---

# 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
March 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
May 14, 2003, there were outstanding 17,684,610 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                                   |     
|March 31, 2003 and June 30, 2002                                    |     
|Consolidated Statements of Operations for the three and nine months |     
|ended March 31, 2003 and 2002                                       |     
|Consolidated Statements of Cash Flows for the nine months ended     |     
|March 31, 2003 and 2002                                             |     
|Consolidated Statements of Stockholders Equity for the year        |     
|ended June 30, 2002 and the nine                                    |     
|months ended March 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

|                                                               | March 31,2003(Unaudited) | June 30,2002    
|-------------------------------------------------------------- | ------------------------ | ----------------
|ASSETS                                                         |                          |                 
|Current assets:                                                |                         
|Cash and cash equivalents                                      |                          | $     1,266,000 
|Accounts receivable, net of allowance for                      |                         
|doubtful accounts of $274,000 and $293,000                     |                         
|at March 31, 2003 and June 30, 2002, respectively              |                          | 634,000         
|Inventory, net                                                 |                          | 396,000         
|Other current assets                                           |                          | 276,000         
|Assets held for sale                                           |                          | --              
|                                                               |                          |                 
|Total current assets                                           |                          | 2,572,000       
|Property and equipment, net                                    |                          | 1,669,000       
|Restricted cash                                                |                          | 1,081,000       
|Intangible assets, net                                         |                          | 68,000          
|Other assets                                                   |                          | 26,000          
|                                                               |                          |                 
|Total assets                                                   |                          | $     5,416,000 
|                                                               |                          |                 
|                                                               |                          |                 
|LIABILITIES AND STOCKHOLDERS EQUITY                           |                         
|Current liabilities:                                           |                         
|Accounts payable                                               |                          | $        416,000
|Accrued liabilities                                            |                          | 442,000         
|Other current liabilities                                      |                          | 805,000         
|Accrued restructuring expense, current portion                 |                          | 141,000         
|Obligation under capital lease, current portion                |                          | 249,000         
|Purchase price payable, current portion                        |                          | --              
|                                                               |                          |                 
|Total current liabilities                                      |                          | 2,053,000       
|Deferred rent expense                                          |                          | 192,000         
|Accrued restructuring expense, less current portion            |                          | 588,000         
|Other liabilities                                              |                          | 151,000         
|Obligation under capital lease, less current portion           |                          | 320,000         
|                                                               |                          |                 
|Total liabilities                                              |                          | 3,304,000       
|                                                               |                          |                 
|Commitments and contingencies                                  |                         
|Stockholders equity:                                          |                         
|Preferred stock, 25,000,000 shares authorized:                 |                         
|Series C convertible, at $.01 par value, liquidation value     |                         
|$10.00 per share, aggregating $35,937,000 and $39,413,000      |                         
|at March 31, 2003 and June 30, 2002, respectively; 8,450,000   |                         
|shares authorized, 3,593,700 and 3,941,325 issued and          |                         
|outstanding at March 31, 2003 and June 30, 2002, respectively  |                          | 36,000          
|Common stock, 200,000,000 shares authorized at $.01 par value; |                         
|17,626,276 and 14,813,927 shares issued and outstanding at     |                         
|March 31, 2003 and June 30, 2002, respectively                 |                          | 176,000         
|Additional paid-in capital                                     |                          | 142,703,000     
|Unearned compensation                                          |                          | (7,000          
|Accumulated deficit                                            |                          | (140,796,000    
|                                                               |                          |                 
|Total stockholders equity                                     |                          | 2,112,000       
|                                                               |                          |                 
|Total liabilities and stockholders equity                     |                          | $     5,416,000 
|                                                               |                          |                 
|                                                               |                          |                 

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 endedMarch 31, | For the nine months endedMarch 31, |   |                
|-------------------------------------------------- | ----------------------------------- | ---------------------------------- | - | ---------------
|
|Revenues                                           |                                     |                                    |   |                
|Service revenues                                   |                                    
|Activation fees                                    |                                     | $        43,000                    |   | $        80,000
|Monthly fees                                       |                                     | 630,000                            |   | 386,000        
|Transaction fees                                   |                                     | 48,000                             |   | 35,000         
|Other fees                                         |                                     | 39,000                             |   | 6,000          
|                                                   |                                     |                                    |   |                
|Total service revenues                             |                                     | 760,000                            |   | 507,000        
|Product sales                                      |                                     | 104,000                            |   | 85,000         
|                                                   |                                     |                                    |   |                
|Total revenues                                     |                                     | 864,000                            |   | 592,000        
|                                                   |                                     |                                    |   |                
|Cost of revenues                                   |                                    
|Services                                           |                                     | 370,000                            |   | 234,000        
|Product sales                                      |                                     | 101,000                            |   | 79,000         
|Write-down of inventory                            |                                     | --                                 |   | --             
|                                                   |                                     |                                    |   |                
|Total cost of revenues                             |                                     | 471,000                            |   | 313,000        
|                                                   |                                     |                                    |   |                
|Gross profit                                       |                                     | 393,000                            |   | 279,000        
|                                                   |                                     |                                    |   |                
|Operating expenses                                 |                                    
|Selling, general and administrative                |                                    
|(Exclusive of non-cash compensation for directors) |                                     | 1,832,000                          |   | 2,330,000      
|Non-cash compensation for directors                |                                     | (94,000                            | ) | 375,000        
|                                                   |                                     |                                    |   |                
|Total selling, general and administrative          |                                     | 1,738,000                          |   | 2,705,000      
|Depreciation and amortization                      |                                     | 200,000                            |   | 718,000        
|Research and development                           |                                     | 109,000                            |   | 281,000        
|Restructuring expense                              |                                     | --                                 |   | --             
|Impairment of intangible assets                    |                                     | --                                 |   | --             
|                                                   |                                     |                                    |   |                
|Total operating expenses                           |                                     | 2,047,000                          |   | 3,704,000      
|                                                   |                                     |                                    |   |                
|Loss from operations                               |                                     | (1,654,000                         | ) | (3,425,000     
|Interest income                                    |                                     | 8,000                              |   | 27,000         
|Interest expense                                   |                                     | (13,000                            | ) | (135,000       
|Other income (expense), net                        |                                     | 99,000                             |   | (80,000        
|                                                   |                                     |                                    |   |                
|Loss from continuing operations                    |                                     | (1,560,000                         | ) | (3,613,000     
|                                                   |                                     |                                    |   |                
|Discontinued operations:                           |                                    
|Income from discontinued operations                |                                     | --                                 |   | 230,000        
|Gain on sale of discontinued operations            |                                     | --                                 |   | --             
|                                                   |                                     |                                    |   |                
|Income from discontinued operations                |                                     | --                                 |   | 230,000        
|                                                   |                                     |                                    |   |                
|Net loss                                           |                                     | $(1,560,000                        | ) | $(3,383,000    
|                                                   |                                     |                                    |   |                
|                                                   |                                     |                                    |   |                
|Basic and diluted income (loss) per common share:  |                                    
|Loss from continuing operations                    |                                     | $         (0.09                    | ) | $         (0.26
|Income from discontinued operations                |                                     | $              --                  |   | $          0.02
|                                                   |                                     |                                    |   |                
|Net loss per share                                 |                                     | $         (0.09                    | ) | $         (0.24
|                                                   |                                     |                                    |   |                
|                                                   |                                     |                                    |   |                
|Weighted average common shares outstanding,        |                                    
|basic and diluted                                  |                                     | 17,488,000                         |   | 14,070,000     
|                                                   |                                     |                                    |   |                
|                                                   |                                     |                                    |   |                

Accompanying
notes are an integral part of the financial statements

4

---

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

|                                                           | For the nine months endedMarch 31, |            
|---------------------------------------------------------- | ---------------------------------- | -----------
|
|CASH FLOWS FROM OPERATING ACTIVITIES:                      |                                    |            
|Net loss                                                   |                                    | $(6,741,000
|Adjustments to reconcile net loss to net cash used in      |                                   
|operating activities:                                      |                                   
|Depreciation and amortization                              |                                    | 738,000    
|Depreciation and amortization from discontinued operations |                                    | --         
|Gain on sale of discontinued operations                    |                                    | (133,000   
|Bad debt expense                                           |                                    | 26,000     
|Deferred rent                                              |                                    | 10,000     
|Non-cash compensation for directors                        |                                    | 469,000    
|Non-cash consulting and other                              |                                    | 293,000    
|Write-down of inventory                                    |                                    | 333,000    
|Impairment of intangible assets                            |                                    | 836,000    
|Loss on notes receivable                                   |                                    | 47,000     
|Changes in assets and liabilities:                         |                                   
|Accounts receivable                                        |                                    | 703,000    
|Inventory                                                  |                                    | 71,000     
|Other current assets                                       |                                    | 122,000    
|Other assets                                               |                                    | 9,000      
|Accounts payable                                           |                                    | (1,464,000 
|Accrued liabilities                                        |                                    | (336,000   
|Other current liabilities                                  |                                    | 506,000    
|Other liabilities                                          |                                    | 75,000     
|Accrued restructuring expense                              |                                    | (220,000   
|                                                           |                                    |            
|Net cash used in operating activities                      |                                    | (4,656,000 
|                                                           |                                    |            
|CASH FLOWS FROM INVESTING ACTIVITIES:                      |                                   
|Purchase of property and equipment                         |                                    | (55,000    
|Decrease in restricted cash                                |                                    | 86,000     
|Net payment for purchase acquisition, net of cash acquired |                                    | (477,000   
|Loan and notes receivable                                  |                                    | (97,000    
|                                                           |                                    |            
|Net cash used in investing activities                      |                                    | (543,000   
|                                                           |                                    |            
|CASH FLOWS FROM FINANCING ACTIVITIES:                      |                                   
|Proceeds from exercise of options                          |                                    | --         
|Issurance of common stock                                  |                                    | --         
|Conversion of preferred stock                              |                                    | --         
|Decrease in deposits                                       |                                    | 29,000     
|Proceeds from the sale of NXT                              |                                    | 5,000,000  
|Payments of expenses for sale of NXT                       |                                    | (926,000   
|Payments of obligations under capital lease                |                                    | (500,000   
|                                                           |                                    |            
|Net cash provided by (used in) financing activities        |                                    | 3,603,000  
|                                                           |                                    |            
|Net decrease in cash and cash equivalents                  |                                    | (1,596,000 
|Cash and cash equivalents, beginning of period             |                                    | 2,862,000  
|                                                           |                                    |            
|Cash and cash equivalents, end of period                   |                                    | $ 1,266,000
|                                                           |                                    |            
|                                                           |                                    |            

