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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended: June 30, 2003.

OR

For the transition period from ___________ to __________ .

Commission file number: 1-13521

HYPERCOM CORPORATION

2851 West Kathleen Road
Phoenix, Arizona 85053
(Address of principal executive offices) (Zip Code)

(602) 504-5000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [   ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes [X] No [   ]

Number of shares of the registrant’s common stock, $.001 par value per share, outstanding as of August 7, 2003,

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INDEX

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

HYPERCOM CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

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

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HYPERCOM CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited and in thousands, except per share data)

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

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HYPERCOM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands)

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 1 – BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair statement of results for the periods have been included and are considered of a normal recurring nature. The Company’s 2002 results of operations and balance sheets also reflect the loss on early extinguishment of debt (Note 8) and the cumulative effect of change in accounting principle (Note 7). Operating results for the six months ended June 30, 2003, are not necessarily indicative of the results to be expected for the year ending December 31, 2003.

Certain prior year amounts have been reclassified to conform to the current period presentation, including the results of operations and cash flows of the Company’s discontinued operations.

This financial information is intended to be read in conjunction with Hypercom’s audited financial statements and footnotes thereto included in Hypercom’s Annual Report on Form 10-K for the year ended December 31, 2002.

NOTE 2 – NEW AND PROPOSED ACCOUNTING PRONOUNCEMENTS

Effective January 1, 2003 the Company adopted SFAS 145, Rescission of FASB Statements No.4, 44 and 64, amendment of FASB Statement No.13, and Technical Corrections, which among other things, restricts the classification of gains and losses from extinguishment of debt as extraordinary to only those transactions that are unusual and infrequent in nature as defined by APB Opinion No. 30. Upon adoption, gains and losses on certain future debt extinguishment, if any, will be recorded in pre-tax income. In accordance with the provisions of SFAS 145, the Company reclassified its $2.6 million extraordinary loss from early extinguishment of debt for the six months ended June 30, 2002 to pre-tax loss (see Note 8).

In January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51. FIN No. 46 requires certain variable interest entities, or VIEs, to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN No. 46 is effective for all VIEs created or acquired after January 31, 2003. For VIEs created or acquired prior to February 1, 2003, the provisions of FIN No. 46 must be applied for the first interim or annual period beginning after June 15, 2003. The Company currently has no contractual relationship or other business relationship with a variable interest entity and therefore the adoption of FIN No. 46 is not expected to have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

In April 2003, the FASB issued SFAS 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, which is generally effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. SFAS 149 clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative as discussed in SFAS 133, clarifies when a derivative contains a financing component, amends the definition of an “underlying” to conform it to the language used in FASB Interpretation No. 45, Guarantor Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others and amends certain other existing pronouncements. The Company has only limited involvement with derivative financial instruments, does not use them for trading purposes and is not a party to any leveraged derivatives. However, the Company periodically enters into forward exchange contracts to hedge some of its foreign currency exposure. The Company does not anticipate that the adoption of SFAS 149 to have a material effect on its consolidated financial position, results of operations, or cash flows.

In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. This Statement requires that certain instruments that were previously classified as equity on a company’s statement of financial position now be classified as liabilities. The Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company currently has no instruments impacted by the adoption of this statement and therefore the adoption did not have an effect on the Company’s consolidated financial position, results of operations or cash flows.

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NOTE 3 – STOCK-BASED COMPENSATION

Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, (SFAS 123) defines a fair value based method of accounting for employee stock options or similar equity instruments. However, it also allows an entity to continue to account for these plans according to Accounting Principles Board Opinion No. 25 (APB 25) and related interpretations, provided pro forma disclosures of net income are made as if the fair value based method of accounting, defined by SFAS 123, had been applied.

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

As required, the pro forma disclosures above include options granted since January 1, 1995. Consequently, the effects of applying SFAS 123 for providing pro forma disclosures may not be representative of the effects on reported net income for future years until all options outstanding are included in the pro forma disclosures. For purposes of pro forma disclosures, the estimated fair value of stock-based compensation plans and other options is amortized to expense primarily over the vesting period. See Note 16 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2002 for further discussion of the Company’s stock-based employee compensation.

NOTE 4 – INVENTORIES

Inventories consist of the following (dollars in thousands):

NOTE 5 – SEGMENT INFORMATION

As of June 30, 2003, the Company had two segments: Point-of-Sale (POS)/Network Systems and Direct-Finance Leasing. POS Systems develops, manufactures, markets, and supports products that automate electronic payment transactions at the point of sale in merchant establishments as well as supporting non-payment applications and new markets, including government, education and healthcare. Network Systems develops, manufactures, markets, and supports enterprise-networking systems. Direct-finance leasing includes the activities of our direct finance lease subsidiary, Golden Eagle.

