UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB



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

For the quarterly period ended September 30, 2003

[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the Transition Period From to

Commission file number 0-25786



|DATAWAVE SYSTEMS INC.                                                          
|-------------------------------------------------------------------------------
|(Exact name of Registrant as specified in its charter)                         
|YUKON, CANADA                                                                  
|(Jurisdiction of incorporation or organization)                                
|101 WEST 5TH AVENUE, VANCOUVER, BRITISH COLUMBIA V5Y 4A5                       
|(Address of principal executive offices)                                       
|604.874.1302                                                                   
|(Registrant's telephone number, including area code)                           
|                                                                               
|Securities registered or to be registered pursuant to Section 12(b) of the Act:
|Title of each Class                                                            
|None                                                                           
|                                                                               
|Securities registered or to be registered pursuant to Section 12(g) of the Act:
|Common Shares                                                                  
|(Title of Class)                                                               
|                                                                               

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

Yes ___X____ No _______

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

Yes _______ No ___X____



Common shares outstanding at October 31, 2003 43,889,334

ii

DATAWAVE SYSTEMS INC.

FORM 10-QSB

|PART 1 FINANCIAL INFORMATION | 1     
|---------------------------- | ------
|                             | Item 1
|                             | Item 2
|                             | Item 3
|PART II OTHER INFORMATION    | 36    
|                             | Item 6

iii

NOTE REGARDING FORWARD LOOKING STATEMENTS

This quarterly report on Form 10-QSB, including exhibits thereto, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are typically identified by the words "anticipates", "believes", "expects", "intends", "forecasts", "plans", "future", "strategy", or words of similar meaning. Various factors could cause actual results to differ materially from those expressed in the forward-looking statements. The Company assumes no obligations to update these forward-looking statements to reflect actual results, changes in assumptions, or changes in other factors, except as required by law.

1

Item 1 Financial Statements.



2



3



4



5

1.	DESCRIPTION OF BUSINESS

DataWave Systems Inc. (the "Company" or "DataWave") designs, develops, produces, owns and manages a proprietary, intelligent, automated direct merchandising network (the "DataWave System"). DataWave uses the DataWave System to distribute prepaid calling cards. The DataWave System is comprised of DataWave Telecard Merchandisers ("DTMs"), which are free-standing "smart" machines capable of dispensing multiple prepaid product offerings, and over-the-counter "swipe" units ("OTCs") for point-of-sale prepaid retailing all of which are connected to DataWave's proprietary server software and databases through a wireless and/or land line wide area network. In addition DataWave sells prepaid calling cards and point of sale activated prepaid cellular PINs on a wholesale basis to certain retail operators and other customers.



2.	SIGNIFICANT ACCOUNTING POLICIES

(a)	Basis of presentation

These unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and pursuant to the rules and regulations of the United States Securities and Exchange Commission for the presentation of interim financial information. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with United States generally accepted accounting principles have been condensed, or omitted, pursuant to such rules and regulations. These financial statements do not include all disclosures required for annual financial statements and should be read in conjunction with the Company's audited consolidated financial statements and notes thereto included as part of the Company's 2003 Annual Report on Form 10-KSB. All amounts herein are expressed in United States dollars unless otherwise noted.

In the opinion of management, all adjustments (including reclassifications and normal recurring adjustments) necessary to present fairly the financial position for the six months then ended at September 30, 2003, results of operations and cash flows and for all periods presented, have been made. Interim results are not necessarily indicative of results for a full year.



(b)	Principles of consolidation

The consolidated financial statements include the accounts of DataWave and its wholly-owned subsidiaries. Intercompany transactions and balances have been eliminated.

6

2.	SIGNIFICANT ACCOUNTING POLICIES (Continued)



(c)	Use of estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Estimates are used for, but not limited to, accounting for doubtful accounts, assessing the recoverability of machinery and equipment, intangibles and goodwill, amortization, accruals for cost of time in excess of amounts billed by service providers, income and capital taxes and contingencies. Actual results could differ from those estimates.



(d)	Foreign currency translation

DataWave's functional currency is the U.S. dollar since it is the currency of the primary economic environment in which the company operates. The accounts of the integrated wholly-owned subsidiary amounts denominated in foreign currencies are translated into United States dollars using the current method of foreign currency translation. Under this method, assets and liabilities are translated at the rate of exchange in effect at the balance sheet date. Transactions denominated in foreign currencies are translated at average rates for the period. Gains and losses from translation are included in operations the period in which they occur.

Where a subsidiary's functional currency is other than the U.S. dollar, amounts are translated into U.S. dollars at the rate of exchange in effect at the balance sheet date. Revenue and expenses are translated at the average rate for the year. Translation gains or losses are deferred and included as a separate component of shareholders' equity.