Accompanying
notes are an integral part of the financial statements

5

---

# U.S. WIRELESS
DATA, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY FOR THE YEAR
ENDED JUNE 30, 2002 AND THE NINE MONTHS ENDED MARCH 31, 2003
(Unaudited)

|                               | Series C Convertible Preferred StockShares        Amount | Common StockShares        Amount | Additional  Paid-inCapital | UnearnedCompensation | AccumulatedDeficit | Total StockholdersEquity |   |         
|------------------------------ | -------------------------------------------------------- | -------------------------------- | -------------------------- | -------------------- | ------------------ | ------------------------- | - | --------
|BALANCE AT JUNE 30, 2001       |                                                          | 5,514,475                        |                            | $ 55,000             |                    | 11,478,419                |   | $115,000
|Exercise of stock options      |                                                          | --                               |                            | --                   |                    | 214,444                   |   | 2,000   
|Non-cash compensation          |                                                          | --                               |                            | --                   |                    | 30,571                    |   | 1,000   
|Amortization of non-cash       |                                                         
|compensation                   |                                                          | --                               |                            | --                   |                    | --                        |   | --      
|Cancellation of options issued |                                                         
|to Board member                |                                                          | --                               |                            | --                   |                    | --                        |   | --      
|Issuance of options to         |                                                         
|investment banker              |                                                          | --                               |                            | --                   |                    | --                        |   | --      
|Issuance of common stock       |                                                         
|to former Cellgate             |                                                         
|shareholders                   |                                                          | --                               |                            | --                   |                    | 468,750                   |   | 5,000   
|Conversion of Series C         |                                                         
|convertible                    |                                                         
|preferred stock                |                                                          | (1,573,150                       | )                          | (16,000              | )                  | 2,621,743                 |   | 26,000  
|Net loss                       |                                                          | --                               |                            | --                   |                    | --                        |   | --      
|                               |                                                          |                                  |                            |                      |                    |                           |   |         
|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                |                                                          | --                               |                            | --                   |                    | --                        |   | --      
|Amortization of options in     |                                                         
|lieu of cash                   |                                                         
|to non employees               |                                                          | --                               |                            | --                   |                    | --                        |   | --      
|Issuance of options to         |                                                         
|investment banker              |                                                          | --                               |                            | --                   |                    | --                        |   | --      
|Issuance of options for sale   |                                                         
|of NXT                         |                                                          | --                               |                            | --                   |                    | --                        |   | --      
|Issuance of options for        |                                                         
|investor relations             |                                                         
|services                       |                                                          | --                               |                            | --                   |                    | --                        |   | --      
|Issuance of options to         |                                                         
|legal counsel                  |                                                          | --                               |                            | --                   |                    | --                        |   | --      
|Issuance of common stock to    |                                                         
|former NXT                     |                                                         
|shareholders                   |                                                          | --                               |                            | --                   |                    | 2,241,658                 |   | 22,000  
|Loss on notes receivable to    |                                                         
|fair mkt value                 |                                                          | --                               |                            | --                   |                    | (9,258                    | ) | --      
|Conversion of Series C         |                                                         
|convertible                    |                                                         
|preferred stock                |                                                          | (347,625                         | )                          | (3,000               | )                  | 579,949                   |   | 5,000   
|Net loss                       |                                                          | --                               |                            | --                   |                    | --                        |   | --      
|                               |                                                          |                                  |                            |                      |                    |                           |   |         
|BALANCE AT MARCH 31, 2003      |                                                          | 3,593,700                        |                            | $ 36,000             |                    | 17,626,276                |   | $176,000
|                               |                                                          |                                  |                            |                      |                    |                           |   |         
|                               |                                                          |                                  |                            |                      |                    |                           |   |         

Accompanying
notes are an integral part of the financial statements

6

---

# U.S.
WIRELESS DATA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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. U.S. Wireless Data, Inc. provides
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 provides these entities with turnkey wireless and other
transaction management services. The Company also provides those entities 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.

NOTE
2  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) prior to the sale of NXTs assets as described below. All
intercompany accounts and transactions have been eliminated in consolidation.

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.

NOTE
3  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 nine
months ended March 31, 2003 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. Certain amounts in
the financial statements have been reclassified from prior period presentations.
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, 2002 on Form
10-KSB/A.

7

---

The
preparation of consolidated financial statements in conformity with generally
accepted accounting principles 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.

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 No. 123,
Accounting for Stock  Based-Compensation (SFAS  No. 123) and
Statement of Financial  Accounting  Standards  No. 148,  Accounting  for
Stock-Based  Compensation (SFAS No. 148).  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.

At
March 31, 2003, the Company had four fixed stock-based compensation plans. The
exercise price of each option granted pursuant to these plans is 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 income and earnings per share for the periods
indicated would have been as follows:

|                                       | Three months endedMarch 31, | Nine months endedMarch 31, |   |              
|-------------------------------------- | --------------------------- | -------------------------- | - | -------------
|
|Net loss, as reported                  |                             | $(1,560,000                | ) | $(3,383,000  
|Deduct: Total stock-based compensation |                            
|expense determined under fair value    |                            
|based method                           |                            
|                                       |                             | (684,000                   | ) | (707,000     
|                                       |                             |                            |   |              
|Pro forma net loss                     |                             | $(2,244,000                | ) | $(4,090,000  
|                                       |                             |                            |   |              
|                                       |                             |                            |   |              
|Net loss per share                     |                            
|As reported                            |                             | $       (0.09              | ) | $       (0.24
|                                       |                             |                            |   |              
|                                       |                             |                            |   |              
|As reported                            |                             | $       (0.13              | ) | $       (0.29
|                                       |                             |                            |   |              
|                                       |                             |                            |   |              

In determining
the minimum fair value of each option,  the Company used the Black-Scholes
option-pricing  model  as prescribed by SFAS No. 123 using the following  assumptions:
dividend yield of zero,  expected volatility of  123% and 140%,  an average  expected
option life of 3.5 years and an average  risk-free  interest rate of 2.31%  and 3.47% for
the three and nine month periods ended March 31, 2003 and 2002, respectively.

8

---

NOTE
4  RECENT ACCOUNTING PRONOUNCEMENTS

In
June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets. SFAS No. 142 requires that
goodwill and other intangible assets with indefinite lives no longer be
amortized, but instead be tested for impairment at least annually. In addition,
the standard includes provisions for the reclassification of certain existing
intangibles as goodwill and reassessment of the useful lives of existing
recognized intangibles. SFAS No. 142 is effective for fiscal years beginning
after December 15, 2001, which the Company adopted on July 1, 2002. As a result
of the write-off of all goodwill during the year ended June 30, 2002, the
adoption of SFAS No. 142 in the first quarter of fiscal 2003 did not have an
impact on the Company. The remaining intangibles at June 30, 2002 shall be
subject to the impairment provisions of SFAS No. 144. The provisions of SFAS No.
142 are effective for periods after adoption and retroactive application is not
permitted. Therefore,  the
historical  results of periods prior to the fourth quarter of fiscal year 2002 in the
Companys  consolidated  statement  of  operations  do not  reflect  the  effect  of
SFAS No.  142.  Had the  Company  been  accounting  for  goodwill  under SFAS No. 142 for
the three and nine month  periods  ended March 31,  2002,  the  Companys net loss
and net loss per share would have been as follows:

|                                  | Three months endedMarch 31, | Nine months endedMarch 31, |   |                         
|--------------------------------- | --------------------------- | -------------------------- | - | ------------------------
|
|Net loss, as reported             |                             | $   (1,560,000             | ) | $   (3,383,000          
|Add back amortization of goodwill |                            
|                                  |                             | --                         |   | 102,000                 
|                                  |                             |                            |   |                         
|Pro forma adjusted net loss       |                             | $   (1,560,000             | ) | $   (3,281,000          
|                                  |                             |                            |   |                         
|                                  |                             |                            |   |                         
|Net loss per share                |                            
|As reported                       |                             | $                 (0.09)   |   | $                 (0.24)
|Add  back amortization            |                            
|of goodwill                       |                             | --                         |   | 0.01                    
|                                  |                             |                            |   |                         
|Pro forma                         |                             | $                 (0.09)   |   | $                 (0.23)
|                                  |                             |                            |   |                         
|                                  |                             |                            |   |                         

In
November 2002, the FASB approved FASB Interpretation No. 45
Guarantors Accounting and Disclosure Requirements for Guarantees,
including Indirect Guarantees of Indebtedness of Others, an Interpretation of
FASB Statement No. 5, 57 and 107 and Rescission of FASB Interpretation No.
34 (FIN 45). FIN 45 clarifies the requirements of SFAS No. 5,
Accounting for Contingencies, relating to a guarantors
accounting for, and disclosure of, the issuance of certain types of guarantees.
Specifically, FIN 45 requires a guarantor to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The provisions for initial recognition and measurement
are effective on a prospective basis for guarantees that are issued or modified
after December 31, 2002, irrespective of a guarantors fiscal year-end.
However, the disclosure provisions of FIN 45 are effective for financial
statements of interim or annual periods ending after December 15, 2002. The
adoption of FIN 45 did not have a material impact on the Companys
consolidated financial statements.

In
December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure  an amendment of FASB
Statement No. 123.  SFAS No. 148 amends SFAS No. 123,
Accounting for Stock-Based Compensation, to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation.  In addition, this
Statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. This Statement permits two additional
transition methods for entities that adopt the preferable method of accounting
for stock-based employee compensation.

9

---

Both of those
methods avoid the  ramp-up effect arising from prospective application of the fair value
based  method.  In addition, to address concerns raised by some constituents about
the lack of comparability caused by multiple transition methods, this Statement  does not
permit the use of the original Statement 123 prospective method of  transition for
changes to the fair value based method made in fiscal years  beginning after December 15,
2003. The Company will continue to account for  stock-based employee compensation under
the recognition and measurement  principle of APB Opinion No. 25 and related
interpretations. On January 1, 2003,  the Company adopted the disclosure provisions of
SFAS No. 148.

In
January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46). FIN 46 clarifies the
application of Accounting Research Bulletin No. 51, Consolidated Financial
Statements, to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. The Company is required to
adopt the provisions of FIN 46 for variable interest entities created after
January 31, 2003. The Company does not have any variable interest entities, and,
accordingly, adoption is not expected to have a material effect on the Company.