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The Company’s reportable segments are strategic business units that market distinctly different products and services to a respectively different group of customers. Their business models vary and each is separately managed given their unique marketing, operations and financing strategies. The POS/Network Systems segment information excludes the results of the operating units that have been discontinued as more fully described in Note 6. The following table presents certain segment financial information (dollars in thousands):

As of and for the three months ended June 30, 2003:

As of and for the three months ended June 30, 2002:

As of and for the six months ended June 30, 2003:

As of and for the six months ended June 30, 2002:

NOTE 6 – RESTRUCTURING CHARGES AND DISCONTINUED OPERATIONS

In September 2002, the Company committed to a plan to improve profits in its POS/Network Systems segment. The plan entailed downsizing certain operations and streamlining their product offerings, changing to a distributor sales model versus a direct sales model in certain international locations and disposing of unprofitable operations around the world. The profit improvement plan encompasses both restructuring activities to be accounted and reported under SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, as well as discontinued operations to be accounted and reported under SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.

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Restructuring Charges

The downsizing activities principally focused on the Company’s POS/Network Systems segment, including our manufacturing operations in Brazil. Such activities entailed moving to a contract manufacturer, reducing the number of personnel and holding for sale certain long-lived assets such as buildings and production equipment. Inventories were also written down to support a more streamlined product offering. In addition, the Company identified certain sales offices around the world to close in favor of a more cost-effective distributor arrangement in those locations. Costs associated with closing these sales offices principally included employee severance, inventory write-downs and costs associated with exiting office space and disposing of office fixed assets. The Company is actively marketing the assets held for sale. All other restructuring activities were completed during the fourth quarter of 2002.

Discontinued Operations

In connection with the profit improvement plan, the Company identified and decided to hold for sale certain under-performing operating units whose activities were not closely aligned with the Company’s core business. The results of operations for these operating units held for sale have been classified as discontinued operations and all periods prior to September 2002 have been restated to present these operating units as discontinued operations. At the time the Company determined to hold these operations for sale, the carrying amounts of their assets were written down to their estimated fair value less an estimate of costs to sell. Assets written down consisted principally of accounts receivable, inventories, intangible assets and fixed assets. In accordance with SFAS 144, the operating results of the discontinued operating units will be classified as discontinued operations as they are incurred.

Net revenues of the operating units classified as discontinued operations for the three and six months ended June 30, 2003 and 2002 were $2.9 and $5.3 million, and $7.3 and $13.6 million, respectively. Pretax losses of the operating units classified as discontinued operations for the three and six months ended June 30, 2003 and 2002 were $2.5 and $3.4 million, and $1.3 and $3.4 million, respectively.

During the second quarter of 2003, the Company disposed of substantially all the assets held for sale of Hypercom Horizon Inc., for $4.0 million in cash. In connection with the disposal, the Company recognized a $1.6 million loss comprised of non-cash fixed asset and inventory write-downs of $1.1 million, one-time severance costs of $0.4 million, and remaining facility lease costs of $0.1 million.

As of June 30, 2003, the Company has one remaining discontinued operating unit held for sale. A disposition of this unit is expected to be completed by September 30, 2003.

NOTE 7 – GOODWILL

During 2002 the Company implemented SFAS No. 142, Goodwill and Other Intangible Assets. Upon adoption of SFAS 142 on January 1, 2002, the carrying amount of goodwill was $21.8 million, of which $20.3 million was attributed to Golden Eagle, which comprises all of the Direct-Finance Leasing segment, with the remaining amount of $1.5 million attributed to the POS/Network Systems segment. Under the transitional provisions of SFAS 142, the Company evaluated its reporting units for impairment of goodwill as of January 1, 2002, completing the evaluations by June 30, 2002. The impairment test relative to Golden Eagle’s goodwill was performed by an independent third party valuation firm using market multiple, comparable transaction and discounted net earnings methodologies, with the remaining amount of goodwill evaluated internally using similar valuation methodologies.

The results of the impairment tests resulted in a full write-off of the carrying value of goodwill of $21.8 million. In accordance with the transition provisions of SFAS 142, the write-off was reported as a cumulative effect of a change in accounting principle impacting the first quarter of 2002.

