---

# SECURITIES
AND EXCHANGE COMMISSION

# Washington, DC 20549

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# FORM 10-QSB

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[X]    Quarterly Report under Section 13 or Section
15(d) of the Securities Exchange Act 
    
              
          
      of 1934 for the quarterly period ended
December 31, 2003

[  ]    
Transition Report Pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934

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Commission File Number 0-22848

# U.S. Wireless Data, Inc.
(Exact name of small business issuer as specified in its charter)

Delaware
(State of incorporation)

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84-1178691
(IRS Employer
Identification No.)

750 Lexington Avenue, 20th FloorNew York, NY 10022
(Address of principal executive offices, including zip code)

(212) 750-7766
(Registrant's Telephone Number, including area code)

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Check whether the
issuer (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Exchange Act during the past 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 ninety days.
Yes [X]     No [  ]

As
of February 20, 2004, there were outstanding 18,142,889 shares of the Registrants
Common Stock ($0.01 par value per share).

Transitional Small
Business Disclosure Format.
Yes [  ]     No [X]

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# U.S. WIRELESS
DATA, INC.
TABLE OF CONTENTS

|                                                               | Page
|-------------------------------------------------------------- | ----
|PART I -- FINANCIAL INFORMATION                                |     
|ITEM 1.  Financial Statements                                  |     
|Consolidated Balance Sheets as of                              |     
|December 31, 2003 and June 30, 2003                            |     
|Consolidated Statements of Operations for the six months       |     
|ended December 31, 2003 and 2002                               |     
|Consolidated Statements of Cash Flows for the six months ended |     
|December 31, 2003 and 2002                                     |     
|Consolidated Statements of Stockholders (Deficit) Equity for  |     
|the year ended June 30, 2003 and the six months                |     
|ended December 31, 2003                                        |     
|                                                               |     
|Notes to Consolidated Financial Statements                     |     
|ITEM 2.  Managements Discussion and Analysis                  |     
|ITEM 3.  Controls and Procedures                               |     
|PART II -- OTHER INFORMATION                                   |     
|ITEM 1.  Legal Proceedings                                     |     
|ITEM 2.  Changes in Securities and Use of Proceeds             |     
|ITEM 3.  Defaults Upon Senior Securities                       |     
|ITEM 4.  Submission of Matters to a Vote of Security Holders   |     
|ITEM 5.  Other Information                                     |     
|ITEM 6.  Exhibits and Reports on Form 8-K                      |     
|SIGNATURES                                                     |     

2

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# Part I  FINANCIAL
INFORMATION

# ITEM 1. Financial
Statements

U.S. WIRELESS
DATA, INC.CONSOLIDATED BALANCE SHEETS

|                                                                 | December 31,2003 | June 30,2003    
|---------------------------------------------------------------- | ---------------- | ----------------
|
|ASSETS                                                           |                  |                 
|Current assets:                                                  |                 
|Cash and cash equivalents                                        |                  | $        456,000
|Accounts receivable, net of allowance for                        |                 
|doubtful accounts of $16,000 and $18,000                         |                 
|at December 31, 2003 and June 30, 2003, respectively             |                  | 308,000         
|Due from factor                                                  |                  | 75,000          
|Inventory, net                                                   |                  | 120,000         
|Deferred cost of revenue                                         |                  | 137,000         
|Deferred financing costs                                         |                  | 73,000          
|Prepaids and other current assets                                |                  | 510,000         
|                                                                 |                  |                 
|Total current assets                                             |                  | 1,679,000       
|Property and equipment, net                                      |                  | 1,272,000       
|Restricted cash                                                  |                  | 456,000         
|Other assets                                                     |                  | 25,000          
|                                                                 |                  |                 
|Total assets                                                     |                  | $     3,432,000 
|                                                                 |                  |                 
|                                                                 |                  |                 
|LIABILITIES AND STOCKHOLDERS (DEFICIT) EQUITY                   |                 
|Current liabilities:                                             |                 
|Accounts payable                                                 |                  | $        937,000
|Accrued liabilities                                              |                  | 870,000         
|Bridge loan at 7.5% (principal plus accrued interest aggregating |                 
|$2,578,000, net of debt discount of $628,000, with               |                 
|imputed interest rate of 18.9% for debt discount)                |                  | 1,950,000       
|Accrued restructuring expense                                    |                  | --              
|Customer advances                                                |                  | 449,000         
|Deferred revenue                                                 |                  | 287,000         
|Obligation under capital lease                                   |                  | 276,000         
|                                                                 |                  |                 
|Total current liabilities                                        |                  | 4,769,000       
|Obligation under capital lease, less current portion             |                  | 249,000         
|Deferred rent expense                                            |                  | 202,000         
|Other liabilities                                                |                  | 13,000          
|                                                                 |                  |                 
|Total liabilities                                                |                  | 5,233,000       
|                                                                 |                  |                 
|Commitments and contingencies (Note 11)                          |                 
|Stockholders (deficit) equity:                                  |                 
|Preferred stock, 25,000,000 shares authorized:                   |                 
|Series C convertible, at $.01 par value, liquidation value       |                 
|$10.00 per share, aggregating $33,802,000 and $35,487,000        |                 
|at December 31, 2003 and June 30, 2003, respectively; 8,450,000  |                 
|shares authorized, 3,380,200 and 3,548,700 issued and            |                 
|outstanding at December 31, 2003 and June 30, 2003, respectively |                  | 34,000          
|Common stock, 200,000,000 shares authorized at $.01 par value;   |                 
|17,909,552 and 17,628,716 shares issued and outstanding at       |                 
|December 31, 2003 and June 30, 2003, respectively                |                  | 179,000         
|Additional paid-in capital                                       |                  | 143,467,000     
|Accumulated deficit                                              |                  | (145,481,000    
|                                                                 |                  |                 
|Total stockholders (deficit) equity                             |                  | (1,801,000      
|                                                                 |                  |                 
|Total liabilities and stockholders (deficit) equity             |                  | $     3,432,000 
|                                                                 |                  |                 
|                                                                 |                  |                 

Accompanying
notes are an integral part of the financial statements

3

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U.S. WIRELESS
DATA, INC.CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)

|                                                   | For the three months endedDecember 31, | For the six months endedDecember 31, |   |                
|-------------------------------------------------- | -------------------------------------- | ------------------------------------ | - | ---------------
|
|Revenues                                           |                                        |                                      |   |                
|Service revenues                                   |                                       
|Activation fees                                    |                                        | $        86,000                      |   | $        71,000
|Monthly fees                                       |                                        | 1,030,000                            |   | 583,000        
|Transaction fees                                   |                                        | 98,000                               |   | 50,000         
|Other fees                                         |                                        | 94,000                               |   | 60,000         
|                                                   |                                        |                                      |   |                
|Total service revenues                             |                                        | 1,308,000                            |   | 764,000        
|Product sales                                      |                                        | 5,000                                |   | 135,000        
|                                                   |                                        |                                      |   |                
|Total revenues                                     |                                        | 1,313,000                            |   | 899,000        
|                                                   |                                        |                                      |   |                
|Cost of revenues                                   |                                       
|Services                                           |                                        | 798,000                              |   | 404,000        
|Product sales                                      |                                        | 4,000                                |   | 132,000        
|Write-down of inventory                            |                                        | 79,000                               |   | 333,000        
|                                                   |                                        |                                      |   |                
|Total cost of revenues                             |                                        | 881,000                              |   | 869,000        
|                                                   |                                        |                                      |   |                
|Gross profit                                       |                                        | 432,000                              |   | 30,000         
|                                                   |                                        |                                      |   |                
|Operating expenses                                 |                                       
|Selling, general and administrative                |                                       
|(Exclusive of non-cash compensation for directors) |                                        | 1,522,000                            |   | 2,036,000      
|Non-cash compensation for directors                |                                        | --                                   |   | 281,000        
|                                                   |                                        |                                      |   |                
|Total selling, general and administrative          |                                        | 1,522,000                            |   | 2,317,000      
|Depreciation and amortization                      |                                        | 153,000                              |   | 269,000        
|Research and development                           |                                        | 96,000                               |   | 143,000        
|Impairment of intangible assets                    |                                        | --                                   |   | 836,000        
|                                                   |                                        |                                      |   |                
|Total operating expenses                           |                                        | 1,771,000                            |   | 3,565,000      
|                                                   |                                        |                                      |   |                
|Loss from operations                               |                                        | (1,339,000                           | ) | (3,535,000     
|Interest income                                    |                                        | 1,000                                |   | 17,000         
|Interest expense                                   |                                        | (208,000                             | ) | (20,000        
|Other income                                       |                                        | 31,000                               |   | 136,000        
|                                                   |                                        |                                      |   |                
|Loss from continuing operations                    |                                        | (1,515,000                           | ) | (3,402,000     
|                                                   |                                        |                                      |   |                
|Discontinued operations:                           |                                       
|Income (loss) from discontinued operations         |                                        | --                                   |   | (9,000         
|Gain (loss) on sale of discontinued operations     |                                        | --                                   |   | (7,000         
|                                                   |                                        |                                      |   |                
|Income (loss) from discontinued operations         |                                        | --                                   |   | (16,000        
|                                                   |                                        |                                      |   |                
|Net loss                                           |                                        | $(1,515,000                          | ) | $(3,418,000    
|                                                   |                                        |                                      |   |                
|                                                   |                                        |                                      |   |                
|Basic and diluted net loss per share:              |                                       
|Loss from continuing operations                    |                                        | $         (0.09                      | ) | $         (0.23
|Income from discontinued operations                |                                        | --                                   |   | --             
|                                                   |                                        |                                      |   |                
|Net loss per share                                 |                                        | $         (0.09                      | ) | $         (0.23
|                                                   |                                        |                                      |   |                
|                                                   |                                        |                                      |   |                
|Weighted average common shares outstanding,        |                                       
|basic and diluted                                  |                                        | 17,709,000                           |   | 15,144,000     
|                                                   |                                        |                                      |   |                
|                                                   |                                        |                                      |   |                

Accompanying
notes are an integral part of the financial statements

4

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# U.S.
WIRELESS DATA, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)

|                                                      | For the six months ended December 31, |                
|----------------------------------------------------- | ------------------------------------- | ---------------
|
|CASH FLOWS FROM OPERATING ACTIVITIES:                 |                                       |                
|Net loss                                              |                                       | $  (2,846,000  
|Adjustments to reconcile net loss to net cash used in |                                      
|operating activities:                                 |                                      
|Depreciation and amortization                         |                                       | 306,000        
|Accretion of bridge loan discount                     |                                       | 152,000        
|Amortization of deferred financing costs              |                                       | 17,000         
|Gain on sale of discontinued operations               |                                       | --             
|Bad debt expense                                      |                                       | 12,000         
|Deferred rent                                         |                                       | 7,000          
|Impairment of intangible assets                       |                                       | --             
|Write-down of inventory                               |                                       | 79,000         
|Non-cash compensation for directors                   |                                       | --             
|Non-cash consulting and other                         |                                       | --             
|Loss on notes receivable                              |                                       | --             
|Changes in operating assets and liabilities:          |                                      
|Accounts receivable                                   |                                       | (14,000        
|Due from factor                                       |                                       | 65,000         
|Inventory                                             |                                       | (62,000        
|Deferred cost of revenue                              |                                       | (74,000        
|Prepaids and other current assets                     |                                       | 25,000         
|Other assets                                          |                                       | 2,000          
|Accounts payable                                      |                                       | 104,000        
|Accrued liabilities                                   |                                       | (22,000        
|Accrued restructuring expense                         |                                       | 65,000         
|Customer advances                                     |                                       | (236,000       
|Deferred revenue                                      |                                       | 128,000        
|Other liabilities                                     |                                       | (138,000       
|                                                      |                                       |                
|Net cash used in operating activities                 |                                       | (2,430,000     
|                                                      |                                       |                
|CASH FLOWS FROM INVESTING ACTIVITIES:                 |                                      
|Proceeds from the sale of NXT                         |                                       | --             
|Payment of expenses for sale of NXT                   |                                       | --             
|Purchase of property and equipment                    |                                       | (160,000       
|Decrease in restricted cash                           |                                       | 625,000        
|Payment for acquisition, net of cash acquired         |                                       | --             
|                                                      |                                       |                
|Net cash provided by investing activities             |                                       | 465,000        
|                                                      |                                       |                
|CASH FLOWS FROM FINANCING ACTIVITIES:                 |                                      
|Proceeds from notes payable                           |                                       | 450,000        
|Payment of notes payable                              |                                       | (450,000       
|Proceeds from bridge loan                             |                                       | 2,540,000      
|Accrued interest on bridge loan                       |                                       | 38,000         
|Financing costs of bridge loan                        |                                       | (90,000        
|Payments for real estate lease termination            |                                       | (625,000       
|Payments of obligations under capital lease           |                                       | (44,000        
|                                                      |                                       |                
|Net cash provided by (used in) financing activities   |                                       | 1,819,000      
|                                                      |                                       |                
|Net (decrease) increase in cash and cash equivalents  |                                       | (146,000       
|Cash and cash equivalents, beginning of period        |                                       | 602,000        
|                                                      |                                       |                
|Cash and cash equivalents, end of period              |                                       | $       456,000
|                                                      |                                       |                
|                                                      |                                       |                

