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UNITED STATES

FORM 10-K

For the fiscal year ended December 31, 2002

OR

Commission file number: 1-13521

HYPERCOM CORPORATION

2851 West Kathleen Road

(602) 504-5000

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

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

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

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

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

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

Documents Incorporated By Reference

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

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PART I

Item 1. Business

General Description

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

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

History and Business Profile

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

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

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

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

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

          POS/Network Services Segment:

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

          Leasing Segment:

•

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

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

Recent Financial Developments

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

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

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

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

POS Terminal Industry Overview

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Products and Services

Point of Sale / Point of Transaction Terminals

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

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

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

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

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

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

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

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

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

          Hypercom Plus. Our Plus family of products consists of enhanced versions of our T series and ICE product lines. These products incorporate the Hypercom SureLoad™ printer, a new thermal printer that incorporates fast, easy loading of paper rolls. The Plus products also have integrated PIN pads and the ability to read traditional magnetic stripe and the new smart cards. The T7Plus is the next generation of the Hypercom T7P. The ICE 5500Plus includes all of the features and functionality of the ICE 5500, with the addition of the SureLoad printer and an integrated PIN pad. The ICE 5700Plus combines the ability to do check conversion and credit/debit/chip card transactions in one, convenient, easy-to-use device.

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

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

Network Solutions and Equipment

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

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

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

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

Services and Software

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

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

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

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

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

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

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

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

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

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

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

Customers

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

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

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

Sales, Marketing and Distribution

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

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

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

Customer Service and Support

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

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

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

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

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

Manufacturing

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

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

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

Research and Product Development

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

	Our product development process generally involves the following:
	•		Identification of the applicable market for the product.
	•		Design of the product for the market.
	•		Engineering and development of the product.
	•		Testing of the product.

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

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

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

Seasonality

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

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

Competition

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

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

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

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

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

Proprietary Rights

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

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

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

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

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

Industry Standards and Government Regulation

	Before product sales are completed in the United States, our products must:
	•		meet industry standards as imposed by VISA, MasterCard, and others;
	•		be certified to connect to some public telecommunications networks;
	•		comply with Federal Communications Commission regulations; and
	•		comply with Underwriters Laboratories’ regulations.

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

Equipment Leasing

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

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

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

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

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

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

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

Employees

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

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

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

Executive Officers of the Registrant

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

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

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

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

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

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Item 2. Properties

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

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

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

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

Item 3. Legal Proceedings

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

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

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

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

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PART II

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

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

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

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

Item 6. Selected Financial Data

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

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