<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

(MARK ONE)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED OCTOBER 3, 1998, OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___________ TO _________

                         COMMISSION FILE NUMBER: 0-13459

                       AXIOHM TRANSACTION SOLUTIONS, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

           CALIFORNIA                                           94-2917470
(STATE OR OTHER JURISDICTION OF                              (I.R.S. EMPLOYER 
INCORPORATION OR ORGANIZATION)                               IDENTIFICATION NO.)

                         16 SENTRY PARK WEST, SUITE 450
                            1787 SENTRY PARKWAY WEST
                               BLUE BELL, PA 19422
                     (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)

     REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (215) 591-0940

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  XXX   NO
                                        ---       ---

AS OF NOVEMBER 9, 1998, THERE WERE 6,519,301 SHARES OF THE REGISTRANT'S 
COMMON STOCK OUTSTANDING.
<PAGE>

         AXIOHM TRANSACTION SOLUTIONS, INC. AND SUBSIDIARIES

                                INDEX
<TABLE>
<CAPTION>
PART I.  FINANCIAL INFORMATION                                       PAGE NO.
<S>                                                                  <C>
     ITEM 1 - FINANCIAL STATEMENTS

         CONDENSED CONSOLIDATED BALANCE SHEETS                          1
         OCTOBER 3, 1998 AND DECEMBER 31, 1997

         CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
         THREE MONTHS AND NINE MONTHS ENDED
         OCTOBER 3, 1998 AND SEPTEMBER 30, 1997                         2

         CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
         NINE MONTHS ENDED OCTOBER 3, 1998 AND SEPTEMBER 30, 1997       3

         NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS           4

     ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
     FINANCIAL CONDITION AND RESULTS OF OPERATIONS                     13

PART II.  OTHER INFORMATION

     ITEM 1 - LEGAL PROCEEDINGS                                        23

SIGNATURES                                                             24

EXHIBITS INDEX                                                         25
</TABLE>
<PAGE>

                      PART 1 - FINANCIAL INFORMATION
                      ITEM 1 - Financial Statements
          AXIOHM TRANSACTION SOLUTIONS, INC. AND SUBSIDIARIES

                  Condensed Consolidated Balance Sheets
                    (In thousands, except share data)
<TABLE>
<CAPTION>
                                                          October 3,        December 31,
                                                            1998               1997
                                                          ----------        ------------
                                                         (Unaudited)
<S>                                                          <C>               <C>
                                   ASSETS
Current assets:
      Cash and cash equivalents                              1,919             3,877
      Restricted cash                                           --             8,594
      Accounts receivable, net                              36,652            30,515
      Inventories                                           31,997            30,103
      Prepaid expenses and other current assets             12,518            11,015
                                                           -------           -------
          Total current assets                              83,086            84,104
      Fixed assets, net of accumulated depreciation         21,760            21,535
      Intangible assets                                     72,483            92,371
      Other assets                                           7,806             6,034
                                                           -------           -------
         Total assets                                      185,135           204,044
                                                           -------           -------
                                                           -------           -------

               LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)

Current liabilities:
      Accounts payable                                      18,892            17,351
      Current portion of long-term debt                      6,901             5,948
      Current portion of government grant obligations          884               649
      Accrued payroll, payroll taxes and benefits            6,930             6,194
      Accrued expenses                                       6,671             4,645
      Income taxes payable                                     276             1,937
      Deferred revenue                                       2,121             2,056
      Rabbi Trust                                               --             8,594
      Other current liabilities                                298             4,481
                                                           -------           -------
         Total current liabilities                          42,973            51,855
Non-current liabilities:
      Long-term debt                                       175,181           165,564
      Government grant obligations                           1,334             1,569
      Other long-term liabilities                            4,053             3,137
                                                           -------           -------
         Total liabilities                                 223,541           222,125
                                                           -------           -------
Shareholders' equity (deficit):                                                    
      Preferred shares, no par value                                              
         Authorized: 1,000,000 shares, none issued              --                --
      Common shares:                                                              
         Common stock, authorized: 28,500,000                                     
         shares; issued and outstanding:                                          
         6,519,301 shares in 1998 and 6,513,301 in 1997     24,257            23,852
      Comprehensive Income                                      86              (658)
      Accumulated deficit                                  (62,749)          (41,275)
                                                           -------           -------
         Total shareholders' equity (deficit)              (38,406)          (18,081)
                                                           -------           -------
         Total liabilities and shareholders' equity                                  
          (deficit)                                        185,135           204,044
                                                           -------           -------
                                                           -------           -------
</TABLE>

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

                                   Page 1
<PAGE>

               AXIOHM TRANSACTION SOLUTIONS, INC. AND SUBSIDIARIES

                 Condensed Consolidated Statements of Operations
                     (In thousands, except per share data)

<TABLE>
<CAPTION>
                                    Three Months Ended                            Nine Months Ended
                             October 3,          September 30,            October 3,          September 30,
                                1998                 1997                    1998                  1997
                             ---------------------------------            ---------------------------------
                                        (Unaudited)                                  (Unaudited)
<S>                           <C>                   <C>                    <C>                   <C>
Net sales                     $59,038              $ 42,943                $174,725              $ 99,558
Cost of net sales              38,533                28,176                 112,613                66,978
                              -------              --------                --------              --------
Gross margin                   20,505                14,767                  62,112                32,580

Operating expenses:

  Selling, general and         
    administrative             10,024                 5,285                  28,306                10,984
  Research and development      3,869                 2,575                  11,825                 6,198
  Plant closing expenses          799                    --                     799                    --
  In-process technology            --                50,831                      --                50,831
  Acquisition related 
   intangible amortization      8,970                 2,894                  25,892                 2,894
                              -------              --------                --------              --------
Total operating expenses       23,662                61,585                  66,822                70,907
                              -------              --------                --------              --------
Loss from operations           (3,157)              (46,818)                 (4,710)              (38,327)

Interest and other income         100                   327                     230                   390
Interest and other expense      4,333                 2,715                  13,333                 3,077
                              -------              --------                --------              --------
Loss before income taxes       (7,390)              (49,206)                (17,813)              (41,014)
                              -------              --------                --------              --------
Income taxes                    1,060                 2,272                   3,661                 5,484
                              -------              --------                --------              --------
Net loss                      ($8,450)             ($51,478)               ($21,474)             ($46,498)
                              -------              --------                --------              --------
                              -------              --------                --------              --------
Basic and diluted:
  Net loss per share           $(1.30)               $(7.90)                 $(3.29)               $(7.14)
  Shares used in per share 
   calculation                  6,519                 6,513                   6,519                 6,513
</TABLE>

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

                                   Page 2
<PAGE>

               AXIOHM TRANSACTION SOLUTIONS, INC. AND SUBSIDIARIES

                  Condensed Consolidated Statements of Cash Flows
                                (In thousands)
<TABLE>
<CAPTION>
                                                                                              Nine Months Ended
                                                                                    October 3,               September 30,
                                                                                      1998                       1997
                                                                                   -----------               -------------
                                                                                   (Unaudited)                (Unaudited)
<S>                                                                                <C>                         <C>
Cashflows from operating activities:
   Net loss                                                                         ($21,474)                  ($46,498)
   Adjustments to reconcile net loss to net cash provided by
    (used in) operations:
     Write off of acquired in-process technology                                          --                     50,831
     Depreciation and amortization                                                    30,978                      5,369
     Other non-cash items                                                                332                        450
   Changes in assets and liabilities, net of effects of acquisition of business:
     Accounts receivable                                                              (6,137)                    (8,909)
     Inventories                                                                      (1,894)                    (1,323)
     Accounts payable and accrued expenses                                              (162)                     3,962
     Other current assets                                                             (1,503)                     4,819
     Other current liabilities                                                        (4,183)                        --
                                                                                    --------                  ---------
Net cash provided (used in) by operating activities                                   (4,043)                     8,701

Cashflows from investing activities:
   Payment for acquisition of business, net of cash acquired                          (5,647)                  (148,074)
   Capital expenditures and other                                                     (4,571)                    (3,670)
                                                                                    --------                  ---------
Net cash used in investing activities                                                (10,218)                  (151,744)

Cashflows from financing activities:
   Proceeds from tender financing                                                         --                    186,979
   Net borrowings under line of credit                                                14,029                     (1,051)
   Principal repayments under long term debt                                          (2,543)                    (5,000)
   Exercise of Stock Options                                                              73                         --
   Payments of dividends                                                                  --                     (1,768)
   Debt issuance costs                                                                    --                     (2,799)
   Net loans to related parties                                                           --                      1,713
                                                                                    --------                  ---------
Net cash provided by financing activities                                             11,559                    178,074

Effect of exchange rate changes on cash                                                  744                       (622)
                                                                                    --------                  ---------
Net increase (decrease) in cash and cash equivalents                                  (1,958)                    34,409

Cash and cash equivalents at beginning of period                                       3,877                      1,839
                                                                                    --------                  ---------
Cash and cash equivalents at end of period                                          $  1,919                  $  36,248
                                                                                    --------                  ---------
                                                                                    --------                  ---------
Supplemental Cashflow Disclosures:
Cash paid during the year for:
   Interest                                                                         $ 15,489                  $     488
   Income taxes                                                                     $  5,192                  $   4,723

Schedule of non-cash investing and financing activities:
   Fair value of assets acquired, net of cash acquired                              $  5,647                  $ 134,480
   In-process technology                                                                  --                  $  50,831
   Liabilities assumed                                                                    --                   ($17,995)
   Fair value of non-tendered stock                                                       --                   ($19,242)
                                                                                    --------                  ---------
   Cash paid, net of cash acquired                                                  $  5,647                  $ 148,074
</TABLE>

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

                                            Page 3
<PAGE>


               AXIOHM TRANSACTION SOLUTIONS, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                       (OCTOBER 3, 1998 - UNAUDITED)

NOTE 1: UNAUDITED INTERIM FINANCIAL STATEMENTS

The accompanying unaudited condensed consolidated financial statements have 
been prepared in accordance with generally accepted accounting principles for 
interim financial information and with the instructions to Form 10-Q and 
Article 10 of Regulation S-X. Accordingly, they do not include all of the 
information and footnotes required by generally accepted accounting 
principles for complete financial statements. In the opinion of management, 
all adjustments (consisting of only normal recurring accruals) considered 
necessary for a fair presentation have been included. Operating results for 
the quarter ended October 3, 1998 are not necessarily indicative of the 
results which may be expected for the year ending January 2, 1999 or any 
other period. Reference is made to the Consolidated Financial Statements and 
Notes thereto included in the Company's Annual Report on Form 10-K filed with 
the Securities and Exchange Commission (the "SEC") on March 31, 1998 as 
amended on April 15, 1998.

