  |            |         |     
|                                                     |  | December 31, |         | Ended        |  | Year Ended
|                                                     |  |              |         | December 31, |  | June 30,  
|                                                     |  | 2001         |         | 2000         |  | 1999       |         | 1999
|                                                     |  |              |         |              |  |            |         |     
|Numerator  Basic and Diluted EPS:                   |  |              |         |              |  |            |         |      |  |   |        |  |  |   |        | 
|                                                    
|                                                    
|                                                    
|                                                    
|Net income (loss)                                    |  | $            | (19,908 | )            |  | $          | (30,950 | )    |  | $ | 5,385  |  |  | $ | 9,173  | 
|                                                    
|                                                    
|                                                    
|                                                    
|Denominator  Basic EPS:                             |  |              |         |              |  |            |         |      |  |   |        |  |  |   |        | 
|                                                    
|                                                    
|                                                    
|                                                    
|Weighted average common shares
outstanding           |  |              | 36,643  |              |  |            | 34,184  |      |  |   | 33,232 |  |  |   | 33,148 | 
|                                                     |  |              |         |              |  |            |         |      |  |   |        |  |  |   |        | 
|Basic earnings (loss) per share                      |  | $            | (0.54   | )            |  | $          | (0.91   | )    |  | $ | 0.16   |  |  | $ | 0.28   | 
|                                                    
|                                                    
|                                                    
|                                                    
|Denominator  Diluted EPS:                           |  |              |         |              |  |            |         |      |  |   |        |  |  |   |        | 
|                                                    
|                                                    
|                                                    
|                                                    
|Denominator  Basic EPS                              |  |              | 36,643  |              |  |            | 34,184  |      |  |   | 33,232 |  |  |   | 33,148 | 
|                                                    
|                                                    
|                                                    
|                                                    
|Effect of dilutive
securities  common stock
options |  |              |        |              |  |            |        |      |  |   | 1,214  |  |  |   | 1,280  | 
|                                                     |  |              |         |              |  |            |         |      |  |   |        |  |  |   |        | 
|Weighted average diluted common
shares outstanding   |  |              | 36,643  |              |  |            | 34,184  |      |  |   | 34,446 |  |  |   | 34,428 | 
|                                                     |  |              |         |              |  |            |         |      |  |   |        |  |  |   |        | 
|Diluted earnings (loss) per share                    |  | $            | (0.54   | )            |  | $          | (0.91   | )    |  | $ | 0.16   |  |  | $ | 0.27   | 
|                                                     |  |              |         |              |  |            |         |      |  |   |        |  |  |   |        | 

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 1,701,235 and 1,711,817 for the years ended
December 31, 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 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.

Self-Insurance

The Company self-insures, with certain stop loss insurance coverages, 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.

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.

Reclassification

Certain prior year amounts have been reclassified to conform with the
current period presentation.

42



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New Pronouncements

In June 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 141, Business Combinations, (SFAS No.
141) and No. 142, Goodwill and Other Intangible Assets (SFAS No. 142),
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 is currently reviewing the
impact of SFAS Nos. 141 and 142 and will be performing a fair-value analysis at
a later date in connection with the adoption of SFAS No. 142 on January 1,
2002.

In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (SFAS No. 144), which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets
and supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of, and the accounting and reporting
provisions of APB Opinion No. 30, Reporting the Results of Operations for a
disposal of a segment of a business. SFAS No. 144 is effective for fiscal years
beginning after December 15, 2001, with earlier application encouraged. The
Company is currently reviewing the impact of SFAS No. 144 and has not
determined the effect, if any, the adoption of SFAS No. 144 will have on the
Companys financial position and results of operations.

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, 2001 and 2000 was approximately $6.9
million and $4.7 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 $8.2 million and $10.7 million as of December 31,
2001 and 2000, respectively.

The Companys accounts receivable result primarily from credit sales to a
broad customer base, both nationally and internationally. 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.

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The Company conducts manufacturing operations in Brazil and China. 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, 2001, the Company maintained significant accounts
receivable balances in the Asia Pacific and Latin America regions, which are
subject to the economic risks inherent to those regions.

4. Marketable Securities

As
of December 31, 2001 and 2000, 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 of
December 31, 2001 and 2000, marketable securities consist of the following
(dollars in thousands):

|                                          |                                       |   |              |     |      |   |       |       | 
|----------------------------------------- | ------------------------------------- | - | ------------ | --- | ---- | - | ----- | ----- | 
|                                          |                                       |   | December 31, |    
|                                          |                                       |   |              |    
|                                          |                                       |   | 2001         |     | 2000 |  
|                                          |                                       |   |              |     |      |  
|Municipal bonds and government securities |                                       | $ |             |     |      | $ | 878   |      
|                                         
|                                         
|                                         
|                                         
|Corporate bonds                           |                                       |   |             |     |      |   | 1,232 |      
|                                         
|                                         
|                                         
|                                         
|Commercial paper                          |                                       |   |             |     |      |   |      |      
|                                         
|                                         
|                                         
|                                         
|Mutual funds                              |                                       |   |             |     |      |   |      |      
|                                          |                                       |   |              |     |      |   |       |       | 
|                                          | Total marketable securities           |   | $            |    |      |   | $     | 2,110 | 
|                                          |                                       |   |              |     |      |   |       |      
|                                         
|                                         
|                                         
|                                         
|Municipal bonds and government securities |                                       | $ | 155          |     |      | $ | 161   |      
|                                         
|                                         
|                                         
|                                         
|Corporate bonds                           |                                       |   |             |     |      |   | 659   |      
|                                          |                                       |   |              |     |      |   |       |      
|                                          | Total long-term marketable securities |   | $            | 155 |      |   | $     | 820   | 
|                                          |                                       |   |              |     |      |   |       |      

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 $3.8
and $18.1 million and $4.9 and $11.7 million, respectively, for the years ended
December 31, 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;
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | 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,
|                                      |  |             
|                                      |  | 2001         |         | 2000
|                                      |  |              |         |     
|Lease contracts receivable            |  | $            | 49,923  |      |  | $ | 76,306  |  
|                                     
|                                     
|                                     
|                                     
|Allowance for credit losses           |  |              | (5,306  | )    |  |   | (2,124  | )
|                                     
|                                     
|                                     
|                                     
|Estimated unguaranteed residual value |  |              | 11,433  |      |  |   | 16,117  |  
|                                     
|                                     
|                                     
|                                     
|Initial direct costs                  |  |              | 2,627   |      |  |   | 3,594   |  
|                                     
|                                     
|                                     
|                                     
|Unearned income                       |  |              | (17,674 | )    |  |   | (31,768 | )
|                                      |  |              |         |      |  |   |         |  
|Net investment                        |  | $            | 41,003  |      |  | $ | 62,125  |  
|                                      |  |              |         |      |  |   |         |  

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.

Continued losses that exceed historical trends could result in the
substantial impairment of Golden Eagles goodwill, which amounted to $20.4
million, net as of December 31, 2001.

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

|                          |  |   |        | 
|------------------------- |  | - | ------ | 
|Years Ending December 31,
|                         
|2002                      |  | $ | 22,567 | 
|                         
|                         
|                         
|                         
|2003                      |  |   | 16,803 | 
|                         
|                         
|                         
|                         
|2004                      |  |   | 8,397  | 
|                         
|                         
|                         
|                         
|2005                      |  |   | 2,156  | 
|                          |  |   |        | 
|                          |  | $ | 49,923 | 

6. 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, 2001 and 2000 the fair value (see Note 2) of
these financial instruments approximated the respective carrying values.

7. Inventories

Inventories consist of the following (dollars in thousands):

|                |  |              |        |      |  |   |        | 
|--------------- |  | ------------ | ------ | ---- |  | - | ------ | 
|                |  | December 31,
|                |  |             
|                |  | 2001         |        | 2000
|                |  |              |        |     
|Purchased parts |  | $            | 21,502 |      |  | $ | 29,744 | 
|               
|               
|               
|               
|Work in process |  |              | 8,560  |      |  |   | 7,256  | 
|               
|               
|               
|               
|Finished goods  |  |              | 32,349 |      |  |   | 33,358 | 
|                |  |              |        |      |  |   |        | 
|                |  | $            | 62,411 |      |  | $ | 70,358 | 
|                |  |              |        |      |  |   |        | 

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##### Table of Contents



8.     Property, Plant and Equipment

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

|                                |  |              |         |      |  |   |         |   | 
|------------------------------- |  | ------------ | ------- | ---- |  | - | ------- | - | 
|                                |  | December 31,
|                                |  |             
|                                |  | 2001         |         | 2000
|                                |  |              |         |     
|Land and improvements           |  | $            | 4,701   |      |  | $ | 4,701   |  
|                               
|                               
|                               
|                               
|Building                        |  |              | 16,729  |      |  |   | 17,327  |  
|                               
|                               
|                               
|                               
|Computer equipment and software |  |              | 18,175  |      |  |   | 16,742  |  
|                               
|                               
|                               
|                               
|Machinery and equipment         |  |              | 22,604  |      |  |   | 18,794  |  
|                               
|                               
|                               
|                               
|Furniture and fixtures          |  |              | 5,919   |      |  |   | 5,865   |  
|                               
|                               
|                               
|                               
|Leasehold improvements          |  |              | 2,985   |      |  |   | 2,994   |  
|                                |  |              |         |      |  |   |         |  
|                                |  |              | 71,113  |      |  |   | 66,423  |  
|                               
|                               
|                               
|                               
|Less accumulated depreciation   |  |              | (33,149 | )    |  |   | (24,259 | )
|                                |  |              |         |      |  |   |         |  
|                                |  | $            | 37,964  |      |  | $ | 42,164  |  
|                                |  |              |         |      |  |   |         |  

Depreciation expense was $9.6 million, $8.3 million, $3.2 million and
$5.5 million for the years ended December 31, 2001 and 2000, the six months
ended December 31, 1999 and the fiscal year ended June 30, 1999, respectively.