The Company provided a full valuation reserve against the deferred tax benefit attributed to the write-off of the goodwill that had tax basis, and accordingly did not report the cumulative effect of a change in accounting principle net of tax. Due to the goodwill balances that had tax basis with amortizable lives extending up to 13 years, the Company was uncertain as to whether the tax benefits would be realized over such an extended time period. Although the Company did not provide a tax benefit

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attributed to the write off of goodwill, the tax benefit would be available to the Company in the future to the extent sufficient taxable income is recognized in the United States.

NOTE 8– DEBT AND EQUITY TRANSACTIONS

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

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

In connection with the early retirement of the term loans, the Company recorded an extraordinary loss on retirement of debt of $2.6 million during the six months ended June 30, 2002. In accordance with SFAS 145, Rescission of FASB Statements No.4, 44 and 64, amendment of FASB Statement No.13, and Technical Corrections, the Company has reclassified its $2.6 million extraordinary loss from early extinguishment of debt for the six months ended June 30, 2002 to pre-tax loss.

During March 2003, the Company amended its revolving credit facility to reduce the available credit limit from $25 million to $15 million. This reduction better matches the Company’s current liquidity needs and provides further cost savings.

During the second quarter of 2003, the Company issued 1,460,000 shares of its common stock, par value $0.001 per share, upon the conversion of its Series A (1.0 million shares at an exercise price of $3.19 per share) and Series B (460,000 shares at an exercise price of $3.16 per share) Warrants. Proceeds from the conversions amounted to $4.6 million. Additional equity activity during the second quarter of 2003 related to issuances of common stock under our Employee Stock Purchase Plan and stock option plans.

NOTE 9– INCOME TAXES

Income tax (expense) benefit before discontinued operations and cumulative effect of change in accounting principle for federal, state and foreign taxes was ($1.0) and ($1.6) million for the three and six months ended June 30, 2003 and ($0.5) and $0.1 million for the three and six months ended June 30, 2002. The income tax provision for 2003 is primarily comprised of income taxes associated with the Company’s profitable foreign locations.

As discussed in the Company’s 2002 Annual Report on Form 10K, the Company recorded full valuation reserves against the Company’s unreserved deferred tax asset balance existing at September 30, 2002. Consistent with the facts and circumstances leading to our conclusion to provide a full valuation reserve against our deferred tax assets in 2002, we have provided a further valuation allowance against any net increases in deferred tax assets which in 2003 consisted principally of net operating loss carryforwards for U.S. operating losses generated during the six months ended June 30, 2003. Accordingly, the effective tax rate for 2003 is not meaningful. These valuation allowances are subject to reversal in future years at such time that the benefits are actually utilized or, the operating profits in the U.S. become sustainable at a level that meets the recoverability criteria under SFAS 109.

The effective income tax rate for the three and six months ended June 30, 2002 was 29% and 53%, respectively, which differed from the U.S. statutory rate principally due to foreign taxes attributable to foreign operations that differed from the U.S. statutory rate.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. Words such as “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” and similar expressions identify forward-looking statements, which speak only as of the date the statement was made. These forward-looking statements may include, but not be limited to, projections of revenue or net income and issues that may affect revenue or net income, projections of capital expenditures, plans for future operations, products or services, financing needs of the Company, and economic conditions, as well as assumptions relating to the foregoing.

Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. Future events and actual results could differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. Statements in this Quarterly Report, including the Notes To The Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations describe factors, among others, that could contribute to or cause such differences. Additional risk factors that could cause actual results to differ materially from those expressed in such forward-looking statements, and that could affect the Company’s results of operations and financial position generally, are set forth in Exhibit 99.1, which is attached hereto and incorporated by reference into this Quarterly Report on Form 10-Q. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

RESULTS OF CONTINUING OPERATIONS

The results of continuing operations exclude the operations of the operating units being reported as discontinued operations (see Note 6 to the financial statements). Prior year results of continuing operations have been restated to reflect the discontinued operations on a consistent basis with 2003.