Accompanying
notes are an integral part of the financial statements

5

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# U.S. WIRELESS
DATA, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS (DEFICIT) EQUITYFor the year ended June 30, 2003 and the
six months ended December 31, 2003 (Unaudited)

|                                      | Series C Convertible Preferred Stock | Common Stock | Additional Paid-in | UnearnedCompensation and Contra | Accumulated | Total Stockholders(Deficit) |   |          
|------------------------------------- | ------------------------------------ | ------------ | ------------------ | ------------------------------- | ----------- | ---------------------------- | - | ---------
|
|BALANCE AT JUNE 30, 2002              |                                      | 3,941,325    |                    | $ 39,000                        |             | 14,813,927                   |   | $ 149,000
|Amortization of non-cash compensation |                                     
|for directors                         |                                      | --           |                    | --                              |             | --                           |   | --       
|Cancellation of options issued to-    |                                     
|Board member                          |                                      | --           |                    | --                              |             | --                           |   | --       
|Issuance of options for services      |                                      | --           |                    | --                              |             | --                           |   | --       
|Amortization of non-cash investment   |                                     
|banking services                      |                                      | --           |                    | --                              |             | --                           |   | --       
|Issuance of options related to the    |                                     
|sale of NXT                           |                                      | --           |                    | --                              |             | --                           |   | --       
|Issuance of common stock to former    |                                     
|NXT shareholders                      |                                      | --           |                    | --                              |             | 2,241,658                    |   | 22,000   
|Retirement of common stock in         |                                     
|settlement of notes receivable        |                                      | --           |                    | --                              |             | (81,818                      | ) | (1,000   
|Conversion of Series C convertible    |                                     
|preferred stock                       |                                      | (392,625     | )                  | (3,000                          | )           | 654,949                      |   | 6,000    
|Net loss                              |                                      | --           |                    | --                              |             | --                           |   | --       
|                                      |                                      |              |                    |                                 |             |                              |   |          
|BALANCE AT JUNE 30, 2003              |                                      | 3,548,700    |                    | $ 36,000                        |             | 17,628,716                   |   | $ 176,000
|Conversion of Series C convertible    |                                     
|preferred stock                       |                                      | (168,500     | )                  | 2,000                           |             | 280,836                      |   | 3,000    
|Issuance of warrants for bridge Loan  |                                      | --           |                    | --                              |             | --                           |   | --       
|Net loss                              |                                      | --           |                    | --                              |             | --                           |   | --       
|                                      |                                      |              |                    |                                 |             |                              |   |          
|BALANCE AT DECEMBER 31, 2003          |                                      | 3,380,200    |                    | $ 34,000                        |             | 17,909,552                   |   | $ 179,000
|                                      |                                      |              |                    |                                 |             |                              |   |          
|                                      |                                      |              |                    |                                 |             |                              |   |          

Accompanying
notes are an integral part of the financial statements

6

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# U.S.
WIRELESS DATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended December 31, 2003 and 2002
(Unaudited)

NOTE 1
 THE COMPANY

U.S.
Wireless Data, Inc. (USWD or the Company) was
incorporated in the state of Colorado on July 30, 1991 and was reincorporated in
the state of Delaware on October 6, 2000. USWD operates in one business segment
and provides proprietary enabling solutions and wireless transaction delivery
and gateway services to the payments processing industry. The Companys
customers include credit card processors, merchant acquirers, banks, automated
teller machine (ATM) distributors and their respective sales
organizations, as well as certain businesses seeking new solutions to make it
easier for their customers to buy their products or services. The Company offers
these entities turnkey wireless and other transaction management services. The
Company also provides its customers with proprietary wireless enabling products
designed to allow for card acceptance. These services and products may be
utilized by conventional card accepting retailers as well as emerging card
accepting market segments such as vending machines, quickservice (fast-food) and
quick casual restaurants, taxis and limousines, in-home service providers,
door-to-door sales, contractors, delivery services, sporting events, and outdoor
markets. The Companys services and products may also be used for gathering
telemetric information from remote equipment such as vending machines.

Going
Concern and Liquidity Uncertainties

The
Company needs additional capital in the immediate future in order to continue
operations. Since the Companys inception, it has incurred significant
losses and negative cash flow from operations. As of December 31, 2003, the
Company had an accumulated deficit of approximately $145 million and its
principal source of liquidity was approximately $456,000 in cash and cash
equivalents. Managements concerns about capital have placed it in a
position where it is required to take additional steps to raise funds and cut
costs. If the Company is not successful in its efforts to raise additional
capital, the Company will be required to cease operations altogether.

The
availability of funds from a $2.75 million bridge facility (the Bridge
Loan) was made pursuant to a previously executed and fully secured loan
with Brascan Financial Corporation (Brascan), a subsidiary of
Toronto, Canada-based Brascan Corporation. The Bridge Loan is secured by a
general security interest in all of the Companys assets, bears interest at
7.5% and is due March 16, 2005. In connection with the Bridge Loan, Brascan
received a warrant on September 16, 2003 exercisable for 10 million shares of
the Companys common stock at $.15 per share (the Bridge Loan
Warrant). The Bridge Loan Warrant became exercisable on December 31, 2003
and will expire in September 2008.

7

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# U.S.
WIRELESS DATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended December 31, 2003 and 2002
(Unaudited)

The
Bridge Loan contains various covenants which include, among others, (i) a
material adverse change clause, (ii) a minimum monthly revenue requirement of
approximately $380,000, and (iii) a minimum net worth requirement of not less
than negative $2 million. As of January 31, 2004, the Company was not in
compliance with the minimum net worth requirement and was in technical default
under the Bridge Loan with respect to two post-closing covenants (relating to
receiving a landlord waiver for the Companys New York facility and completing the actions
necessary to subject certain of the Companys funds to a blocked account
arrangement). Despite the defaults in connection with their Bridge Loan to the
Company, Brascan continued to extend the balance of the remaining unadvanced
amounts under the Bridge Loan. As of January 31, 2004, the Company has drawn
down the full amount of the $2.75 million Bridge Loan commitment. However, there
can be no assurance that Brascan will not declare a default under the Bridge
Loan.

In
connection with the Bridge Loan, and as part of an overall restructuring and
strategic alliance with MIST Inc. (MIST), a subsidiary of Brascan
Corporation and a provider of card issuance and payments processing products and
gateway services to banks, non-bank card issuers and the payments processing
industry, the Company also entered into a term sheet that contemplated the
agreement by Brascan, subject to a number of conditions, to arrange for the
purchase of $12.5 million of a newly issued Series D Preferred Stock
representing at least 60% of the Companys equity. The Bridge Loan would
have allowed the Company to continue operations while it was to negotiate a definitive
Series D Preferred Stock purchase agreement and to satisfy the anticipated
closing conditions of such a financing.

On
October 30, 2003, the Company received notification from Brascan, on behalf of
its designate MIST, that it no longer intended to pursue the equity financing
transaction contemplated by the term sheet with USWD as previously announced on
September 16, 2003. In connection with MISTs determination not to proceed
with the equity financing transaction as previously contemplated, Brascan had
released the Company from its obligations to not solicit alternative financings
from other potential investors, and the break-up fee that was associated with
such an alternative financing. Since obtaining the release, the Company has been
exploring options with other parties, and continue to explore alternative
transactions with MIST, although there can be no assurance that any transaction
will be consummated, or consummated on terms favorable to the Company.

On
January 27, 2004, the Company entered into a non-binding term sheet with MIST
under which the Company will sell to MIST its Synapse POS gateway business. The deal
contemplates that MIST will pay the Company consideration consisting of cash and
an agreement to provide the Company with a certain amount of payment processing
services for the Companys vending initiatives. The Company anticipates the
execution of definitive agreements on or about February 27, 2004.

8

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# U.S.
WIRELESS DATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended December 31, 2003 and 2002
(Unaudited)

On
January 27, 2004, the Company also entered into a non-binding term sheet with
Brascan, to amend the terms of the Bridge Loan and increase the loan amount from
$2.75 million to $3.85 million. Concurrent with the signing of definitive
agreements for the contemplated sale of the Synapse POS gateway business, it is
anticipated that the amendment to the Bridge Loan (the Amended Bridge
Loan) will be executed and Brascan will extend up to an additional $1.1
million (less accrued interest) under certain conditions. The cash portion of
the proceeds from the contemplated sale of the Synapse POS gateway business will
be used to reduce the Companys outstanding balance on the Amended Bridge
Loan. As part of the foregoing transactions, Brascan has also agreed to forfeit
one-half of its currently outstanding 10,000,000 share Bridge Loan Warrant (the
Amended Bridge Loan Warrant). Except for the number of shares, the
Amended Bridge Loan Warrant will contain the same exercise price, expiration
date and other terms as the original Bridge Loan Warrant. The Amended Bridge
Loan will continue to be secured by a general security interest in all of the
Companys assets. The principal amount of the Amended Bridge Loan
will be due March 16, 2005.

MIST
is seeking to acquire the Companys Synapse POS gateway business to gain an
additional wireless commerce gateway and a substantial presence in the United States. It is
anticipated that approximately 19 of the Companys 38 employees will become
employees of MIST upon closing. The Synapse POS gateway business currently
generates substantially all of the Companys revenues.

The
additional amounts to be received upon execution of the Amended Bridge Loan are
expected to provide the Company with enough capital to support the
Companys operations for approximately two to three months given its
anticipated short-term negative cash flow. During this period, the Company will
focus on its vending initiatives and attempt to address its capital
requirements.

The
ultimate completion of the contemplated transactions with Brascan and MIST
remain subject to a number of conditions, including the execution of definitive
documentation.
Accordingly, there is no assurance that these transactions will be consummated
according to the terms and conditions contemplated by the non-binding term
sheets, or at all.

The
Company must secure additional financing in order to continue operations.
In doing so, the Company may secure capital in the form of debt and/or equity
financing. Should USWD be successful in completing an equity financing, it is
likely that such a transaction would require reorganization of its capital
structure, which may include the restructuring of its currently issued and
outstanding Series C Convertible Preferred Stock and Series C Warrants. It is
also anticipated that the terms and provisions of any equity financing, if
completed, will have a substantial dilutive effect on the ownership interests of
the Companys existing stockholders.

These
conditions raise substantial doubt about USWDs ability to continue as a
going concern and if it is unable to obtain additional capital as needed, the
Company will be required to cease operations altogether. The consolidated
financial statements do not include any adjustments that might result from the
Companys inability to continue as a going concern.

9

---

# U.S.
WIRELESS DATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended December 31, 2003 and 2002
(Unaudited)

NOTE 2
 BASIS OF CONSOLIDATION AND PRESENTATION

Basis of
Consolidation and Asset Sale of Subsidiary

The
consolidated financial statements include the accounts of the Company and its
wholly- owned subsidiary, UNS Corporation, formerly known as NXT Corporation
(NXT). UNS Corporation was dormant for the six months ended December
31, 2003 and was dissolved on December 11, 2003.

During
May 2002, the Company developed a formal plan to sell NXT. Effective as of the
close of business on August 31, 2002, the Company sold, for $5 million in cash,
substantially all of the operating assets associated with NXT, to Paymentech,
L.P. (Paymentech). NXT provided data services and landline-based
connectivity for credit-card transaction processing. NXT has been classified as
a discontinued operation in the accompanying consolidated financial statements.

Basis of
Presentation

The
accompanying financial statements have been prepared by the Company, without an
audit. In the opinion of management, all adjustments have been made, which
include normal recurring adjustments necessary to present fairly the
consolidated financial statements. Operating results for the three and six
months ended December 31, 2003 and 2002 are not necessarily indicative of the
operating results for the full year. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been condensed or omitted. The Company believes that the disclosures
provided are adequate to make the information presented not misleading. These
unaudited consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and related notes included in the
Companys Annual Report for the year ended June 30, 2003 on Form 10-KSB and
Form 10-KSB/A.

Use of
Estimates

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

Reclassifications

Certain
amounts in the prior period financial statements have been reclassified to
conform to the current presentation.

Stock-based
Compensation

The
Company accounts for employee stock-based compensation cost using the intrinsic
value method of accounting prescribed by the Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees (APB No.
25). The Company has adopted the disclosure-only provisions of Statement
of Financial Accounting Standards (SFAS) No. 123, Accounting
for Stock Based-Compensation and SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure for employee
stock arrangements. Restricted stock or stock awards are recorded as
compensation expense over the vesting period, if any, based on the market value
on the date of grant.

10

---

# U.S.
WIRELESS DATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended December 31, 2003 and 2002
(Unaudited)

For options
issued to non-employees, the Company utilizes the fair value method prescribed in SFAS
No. 123.