9. Long-term Obligations

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

|                                                                                                                                                                                                                                                                               |  |                                                                                                                                                                                                                                                                                                                       |        |              |        |      |        |  |   | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------ | ------------ | ------ | ---- | ------ |  | - | 
|                                                                                                                                                                                                                                                                               |  |                                                                                                                                                                                                                                                                                                                       |        | December 31,
|                                                                                                                                                                                                                                                                               |  |                                                                                                                                                                                                                                                                                                                       |        |             
|                                                                                                                                                                                                                                                                               |  |                                                                                                                                                                                                                                                                                                                       |        | 2001         |        | 2000
|                                                                                                                                                                                                                                                                               |  |                                                                                                                                                                                                                                                                                                                       |        |              |        |     
|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                                                     |  | $                                                                                                                                                                                                                                                                                                                     | 9,585  |              |        | $    | 9,845  | 
|                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                              
|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 |        |              | 6,890  |      |        |  |  | 
|                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                               |  | Term Loan A bears interest at the greater of
10% per annum or the prime rate plus 3%,
repayable in six monthly principal installments
of $833,333 with the first installment due
February 2002, matures July 31, 2002                                                                                                 |        |              | 4,008  |      |        |  |  | 
|                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                               |  | Term Loan B bears interest at the greater of
14% per annum or the prime rate plus 7%,
repayable in monthly principal installments of
$250,000, with first installment due September
2002, matures July 31, 2004 (net of discount of
$861K)                                                                            |        |              | 14,291 |      |        |  |  | 
|                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                              
|Contract-backed term notes to Rothschild, (the
Notes), payable on a monthly basis including
interest at 8.58%, due on November 2006                                                                                                                                          |  |                                                                                                                                                                                                                                                                                                                       | 24,839 |              |        |      |       | 
|                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                              
|Revolving credit agreement, (the Credit Agreement)
bears interest at Companys option of prime or LIBOR
based rates payable monthly, due August 2002                                                                                                                         |  |                                                                                                                                                                                                                                                                                                                       |       |              |        |      | 48,957 | 
|                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                              
|Receivables purchase agreement, (the Conduit) bears
interest at Companys option of prime or LIBOR                                                                                                                                                                           |  |                                                                                                                                                                                                                                                                                                                       |        |              |        |      |        | 

46



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##### Table of Contents



|                                                                                                                                                                                          |                                              |   |         |              |  |      |         |        |  | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------- | - | ------- | ------------ |  | ---- | ------- | ------ |  | 
|                                                                                                                                                                                          |                                              |   |         | December 31,
|                                                                                                                                                                                          |                                              |   |         |             
|                                                                                                                                                                                          |                                              |   |         | 2001         |  | 2000
|                                                                                                                                                                                          |                                              |   |         |              |  |     
|                                                                                                                                                                                         
|                                                                                                                                                                                         
|                                                                                                                                                                                         
|                                                                                                                                                                                         
|                                                                                                                                                                                          | based rates payable monthly, due August 2001 |   |         |             |  |      |         | 23,030 | 
|                                                                                                                                                                                         
|                                                                                                                                                                                         
|                                                                                                                                                                                         
|                                                                                                                                                                                         
|Note payable to Tokyo Leasing, bears interest at 285
basis points over US Treasury yield payable
monthly, expired December 31, 2000                                                       |                                              |   |        |              |  |      | 4,750   |       
|                                                                                                                                                                                         
|                                                                                                                                                                                         
|                                                                                                                                                                                         
|                                                                                                                                                                                         
|Note payable to Webster Bank, bears interest at
Companys option of prime or LIBOR based rates, due
in June 2001                                                                          |                                              |   |        |              |  |      | 4,402   |       
|                                                                                                                                                                                         
|                                                                                                                                                                                         
|                                                                                                                                                                                         
|                                                                                                                                                                                         
|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    |                                              |   | 1,440   |              |  |      | 2,079   |       
|                                                                                                                                                                                         
|                                                                                                                                                                                         
|                                                                                                                                                                                         
|                                                                                                                                                                                         
|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 |                                              |   | 1,434   |              |  |      | 1,615   |       
|                                                                                                                                                                                         
|                                                                                                                                                                                         
|                                                                                                                                                                                         
|                                                                                                                                                                                         
|Note payable to director and stockholder bears
interest at 12% annually due January 31, 2003 (see
Note 15)                                                                                |                                              |   | 3,100   |              |  |      | 1,500   |       
|                                                                                                                                                                                         
|                                                                                                                                                                                         
|                                                                                                                                                                                         
|                                                                                                                                                                                         
|Lease payable to Banc One Leasing, collateralized
by equipment, payable in 48 equal monthly
installments including interest at 8.62%, matures
June 2004                                   |                                              |   | 1,084   |              |  |      | 1,456   |       
|                                                                                                                                                                                         
|                                                                                                                                                                                         
|                                                                                                                                                                                         
|                                                                                                                                                                                         
|Note payable to Bank One Arizona, collateralized by
equipment, payable in 35 equal monthly
installments including interest at 9.75%, matures
September 2003                               |                                              |   |        |              |  |      | 990     |       
|                                                                                                                                                                                         
|                                                                                                                                                                                         
|                                                                                                                                                                                         
|                                                                                                                                                                                         
|Note payable to Brazilian bank, collateralized by
$1.0 million letter of credit, interest at 18.7%,
due May 23, 2001                                                                      |                                              |   |        |              |  |      | 919     |       
|                                                                                                                                                                                         
|                                                                                                                                                                                         
|                                                                                                                                                                                         
|                                                                                                                                                                                         
|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
August 2002                               |                                              |   | 750     |              |  |      |        |       
|                                                                                                                                                                                         
|                                                                                                                                                                                         
|                                                                                                                                                                                         
|                                                                                                                                                                                         
|Other capital leases                                                                                                                                                                      |                                              |   | 341     |              |  |      | 491     |       
|                                                                                                                                                                                         
|                                                                                                                                                                                         
|                                                                                                                                                                                         
|                                                                                                                                                                                         
|Other debt                                                                                                                                                                                |                                              |   | 126     |              |  |      | 357     |       
|                                                                                                                                                                                          |                                              |   |         |              |  |      |         |       
|                                                                                                                                                                                          |                                              |   | 67,888  |              |  |      | 100,391 |       
|                                                                                                                                                                                         
|                                                                                                                                                                                         
|                                                                                                                                                                                         
|                                                                                                                                                                                         
|Current portion of long-term debt                                                                                                                                                         |                                              |   | (20,716 | )            |  |      | (84,036 | )     
|                                                                                                                                                                                          |                                              |   |         |              |  |      |         |       
|Long-term debt                                                                                                                                                                            |                                              | $ | 47,172  |              |  | $    | 16,355  |       
|                                                                                                                                                                                          |                                              |   |         |              |  |      |         |       

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,

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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 are payable monthly based on a
twenty-nine month amortization schedule. The principal balance outstanding on
the Notes at December 31, 2001 amounted to $24.8 million. The net carrying
amount of the securitized equipment leases, included in the net investment in
direct financing leases at December 31, 2001, amounted to $31.7 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, 2001 there was $6.4 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, 2001.

In June 2001, we entered into certain interim financing arrangements
pending the completion of the refinancing of our credit facilities. On June 4,
2001, we entered a Loan Agreement with a group of eight investors pursuant to
which we 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 our 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, we issued to the lenders Series B
Warrants to purchase up to 460,000 shares of our common stock in the aggregate
at an exercise price of $3.16 per share, exercisable through
June 4, 2003. In addition, on July 30, we 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 our 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. No warrants were exercised during 2001.

On June 6, 2001, we 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, we granted to Michelle Investments a Series A Warrant to
purchase up to 1.0 million shares of our common stock, subject to certain
adjustments, at an exercise price of $3.19 per share, exercisable
through June 6, 2003. On July 31, 2001, we and
Michelle Investments entered into a Stock Purchase Agreement under which
Michelle Investments purchased 2,475,248 shares of our 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, we repaid the remaining
balance of the loan out of funds available under our 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 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 Chairman and Chief Strategist and our principal
stockholder, agreed to loan us $3.1 million and to subordinate these loans to
our other indebtedness, including our new lending facility.

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In August 2001, we 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 our 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 of our domestic subsidiaries, and
the guarantors consist of Golden Eagle Leasing and two of our 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, we have agreed
to, among other things, maintain certain specified financial ratios and
consolidated net worth, not make certain distributions with respect to our
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 us from:



| |  | incurring any additional indebtedness;                                                                                       
|- |  | -----------------------------------------------------------------------------------------------------------------------------
| 
| |  | incurring or permitting to exist any additional liens on our assets;                                                         
| 
| |  | engaging in a change of control transaction or other fundamental change, such as a merger, recapitalization or liquidation;  
| 
| |  | disposing of our assets, including equipment and inventory, outside the ordinary course of business;                         
| 
| |  | prepaying or modifying the terms of our existing indebtedness, except in connection with a permitted financing;              
| 
| |  | redeeming, repurchasing or paying dividends or other distributions on our capital stock;                                     
| 
| |  | engaging in certain transactions with our affiliates;                                                                        
| 
| |  | failing to maintain specified levels of EBITDA and tangible net worth
and ratios of senior debt and total debt to EBITDA; and
| 
| |  | issuing or selling any prohibited preferred stock.                                                                           

As
of December 31, 2001 we 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 we obtained a
waiver of any event of default related to this pledge. The
term loans were paid off in March 2002, concurrent with the
completion of our private placement of common stock (see
Note 20).

As partial consideration for the senior secured credit facility, we issued
to Ableco Holding LLC, an affiliate of one of our lenders, a Series C Warrant
to purchase up to 375,000 shares of our common stock at an exercise price of
$4.00 per share. 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.
The estimated fair value of the Series C stock warrant to purchase 375,000
shares of the Companys common stock, at the date issued was $2.64 per share
using a Black-Scholes option pricing model. No warrants were
exercised during 2001. The total fair value of these
stock warrants of $1.0 million was recorded as additional paid in capital and
loan discount. Amortization of the discount in the amount of $.1 million was
recorded as interest expense in 2001.