NOTE
5  INVENTORY

In the
second half of the fiscal year ended June 30, 2002, product sales of the Synapse
Adapter trailed off substantially as the Company found it challenging to get
clients to commit to purchases. The Company instituted alternative strategies to
improve sales which have so far been unsuccessful in moving any significant
volume of units. This product is based on the Cellular Digital Packet Data
(CDPD) wireless medium, which has certain coverage issues in various
markets and which the existing wireless carriers will ultimately migrate away
from as they move to next generation mediums. As of April 1, 2003, AT&T
Wireless is no longer activating new units on CDPD. They have stated that they
intend to completely shutdown their CDPD network in June 2004. As a result, in
the quarter ended December 31, 2002, the Company recorded a charge of $333,000
to completely write-down the inventory of Synapse Adapters and other CDPD based
inventory.

NOTE
6  INTANGIBLE ASSETS

All of
USWDs acquired intangible assets are subject to amortization. There were
no material acquisitions of intangible assets during the nine months ended March
31, 2003 or the year ended June 30, 2002. Amortization expense related to
intangible assets was $23,000 and $520,000 for the three months ended March 31,
2003 and 2002, respectively, and $155,000 and $1,775,000 for the nine months
ended March 31, 2003 and 2002, respectively.

10

---

In the
fourth quarter of the year ended June 30, 2002, the Company recorded an
impairment charge of $5,701,000 on goodwill and other intangible assets to
write-down the value of the acquired assets of Cellgate to the fair value of the
Synapse Adapter product. Goodwill was completely eliminated due to this
impairment charge, and the remaining $1,059,000 value of intangibles from this
acquisition as of June 30, 2002 was to have been amortized over the estimated
remaining useful life of four years.

As
indicated in Note 5, in the second half of the fiscal year ended June 30, 2002,
product sales of the Synapse Adapter trailed off substantially and the remaining
useful life of CDPD based products is limited. As a result, in the quarter ended
December 31, 2002, the Company recorded an impairment charge of $836,000 on
intangible assets to write-down the value of the acquired assets of Cellgate to
the fair value of the Synapse Adapter product. The remaining $68,000 value of
intangibles from this acquisition as of March 31, 2003 will be amortized over
the estimated remaining useful life of nine-months.

The
components of intangible assets are as follows:

Intangibles
related to the acquisition of Cellgate:

|                      | March 31, 2003 |            |  |            
|--------------------- | -------------- | ---------- |  | -----------
|
|Intellectual property |                | $2,444,000 |  | $(1,565,000
|Acquired workforce    |                | 135,000    |  | (110,000   
|Goodwill              |                | 406,000    |  | (406,000   
|                      |                |            |  |            
|Total                 |                | $2,985,000 |  | $(2,081,000
|                      |                |            |  |            
|                      |                |            |  |            
|
|
|Intellectual property |                | $6,000,000 |  | $(1,416,000
|Acquired workforce    |                | 250,000    |  | (104,000   
|Goodwill              |                | 2,436,000  |  | (406,000   
|                      |                |            |  |            
|Total                 |                | $8,686,000 |  | $(1,926,000
|                      |                |            |  |            
|                      |                |            |  |            

11

---

The
net carrying amount of $5,927,000 as of June 30, 2002 of goodwill and other
intangible assets relating to the Companys original acquisition of NXT was
reclassified to assets held for sale as a result of the sale of NXT. Since the
net proceeds from the sale of NXT did not exceed the carrying value of the
related net assets, a loss on the carrying value of such assets was recorded as
of June 30, 2002 (see Note 11).

NOTE
7  ACCRUED RESTRUCTURING EXPENSE

Provided
below is an analysis of the changes in the restructuring accrual for the period
indicated:

|                                          | 
|----------------------------------------- | 
|Balance at June 30, 2002                  | 
|Charges against accrual (Bethesda rent    | 
|payments, net of rental income; severance | 
|and benefit payments)                     | 
|                                          | 
|Balance at March 31, 2003                 | 
|Less current portion                      | 
|                                          | 
|Balance at March 31, 2003, excluding      | 
|current portion                           | 
|                                          | 
|                                          | 

The
balance of the restructuring charge accrual will be paid over the remaining
lease term of the former Bethesda office which expires July 2009.

NOTE
8  STOCKHOLDERS EQUITY

During
the nine months ended March 31, 2003, 347,625 shares of Series C preferred stock
were converted into 579,949 shares of common stock, in accordance with the
Series C preferred stock documents.

During
the nine months ended March 31, 2003, 1,928,432 stock options were granted to
employees with exercise prices equal to the fair market value of the
Companys common stock at the date of grant, with 884,886 options granted
to employees as additional compensation to offset a reduction of salaries.

On
July 16, 2002, 50,000 stock options were granted to an investment-banking firm
for services to be performed. These options were valued at $21,000 and were
amortized to expense over the six-month contract period ending January 16, 2003.
In determining the fair value of the options 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 123%, expected life
of two years and an average risk free rate of 2.1%.

On
August 30, 2002, 50,000 stock options were granted to an investment-banking firm
pursuant to their service agreement. These options were recorded as an expense
of $27,000 in relation to the sale of NXT. Also in relation to the sale of NXT,
100,000 options were granted to a vendor as consideration for their consent of
assignment and modifications of their service agreement. These options were
valued at $25,000 and charged against the expense of the NXT sale. In
determining the fair value of the options 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 123%, expected life
of two years and an average risk free rate of 2.1%.

12

---

On
October 16, 2002, 65,000 stock options were granted to our investor relations
firm for services to be performed from July 1, 2002 through June 30, 2003. These
options were valued at $29,000 and are being amortized to expense over the
period of the contract. In determining the fair value of the options 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 123%,
expected life of two years and an average risk free rate of 2.1%.

On
October 24, 2002, 164,000 stock options were granted to our counsel as a
reduction of $80,000 of outstanding legal fees for services performed. These
options were valued at the amount of the cash reduction, which approximated the
fair value using the Black-Scholes option pricing model. In determining the fair
value of the options 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 123%, expected life of two years and an average
risk free rate of 2.1%.

On
December 23, 2002, 2,241,658 shares of common stock were issued to the former
NXT shareholders pursuant to the terms of the acquisition agreement.

For
the nine months ended March 31, 2003, $563,000 was charged to compensation
expense relating to options granted to two board members on March 29, 2000,
offset by the reversal of $94,000 related to the resignation of a third director
on January 13, 2003. In addition, since the last year of vesting was forfeited
upon the resignation of the director, $375,000 of unearned compensation was
removed from stockholders equity.

NOTE
9  NET LOSS PER SHARE

Earnings
(loss) per common share (EPS) is computed using 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 fiscal years 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.

13

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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 as of the dates indicated.

|                                                    | March 31,2003 | June 30,2002
|--------------------------------------------------- | ------------- | ------------
|Common shares outstanding                           |               | 17,626,000  
|Series C Preferred Stock outstanding in             |              
|common stock equivalents                            |               | 5,990,000   
|                                                    |               |             
|                                                    |               | 23,616,000  
|                                                    |               |             
|Warrants                                            |              
|Outstanding related to the Private Placement        |              
|Investor warrants                                   |               | 2,328,000   
|Agent warrants                                      |               | 2,328,000   
|Agent warrants                                      |               | 582,000     
|Investment company warrants                         |               | 466,000     
|Investment company warrants                         |               | 116,000     
|Various outstanding                                 |               | 322,000     
|Executive                                           |               | 1,344,000   
|                                                    |               |             
|Total warrants                                      |               | 7,486,000   
|                                                    |               |             
|Options                                             |              
|Outstanding, 1992 Option Plan                       |               | 415,000     
|Outstanding, 2000 Option Plan                       |               | 2,944,000   
|Outstanding, 2002 Option Plan                       |              
|                                                    |               |             
|Outstanding, Non-Plan                               |               | 1,474,000   
|                                                    |               |             
|Total options                                       |               | 4,833,000   
|                                                    |               |             
|                                                    |               |             
|Common stock contingently issuable for acquisitions |               | --          
|                                                    |               |             
|Total                                               |               | 36,935,000  
|                                                    |               |             
|                                                    |               |             

NOTE
10  COMMITMENTS AND CONTINGENCIES

The
Company has entered into leases for facilities. On November 5, 2002, the Company
renewed its lease agreement for its facilities in Palmer Lake, CO, for a term of
3 years, expiring October 31, 2005. Future minimum lease payments and sublease
income under non-cancelable operating leases as of March 31, 2003, are as
follows:

14

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|                                | FacilityLeases | Less SubleasedFacilities | Net
|------------------------------- | -------------- | ------------------------ | ---
|For fiscal year ending June 30: |                |                          |    
|2003                            |                | $   338,000              |    
|2004                            |                | 1,370,000                |    
|2005                            |                | 1,396,000                |    
|2006                            |                | 1,415,000                |    
|2007                            |                | 1,410,000                |    
|Thereafter                      |                | 3,564,000                |    
|                                |                |                          |    
|Total minimum payments required |                | $9,493,000               |    
|                                |                |                          |    
|                                |                |                          |    

Certain
capital lease obligations were assumed by the Company in its purchase of assets
and certain liabilities of Cellgate. On October 24, 2002, the Company entered
into an amendment to the capital lease obligation relating to certain inventory
to revise the timing of remaining principal payments due under the lease.
According to the terms of the amendment, the Company paid the lessor $462,000 on
October 25, 2002, which included the application of a $52,000 deposit held by
the lessor, to buy out the first five of eleven leases. The lease schedules for
the remaining units were revised to extend the payments until April 25, 2005.
Future minimum lease payments under non-cancelable capital leases as of March
31, 2003 are as follows:

|                                          | Capital leaseobligations
|----------------------------------------- | ------------------------
|For the fiscal year ending June 30,       |                         
|2003                                      |                         
|2004                                      |                         
|2005                                      |                         
|                                          |                         
|Total minimum payments required           |                         
|Less: accrued interest                    |                         
|                                          |                         
|Total minimum principal payments required |                         
|                                          |                         
|                                          |                         

NOTE
11  SALE OF NXT AND FINAL PAYMENT FOR ORIGINAL ACQUISITION

During
May 2002, the Company developed a formal plan to sell 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
associated with NXT to Paymentech, which subsequently transferred the NXT assets
to its wholly-owned subsidiary Merchant-Link, LLC. NXT provides data services
and landline-based connectivity for credit-card transaction processing. The
assets to be sold, at their book values, have been separately classified as
Assets held for sale in the accompanying balance sheet at June 30,
2002.

15

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Paymentech
is obligated under the Agreement, subject to certain conditions in such
agreement, to purchase goods or services from the Company or its 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 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. The Company has provided minimal services and
products to Paymentech to date. Payments from Paymentech aggregating $583,000
have been classified as deferred revenue and included as other liabilities at
March 31, 2003.