(e)	Revenue and cost recognition

The Company's revenues are primarily generated from the resale of prepaid long distance and cellular telephone time, principally from the sale of prepaid calling cards and point of sale activated PINs. Sales of prepaid calling cards and point of sale activated PINs under third party brands, where DataWave is not the primary obligor of the related phone service, does not incur significant inventory risk, has no significant continuing obligation with respect to services being rendered subsequent to sale, the price to the consumer is fixed and determinable and collection is reasonably assured, are recognized at the date of sale to the consumer on a net basis. The resulting net agency revenue earned is calculated as the difference between the gross proceeds received and the cost of the related phone time.

7

2.	SIGNIFICANT ACCOUNTING POLICIES (Continued)



(e)	Revenue and cost recognition (continued)

Sales of Company or custom branded cards where DataWave incurs inventory risk but does not provide the related telephone time are recognized on the gross basis on the date of sale to the consumer when title to the card transfers, collectability of proceeds is reasonably assured, the full obligation to the phone service provider is fixed and determinable, and DataWave has no significant continuing obligations. Revenues from certain prepaid phone cards where our obligation to the phone service provider is not fixed or determinable at the date of delivery is deferred and recognized on a gross basis when services have been rendered to the buyer, phone service is delivered and its cost determined, as the card is used or expires.

(f)	Cash and cash equivalents

Cash and cash equivalents include cash deposited in DataWave's vending equipment, cash on hand and highly liquid money market instruments with original terms to maturity of less than 90 days.

(g)	Restricted cash

Restricted cash consists of cash pledge with banks as collateral for letters of credit issued.

(h)	Inventories

Inventories include prepaid pre-activated calling cards and related cards and promotional supplies, which are valued at the lower of average cost and market. Component parts and supplies used in the assembly of machines and related work-in-progress are included in machinery and equipment.

(i)	Direct cost of revenues

Direct cost of revenues consists primarily of long distance telephone time, commissions to agents and site landlords, and standard phone cards. Direct costs are also associated with the DTM machines including direct production salaries, parts and accessories and costs to service the machines.

(j)	Product development costs

Product development costs are charged as an expense in the period in which they are incurred.

8

2.	SIGNIFICANT ACCOUNTING POLICIES (Continued)

(k)	Advertising costs and sales incentives

Advertising costs are expensed as incurred.

The majority of the Company's advertising expense relates to its consumer long distance business. Most of the advertisements are in print media, with expenses recorded as they are incurred.

Effective April 1, 2002, the Company adopted the provisions of the Financial Accounting and Standards Board's Emerging Issues Task Force Issue 01-9, Accounting for Consideration Given by a Vendor to a Customer ("EITF 01-9"). Under EITF 01-9, the Company's sales and other incentives are recognized as a reduction of revenue, unless an identifiable benefit is received in exchange. Previously, the Company included sales and other incentives as a component of cost of sales. For the period ending September 30, 2003, sales and other incentives included as a reduction of revenue totalled $91,438 (2002 - $75,162, reclassified from Cost of Sales).

Certain advertising and promotional incentives in which the Company exercises joint-control over the expenditure, receives an incremental benefit and can ascertain the fair value of advertising and promotion incurred are included in Cost of Sales.

(l)	Machinery and equipment

Machinery and equipment are recorded at cost less accumulated depreciation. Depreciation is calculated over the estimated useful lives of machinery and equipment as follows:



|Computer equipment and software | 30% declining balance
|------------------------------- | ---------------------
|Office equipment                | 20% declining balance
|Other machinery and equipment   | 30% declining balance
|Vending, DTM and OTC equipment  | 3 years straight-line
|Leasehold improvements          | 4 years straight-line

Parts, supplies and components are depreciated when they are put in use.

9

2.	SIGNIFICANT ACCOUNTING POLICIES (Continued)

(m)	Impairment of long-lived assets

The Company reviews its long-lived assets, other than goodwill, for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. To determine recoverability, the Company compares the carrying value of the assets to the estimated future undiscounted cash flows. Measurement of an impairment loss for long-lived assets held for use is based on the fair value of the asset. Long-lived assets classified as held for sale are reported at the lower of carrying value and fair value less estimated selling costs. For assets to be disposed of other than by sale, an impairment loss is recognized when the carrying value is not recoverable and exceeds the fair value of the asset. For goodwill, an impairment loss will be recorded to the extent that the carrying amount of the goodwill exceeds its fair value. For the six months ending September 30, 2003 and for each of the two years ended March 31, 2003 and 2002, no such impairment losses were identified.

(n)	Goodwill and other intangibles assets

In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard No. 141 ("SFAS 141"), Business Combinations, and Statement of Financial Accounting Standard No. 142 ("SFAS 142"), Goodwill and Other Intangible Assets.

SFAS 141 requires that business combinations be accounted for under the purchase method of accounting and addresses the initial recognition and measurement of assets acquired, including goodwill and intangibles, and liabilities assumed in a business combination. The Company adopted SFAS 141 on a prospective basis effective July 1, 2002 with the effect as described in Note 3 (e).

SFAS 142 requires that goodwill and intangible assets with indefinite lives no longer be amortized. Instead, these amounts will be subject to a fair-value based annual impairment assessment. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives.