At
December 31, 2003, the Company had four fixed stock-based compensation plans.
The exercise price of each option granted pursuant to these plans was equal to
the market price of the Companys common stock on the date of grant.
Accordingly, pursuant to APB No. 25, no compensation cost has been recognized
for such grants. Had compensation cost been determined based on the fair value
at the grant dates for such awards consistent with the method prescribed by SFAS
No. 123, the Companys net loss and loss per share for the periods
indicated would have been as follows:

|                                | Three months endedDecember 31, | Six months endedDecember 31, |   |               
|------------------------------- | ------------------------------ | ---------------------------- | - | --------------
|
|Loss from continuing            |                                | $   (1,515,000               | ) | $   (3,402,000
|operations                      |                               
|Income (loss) from              |                               
|discontinued operations         |                                | --                           |   | (16,000       
|                                |                                |                              |   |               
|Net loss, as reported           |                                | $   (1,515,000               | ) | $   (3,418,000
|Deduct: Total stock-based       |                               
|compensation expense determined |                               
|under fair value based method   |                                | (198,000                     | ) | (755,000      
|                                |                                |                              |   |               
|Pro forma net loss              |                                | $   (1,713,000               | ) | $   (4,173,000
|                                |                                |                              |   |               
|                                |                                |                              |   |               
|Per share, as reported          |                               
|From continuing operations      |                                | $  (0.09                     | ) | $  (0.23      
|From discontinued               |                               
|operations                      |                                | --                           |   | --            
|                                |                                |                              |   |               
|Net loss                        |                                | $  (0.09                     | ) | $  (0.23      
|                                |                                |                              |   |               
|                                |                                |                              |   |               
|Per share, pro forma            |                               
|From continuing operations      |                                | $  (0.10                     | ) | $  (0.28      
|From discontinued               |                               
|operations                      |                                | --                           |   | --            
|                                |                                |                              |   |               
|Net loss                        |                                | $  (0.10                     | ) | $  (0.28      
|                                |                                |                              |   |               
|                                |                                |                              |   |               

11

---

# U.S.
WIRELESS DATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended December 31, 2003 and 2002
(Unaudited)

NOTE 3
 RECENT ACCOUNTING PRONOUNCEMENTS

In
November 2002, the Financial Accounting Standards Board (FASB)
issued FASB Interpretation No. 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, including Indirect Guarantees of
Indebtedness of Others (FIN 45). FIN 45 elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued.
FIN 45 requires a guarantor to recognize, at the inception of a guarantee, a
liability for the fair value of the obligations undertaken in issuing the
guarantee. The disclosure provisions of FIN 45 are effective for financial
statements of periods ending after December 15, 2002. Additionally, the
recognition of a guarantors obligation should be applied on a prospective
basis to guarantees issued after December 31, 2002. The adoption of the
disclosure and recognition provisions of FIN 45 did not have a material effect
on the Companys results of operations or financial position.

In
January 2004, the FASB issued FASB Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46). In December 2003, the
FASB issued FIN No. 46 (Revised) (FIN 46R) to address certain FIN 46
implementation issues. This interpretation requires that the assets,
liabilities, and results of activities of a Variable Interest Entity
(VIE) be consolidated into the financial statements of the
enterprise that has a controlling interest in the VIE. FIN 46R also requires
additional disclosures by primary beneficiaries and other significant variable
interest holders. For entities acquired or created before February 1, 2003, this
interpretation is effective no later than the end of the first interim or
reporting period ending after March 15, 2004, except for those VIEs that
are considered to be special purpose entities, for which the effective date is
no later than the end of the first interim or annual reporting period ending
after December 15, 2003. For all entities that were acquired subsequent to
January 31, 2003, this interpretation is effective as of the first interim or
annual period ending after December 31, 2003. The adoption of the provisions of
this interpretation did not have a material effect on the Companys results
of operations or financial condition.

In
April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This standard amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts,
collectively referred to as derivatives, and for hedging activities under SFAS
No. 133, Accounting for Derivative Instruments and Hedging
Relationships. SFAS No. 149 is effective for contracts entered into or
modified after June 30, 2003 and for hedging relationships after June 30, 2003.
The adoption of this statement did not have a material impact on the
Companys results of operations or financial condition.

In May
2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No.
150 clarifies the accounting for certain financial instruments with
characteristics of both liabilities and equity and requires that those
instruments be classified as liabilities in statements of financial condition.
Previously, many of those financial instruments were classified as equity. SFAS
No. 150 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 adoption the provisions of SFAS No.
150 did not have a material effect on the Companys results of operations
or financial condition.

12

---

# U.S.
WIRELESS DATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended December 31, 2003 and 2002
(Unaudited)

NOTE 4
 INVENTORY

The
Company has curtailed further efforts and resources associated with its Synapse
Enabler for Transportation and Synapse Enabler T8, and intends to liquidate its
remaining inventory of these products and other materials. As a result, in the
quarter ended December 31, 2003, the Company recorded a charge of $79,000 to
write-down the remaining inventory to the net realizable value the Company
estimates it will realize from such sales. In this regard, subsequent to
December 31, 2003, the Company has returned for a refund approximately $69,000
of previously purchased inventory items and already sold approximately $29,000
of materials held in inventory at December 31, 2003.

NOTE 5
 DEFERRED FINANCING COSTS

The
Deferred financing costs balance of $73,000 at December 31, 2003
represents the unamortized balance of capitalized costs (allocated legal fees)
incurred with respect to securing the Bridge Loan. These costs are being
amortized over the 18-month term of the Bridge Loan.

NOTE 6
 BRIDGE LOAN

The
Bridge loan balance of $1,950,000 at December 31, 2003 represents
the outstanding balance of $2,578,000 (principal of $2,540,000 and accrued
interest of $38,000) on the Bridge Loan (see Note 1), less the debt discount
balance of $628,000 from the Bridge Loan Warrant which is being accreted into
interest expense over the 18-month term of the Bridge Loan.

NOTE 7
 ACCRUED RESTRUCTURING EXPENSE

During
the fourth quarter of fiscal year 2001, we recorded a restructuring charge of
$2.4 million related to the consolidation and relocation of our former Bethesda,
Maryland network operations center with its research, development and operations
center, located in Palmer Lake, Colorado.

As
part of the consolidation of our technical and network operations and the
closure of our Bethesda facility, a restructuring charge of $625,000 was
recorded in the first quarter of the year ended June 30, 2002 related to the
termination of thirty-seven employees. The charge represents the cost of
involuntary severance and related benefits for technical, operations,
engineering, and administrative employees located in the Bethesda and Palmer
Lake facilities.

During
the fourth quarter of the year ended June 30, 2002, as a result of completing a
sublease arrangement for our former Bethesda facility, we re-evaluated the
balance of the restructuring accrual and adjusted our estimates of sublease
income and related costs. As a result, we reduced the restructuring accrual
balance by $714,000.

In
June 2003, we revised our restructuring accrual related to a settlement of our
Bethesda lease obligation. Accordingly, the restructuring accrual was adjusted
by approximately $131,000 to reflect the actual amount that was paid in fiscal
2004.

13

---

# U.S.
WIRELESS DATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended December 31, 2003 and 2002
(Unaudited)

The
following is an analysis of the changes in the restructuring accrual:

|                                             | 
|-------------------------------------------- | 
|Balance at June 30, 2001                     | 
|Charges against accrual (Bethesda rent       | 
|payments, severance and benefit payments)    | 
|Additions to accrual (severance and benefits | 
|accrual)                                     | 
|Change in estimate (based on sublease)       | 
|                                             | 
|Balance at June 30, 2002                     | 
|Charges against accrual                      | 
|Change in estimate (for Bethesda lease       | 
|termination)                                 | 
|                                             | 
|Balance at June 30, 2003                     | 
|Charges against accrual                      | 
|                                             | 
|Balance at December 31, 2003                 | 
|                                             | 
|                                             | 

NOTE 8
 STOCKHOLDERS EQUITY

During
the six months ended December 31, 2003, 168,500 shares of Series C preferred
stock were converted into 280,836 shares of common stock, in accordance with the
Series C preferred stock documents.

The
Bridge Loan Warrant was valued at $780,000 and is being accreted to interest
expense over the 18-month period of the Bridge Loan. In determining the fair
value of the warrants issued, the Company used the Black-Scholes option pricing
model as prescribed by SFAS No. 123 using the following assumptions: dividend
yield of zero, volatility of 144%, expected life of 18 months and an average
risk free rate of 1.74%.

NOTE 9
 NET LOSS PER SHARE

Loss
per common share is computed in accordance with the provisions of SFAS No. 128,
Earnings per Share. SFAS No. 128 establishes standards for the
computation, presentation, and disclosure of earnings per share. Basic per share
amounts are computed by dividing the net loss available to common stockholders
by the weighted average number of common shares outstanding during the year.
Diluted per share amounts incorporate the incremental shares issuable upon the
assumed exercise of the Companys stock options and warrants and assumed
conversion of convertible securities. During the three and six months ended
December 31, 2003 and 2002, such incremental amounts have been excluded from the
calculation since their effect would be anti-dilutive. Such stock options,
warrants and conversions could potentially dilute earnings per share in the
future.

The
following table reconciles the number of shares of common stock outstanding to
the maximum number of common stock and potentially dilutive common stock for
grants issued and outstanding as of the dates indicated.

14

---

# U.S.
WIRELESS DATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended December 31, 2003 and 2002
(Unaudited)

|                                                            | December 31,2003 | June 30,2003
|----------------------------------------------------------- | ---------------- | ------------
|Common shares outstanding                                   |                  | 17,909,000  
|Series C Convertible Preferred Stock outstanding, in common |                 
|stock equivalents                                           |                  | 5,634,000   
|                                                            |                  |             
|                                                            |                  | 23,543,000  
|                                                            |                  |             
|Warrants                                                    |                 
|Outstanding related to the Private Placement                |                 
|Investor warrants                                           |                  | 2,328,000   
|Agent warrants                                              |                  | 2,910,000   
|Investment company warrants                                 |                  | 582,000     
|                                                            |                  |             
|Subtotal                                                    |                  | 5,820,000   
|Various outstanding                                         |                  | 283,000     
|Executive                                                   |                  | 1,344,000   
|Bridge Loan                                                 |                  | 10,000,000  
|                                                            |                  |             
|Total warrants                                              |                  | 17,447,000  
|                                                            |                  |             
|Options                                                     |                 
|Outstanding, 1992 Option Plan                               |                  | 398,000     
|Outstanding, 2000 Option Plan                               |                  | 2,759,000   
|Outstanding, 2002 Option Plan (3,500,000 authorized)        |                  | --          
|Outstanding, Non-Plan                                       |                  | 1,358,000   
|                                                            |                  |             
|Total options                                               |                  | 4,515,000   
|                                                            |                  |             
|Total                                                       |                  | 45,505,000  
|                                                            |                  |             
|                                                            |                  |             

NOTE 10
 SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental
disclosure of cash flow information:

$85,000
and $79,000 was paid in cash for interest for the six months ended December 31,
2003 and 2002, respectively.

Supplemental
disclosure of non-cash financing and investing activities:

15

---

# U.S.
WIRELESS DATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended December 31, 2003 and 2002
(Unaudited)

Six months
ended December 31, 2003

|1. |  | Conversion
of 168,500 shares of Series C Convertible Preferred Stock into 280,836 shares of Common
Stock.
|-- |  | ---------------------------------------------------------------------------------------------------------

|2. |  | Issuance
of warrant in connection with the Bridge Loan,  exercisable for 10,000,000 shares of
Common Stock  valued at $780,000.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------

Year ended June
30, 2003

|1. |  | Conversion
of 392,625 shares of Series C Preferred Stock into 654,949 shares of Common Stock.
|-- |  | ---------------------------------------------------------------------------------------------

|2. |  | Issuance
of 2,241,658  shares of Common Stock to former NXT  shareholders  in connection  with
stock price  guarantees.
|-- |  | -----------------------------------------------------------------------------------------------------------------------

|3. |  | Issuance
of 329,000 options for services valued at $157,000.
|-- |  | ------------------------------------------------------------

|4. |  | Retirement
of 72,560 common shares received in connection with  settlement of notes  receivable
valued at  $15,000.
|-- |  | -------------------------------------------------------------------------------------------------------------------

NOTE 11
 COMMITMENTS AND CONTINGENCIES

The
Company has entered into leases for facilities. Future minimum lease payments
and sublease income under non-cancelable operating leases as of December 31,
2003 are as follows:

|                                 | FacilityLeases | Less SubleasedFacilities | Net
|-------------------------------- | -------------- | ------------------------ | ---
|For fiscal years ending June 30: |                |                          |    
|2004                             |                | $   345,000              |    
|2005                             |                | 695,000                  |    
|2006                             |                | 694,000                  |    
|2007                             |                | 667,000                  |    
|2008                             |                | 667,000                  |    
|Thereafter                       |                | 1,279,000                |    
|                                 |                |                          |    
|Total minimum payments required  |                | $4,347,000               |    
|                                 |                |                          |    
|                                 |                |                          |    

Rent
expense for the three and six months ended December 31, 2003 were $181,000 and
$361,000, respectively, as compared to $179,000 and $358,000 for the same
periods of the prior fiscal year.

As a
security deposit for the Companys New York facility, the Company maintains
a letter of credit in the amount of $456,000. The Company has restricted cash of
$456,000 on deposit in a money market fund as collateral for the letter of
credit maintained by the bank.