The
results of operations of NXT are reported as discontinued operations for all
periods presented. Revenues and income from operations of NXT are as follows:

|                       | Three months endedMarch 31, | Nine months endedMarch 31, |  |           
|---------------------- | --------------------------- | -------------------------- |  | ----------
|
|Revenues               |                             | $     --                   |  | $1,524,000
|Income from operations |                             | --                         |  | 230,000   

(a)
Includes results through August 31, 2002.

The
Company recorded a gain on the sale of discontinued operations of $133,000 for
the nine months ended March 31, 2003 due to the reversal of an accrued vendor
obligation as a result of the sale of NXT, partially offset by additional
transaction costs.

In
accordance with the terms of the agreement relating to the Companys
acquisition of NXT, $500,000 was paid to the former shareholders of NXT on
January 15, 2003. Such amount was fully accrued on the December 31, 2002
consolidated balance sheet. In addition, on December 23, 2002, 2,241,658 shares
of common stock were issued to the former NXT shareholders pursuant to the terms
of the acquisition agreement.

NOTE 12 -
SUBSEQUENT EVENTS

In May
2003, the Company entered into an agreement to sell a portion of its trade
receivables on a regular monthly basis.

16

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## 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  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 too expensive or technologically
unfeasible or to displace  conventional  telephone lines for increased  speed,  cost
reduction 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 such as vending machines.

We connect
merchants to credit card or other transaction processors using wireless technologies. We
make it easy for the credit and  debit card industries to deploy wireless solutions
through a single source, our Synapse platform.  We aggregate wireless network  services,
offering ubiquitous 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
and taximeters) with card  acceptance.  All of our efforts are aimed at providing the
transaction processing industry and end-user merchants with the speed,  mobility, cost
savings and other strategic benefits associated with wireless technology.

17

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We have
contracts with many of the  industrys  larger  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.

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 and Synapse Adapter 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 Linkpoint, Lipman, Thales, Ingenico, 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 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, Verizon Wireless and
Alltel, and Cingulars Mobitex network.  We are also in discussions with the
leading wireless carriers and equipment manufacturers regarding next generation wireless
technology, including  CDMA and GPRS.  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.

In April 2003,
we successfully  converted  approximately  7,500 existing wireless merchant  terminals on
Cingulars  Mobitex network to  our Synapse  service on behalf of a major payment
processor.  Previously,  the terminals had been connected  directly to the processor
over the Mobitex  wireless  network.  Now, the terminals  continue to use Cingulars
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.  This conversion  brings our total active  sites to more than 28,000 at
April 30, 2003.

18

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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 which wireless
carrier service or terminal hardware are chosen for  each individual merchant site.

Synapse
Enabler for POS

The Synapse
Enabler is a  proprietary  device that we  developed  for the purpose of
converting  non-wireless  devices to a wireless  medium.  The product has  applicability
to many vertical  markets,  but a key  advantage  for the payments  industry is the
ability to  displace  slow and  expensive  conventional  phone lines by  converting
traditional  dial-up POS  terminals to  wireless.  The Synapse  Enabler  with our
proprietary  T8 Hub can  convert  as many as eight  dial-up  POS  terminals  in one
location  to a single  wireless  connection.  When compared to dialup connectivity,  the T8
affords the merchant less expensive  installation,  faster  transactions,  and  lower
operating costs, making it an ideal solution for  queue-sensitive,  multi-lane
environments such as quickservice (fast food) and  quick casual  restaurants.  When
compared to leased line  connectivity,  the Synapse  Enabler  offers  similar  high-speed
transaction  processing with dramatically reduced monthly communications costs.

Currently,  we
have certified the Synapse Enabler with one of our largest  processing  clients who has
deployed the system in a limited  number of quickservice  restaurants in California and
Florida. We are finalizing the  commercialization  of the product with our client  for
rollout to their sales channels.

Synapse
Enabler for Vending

In addition to
fixed-location, mobile, and portable wireless applications, we have  integrated our
propriety technology into devices such as vending machines to create new opportunities
for card acceptance and other data gathering services.  The Synapse Enabler has been
integrated into various  vending machines, such as the Dixie Narco and Vendo Round Front,
Glass Front and High Visibility machines.  Vending machines in selected cities have been
retrofitted with the Synapse Enabler as part of a program  for Pepsi-Cola North America (Pepsi)
to introduce credit card payments for their vended products. Transactions  are routed
through the Synapse system for authorization and settlement.  In addition to enabling
card payments on  vending machines, the Synapse Enabler communicates with the vending
machines internal technology allowing it to  send up to the minute information
about inventory and the operational status of each vending machine to Synapse.  This
telemetric data is then provided to Pepsi and its bottlers over a secure Internet
connection.  Increased  sales and margin through credit card acceptance, more efficiency
in determining and servicing daily routes, and  information designed to keep machines
operating at peak performance are all expected results of the Synapse  Vending system.

19

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In December
2002, we received "trademark authorization" from Pepsi for our
wireless credit card processing solution for vending machines. The trademark
authorization given by Pepsi authorizes our Synapse Enabler 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. Based on statistics from various
sources, Pepsi bottlers have deployed over 1.3 million soft drink vending
machines of which 650,000 are retrofittable with our technology. In addition,
Pepsi bottlers typically deploy approximately 75,000 to 100,000 new vending
machines each year. All of these new vending machines may be retrofitted with
our technology or may have it installed at the time of
manufacture.

We are in
discussions with and working with various  vendors to the vending  industry for certain
integrations  and  manufacturing.  We are  now in negotiations with Pepsi to finalize
certain operational and commercialization arrangements governing the program.

While we await
determination of the partners for full commercialization of the program and the
final agreement with Pepsi, we continue to build and deploy units pursuant to
purchase orders received from Pepsi. As such, a few hundred units are being
deployed in Las Vegas currently. Upon the completion of the deployment in Las
Vegas, which is expected to be completed in May 2003, we will have approximately
500 operational units in the field in five cities across the U.S.

Upon
completion  of the final  agreement  with  Pepsi,  we expect to receive  various  orders
of unit  deployments  from Pepsi and its  bottlers as we seek to ramp up to a steady
deployment of units.

Synapse
Enabler for Transportation

We have also
integrated our Synapse Enabler solution into taximeters from Centrodyne and
Pulsar, the two leading manufacturers of taximeters in North America. This
wireless solution, called the CardMeter Wireless Taximeter, is currently
in use by taxi companies in Dallas, Texas; Chicago, Illinois; Cincinnati, Ohio;
Park City, Utah; and Providence, Rhode Island. The CardMeter solution offers
such companies the opportunity to accept cards and get real-time authorizations
in their taxicabs, which is fast, convenient, and safer because drivers carry
less cash.

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 recently launched PowerSwipe, a new product by Creditel that
attaches to certain models of Motorola cell phones 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.
The solution will be sold through wireless dealers. Our Synapse Service provides
Creditel with a payment gateway to various credit card processors and other
services. We have signed an agreement with Creditel to be the exclusive payment
gateway for the PowerSwipe product and the exclusive reseller of this solution
to the payments industry. Device trials included payment acceptance for food and
beverages in the club seats of the recent Super Bowl and in kiosks and
merchandise tents surrounding the Pro Bowl. Full commercial launch is expected
in early June 2003.

20

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Synapse
Adapter for POS or ATMs

The Synapse
Adapter is a proprietary device utilizing  patented dial  tone-emulation
technology  licensed from AT&T Wireless Services  to provide our clients with a seamless
"plug and play"  solution for the  conversion of dial-up POS  terminals to a
high speed,  lower  cost, wirelessly-enabled device based on the CDPD wireless network.

The Synapse
Adapter also makes it easy for the operators of dial-up ATMs to utilize wireless
technology.  Typically,  dial-up ATMs are  placed in "off premise"  locations
such as convenience  stores,  supermarkets,  and shopping  malls.  To install a dial-up
ATM, a phone  line must be ordered  from the local  phone  company  and,  after  waiting
days or weeks,  when the line is  installed  the ATM can be  deployed.  With the  Synapse
Adapter,  dial-up  ATMs can be placed  immediately,  without the wait or cost of
installing  a new phone  line.  Once  installed  using the Synapse  Adapter,  the ATM can
be relocated  quickly and easily.  Additionally,  based on the monthly  cost of a phone
line, the Synapse Adapter generally offers the opportunity to reduce operating costs.

AT&T
Wireless  has  announced  that it intends to  transition  from its current  CDPD data
service to its next  generation  GPRS data  service.  Specifically,  as of April 1, 2003,
AT&T  Wireless  is no longer  activating  new units on CDPD.  They have stated that
they  intend to  completely  shutdown  their CDPD network in June 2004.  Currently,  CDPD
is supported by several  carriers,  including  AT&T  Wireless,  Verizon Wireless,
Alltel,  Cingular,  and Dobson  Communications.  Even though AT&T Wireless' decision
to withdraw its CDPD  service  will  geographically  diminish  CDPD  availability,  the
other  carriers,  although  expected  to  eventually  migrate to next  generation
service,  have not announced any plans to shut down their CDPD networks.  Our Synapse
Adapter  product is CDPD based,  and  certain  third party  products  used on our service
are also CDPD based.  We are  currently  exploring  our options with AT&T and other
carriers.  The useful life of this product and other CDPD based terminals are dependent
on the availability of CDPD service.

Other
Services

We may also
provide merchants and their processing companies 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. NXT provides data services and  landline-based  connectivity
for credit-card  transaction  processing.  In accordance  with generally accepted
accounting  principles,  we classified NXT as a discontinued  operation in this report,
and have eliminated NXT  from the discussion that follows except as indicated.

21

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RESULTS OF
OPERATIONS FOR THE THREE AND NINE MONTHS ENDED MARCH 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; (4) the number
of units of USWD products sold; and (5) EBITDA  - Earnings before interest, taxes,
depreciation and amortization.

Active Sites

Active  sites
have grown to  approximately  20,800 as of March 31,  2003,  an  increase of 8,400 or 68%
from the same date of the prior  year.

In April 2003,
we successfully  converted  approximately  7,500 wireless sites using Cingular's  Mobitex
network to our Synapse service  on the same wireless  network for a major processor.
This conversion  brings our total active sites to over 28,000 and this client now  enjoys
the value added services that our Synapse  service  provides.  This  conversion is
expected to increase  future  activations and  transactions  due to the increase in
active sites from the  conversion and since all new wireless  activations  for this
client will be  through our Synapse service.

Gross
Activations

Gross
activations for the three and nine months ended March 31, 2003, were 3,400 and 10,500,
compared to 3,400 and 8,400 for the same  periods in the prior year.  This represents a
0% and 25% increase, respectively.