NET REVENUE

Net revenue for the three and six months ended June 30, 2003, decreased $3.4 million and $18.5 million or 5% and 13%, respectively, to $64.4 million and $120.1 million from $67.8 million and $138.6 million in the three and six months ended June 30, 2002. The decrease in net revenue for the second quarter of 2003 compared to the same period in 2002, principally reflects a soft global economy and the maturing of our direct finance lease portfolio. The decrease for the six month period was principally due to the attainment of a performance milestone under our Brazilian Health Ministry contract resulting in revenue of $8.6 million during the six months ended June 30, 2002, versus $0.8 million in revenue recognized under the same contract in the six months ended June 30, 2003. Performance milestones under this contract were substantially less than the milestone achieved in the first quarter of 2002, as we have now entered the maintenance phase of this contract. The additional decrease in net revenue for the six months ended June 30, 2003, compared to the same period in the prior year also reflects a soft global economy and the maturing of our direct finance lease portfolio, as well as uncertainty relating to the conflict in Iraq during the first quarter of 2003.

Net revenues from services activities, principally derived from POS support services, comprised less than 10% of total net revenue in both the three and six months ended June 30, 2003 and 2002. Our only revenues from long-term contracts in these periods were derived from our contract with the Brazilian Health Ministry as discussed previously.

COST OF REVENUE

Cost of revenue includes the cost of raw materials, manufacturing labor, overhead and subcontracted manufacturing costs, as well as interest expense and loan loss provisions with respect to direct financing and sales-type leases. For the three months and six months ended June 30, 2003, costs of revenue decreased $4.6 and $15.4 million or 11% and 18%, respectively, to $36.6 and $69.0 million from $41.2 and $84.4 million for the three and six months ended June 30, 2002. This decrease is a result of the decline in revenues year over year offset in part by an increase in gross margin as a percentage of revenue.

Gross margin for the three and six months ended June 30, 2003 was 43.1% and 42.6% compared to 39.3% and 39.1% in the same period in the prior year. The increase in the gross margin percentage is principally attributed to our direct finance leasing segment (Golden Eagle Leasing) whose margin was 32.7% and 31.2% in the three and six months ended June 30, 2002 compared to a gross margin of 69.8% and 64.0% in the three and six months ended June 30, 2003. The improvement in Golden Eagle’s gross margin is a result of decreases in direct finance lease defaults and incremental income from lease renewals as the lease portfolio matures.

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RESEARCH AND DEVELOPMENT

Research and development expenses consist mainly of software and hardware engineering costs and the cost of development personnel. Research and development expenses for the three months ended June 30, 2003 increased $0.2 million or 3% to $6.4 million from $6.2 for the three months ended June 30, 2002. The slight increase during the second quarter of 2003 compared to 2002 is attributable to the acceleration of certain development costs in 2003 associated with new product development. Research and development expenses for the six months ended June 30, 2003 decreased $0.1 million or less than 1% to $12.2 million from $12.3 for the same period a year ago. This change reflects the general stabilization of our cost containment efforts. Present development activities are primarily focusing on the continued reduction in the component costs of existing products and production enhancements, including certain new product development, that support current market requirements.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE

Sales and marketing expenses, administrative personnel costs, and facilities operations make up the selling, general and administrative expenses. These expenses totaled $16.5 and $33.4 million for the three and six months ended June 30, 2003, compared to $16.0 and $32.9 million for the three and six months in the prior year. This $0.5 million or 3% and 2% increase for the three and six months ended June 30, 2003 relates principally to the Company’s increased marketing efforts in the U.S. and Europe.

INCOME FROM CONTINUING OPERATIONS

Income from continuing operations for the quarter ended June 30, 2003 increased $0.3 million to $4.8 million compared to income of $4.5 million for the same quarter in the prior year primarily due to the improvement in Golden Eagle Leasing’s gross margin. Income from continuing operations for the six months ended June 30, 2003 decreased $3.4 million to $5.5 million from $8.9 million for the same period last year, as higher gross margins and lower operating expenses were insufficient to fully offset the decline in revenues. The year-to-date decline in income from continuing operations is also reflective of a soft global economy and the effects of the conflict in Iraq.

NET INTEREST, FOREIGN CURRENCY LOSSES AND OTHER ITEMS

The Company incurred interest expense of $0.6 and $1.2 million for the three and six months ended June 30, 2003 compared to $0.7 and $2.7 million for the three and six months ended June 30, 2002. Interest expense consists primarily of interest on borrowings for long-term debt and amortization of debt issuance costs. The reduction in interest expense year over year was principally the result of repaying $21.7 million of debt in March 2002. Other income (expense) in the amount of $0.1 and ($0.1) million for the three and six months ended June 30, 2003 compares to other income of $0.2 million and $0.4 million in the same period in the prior year. These amounts reflect various activities such as gains or losses on asset dispositions, certain non-operating finance costs, and other non-operating activity. Foreign currency loss for the three and six months ended June 30, 2003 was $0.5 and $0.9 million and significantly less than the loss of $2.2 and $3.8 million in the three and six months ended June 30, 2002. The reduced loss is a result of a hedging program the Company has since undertaken to mitigate foreign currency exposures.