We also paid to Roth Capital Partners LLC, which assisted us in obtaining
our 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. 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 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 $.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, and effectively increase our interest
rate.

The Company had a $10 million loan agreement with Webster Bank that
expired in June 2001. The loan bore interest at either prime or LIBOR based
rates, payable on a monthly basis. Additionally, the Company had a $20 million
loan agreement with Tokyo Leasing that bore interest at 285 basis points over
US Treasury yield, payable monthly. This loan agreement expired on December 31,
2000. These loan agreements were replaced by the securitization.

At December 31, 2001, the Company has a $3.85 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, 2001.

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As of December 31, 2000 the Company was not in compliance with certain
covenants of the Credit Agreement, the Conduit and Webster loan agreement, as
well as delinquency restrictions under the Conduit. Such defaults created
cross-defaults under the Tokyo Leasing loan agreement. Consequently the balance
outstanding under these agreements, which amounted to $81.1 million, was
classified as current debt at December 31, 2000. The Credit Agreement and
Conduit were refinanced during 2001 as discussed above.

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

|                          |  |   |        | 
|------------------------- |  | - | ------ | 
|Years Ending December 31, |  |   |        | 
|                          |  |   |        | 
|2002                      |  | $ | 20,716 | 
|                         
|                         
|                         
|                         
|2003                      |  |   | 19,436 | 
|                         
|                         
|                         
|                         
|2004                      |  |   | 18,228 | 
|                         
|                         
|                         
|                         
|2005                      |  |   | 668    | 
|                         
|                         
|                         
|                         
|2006                      |  |   | 8,578  | 
|                         
|                         
|                         
|                         
|Thereafter                |  |   | 262    | 
|                          |  |   |        | 
|                          |  | $ | 67,888 | 
|                          |  |   |        | 

10. Income Taxes

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

|                                   |               |   |              |         |              |   |          |         |      |   |       |        |   |   |             |        |  
|---------------------------------- | ------------- | - | ------------ | ------- | ------------ | - | -------- | ------- | ---- | - | ----- | ------ | - | - | ----------- | ------ | -
|                                   |               |   |              |         |              |   |          |         |      |   |       |        |   |   | Fiscal Year
|                                   |               |   | Years Ended  |         | Six Months   |   | Ended   
|                                   |               |   | December 31, |         | Ended        |   | June 30,
|                                   |               |   |              |         | December 31, |   |         
|                                   |               |   | 2001         |         | 2000         |   | 1999     |         | 1999
|                                   |               |   |              |         |              |   |          |         |     
|Income (loss) before income taxes: |               |   |              |         |              |   |          |         |      |   |       |        |   |   |             |       
|                                  
|                                  
|                                  
|                                  
|                                   | United States |   | $            | (30,586 | )            |   | $        | (29,039 | )    |   | $     | (2,482 | ) |   | $           | 13,702 |  
|                                  
|                                  
|                                  
|                                  
|                                   | Foreign       |   |              | 5,701   |              |   |          | (8,559  | )    |   |       | 8,253  |   |   |             | (1,136 | )
|                                   |               |   |              |         |              |   |          |         |      |   |       |        |   |   |             |       
|                                   |               | $ | (24,885      | )       |              | $ | (37,598  | )       |      | $ | 5,771 |        |   | $ | 12,566      |       
|                                   |               |   |              |         |              |   |          |         |      |   |       |        |   |   |             |        |  

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,
|                                                |                                  |                                      |   |             
|                                                |                                  |                                      |   | 2001         |        | 2000 |   |       
|                                                |                                  |                                      |   |              |        |     
|Deferred tax assets, current:                   |                                  |                                      |   |              |        |      |   |        |        |  |  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Inventory valuation and reserves |                                      | $ | 8,386        |        |      | $ | 7,000  |        |  |  |  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Compensation accruals            |                                      |   | 6,756        |        |      |   | 6,255  |        |  |  |  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Allowance for doubtful accounts  |                                      |   | 3,367        |        |      |   | 1,923  |        |  |  |  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Other                            |                                      |   |             |        |      |   |       |        |  |  |  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Valuation allowance              |                                      |   | (2,419       | )      |      |   | (2,232 | )      |  |  |  | 
|                                                |                                  |                                      |   |              |        |      |   |        |        |  | 
|                                                |                                  | Deferred tax assets, current         |   | $            | 16,090 |      |   | $      | 12,946 |  |  |  |  | 
|                                                |                                  |                                      |   |              |        |      |   |        |        |  | 
|                                               
|                                               
|                                               
|                                               
|Deferred tax assets (liabilities), non-current: |                                  |                                      |   |              |        |      |   |        |        |  |  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Tax loss carry forwards          |                                      | $ | 10,759       |        |      | $ | 6,634  |        |  |  |  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Property, plant and equipment    |                                      |   | (781         | )      |      |   | (917   | )      |  |  |  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Other                            |                                      |   | 4,469        |        |      |   | 3,307  |        |  |  |  | 
|                                               
|                                               
|                                               
|                                               
|                                                | Valuation
allowance              |                                      |   | (4,444       | )      |      |   |       |        |  |  |  | 
|                                                |                                  |                                      |   |              |        |      |   |        |        |  | 
|                                                |                                  | Net deferred tax assets, non-current |   | $            | 10,003 |      |   | $      | 9,024  |  |  |  |  | 
|                                                |                                  |                                      |   |              |        |      |   |        |        |  | 

50



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

|          |         |   |              |        |              |   |             |        |      |   |        |        |   |   |        |        |  
|--------- | ------- | - | ------------ | ------ | ------------ | - | ----------- | ------ | ---- | - | ------ | ------ | - | - | ------ | ------ | -
|          |         |   | Years Ended  |        | Six Months   |   | Fiscal Year
|          |         |   | December 31, |        | Ended        |   | Ended      
|          |         |   |              |        | December 31, |   | June 30,   
|          |         |   | 2001         |        | 2000         |   | 1999        |        | 1999
|          |         |   |              |        |              |   |             |        |     
|Current:  |         |   |              |        |              |   |             |        |      |   |        |        |   |   |        |       
|         
|         
|         
|         
|          | Federal |   | $            | (2,302 | )            |   | $           | 8      |      |   | $      |       |   |   | $      | 3,584  |  
|         
|         
|         
|         
|          | State   |   |              | 15     |              |   |             | 9      |      |   |        | 12     |   |   |        | 277    |  
|         
|         
|         
|         
|          | Foreign |   |              | 1,433  |              |   |             | 720    |      |   |        | 3,383  |   |   |        | 978    |  
|          |         |   |              |        |              |   |             |        |      |   |        |        |   |   |        |       
|          |         |   | (854         | )      |              |   | 737         |        |      |   | 3,395  |        |   |   | 4,839  |       
|         
|         
|         
|         
|Deferred: |         |   |              |        |              |   |             |        |      |   |        |        |   |   |        |       
|         
|         
|         
|         
|          | Federal |   |              | (4,274 | )            |   |             | (7,409 | )    |   |        | (1,503 | ) |   |        | (35    | )
|         
|         
|         
|         
|          | State   |   |              | (510   | )            |   |             | (775   | )    |   |        | (250   | ) |   |        | (5     | )
|         
|         
|         
|         
|          | Foreign |   |              | 661    |              |   |             | 799    |      |   |        | (1,256 | ) |   |        | (1,406 | )
|          |         |   |              |        |              |   |             |        |      |   |        |        |   |   |        |       
|          |         |   | (4,123       | )      |              |   | (7,385      | )      |      |   | (3,009 | )      |   |   | (1,446 | )     
|          |         |   |              |        |              |   |             |        |      |   |        |        |   |   |        |       
|          |         | $ | (4,977       | )      |              | $ | (6,648      | )      |      | $ | 386    |        |   | $ | 3,393  |       
|          |         |   |              |        |              |   |             |        |      |   |        |        |   |   |        |       

Consolidated income tax expense (benefit) differed from the amount
computed by applying the U.S. federal income tax rate to income taxes before
income (loss) as shown below:

|                                                                                  |  |              |       |              |  |             |       |      |  |  |       |   |  |  |      |  
|--------------------------------------------------------------------------------- |  | ------------ | ----- | ------------ |  | ----------- | ----- | ---- |  |  | ----- | - |  |  | ---- | -
|                                                                                  |  | Years Ended  |       | Six Months   |  | Fiscal Year
|                                                                                  |  | December 31, |       | Ended        |  | Ended      
|                                                                                  |  |              |       | December 31, |  | June 30,   
|                                                                                  |  | 2001         |       | 2000         |  | 1999        |       | 1999
|                                                                                  |  |              |       |              |  |             |       |     
|Tax expense (benefit) at the federal statutory rate                               |  |              | (35.0 | )%           |  |             | (35.0 | )%   |  |  | 35.0  | % |  |  | 35.0 | %
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|State income taxes (benefit), net of federal income
tax effect                    |  |              | (2.0  | )            |  |             | (2.0  | )    |  |  | (2.7  | ) |  |  | 1.4  |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Foreign taxes attributable to foreign operations less
than federal statutory rate |  |              | (0.3  | )            |  |             | 12.0  |      |  |  | (13.2 | ) |  |  | (3.2 | )
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Tax credits                                                                       |  |              | (2.0  | )            |  |             | (5.3  | )    |  |  | (12.4 | ) |  |  | (9.0 | )
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Foreign sales corporation                                                         |  |              |      |              |  |             |      |      |  |  |      |   |  |  | (2.2 | )
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Tax exempt interest                                                               |  |              |      |              |  |             |      |      |  |  | (0.5  | ) |  |  | (3.5 | )
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Translation loss                                                                  |  |              | 1.0   |              |  |             | 1.5   |      |  |  |      |   |  |  | 11.8 |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Change in valuation allowance                                                     |  |              | 18.6  |              |  |             | 5.9   |      |  |  |      |   |  |  |     |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Capital loss from investment in equity affiliate                                  |  |              | 0.4   |              |  |             | 0.9   |      |  |  |      |   |  |  |     |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Other                                                                             |  |              | (0.7  | )            |  |             | 4.3   |      |  |  | 0.5   |   |  |  | (3.4 | )
|                                                                                  |  |              |       |              |  |             |       |      |  |  |       |   |  |  |      |  
|Effective tax rate                                                                |  |              | (20.0 | )%           |  |             | (17.7 | )%   |  |  | 6.7   | % |  |  | 26.9 | %
|                                                                                  |  |              |       |              |  |             |       |      |  |  |       |   |  |  |      |  

The
deferred tax assets increased during 2001 primarily due to the
increase in net operating loss carryforwards. The valuation allowance
increased by $4.6 million as management believes, based on the weight
of available evidence, it is more likely than not that some portion
of the deferred tax asset will not be realized. During the year ended
December 31, 2000, the Company provided a valuation
reserve of $2.2 million on its deferred tax assets relating to a portion of
the compensation accrual that it estimates is not likely of being recovered
when it becomes deductible.