Transactions

Transactions
processed for the three and nine months ended March 31, 2003, were approximately
1,671,000 and 5,207,000,  an increase of  468,000 or 39%, and  1,533,000 or 42% from the
same periods in the prior fiscal year.  This increase was primarily due to the growth in
active sites.

Product
Sales in Units

Product  sales
in units for the three and nine months  ended March 31,  2003,  were 2 and 395, a
decrease of 210 units or 99% and 1,291  units or 77% from the same  periods  of the prior
fiscal  year.  The  decrease  was  attributed  to the lack of sales for the  Synapse
Adapter.  Our Synapse Adapter generally provides for the conversion of certain
conventional  dial-up POS terminals and dial-up ATMs to  high speed,  low cost
wirelessly  enabled  devices.  Product  sales in units also reflect  sales of our Synapse
Enabler.  Our Synapse  Enabler was developed to convert POS terminals or non-wireless
devices to accept credit cards wirelessly,  including vending machines,  taximeters,  and
other integrated  devices.  Sales of the Synapse Enabler  decreased by 125 units to 2
units and increased by 103 units  to 335 units for the three and nine months  ended March
31, 2003 and 2002,  respectively,  as compared to the same periods in the prior  fiscal
year.

22

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Product sales
are expected to gradually  increase as we introduce the PowerSwipe product and move to
commercialization  of our Synapse  Enabler for Vending and Synapse Enabler for POS.

EBITDA

EBITDA is
included in a later discussion below.

REVENUE

We derive
revenue primarily from two sources: service revenues and product sales.
Service revenues are generated from our Synapse Service and 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 and
certain charges for telecommunications connections between us and a party.
Product sales are primarily derived from the sale of our proprietary Synapse
Enabler and Synapse Adapter products.

Total
Revenues

Total  revenues
were  $864,000  and $  2,546,000  for the three and nine  months  ended March 31,  2003,
as compared to $592,000  and  $1,871,000 for the respective  periods in the prior fiscal
year. This  improvement from the prior fiscal year represents a 46% increase  for the
three-month period and a 36% increase for the nine-month  period. 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  for the nine-month period this year.  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 ended   March 31, | For the nine months ended   March 31, |   |    
|---------------------- | -------------------------------------- | ------------------------------------- | - | ---
|
|Revenues               |                                        |                                       |   |    
|Activation fees        |                                        | 5                                     | % | 14 
|Monthly fees           |                                        | 73                                    | % | 65 
|Transaction fees       |                                        | 6                                     | % | 6  
|Other fees             |                                        | 4                                     | % | 1  
|                       |                                        |                                       |   |    
|Total service revenues |                                        | 88                                    | % | 86 
|Product sales          |                                        | 12                                    | % | 14 
|                       |                                        |                                       |   |    
|Total revenues         |                                        | 100                                   | % | 100
|                       |                                        |                                       |   |    
|                       |                                        |                                       |   |    

23

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Service
Revenues

Revenue
from services for the three and nine months ended March 31, 2003 increased to
$760,000 and $2,241,000 from $507,000 and $1,326,000 during the same periods in
the prior fiscal year, a $253,000 or 50% and $915,000 or 69% increase.

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 $43,000 for the three months ended March 31, 2003, a
$37,000 or 46% decrease as compared to the same period in the prior fiscal year.
Activation revenue for the nine months ended March 31, 2003 was $219,000, a
$3,000 or 1% decrease as compared to the same period in the prior fiscal year.
The amortization of revenue from activation fees for the current periods as
compared to the same periods of the prior year were 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 $630,000 for the three months ended March 31, 2003, a $244,000 or
63% increase as compared to the same period in the prior fiscal year. Monthly
fee revenue for the nine months ended March 31, 2003 was $1,739,000, a $738,000
or 74% 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.

Transaction
Fees.Revenue from transaction fees for the three months ended March 31,
2003 was $48,000, compared to $35,000 during the same period in the prior fiscal
year, a $13,000 or 37% increase. Transaction revenue for the nine months ended
March 31, 2003 was $161,000, compared to $95,000 during the same period in the
prior fiscal year, a $66,000 or 70% increase. 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 March 31, 2003 was
$39,000, compared to $6,000 during the same period in the prior fiscal year, a
$33,000 increase. Revenue from other fees for the nine months ended March 31,
2003 was $122,000, compared to $8,000 during the same period in the prior fiscal
year, a $114,000 increase. The increase is a result of certain administrative
and other charges to certain clients.

24

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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
increased for the three months ended March 31, 2003 to $104,000 from $85,000
during the same period in the prior fiscal year, a $19,000 or 22% increase.
Product sales for the quarter ended March 31, 2003 included approximately
$103,000 for the sale of certain third party products purchased on behalf of a
client and other one-time product sales (product sales in units included in key
metrics above exclude these items). For the nine months ended March 31, 2003,
product sales decreased to $305,000 from $545,000 during the same period in the
prior fiscal year, a $240,000 or 44% decrease. The decrease was attributed to
the lack of sales of our products in the recent quarter-end and the lack sales
of the Synapse Adapter, partially offset by sales of the Synapse Enabler for the
nine-month period and the $103,000 of other products for the three-month period.
See Gross Profit below for a further discussion regarding the Synapse Adapter
and products purchased on behalf of such client.

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 Adapter and Enablers, and certain carrier and
other costs. Total gross profit for the three months ended March 31, 2003 was
$393,000, compared to $279,000 for the same period in the prior fiscal year, a
$114,000 or 41% increase. Total gross profit for the nine months ended March 31,
2003 was $823,000, compared to $837,000 for the same period in the prior fiscal
year, a $14,000 or 2% decrease. This decrease in total gross profit for the nine
months ended March 31, 2003 was primarily due to a write-down of our inventory
of Synapse Adapters and other CDPD based inventory. Without the write-down of
the CDPD based inventory, gross profit for the nine months ended would have been
$1,156,000, an increase of $319,000 or 38% over the same period in the prior
fiscal year. Without the write-down, the improvement in total gross profit for
the three and nine months ended March 31, 2003 over the same periods in the
prior fiscal year was attributed to volume increases in new activations of
Synapse services and the growth of active sites for Synapse services. The
increase was partially offset by the decrease in gross profit from product
sales.

Product
sales of the Synapse Adapter trailed off substantially from the
prior year as we found it challenging to get clients to commit to purchases.
This product is based on the CDPD wireless medium, which has certain coverage
issues in various markets and which the existing wireless carriers will
ultimately migrate away from as they move to next generation mediums. As of
April 1, 2003, AT&T Wireless will no longer activate new accounts on CDPD,
and they intend to completely shutdown their CDPD network in June 2004. As a
result, in the quarter ended December 31, 2002, we recorded a charge of $333,000
to completely write-off our inventory of Synapse Adapters and other CDPD based
inventory.

25

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Gross
profit from services for the three months ended March 31, 2003 was $390,000,
compared to $273,000 for the same period in the prior fiscal year, a 43%
increase. Gross profit from services for the nine months ended March 31, 2003
was $1,145,000, compared to $708,000 for the same period in the prior fiscal
year, a 62% increase. The improvement in gross profit from services was
discussed earlier in this section.

Gross
profit from product sales for the three months ended March 31, 2003 was $3,000,
compared to $6,000 for the same period in the prior fiscal year, a $3,000
decrease. Gross profit from product sales for the nine months ended March 31,
2003 was a loss of $322,000, compared to a profit of $129,000 for the same
period in the prior fiscal year, a $451,000 decrease. A significant portion of
the decrease is due to the $333,000 write-down of the CDPD related inventory in
the quarter ending December 31, 2002. Without including the inventory
write-down, gross profit from product sales for the nine months ended March 31,
2003 would have been $11,000, compared to $129,000 for the same period in the
prior fiscal year, a 92% decrease. The decrease was attributed to the lack of
sales of our products in the recent quarter-end, and the write-down of inventory
and lack of sales of the Synapse Adapter, partially offset by sales of Synapse
Enabler products for the nine-month period. In addition, product sales for the
quarter ended March 31, 2003 included the sale of certain third party products
purchased on behalf of a client and sold at cost to such client.

GROSS
MARGIN

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

|                              | For the three months endedMarch 31, | For the nine months endedMarch 31, |     |   
|----------------------------- | ----------------------------------- | ---------------------------------- | --- | --
|
|Gross margin                  |                                     |                                    |     |   
|Services                      |                                     | 51                                 | .3% | 53
|Product sales                 |                                     | 2                                  | .9% | 7 
|Total gross margin, including |                                    
|inventory write-down          |                                     | 45                                 | .5% | 47
|Total gross margin, excluding |                                    
|inventory write-down          |                                     | 45                                 | .5% | 47

Total gross
margin (gross profit as a percentage of total  revenues) for the three months ended March
31, 2003  decreased to 45.5% from  47.1%.  This decrease was  attributed to lower margin
product  revenues as well as changes in customer  pricing plans that led to lower
service  margins,  and  partially  offset by the greater  percentage  of total  revenue
from  monthly fees due to the growth in active  sites.  Total gross  margin for the nine
months  ended March 31, 2003  decreased  to 32.3% from 44.7%.  The  decrease was caused
by the  write-down of  inventory.  Excluding  the  write-down  of inventory,  total gross
margin for the nine months ended March 31, 2003 would  have  increased  to 45.4% from
44.7% for the same period in the prior  fiscal year.  This  increase in gross margin for
the  nine-month  period was  primarily  attributed  to the greater  percentage  of total
revenue from monthly fees due to the growth in active sites and  the decrease in product
sales as well as changes in customer pricing plans that led to lower service margins.

Gross  margin
from  services  was 51.3% for the three  months  ended March 31, 2003  compared to 53.8%
for the same period in the prior  fiscal  year.  Gross margin from  services was 51.1%
for the nine months ended March 31, 2003  compared to 53.4% for the  same period in  the
prior fiscal year.  This  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.

26

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Gross margin
from product  sales was 2.9% for the three months ended March 31, 2003  compared to 7.06%
for the same period in the prior  fiscal  year.  Gross margin from  product  sales was
(105.6)% for the nine months ended March 31, 2003  compared to 23.7% for the same  period
in the prior fiscal year.  Excluding  the  inventory  write-down,  gross margin from
product  sales would have been 3.6% for the  nine months ended March 31, 2003. The
decrease is primarily  attributed to the  substantial  reduction of sales of the Synapse
Adapter  and the increased  sales of Synapse Enabler  products.  Certain  initial
deployments of Synapse Enabler  products were sold at reduced  margins.  The decrease in
gross margin from product sales is discussed in the last paragraph of the "Gross
Profit" section above.