In May 1998, Axiohm Transaction Solutions, Inc. (the "Company") changed its
fiscal year from the twelve-month period ended December 31 to the 52 or 53-week
period that ends on the Saturday nearest December 31, effective for fiscal year
1998. As a result, the Company's third quarter of 1998 represents the
thirteen-week period ended on October 3, 1998, the nine-month period represents
the thirty-nine week and three day period ended on October 3, 1998 and the
Company's 1998 fiscal year will end on January 2, 1999. Fiscal year 1998 will
have fifty-three weeks. The quarter ended September 30, 1997, contained 13 weeks
and the nine-month period ended September 30, 1997 contained 39 weeks. The
difference between the comparable periods is not material in terms of sales and
net loss.

NOTE 2: BASIS OF PRESENTATION

The financial statements of the Company include the accounts of its wholly owned
subsidiaries in the United States, France, Mexico, the United Kingdom,
Australia, Hong Kong and Japan. All intercompany accounts and transactions have
been eliminated.

On August 21, 1997, pursuant to an Agreement and Plan of Merger dated as of July
14, 1997 (the "Agreement of Merger"), AX Acquisition Corporation ("AX" or the
"Purchaser"), an indirect wholly-owned subsidiary of Axiohm S.A., a private
French Corporation, acquired approximately 88%, or 7,000,000 shares, of the
outstanding Common Stock of DH Technology, Inc. ("DH") through a public tender
offer to the shareholders of DH at a price of $25 per share (the "Tender
Offer").

On October 2, 1997, pursuant to the Agreement of Merger, AX acquired, directly
or indirectly, 100% of the outstanding Common Stock of Axiohm S.A. in exchange
for 5,518,524 shares of DH Common Stock and $12.2 million in cash (the "Share
Exchange Offer"). Simultaneously with the Share Exchange Offer, DH purchased all
of the outstanding shares of AX in exchange for the assumption of approximately
$190 million of debt (the "Acquisition Financing") incurred by AX to finance the
Tender Offer. As part of the Acquisition Financing the Company completed a
private placement (the "Senior Notes Offering") of $120 million of its 9.75%
Senior Subordinated Notes due 2007. The notes were exchanged in March 1998 for
new, substantially identical notes, which have been registered under the
Securities Act of 1933, as amended (the "Notes"). The Company's payment
obligation under the Notes is jointly and severally fully and unconditionally
guaranteed on a senior subordinated basis by certain of the Company's
subsidiaries (the "Guarantor Subsidiaries"), all of which are directly or
indirectly wholly owned by the Company. Immediately after the Share Exchange
Offer, AX was merged with and into DH (the "Merger"), the surviving legal
entity, and the company changed its name from "DH Technology, Inc." to "Axiohm
Transaction Solutions, Inc.". In connection with the Merger, Axiohm S.A. changed
its tax filing status and was renamed Axiohm S.A.R.L. Immediately after the
Merger, approximately 85% of DH's outstanding Common Stock were held by the
former shareholders of Axiohm S.A.R.L. and approximately 15% were held by the
former public shareholders of DH.

                                   Page 4
<PAGE>

The Tender Offer, the Share Exchange Offer and the Merger (collectively the
"Acquisition") have been accounted for in a manner similar to a reverse
acquisition, in which Axiohm S.A.R.L. was treated as the acquirer for accounting
purposes. Accordingly, the historical financial information for periods prior to
August 31, 1997 is that of Axiohm S.A.R.L. The effective date of the Acquisition
and Merger of DH for accounting purposes was August 31, 1997, and, accordingly,
the capital structure of the Company has been retroactively restated to reflect
the number of shares and options outstanding as a result of the Acquisition.

NOTE 3: INVENTORIES

The composition of inventories at October 3, 1998 and December 31, 1997 was as
follows:

<TABLE>
<CAPTION>
                                        October 3, 1998     December 31, 1997
                                        ---------------     -----------------
<S>                                       <C>                 <C>
      Raw materials                       $23,374,000         $20,014,000
      Work in process                       2,473,000           2,328,000
      Finished goods                        6,150,000           7,761,000
                                          -----------         -----------
      Total Inventories                   $31,997,000         $30,103,000
                                          -----------         -----------
                                          -----------         -----------
</TABLE>

NOTE 4: COMPREHENSIVE INCOME

In June 1997, Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("FAS 130") was issued. FAS 130 requires the disclosure of
comprehensive income to reflect changes in equity that result from transactions
and economic events from non-owner sources. Comprehensive income for the nine
months ended October 3, 1998 and September 30, 1997 presented below includes
foreign currency translation items. There was no tax expense or tax benefit
associated with the foreign currency translation items.

<TABLE>
<CAPTION>
                                        October 3, 1998     September 30, 1997
                                        ---------------     ------------------
<S>                                        <C>                   <C>
      Net loss                             (21,474)              ($46,498)
      Foreign currency translation 
       adjustments                             744                   (622)
      Comprehensive loss                  ($20,730)              ($47,120)
                                          --------               --------
                                          --------               --------
</TABLE>

NOTE 5: GUARANTORS AND FINANCIAL INFORMATION

The following consolidating financial information is presented for purposes of
complying with the reporting requirements of the Guarantor Subsidiaries.
Separate financial statements and other disclosures with respect to the
Guarantor Subsidiaries are not presented because the Company believes that such
financial statements and other information would not provide additional
information that is material to investors.

There are no contractual restrictions, under the Notes or otherwise, upon the
ability of the Guarantor Subsidiaries to make distributions or pay dividends to
their respective equity-holders. Directly or indirectly, the Company is the sole
equity-holder of all of the Guarantor Subsidiaries.

The Company's payment obligation under the Notes is jointly and severally fully
and unconditionally guaranteed on a senior subordinated basis by the Guarantor
Subsidiaries, all of which are directly or indirectly wholly owned by the
Company.

                                    Page 5
<PAGE>

The condensed consolidating financial information presents condensed financial
statements as of October 3, 1998 and December 31, 1997 and for the nine month
period ended October 3, 1998 of:

           a)  the Company on a parent company only basis ("Parent")
               (carrying its investments in the  subsidiaries under
               the equity method),

           b)  the Guarantor Subsidiaries separated as to French
               Guarantors (Axiohm S.A.R.L., Dardel Technologies
               E.U.R.L., Axiohm Investissements S.A.R.L.), and U.S.
               Guarantors (Axiohm  IPB, Inc., Cognitive L.L.C.,
               Cognitive Solutions, Inc., and  Stadia Colorado Corp.),

           c)  the Non-Guarantor Subsidiaries (DH Technology Plc, DH
               Technology Pty, DH Technologia, Axiohm Ltd. (Hong
               Kong), Axiohm Japan Inc. and AP Print S.A.R.L),

           d)  elimination entries necessary to consolidate the Parent
               Company and its subsidiaries, and

           e)  the Company on a consolidated basis.

The condensed consolidating financial information also presents condensed
financial statements for the nine-month period ended September 30, 1997.

           a)  the Company on a parent company only basis ("Parent")
               (carrying its investments in the  subsidiaries under
               the equity method),

           b)  the Guarantor Subsidiaries separated as to French
               Guarantors (Axiohm S.A.R.L., Dardel Technologies
               E.U.R.L., Axiohm Investissements S.A.R.L.), and U.S.
               Guarantors (Axiohm  IPB, Inc., Cognitive L.L.C.,
               Cognitive Solutions, Inc., and Stadia Colorado Corp.),

           c)  the Non-Guarantor Subsidiaries (DH Technology Plc, DH
               Technology Pty, DH Technologia, Axiohm Ltd. (Hong
               Kong), Axiohm Japan Inc.

           d)  elimination entries necessary to consolidate the Parent
               Company and its subsidiaries, and

           e)  the Company on a consolidated basis.