As
of December 31, 2001 and 2000, the Company had not provided
deferred income tax benefits on cumulative losses of certain individual
international subsidiaries of $26.6 million and $27.1 million,
respectively. If deferred income tax assets were recognized for these net
operating losses, they would be approximately $5.3 million and $5.4
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.

At
December 31, 2001, the Company has U.S. Federal and State net
operating loss carryforwards of approximately $24 million. These
Federal and State net operating loss carryforwards will begin to
expire beginning in 2019 and 2004, respectively, if not previously
utilized.

11. 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, 2001 and
2000, the six-month period ended December 31, 1999 and the fiscal year ended
June 30, 1999 was approximately $165,000, $1,119,000, $439,000 and $867,000
respectively.

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12. 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:

|                              |           |  |                   |            |                   |   |                   |       |               |  |           |           |                  |   |            |       |          |  |           |          |   |   |      |      |          |  |           |           |   |   |      |      | 
|----------------------------- | --------- |  | ----------------- | ---------- | ----------------- | - | ----------------- | ----- | ------------- |  | --------- | --------- | ---------------- | - | ---------- | ----- | -------- |  | --------- | -------- | - | - | ---- | ---- | -------- |  | --------- | --------- | - | - | ---- | ---- | 
|                              |           |  | Years Ended       |            |                   |   |                   |       |               |  |           |           | Six Months Ended |   | Year Ended
|                              |           |  | December 31, 2001 |            | December 31, 2000 |   | December 31, 1999 |       | June 30, 1999
|                              |           |  |                   |            |                   |   |                   |       |              
|                              |           |  |                   |            |                   |   | Weighted          |       |               |  |           |           | Weighted         |   |            |       |          |  | Weighted  |          |   |   |      |      | Weighted
|                              |           |  | Shares            |            | Average           |   | Shares            |       | Average       |  | Shares    |           | Average          |   | Shares     |       | Average 
|                              |           |  | under             |            | Exercise          |   | under             |       | Exercise      |  | under     |           | Exercise         |   | under      |       | Exercise
|                              |           |  | Options           |            | Price             |   | Options           |       | Price         |  | Options   |           | Price            |   | Options    |       | Price   
|                              |           |  |                   |            |                   |   |                   |       |               |  |           |           |                  |   |            |       |         
|Beginning balance
outstanding |           |  | 7,057,043         |            |                   | $ | 8.67              |       |               |  | 5,639,684 |           |                  | $ | 7.14       |       |          |  | 5,084,679 |          |   | $ | 6.96 |      |          |  | 3,745,875 |           |   | $ | 5.83 |     
|                             
|                             
|                             
|                             
|                              | Granted   |  |                   | 5,653,600  |                   |   |                   | 3.75  |               |  |           | 2,830,850 |                  |   |            | 11.62 |          |  |           | 969,780  |   |   |      | 9.21 |          |  |           | 1,520,304 |   |   |      | 9.98 | 
|                             
|                             
|                             
|                             
|                              | Exercised |  |                   | (80        | )                 |   |                   | 10.38 |               |  |           | (548,962  | )                |   |            | 4.73  |          |  |           | (500     | ) |   |      | 9.60 |          |  |           | (3,750    | ) |   |      | 9.60 | 
|                             
|                             
|                             
|                             
|                              | Forfeited |  |                   | (2,047,211 | )                 |   |                   | 7.29  |               |  |           | (864,529  | )                |   |            | 10.83 |          |  |           | (414,275 | ) |   |      | 8.96 |          |  |           | (177,750  | ) |   |      | 9.12 | 
|                              |           |  |                   |            |                   |   |                   |       |               |  |           |           |                  |   |            |       |          |  |           |          |   |   |      |      |          |  |           |           |   |   |      |     
|Ending balance
outstanding    |           |  | 10,663,352        |            |                   | $ | 6.32              |       |               |  | 7,057,043 |           |                  | $ | 8.67       |       |          |  | 5,639,684 |          |   | $ | 7.14 |      |          |  | 5,084,679 |           |   | $ | 6.96 |     
|                              |           |  |                   |            |                   |   |                   |       |               |  |           |           |                  |   |            |       |          |  |           |          |   |   |      |      |          |  |           |           |   |   |      |     
|Exercisable at end of
year    |           |  | 4,054,616         |            |                   | $ | 6.83              |       |               |  | 2,682,934 |           |                  | $ | 5.89       |       |          |  | 2,503,150 |          |   | $ | 4.92 |      |          |  | 2,179,971 |           |   | $ | 4.41 |     
|                              |           |  |                   |            |                   |   |                   |       |               |  |           |           |                  |   |            |       |          |  |           |          |   |   |      |      |          |  |           |           |   |   |      |     

52



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##### Table of Contents



The following table summarizes additional information about the Companys
stock options outstanding as of December 31, 2001:

|                         |  |         |   |                  |  |                     |       |         |  |        |            |                     |  |          |      |          |  |          |       |  |  |          |           |  |  |   |       | 
|------------------------ |  | ------- | - | ---------------- |  | ------------------- | ----- | ------- |  | ------ | ---------- | ------------------- |  | -------- | ---- | -------- |  | -------- | ----- |  |  | -------- | --------- |  |  | - | ----- | 
|                         |  |         |   |                  |  | Options Outstanding |       |         |  |        |            | Options Exercisable
|                         |  |         |   |                  |  |                     |       |         |  |        |            |                    
|                         |  |         |   |                  |  |                     |       |         |  |        |            |                     |  | Weighted |      | Weighted |  |          |       |  |  | Weighted
|                         |  |         |   |                  |  |                     |       |         |  | Shares |            | Average             |  | Average  |      | Shares   |  | Average 
|                         |  |         |   |                  |  |                     |       |         |  | under  |            | Remaining           |  | Exercise |      | under    |  | Exercise
|Range of Exercise Prices |  | Options |   | Contractual Life |  | Price               |       | Options |  | Price 
|                         |  |         |   |                  |  |                     |       |         |  |       
|$0.66                    |  |         |  |                  |  |                     | 2.66  |         |  |        | 790,000    |                     |  |          | 1.00 |          |  | $        | 1.91  |  |  |          | 790,000   |  |  | $ | 1.91  | 
|                        
|                        
|                        
|                        
|$3.00                    |  |         |  |                  |  |                     | 3.50  |         |  |        | 3,642,650  |                     |  |          | 9.13 |          |  |          | 3.49  |  |  |          | 202,806   |  |  |   | 3.49  | 
|                        
|                        
|                        
|                        
|$3.60                    |  |         |  |                  |  |                     | 6.813 |         |  |        | 2,674,575  |                     |  |          | 7.08 |          |  |          | 5.66  |  |  |          | 1,564,794 |  |  |   | 6.21  | 
|                        
|                        
|                        
|                        
|$7.06                    |  |         |  |                  |  |                     | 15.00 |         |  |        | 3,556,127  |                     |  |          | 8.05 |          |  |          | 10.69 |  |  |          | 1,497,016 |  |  |   | 10.51 | 
|                         |  |         |   |                  |  |                     |       |         |  |        |            |                     |  |          |      |          |  |          |       |  |  |          |           |  |  |   |       | 
|                         |  |         |   |                  |  |                     |       |         |  |        | 10,663,352 |                     |  |          |      |          |  |          |       |  |  |          | 4,054,616 |  |  |   |       | 
|                         |  |         |   |                  |  |                     |       |         |  |        |            |                     |  |          |      |          |  |          |       |  |  |          |           |  |  |   |       | 

The weighted average fair value of options granted in the years ended
December 31, 2001 and 2000, the six months ended December 31, 1999 and the
fiscal year ended June 30, 1999 was $2.87, $8.90, $7.05 and $6.92 respectively.

Pro forma information regarding net income and net income per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its stock option plans under the fair value based method of that
Statement.

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 4.5%, 6.0%, 6.5% and 6.5%; an average expected time to
exercise of five years; expected volatility of 83%, 77%, 44% and 88%; and no
dividends for the years ended December 31, 2001 and 2000, the six months ended
December 31, 1999 and the fiscal year ended June 30, 1999.