# OPERATING
EXPENSES

Total operating
expenses for the three months ended March 31, 2003 decreased to $2,047,000 from
$3,704,000,  a decrease of $1,657,000  or 45%  compared to the same  period in the prior
fiscal  year.  Total  operating  expenses  for the nine months  ended March 31, 2003
decreased to $8,076,000  from  $12,063,000,  a decrease of $3,987,000 or 33% compared to
the same period in the prior fiscal year.  The  decrease was due to cost  reduction
efforts and  efficiency  gains,  including  reductions  in staff,  as well as the
reduction in the  amortization  expense  recorded in relation to goodwill and intangible
assets.  A portion of the decrease in expenses was offset by an  impairment  charge of
$836,000 in the quarter  ended  December  31, 2002  against  intangible  assets  relating
to our  acquisition  of  Cellgate  Technologies,  Inc.  ("Cellgate").  In
November 2002, we instituted an additional  cost reduction  plan,  which was primarily
comprised of salary and  headcount  reductions.  These cost savings are partially
reflected in the decrease in operating  expenses for  the three and nine-month periods
ended March 31, 2003.

Selling,
General, and Administrative Expenses

Selling,
general,  and  administrative  expenses  consist  primarily of salaries and  benefits for
sales,  general and  administrative  personnel,  advertising and promotion  expenses,
professional  fees,  occupancy and general office 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
$1,832,000  and $5,622,000 for the three and nine months ended March 31, 2003 compared to
$2,330,000  and  $7,283,000  for the same  periods  in the prior  fiscal  year,  a
$498,000  or 21%  decrease  and a  $1,661,000  or 23%  decrease,  respectively.  The
decrease is primarily  attributed  to the  reduction  of staff,  the  reduction  in
compensation  of staff and our  continued cost reduction efforts.

27

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The
amortization  of non-cash  compensation  of directors of $(94,000) and $469,000 for the
three and nine months ended March 31, 2003  decreased  $469,000 or 125%,  and $653,000 or
58% from the same periods in the prior fiscal year.  The decrease was  primarily  related
to the elimination of the non-cash compensation  amortization,  and the reversal of a
portion of the previous amortization,  related to  the resignation of a director on
January 13, 2003 who had received options in March 2000.

Selling,
general and administrative expenses including non-cash compensation of directors,  were
$1,738,000 for the three months ended  March 31, 2003 compared to $2,705,000  for the
same period in the prior fiscal year, a $967,000 or 36% decrease.  Selling,  general and
administrative  expenses  including  non-cash  compensation,  were  $6,091,000  for the
nine months  ended  March 31, 2003  compared to  $8,405,000 for the same period in the
prior fiscal year, a $2,314,000 or 28% 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  decreased to  $109,000
for the three months  ended March 31, 2003  compared to $281,000 for the same period in
the prior fiscal year, a $172,000,  or  61% decrease.  Research and  development
expenses  decreased to $411,000 for the nine months ended March 31, 2003 compared to
$895,000  for the same period in the prior fiscal year, a $484,000,  or 54%  decrease.
The decrease is primarily  attributed to the reduction of  staff, the reduction in
compensation of staff and our continued cost reduction efforts.

Depreciation
and Amortization

Amortization
of  intangibles  includes  amortization  of goodwill,  acquired  workforce  and
intellectual  property,  including  core  technology,  customer  relationships  and
contract  rights.  Amortization of goodwill and intangibles were $23,000 and $155,000 for
the  three and nine months ended March 31, 2003,  compared  with  $520,000 and
$1,560,000  for the same periods in the prior fiscal year, a  $497,000 or 96% decrease
and a $1,405,000  or 90% decrease.  For the three and nine months ended March 31, 2002, a
significant  part of  the  amortization  included  amortization  relating to goodwill
and  intangibles  generated by the  previous  acquisitions  of NXT and  Cellgate.  As a
result of the sale of NXT and an  impairment  charge of  $5,701,000  at June 30, 2002 and
$836,000 at December 31, 2002  of goodwill and  intangibles  related to our  acquisition
of Cellgate,  remaining  intangible  assets of $68,000 at March 31, 2003 are  being
amortized over a nine-month remaining life.

Depreciation
and  amortization of fixed assets,  leasehold  improvements  and capitalized  software
were $177,000 and $583,000 for the  three and nine months  ended March 31,  2003,
compared  with  $198,000  and  $578,000 for the same periods in the prior fiscal year, a
$21,000 or 11%  decrease and a $5,000 or 1% increase.  We  anticipate a decrease in
depreciation  and  amortization  of fixed  assets,  leasehold improvements, and
capitalized software as we expect minimal outlays for capital expenditures over the next
year.

28

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Restructuring
Charge

During the
fourth  quarter of the fiscal year ended June 30, 2001,  we recorded a  restructuring
charge of  $2,400,000  related to the  consolidation  and  relocation  of our former
Bethesda,  Maryland  network  operations  center with our research and  development  and
operations center,  located in Palmer Lake, Colorado.  In addition,  we recorded pretax
charges totaling $625,000 or $0.05 per share in  the first quarter of the fiscal year
ended June 30, 2002,  related to severance  payments to employees and benefits.  During
the fourth  quarter of the fiscal year ended June 30, 2002,  we  reevaluated  the balance
of the  restructuring  accrual as the  Bethesda  facility  sublease was completed.  It
was determined that in connection with vacating the Bethesda office, we underestimated
potential  sublease  income and overestimated related costs.  Accordingly, we reduced the
restructuring accrual by $714,000.  Provided below is an analysis of the changes in the
restructuring accrual during the period indicated:

|                                     | 
|------------------------------------ | 
|Balance at June 30, 2002             | 
|Charges against accrual (Bethesda    | 
|rent payments, net of rental income; | 
|severance and benefit payments)      | 
|                                     | 
|Balance at March 31, 2003            | 
|Less current portion                 | 
|                                     | 
|Balance at March 31, 2003,           | 
|less current portion                 | 
|                                     | 
|                                     | 

The
balance of the restructuring charge accrual will be paid over the remaining
lease term of our former Bethesda office which expires in July 2009.

Impairment
of Intangible Assets

As
discussed earlier in the Gross Profit discussion above, product
sales of the Synapse Adapter are minimal and our expectation of future sales is
the same. In the fourth quarter of the year ended June 30, 2002, we recorded an
impairment charge of $5.7 million on goodwill and other intangibles to
write-down our value of these acquired assets to the fair value of the net
amount we expected to realize over the remaining expected life of this product.
As discussed earlier, the remaining useful life of CDPD based products is
limited. Accordingly, we recorded an additional impairment charge of $836,000
for the quarter ended December 31, 2002. The remaining value of intangibles of
$68,000 as of March 31, 2003 will be amortized over their estimated remaining
life of nine months.

OTHER

Interest
income for the three months ended March 31, 2003 was $8,000, compared to $27,000
for the same period in the prior fiscal year. Interest income for the nine
months ended March 31, 2003 was $38,000, compared to $247,000 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 and the decline in interest rates over the period.

29

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Interest
expense for the three months ended March 31, 2003 was $13,000, compared to
$135,000 for the same period in the prior fiscal year. Interest expense for the
nine months ended March 31, 2003 was $93,000, compared to $306,000 for the same
period in the prior fiscal year. The decrease in interest expense was primarily
related to 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 March 31, 2003 was net income
of $99,000, compared to a net expense of $80,000 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 March 31,
2003 compared to $0 for the same period in the prior fiscal year, a $33,000
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 $92,000 for the three months
ended March 31, 2003 and $0 for the same period in the prior fiscal year; and
(c) tax expense for the three months ended March 31, 2003 of $30,000 compared to
$80,000 for the same period in the prior fiscal year, a $50,000 decrease for
certain state and local taxes. Other income (expense), net for the nine months
ended March 31, 2003 was net income of $71,000, compared to a net loss of
$46,000 for the same period in the prior fiscal year.

Other income
(expense),  net consists primarily of: (a) rental income for sublet facilities of $78,000
for the nine months ended March 31, 2003 compared to $64,000 for the same period  in the
prior fiscal year, a $14,000 increase due to a sublet termination which  occurred
simultaneously with the expiration of the lease for the facility,  partially offset by
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 $203,000 for the nine months  ended March 31, 2003 and $0 for the same
period in the prior fiscal year; (c)  expense of $46,000 for the nine months ended March
31, 2003 and $0 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  nine months ended March 31, 2003 of $168,000 compared to $119,000 for
the same  period in the prior fiscal year, a $49,000 increase due to the amortization of
an accrual for corporation franchise taxes for Delaware and an increase in  accruals for
certain state and local taxes.

LOSS
FROM CONTINUING OPERATIONS

Loss
from continuing operations of $1,560,000 for the three months ended March 31,
2003 decreased $2,053,000 or 57% from the same period in the prior fiscal year.
Loss from continuing operations of $7,237,000 for the nine months ended March
31, 2003 decreased $4,094,000 or 36% from the same period in the prior fiscal
year. The decrease in loss was primarily attributed to the realization of the
cost reduction efforts and efficiency gains, the reduction in the amortization
expense recorded in relation to goodwill and intangible assets, as well as
overall increased service revenues, partially offset by one-time charges for the
write-down of inventory and the impairment of intangible assets.

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. No operations existed for the three
months ended March 31, 2003. For the three months ended March 31, 2002,
operations resulted in income of $230,000. The increase in net results for the
nine months ended March 31, 2002 to income of $363,000 from $58,000 was due
primarily to growth in the number of transactions processed, reductions in
telecommunications costs from third parties, the successful implementation of
our integration and consolidation plan of the acquisition of NXT in November
2000 and other cost reduction efforts.

30

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For
the nine months ended March 31, 2003, gain on sale of discontinued operations of
$133,000 represents the reversal of an accrued vendor obligation that was waived
as a result of the sale of NXT, partially offset by additional transaction costs
associated with the sale.

NET
LOSS

For
the three months ended March 31, 2003, net loss totaled $1.56 million or $0.09
per share, as compared to a net loss of $3.38 million or $0.24 per share, for
the same period in the prior fiscal year. For the nine months ended March 31,
2003, net loss totaled $6.74 million or $0.42 per share, as compared to a net
loss of $11.27 million or $0.88 per share, for the same period in the prior
fiscal year.

EBITDA

EBITDA
is presnted 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 GAAP.