16

---

# U.S.
WIRELESS DATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended December 31, 2003 and 2002
(Unaudited)

Future
minimum lease payments on capital leases as of December 31, 2003 are as follows:

|                                  | 
|--------------------------------- | 
|For fiscal years ending June 30:  | 
|2004                              | 
|2005                              | 
|2006                              | 
|                                  | 
|Total minimum payments required   | 
|Less amount representing interest | 
|                                  | 
|Present value of net minimum      | 
|lease payments                    | 
|Less current installments         | 
|                                  | 
|Obligations under capital leases, | 
|excluding current installments    | 
|                                  | 
|                                  | 

The Company
entered into purchase commitments with a contract manufacturer aggregating
approximately $224,000 for the manufacture of additional units of the
Companys Synapse Enabler for Vending. Approximately $73,000 of this
commitment was prepaid and is included in Prepaids and other current
assets in the consolidated balance sheet at December 31, 2003.

The
Company has employment agreements with four of its executive officers. The
agreements are for initial terms of one to three years, with automatic one-year
extensions after the initial term. As of December 31, 2003, the employment
agreements commit the Company to annual salary compensation of $738,000.
Effective February 1, 2004, the employment agreements commit the Company to
annual salary compensation of $681,000. The agreements include provisions for
severance payments upon nonrenewal or termination under certain conditions.

The
Company has committed to reimburse a third party 50%, up to a maximum of
$300,000, for certain agreed upon development costs. As of December 31, 2003,
$150,000 has been accrued based on an informal agreement to settle this matter.
Management is negotiating the modification of the terms of payment of the
Companys obligation.

The
Company maintains agreements with wireless, landline and other carriers for
certain telecommunication services. The agreements include pricing for various
services, including volume discounts. Should the Company fail to maintain or
reach minimum volume levels, the prices the Company pays for services may
increase and this may have an adverse effect on the results of operations.

The
Company is not currently subject to any material legal proceedings. However, the
Company may from time to time become a party to legal proceedings arising in the
ordinary course of its business.

NOTE 12
 SALE OF NXT

In May
2002, the Company adopted a formal plan to sell its wholly-owned subsidiary NXT.
Pursuant to an Asset Purchase Agreement dated August 31, 2002 (the
Agreement), the Company sold, for $5 million in cash, substantially
all of the operating assets and operating obligations of NXT to Paymentech,
which subsequently transferred the acquired assets and obligations to its
wholly-owned subsidiary Merchant-Link. Pursuant to a Transition Services
Agreement the Company entered into on the same date with Merchant-Link, certain
of the NXT assets continued to be located in the Companys Colorado
facility and the Company provided certain services for payment to Merchant-Link
for a limited period of time. NXT provides data services and landline-based
connectivity for credit-card transaction processing.

17

---

# U.S.
WIRELESS DATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended December 31, 2003 and 2002
(Unaudited)

Revenues
and income from the discontinued operations of NXT are as follows:

|                              | Three months endedDecember 31, | Six months endedDecember 31, |  |            
|----------------------------- | ------------------------------ | ---------------------------- |  | -----------
|
|Revenues                      |                                | $      --                    |  | $        --
|Income (loss) from operations |                                | --                           |  | (9,000     

(a)
Includes results through August 31, 2002.

The
Company recorded a gain on the sale of discontinued operations of $134,000 for
the six months ended December 31, 2002 due to the reversal of an accrued vendor
obligation as a result of the sale of NXT.

Paymentech
is obligated under the Agreement, subject to certain conditions, to purchase
goods or services from the Company or its affiliates over a three (3) year
period that commenced September 1, 2002, in an amount aggregating a minimum of
$3,472,500. Paymentech is obligated to pay the Company at least $1,000,000
during the first year, in installments of $83,333 per month, at least $1,150,000
during the second year, in installments of $95,833 per month, and at least
$1,322,500 during the third year, in installments of $110,208. Paymentech has
made such payments as scheduled and is expected to continue to make such
payments on a timely basis. In August 2003, the Company received an advance of
$167,000 from Paymentech representing guaranteed payments due for September and
October 2003. The Company agreed to a $25,000 reduction in the scheduled amount
due in return for the early advance. The Company has also agreed to apply any
unapplied balance to future services. Payments from Paymentech in excess of
goods and services provided to date aggregating $282,000 are included in
Customer advances in the consolidated balance sheet at December 31,
2003.

18

---

ITEM 2.
MANAGEMENTS DISCUSSION AND ANALYSIS

Special Note
Regarding Forward-Looking Statements

We
may, in discussions of our future plans, objectives and expected performance in
periodic reports filed by us with the Securities and Exchange Commission (or
documents incorporated by reference therein) and in written and oral
presentations made by us, include projections or other forward-looking
statements within the meaning of Section 27A of the Securities Exchange Act of
1933 or Section 21E of the Securities Act of 1934, as amended. Such projections
and forward-looking statements are based on assumptions, which we believe are
reasonable but are, by their nature, inherently uncertain. In all cases, results
could differ materially from those projected. Some of the important factors that
could cause actual results to differ from any such projections or other
forward-looking statements are discussed below, and in other reports filed by us
under the Securities Exchange Act of 1934, including under the caption
Risk Factors in our Annual Report on Form 10-KSB. Our forward
looking statements are based on information available to us today, and except as
required by law, we undertake no obligation to update any forward looking
statement, whether as a result of new information, future events or otherwise.

OVERVIEW

U.S.
Wireless Data, Inc. (USWD or the Company) provides
proprietary enabling solutions and wireless transaction delivery and gateway
services to the payments processing industry. Our customers include credit card
processors, merchant acquirers, banks, automatic teller machine
(ATM) distributors and their respective sales organizations, as well
as certain businesses seeking new solutions to make it easier for their
customers to buy their products or services. We offer these entities turnkey
wireless and other transaction management services. We also provide our clients
with proprietary wireless enabling products designed to allow for card
acceptance where such acceptance has heretofore been either too expensive or
technologically unfeasible, or to displace conventional telephone lines for
increased speed, cost reduction and/or convenience. These services and products
may be utilized by conventional card accepting retailers as well as emerging
card accepting market segments such as vending machines, quickservice
(fast-food) and quick casual restaurants, taxis and limousines, in-home service
providers, door-to-door sales, contractors, delivery services, sporting events,
and outdoor markets. Our services and products may also be used for gathering
telemetric information such as mission critical operational data on a real-time
basis from remote equipment (e.g., vending machines).

We
facilitate the delivery of credit card or other electronic payment transactions
from merchants to payment processors using wireless technologies. We make it
easy for our clients to deploy wireless solutions for their merchants through a
single source, our Synapse platform. We aggregate different wireless network
services, offering nationwide wireless coverage, and provide a single point of
terminal management, customer support and transaction reporting. For
strategically selected markets, we develop and integrate proprietary wireless
hardware products designed to enable traditional points of sale and
unconventional points of sale (such as vending machines) with card acceptance.
All of our efforts are aimed at providing the payments processing industry and
end-user merchants with the speed, mobility, cost savings and other strategic
benefits associated with wireless technology.

19

---

We
have contracts with many of the industrys largest resellers, including
eight of the top 10 merchant acquirers as ranked in The Nilson Report. Our
clients process the majority of all point-of-sale (POS) transaction
activity in the United States and include: Bank of America, BuyPass, Cardservice
International, CardSystems, Concord EFS, First Data Merchant Services, First
Horizon, Global Payments, Heartland, Lynk Systems, MSI, National Processing
Company, Paymentech, Vital, and many others.

Going
Concern and Liquidity Uncertainties

We
need additional capital in the immediate future in order to continue operations.
Since our inception, we have incurred significant losses and negative cash flow
from operations. As of December 31, 2003, we had an accumulated deficit of
approximately $145 million and our principal source of liquidity was
approximately $456,000 in cash and cash equivalents. Our concerns about capital
have placed us in a position where we are required to take additional steps to
raise funds and cut costs. If we are not successful in our efforts to raise
additional capital, we will
be required to cease operations altogether.

The
availability of funds from a $2.75 million bridge facility (the Bridge
Loan) was made pursuant to a previously executed and fully secured loan
with Brascan Financial Corporation (Brascan), a subsidiary of
Toronto, Canada-based Brascan Corporation. The Bridge Loan is secured by a
general security interest in all of our assets, bears interest at 7.5% and is
due March 16, 2005. In connection with the Bridge Loan, Brascan received a
warrant on September 16, 2003 exercisable for 10 million shares of the
Companys common stock at $.15 per share (the Bridge Loan
Warrant). The Bridge Loan Warrant became exercisable on December 31, 2003
and will expire in September 2008.

The
Bridge Loan contains various covenants which include, among others, (i) a
material adverse change clause, (ii) a minimum monthly revenue requirement of
approximately $380,000, and (iii) a minimum net worth requirement of not less
than negative $2 million. As of January 31, 2004, the Company was not in
compliance with the minimum net worth requirement and was in technical default
under the Bridge Loan with respect to two post-closing covenants (relating to
receiving a landlord waiver for our New York facility and completing the actions
necessary to subject certain of our funds to a blocked account
arrangement). Despite the defaults in connection with their Bridge Loan to us,
Brascan continued to extend the balance of the remaining unadvanced amounts
under the Bridge Loan. As of January 31, 2004, we have drawn down the full
amount of the $2.75 million Bridge Loan commitment. However, there can be no
assurance that Brascan will not declare a default under the Bridge Loan.

In
connection with the Bridge Loan, and as part of an overall restructuring and
strategic alliance with MIST Inc. (MIST), a subsidiary of Brascan
Corporation and a provider of card issuance and payments processing products and
gateway services to banks, non-bank card issuers and the payments processing
industry, we also entered into a term sheet that contemplated the agreement by
Brascan, subject to a number of conditions, to arrange for the purchase of $12.5
million of a newly issued Series D Preferred Stock representing at least 60% of
our equity. The Bridge Loan would have allowed us to continue operations while we were
to negotiate a definitive Series D Preferred Stock purchase agreement and to
satisfy the anticipated closing conditions of such a financing.

20

---

On
October 30, 2003, we received notification from Brascan, on behalf of its
designate MIST, that it no longer intended to pursue the equity financing
transaction contemplated by the term sheet with USWD as previously announced on
September 16, 2003. In connection with MISTs determination not to proceed
with the equity financing transaction as previously contemplated, Brascan had
released us from our obligations to not solicit alternative financings from
other potential investors, and the break-up fee that was associated with such an
alternative financing. Since obtaining the release, we have been exploring
options with other parties, and continue to explore alternative transactions
with MIST, although there can be no assurance that any transaction will be
consummated, or consummated on terms favorable to us.

On
January 27, 2004, we entered into a non-binding term sheet with MIST under which
we will sell to MIST our Synapse POS gateway business. The deal contemplates that MIST
will pay us consideration consisting of cash and an agreement to provide us with
a certain amount of payment processing services for our vending initiatives. We
anticipate the execution of definitive agreements on or about February 27,
2004.

On
January 27, 2004, we also entered into a non-binding term sheet with Brascan, to
amend the terms of the Bridge Loan and increase the loan amount from $2.75
million to $3.85 million. Concurrent with the signing of definitive
agreements for the contemplated sale of the Synapse POS gateway business, it is
anticipated that the amendment to the Bridge Loan (the Amended Bridge
Loan) will be executed and Brascan will extend up to an additional $1.1
million (less accrued interest) under certain conditions. The cash portion of
the proceeds from the contemplated sale of the Synapse POS gateway business will
be used to reduce our outstanding balance on the Amended Bridge Loan. As part of
the foregoing transactions, Brascan has also agreed to forfeit one-half of its
currently outstanding 10,000,000 share Bridge Loan Warrant (the Amended
Bridge Loan Warrant). Except for the number of shares, the Amended Bridge
Loan Warrant will contain the same exercise price, expiration date and other
terms as the original Bridge Loan Warrant. The Amended Bridge Loan will continue
to be secured by a general security interest in all of our assets. The principal
amount of the Amended Bridge Loan will be due March 16, 2005.

MIST
is seeking to acquire our Synapse POS gateway business to gain an additional wireless
commerce gateway and a substantial presence in the United States. It is anticipated that
approximately 19 of our 38 employees will become employees of MIST upon closing.
The Synapse POS gateway business currently generates substantially all of our
revenues.

21

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The
additional amounts to be received upon execution of the Amended Bridge Loan are
expected to provide us with enough capital to support our operations for
approximately two to three months given our anticipated short-term negative cash
flow. During this period, we will focus on our vending initiatives and attempt
to address our capital requirements.

The
ultimate completion of the contemplated transactions with Brascan and MIST
remain subject to a number of conditions, including the execution of definitive
documentation. Accordingly, there
is no assurance that these transactions will be consummated according to the
terms and conditions contemplated by the non-binding term sheets, or at all.

We
must secure additional financing in order to continue operations.  In
doing so, we may secure capital in the form of debt and/or equity
financing. Should we be successful in completing an equity financing, it is
likely that such a transaction would require reorganization of our capital
structure, which may include the restructuring of our currently issued and
outstanding Series C Convertible Preferred Stock and Series C Warrants. It is
also anticipated that the terms and provisions of any equity financing, if
completed, will have a substantial dilutive effect on the ownership interests of
our existing stockholders.

These
conditions raise substantial doubt about our ability to continue as a going
concern and if we are unable to obtain additional capital as needed, we will be
required to cease operations altogether. The consolidated financial statements
do not include any adjustments that might result from our inability to continue
as a going concern.