INCOME TAXES

Income tax (expense) benefit before discontinued operations and cumulative effect of change in accounting principle for federal, state and foreign taxes was ($1.0) and ($1.6) million for the three and six months ended June 30, 2003 and ($0.5) and $0.1 million for the three and six months ended June 30, 2002. The income tax provision for 2003 is primarily comprised of income taxes associated with the Company’s profitable foreign locations.

As discussed in the Company’s 2002 Annual Report on Form 10K, the Company recorded full valuation reserves against the Company’s unreserved deferred tax asset balance existing at September 30, 2002. Consistent with the facts and circumstances leading to our conclusion to provide a full valuation reserve against our deferred tax assets in 2002, we have provided a further valuation allowance against any net increases in deferred tax assets which in 2003 consisted principally of net operating loss carryforwards for U.S. operating losses generated during the six months ended June 30, 2003. Accordingly, the effective tax rate for 2003 is not meaningful. These valuation allowances are subject to reversal in future years at such time that the benefits are actually utilized or, the operating profits in the U.S. become sustainable at a level that meets the recoverability criteria under SFAS 109.

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The effective income tax rate for the three and six months ended June 30, 2002 was 29% and 53%, respectively, which differed from the U.S. statutory rate principally due to foreign taxes attributable to foreign operations that differed from the U.S. statutory rate.

LIQUIDITY AND CAPITAL RESOURCES

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

Cash provided by continuing operations for the six months ended June 30, 2003 was $25.3 million compared to $5.7 million for the six months ended June 30, 2002. The increase in operating cash flow between 2003 and 2002 is principally due to the Company’s continued focus on decreasing working capital requirements as well as the receipt of an $9.1 million income tax refund related to a U.S. net operating loss carryback claim filed during the first quarter 2003. The decrease in working capital requirements principally relates to changes in accounts receivable, inventory and accounts payable during the first half of 2003 which favorably impacted operating cash compared to changes in those same working capital items during the first half of 2002. The change in accounts receivable and its favorable impact on operating cash flow reflects an improved number of days sales outstanding. The change in inventory and its favorable impact on operating cash flow reflects a decline in inventory levels due to manufacturing efficiencies and maintaining inventory levels to support our core products. Accounts payable changes during the six-month period 2003 compared to 2002 reflect normal variations in vendor activity.

Cash provided by investing activities was $0.9 million for the six months ended June 30, 2003 compared to cash used by investing activities of $3.1 million for the six months ended June 30, 2002. The decrease in cash used by investing activities is primarily related to a decrease in the Company’s restricted cash balances attributable to reductions in collateral requirements due to significant debt repayments on debt securitized by the Company’s lease portfolio. The Company will continue to experience a decline in restricted cash balances up to November 2003 when this debt is repaid. Capital expenditures decreased $1.2 million from $4.4 million for the six months ended June 30, 2002 to $3.2 million for the six months ended June 30, 2003. Capital expenditures in 2003 were principally for upgrades to computer software and equipment purchases.

Cash used in financing activities was $2.6 and $2.0 million for the six months ended June 30, 2003 and 2002, respectively. The increase in cash used in financing activities of $0.6 million is the result of the Company’s reduction in overall debt balances and a decrease in advances to the Company’s discontinued operations. Long-term debt decreased $8.3 million to $16.7 million at June 30, 2003, from $25.0 million at December 31, 2002, principally as a result of repayments on debt related to the Company’s securitized lease portfolio. At June 30, 2003, working capital and cash was $136.3 million and $47.1 million, respectively, compared to $129.3 and $23.1 million, respectively, at December 31, 2002.

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

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

In connection with the early retirement of the term loans, the Company recorded an extraordinary loss on retirement of debt of $2.6 million during the six months ended June 30, 2002. In accordance with SFAS 145, Rescission of FASB Statements No. 4, 44 and 64, amendment of FASB Statement No. 13, and Technical Corrections, the Company has reclassified its $2.6 million extraordinary loss from early extinguishment of debt for the six months ended June 30, 2002 to pre-tax income (see Note 8).

During March 2003, the Company amended its revolving credit facility to reduce the available credit limit from $25.0 million to $15.0 million. This reduction better matches the Company’s current liquidity needs and provides further cost savings.