The EBITDA loss
for the three months ended March 31, 2003 was $1.33 million or $0.08 per share
as compared to the same period in the prior fiscal year of $2.48 million or
$0.18 per share. The EBITDA loss for the nine months ended March 31, 2003 was
$5.78 million or $0.36 per share as compared to the same period in the prior
fiscal year of $8.96 million or $0.70 per share. This improvement in EBITDA loss
of $1.15 million or approximately 47%, and $3.18 million or approximately 36%,
for the comparative three and nine month periods in the prior fiscal year,
respectively, is primarily attributed to the increase in revenues and a
reduction of cost of revenues and operating expenses as discussed in prior
sections.

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

31

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|                                   | For the three monthsended March 31, | For the nine monthsended March 31, |   |            
|---------------------------------- | ----------------------------------- | ---------------------------------- | - | -----------
|
|Net loss                           |                                     | $(1,560,000                        | ) | $(3,383,000
|Subtract interest income           |                                     | (8,000                             | ) | (27,000    
|Add interest expense               |                                     | 13,000                             |   | 135,000    
|Add taxes included in other income |                                    
|(expense), net                     |                                     | 30,000                             |   | 80,000     
|Depreciation and amortization      |                                     | 200,000                            |   | 718,000    
|                                   |                                     |                                    |   |            
|EBITDA loss                        |                                     | $(1,325,000                        | ) | $(2,477,000
|                                   |                                     |                                    |   |            
|                                   |                                     |                                    |   |            
|EBITDA loss per share              |                                     | $   (0.08)                         |   | $   (0.18) 
|                                   |                                     |                                    |   |            
|                                   |                                     |                                    |   |            
|Net loss per share                 |                                     | $   (0.09)                         |   | $   (0.24) 
|                                   |                                     |                                    |   |            
|                                   |                                     |                                    |   |            

FINANCIAL
CONDITION, CAPITAL RESOURCES AND LIQUIDITY

Since
our inception we have incurred significant losses and negative cash flow
(assuming the positive cash flow from capital transactions are excluded). As of
March 31, 2003, we had an accumulated deficit of approximately $141 million. At
March 31, 2003 our principal source of liquidity was approximately $1.27 million
in cash and cash equivalents. At April 30, 2003, cash and cash equivalents
aggregated approximately $1.07 million.

We
need additional capital in the immediate future. Based on our current estimates
of revenue levels, operating costs and other cash inflows and outlays, we will
not have cash balances adequate for us to continue operations without a capital
infusion within the next two months from mid May 2003. Our concerns about
capital may lead us to take additional steps to cut costs and, depending on
whether we are successful in our efforts to raise additional capital, may
require us to eliminate or curtail certain of our projects and take additional
steps to conserve cash that may adversely affect our operations. If we are
unable to obtain additional capital as needed, we will be required to cease
operations altogether.

In
connection with our efforts to raise capital, we have hired investment bankers.
We are exploring a number of alternatives for raising additional capital,
including debt and equity financings, and strategic investments. In May 2003, we
entered into an agreement to sell a portion of our trade receivables on a
regular monthly basis. If we raise additional funds on an equity basis from
other than a strategic partner, substantial dilution to existing shareholders
would likely occur in light of the full ratchet antidilution
provisions of our Series C preferred stock and the related warrants. In fact,
under certain scenarios, there may be virtually no value remaining to the common
stock shareholders. Some of the alternatives that we are pursuing, though, may
be less dilutive or non-dilutive to existing shareholders. However, we cannot be
certain whether additional capital will be available when needed, if at all, or
on acceptable terms.

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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.

Paymentech
has only recently begun to accelerate its purchase of services from us. Such
purchases will be reflected in significant increases to our service and product
sales revenues in comparison with prior periods but will have no immediate cash
benefit. To the contrary, if Paymentechs purchases of services or products
continue in the future, Paymentech will offset the amounts due us with the
payments and credit balances that it has built up by making the payments
referred to in the previous paragraph. Therefore, Paymentechs purchases of
services or products from us will have a negative impact on our cash balance
until the point at which it has exhausted the benefits of its prior period
payments, even though revenues will increase.

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 focused on conserving cash and improving our
cash flow through growth in the number of active sites and various product
sales, including revenues from services and products for vending, and a
continued reduction in cash expenses.

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.

33

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Historical
Cash Flows

For
the nine months ended March 31, 2003, cash decreased by $1,596,000 to
$1,266,000. For the nine months ended March 31, 2002, cash decreased by
$12,030,000 to $6,175,000.

Net
cash used in operating activities was $4,656,000 during the nine months ended
March 31, 2003. This primarily consisted of net operating losses, decreases in
accounts payable and accrued liabilities, and charges against the restructuring
accrual, partially offset by non-cash charges for depreciation and amortization,
non-cash compensation for directors and consulting, the losses related to the
inventory write-down and impairment of intangible assets, and a decrease in
accounts receivable. Net cash used in operating activities was $8,981,000 during
the nine months ended March 31, 2002. This primarily consisted of net operating
losses and an increase in inventory and liabilities, partially offset by
non-cash charges for depreciation and amortization, and non-cash compensation
for directors and consulting.

Net
cash used by investing activities was $543,000 for the nine months ended March
31, 2003. This was primarily comprised of the final payment related to the
acquisition of NXT. Net cash used in investing activities was $2,985,000 for the
nine months ended March 31, 2002. This amount primarily consists of (i) the net
cash paid for the acquisitions of Cellgate Technologies LLC and NXT, and (ii)
capital expenditures.

Net
cash provided by financing activities for the nine months ended March 31, 2003
of $3,603,000 was primarily comprised of the net proceeds from the sale of NXT,
partially offset by payments under capital leases. Net cash used in financing
activities for the nine months ended March 31, 2002 of $64,000 was primarily
comprised of payments under capital leases offset by proceeds from the exercise
of options.

CRITICAL
ACCOUNTING POLICIES

The
Securities and Exchange Commission (SEC) has requested that all
registrants list their three to five most critical accounting
policies in the Managements Discussion and Analysis section. 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
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 three accounting
policies fit this definition:

Intangibles
and Recovery of Long-Lived Assets

Cost
in excess of the fair value of tangible and identifiable intangible net assets
acquired is amortized on a straight-line basis over four years. Identifiable
intangible net assets consist of completed technology, assembled workforce,
trademarks, and acquired customers. With the adoption of Statement of Financial
Accounting Standards (SFAS) No. 144, we evaluate whether there has
been an impairment in any of our long-lived assets on an annual basis or if
certain circumstances indicate that a possible impairment may exist. An
impairment in value exists when the carrying value of a long-lived asset exceeds
its undiscounted cash flow. If it is determined that an impairment in value has
occurred, the carrying value is written down to its fair value.

34

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Prior
to July 1, 2001, in accordance with SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of, our policy was to review our long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount may not be
recoverable. An impairment in value was considered to have occurred when the sum
of the expected future undiscounted cash flows is less than the carrying amount
of the asset. The measurement of the impairment loss to be recognized is based
upon the difference between the future cash flows and the carrying amount of the
assets.

In
June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 142 requires that goodwill and other intangible assets
with indefinite lives no longer be amortized, but instead tested for impairment
at least annually. In addition, the standard includes provisions for the
reclassification of certain existing intangibles as goodwill and reassessment of
the useful lives of existing recognized intangibles. SFAS No. 142 was effective
for fiscal years beginning after December 15, 2001, which we adopted on July 1,
2002. As a result of the write-off of all goodwill during the year ended June
30, 2002, the adoption of SFAS No. 142 did not have an impact on the Company.
The remaining intangibles at June 30, 2002 shall be subject to the impairment
provisions of SFAS No. 144. The provisions of SFAS No. 142 are effective for
periods after adoption and retroactive application is not permitted. Therefore,  the
historical  results of periods prior to the fourth quarter of fiscal year 2002 in the
Companys  consolidated  statement  of  operations  do not  reflect  the  effect  of
SFAS No.  142.  Had the  Company  been  accounting  for  goodwill  under SFAS No. 142 for
the three and nine month  periods  ended March 31,  2002,  the  Companys net loss
and net loss per share would have been as follows:

|                            | Three months endedMarch 31, | Nine months endedMarch 31, |   |                         
|--------------------------- | --------------------------- | -------------------------- | - | ------------------------
|
|Net loss, as reported       |                             | $   (1,560,000             | ) | $   (3,383,000          
|Add back amortization       |                            
|of goodwill                 |                             | --                         |   | 102,000                 
|                            |                             |                            |   |                         
|Pro forma adjusted net loss |                             | $   (1,560,000             | ) | $   (3,281,000          
|                            |                             |                            |   |                         
|                            |                             |                            |   |                         
|                            |                             |                            |   |                         
|Net loss per share          |                            
|As reported                 |                             | $                 (0.09)   |   | $                 (0.24)
|Add  back amortization      |                            
|of goodwill                 |                             | --                         |   | 0.01                    
|                            |                             |                            |   |                         
|Pro forma                   |                             | $                 (0.09)   |   | $                 (0.23)
|                            |                             |                            |   |                         
|                            |                             |                            |   |                         
|                            |                             |                            |   |                         

SFAS
No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121, and the
accounting and reporting provisions of APB Opinion No. 30, Reporting the
Results of Operations  Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, for the disposal of a segment of a business. This Statement
also amends ARB No. 51, Consolidated Financial Statements, to
eliminate the exception to consolidation for a subsidiary for which control is
likely to be temporary. The provisions of this Statement are required to be
applied starting with fiscal years beginning after December 15, 2001. We adopted
SFAS No. 144 in the first quarter of the fiscal year ending June 30, 2002. The
initial adoption of SFAS No. 144 did not have an impact on our financial
condition or results of operations.

Inventory
Valuation

Inventory
is stated at the lower of cost or market, cost being determined by the first-in,
first-out method. In the fourth quarter of the year ended June 30, 2002, we took
a charge of $3.48 million to cost of revenues to write-down our inventory of
Synapse Adapters to the cost value of the number of units we expect to realize
over the remaining expected life of this product. As of April 1, 2003, AT&T
Wireless will no longer activate new units on CDPD, and they intend to
completely shutdown their CDPD network in June 2004. As a result, in the quarter
ended December 31, 2002, we recorded a charge of $333,000 to completely
write-off the remaining inventory of Synapse Adapters and other CDPD based
inventory.

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Revenue
Recognition

We
derive revenue primarily from two sources: service revenues and product sales.
Service revenues are generated from our Synapse Service and 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 and
certain charges for telecommunications connections between us and a party.
Product sales are primarily derived from the sale of our proprietary Synapse
Enabler and Synapse Adapter products.