                                    Page 6
<PAGE>
                                       
               AXIOHM TRANSACTION SOLUTIONS, INC. AND SUBSIDIARIES
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                      CONDENSED CONSOLIDATING BALANCE SHEET
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                       OCTOBER 3, 1998 (UNAUDITED)
                                        ------------------------------------------------------------------------------------
                                                           GUARANTOR
                                                          SUBSIDIARIES
                                                      --------------------    NON-GUARANTOR
                                         PARENT        FRENCH         US      SUBSIDIARIES     ELIMINATIONS     CONSOLIDATED
                                        --------      -------      -------    ------------     ------------     ------------
<S>                                     <C>           <C>          <C>        <C>              <C>              <C>
ASSETS
Current assets:
  Cash and cash equivalents             $  4,321      $  (237)     $(3,235)     $ 1,070        $     --          $  1,919
  Accounts receivable, net                 9,717        3,823       19,156        3,956              --            36,652
  Inventories                              7,446        6,675       14,581        3,978            (683)           31,997
  Prepaid expenses and other 
    current assets                         9,975        1,412          436          496             199            12,518
  Intercompany                            (7,910)      (3,230)      11,832       (3,029)          2,337                --
                                        --------      -------      -------      -------        --------          --------
      Total current assets                23,549        8,443       42,770        6,471           1,853            83,086
  Fixed assets, net of 
    accumulated depreciation               4,073        4,368       11,767        1,552              --            21,760
  Intangible assets                       69,119          459        2,955          (50)             --            72,483
  Other assets                             5,770          482        1,482           72              --             7,806
  Investment in Subsidiaries              45,029        8,752           --           --         (53,781)               --
                                        --------      -------      -------      -------        --------          --------
      Total assets                      $147,540      $22,504      $58,974      $ 8,045        $(51,928)         $185,135
                                        --------      -------      -------      -------        --------          --------
                                        --------      -------      -------      -------        --------          --------

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)

Current liabilities:
  Accounts payable                         3,484        4,974        8,523        1,911              --            18,892
  Current portion of long-term 
    debt                                   6,650          229           20            2              --             6,901
  Current portion of government 
    grant obligations                         (1)         865           --           20              --               884
  Accrued payroll, payroll taxes 
    and benefits                           2,783        1,821        1,931          395              --             6,930
  Accrued expenses                         4,914          354        1,216          187              --             6,671
  Income taxes payable                    (3,704)         399        3,244          337              --               276
  Deferred revenue                           192        1,232          697           --              --             2,121
  Other current liabilities                  297            1           --           --              --               298
                                        --------      -------      -------      -------        --------          --------
      Total current liabilities           14,615        9,875       15,631        2,852              --            42,973
Non-current liabilities:
  Long-term debt                         173,411        1,633           24          113              --           175,181
  Government grant obligations                --          784          550           --              --             1,334
  Other long-term liabilities                 --        2,106        1,646           --              --             3,752
  Deferred tax liability                  (2,168)       2,154          315           --              --               301
                                        --------      -------      -------      -------        --------          --------
      Total liabilities                  185,858       16,552       18,166        2,965              --           223,541
                                        --------      -------      -------      -------        --------          --------
Shareholders' equity (deficit):
  Common stock                            24,257        4,167           --          505          (4,672)           24,257
  Comprehensive Income                       174          580           --          (95)           (573)               86
  Retained earnings (accumulated 
    deficit)                             (62,749)       1,205       40,808        4,670         (46,683)          (62,749)
                                        --------      -------      -------      -------        --------          --------
  Total shareholders' equity (deficit)   (38,318)       5,952       40,808        5,080         (51,928)          (38,406)
                                        --------      -------      -------      -------        --------          --------
  Total liabilities and shareholders' 
    equity (deficit)                    $147,540      $22,504      $58,974      $ 8,045        $(51,928)         $185,135
                                        --------      -------      -------      -------        --------          --------
                                        --------      -------      -------      -------        --------          --------
</TABLE>


                                     Page 7

<PAGE>
                                       
              AXIOHM TRANSACTION SOLUTIONS, INC. AND SUBSIDIARIES
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
               CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
                              (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                              NINE MONTHS ENDED OCTOBER 3, 1998 (UNAUDITED)
                                        ------------------------------------------------------------------------------------
                                                           GUARANTOR
                                                          SUBSIDIARIES
                                                      ---------------------   NON-GUARANTOR
                                         PARENT        FRENCH         US      SUBSIDIARIES     ELIMINATIONS     CONSOLIDATED
                                        --------      -------      --------   ------------     ------------     ------------
<S>                                     <C>           <C>          <C>        <C>              <C>              <C>
Net Sales                               $ 46,575      $34,903      $100,368      $17,353        $(24,474)         $174,725
Cost of net sales                         30,922       22,057        72,008       13,461         (25,835)          112,613
                                        --------      -------      --------      -------        --------          --------
Gross margin                              15,653       12,846        28,360        3,892           1,361            62,112


Operating expenses:
  Selling, general & administrative        8,708        4,108        12,134        3,356              --            28,306
  Research and development                 3,236        2,629         5,538          422              --            11,825
  Plant closing expenses                     799           --            --           --              --               799
  Acquisition related
    intangible amortization               25,892           --            --           --              --            25,892
                                        --------      -------      --------      -------        --------          --------
Total operating expenses                  38,635        6,737        17,672        3,778              --            66,822
                                        --------      -------      --------      -------        --------          --------

Income (loss) from operations            (22,982)       6,109        10,688          114           1,361            (4,710)
Interest and other income                  3,980           51            12          105          (3,918)              230
Interest and other expense                12,975        4,043           208           18          (3,911)           13,333
Equity earnings in subsidiaries            6,541           --            --           --          (6,541)               --
                                        --------      -------      --------      -------        --------          --------

Income (loss) before income taxes        (25,436)       2,117        10,492          201          (5,187)          (17,813)

Income taxes (benefit)                    (3,963)       2,592         4,283          167             582             3,661
                                        --------      -------      --------      -------        --------          --------

Net income (loss)                       $(21,473)     $  (475)     $  6,209      $    34        $ (5,769)         $(21,474)
                                        --------      -------      --------      -------        --------          --------
                                        --------      -------      --------      -------        --------          --------
</TABLE>



                                     Page 8
<PAGE>
                                       
             AXIOHM TRANSACTION SOLUTIONS, INC. AND SUBSIDIARIES
         NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
              CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
                                (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                        NINE MONTHS ENDED OCTOBER 3, 1998 (UNAUDITED)
                                        ------------------------------------------------------------------------------------
                                                           GUARANTOR
                                                          SUBSIDIARIES
                                                      ---------------------   NON-GUARANTOR
                                         PARENT        FRENCH         US      SUBSIDIARIES     ELIMINATIONS     CONSOLIDATED
                                        --------      -------      --------   ------------     ------------     ------------
<S>                                     <C>           <C>          <C>        <C>              <C>              <C>
Cashflows from operating activities:

  Net cash provided by (used in)                                    
    operating activities                $(15,962)     $   678      $ 11,207      $ (356)           $ 390          $ (4,043)

Cashflows from investing activities:

  Payment for acquisition of business
    and other intangibles                 (3,929)        (733)         (934)        (51)              --            (5,647)
  Capital expenditures and other          (1,443)      (1,314)       (1,842)         28               --            (4,571)
                                        --------      -------      --------      ------            -----          --------
  Net cash provided by (used in)
    investing activities                  (5,372)      (2,047)       (2,776)        (23)              --           (10,218)

Cashflows from financing activities:

  Net borrowings under line of credit     14,029           --            --          --               --            14,029
  Principal repayments under long
    term debt                             (2,400)        (143)           --          --               --            (2,543)
  Exercise of stock options                   73           --            --          --               --                73
                                        --------      -------      --------      ------            -----          --------
  Net cash provided by (used in)
    financing activities                  11,702         (143)           --          --               --            11,559

Effect of exchange rate changes on cash       93        1,137            --         (96)            (390)              744
                                        --------      -------      --------      ------            -----          --------

Net increase in cash and cash
  equivalents                             (9,539)        (375)        8,431        (475)              --            (1,958)

Cash and cash equivalents at beginning
  of period                               13,860          138       (11,666)      1,545               --             3,877
                                        --------      -------      --------      ------            -----          --------

Cash and cash equivalents at end of                   
  period                                $  4,321      $  (237)     $ (3,235)     $1,070            $  --          $  1,919
                                        --------      -------      --------      ------            -----          --------
                                        --------      -------      --------      ------            -----          --------
</TABLE>