During the second quarter of 2003, the Company issued 1,460,000 shares of its common stock, par value $0.001 per share, upon the conversion of its Series A (1.0 million shares at an exercise price of $3.19 per share) and Series B (460,000 shares at

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an exercise price of $3.16 per share) Warrants. Proceeds from the conversions amounted to $4.6 million. Additional equity activity during the second quarter of 2003 related to issuances of common stock under our Employee Stock Purchase Plan and stock option plans.

The Company continues to accelerate cash generation through aggressively pursuing collection of trade receivables, reducing inventories and controlling expenses. We believe that our cash flow from operations, and the net cash provided by our direct-financing leases, together with our current cash reserves, will be sufficient to fund our projected liquidity and capital resource requirements through 2003. If operating results are unfavorable or our direct-financing lease fundings exceed direct-financing lease receipts, we may need to use additional capital sources to meet our short-term liquidity and capital resource requirements. These additional sources would include our $15.0 million revolving line of credit, which is available based on certain accounts receivable and inventory balances, or our direct-financing lease credit facilities with approximately $25.0 million of credit available at June 30, 2003.

BACKLOG

As of June 30, 2003, the Company had backlog of $83.3 million, compared to $50.1 million at June 30, 2002. The increase in backlog is primarily related to an increase in sales orders in the United States that are subject to a customer approved delivery schedule.

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Company is exposed to financial market risks, including changes in interest rates and foreign currency exchange rates. Nevertheless, the fair value of the Company’s investment portfolio or related income would not be significantly impacted by either a 100 basis point increase or decrease in interest rates, as the majority of its holdings are short-term in nature.

A substantial portion of the Company’s revenue and capital spending is transacted in U.S. dollars. However, the Company does at times enter into transactions in other currencies, such as the Hong Kong dollar, Australian dollar, Brazilian Real and other Asian and European currencies. Beginning in June 2002, the Company resumed its foreign currency risk management strategy, which had been suspended starting in the fourth quarter of 2000 due to credit limitations imposed by the Company’s banks. As a policy, the Company hedges the translation of its net investment in foreign subsidiaries in an attempt to neutralize the effect of translation gains or losses in the statement of operations. Financial hedging instruments are limited by Company policy to foreign-currency forward or option contracts and foreign-currency debt. The Company enters into forward or option contracts with its bank or other financial institutions to accomplish its hedging strategy. At June 30, 2003, the Company had foreign currency forward contracts outstanding in the amount of $27.8 million, denominated principally in the Brazilian real, British pound, Swedish krona, Chilean peso, and Australian dollar. Gains and losses on these contracts principally consist of mark-to-market adjustments, recorded in earnings as foreign currency gains or losses. See Net Interest, Foreign Currency Losses and Other Items section above.

The Company does not purchase or hold any derivative financial instruments for the purpose of speculation or arbitrage. See information/discussion appearing in subcaption “Risks Associated with International Operations and Foreign Currency Fluctuations” of “CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND RISK FACTORS” set forth in Exhibit 99.1, attached hereto.

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Item 4. Controls and Procedures

As of the end of the period covered by this report, Hypercom management conducted an evaluation, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in alerting them in a timely manner to material information required to be included in the Company’s SEC reports. In addition, Hypercom management, including the Company’s Chief Executive Officer and Chief Financial Officer, reviewed our internal controls, and there have been no significant changes in the Company’s internal controls or in other factors that could significantly affect those controls subsequent to the date of our last evaluation.

PART II – OTHER INFORMATION

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

(a)  On May 21, 2003, the Company held its Annual Meeting of Stockholders at which the following matters were voted upon:

(b)  Election of Directors. All three nominees for election as Class II Directors were unopposed and elected as follows:

The terms of the Class I Directors (George R. Wallner, Albert A. Irato, Jane Evans and Norman Stout) will expire in 2004.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

	* Filed herewith.

(b)  Reports on Form 8-K.

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The Company filed the following reports on Form 8-K during the quarter ended June 30, 2003:

	a)		Form 8-K dated April 25, 2003, furnishing under Item 9 and Item 12, the Company’s press release, dated April 25, 2003, announcing the Company’s results of operations for the quarter ended March 31, 2003; and
	b)		Form 8-K/A dated April 25, 2003, furnishing under Item 9 and Item 12, the Company’s press release, dated April 25, 2003, announcing the Company’s results of operations for the quarter ended March 31, 2003.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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EXHIBIT INDEX

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