SERVICES AND
PRODUCTS

We
derive revenue primarily from two sources: service revenues and product sales.
Service revenues are generated from our Synapse Wireless Services. Revenue from
product (equipment) sales are primarily derived from the sale of our proprietary
Synapse Enabler products, and, as these products send transactions through our
Synapse Service, sales of these products are typically precursors to Synapse
Service revenues. The following provides more details on our service and product
offerings:

SynapseSM
Wireless Services

For
mobile merchants or merchants conducting business in the field, wireless POS
systems are an obvious solution, enabling card acceptance and delivering
increased profits and greater customer satisfaction. We believe we are at the
forefront of this payments revolution, providing certification of wireless
credit card terminals from third-party manufacturers such as Creditel,
Linkpoint, Lipman, Thales, and others, to the Synapse host platform, which acts
as a neutral gateway to payment processors. This proprietary service also allows
credit card processing for vending machines, quickservice (fast-food) and quick
casual restaurants, taxis and limousines, in-home service providers,
door-to-door sales, contractors, delivery services, sporting events, and outdoor
markets. No single wireless network provides a complete and ubiquitous
foot print of nationwide coverage in the United States. Our service
is wireless carrier agnostic, providing a broad selection of wireless data
networks including Motients DataTac network, the Cellular Digital Packet
Data (CDPD) networks operated by AT&T Wireless and Verizon
Wireless (both of which are being phased out) and Alltel, and Cingulars
Mobitex network. We are also in discussions with the leading wireless carriers
and equipment manufacturers regarding next generation (3G) wireless
technologies, including Code Division Multiple Access digital wireless developed
by Qualcomm (CDMA) and General Packet Radio Service
(GPRS) enabled networks which offer always-on, higher
capacity, Internet-based content and packet-based data services. Utilizing
Synapse Wireless Services, businesses with locations throughout the United
States can implement a wireless POS strategy using multiple networks and
terminals to ensure optimal coverage.

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In
April 2003, we successfully converted, on behalf of a major payment processor,
approximately 7,400 existing wireless merchant terminals on Cingulars
Mobitex network to our Synapse service. Previously, the terminals had been
connected directly to the processor over the Mobitex wireless network. Now, the
terminals continue to use Cingulars Mobitex network, but the transactions
are routed to the processor via the Synapse host platform. The processor can now
leverage the value added services of Synapse including online management of the
wireless accounts, our 24/7 customer support desk and online reporting. Total
active sites on our services number more than 34,100 at December 31, 2003.

The
terminal conversion described above highlights the growing importance of Synapse
to payment processors and other clients as a means of improving the overall
management of their wireless programs through our value-added services. Of great
importance to processors is the ability to activate and manage wireless
merchants through our online tools and reporting features. Additionally, our
24/7 customer support desk provides them with personalized attention and fast
responses to issues that arise. Our focus will be to continually improve these
support tools and services and to offer our clients a single source for their
wireless payment processing programs, regardless of the wireless carrier service
or terminal hardware that is chosen for each individual merchant site.

Synapse
Enabler for Vending

We
developed our proprietary Synapse Enabler device for the purpose of converting
non-wireless devices to devices that are capable of transmitting and receiving
electronic payment transactions and other data wirelessly. We have integrated
such technology into devices such as vending machines to create new
opportunities for cashless payments and other data gathering services. Vending
machines in selected cities have been retrofitted with the Synapse Enabler for
Vending (SEV) as part of a program for PepsiCo, Inc.
(Pepsi) to introduce cashless payments for their vended products.
Transactions are routed through our Synapse platform for authorization and
settlement. In addition to enabling card payments on vending machines, the SEV
communicates with the vending machines internal Data Exchange
(DEX) control boards allowing it to send up-to-the-minute
information about inventory and the operational status of each vending machine
to USWD. This telemetric data is re-configured and organized into various
reports, and then provided to Pepsi, its bottlers and licensees via online
access over secure Internet connections. Increased sales and margin through
cashless payment acceptance, more efficiency in determining and servicing daily
routes, and information designed to keep machines operating at peak performance
are all expected results of our solution for the vending industry.

23

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In
December 2002, we received our first trademark authorization from
Pepsi for our wireless cashless payment processing solution for vending
machines. The trademark authorization given by Pepsi authorizes our first
generation SEV for deployment by Pepsis bottling partners in their vending
machines throughout North America. The solution earned trademark authorization
after nearly two years of development and testing in various locations. Over 600
units have already been deployed in certain markets by key Pepsi anchor bottlers
and licensees. These markets include Chicago, Illinois; Danbury, Connecticut;
Las Vegas, Nevada; Memphis, Tennessee; Orlando, Florida; and, St. Louis, Missouri.

On
October 16, 2003, we announced that we entered into a multi-year exclusive
supply agreement with Pepsi for cashless payment and wireless route management
systems and service for use on the vending machines of Pepsis bottlers,
licensees and affiliates. The Pepsi-Cola North America division of Pepsi has
also committed to purchase a minimum of 10,000 SEVs. The exclusive supply
agreement and the 10,000 SEV purchase order are subject to the successful
completion of commercial and field tests for our second generation
SEV.

In
February 2004, we received a provisional six-month trademark authorization from
Pepsi for our second generation SEV. Pepsis Global Procurement Team
notified Pepsis bottlers that our solution is available for commercial
rollout and we expect to receive orders for unit deployments from Pepsi, its
bottlers and licensees over the coming weeks and months. We also expect to receive
non-provisional trademark authorization in the next few weeks as we anticipate
the successful completion of the commercial and field tests.  In addition, we
continue to pursue other opportunities in the vending industry.

Synapse
Wireless Payment Acceptance on Cell Phones

We
believe the market for card payments will become larger with the emergence of
card acceptance on new wireless devices such as those integrated with mobile
phones.

To
that end, we have played an important role in the recently launched PowerSwipe,
a new product by Creditel Corp. that attaches to certain models of Motorola
telephones utilizing the Nextel network. The device provides mobile workers with
the capability to swipe a credit card and take payment with greater security,
speed, and convenience while also having access to Nextels standard cell
phone, two-way voice messaging and text messaging services. We believe that
Creditels partnership with Nextel and Motorola is ideal for the launch of
this solution since Motorola phones with service on the Nextel network are
already popular with fleet-based businesses. Motorola and Nextel will promote
and sell the solution through their dealer networks. Our Synapse Service
provides Creditel with a payments gateway to various credit card processors and
other services. We have signed an agreement with Creditel to be the exclusive
payments gateway for the PowerSwipe product. The product is now in full
commercial deployment and we now have over 300 units on our gateway.

24

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Other
Services and Products

We
have also integrated our Synapse Enabler solution into taximeters from
Centrodyne and Pulsar, the two leading manufacturers of taximeters in North
America. In addition, we developed our Synapse Enabler T8 (T8),
which can convert as many as eight dial-up POS terminals in one location to a
single wireless connection, for queue-sensitive, multi-lane environments such as
quickservice (fast-food) and quick casual restaurants. Although some sites
remain active with these products, due to limited marketing and other resources
and certain operational difficulties, we have curtailed further efforts and
resources with regards to these two markets.

Our
Synapse Adapter is a proprietary device utilizing patented dial
tone-emulation technology licensed from AT&T Wireless to provide our clients
with a seamless plug and play solution for the conversion of dial-up
POS and ATM terminals to a high speed, lower cost, wirelessly-enabled device
operating on the CDPD wireless network. Although we continue to provide service
for this product, we no longer sell the Synapse Adapter in light of the
discussion that follows.

The
major U.S. wireless carriers are migrating away from the CDPD wireless medium as
they move to next generation technologies. AT&T Wireless has stated that it
intends to completely shutdown its CDPD network in June 2004 and will migrate to
its new GPRS network. Verizon Wireless has announced that it intends to
transition from its current CDPD data service to its next generation CDMA data
service and intends to completely shutdown its CDPD network in December 2005.
Our Synapse Adapter product is CDPD-based, and certain third party products used
on our service are also CDPD-based. The useful life of all CDPD-based terminals
is dependent on the availability of CDPD service, which has become limited in
duration.

We may
also provide our customers with customized solutions or other services.

Discontinued
Operations

During
May 2002, we developed a formal plan to sell our wholly owned subsidiary, NXT
Corporation (NXT). Effective as of the close of business on August
31, 2002, we sold, for $5 million in cash, substantially all of the operating
assets associated with NXT to Paymentech, L.P. (Paymentech). NXT
provides data services and landline-based connectivity for credit-card
transaction processing. In accordance with accounting principles generally
accepted in the United States of America, we classified NXT as a discontinued
operation and have eliminated NXT from the discussion that follows except where
indicated.

RESULTS OF
OPERATIONS FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2003 AND 2002

KEY METRICS

We
utilize several basic performance metrics to measure the progress of our
operations. Some of the metrics we rely upon include: (1) the number of active
sites that can process transactions through our hosts; (2) the gross number of
active sites that are added to our system; (3) the number of transactions
processed through our hosts; and (4) EBITDA  Earnings before interest,
taxes, depreciation and amortization.

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Active Sites

Active
sites have grown to approximately 34,100 as of December 31, 2003, an increase of
15,400 or 82% from the same date of the prior year. In April 2003, we converted
approximately 7,400 wireless sites for a major processor using Cingulars
Mobitex network to our Synapse service on the same wireless network. This
conversion has resulted in a substantial increase in activations and
transactions, as several hundred new wireless activations are being made by this
customer through our Synapse service each month.

Gross
Activations

Gross
activations for the three and six months ended December 31, 2003, were 4,300 and
8,700 compared to 3,400 and 7,100 for the same periods in the prior fiscal year.
This represents a 900 and 1,600 unit or 27% and 23% increase, respectively.

Transactions

Transactions
processed for the three and six months ended December 31, 2003, were
approximately 2,724,000 and 5,347,000, an increase of 961,000 and 1,811,000 or
55% and 51% from the same periods in the prior fiscal year. This increase was
primarily due to the growth in active sites.

EBITDA

Discussion
of EBITDA is included below.

REVENUE

We
derive revenue primarily from two sources: service revenues and product sales.
Service revenues consist of: (a) one-time, non-refundable service activation
fees; (b) monthly minimum subscription fees for the availability of service; (c)
fees for transactions delivered on wireless or other methods through our hosts;
and (d) other fees, including administration and other fees for certain wireless
services, certain charges for telecommunications connections between us and a
party, and installation fees and expenses. Service revenues are generated from
our Synapse Service. Product sales are primarily derived from the sale of our
proprietary Synapse Enabler and Synapse Adapter products.

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Total
Revenues

Total
revenues were $1,313,000 and $2,559,000 for the three and six months ended
December 31, 2003, as compared to $899,000 and $1,683,000 for the same periods
in the prior fiscal year. This improvement from the prior fiscal year represents
a $414,000 and $876,000 or 46% and 52% increase, respectively. The increase is
primarily attributed to the higher recurring service revenues from the growth in
the number of active sites. This increase was partially offset by the decrease
in product sales. Revenues are discussed in more detail below.

The
following table sets forth, for the periods indicated, certain financial data as
percentages of our total revenues:

|                       | For the three months endedDecember 31, | For the six months endedDecember 31, |   |    
|---------------------- | -------------------------------------- | ------------------------------------ | - | ---
|
|Revenues               |                                        |                                      |   |    
|Activation fees        |                                        | 7                                    | % | 8  
|Monthly fees           |                                        | 78                                   | % | 65 
|Transaction fees       |                                        | 8                                    | % | 5  
|Other fees             |                                        | 7                                    | % | 7  
|                       |                                        |                                      |   |    
|Total service revenues |                                        | 100                                  | % | 85 
|Product sales          |                                        | --                                   |   | 15 
|                       |                                        |                                      |   |    
|Total revenues         |                                        | 100                                  | % | 100
|                       |                                        |                                      |   |    
|                       |                                        |                                      |   |    

Service
Revenues

Revenue
from services for the three and six months ended December 31, 2003 increased to
$1,308,000 and $2,539,000 from $764,000 and $1,481,000 during the same periods
in the prior fiscal year, a $544,000 or 71% and $1,058,000 or 71% increase,
respectively.

Activation
Fees. Revenue from activation fees, which represents the amortization of
fees generated from activations of new sites added through our proprietary
Synapse service, was $86,000 for the three months ended December 31, 2003, a
$15,000 or 21% increase as compared to the same period in the prior fiscal year.
Revenue from activation fees for the six months ended December 31, 2003 was
$168,000, an $8,000 or 5% decrease as compared to the same period in the prior
fiscal year. The amortization of revenue from activation fees for the current
period as compared to the same periods of the prior year was reduced by an
increase in the amortization period effective July 1, 2002, resulting from an
increase of our estimate of the expected life of an activation from six months
to one year. The number of gross activations by client and the applicable rate
charged to each client also affects aggregate activation fees.