                                     Page 9

<PAGE>

               AXIOHM TRANSACTION SOLUTIONS, INC. AND SUBSIDIARIES
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                     CONDENSED CONSOLIDATING BALANCE SHEETS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                DECEMBER 31, 1997
                                               ------------------------------------------------------------------------------------
                                                                 GUARANTOR SUBSIDIARIES
                                                                ------------------------ NON-GUARANTOR
                                                   PARENT        FRENCH          US      SUBSIDIARIES   ELIMINATIONS   CONSOLIDATED
                                                -----------     ---------     --------   ------------   ------------   ------------
<S>                                             <C>             <C>           <C>        <C>            <C>            <C>         
ASSETS
Current assets:
  Cash and cash equivalents                       $ 13,860       $   138      $(11,666)      $ 1,545     $     --       $  3,877
  Restricted cash                                    8,594            --            --            --           --          8,594
  Accounts receivable, net                          10,388         3,760        15,209         3,099       (1,941)        30,515
  Inventories                                        3,611         4,995        17,140         4,600         (243)        30,103
  Prepaid expenses and other current assets          4,235         9,759           437        (3,316)        (100)        11,015
  Intercompany                                     (14,259)        2,612        11,514        (1,761)       1,894             --
                                               ------------  ------------  ------------   -----------   ----------   -----------
    Total current assets                            26,429        21,264        32,634         4,167         (390)        84,104
  Fixed assets, net of accumulated depreciation      3,847         4,052        11,679         1,957           --         21,535
  Intangible assets                                 88,555            93         3,521           202           --         92,371
  Other assets                                       5,428           413           418            83         (308)         6,034
  Investment in Subsidiaries                        45,030            --            --            --      (45,030)            --
                                               ------------  ------------  ------------   -----------   ----------   -----------
    Total assets                                  $169,289       $25,822      $ 48,252       $ 6,409     $(45,728)      $204,044
                                               ------------  ------------  ------------   -----------   ----------   -----------
                                               ------------  ------------  ------------   -----------   ----------   -----------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
  Accounts payable                                   2,511         6,569         6,767         1,504           --         17,351
  Current portion of long-term debt                  5,689           227            32            --           --          5,948
  Current portion of government grant obligations       --           649            --            --           --            649
  Accrued payroll, payroll taxes and benefits          689         3,558         1,947            --           --          6,194
  Accrued expenses                                   1,620         1,196         2,113          (284)          --          4,645
  Income taxes payable                               1,937           174          (174)           --           --          1,937
  Deferred revenue                                     416         1,121           519            --           --          2,056
  Rabbi Trust                                        8,594            --            --            --           --          8,594
  Other current liabilities                          4,481            --            --            --           --          4,481
                                               ------------  ------------  ------------   -----------   ----------   -----------
    Total current liabilities                       25,937        13,494        11,204         1,220           --         51,855
Non-current liabilities:
  Long-term debt                                   162,903         2,014           600            47           --        165,564
  Government grant obligations                          --         1,569            --            --           --          1,569
  Other long-term liabilities                       (2,168)        3,455         1,850            --           --          3,137
                                               ------------  ------------  ------------   -----------   ----------   -----------
    Total liabilities                              186,672        20,532        13,654         1,267           --        222,125
                                               ------------  ------------  ------------   -----------   ----------   -----------
Shareholders' equity (deficit):
  Common stock                                      23,852         4,167            --           360       (4,527)        23,852
  Comprehensive Income                                  40          (557)           --             2         (143)          (658)
  Retained earnings (accumulated deficit)          (41,275)        1,680        34,598         4,780      (41,058)       (41,275)
                                               ------------  ------------  ------------   -----------   ----------   -----------
  Total shareholders' equity (deficit)             (17,383)        5,290        34,598         5,142      (45,728)       (18,081)
                                               ------------  ------------  ------------   -----------   ----------   -----------
  Total liabilities and shareholders' equity 
    (deficit)                                     $169,289       $25,822       $48,252        $6,409     $(45,728)      $204,044
                                               ------------  ------------  ------------   -----------   ----------   -----------
                                               ------------  ------------  ------------   -----------   ----------   -----------
</TABLE>

                                       Page 10

<PAGE>
                                       
               AXIOHM TRANSACTION SOLUTIONS, INC. AND SUBSIDIARIES
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>
                                                      NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
                                     -------------------------------------------------------------------------------------
                                                  GUARANTOR SUBSIDIARIES      
                                                  ----------------------      NON-GUARANTOR
                                      PARENT        FRENCH          US         SUBSIDIARIES     ELIMINATIONS  CONSOLIDATED
                                     --------       ------         ----        ------------     ------------  ------------
<S>                                  <C>           <C>          <C>           <C>               <C>           <C>
Net Sales                            $  6,166      $ 33,558     $ 80,230         $ 4,040         $ (24,436)    $ 99,558
Cost of net sales                       4,160        20,968       61,531           3,415           (23,096)      66,978
                                     --------      --------     --------         -------         ---------     --------
Gross margin                            2,006        12,590       18,699             625            (1,340)      32,580


Operating expenses:
    Selling, general &
     administrative                     3,457         3,683        5,716             730               292       13,878
    Research and development              322         2,371        3,513              44               (52)       6,198
    In-process technology              50,831            --           --              --                --       50,831
                                     --------      --------     --------         -------         ---------     --------
Total operating expenses               54,610         6,054        9,229             774               240       70,907
                                     --------      --------     --------         -------         ---------     --------

Income (loss) from operations         (52,604)        6,536        9,470            (149)           (1,580)     (38,327)
                                                                                              
Interest and other income                 284           151          (62)             17                --          390
                                                                                              
Interest and other expense              3,588           161         (673)              1                --        3,077
                                                                                              
Equity earnings in subsidiaries         9,209            --           --              --            (9,209)          --
                                     --------      --------     --------         -------         ---------     --------

Income (loss) before income taxes     (46,699)        6,526       10,081            (133)          (10,789)     (41,014)
                                                                                              
Income taxes (benefit)                   (201)        2,862        3,530             (51)             (656)       5,484
                                     --------      --------     --------         -------         ---------     --------

Net income (loss)                    $(46,498)     $  3,664     $  6,551         $   (82)        $ (10,133)    $(46,498)
                                     --------      --------     --------         -------         ---------     --------
                                     --------      --------     --------         -------         ---------     --------
</TABLE>

                                    Page 11
<PAGE>




                 AXIOHM TRANSACTION SOLUTIONS, INC. AND SUBSIDIARIES
             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                  CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
                                   (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                            NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
                                           -------------------------------------------------------------------------------------
                                                        GUARANTOR SUBSIDIARIES      
                                                        ----------------------     NON-GUARANTOR
                                            PARENT        FRENCH        US         SUBSIDIARIES     ELIMINATIONS  CONSOLIDATED
                                           --------       ------       ----        ------------     ------------  ------------
<S>                                       <C>           <C>        <C>             <C>              <C>           <C>
Cashflows from operating activities:
     Net cash provided by (used in)
      operating activities                    4,169        7,313        (669)         (1,997)          (115)         8,701

Cashflows from investing activities:
     Payment for acquisition of business
      and other intangibles                (147,522)          --        (552)             --             --       (148,074)
     Capital expenditures and other             (15)      (1,494)     (2,161)             --             --         (3,670)
                                          ---------     --------   ---------         -------          -----      ---------
     Net cash provided by (used in)
      investing activities                 (147,537)      (1,494)     (2,713)             --             --       (151,744)

Cashflows from financing activities:
     Proceeds from tender financing         186,979           --          --              --             --        186,979
     Net repayment under line of credit          --          157      (1,174)            (34)            --         (1,051)
     Principal repayments under long   
      term debt                                  --       (1,102)     (3,892)             (6)            --         (5,000)
     Payments of dividends                       --       (1,768)         --              --             --         (1,768)
     Debt issuance costs                     (1,050)          --      (1,749)             --             --         (2,799)
     Net loans to related parties              (728)         712        (745)          2,474             --          1,713
                                          ---------     --------   ---------         -------          -----      ---------
     Net cash provided by (used in)
      financing activities                  185,201       (2,001)     (7,560)          2,434             --        178,074

Effect of exchange rate changes on
 cash                                          (682)        (601)        546             --             115           (622)
                                          ---------     --------   ---------         -------          -----      ---------
Net increase in cash and cash
 equivalents                                 41,151        3,217     (10,396)            437             --         34,409

Cash and cash equivalents at beginning
 of period                                       --        1,494         230             115             --          1,839

Cash and cash equivalents at end of
 period                                   $  41,151     $  4,711   $ (10,166)            552          $  --       $ 36,248
                                          ---------     --------   ---------         -------          -----      ---------
                                          ---------     --------   ---------         -------          -----      ---------

                                    Page 12
</TABLE>
<PAGE>
                                       
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the Company's 
Consolidated Financial Statements and Notes thereto included herein.

BACKGROUND

The Company was formed from the combination of Axiohm S.A. a French 
corporation ("Axiohm") and DH Technology, Inc. ("DH"). On August 21, 1997, AX 
Acquisition Corporation, an indirect wholly-owned subsidiary of Axiohm 
("Purchaser"), acquired 7,000,000 shares of the Common Stock of DH 
(approximately 88%) through a tender offer to the shareholders of DH ("the 
Tender Offer"), resulting in a change in control of DH. On October 2, 1997, 
the Purchaser exchanged 5,518,524 shares of the Common Stock it had acquired 
in the Tender Offer and approximately $12.2 million in cash for certain of 
the outstanding shares of capital stock of Axiohm and all of the outstanding 
shares of capital stock of Dardel Technologies S.A. ("Dardel"), which held 
the remaining shares of capital stock of Axiohm. Immediately after this 
exchange, DH purchased from Axiohm IPB all of Purchaser's outstanding capital 
stock in exchange for the assumption by DH of the obligations incurred in 
financing the Tender Offer. Purchaser was then merged with and into DH (the 
"Merger"), and the remaining 1,481,476 shares of DH's Common Stock acquired 
in the Tender Offer and held by Purchaser at the time of the Merger were 
canceled in the Merger. Simultaneously, DH changed its name to Axiohm 
Transaction Solutions, Inc. The aggregate initial purchase price of $209.1 
million consisted of cash for DH shares and stock options, transaction costs 
and the fair value of DH shares not tendered. The above transactions were 
financed with (i) borrowings of approximately $57.0 million, under a new $85 
million credit facility that provides term loans in the aggregate principal 
amount of $50.0 million (the "Term Loan Facility), and revolving loans and 
letters of credit of up to $35.0 million (the "Revolving Credit Facility", 
and together with the Term Loan Facility, the "New Credit Facility") (ii) the 
proceeds of the Offering of $120,000,000 of its 9 3/4% Senior Subordinated 
Notes due in 2007, which were exchanged in March 1998 for equivalent notes 
which have been registered under the Securities Act (the "Notes").

Although DH was the surviving legal entity, the transaction was accounted for 
as a purchase of DH by Axiohm. For the third quarter of 1997 and first nine 
months of 1997, the following discussion includes the complete results of 
operations of Axiohm, and one month of DH for comparative purposes. While the 
effective date of the Merger was October 2, 1997 for legal purposes, the 
effective date of the acquisition of DH for accounting purposes was August 
31, 1997.

In connection with the foregoing transactions, the Company recorded 
approximately $102.1 million of goodwill and other intangibles which is being 
amortized over three years using the straight line method, which is the 
period estimated to be benefited.