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options vesting period. The pro forma
information for the years ended December 31, 2001 and 2000, the six months
ended December 31, 1999 and the fiscal year ended June 30, 1999 follows
(dollars in thousands except for net income (loss) per share information):

|                                                |  |              |         |              |  |          |         |      |  |   |       |  |  |   |       | 
|----------------------------------------------- |  | ------------ | ------- | ------------ |  | -------- | ------- | ---- |  | - | ----- |  |  | - | ----- | 
|                                                |  | Year Ended   |         | Six Months   |  | Year    
|                                                |  | December 31, |         | Ended        |  | Ended   
|                                                |  |              |         | December 31, |  | June 30,
|                                                |  | 2001         |         | 2000         |  | 1999     |         | 1999
|                                                |  |              |         |              |  |          |         |     
|Pro forma net income (loss)                     |  | $            | (23,533 | )            |  | $        | (36,540 | )    |  | $ | 3,462 |  |  | $ | 7,078 | 
|                                               
|                                               
|                                               
|                                               
|Pro forma net income (loss) per
share  basic   |  | $            | (0.64   | )            |  | $        | (1.07   | )    |  |   | 0.10  |  |  |   | 0.21  | 
|                                               
|                                               
|                                               
|                                               
|Pro forma net income (loss) per
share  diluted |  | $            | (0.64   | )            |  | $        | (1.07   | )    |  |   | 0.10  |  |  |   | 0.21  | 

The above pro forma disclosure is not necessarily representative of the
effects on reported net income for future years.

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, 2001 and 2000, the six month period ended December 31, 1999
and the fiscal year ended June 30, 1999 the Company sold 156,765, 83,641,
34,508, and 79,133 shares to employees at weighted average prices of $2.84,
$9.16, $8.61, and $9.09 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, 2001,
2000, and 1999, no shares were outstanding.

53



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##### Table of Contents



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 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, previously
acquired shares having a fair market value at the time of exercise equal to the
total option exercise price or a combination thereof.

13. Brazil Devaluation

As a result of the devaluation of the Brazilian Real, the Company recorded
a pretax loss of $4.4 million related to the net monetary asset exposure for
the fiscal year ended June 30, 1999. This loss is included in the $6.7 million
foreign currency loss for the fiscal year ended June 30, 1999.

14. 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):

|                             |  |           |       | 
|---------------------------- |  | --------- | ----- | 
|                             |  | Operating
|Years Ending December 31,    |  | Leases   
|                             |  |          
|2002                         |  | $         | 2,326 | 
|                            
|                            
|                            
|                            
|2003                         |  |           | 1,318 | 
|                            
|                            
|                            
|                            
|2004                         |  |           | 729   | 
|                            
|                            
|                            
|                            
|2005                         |  |           | 507   | 
|                            
|                            
|                            
|                            
|2006                         |  |           | 555   | 
|                            
|                            
|                            
|                            
|Thereafter                   |  |           |      | 
|                             |  |           |       | 
|Total minimum lease payments |  | $         | 5,435 | 
|                             |  |           |       | 

Rental expense amounted to $4.5 million, $4.4 million, $2.1 million and
$3.5 million for the years ended December 31, 2001 and 2000, the six months
ended December 31, 1999 and the fiscal year ended June 30, 1999, respectively.

Litigation

The Company is subject to other 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 and financial condition of the Company.

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##### Table of Contents



15. 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 Chairman, in the aggregate amount of $3.1 million. The loans bear interest at
12% annually and are due January 31, 2003. The outstanding balance of $3.1
million as of December 31, 2001 is included in long-term debt. (See Note 20).

In fiscal 1997, the Company made a loan to George Wallner, the Companys
Chairman, 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.

16. Segment Information

As of December 31, 1999, the Company had two segments: Point-of-Sale (POS)
Systems and Network Systems. 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. In conjunction with the
establishment of the Cirilium joint venture on December 31, 1999, Network
Systems became immaterial to the Companys consolidated financial position and
results of operations as a separate reportable segment. With the acquisition of
Golden Eagle LLC, a direct-financing lease business, direct-finance leasing
activities became a new reportable segment.

The Companys reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different technologies and marketing strategies. The
following table presents certain segment financial information and the
reconciliation of segment financial information to consolidated totals as of
and for the years ended December 31, 2001 and 2000 (dollars in thousands):

|                                      |  |                              |         |                              |  |       |        |         |  |                 |         |           |  |   |         |  |  |   |        |   |  |   |         | 
|------------------------------------- |  | ---------------------------- | ------- | ---------------------------- |  | ----- | ------ | ------- |  | --------------- | ------- | --------- |  | - | ------- |  |  | - | ------ | - |  | - | ------- | 
|                                      |  | Year Ended December 31, 2001 |         | Year Ended December 31, 2000
|                                      |  |                              |         |                             
|                                      |  | POS and Network              |         | Equipment                    |  |       |        |         |  | POS and Network |         | Equipment |  |   |         | 
|                                      |  | Systems                      |         | Leasing                      |  | Total |        | Systems |  | Leasing         |         | Total    
|                                      |  |                              |         |                              |  |       |        |         |  |                 |         |          
|Revenue from external customers       |  | $                            | 263,139 |                              |  | $     | 28,565 |         |  | $               | 291,704 |           |  | $ | 302,203 |  |  | $ | 25,357 |   |  | $ | 327,560 | 
|                                     
|                                     
|                                     
|                                     
|Intersegment revenues                 |  |                              |        |                              |  |       |       |         |  |                 |        |           |  |   |        |  |  |   |       |   |  |   |        | 
|                                      |  |                              |         |                              |  |       |        |         |  |                 |         |           |  |   |         |  |  |   |        |   |  |   |         | 
|Total revenues                        |  | $                            | 263,139 |                              |  | $     | 28,565 |         |  | $               | 291,704 |           |  | $ | 302,203 |  |  | $ | 25,357 |   |  | $ | 327,560 | 
|                                      |  |                              |         |                              |  |       |        |         |  |                 |         |           |  |   |         |  |  |   |        |   |  |   |         | 
|Segment income (loss) from operations |  | $                            | 13,806  |                              |  | $     | (7,376 | )       |  | $               | 6,430   |           |  | $ | 6,110   |  |  | $ | (4,397 | ) |  | $ | 1,713   | 
|                                      |  |                              |         |                              |  |       |        |         |  |                 |         |           |  |   |         |  |  |   |        |   |  |   |         | 
|Depreciation and amortization expense |  | $                            | 11,110  |                              |  | $     | 2,590  |         |  | $               | 13,700  |           |  | $ | 9,511   |  |  | $ | 1,799  |   |  | $ | 11,310  | 
|                                      |  |                              |         |                              |  |       |        |         |  |                 |         |           |  |   |         |  |  |   |        |   |  |   |         | 
|Segment assets                        |  | $                            | 775,988 |                              |  | $     | 74,804 |         |  | $               | 850,792 |           |  | $ | 622,741 |  |  | $ | 87,103 |   |  | $ | 709,844 | 
|                                      |  |                              |         |                              |  |       |        |         |  |                 |         |           |  |   |         |  |  |   |        |   |  |   |         | 

55



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##### Table of Contents



Reconciliation

|                                                                |                                              |                                         |                                                    |   |                         |         |         |   |         |         |  
|--------------------------------------------------------------- | -------------------------------------------- | --------------------------------------- | -------------------------------------------------- | - | ----------------------- | ------- | ------- | - | ------- | ------- | -
|                                                                |                                              |                                         |                                                    |   | Year Ended December 31,
|                                                                |                                              |                                         |                                                    |   |                        
|                                                                |                                              |                                         |                                                    |   | 2001                    |         | 2000   
|                                                                |                                              |                                         |                                                    |   |                         |         |        
|Net Revenues                                                    |                                              |                                         |                                                    |   |                         |         |         |  
|                                                               
|                                                               
|                                                               
|                                                               
|Net revenues for reportable segments                            |                                              | $                                       | 291,704                                            |   |                         | $       | 327,560 |  
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Elimination of intersegment revenues         |                                         |                                                    |  |                         |         |         |  |        
|                                                                |                                              |                                         |                                                    |   |                         |         |         |  
|                                                                |                                              | Total consolidated revenues             |                                                    | $ | 291,704                 |         |         | $ | 327,560 |        
|                                                                |                                              |                                         |                                                    |   |                         |         |         |  
|Income from Operations                                          |                                              |                                         |                                                    |   |                         |         |         |  
|                                                               
|                                                               
|                                                               
|                                                               
|Income from operations for reportable segments                  |                                              | $                                       | 6,430                                              |   |                         | $       | 1,713   |  
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Elimination of intersegment profits (losses) |                                         |                                                    |  |                         |         |         |  |        
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Unallocated amounts:                         |                                         |                                                    |   |                         |         |         |   |        
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                |                                              | Corporate expenses                      |                                                    |   | (17,377                 | )       |         |   | (24,756 | )      
|                                                                |                                              |                                         |                                                    |   |                         |         |         |  
|                                                                |                                              |                                         | Consolidated loss from operations                  |   | $                       | (10,947 | )       |   | $       | (23,043 | )
|                                                                |                                              |                                         |                                                    |   |                         |         |         |  
|Depreciation and Amortization Expenses                          |                                              |                                         |                                                    |   |                         |         |         |  
|                                                               
|                                                               
|                                                               
|                                                               
|Depreciation and amortization expenses from reportable
segments |                                              | $                                       | 13,700                                             |   |                         | $       | 11,310  |  
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Unallocated amounts:                         |                                         |                                                    |   |                         |         |         |   |        
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                |                                              | Corporate depreciation and amortization |                                                    |   | 2,045                   |         |         |   | 1,929   |        
|                                                                |                                              |                                         |                                                    |   |                         |         |         |  
|                                                                |                                              |                                         | Consolidated depreciation and amortization expense |   | $                       | 15,745  |         |   | $       | 13,239  |  
|                                                                |                                              |                                         |                                                    |   |                         |         |         |  

|               |                      |                             |                     |  |                          |         |         |  |          |         | 
|-------------- | -------------------- | --------------------------- | ------------------- |  | ------------------------ | ------- | ------- |  | -------- | ------- | 
|               |                      |                             |                     |  | Years Ended December 31,
|               |                      |                             |                     |  |                         
|               |                      |                             |                     |  | 2001                     |         | 2000   
|               |                      |                             |                     |  |                          |         |        
|Assets         |                      |                             |                     |  |                          |         |         | 
|              
|              
|              
|              
|Segment assets |                      | $                           | 850,792             |  |                          | $       | 709,844 | 
|              
|              
|              
|              
|               | Unallocated amounts: |                             |                     |  |                          |         |         |  |         
|              
|              
|              
|              
|               |                      | Corporate assets            |                     |  | 225,110                  |         |         |  | 166,298  |        
|              
|              
|              
|              
|               | Eliminations:        |                             |                     |  |                          |         |         |  |         
|              
|              
|              
|              
|               |                      | Intercompany receivables    |                     |  | (357,748                 | )       |         |  | (255,980 | )      
|              
|              
|              
|              
|               |                      | Investments in subsidiaries |                     |  | (125,771                 | )       |         |  | (94,124  | )      
|              
|              
|              
|              
|               |                      | Advances to subsidiaries    |                     |  | (247,588                 | )       |         |  | (158,261 | )      
|              
|              
|              
|              
|               |                      | Profit in ending inventory  |                     |  | (7,107                   | )       |         |  | 1,460    |        
|              
|              
|              
|              
|               |                      | Other profit eliminations   |                     |  | 6                        |         |         |  |         |        
|               |                      |                             |                     |  |                          |         |         | 
|               |                      |                             | Consolidated assets |  | $                        | 337,694 |         |  | $        | 369,237 | 
|               |                      |                             |                     |  |                          |         |         | 