Monthly
Fees.Revenue from recurring monthly fees, which is generated from the
number of active sites that can process transactions through our Synapse
service, was $1,030,000 for the three months ended December 31, 2003, a $447,000
or 77% increase as compared to the same period in the prior fiscal year. Revenue
from recurring monthly fees for the six months ended December 31, 2003 was
$2,005,000, an $896,000 or 81% increase as compared to the same period in the
prior fiscal year. The increase is a direct result of the increase in the number
of active sites. The number of active sites by client and the applicable rate
charged to each client also affects aggregate monthly fees.

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Transaction
Fees.Revenue from transaction fees for the three months ended December 31,
2003 was $98,000, a $48,000 or 96% increase as compared to the same period in
the prior fiscal year. Revenue from transaction fees for the six months ended
December 31, 2003 was $192,000, a $79,000 or 70% increase as compared to the
same period in the prior fiscal year. The increase is a direct result of the
increase in the volume of transactions due primarily to the growth in the number
of active sites. The number of active sites by client and the applicable rate
charged to each client also affects aggregate transaction fees.

Other
Fees.Revenue from other fees for the three months ended December 31, 2003
was $94,000, a $34,000 increase. Revenue from other fees for the six months
ended December 31, 2003 was $174,000, a $91,000 increase. The increase is a
result of certain administrative, installation and other charges to certain
clients.

Product Sales

Product
sales are primarily derived from the sale of our proprietary wireless devices,
the Synapse Enabler and the Synapse Adapter. Revenue from product sales for the
three months ended December 31, 2003 was $5,000, a $130,000 or 96% decrease as
compared to the same period in the prior fiscal year. Revenue from product sales
for the six months ended December 31, 2003 was $20,000, a $182,000 or 90%
decrease as compared to the same period in the prior fiscal year. The decrease
was attributed to the reduction in the number of units sold and the amortization
of product sales of our Synapse Enabler for Vending recognized ratably over the
life of the customer contract upon activation.

GROSS PROFIT

Gross
profit consists of revenues, net of direct costs of sales. Costs of revenues
consist primarily of the cost for the initial setup and ongoing communications
costs associated with terminals connected through Synapse, costs of production
of products such as the Synapse Enablers and Adapters, and certain carrier and
other costs. Total gross profit for the three months ended December 31, 2003 was
$432,000, compared to $30,000 for the same period in the prior fiscal year, a
$402,000 or 1340% increase. Total gross profit for the six months ended December
31, 2003 was $934,000, compared to $430,000 for the same period in the prior
fiscal year, a $504,000 or 117% increase. The improvement in total gross profit
for the current periods over the same periods in the prior fiscal year was
primarily attributed to the growth of active sites for Synapse services and
reduced charges for inventory write-downs. Without the write-downs for
inventory, total gross profit for the three months ended December 31, 2003 would
have been $511,000, a $148,000 or 41% increase, and total gross profit for the
six months ended December 31, 2003 would have been $1,013,000, a $250,000 or 33%
increase, each as compared to the same periods in the prior fiscal year.

Gross
profit from services for the three months ended December 31, 2003 was $510,000,
a $150,000 or 42% increase as compared to the same period in the prior fiscal
year. Gross profit from services for the six months ended December 31, 2003 was
$1,007,000, a $252,000 or 33% increase as compared to the same period in the
prior fiscal year. The improvement in gross profit from services was primarily
attributed to the growth of active sites for Synapse services.

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Gross
profit from product sales for the three months ended December 31, 2003 was a
loss of $78,000, a $252,000 or 76% reduction in the loss as compared to the same
period in the prior fiscal year. Gross profit from product sales for the six
months ended December 31, 2003 was a loss of $73,000, a $252,000 or 78%
reduction in the loss as compared to the same period in the prior fiscal year.
The improvements in gross profit from product sales are almost entirely a direct
result of the reduced charges for inventory write-downs. The mix of
Product Sales in Units as discussed above, and the applicable rates
charged for such sales, also affected gross profit from product sales.

GROSS MARGIN

The
following table sets forth, for the periods indicated, certain financial data as
percentages of our total revenue:

|                   | For the three months endedDecember 31, | For the six months endedDecember 31, |      |     
|------------------ | -------------------------------------- | ------------------------------------ | ---- | ----
|
|Gross margin       |                                        |                                      |      |     
|Services           |                                        | 39                                   | .0%  | 47  
|Product sales      |                                        | (1560                                | .0)% | (244
|Total gross margin |                                        | 32                                   | .9%  | 3   

Total
gross margin (gross profit as a percentage of total revenues) for the three
months ended December 31, 2003 increased to 32.9% from 3.3% for the same period
in the prior fiscal year. Total gross margin for the six months ended December
31, 2003 increased to 36.5% from 25.5% for the same period in the prior fiscal
year. The increases were primarily attributed to the reduction in inventory
write-downs and the greater percentage of total revenue from monthly fees due to
the growth in active sites, which were partially offset by changes in customer
pricing plans that led to lower service margins and higher costs for certain
wireless carrier service.

Gross
margin from services for the three months ended December 31, 2003 decreased to
39.0% compared to 47.1% for the same period in the prior fiscal year. Gross
margin from services for the six months ended December 31, 2003 decreased to
39.7% compared to 51.0% for the same period in the prior fiscal year. The
reduction was primarily attributed to the mix of rates charged to our clients,
including a reduction in rates for a large client and the associated number of
active sites for each client, and higher costs for certain wireless carrier
service, which were partially offset by the greater percentage of total revenue
from monthly fees due to the growth in active sites.

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Gross
margin from product sales for the three months ended December 31, 2003 was a
gross margin loss of 1560.0% compared to a gross margin loss of 244.4% for the
same period in the prior fiscal year. Gross margin from product sales for the
six months ended December 31, 2003 was a gross margin loss of 365.0% compared to
a gross margin loss of 160.9% for the same period in the prior fiscal year. The
increase in gross margin loss is primarily attributed to the reduction in the
number of units and aggregate sales dollars and the reduction in write-downs of
inventory. Excluding the write-downs of inventory, gross margin from product
sales for the three months ended December 31, 2003 would have been 20.0%
compared to 2.2% for the same period in the prior fiscal year, and gross margin
from product sales for the six months ended December 31, 2003 would have been
30.0% compared to 4.0% for the same period in the prior fiscal year.

OPERATING
EXPENSES

Total
operating expenses for the three months ended December 31, 2003 decreased to
$1,771,000, a decrease of $1,794,000 or 50% compared to the same period in the
prior fiscal year. Total operating expenses for the six months ended December
31, 2003 decreased to $3,556,000, a decrease of $2,586,000 or 42% compared to
the same period in the prior fiscal year. The decrease was due to an impairment
charge of $836,000 included in the prior period; cost reduction efforts and
efficiency gains, including reductions in staff and compensation; the
elimination of amortization of the non-cash compensation expense which was
completed in the fiscal year ended June 30, 2003; a reduction in depreciation
expense due to minimal capital expenditures in recent periods, and to the
reduction in amortization expense related to goodwill and intangible assets. In
November 2002, we instituted an additional cost reduction plan, which was
primarily comprised of salary and staff reductions. These cost savings were not
fully realized for the entire three and six-month periods ended December
31st of the prior fiscal year.

Selling,
General, and Administrative Expenses

Selling,
general, and administrative expenses consist primarily of salaries and benefits
for sales, general and administrative personnel, occupancy and general office
expenses, professional fees (including legal, tax and accounting), insurance,
advertising and promotion expenses, travel expenses, other general corporate
purposes, and non-cash compensation of directors. Selling, general, and
administrative expenses excluding non-cash compensation of directors, were
$1,522,000 for the three months ended December 31, 2003 compared to $2,036,000
for the same period in the prior fiscal year, a $514,000 or 25% decrease.
Selling, general, and administrative expenses excluding non-cash compensation of
directors, were $3,060,000 for the six months ended December 31, 2003 compared
to $3,904,000 for the same period in the prior fiscal year, a $844,000 or 22%
decrease. The decrease is primarily attributed to the reduction of staff and
compensation of staff, and our continued cost cutting efforts.

The
amortization of non-cash compensation of directors of $0 for the three months
ended December 31, 2003 compared to $281,000 for the same period in the prior
fiscal year. The amortization of non-cash compensation of directors of $0 for
the six months ended December 31, 2003 compared to $562,000 for the same period
in the prior fiscal year. The decrease was related to the elimination of
amortization of the non-cash compensation expense since the amortization was
completed in the fiscal year ended June 30, 2003.

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Selling,
general and administrative expenses including non-cash compensation of directors
were $1,522,000 for the three months ended December 31, 2003 compared to
$2,317,000 for the same period in the prior fiscal year, a $795,000 or 34%
decrease. Selling, general and administrative expenses including non-cash
compensation of directors were $3,060,000 for the six months ended December 31,
2003 compared to $4,466,000 for the same period in the prior fiscal year, a
$1,406,000 or 32% decrease.

Research and
Development Expenses

Research
and development expenses consist primarily of engineering personnel costs for
research, design and development of the proprietary technology we use to
integrate and develop our products and services. Research and development
expenses for the three months ended December 31, 2003 were $96,000, a $47,000 or
33% decrease compared to the same period in the prior fiscal year. Research and
development expenses for the six months ended December 31, 2003 were $190,000, a
$112,000 or 37% decrease compared to the same period in the prior fiscal year.
The decrease is primarily attributed to the reduction of staff and compensation
of staff, and our continued cost cutting efforts.

Depreciation
and Amortization

Depreciation
and amortization for the three months ended December 31, 2003 was $153,000, a
$116,000 or 43% decrease compared to the same period in the prior fiscal year.
Depreciation and amortization for the six months ended December 31, 2003 was
$306,000, a $232,000 or 43% decrease compared to the same period in the prior
fiscal year. The improvement in depreciation and amortization is discussed below
in this section.

Amortization
of intangibles includes amortization of goodwill and intellectual property,
including core technology, customer relationships, and contract rights.
Amortization of intangibles for the three months ended December 31, 2003 were
$22,000, a $44,000 or 67% decrease compared with the same period in the prior
fiscal year. Amortization of intangibles for the six months ended December 31,
2003 were $45,000, an $87,000 or 66% decrease compared with the same period in
the prior fiscal year. For the three and six month periods ended December
31st of the prior year, a significant portion of the amortization
included amortization relating to goodwill and intangibles generated by the
acquisitions of NXT and Cellgate Technologies, Inc. As a result of the sale of
NXT and impairment charges in fiscal 2003 against goodwill and intangibles
related to our acquisition of Cellgate, all intangible assets were fully
amortized by December 31, 2003.

Depreciation
and amortization of fixed assets, leasehold improvements and capitalized
software for the three months ended December 31, 2003 were $131,000, a $72,000
or 36% decrease compared with the same period in the prior fiscal year.
Depreciation and amortization of fixed assets, leasehold improvements and
capitalized software for the six months ended December 31, 2003 were $261,000, a
$145,000 or 36% decrease compared with the same period in the prior fiscal year.
We anticipate a decrease in depreciation and amortization of fixed assets,
leasehold improvements, and capitalized software as our outlays for capital
expenditures have been minimal during the past year and we expect minimal
outlays for capital expenditures over the next year.

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OTHER

Interest
income for the three months ended December 31, 2003 was $1,000, compared to
$17,000 for the same period in the prior fiscal year. Interest income for the
six months ended December 31, 2003 was $2,000, compared to $29,000 for the same
period in the prior fiscal year. Interest income decreased due to lower cash
balances invested corresponding with the utilization of cash to fund our
business.

Interest
expense for the three months ended December 31, 2003 was $208,000, compared to
$20,000 for the same period in the prior fiscal year. Interest expense for the
six months ended December 31, 2003 was $284,000, compared to $79,000 for the
same period in the prior fiscal year. The increase in interest expense was
primarily related to increased borrowing costs, including interest on the Bridge
Loan effective September 16, 2003, the amortization of deferred financing
interest for the Bridge Loan warrant over the term of such loan, and interest
for factoring certain receivables; partially offset by the reduced principal
balance of a capital lease for Synapse Adapters assumed with the acquisition of
Cellgate.

Other
income (expense), net for the three months ended December 31, 2003 was net
income of $31,000, compared to a net income of $136,000 for the same period in
the prior fiscal year. Other income (expense), net consists primarily of: (a)
rental income for sublet facilities of $33,000 for the three months ended
December 31, 2003 compared to $33,000 for the same period in the prior fiscal
year; (b) income relating to a transition services agreement that was executed
in connection with the sale of NXT of $0 for the three months ended December 31,
2003 and $86,000 for the same period in the prior fiscal year; (c) expense of $0
for the three months ended December 31, 2003 and $46,000 for the same period in
the prior fiscal year relating to withholding taxes on additional shares issued
to certain former shareholders of NXT; and (d) tax expense for the three months
ended December 31, 2003 of $2,000 compared to income of $63,000 for the same
period in the prior fiscal year which included a reversal of previously accrued
amounts for certain state and local taxes.

Other
income (expense), net for the six months ended December 31, 2003 was net income
of $58,000, compared to a net income of $85,000 for the same period in the prior
fiscal year. Other income (expense), net consists primarily of: (a) rental
income for sublet facilities of $66,000 for the six months ended December 31,
2003 compared to $45,000 for the same period in the prior fiscal year, a $21,000
increase due to the sublet of a portion of the Companys current offices in
New York; (b) income relating to a transition services agreement that was
executed in connection with the sale of NXT of $0 for the six months ended
December 31, 2003 and $111,000 for the same period in the prior fiscal year; (c)
expense of $0 for the six months ended December 31, 2003 and $46,000 for the
same period in the prior fiscal year relating to withholding taxes on additional
shares issued to certain former shareholders of NXT; and (d) tax expense for the
six months ended December 31, 2003 of $9,000 compared to $24,000 for the same
period in the prior fiscal year, a $15,000 decrease for certain state and local
taxes.