On July 28, 1998 the Company announced a major restructuring program designed 
to streamline operations and improve manufacturing efficiencies. As part of 
this program, the Company will consolidate its Paso Robles, California and 
Riverton, Wyoming manufacturing operations principally into its Ithaca, New 
York manufacturing operation. The Company expects that these actions will 
result in the reduction of approximately 200 jobs in the closing locations 
and the addition of approximately 100 jobs in Ithaca, New York. This final 
program is a result of an assessment that began at the time of the 
acquisition of DH Technology.

The Company expects that when the consolidation moves are completed by late 
1999, pre-tax operating costs will be reduced by approximately $3.5 million a 
year. The Company expects to incur approximately $6 million of costs to fully 
implement the plan by the end of 1999, of which approximately $3 million was 
recorded in the second quarter of 1998 as an adjustment of the purchase price 
of DH Technology, Inc. thereby increasing goodwill and other intangibles from 
$102.1 million to $105 million.

The company was reorganized into two divisions during the third quarter of 
1998: transaction products, based in Blue Bell, Pennsylvania and 
identification products, based in Denver, Colorado. Transaction products 
account for approximately 85-90% of the revenue of the business and 
identification products 
                                       
                                   Page 13
<PAGE>

represent the balance of the revenue of the business. This reorganization was 
undertaken to better serve customer needs.

RESULTS OF OPERATIONS

THREE MONTHS ENDED OCTOBER 3, 1998 COMPARED TO THREE MONTHS ENDED  
SEPTEMBER 30, 1997

NET SALES. Net Sales of $59.0 million for the third quarter of 1998 increased 
37.5%, or $16.1 million, compared to net sales of $42.9 million for the same 
period last year. Slightly more than 85% of the increase was the result of 
the inclusion of sales of DH; the balance was due to growth in the existing 
business which reflects increased unit volume of transaction printers and 
printer mechanisms partially offset by a decline in average selling prices.

COST OF NET SALES. Cost of net sales of $38.5 million remained relatively 
constant at 65.3% of net sales for the third quarter of 1998 compared to 
65.6% of net sales for the same period of 1997.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general, and 
administrative expenses of $10.0 million increased to 17.0% of net sales in 
the third quarter of 1998 from 12.3% in the same period in 1997. The majority 
of the increase was due to the inclusion of expenses of DH and costs related 
to the acquisition of DH; the balance was primarily the result of higher 
staffing levels and expenses needed to support higher sales.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses as a 
percentage of net sales increased to 6.6% in the third quarter of 1998 
compared to 6.0% in the third quarter of 1997. Total dollars expended for 
research and development increased $1.3 million to $3.9 million in the third 
quarter of 1998 compared to $2.6 million in the third quarter of 1997 
primarily due to the inclusion of expenses of DH. In addition, the Company 
believes that continued timely development of new products and enhancements 
to existing products are essential to maintaining the Company's competitive 
position. Accordingly, the Company anticipates that such expenses will 
continue to increase in absolute dollar terms for the foreseeable future.

PLANT CLOSING EXPENSES. The Company recorded $0.8 million in expenses in the 
third quarter of 1998, relating to the relocation of operations from the Paso 
Robles, California and Riverton, Wyoming facilities to the company's Ithaca, 
New York facility, primarily for the accrual of bonuses to be paid to 
employees upon completion of integration duties.

ACQUISITION RELATED INTANGIBLE AMORTIZATION. The Company anticipates that, on 
a quarterly basis through the third quarter of 2000, operating expenses will 
include approximately $8.9 million in non-cash acquisition related charges 
which principally includes non-cash intangibles amortization.

LOSS FROM OPERATIONS. Loss from operations for the third quarter of 1998 was 
$3.2 million, compared to a loss from operations of $46.8 million in the same 
period for 1997. The loss from operations in the third quarter of 1998 was 
primarily due to the acquisition related amortization charges discussed 
above. The loss in the third quarter 1997 was due primarily to the one time 
charge of $50.8 million for in-process technology, relating to the 
acquisition.

INTEREST AND OTHER EXPENSE. Interest expense increased to $4.3 million in the 
third quarter of 1998 from $2.7 million for the same period in 1997. This was 
primarily due to higher average outstanding debt balances, couple with longer 
outstanding periods related to the New Credit Facility and Notes.

INCOME TAXES. Provision for income taxes of $1.1 million in the third quarter 
of 1998 decreased $1.2 million from $2.3 million in 1997. Although the 
company reported a loss before income taxes, a provision for income taxes was 
recorded because goodwill amortization was not deductible for income tax 
purposes. In addition the company pays income taxes in foreign countries, 
principally France, on income earned in those countries. Income taxes as a 
percentage of income before taxes, excluding the effect of acquisition 
related charges, was approximately 45.0% in 1998 compared to 46.0% in 1997, 
and 39% in 

                                   Page 14
<PAGE>

the second quarter of 1998. The increase from the second quarter is the 
result of higher than anticipated pretax income outside the United States.

NINE MONTHS ENDED OCTOBER 3, 1998 COMPARED TO NINE MONTHS ENDED 
SEPTEMBER 30, 1997

NET SALES. Net Sales of $174.7 million for the first nine months of 1998 
increased 75.5%, or $75.2 million, compared to net sales of $99.6 million for 
the same period last year. Approximately 80% of the increase was the result 
of the inclusion of sales of DH since the acquisition; the balance was due to 
growth in the existing business which reflects increased unit volume of 
transaction printers and printer mechanisms partially offset by a decline in 
average selling prices.

COST OF NET SALES. Cost of net sales of $112.6 million decreased to 64.5% of 
net sales for the first nine months of 1998 from 67.3% of net sales for the 
same period of 1997, due primarily to the following four factors: a favorable 
impact of the exchange rate between the U.S. dollar and the French franc for 
products manufactured in France and sold in the U.S.; lower purchase prices 
of components and parts; continuing technology improvements; and higher 
absorption of relatively fixed overhead costs partially offset by a decrease 
in average selling prices.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general, and 
administrative expenses of $28.3 million increased to 16.2% of net sales in 
the first nine months of 1998 from 11.0% in the same period in 1997. The vast 
majority of the increase was due to the inclusion of expenses of DH and costs 
related to the acquisition of DH; the balance was primarily the result of 
recruiting, severance and other expenses needed to support higher sales.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses as a 
percentage of net sales increased to 6.8% in the first nine months of 1998 
compared to 6.2% in the first nine months of 1997. Total dollars expended for 
research and development increased $5.6 million to $11.8 million in the first 
nine months of 1998 compared to $6.2 million in the same period of 1997 
primarily due to the inclusion of expenses of DH.

PLANT CLOSING EXPENSES. The Company recorded $0.8 million in expenses in the 
first nine months of 1998, relating to the relocation of operations from the 
Paso Robles, California and Riverton, Wyoming facilities to the company's 
Ithaca, New York facility, primarily for the accrual of bonuses to be paid to 
employees upon completion of integration duties.

ACQUISITION RELATED INTANGIBLE AMORTIZATION. The Company anticipates that, on 
a quarterly basis through the third quarter of 2000, operating expenses will 
include approximately $8.9 million in non-cash acquisition related charges 
which principally includes non-cash intangible amortization.

LOSS FROM OPERATIONS. Loss from operations for the first nine months of 1998 
was $4.7 million, compared to a loss from operations of $38.3 million in the 
same period for 1997. The loss from operations in the first nine months of 
1998 was primarily due to the acquisition related amortization charges 
discussed above. The loss in 1997 is inclusive of a one-time charge of $50.8 
for in-process technology.

INTEREST AND OTHER EXPENSE. Interest expense increased to $13.3 million in 
the first nine months of 1998 from $3.1 million for the same period in 1997 
due to interest payments on the New Credit Facility and Notes.

INCOME TAXES. Provision for income taxes of $3.7 million in the first nine 
months of 1998 decreased $1.8 million from $5.5 million in 1997. Although the 
company reported a loss before income taxes, a provision for income tax was 
recorded because goodwill amortization was not deductible for federal income 
tax purposes. In addition the company pays income taxes in foreign countries, 
principally France, where historically the tax rate is higher than that of 
the U.S., on income earned in those countries. Income taxes as a percentage 
of income before taxes, excluding the effect of acquisition related charges, 
was approximately 44.8% for 1998 compared to 41.8% for 1997.

                                   Page 15
<PAGE>

CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

The risk factors set forth below are important factors that may affect future 
results and that could cause actual results to differ materially from those 
projected in forward-looking statements that may be made by the Company from 
time to time, including the forward-looking statements included in this 
report.

SUBSTANTIAL LEVERAGE AND DEBT SERVICE. On October 3, 1998, the Company's 
total debt (net of cash) was $182.4 million and the Company had a 
shareholders' deficit of $38.4 million. Required principal payments under the 
New Credit Facility and Notes (excluding the Revolver) are as follows: $0.8 
million remaining in 1998; $7.8 million in 1999; $7.8 million in 2000; $9.1 
million in 2001; $5.6 million in 2002; $12.25 million in 2003; and $120.0 
million in 2007. In 1998, it is anticipated that capital expenditures will 
not exceed the limit of $10.5 million permitted under the New Credit Facility.