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, 2001 and 2000 and for the six months ended
December 31, 1999 and for the fiscal year ended June 30, 1999 is
presented in the table below (dollars in thousands):

|                                    |  |               |         |               |  |              |        |        |  |       |        |  |  |   |        |  |  |   |         | 
|----------------------------------- |  | ------------- | ------- | ------------- |  | ------------ | ------ | ------ |  | ----- | ------ |  |  | - | ------ |  |  | - | ------- | 
|                                    |  | United States |         | Latin America |  | Asia/Pacific |        | Europe |  | Total
|                                    |  |               |         |               |  |              |        |        |  |      
|Year ending December 31, 2001       |  |               |         |               |  |              |        |        |  |       |        |  |  |   |        |  |  |   |         | 
|                                   
|                                   
|                                   
|                                   
|Revenues                            |  | $             | 138,764 |               |  | $            | 73,243 |        |  | $     | 34,143 |  |  | $ | 45,554 |  |  | $ | 291,704 | 
|                                   
|                                   
|                                   
|                                   
|Long-lived assets                   |  |               | 57,969  |               |  |              | 18,257 |        |  |       | 3,337  |  |  |   | 10,510 |  |  |   | 90,073  | 
|                                   
|                                   
|                                   
|                                   
|Year ending December 31, 2000       |  |               |         |               |  |              |        |        |  |       |        |  |  |   |        |  |  |   |         | 
|                                   
|                                   
|                                   
|                                   
|Revenues                            |  | $             | 155,810 |               |  | $            | 76,360 |        |  | $     | 39,908 |  |  | $ | 55,482 |  |  | $ | 327,560 | 
|                                   
|                                   
|                                   
|                                   
|Long-lived assets                   |  |               | 61,036  |               |  |              | 20,232 |        |  |       | 6,405  |  |  |   | 10,069 |  |  |   | 97,742  | 
|                                   
|                                   
|                                   
|                                   
|Six months ending
December 31, 1999 |  |               |         |               |  |              |        |        |  |       |        |  |  |   |        |  |  |   |         | 
|                                   
|                                   
|                                   
|                                   
|Revenues                            |  | $             | 66,224  |               |  | $            | 39,971 |        |  | $     | 21,275 |  |  | $ | 21,812 |  |  | $ | 149,282 | 
|                                   
|                                   
|                                   
|                                   
|Long-lived assets                   |  |               | 42,053  |               |  |              | 8,136  |        |  |       | 9,530  |  |  |   | 7,948  |  |  |   | 67,667  | 
|                                   
|                                   
|                                   
|                                   
|Year ending June 30, 1999           |  |               |         |               |  |              |        |        |  |       |        |  |  |   |        |  |  |   |         | 
|                                   
|                                   
|                                   
|                                   
|Revenues                            |  | $             | 141,100 |               |  | $            | 59,461 |        |  | $     | 34,253 |  |  | $ | 26,701 |  |  | $ | 261,515 | 
|                                   
|                                   
|                                   
|                                   
|Long-lived assets                   |  |               | 32,012  |               |  |              | 7,315  |        |  |       | 7,030  |  |  |   | 6,818  |  |  |   | 53,175  | 

17. Acquisitions

Golden Eagle LLC

On January 10, 2000, the Company acquired, through a wholly owned
subsidiary, substantially all of the assets and business and assumed certain
liabilities of Golden Eagle LLC (Golden Eagle). Golden Eagle is a lessor of
POS equipment. The purchase price

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paid was $18.5 million in cash and $4 million in the Companys common
stock. The purchase agreement provides for additional payments up to $32.5
million, payable in the Companys common stock based on Golden Eagles earnings
over the next three-year period subsequent to the acquisition date, ending
December 31, 2002. Such payments, if paid, would constitute additional goodwill
and be assessed annually in accordance with SFAS No. 142. No payments were made
for the earn out periods ending December 31, 2001 and 2000.

The acquisition was accounted for under the purchase method of accounting.
Substantially all the purchase price was allocated to identifiable net tangible
assets and liabilities of $0.9 million and identifiable intangibles and
goodwill amounting to $21.6 million, which is being amortized over 15 years.
The results of Golden Eagles operations are included in the Companys
consolidated statements of operations and cash flows beginning from the date of
acquisition.

Pro forma information with respect to the acquisition of Golden Eagle
includes the historical financial information of the Company and Golden Eagle
for the year ended December 31, 2000, and the six months ended December 31,
1999, as if the acquisition occurred at the beginning of each period. Pro forma
adjustments include only those adjustments directly attributable to the
transaction, and as such, are for illustrative purposes only and are not
necessarily indicative of the results of operations that would have been
reported had the acquisition actually occurred on such dates. Pro forma
information (in thousands) as if the acquisition occurred at the beginning of
each period is as follows:

|                                  |  |              |         |                  |  |   |         | 
|--------------------------------- |  | ------------ | ------- | ---------------- |  | - | ------- | 
|                                  |  | Year Ended   |         | Six Months Ended
|                                  |  | December 31, |         | December 31,    
|                                  |  | 2000         |         | 1999            
|                                  |  |              |         |                 
|Revenues                          |  | $            | 327,996 |                  |  | $ | 153,161 | 
|                                 
|                                 
|                                 
|                                 
|Net income (loss)                 |  | $            | (30,949 | )                |  | $ | 3,436   | 
|                                 
|                                 
|                                 
|                                 
|Basic earnings (loss) per share   |  | $            | (0.91   | )                |  | $ | 0.10    | 
|                                 
|                                 
|                                 
|                                 
|Diluted earnings (loss) per share |  | $            | (0.91   | )                |  | $ | 0.10    | 

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18. Supplemental Cash Flow Information (in thousands)

|                                                                      |                                                                                      |   |              |        |                  |   |            |         |      |   |       |       |   |   |        |        |  
|--------------------------------------------------------------------- | ------------------------------------------------------------------------------------ | - | ------------ | ------ | ---------------- | - | ---------- | ------- | ---- | - | ----- | ----- | - | - | ------ | ------ | -
|                                                                      |                                                                                      |   | Years Ended  |        |                  |   |            |         |      |   |      
|                                                                      |                                                                                      |   | December 31, |        | Six Months Ended |   | Year Ended
|                                                                      |                                                                                      |   |              |        | December 31,     |   | June 30,  
|                                                                      |                                                                                      |   | 2001         |        | 2000             |   | 1999       |         | 1999
|                                                                      |                                                                                      |   |              |        |                  |   |            |         |     
|Interest paid                                                         |                                                                                      | $ | (8,614       | )      |                  | $ | (8,979     | )       |      | $ | (541  | )     |   | $ | (455   | )     
|                                                                      |                                                                                      |   |              |        |                  |   |            |         |      |   |       |       |   |   |        |       
|Income taxes paid                                                     |                                                                                      | $ | (2,340       | )      |                  | $ | (368       | )       |      | $ | (18   | )     |   | $ | (5,652 | )     
|                                                                      |                                                                                      |   |              |        |                  |   |            |         |      |   |       |       |   |   |        |       
|Noncash investing activities:                                         |                                                                                      |   |              |        |                  |   |            |         |      |   |       |       |   |   |        |       
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Acquisition of plant and equipment through
capital leases                            |   | $            |       |                  |   | $          | 1,630   |      |   | $     |      |   |   | $      |       |  
|                                                                      |                                                                                      |   |              |        |                  |   |            |         |      |   |       |       |   |   |        |       
|                                                                      | Contribution of assets to jointly-owned
company                                      |   | $            |       |                  |   | $          |        |      |   | $     | 776   |   |   | $      |       |  
|                                                                      |                                                                                      |   |              |        |                  |   |            |         |      |   |       |       |   |   |        |       
|                                                                      | Changes in accounts payable related to
the purchase of property, plant and
equipment |   | $            | 471    |                  |   | $          | (36     | )    |   | $     | (95   | ) |   | $      | 210    |  
|                                                                      |                                                                                      |   |              |        |                  |   |            |         |      |   |       |       |   |   |        |       
|Noncash
financing activities:                                         |                                                                                      |   |              |        |                  |   |            |         |      |   |       |       |   |   |        |       
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Issuance of stock to pay off notes payable                                           |   | $            | (7,500 | )                |   | $          |        |      |   | $     |      |   |   | $      |       |  
|                                                                      |                                                                                      |   |              |        |                  |   |            |         |      |   |       |       |   |   |        |       
|                                                                      | Issuance of common stock warrants at fair value                                      |   | $            | (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  |      |   | $     | 3,962 |   |   | $      | 18,290 |  
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Liabilities assumed                                                                  |   |              |       |                  |   |            | (41,378 | )    |   |       | (362  | ) |   |        | (7,942 | )
|                                                                      |                                                                                      |   |              |        |                  |   |            |         |      |   |       |       |   |   |        |       
|                                                                      | Net assets acquired                                                                  |   |              |       |                  |   |            | 28,134  |      |   |       | 3,600 |   |   |        | 10,348 |  
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Less issuance of treasury stock                                                      |   |              |       |                  |   |            |        |      |   |       |      |   |   |        | (1,069 | )
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Less issuance of common stock                                                        |   |              |       |                  |   |            | (4,000  | )    |   |       |      |   |   |        |       |  
|                                                                      |                                                                                      |   |              |        |                  |   |            |         |      |   |       |       |   |   |        |       
|Net cash paid for acquisition of
controlling interest in
subsidiaries |                                                                                      | $ |             |        |                  | $ | 24,134     |         |      | $ | 3,600 |       |   | $ | 9,279  |       
|                                                                      |                                                                                      |   |              |        |                  |   |            |         |      |   |       |       |   |   |        |       