32

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LOSS FROM
CONTINUING OPERATIONS

Loss
from continuing operations for the three months ended December 31, 2003 was
$1,515,000, as compared with a loss of $3,402,000 for the same period in the
prior fiscal year, a $1,887,000 or 56% improvement. Loss from continuing
operations for the six months ended December 31, 2003 was $2,845,000, as
compared with a loss of $5,677,000 for the same period in the prior fiscal year,
a $2,832,000 or 50% improvement. The decrease in loss was primarily attributed
to the realization of the cost reduction efforts and efficiency gains, the
elimination of amortization of the non-cash compensation expense, the reduction
in depreciation and amortization, the elimination of an impairment charge, as
well as overall increased service revenues.

DISCONTINUED
OPERATIONS

Income
from discontinued operations represents the net results of our wholly-owned
subsidiary, UNS Corporation (formerly, NXT). During May 2002, we developed a
formal plan to sell NXT. As previously disclosed, effective as of the close of
business on August 31, 2002, we sold substantially all of the operating assets
associated with NXT. NXT provides data services and landline-based connectivity
for credit-card transaction processing. UNS Corporation was dormant for the
three and six months ended December 31, 2003 and was dissolved on December 11,
2003. For the six months ended December 31, 2002, operations resulted in income
of $362,000. For the six months ended December 31, 2002, gain on sale of
discontinued operations of $134,000 primarily represents the reversal of an
accrued vendor obligation that was waived as a result of the sale of NXT.

NET LOSS

For
the three months ended December 31, 2003, net loss totaled $1.515 million or
$0.09 per share, as compared to a net loss of $3.418 million or $0.23 per share,
for the same period in the prior fiscal year. For the six months ended December
31, 2003, net loss totaled $2.846 million or $0.16 per share, as compared to a
net loss of $5.181 million or $0.34 per share, for the same period in the prior
fiscal year.

EBITDA

EBITDA
is presented because it is a widely accepted indicator of funds available to
service debt, although it is not a measure of liquidity or of financial
performance under accounting principles generally accepted in the United States
of America. We use EBITDA as an internal measure of operating performance, which
is net loss excluding net interest, taxes, depreciation and amortization. We
believe that EBITDA, while providing useful information, should not be
considered in isolation or as an alternative to net income or cash flows as
determined under accounting principles generally accepted in the United States
of America.

33

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The
EBITDA loss for the three months ended December 31, 2003 was $1.15 million, as
compared to the same period in the prior fiscal year of $3.21 million, an
improvement of $2.06 million or approximately 64%. The EBITDA loss for the six
months ended December 31, 2003 was $2.25 million, as compared to the same period
in the prior fiscal year of $4.57 million, an improvement of $2.32 million or
approximately 51%. The improvement in EBITDA loss is primarily attributed to the
increase in revenues and a reduction of operating expenses as discussed in prior
sections.

The
following table sets forth, for the periods indicated, the reconciliation of net
loss to EBITDA:

|                                  | For the three months ended  December 31, | For the six months endedDecember 31, |   |            
|--------------------------------- | ---------------------------------------- | ------------------------------------ | - | -----------
|
|Net loss                          |                                          | $(1,515,000                          | ) | $(3,418,000
|Subtract interest income          |                                          | (1,000                               | ) | (17,000    
|Add interest expense              |                                          | 208,000                              |   | 20,000     
|Add income taxes                  |                                          | 2,000                                |   | (63,000    
|Add depreciation and amortization |                                          | 153,000                              |   | 269,000    
|                                  |                                          |                                      |   |            
|EBITDA loss                       |                                          | $(1,153,000                          | ) | $(3,209,000
|                                  |                                          |                                      |   |            
|                                  |                                          |                                      |   |            

FINANCIAL
CONDITION, CAPITAL RESOURCES AND LIQUIDITY

We
need additional capital in the immediate future in order to continue operations.
Since our inception, we have incurred significant losses and negative cash flow
from operations. As of December 31, 2003, we had an accumulated deficit of
approximately $145 million and our principal source of liquidity was
approximately $456,000 in cash and cash equivalents. Our concerns about capital
have placed us in a position where we are required to take additional steps to
raise funds and cut costs. If we are not successful in our efforts to raise
additional capital, we will be required to cease operations altogether.

The
availability of funds from a $2.75 million bridge facility (the Bridge
Loan) was made pursuant to a previously executed and fully secured loan
with Brascan Financial Corporation (Brascan), a subsidiary of
Toronto, Canada-based Brascan Corporation. The Bridge Loan is secured by a
general security interest in all of our assets, bears interest at 7.5% and is
due March 16, 2005. In connection with the Bridge Loan, Brascan received a
warrant on September 16, 2003 exercisable for 10 million shares of the
Companys common stock at $.15 per share (the Bridge Loan
Warrant). The Bridge Loan Warrant became exercisable on December 31, 2003
and will expire in September 2008.

The
Bridge Loan contains various covenants which include, among others, (i) a
material adverse change clause, (ii) a minimum monthly revenue requirement of
approximately $380,000, and (iii) a minimum net worth requirement of not less
than negative $2 million. As of January 31, 2004, the Company was not in
compliance with the minimum net worth requirement and was in technical default
under the Bridge Loan with respect to two post-closing covenants (relating to
receiving a landlord waiver for our New York facility and completing the actions
necessary to subject certain of our funds to a blocked account
arrangement). Despite the defaults in connection with their Bridge Loan to us,
Brascan continued to extend the balance of the remaining unadvanced amounts
under the Bridge Loan. As of January 31, 2004, we have drawn down the full
amount of the $2.75 million Bridge Loan commitment. However, there can be no
assurance that Brascan will not declare a default under the Bridge Loan.

34

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In
connection with the Bridge Loan, and as part of an overall restructuring and
strategic alliance with MIST Inc. (MIST), a subsidiary of Brascan
Corporation and a provider of card issuance and payments processing products and
gateway services to banks, non-bank card issuers and the payments processing
industry, we also entered into a term sheet that contemplated the agreement by
Brascan, subject to a number of conditions, to arrange for the purchase of $12.5
million of a newly issued Series D Preferred Stock representing at least 60% of
our equity. The Bridge Loan would have allowed us to continue operations while we were
to negotiate a definitive Series D Preferred Stock purchase agreement and to
satisfy the anticipated closing conditions of such a financing.

On
October 30, 2003, we received notification from Brascan, on behalf of its
designate MIST, that it no longer intended to pursue the equity financing
transaction contemplated by the term sheet with USWD as previously announced on
September 16, 2003. In connection with MISTs determination not to proceed
with the equity financing transaction as previously contemplated, Brascan had
released us from our obligations to not solicit alternative financings from
other potential investors, and the break-up fee that was associated with such an
alternative financing. Since obtaining the release, we have been exploring
options with other parties, and continue to explore alternative transactions
with MIST, although there can be no assurance that any transaction will be
consummated, or consummated on terms favorable to us.

On
January 27, 2004, we entered into a non-binding term sheet with MIST under which
we will sell to MIST our Synapse POS gateway business. The deal contemplates that MIST
will pay us consideration consisting of cash and an agreement to provide us with
a certain amount of payment processing services for our vending initiatives. We
anticipate the execution of definitive agreements on or about February 27,
2004.

On
January 27, 2004, we also entered into a non-binding term sheet with Brascan, to
amend the terms of the Bridge Loan and increase the loan amount from $2.75
million to $3.85 million. Concurrent with the signing of definitive
agreements for the contemplated sale of the Synapse POS gateway business, it is
anticipated that the amendment to the Bridge Loan (the Amended Bridge
Loan) will be executed and Brascan will extend up to an additional $1.1
million (less accrued interest) under certain conditions. The cash portion of
the proceeds from the contemplated sale of the Synapse POS gateway business will
be used to reduce our outstanding balance on the Amended Bridge Loan. As part of
the foregoing transactions, Brascan has also agreed to forfeit one-half of its
currently outstanding 10,000,000 share Bridge Loan Warrant (the Amended
Bridge Loan Warrant). Except for the number of shares, the Amended Bridge
Loan Warrant will contain the same exercise price, expiration date and other
terms as the original Bridge Loan Warrant. The Amended Bridge Loan will continue
to be secured by a general security interest in all of our assets. The principal
amount of the Amended Bridge Loan will be due March 16, 2005.

35

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MIST
is seeking to acquire our Synapse POS gateway business to gain an additional wireless
commerce gateway and a substantial presence in the United States. It is anticipated that
approximately 19 of our 38 employees will become employees of MIST upon closing.
The Synapse POS gateway business currently generates substantially all of our
revenues.

The
additional amounts to be received upon execution of the Amended Bridge Loan are
expected to provide us with enough capital to support our operations for
approximately two to three months given our anticipated short-term negative cash
flow. During this period, we will focus on our vending initiatives and attempt
to address our capital requirements.

The
ultimate completion of the contemplated transactions with Brascan and MIST
remain subject to a number of conditions, including the execution of definitive
documentation. Accordingly, there
is no assurance that these transactions will be consummated according to the
terms and conditions contemplated by the non-binding term sheets, or at all.

We
must secure additional financing in order to continue operations.  In
doing so, we may secure capital in the form of debt and/or equity
financing. Should we be successful in completing an equity financing, it is
likely that such a transaction would require reorganization of our capital
structure, which may include the restructuring of our currently issued and
outstanding Series C Convertible Preferred Stock and Series C Warrants. It is
also anticipated that the terms and provisions of any equity financing, if
completed, will have a substantial dilutive effect on the ownership interests of
our existing stockholders.

These
conditions raise substantial doubt about our ability to continue as a going
concern and if we are unable to obtain additional capital as needed, we will be
required to cease operations altogether. The consolidated financial statements
do not include any adjustments that might result from our inability to continue
as a going concern.

On May
14, 2003, we entered into an agreement (the Factoring Agreement)
with a finance company to sell a portion of our trade receivables on a regular
monthly basis. Under the terms of the Factoring Agreement, we receive 70% of the
face amount of approved invoices. Receivables may be sold in lots of not less
than $10,000. We receive the remaining 30% of a lot sold, net of fees and
expenses, upon the finance companys receipt of payment of the entire lot.
The Factoring Agreement requires that we sell not less than $450,000 per quarter
until the expiration of the agreement in May 2005.

36

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Paymentech
is obligated, subject to certain conditions, to purchase goods or services from
us or our affiliates over a three (3) year period commencing September 1, 2002,
in an amount aggregating at a minimum $3,472,500, with Paymentech obligated to
pay us at least $1,000,000 during the first year, in installments of $83,333 per
month, at least $1,150,000 during the second year, in installments of $95,833
per month, and at least $1,322,500 during the third year, in installments of
$110,208. Paymentech has made such payments and is expected to continue to make
such payments on a timely basis. In August 2003, we received an advance of
$167,000 from Paymentech representing guaranteed payments due for September and
October 2003. We agreed to a $25,000 reduction in the scheduled amount due in
return for the early advance. We have also agreed to apply any unapplied balance
to future services. Payments from Paymentech in excess of goods and services
provided to date aggregating $282,000 are included in Customer
advances in the consolidated balance sheet at December 31, 2003.

In
April 2003, Paymentech began to accelerate its purchase of services from us.
Such purchases will be reflected in significant increases in our service and
product sales revenues in comparison with prior periods, but will have no
immediate cash benefit. Paymentech will offset the amounts due us with the
credit balances that it has built up by making the payments referred to above.
Therefore, Paymentechs purchases will have a negative impact on our cash
balance until the accumulated credit balances have been fully realized.

Nevertheless,
we anticipate our negative cash flow will continue to improve on a quarterly
basis. A large percentage of our operating expenses are fixed and we expect to
continue increasing our revenues without incurring significant increases in
operating expenses. We are also exploring ways of conserving cash and improving
our cash flow through growth in the number of active sites, revenues from
services and products for vending, and continued reduction of cash expenses.

Accrued
Restructuring Expense

During
the fourth quarter of fiscal year 2001, we recorded a restructuring charge of
$2.4 million related to the consolidation and relocation of our former Bethesda,
Maryland network operations center with its research, development and operations
center, located in Palmer Lake, Colorado.

As
part of the consolidation of our technical and network operations and the
closure of our Bethesda facility, a restructuring charge of $625,000 was
recorded in the first quarter of the year ended June 30, 2002 related to the
termination of thirty-seven employees. The charge represents the cost of
involuntary severance and related benefits for technical, operations,
engineering, and administrative employees located in the Bethesda and Palmer
Lake facilities.

During
the fourth quarter of the year ended June 30, 2002, as a result of completing a
sublease arrangement for our former Bethesda facility, we re-evaluated the
balance of the restructuring accrual and adjusted our estimates of sublease
income and related costs. As a result, we reduced the restructuring accrual
balance by $714,000.