The Company's ability to make scheduled payments of principal, or to pay the 
premium, if any, interest or liquidated damages, if any, thereon, or to 
refinance its indebtedness, or to fund planned capital expenditures, will 
depend upon its future performance, which, in turn, is subject to general 
economic, financial, competitive, legislative, regulatory and other factors 
that are beyond its control. There can be no assurance that the Company's 
business will generate cash flow at or above anticipated levels or that the 
Company will be able to borrow funds under the New Credit Facility in an 
amount sufficient to enable the Company to service its indebtedness or make 
anticipated capital expenditures. If the Company is unable to generate 
sufficient cash flow from operations or to borrow sufficient funds in the 
future to service its debt, it may be required to sell assets, reduce capital 
expenditures, refinance all or a portion of its existing indebtedness or 
obtain additional financing. There can be no assurance that any such 
refinancing would be available on commercially reasonable terms, or at all, 
or that any additional financing could be obtained, particularly in view of 
the Company's high level of indebtedness, the restrictions on the Company's 
ability to incur additional indebtedness under the New Credit Facility and 
the indenture under which the Notes were issued (the "Indenture"), and the 
fact that substantially all of the Company's and its subsidiaries' assets 
have been pledged to secure obligations under the New Credit Facility.

In addition, the Indenture and the New Credit Facility contain financial and 
other restrictive covenants that limit, among other things, the ability of 
the Company to borrow additional funds. Failure by the Company to comply with 
such covenants could result in events of default under the Indenture and the 
New Credit Facility which, if not cured or waived, could permit the 
indebtedness thereunder to be accelerated which would have a material adverse 
effect on the Company's business, financial condition and results of 
operations.

FUTURE OPERATING RESULTS SUBJECT TO FLUCTUATION. The Company's operating 
results may fluctuate in the future as a result of a number of factors, 
including the timing of customer orders, timing of completion of existing 
customer contracts, variations in the Company's sales channels or the mix of 
products it sells, changes in pricing policies by the Company's suppliers, 
fluctuations in manufacturing yields, market acceptance of new and enhanced 
versions of the Company's products and the timing of acquisitions of other 
businesses, products and technologies and any associated charges to earnings.

In addition, the Company periodically evaluates the possible impairment of 
goodwill to determine whether events or changes in circumstances indicate 
that the carrying amount of goodwill may not be recoverable. Further, the 
Company's expense levels are based in part on expectations of future 
revenues. If anticipated sales and shipments in any quarter do not occur when 
expected, operating expenses and inventory levels could be disproportionately 
high and the Company's operating results for that quarter, and potentially 
for future quarters, would be adversely affected. The Company's operating 
results could also be affected by general economic conditions. Fluctuations 
in operating results are likely to cause volatility in the price of the 
Company's Common Stock.

Axiohm has historically experienced, and the Company expects to continue to 
experience, relatively lower levels of sales of existing point of sale 
transaction printers during the period from mid-November to the end of 
December primarily in the United States. The Company believes that this 
seasonality has been caused by the fact that some of its POS customers do not 
install new systems in their facilities between Thanksgiving and Christmas, 
so as not to disturb their sales flow during this heavy selling period.

The Company's customers encounter uncertain and changing demand for their 
products. They typically 

                                   Page 16
<PAGE>

order products from the Company based on their forecasts. If demand falls 
below customers' forecasts, or if customers do not control their inventories 
effectively, they may cancel or reschedule shipments previously ordered from 
the Company. The Company has in the past experienced, and may at any time and 
with minimal notice in the future experience, cancellations and postponements 
of orders.

DEPENDENCE ON PRINCIPAL CUSTOMER. Sales to NCR Corporation ("NCR"), the 
Company's largest customer, for the nine months ended October 3, 1998 were 
25% of total revenue. Net sales for the years ended December 31, 1997 and 
1996 were 35% and 52% respectively. No other customer accounted for more than 
10% of net sales for the year ended December 31, 1996 or December 31, 1997. 
On September 2, 1997, Axiohm IPB entered into a three-year contract with NCR 
(the "NCR Contract"). The NCR Contract provides that NCR and Axiohm IPB 
intend and expect that NCR will purchase from Axiohm IPB substantially all of 
its requirements for transaction printers of the type manufactured by Axiohm 
IPB (the "Covered Products"). In case there is reason to believe that NCR is 
purchasing less than 75% of its requirements for Covered Products from Axiohm 
IPB at any time during the term of the agreement, there is an obligation for 
both parties to work together in good faith to eliminate such deficiency. The 
NCR Contract provides that NCR's purchase commitment is subject to Axiohm 
IPB's ability to meet NCR's specifications and requirements for price, 
performance, quality, service and delivery with respect to such Covered 
Products. Any failure by NCR to continue purchasing products from the Company 
at historical levels or the termination of the NCR Contract would have a 
material adverse effect on the Company's business, financial condition and 
operating results. Sales of certain products in 1998 not covered by its 
contract with NCR are expected to approximate 1997's level of approximately 
5% of combined pro-forma revenues assuming companies were combined from 
January 1st, of $212 million, and the Company does not anticipate significant 
revenue from these products in 1999. In the second quarter Solectron Corp. 
was assigned the NCR business as part of the sale of certain NCR 
manufacturing operations to Solectron Corp. and is expected to be the 
Company's largest customer in 1998. The company currently expects that this 
assignment will not have a material adverse impact on its financial position 
or results of operations.

COMPETITION. The Company has a number of significant domestic and foreign 
competitors for its transaction printer, bar code printer and card reader 
products. Many of the Company's competitors have significantly greater 
financial, technical and marketing resources than does the Company. To remain 
competitive, the Company believes that it will be required to maintain a high 
level of technological expertise and deliver reliable cost-effective products 
on a timely basis. There can be no assurance that the Company will have 
sufficient resources to continue to make the investments necessary to 
maintain its competitive position or that other competitors with 
substantially greater financial resources, including other manufacturers of 
non-transaction printers, will not attempt to enter the market. A failure to 
remain competitive would have a material adverse effect on the Company's 
business, financial condition and results of operations.

INTEGRATION OF OPERATIONS. The integration of the administrative, finance and 
manufacturing operations of Axiohm and DH, the coordination of their 
respective sales and marketing staffs and the implementation of appropriate 
operational, financial and management systems and controls will require 
significant financial resources and substantial attention from management. 
During the second quarter of 1998, as part of the strategy to achieve 
purchasing, manufacturing and other synergies begun with the acquisition of 
DH, the Company finalized its plan to consolidate two of its manufacturing 
operations principally into its Ithaca, New York manufacturing operation as 
discussed above. The Company expects to incur $6 million in costs through 
1999 related to consolidation of these two facilities and expects to realize 
annual savings of approximately $3.5 million by the end of 1999. The company 
recorded $3 million in additional goodwill in the second quarter related to 
the closure of the two former DH manufacturing operations. Any inability of 
the Company to integrate these operations successfully in a timely and 
efficient manner could have a material adverse effect on the Company's 
business, financial condition and results of operations and would adversely 
affect its ability to realize its planned cost savings or would require 
additional expenditures to realize such cost savings. In addition, even if 
the businesses of Axiohm and DH are successfully integrated, no assurance can 
be given that future expenses can be reduced by the expected cost savings. 
The Company's prospects should be considered in light of the numerous risks 
commonly encountered in business combinations. In addition, the historical 
financial statements presented in this Report may not necessarily be 
indicative of the results that would have been attained had the Company 
actually operated on a combined basis.

                                   Page 17
<PAGE>

TECHNOLOGICAL CHANGE; COMPETITION; DEPENDENCE ON NEW PRODUCTS. The markets 
for some of the Company's products are characterized by frequent new product 
introductions and declining average selling prices over product life cycles. 
The Company's future success is highly dependent upon the timely completion 
and introduction of new products at competitive price/performance levels. In 
addition, the Company must respond to current competitors, who may choose to 
increase their presence in the Company's markets, and to new competitors, who 
may choose to enter those markets. If the Company is unable to make timely 
introduction of new products or respond to competitive threats, its business 
and operating results could be materially adversely affected.

INTERNATIONAL SALES AND OPERATIONS. The Company expects that international 
sales will continue to represent a significant portion of its net sales. 
Although the Company's net sales are denominated in U.S. dollars, its 
international business may be affected by changes in demand resulting from 
fluctuations in exchange rates as well as by risks such as tariff regulations 
and difficulties in obtaining export licenses. In addition, historically the 
French operations of Axiohm S.A.R.L. have incurred a majority of Axiohm 
S.A.R.L.'s expenses in French francs, while a substantial majority of Axiohm 
S.A.R.L.'s revenues have been in U.S. dollars. Any material appreciation in 
the French franc relative to the U.S. dollar would, absent any effects 
associated with hedging or currency trading transactions, detrimentally 
affect the financial performance of the Company's French operations. The 
Company attempts to limit its exposure to French franc currency fluctuation 
compared to the U.S. dollar by entering into various financial instruments, 
including forward exchange contracts, to offset its French franc denominated 
expenses with associated U.S. dollar denominated revenue, if, in the opinion 
of the Company, to do so would mitigate foreign exchange losses. The forward 
exchange contracts the Company has entered into are marked to market, with 
any exchange gains or losses and associated costs recognized in the income 
statement. The Company cannot predict the effect of exchange rate 
fluctuations upon future operating results.

INTELLECTUAL PROPERTY RIGHTS. The Company holds various U.S. and foreign 
patents on impact printheads, transaction printers, magnetic card readers and 
bar code products and has applied for additional domestic and foreign 
patents. The basic technology for many of the Company's products is based 
upon these patents and on manufacturing expertise. There can be no assurance 
that any issued patents will provide the Company with competitive advantages 
or will not be challenged by third parties, or that the patents of others 
will not have a material adverse effect on the Company's ability to do 
business, or that others will not independently develop similar products, 
duplicate the Company's products, or design around the patents issued to the 
Company.