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19. 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, 2001 and 2000. 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.)

|                                  |  |                              |         |         |  |              |        |                |  |             |        |   |  |   |        |  |  |   |         |  
|--------------------------------- |  | ---------------------------- | ------- | ------- |  | ------------ | ------ | -------------- |  | ----------- | ------ | - |  | - | ------ |  |  | - | ------- | -
|                                  |  | Year Ended December 31, 2001
|                                  |  |                             
|                                  |  | March 31                     |         | June 30 |  | September 30 |        | December 31(1) |  | Fiscal Year
|                                  |  |                              |         |         |  |              |        |                |  |            
|Net revenue                       |  | $                            | 71,075  |         |  | $            | 75,095 |                |  | $           | 71,011 |   |  | $ | 74,523 |  |  | $ | 291,704 |  
|                                 
|                                 
|                                 
|                                 
|Gross profit                      |  |                              | 17,944  |         |  |              | 25,810 |                |  |             | 26,340 |   |  |   | 28,037 |  |  |   | 98,131  |  
|                                 
|                                 
|                                 
|                                 
|Income (loss) from
operations     |  |                              | (11,778 | )       |  |              | (2,080 | )              |  |             | 230    |   |  |   | 2,681  |  |  |   | (10,947 | )
|                                 
|                                 
|                                 
|                                 
|Net income (loss)                 |  |                              | (13,253 | )       |  |              | (5,759 | )              |  |             | (2,385 | ) |  |   | 1,489  |  |  |   | (19,908 | )
|                                 
|                                 
|                                 
|                                 
|Basic earnings (loss) per
share   |  |                              | (0.39   | )       |  |              | (0.17  | )              |  |             | (0.06  | ) |  |   | 0.04   |  |  |   | (0.54   | )
|                                 
|                                 
|                                 
|                                 
|Diluted earnings (loss) per
share |  |                              | (0.39   | )       |  |              | (0.17  | )              |  |             | (0.06  | ) |  |   | 0.04   |  |  |   | (0.54   | )

|                                  |  |                              |        |         |  |              |        |             |  |             |         |   |  |   |        |   |  |   |         |  
|--------------------------------- |  | ---------------------------- | ------ | ------- |  | ------------ | ------ | ----------- |  | ----------- | ------- | - |  | - | ------ | - |  | - | ------- | -
|                                  |  | Year Ended December 31, 2000
|                                  |  |                             
|                                  |  | March 31                     |        | June 30 |  | September 30 |        | December 31 |  | Fiscal Year
|                                  |  |                              |        |         |  |              |        |             |  |            
|Net revenue                       |  | $                            | 77,333 |         |  | $            | 89,817 |             |  | $           | 75,915  |   |  | $ | 84,495 |   |  | $ | 327,560 |  
|                                 
|                                 
|                                 
|                                 
|Gross profit                      |  |                              | 30,688 |         |  |              | 37,333 |             |  |             | 17,974  |   |  |   | 29,409 |   |  |   | 115,404 |  
|                                 
|                                 
|                                 
|                                 
|Income (loss) from
operations     |  |                              | (2,832 | )       |  |              | 2,836  |             |  |             | (17,778 | ) |  |   | (5,269 | ) |  |   | (23,043 | )
|                                 
|                                 
|                                 
|                                 
|Net income (loss)                 |  |                              | (3,874 | )       |  |              | (1,235 | )           |  |             | (21,633 | ) |  |   | (4,208 | ) |  |   | (30,950 | )
|                                 
|                                 
|                                 
|                                 
|Basic earnings (loss) per
share   |  |                              | (0.11  | )       |  |              | (0.04  | )           |  |             | (0.63   | ) |  |   | (0.12  | ) |  |   | (0.91   | )
|                                 
|                                 
|                                 
|                                 
|Diluted earnings (loss) per
share |  |                              | (0.11  | )       |  |              | (0.04  | )           |  |             | (0.63   | ) |  |   | (0.12  | ) |  |   | (0.91   | )

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | 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 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.

20. Subsequent Events

On March 22, 2002, the Company completed a private placement of 7,870,000
shares of its common stock, raising $39.4 million in gross proceeds before
deducting commissions and expenses of the offering of approximately $3.2
million. The shares were not registered with the SEC in reliance upon the
exemption from registration contained in Section 4(2) of the Securities Act of
1933, as amended, as well as similar exemptions contained in the securities
laws, rules and regulations of the applicable states. The shares may not be
re-offered or resold in the United States absent registration, or an applicable
exemption from registration requirements of the

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1933 Act. The Company has used the proceeds to pay off and cancel its term
loans from the senior credit facility, pay down to zero the balance on the
revolving line of credit from the senior credit facility, pay off the balance
due to George Wallner, the Companys Chairman. Remaining proceeds will be used for
general corporate purposes.

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REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE

To the Board of Directors and Stockholders
of Hypercom Corporation

Our
audit of the consolidated financial statements for the year ended
June 30, 1999 referred to in our
report dated July 20, 1999 which report and consolidated
financial statements are included in this Annual Report on
Form 10-K also included an audit of the financial statement
schedule for the year ended June 30, 1999 included at
page 62 of this Form 10-K. In our opinion, this financial statement schedule
for the year ended June 30, 1999 presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.

| |                               
| | ------------------------------
| | /s/ PRICEWATERHOUSECOOPERS LLP



Phoenix, Arizona
July 20, 1999

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FINANCIAL STATEMENT SCHEDULE

SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS

|                                    |                                 |          |   |              |       |            |   |                        |       |               |   |               |   |            |   |         |        |   |   |        |       | 
|----------------------------------- | ------------------------------- | -------- | - | ------------ | ----- | ---------- | - | ---------------------- | ----- | ------------- | - | ------------- | - | ---------- | - | ------- | ------ | - | - | ------ | ----- | 
|                                    |                                 |          |   | Additions    |       |            |   |                        |       |               |   |              
|                                    |                                 |          |   |              |       |            |   |                        |       |               |   |              
|                                    |                                 |          |   | Balance at   |       | Charged to |   | Charged to             |       |               |   |               |   |            |   |        
|                                    |                                 |          |   | Beginning of |       | Costs and  |   | Other                  |       |               |   |               |   | Balance at
|                                    |                                 |          |   | Period       |       | Expenses   |   | Accounts               |       | Deductions(A) |   | End of Period
|                                    |                                 |          |   |              |       |            |   |                        |       |               |   |              
|                                    |                                 |          |   |              |       |            |   | (Dollars in thousands) |       |               |   |              
|Year Ended June 30, 1999:           |                                 |          |   |              |       |            |   |                        |       |               |   |               |   |            |   |         |        |   |   |       
|                                   
|                                   
|                                   
|                                   
|                                    | Allowance for doubtful
accounts |          | $ | 3,729        |       |            | $ | 1,386                  |       |               | $ |              |   |            | $ | (2,033  | )      |   | $ | 3,082  |      
|                                   
|                                   
|                                   
|                                   
|                                    | Inventory reserves              |          |   | 4,643        |       |            |   | 2,925                  |       |               |   |              |   |            |   | (2,295  | )      |   |   | 5,273  |      
|                                   
|                                   
|                                   
|                                   
|Six Months Ended December 31, 1999: |                                 |          |   |              |       |            |   |                        |       |               |   |               |   |            |   |         |        |   |   |       
|                                   
|                                   
|                                   
|                                   
|                                    | Allowance for doubtful          |          |   |              |       |            |   |                        |       |               |   |               |   |            |   |         |        |   |   |        |      
|                                   
|                                   
|                                   
|                                   
|                                    |                                 | accounts |   |              | 3,082 |            |   |                        | (24   | )             |   |               |   |            |   |         | (1,469 | ) |   |        | 1,589 | 
|                                   
|                                   
|                                   
|                                   
|                                    | Inventory reserves              |          |   | 5,273        |       |            |   | (281                   | )     |               |   | 32            |   |            |   |         |        |   |   | 5,024  |      
|                                   
|                                   
|                                   
|                                   
|Year Ended December 31, 2000:       |                                 |          |   |              |       |            |   |                        |       |               |   |               |   |            |   |         |        |   |   |       
|                                   
|                                   
|                                   
|                                   
|                                    | Allowance for doubtful
accounts |          |   | 1,589        |       |            |   | 2,732                  |       |               |   |              |   |            |   | (666    | )      |   |   | 3,655  |      
|                                   
|                                   
|                                   
|                                   
|                                    | Inventory reserves              |          |   | 5,024        |       |            |   | 3,170                  |       |               |   |              |   |            |   | (968    | )      |   |   | 7,226  |      
|                                   
|                                   
|                                   
|                                   
|                                    | Allowance for credit losses     |          |   |             |       |            |   | 11,681                 |       |               |   | 1,600         |   |            |   | (11,157 | )      |   |   | 2,124  |      
|                                   
|                                   
|                                   
|                                   
|Year Ended December 31, 2001:       |                                 |          |   |              |       |            |   |                        |       |               |   |               |   |            |   |         |        |   |   |       
|                                   
|                                   
|                                   
|                                   
|                                    | Allowance for doubtful          |          |   |              |       |            |   |                        |       |               |   |               |   |            |   |         |        |   |   |        |      
|                                   
|                                   
|                                   
|                                   
|                                    |                                 | accounts |   |              | 3,655 |            |   |                        | 1,780 |               |   |               |  |            |   |         | (1,406 | ) |   |        | 4,029 | 
|                                   
|                                   
|                                   
|                                   
|                                    | Inventory reserves              |          |   | 7,226        |       |            |   | 3,794                  |       |               |   |              |   |            |   | (250    | )      |   |   | 10,770 |      
|                                   
|                                   
|                                   
|                                   
|                                    | Allowance for credit losses     |          |   | 2,124        |       |            |   | 18,075                 |       |               |   |              |   |            |   | (14,893 | )      |   |   | 5,306  |      