Revenue
is recognized when earned. More specifically, revenue related to providing
services and sales of our products are as follows:

Services.
Service revenues are recognized as services are provided. We adopted 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 SEC. Activation fee revenue is
recognized ratably over the estimated average life of a customer contract.

Product
sales.Revenues from the sale of products (equipment) are recognized upon
shipment. Revenues from equipment under rental agreements and similar
arrangements are accounted for by the operating lease method and are recognized
over the rental term.

ACCOUNTING
PRONOUNCEMENTS TO BE ADOPTED IN FISCAL 2004

In
June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations which requires the recognition of a liability for an asset
retirement obligation in the period in which it is incurred. When the liability
is initially recorded, the carrying amount of the related long-lived asset is
correspondingly increased. Over time, the liability is accreted to its present
value and the related capitalized charge is depreciated over the useful life of
the asset. SFAS No. 143 is effective for fiscal years beginning after June 15,
2002. We have determined that SFAS No. 143 will not have a material effect on
our financial statements.

In April 2002,
the FASB issued SFAS No. 145,  Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB  Statement No. 13, and Technical Corrections. This Statement
eliminates the  automatic classification of gain or loss on extinguishment of debt as an
extraordinary item of income and requires that such gain or loss be evaluated  for
extraordinary classification under the criteria of APB Opinion No. 30. This  Statement
also requires sale-leaseback accounting for certain lease  modifications that have
economic effects that are similar to sale-leaseback  transactions, and makes various
other technical corrections to existing  pronouncements. This Statement will be effective
for us for the fiscal year  ending June 30, 2004. We have not determined the impact, if
any, that this  statement will have on our financial statements.

36

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In
November 2002, the FASB approved FASB Interpretation No. 45
Guarantors Accounting and Disclosure Requirements for Guarantees,
including Indirect Guarantees of Indebtedness of Others, an Interpretation of
FASB Statement No. 5, 57 and 107 and Rescission of FASB Interpretation No.
34 (FIN 45). FIN 45 clarifies the requirements of SFAS No. 5,
Accounting for Contingencies, relating to a guarantors
accounting for, and disclosure of, the issuance of certain types of guarantees.
Specifically, FIN 45 requires a guarantor to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The provisions for initial recognition and measurement
are effective on a prospective basis for guarantees that are issued or modified
after December 31, 2002, irrespective of a guarantors fiscal year-end.
However, the disclosure provisions of FIN 45 are effective for financial
statements of interim or annual periods ending after December 15, 2002. The
adoption of FIN 45 is not expected to have a material impact on the
Companys results of operations or financial position.

In
December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure  an amendment of FASB
Statement No. 123.  SFAS No. 148 amends SFAS No. 123,
Accounting for Stock-Based Compensation, to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation.  In addition, this
Statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. This Statement permits two additional
transition methods for entities that adopt the preferable method of accounting
for stock-based employee compensation.  Both of those methods avoid the
ramp-up effect arising from prospective application of the fair value based
method.  In addition, to address concerns raised by some constituents about
the lack of comparability caused by multiple transition methods, this Statement
does not permit the use of the original Statement 123 prospective method of
transition for changes to the fair value based method made in fiscal years
beginning after December 15, 2003. The Company will continue to account for
stock-based employee compensation under the recognition and measurement
principle of APB Opinion No. 25 and related interpretations. On January 1, 2003,
the Company adopted the disclosure provisions of SFAS No. 148.

In January
2003,  the FASB issued FASB Interpretation No. 46, Consolidation of Variable
Interest Entities (FIN 46). FIN 46 clarifies the application  of
Accounting Research Bulletin No. 51, Consolidated Financial  Statements, to
certain entities in which equity investors do not have the  characteristics of a
controlling financial interest or do not have sufficient  equity at risk for the entity
to finance its activities without additional  subordinated financial support from other
parties. The Company is required to  adopt the provisions of FIN 46 for variable interest
entities created after  January 31, 2003. The Company does not have any variable interest
entities, and,  accordingly, adoption is not expected to have a material effect on the
Company.

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. However, 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 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.

37

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ITEM
3. CONTROLS AND PROCEDURES

(a)
Evaluation of Disclosure Controls and Procedures. The Companys
principal executive officer and principal financial officer, after evaluating
the effectiveness of the Companys disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) on May 8, 2003, have
concluded that, based on such evaluation, the Companys disclosure controls
and procedures were adequate and effective to ensure that material information
relating to the Company, including its 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.

(b)
Changes in Internal Controls. There were no significant changes in the
Companys internal controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation, nor were there
any significant deficiencies or material weaknesses in the Companys
internal controls. Accordingly, no corrective actions were required or
undertaken.

38

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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

The
following risk factors are intended to supplement and amend the Companys
current risk factors contained in its Annual Report on Form 10-KSB/A for the
fiscal year ended June 30, 2002.

We
need additional capital.

Since
our inception we have incurred significant losses and negative cash flow
(assuming the positive cash flow from capital transactions are excluded). As of
March 31, 2003, we had an accumulated deficit of approximately $141 million. At
March 31, 2003 our principal source of liquidity was approximately $1.27 million
in cash and cash equivalents. At April 30, 2003, cash and cash equivalents
aggregated approximately $1.07 million.

We
need additional capital in the immediate future. Based on our current estimates
of revenue levels, operating costs and other cash inflows and outlays, we will
not have cash balances adequate for us to continue operations without a capital
infusion within the next two months from mid May 2003. Our concerns about
capital may lead us to take additional steps to cut costs and, depending on
whether we are successful in our efforts to raise additional capital, may
require us to eliminate or curtail certain of our projects and take additional
steps to conserve cash that may adversely affect our operations. If we are
unable to obtain additional capital as needed, we will be required to cease
operations altogether.

In
connection with our efforts to raise capital, we have hired investment bankers.
We are exploring a number of alternatives for raising additional capital,
including debt and equity financings, and strategic investments. In May 2003, we
entered into an agreement to sell a portion of our trade receivables on a
regular monthly basis. If we raise additional funds on an equity basis from
other than a strategic partner, substantial dilution to existing shareholders
would likely occur in light of the full ratchet antidilution
provisions of our Series C preferred stock and the related warrants. In fact,
under certain scenarios, there may be virtually no value remaining to the common
stock shareholders. Some of the alternatives that we are pursuing, though, may
be less dilutive or non-dilutive to existing shareholders. However, we cannot be
certain whether additional capital will be available when needed, if at all, or
on acceptable terms.

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.

Paymentech
has only recently begun to accelerate its purchase of services from us. Such
purchases will be reflected in significant increases to our service and product
sales revenues in comparison with prior periods but will have no immediate cash
benefit. To the contrary, if Paymentechs purchases of services or products
continue in the future, Paymentech will offset the amounts due us with the
payments and credit balances that it has built up by making the payments
referred to in the previous paragraph. Therefore, Paymentechs purchases of
services or products from us will have a negative impact on our cash balance
until the point at which it has exhausted the benefits of its prior period
payments, even though revenues will increase.

39

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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 focused on conserving cash and improving our
cash flow through growth in the number of active sites and various product
sales, including revenues from services and products for vending, and a
continued reduction in cash expenses.

Phase
out of Cellular Digital Packet Data (CDPD) data services by
telecommunications carriers.

AT&T
Wireless has announced that it intends to transition from its current CDPD data
service to its next generation GPRS data service. Specifically, AT&T
Wireless stated that, as of March 31, 2003, they will no longer activate any new
accounts on CDPD, and that they intend to completely shutdown their CDPD network
in June 2004. Currently, CDPD is supported by many carriers, including AT&T
Wireless, Verizon, Alltel, Cingular, and Dobson Communications. Even though
AT&T Wireless decision to withdraw its CDPD service will
geographically diminish CDPD availability, the other carriers, although expected
to eventually migrate to next generation service, have not announced any plans
to shut down their CDPD networks. Our Synapse Adapter product is currently CDPD
based, and certain third party products used on our service are also CDPD based.
We are currently exploring our options with AT&T and others. Unless a viable
alternative or migration path is provided to our current users of CDPD based
services that may be adversely affected by any termination of carrier service,
our results of operations could be adversely affected.

Third
parties may sue us for infringement of their intellectual property rights. We
may incur costs of defense and royalties or lose the right to use technology
important to providing our products or services.

The
telecommunications, hardware and software industries are characterized by the
existence of a large number of patents and frequent litigation based on
allegations of patent infringement or other violations of intellectual property
rights. In addition, since in most countries patent applications are kept
confidential until they publish (generally 18 months after filing) or they issue
as a patent, there are pending patent applications in existence the substance of
which are not presently known. As the advancement of technology and number of
participants in our market increases, the possibility of an intellectual
property claim against us could increase. Any intellectual property claims, with
or without merit, could be time-consuming and expensive to litigate or settle,
could require us to enter into costly royalty arrangements, could divert
management attention from administering our business and could preclude us from
conducting our business. In this regard, in August 2002 we received a letter
suggesting the CardMeter wireless taximeter technology may infringe on a third
partys existing patent. Similarly, we are aware that earlier this year a
patent was issued to a third party relating to a cashless payment system with
remote auditing capabilities for use in a vending machine. Although we do not
believe we are infringing either of these patents, there can be no assurance
that the owners of these patents or any other third party patents will not
pursue a patent infringement claim against us.

ITEM
6. EXHIBITS AND REPORTS ON FORM 8-K

(a)
Exhibits

99.1
Section 302 Certifications by the Chief Executive Officer.

99.2
Section 302 Certifications by the Chief Financial Officer.

99.3
Section 906 Certifications by the Chief Executive Officer and the Chief
Financial Officer.

(b) Reports
on Form 8-K

On
February 26, 2003, we filed a current report on Form 8-K reporting an Item 9
Regulation FD disclosure regarding a certification pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.

On
February 26, 2003, we filed a current report on Form 8-K reporting Item 5 events
regarding (i) a change in classification of inventory write-down, and (ii) the
anticipated future filing of Forms S-8 and SB-2 for the registration of
securities.

On
February 14, 2003, we filed a current report on Form 8-K reporting an Item 9
Regulation FD disclosure regarding a certification pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.

40

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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
            May 15, 2003
          
       
        By: /s/ Dean M. Leavitt
             
             
             
              
             
           
Dean M. Leavitt
             
             
             
              
             
           
Chief Executive Officer
             
             
             
              
             
           
(Principal Executive Officer)

Dated
            May 15, 2003
          
       
        By: /s/ Adi Raviv
             
             
             
              
             
           
Adi Raviv
             
             
             
              
             
           
Executive Vice President and
             
             
             
              
             
           
Chief Financial Officer
             
             
             
              
             
           
(Principal Financial Officer)

41

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