The Company has in the past been, and may in the future be, notified that it 
may be infringing intellectual property rights possessed by third parties. In 
addition, the Company has in the past commenced, and may in the future, 
commence litigation against third parties for infringement of the Company's 
intellectual property rights. Any such litigation initiated by the Company or 
by others is, at a minimum, costly, and can divert the efforts and attention 
of the Company's management and technical personnel, which can have a 
material adverse effect on the Company's business, financial condition and 
results of operations. Furthermore, there can be no assurance that other 
infringement claims by third parties or other claims for indemnification by 
customers or end-users of the Company's products resulting from infringement 
claims will not be asserted in the future or that such assertions, if proven 
to be true, will not have a material adverse effect on the Company's 
business, financial condition and results of operations. If any such claims 
are asserted against the Company, the Company may seek to obtain a license 
under the third party's intellectual property rights. There can be no 
assurance, however, that a license will be available on commercially 
reasonable terms, if at all. The Company could decide, in the alternative, to 
resort to litigation to challenge such claims or to design around the 
patented technology. Such actions could be costly and would divert the 
efforts and attention of the Company's management and technical personnel, 
which could have a material adverse effect on the Company's business, 
financial condition and results of operations.

                                   Page 18
<PAGE>

MANAGEMENT OF FUTURE ACQUISITIONS. Historically, the Company has achieved a 
portion of its growth through acquisitions of other businesses, and the 
Company intends to pursue additional acquisitions as part of its growth 
strategy. There are a number of risks associated with any acquisition, 
including the substantial time and attention required from management of the 
Company in connection with such transactions, the difficulty of predicting 
whether the operations will perform as expected and other problems inherent 
with any transition of one business organization into another. There can be 
no assurance that the Company will be able to consummate any beneficial 
acquisitions in the future or that the anticipated benefits of any 
acquisition will be realized. If any such acquisitions are consummated, a 
failure by the Company to manage any such acquisitions successfully could 
have a material adverse effect on the Company's business, financial condition 
and results of operations. Additionally, there may be future acquisitions 
that could result in potentially dilutive issuance of equity securities, the 
occurrence of debt and contingent liabilities and amortization expenses 
related to goodwill and other intangible assets associated with the 
acquisitions of other businesses, any of which could have a material adverse 
effect on the Company's business, financial condition and results of 
operations.

FUTURE SALE OF AXIOHM EXCHANGE SHARES. In May 1998, the Company registered 
with the SEC an aggregate of 5,515,858 shares of Common Stock held by the 
former shareholders of Axiohm S.A.R.L. and Dardel for sale by such 
shareholders from time to time in the open market or in private transactions. 
Such sales, or the potential for such sales, could have a material adverse 
effect on the market price for the Company's Common Stock.

YEAR 2000 COMPLIANCE. Many currently installed computer systems and software 
products are coded to accept only two digit entries in the date code field. 
Beginning in the year 2000, these date code fields will need to accept four 
digit entries to distinguish 21st century dates from 20th century dates. As a 
result, in less than two years, computer systems and/or software used by many 
companies may need to be upgraded to comply with such "Year 2000" 
requirements.

YEAR 2000-STATE OF READINESS

The Company recognizes the need for addressing the "Year 2000" issue and has 
developed an oversight committee to ensure compliance prior to December 31, 
1999. Representatives from each operating location, both domestic and 
international, have been identified and assigned the task of evaluating the 
state of readiness of each respective location. In addition, the Company has 
recently employed a Chief Information Officer to oversee the Company's Year 
2000 compliance issues. Information systems ("IT") which are considered to be 
non-compliant are expected to be modified or replaced with systems that are 
Year 2000 compliant. Similar actions are being taken with respect to non-IT 
systems, primarily those systems embedded in equipment and systems used in 
manufacturing and other facilities. In addition, the teams have been given 
the responsibility of determining the state of readiness of customers and 
vendors and other third parties that may have a material impact on the 
Company, and develop contingency plans where necessary. The Company thus far 
has primarily used, and expects to continue to primarily use, internal 
resources to implement its readiness plan and to upgrade or replace systems 
affected by the Year 2000 issue.

As part of the Company's Year 2000 project, the Company has completed the 
awareness phase of all IT and non-IT systems pertaining to the Year 2000 
issue. The Company has completed its initial evaluation of current computer 
systems hardware, including software and embedded technologies. Evaluation of 
IT systems is approximately 75% complete and is expected to be 100% complete 
during the fourth quarter of 1998. The Company expects to begin and complete 
its evaluation of the "state of readiness" of both vendors and customers with 
a material relationship during the fourth quarter 1998. The following table 
summarizes the current status of the Company's position in addressing Year 
2000 issues.

                                   Page 19
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------
                          %           PROJECT COMPLETION DATE 
PHASE                 COMPLETED       DURING THE QTR. ENDING
------------------------------------------------------------------
<S>                   <C>             <C>
Awareness                100%

------------------------------------------------------------------
Evaluation               75%          3/31/99

------------------------------------------------------------------
Renovation               50%          6/30/99

------------------------------------------------------------------
Validation               50%          9/30/99

------------------------------------------------------------------
Implementation           50%          12/31/99

------------------------------------------------------------------
</TABLE>

Based on the evaluation process thus far, the Company has identified the 
primarily non-compliant issue to reside within the company's accounting and 
manufacturing software.

The Company has purchased the necessary hardware and software and is 
currently in the process of implementing firm wide an Oracle based enterprise 
resource planning system ("ERP"). To date, Version 10.6 has been implemented 
in several locations. Although Version 10.6 does not fully address Year 2000 
requirements, the Company believes that Oracle ERP Version 10.7 does. Such 
Version 10.7 has already been released by Oracle, and the Company has begun 
testing and implementation with those divisions currently working with 10.6.

The Company anticipates 75% completion of the Oracle conversion by second 
quarter 1999, and 100% completion to be achieved by the third quarter 1999. 
Failure to implement Oracle ERP Version 10.7 or some other form of enterprise 
software that addresses Year 2000 requirements prior to the year 2000 might 
result in significant difficulties in the Company's administration of 
invoicing and payables and other processes. Such difficulties could have a 
material adverse effect on the Company's business, financial condition and 
results of operations.

While the Company has not completed its evaluation of non-IT systems, it is 
believed that such items which are not Year 2000 compliant can easily be 
remedied through the purchase of "over the counter" products. A material 
effect on the company's performance is not expected.

YEAR 2000-COSTS TO ADDRESS ISSUES

Incremental costs associated with Year 2000 compliance are expected to 
approximate $3.0 million through December 31, 1999. Of which, the Oracle 
conversion is expected to be the largest portion totaling $2.0 million. 
Through October 3, 1998, the company has spent $1.0 million associated with 
the Oracle conversion or 50% of the total. This estimate assumes that the 
Company will not incur significant costs associated with Year 2000 compliance 
on behalf of vendors, customers or other third parties.

YEAR 2000-RISKS OF ISSUES

The Company's failure to resolve Year 2000 issues on or before December 31, 
1999 could result in systems failure or miscalculations causing disruptions 
in operations, including a temporary inability to process transactions, send 
invoices, or engage in normal business activities. Such failures could 
materially and adversely affect the liquidity and financial performance of 
the company. Dependent on the readiness of suppliers, delays in supplies 
could directly correlate to reduced shipments and lost sales. In addition, a 
similar result can be suggested, in the event major customers do not meet 
Year 2000 compliance.

YEAR 2000-CONTINGENCY PLAN

The Company has not, to date, implemented a contingency plan regarding Year 
2000 non-compliance. It is the Company's goal to have the foundation 
developed by the first quarter 1999. A completed plan is to be achieved by 
the end of the second quarter 1999. The Company believes that in-house 
problems can be addressed through the use of alternative resources and manual 
processes. However, due to the uncertainty of third party factors, the 
Company believes a detailed contingency plan is needed.

The costs and timetables in which the Company plans to complete the Year 2000 
readiness activities, as well as potential outcomes of non-compliance are 
based on management's best estimates. These estimates were derived using 
numerous assumptions of future events including continuing factors. 

                                   Page 20
<PAGE>

Evaluation of Year 2000 issues is a continuous process. There can be no 
assurance that these estimates will be achieved. Failure to achieve these 
estimates, or complete the Company's Year 2000 readiness plan and activities, 
could have a material effect on the company's financial condition and 
operating results.

EURO.

On January 1, 1999, eleven of fifteen member countries of the European Union 
are scheduled to establish fixed conversion rates between their existing 
currencies ("legacy currencies") and one common currency - the Euro. The Euro 
will then trade on currency exchanges and may be used in business 
transactions. The conversion to the Euro will eliminate currency exchange 
risk between the member countries. Beginning in January 2002, new 
Euro-denominated bills and coins will be issued, and legacy currencies will 
be withdrawn from circulation. The Company has recognized this situation and 
is currently in the process of developing a plan to address any issue being 
raised by the currency conversion. Possible issues include, but are not 
limited to, the need to adapt computer and financial systems to recognize 
Euro- denominated transactions, as well as the impact of one common European 
currency on pricing. The Company anticipates that any unaddressed issues will 
be resolved during 1999.

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary anticipated sources of capital are cash flow from 
operations and borrowings under the New Credit Facility. For the nine months 
ending October 3, 1998, cash used by operating activities was $4.0 million, 
which is primarily the result of an increase in working capital of $13.6 
million in excess of the net loss plus depreciation and amortization. The 
Company's primary capital requirements include debt service, capital 
expenditures and working capital. The Company's ability to make scheduled 
payments of principal and interest to refinance its indebtedness, or to fund 
planned capital expenditures, will depend upon its future performance, which, 
in turn, is subject to general economic, financial, competitive, legislative, 
regulatory and other factors that are beyond its control. At the time of the 
acquisition of DH, the Company implemented a plan to achieve purchasing, 
manufacturing and other synergies. As part of this plan, the Company 
announced a major restructuring program that will consolidate two of its 
former DH manufacturing operations principally into its Ithaca, New York 
manufacturing operation as discussed above.