37

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In
June 2003, we revised our restructuring accrual related to a settlement of our
Bethesda lease obligation. Accordingly, the restructuring accrual was adjusted
by approximately $131,000 to reflect the actual amount that was paid in fiscal
2004.

The
following is an analysis of the changes in the restructuring accrual:

|                                             | 
|-------------------------------------------- | 
|
|Balance at June 30, 2001                     | 
|Charges against accrual (Bethesda rent       | 
|payments, severance and benefit payments)    | 
|Additions to accrual (severance and benefits | 
|accrual)                                     | 
|Change in estimate (based on sublease)       | 
|                                             | 
|Balance at June 30, 2002                     | 
|Charges against accrual                      | 
|Change in estimate (for Bethesda lease       | 
|termination)                                 | 
|                                             | 
|Balance at June 30, 2003                     | 
|Charges against accrual                      | 
|                                             | 
|Balance at December 31, 2003                 | 
|                                             | 
|                                             | 

Period to
Period Comparisons and Seasonal Variation of Business

In
light of the rapidly evolving nature of our business, we believe that
period-to-period comparisons of our revenues and operating results, especially
those related to product sales, are not necessarily meaningful, and you should
not rely upon them as indications of future performance. Although we have
experienced growth in revenues over the prior periods, we do not believe that
our growth rates are necessarily indicative of future growth.

We
anticipate that the recurring revenue generated from monthly fees under our
Synapse service offerings will be relatively immune to seasonal variations,
although we expect that transaction related revenue will reflect seasonal
variations paralleling consumer spending patterns, generally increasing somewhat
during the holiday and travel seasons. Gross activations may slow during the
holiday season as well, due to the reluctance of merchants to change processors
during premier shopping seasons and the general industry freeze on new systems
implementations during that season.

Historical
Cash Flows

For
the six months ended December 31, 2003, cash decreased by $146,000 to $456,000.
For the six months ended December 31, 2002, cash increased by $220,000 to
$3,082,000.

38

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Net
cash used in operating activities was $2,430,000 during the six months ended
December 31, 2003. This primarily consisted of net operating losses. Net cash
used in operating activities was $3,428,000 during the six months ended December
31, 2002. This primarily consisted of net operating losses and an increase in
liabilities, partially offset by non-cash charges for depreciation and
amortization, non-cash compensation for directors and consulting, impairment of
intangible assets, write-down of inventory and an increase in accounts
receivable.

Net
cash provided by investing activities was $465,000 for the six months ended
December 31, 2003. This was primarily comprised of the decrease in restricted
cash, partially offset by the purchase of property and equipment. Net cash
provided by investing activities was $4,148,000 for the six months ended
December 31, 2002. This amount was primarily comprised of the net proceeds from
the sale of NXT.

Net
cash provided by financing activities for the six months ended December 31, 2003
of $1,819,000 was primarily comprised of the net proceeds from the bridge loan,
partially offset by payments for the real estate lease termination. Net cash
used in financing activities for the six months ended December 31, 2002 of
$500,000 was comprised of payments under capital leases.

CRITICAL
ACCOUNTING POLICIES

The
Securities and Exchange Commission (SEC) has requested that all
registrants discuss their three to five most critical accounting
policies in Managements Discussion and Analysis. The SEC indicated
that a critical accounting policy is one which is both important to
the portrayal of the companys financial condition and results of
operations and requires managements most difficult, subjective or complex
judgments, often as a result of the need to make estimates about the effect of
matters that are inherently uncertain. We believe that the following accounting
policies fit this definition:

Revenue
Recognition

We
adopted the provisions of Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements (SAB 101), which provides
guidance on the recognition, presentation, and disclosure of revenue in
financial statements filed with the Securities and Exchange Commission. In
addition, we follow the guidance contained in Emerging Issues Task Force
position No. 00-21 with respect to sales arrangements with multiple
deliverables.

We
derive revenue primarily from two sources: service revenues and product
(equipment) sales. Revenue is recognized when earned. More specifically, revenue
related to providing services and sales of our products are as follows:

Services.Service fees consist of: (a) one-time, non-refundable service activation
fees; (b) monthly minimum subscription fees for the availability of service; (c)
fees for transactions delivered on wireless or other methods through our hosts;
and (d) other fees, including administration and other fees for certain wireless
services, certain charges for telecommunications connections between us and a
party, and installation fees and expenses. Service fees are generated from our
Synapse Service. Service activation fees are recognized ratably over the
estimated average life of a customer contract. All other service revenues are
recognized as services are provided.

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Product
sales.Product sales (i.e., sales of equipment) are primarily derived from
the sale of our proprietary Synapse Enabler and Synapse Adapter products.
Revenues from product sales are recognized upon shipment and acceptance,
although product sales of our Synapse Enabler for Vending are recognized ratably
over the life of the customer contract upon activation.

Stock-based
Compensation

The
Company accounts for employee stock-based compensation cost using the intrinsic
value method of accounting prescribed by the Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees (APB No.
25). The Company has adopted the disclosure-only provisions of Statement
of Financial Accounting Standards (SFAS) No. 123, Accounting
for Stock Based-Compensation and SFAS No. 148, Accounting for
Stock-Based Compensation for employee stock arrangements. Restricted stock
or stock awards are recorded as compensation expense over the vesting period, if
any, based on the market value on the date of grant.

For options
issued to non-employees, the Company utilizes the fair value method prescribed in SFAS
No. 123.

At
December 31, 2003, the Company had four fixed stock-based compensation plans.
The exercise price of each option granted pursuant to these plans was equal to
the market price of the Companys common stock on the date of grant.
Accordingly, pursuant to APB No. 25, no compensation cost has been recognized
for such grants. Had compensation cost been determined based on the fair value
at the grant dates for such awards consistent with the method prescribed by SFAS
No. 123, the Companys net loss and loss per share for the periods
indicated would have been as follows:

|                                | Three months endedDecember 31, | Six months endedDecember 31, |   |               
|------------------------------- | ------------------------------ | ---------------------------- | - | --------------
|
|Loss from continuing            |                                | $   (1,515,000               | ) | $   (3,402,000
|operations                      |                               
|Income (loss) from              |                               
|discontinued operations         |                                | --                           |   | (16,000       
|                                |                                |                              |   |               
|Net loss, as reported           |                                | $   (1,515,000               | ) | $   (3,418,000
|Deduct: Total stock-based       |                               
|compensation expense determined |                               
|under fair value based method   |                                | (198,000                     | ) | (755,000      
|                                |                                |                              |   |               
|Pro forma net loss              |                                | $   (1,713,000               | ) | $   (4,173,000
|                                |                                |                              |   |               
|                                |                                |                              |   |               
|Per share, as reported          |                               
|From continuing operations      |                                | $  (0.09                     | ) | $  (0.23      
|From discontinued               |                               
|operations                      |                                | --                           |   | --            
|                                |                                |                              |   |               
|Net loss                        |                                | $  (0.09                     | ) | $  (0.23      
|                                |                                |                              |   |               
|                                |                                |                              |   |               
|Per share, pro forma            |                               
|From continuing operations      |                                | $  (0.10                     | ) | $  (0.28      
|From discontinued               |                               
|operations                      |                                | --                           |   | --            
|                                |                                |                              |   |               
|Net loss                        |                                | $  (0.10                     | ) | $  (0.28      
|                                |                                |                              |   |               
|                                |                                |                              |   |               

Loss
Contingencies, Impairment of an Asset or Incurrence of a Liability

We are
subject to the possibility of various loss contingencies arising in the ordinary
course of business. We consider the likelihood of loss or impairment of an asset
or the incurrence of a liability, as well as our ability to reasonably estimate
the amount of loss in determining loss contingencies. An estimated loss
contingency is accrued when it is probable that an asset has been impaired or a
liability has been incurred and the amount of loss can be reasonably estimated.
We regularly evaluate current information available to us to determine whether
such accruals should be adjusted.

RECENT
ACCOUNTING PRONOUNCEMENTS

In
November 2002, the FASB issued FASB Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees,
including Indirect Guarantees of Indebtedness of Others (FIN
45). FIN 45 elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under certain
guarantees that it has issued. FIN 45 requires a guarantor to recognize, at the
inception of a guarantee, a liability for the fair value of the obligations
undertaken in issuing the guarantee. The disclosure provisions of FIN 45 are
effective for financial statements of periods ending after December 15, 2002.
Additionally, the recognition of a guarantors obligation should be applied
on a prospective basis to guarantees issued after December 31, 2002. The
adoption of the disclosure and recognition provisions of FIN 45 did not have a
material effect on the Companys results of operations or financial
position.

In
January 2004, the FASB issued FASB Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46). In December 2003, the
FASB issued FIN No. 46 (Revised) (FIN 46R) to address certain FIN 46
implementation issues. This interpretation requires that the assets,
liabilities, and results of activities of a Variable Interest Entity
(VIE) be consolidated into the financial statements of the
enterprise that has a controlling interest in the VIE. FIN 46R also requires
additional disclosures by primary beneficiaries and other significant variable
interest holders. For entities acquired or created before February 1, 2003, this
interpretation is effective no later than the end of the first interim or
reporting period ending after March 15, 2004, except for those VIEs that
are considered to be special purpose entities, for which the effective date is
no later than the end of the first interim or annual reporting period ending
after December 15, 2003. For all entities that were acquired subsequent to
January 31, 2003, this interpretation is effective as of the first interim or
annual period ending after December 31, 2003. The adoption of the provisions of
this interpretation did not have a material effect on the Companys results
of operations or financial condition.

40

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In
April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This standard amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts,
collectively referred to as derivatives, and for hedging activities under SFAS
No. 133, Accounting for Derivative Instruments and Hedging
Relationships. SFAS No. 149 is effective for contracts entered into or
modified after June 30, 2003 and for hedging relationships after June 30, 2003.
The adoption of this statement did not have a material effect on the
Companys results of operations or financial condition.

In May
2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No.
150 clarifies the accounting for certain financial instruments with
characteristics of both liabilities and equity and requires that those
instruments be classified as liabilities in statements of financial condition.
Previously, many of those financial instruments were classified as equity. SFAS
No. 150 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 adoption the provisions of SFAS No.
150 did not have a material effect on the Companys results of operations
or financial condition.

QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We
currently have no floating rate indebtedness, hold no derivative instruments,
and do not earn foreign-sourced income. Accordingly, changes in interest rates
or currency exchange rates do not generally have a direct effect on our
financial position. Changes in interest rates may affect the amount of interest
we earn on available cash balances as well as the amount of interest we pay on
borrowings. Changes in currency exchange rates may affect the cost of services,
components or systems that we utilize or may employ in the future in or with our
products, and so may directly impact upon the cost of a given service or
product. In addition, to the extent that changes in interest rates and currency
exchange rates affect general economic conditions, and specifically the
environment for credit card and related activities, we would also be affected by
such changes.

ITEM 3.
CONTROLS AND PROCEDURES

(a)
Evaluation of Disclosure Controls and Procedures. Our principal executive
officer and principal financial officer, after evaluating the effectiveness of
our disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly
Report on Form 10-QSB, have concluded that, based on such evaluation, our
disclosure controls and procedures were adequate and effective to ensure that
material information relating to us, including our consolidated subsidiaries,
was made known to them by others within those entities, particularly during the
period in which this Quarterly Report on Form 10-QSB was being prepared.

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(b)
Changes in Internal Controls. There were no significant changes in our
internal control over financial reporting, identified in connection with the
evaluation of such internal control that occurred during our last fiscal
quarter, that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.

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PART II
 OTHER INFORMATION

ITEM 1. LEGAL
PROCEEDINGS

We are
not currently subject to any material legal proceedings. However, we may from
time to time become a party to legal proceedings arising in the ordinary course
of our business.

ITEM 2.
CHANGES IN SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS
UPON SENIOR SECURITIES

None.

ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5.
OTHER INFORMATION

None.

ITEM 6. EXHIBITS
AND REPORTS ON FORM 8-K

(a)
Exhibits

31.1    Section
302 Certifications by the Chief Executive Officer
31.2    Section 302 Certifications by the Chief Financial Officer
32.1    Section 906 Certifications by the Chief Executive Officer
32.2    Section 906 Certifications by the Chief Financial Officer

(b) Reports
on Form 8-K

On
November 4, 2003, we filed a current report on Form 8-K reporting an Item 5
event regarding notification from Brascan Financial Corporation that it no
longer intends to pursue the equity financing transaction contemplated by the
term sheet with us as previously announced on September 16, 2003.

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SIGNATURES

In accordance with Section
13 or 15 of the Exchange Act, the Registrant caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.

U.S. WIRELESS DATA, INC.

Dated:
         February 23, 2004
          
 
        By: /s/ Dean M. Leavitt
             
             
             
              
             
           
Dean M. Leavitt
             
             
             
              
             
           
Chief Executive Officer
             
             
             
              
             
           
(Principal Executive Officer)

Dated:
         February 23, 2004
          
 
        By: /s/ Adi Raviv
             
             
             
              
             
           
Adi Raviv
             
             
             
              
             
           
Executive Vice President and
             
             
             
              
             
           
Chief Financial Officer
             
             
             
              
             
           
(Principal Financial Officer)

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