---

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

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EXHIBIT INDEX

|        |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|------- |  | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|Number  |  |   |  | Description of Exhibit and Method of Filing                                                                                                                                                                                                                                                                                                                                                                                                                      
|        |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|3.1     |  |  |  | Amended and Restated Certificate of Incorporation of
Hypercom Corporation (incorporated by reference to
Exhibit 3.1 to Hypercom Corporations Registration
Statement on Form S-1 (Registration No. 333-35641))                                                                                                                                                                                                                                                   
|       
|       
|       
|       
|        |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|       
|       
|       
|       
|3.2     |  |  |  | Amended and Restated Bylaws of Hypercom Corporation *                                                                                                                                                                                                                                                                                                                                                                                                            
|       
|       
|       
|       
|        |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|       
|       
|       
|       
|        |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|       
|       
|       
|       
|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. 333-35641))                                                                                                                                                                                                                                                               
|       
|       
|       
|       
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|10.1    |  |  |  | Loan and Security Agreement dated as of June 6, 2001
by and among Hypercom Corporation, Hypercom U.S.A.,
Inc., Hypercom Horizon, Inc. and Michelle
Investments LLC (incorporated by reference to
Exhibit 10.2 to Hypercom Corporations Current
Report on Form 8-K filed June 14, 2001)                                                                                                                                                                          
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|10.2    |  |  |  | Promissory Note dated June 6, 2001 executed by
Hypercom Corporation, Hypercom U.S.A., Inc. and
Hypercom Horizon, Inc. in favor of Michelle
Investments LLC (incorporated by reference to
Exhibit 10.3 to Hypercom Corporations Current
Report on Form 8-K filed June 14, 2001)                                                                                                                                                                                  
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|10.3    |  |  |  | Series A Warrant to Purchase Shares of Common Stock
of Hypercom Corporation dated June 6, 2001 issued to
Michelle Investments LLC (incorporated by reference
to Exhibit 10.4 to Hypercom Corporations Current
Report on Form 8-K filed June 14, 2001)                                                                                                                                                                                                           
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|        |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
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|10.4    |  |  |  | Loan Agreement dated as of June 4, 2001 by and among
certain lenders (listed by exhibit thereto),
Hypercom Corporation and George R. Wallner
(incorporated by reference to Exhibit 10.5 to
Hypercom Corporations Current Report on Form 8-K
filed June 14, 2001)                                                                                                                                                                                                
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|        |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
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|10.5    |  |  |  | Security Agreement dated as of June 4, 2001 by and
between George R. Wallner and certain lenders to
Hypercom Corporation (listed by exhibit thereto)
(incorporated by reference to Exhibit 10.6 to
Hypercom Corporations Current Report on Form 8-K                                                                                                                                                                                                             
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|        |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
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|10.6    |  |  |  | filed June 14, 2001)
Form of Convertible Promissory Note issued to
certain lenders to Hypercom Corporation
(incorporated by reference to Exhibit 10.7 to
Hypercom Corporations Current Report on Form 8-K
filed June 14, 2001)                                                                                                                                                                                                                                  
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|10.7    |  |  |  | Form of Series B Warrant to Purchase Shares of
Common Stock of Hypercom Corporation issued to each
member of the Investor Group (incorporated by
reference to Exhibit 10.8 to Hypercom Corporations
Current Report on Form 8-K filed June 14, 2001)                                                                                                                                                                                                             
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|        |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
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|10.8    |  |  |  | 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)
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|        |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
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|10.9    |  |  |  | Form of Series C Warrant to Purchase Shares of
Common Stock of Hypercom Corporation issued to
Ableco Holding LLC (incorporated by reference to
Exhibit 10.2 to Hypercom Corporations Current
Report on Form 8-K filed August 9, 2001)                                                                                                                                                                                                                           
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|10.10   |  |  |  | Form of Series D Warrant to Purchase Shares of
Common Stock of Hypercom Corporation issued to Roth
Capital Partners LLC (incorporated by reference to
Exhibit 10.3 to Hypercom Corporations Current
Report on Form 8-K filed August 9, 2001)                                                                                                                                                                                                                    
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|        |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
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|10.11   |  |  |  | Stock Purchase Agreement dated July 31, 2001 between
Hypercom Corporation and Michelle Investments LLC
(incorporated by reference to Exhibit 10.4 to
Hypercom Corporations Current Report on Form 8-K
filed August 9, 2001)                                                                                                                                                                                                                                     
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|        |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
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|10.12   |  |  |  | Stock Purchase Agreement dated July 30, 2001 among
Hypercom Corporation, Norton Family Living Trust UTD
2-4-91, Norton Family Living Trust UTD 2-15-96,
Stevenson Family Living Trust UTD 7-1-97, JR Norton
Ventures Limited Partnership, Daniel D. Diethelm,
Michael R. Norton and Matthew A. Diethelm
(incorporated by reference to Exhibit 10.5 to
Hypercom Corporations Current Report on Form 8-K
filed August 9, 2001)                                    

63



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##### Table of Contents



|        |  |   |  |                                                                                                                                                                                                                                                                                                                                             
|------- |  | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |   |  |                                                                                                                                                                                                                                                                                                                                             
|Number  |  |   |  | Description of Exhibit and Method of Filing                                                                                                                                                                                                                                                                                                 
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|        |  |   |  |                                                                                                                                                                                                                                                                                                                                             
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|10.13   |  |  |  | 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. 333-35641))                                                                                                 
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|        |  |   |  |                                                                                                                                                                                                                                                                                                                                             
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|10.14   |  |  |  | Hypercom Corporation Long-Term Incentive Plan (incorporated by reference to Exhibit 10.3 to
Hypercom Corporations Registration Statement on Form S-1 (Registration No. 333-35641))                                                                                                                                                        
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|        |  |   |  |                                                                                                                                                                                                                                                                                                                                             
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|10.15   |  |  |  | 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. 333-35641))                                                                                                                                               
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|        |  |   |  |                                                                                                                                                                                                                                                                                                                                             
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|10.16   |  |  |  | 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. 333-43622))                                                                                                                                           
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|        |  |   |  |                                                                                                                                                                                                                                                                                                                                             
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|10.17   |  |  |  | Hypercom Corporation Nonemployee Directors Stock Option Plan (incorporated by reference to
Exhibit 10.6 to Hypercom Corporations Registration Statement on Form S-1 (Registration No.
333-35641))                                                                                                                                        
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|        |  |   |  |                                                                                                                                                                                                                                                                                                                                             
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|10.18   |  |  |  | Employment Agreement with Albert A. Irato, dated October 4, 2001 *                                                                                                                                                                                                                                                                         
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|10.19   |  |  |  | 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)    
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|        |  |   |  |                                                                                                                                                                                                                                                                                                                                             
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|10.20   |  |  |  | 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)
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|        |  |   |  |                                                                                                                                                                                                                                                                                                                                             
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|10.21   |  |  |  | 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)                    
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|        |  |   |  |                                                                                                                                                                                                                                                                                                                                             
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|10.22   |  |  |  | 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)                                                                              
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|        |  |   |  |                                                                                                                                                                                                                                                                                                                                             
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|10.23   |  |  |  | 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)                                                                                                     
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|        |  |   |  |                                                                                                                                                                                                                                                                                                                                             
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|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)                                                                                   
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|        |  |   |  |                                                                                                                                                                                                                                                                                                                                             
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|10.25   |  |  |  | Loan Agreement, dated October 12, 1996 by and between Hypercom Pty. Ltd. and George Wallner
(incorporated by reference to Exhibit 10.11 to Hypercom Corporations Registration Statement on
Form S-1 (Registration No. 333-35641))                                                                                                         
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|        |  |   |  |                                                                                                                                                                                                                                                                                                                                             
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|10.26   |  |  |  | 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. 333-35641))                                                                                                           
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|        |  |   |  |                                                                                                                                                                                                                                                                                                                                             
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|10.27   |  |  |  | Waiver and Consent dated March 25, 2002, by and among Hypercom Corporation, certain of its
subsidiaries and Foothill Capital Corporation*                                                                                                                                                                                                   
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|        |  |   |  |                                                                                                                                                                                                                                                                                                                                             
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|21.1    |  |  |  | List of Subsidiaries (incorporated by reference to Exhibit 21.1 to Hypercom Corporations
Registration Statement on Form S-1 (Registration No. 333-68202))                                                                                                                                                                                  
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|        |  |   |  |                                                                                                                                                                                                                                                                                                                                             
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|23.1    |  |  |  | Consent of Ernst & Young L.L.P., independent accountants*                                                                                                                                                                                                                                                                                   
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|        |  |   |  |                                                                                                                                                                                                                                                                                                                                             
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|23.2    |  |  |  | Consent of PricewaterhouseCooper L.L.P., independent accountants*                                                                                                                                                                                                                                                                           
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|        |  |   |  |                                                                                                                                                                                                                                                                                                                                             
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|24.1    |  |  |  | Powers of Attorney*                                                                                                                                                                                                                                                                                                                         
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|        |  |   |  |                                                                                                                                                                                                                                                                                                                                             
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|99.1    |  |  |  | Cautionary Statement Regarding Forward-Looking Statements and Risk Factors *                                                                                                                                                                                                                                                                

64



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