Required principal payments under the New Credit Facility and Notes 
(excluding the Revolver) are as follows: $0.8 million remaining in 1998; $7.8 
million in 1999; $7.8 million in 2000; $9.1 million in 2001; $5.6 million in 
2002; $12.25 million in 2003; and $120 million in 2007. It is anticipated 
that capital expenditures in 1998 will not exceed the maximum permitted under 
the New Credit Facility of $10.5 million. There can be no assurance, however, 
that the Company's business will generate cash flow at or above anticipated 
levels or that the Company will be able to borrow funds under the New Credit 
Facility in an amount sufficient to enable the Company to service its 
indebtedness, or make anticipated capital expenditures. In particular, there 
can be no assurance that anticipated revenue growth will be achieved at the 
levels currently anticipated or at all. If the Company is unable to generate 
sufficient cash flow from operations or to borrow sufficient funds in the 
future to service its debt, it may be required to sell assets, reduce capital 
expenditures, refinance all or a portion of its existing indebtedness, or 
obtain additional financing. There can be no assurance that any such 
refinancing would be available on commercially reasonable terms, or at all, 
or that any additional financing could be obtained, particularly in view of 
the Company's high level of debt.

At October 3, 1998, the Company's total debt (net of cash) including 
government grant obligations was $182.4 million, including $13.5 million 
under the revolving credit facility. Debt levels increased since December 31, 
1997 due to borrowings against the line of credit to fund payments made to 
former officers of $3.5 million, the payment of $11.8 million of subordinated 
interest expense and working capital requirements in excess of net income 
plus depreciation and amortization.

The New Credit Facility and the Notes, and other debt instruments of the 
Company may, impose various restrictions and covenants on the Company which 
could potentially limit the Company's ability to respond to market 
conditions, to provide for unanticipated capital investments, to raise 
additional debt or equity capital, or to take advantage of business 
opportunities. The New Credit Facility includes various financial covenants 
of the Company, including covenants with respect to the maximum capital 
expenditures, a 

                                   Page 21
<PAGE>

maximum ratio of debt to EBITDA, a minimum interest coverage ratio and a 
minimum fixed charge coverage ratio. As indicated above, the company's future 
compliance with these covenants will depend on future performance which, in 
turn, is subject to general economic, financial, competitive, legislative, 
regulatory and other factors, which are beyond its control. Its compliance 
depends on the timing of orders from customers, timing of new product 
introductions, capital expenditures, working capital requirements, gross 
margins and expense levels. The New Credit Facility subjects the Company to 
certain negative covenants, including without limitation covenants that 
restrict, subject to specified exceptions: the occurrence of additional 
indebtedness and other obligations and the granting of additional liens; 
mergers and acquisitions, investments and acquisitions and dispositions of 
assets; the occurrence of capitalized lease obligations; investments, loans 
and advances; dividends, stock repurchases and redemption's; prepayment or 
repurchase of other indebtedness and other provisions. Effective September 
25, 1998, the Company renegotiated the conditions of its bank agreement. 
Modifications mainly affect the covenant levels within the agreement. See 
attached amendment, Exhibit. 10.1 The Company has entered into a $20 million 
interest rate swap agreement with a major financial institution. This swap 
agreement has the effect of converting certain variable rate debt to defined 
rate obligations and expires in November, 1999. Net amounts paid or received 
are accrued on a settlement basis as adjustments to interest expense.

The Company incurred indebtedness of $120 million in connection with the 
issuance of the Notes. The indebtedness evidenced by the Notes is 
subordinated to the Company's obligations under the New Credit Facility. 
Interest is payable semi-annually on the unpaid principal at 9.75% per annum. 
The first payment of $5.9 million was paid April 1, 1998. A subsequent 
payment of $5.9 million was made on October 1, 1998. The Indenture contains 
covenants regarding restricted payments, occurrence of indebtedness, liens, 
dividends, merger, consolidation or sale of assets, and transactions with 
affiliates.

NEW ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board (FASB) issued 
Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting for 
Derivative Instruments and Hedging Activities". This statement standardizes 
the accounting for derivative instruments, including derivative instruments 
embedded in contracts, by requiring that the entity recognize those items as 
assets of liabilities in the statement of financial position and measure them 
at fair value. The statement is effective for fiscal year beginning after 
June 15, 1999. Management has not yet determined the impact that the adoption 
of this statement may have on earnings, financial condition or liquidity of 
the Company. The Company plans to adopt SFAS No. 133 as permitted by this 
accounting standard by January 1, 2000.

In June 1997 the FASB issued SFAS No. 131, "Disclosure about Segments of an 
Enterprise and Related Information." This statement establishes standards for 
reporting information about operating segments in annual financial statements 
and requires selected information about operating segments in interim 
financial reports issued to shareholders. It also establishes standards for 
related disclosures about products and services, geographic areas and major 
customers. The Company plans to adopt SFAS No. 131 in connection with the 
preparation of the January 2, 1999 consolidated financial statements, as 
permitted by the pronouncement. The adoption of these standards is not 
expected to have a material impact on consolidated results, financial 
condition, or long-term liquidity.

In March 1998, the Accounting Standards Executive Committee (AcSEC) issued 
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer 
Software Developed or Obtained for Internal Use." The SOP is effective for 
financial statements for fiscal years beginning after December 15, 1998.

In April 1998, the Accounting Standards Executive Committee (AcSEC) issued 
Statement of Position (SOP) 98-5, "Reporting for the costs of Start-Up 
Activities." This SOP provides guidance on the financial reporting of 
start-up cost and organization costs. The SOP requires costs related to 
start-up activities and organizational costs to be expensed as incurred. The 
statement is effective for financial statements for fiscal year beginning 
after December 15, 1998.

The Company plans to adopt these statements in connection with the 
preparation of the December 31, 1999 consolidated financial statements, as 
permitted by each statement, SOP 98-1, and 98-5. The adoption of these 
standards is not expected to have a material impact on consolidated results, 
financial condition, or long-term liquidity.

                                   Page 22
<PAGE>

RESTRICTIONS ON DISTRIBUTIONS BY GUARANTORS TO THE COMPANY

There are no contractual restrictions, under the New Credit Facility or 
otherwise, upon the ability of the Guarantor Subsidiaries to make 
distributions or pay dividends to their respective equityholders. Directly or 
indirectly, the Company is the sole equity-holder of all of the Guarantor 
Subsidiaries.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

During the third quarter of 1998 the Company settled a pending claim 
associated with a complaint which was filed by Axiohm S.A. on June 17, 1997 
in the Central District of California alleging infringement of Axiohm's U.S. 
Patent No. 5,579,043 by Seiko Epson and Epson America. On December 22, 1997, 
Seiko Epson and Epson America had filed an answer to Axiohm's complaint as
well as counterclaims against both Axiohm and Axiohm IPB. In their response, 
Seiko Epson and Epson America denied the validity of Axiohm S.A.'s Patent 
No. 5,579,043 and infringement thereof, and sought declaratory relief 
to that effect. Seiko Epson and Epson America further alleged that Axiohm and 
Axiohm IPB had infringed and were infringing Seiko Epson's U.S. Patent Nos. 
5,437,004 5,594,653 and 5,555,349, and sought injunction relief, treble 
damages and attorney's fees. The settlement agreement does not require any 
payments by any of the companies.

In September 1998, Andrew Newmark filed a complaint against the Company in 
the United States District Court, Southern District of California, claiming 
rights to a finders fee of up to $2,187,500 in connection with the 1997 
acquisition of the Company by Axiohm S.A. Also in September, the Company
filed an action in the United States District Court for the Southern 
District of New York against Mr. Newmark, seeking a judgement that Mr. 
Newmark is not entitled to any fee. Motions have been presented by each 
party in each suit regarding the appropriateness of the respective forums.
Although the Company believes that its position is meritorious, the 
litigation may be costly and time consuming. There can be no assurance 
that the Company will ultimately prevail in suits with Mr. Newmark.


                                   Page 23
<PAGE>

                                  SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.

AXIOHM TRANSACTION SOLUTIONS, INC. BY:

 NOVEMBER 6, 1998                                 /s/ WALTER S. SOBON
 ----------------                      ----------------------------------------
      DATE                             WALTER S. SOBON, CHIEF FINANCIAL OFFICER
                                              (CHIEF FINANCIAL OFFICER)






                                   Page 24
<PAGE>


                                       
                     AXIOHM TRANSACTION SOLUTIONS, INC.
                  EXHIBITS TO QUARTERLY REPORT ON FORM 10-Q

                   FOR THE QUARTER ENDED OCTOBER 3, 1998
<TABLE>
<CAPTION>

      EXHIBIT   DESCRIPTION
      -------   -----------
      <S>       <C>

        10.1    FOURTH AMENDMENT, dated as of September 25, 1998 to the CREDIT
                AGREEMENT, dated as of October 2, 1997, among the
                Company, as  Borrower, the several Lenders from
                time to time Parties thereto, Lehman  Brothers
                Inc. as Arranger, Lehman Commercial Paper Inc, as
                Syndication  Agent and Union Bank of California,
                N.A. as Administrative Agent, as  amended by the
                Global Amendment and Assignment and Acceptance, dated 
                as of October 20, 1997.

        27.1    Financial Data Schedule
</TABLE>

                                   Page 25