DataWave has performed an impairment test of its goodwill and determined that no impairment of the recorded goodwill existed. Therefore, no impairment loss was recorded during the year ended March 31, 2003. The customer list is amortized over 6 years, management's best estimate of its useful life, following the pattern in which the expected benefits will be consumed or otherwise used up.

10

2.	SIGNIFICANT ACCOUNTING POLICIES (Continued)

(o)	Financial instruments

(i)	Fair value

DataWave estimates that the carrying values of its cash and cash equivalents, accounts receivable and other, deposits, restricted cash, and accounts payable and accrued liabilities approximate fair value at September 30, 2003 and 2002.

(ii)	Credit risk

Accounts receivable includes amounts due from contractors who collect cash from and service the Company's DTM and other vending machines. Certain of these contractors are not bonded resulting in credit risk to the Company. The Company is also exposed to certain concentrations of credit risk (Note 6 (c)). The Company actively monitors the granting of credit and continuously reviews accounts receivable to ensure credit risk is minimized.

(iii)	Foreign exchange risk

DataWave is exposed to foreign exchange risks due its sales denominated in Canadian dollars (Note 6 (b)).

(p)	Income taxes

DataWave uses the deferred income tax asset and liability method of accounting for income taxes, and deferred income assets and liabilities are recorded based on temporary differences between the carrying amounts of balance sheet items and their corresponding tax bases. In addition, the future benefit of income tax assets, including unused tax losses are recognized, subject to a valuation allowance, to the extent that it is more likely than not that such losses ultimately be utilized. The standards also require that the deferred income tax assets and liabilities be measured using enacted tax rates and laws that are expected to apply when the tax assets or liabilities are to be either settled or realized.

(q)	Income (loss) per share

Basic income per share is calculated by dividing the net income by the weighted average number of common shares outstanding during the period. Diluted income per share is calculated by dividing the net income by the sum of the weighted average number of common shares outstanding and all additional common shares that would have been outstanding if potentially dilutive common shares had been issued during the period. The treasury stock method is used to calculate the dilutive effect of options and warrants.

11

2.	SIGNIFICANT ACCOUNTING POLICIES (Continued)

(r)	Stock-based compensation

Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure an Amendment of FASB Statement No. 123, amends the disclosure requirements of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS 123"), to require more prominent disclosures in both annual and interim financial statements regarding the method of accounting for stock-based employee compensation and the effect of the method used on reported results.

The Company accounts for stock-based compensation in accordance with the intrinsic value method prescribed by APB Opinion No. 25 ("APB 25"), Accounting for Stock Issued to Employees. Under APB 25, compensation is measured as the amount by which the market price of the underlying stock exceeds the exercise price of the opinion on the date of grant; this compensation is amortized over the vesting period.

Pro forma information regarding net income (loss) and net income (loss) per share is required by SFAS 123 for awards granted or modified after December 31, 1994 as if the Company had accounted for its stock-based awards to employees under the fair value method of SFAS 123. The fair value of the Company's stock-based awards to employees was estimated using a Black-Scholes option pricing model. The Black-Scholes model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, the Black-Scholes model requires the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock-based awards to employees have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable measure of the fair value of its stock-based awards to employees. The fair value of the Company's stock-based awards to employees was estimated assuming no expected dividends and using the following weighted-average assumptions:



The weighted-average estimated fair values of employee stock options granted during fiscal 2003 and 2002 were $0.21 and $0.26 per share, respectively.

12

2.	SIGNIFICANT ACCOUNTING POLICIES (Continued)

(r)	Stock-based compensation (continued)

If the computed fair values of 2003 and 2002 awards had been amortized to expense over the vesting period of the awards as prescribed by SFAS 123, net income and net income per share would have been:



13

2.	SIGNIFICANT ACCOUNTING POLICIES (Continued)

(r)	Stock-based compensation (continued)



(s)	Accounting for derivative instruments and hedging activities

In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, which required that all derivatives be recorded on the balance sheet at fair value. The Company does not engage in hedging activities or invest in derivative instruments; therefore, for the period ended September 30, 2003, the use of financial instruments had no significant financial impact.

(t)	Comparative figures

Certain of the prior year's comparative figures have been reclassified to conform with the current year's presentation.

14

2.	SIGNIFICANT ACCOUNTING POLICIES (Continued)

(u)	Recently issued accounting pronouncements

In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"), Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 requires that upon issuance of a guarantee, a guarantor must recognize a liability for the fair value of an obligation assumed under a guarantee. FIN 45 also requires additional disclosures by a guarantor in its interim and annual financial statements about the obligations associated with guarantees issued. The recognition provisions of FIN 45 will be effective for any guarantees that are issued or modified after December 31, 2002. The Company has adopted the disclosure requirements and is currently evaluating the effects of the recognition provisions of FIN 45; however, it does not expect that the adoption of such provisions will have a material impact on the Company's results of operations or financial position.

In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"), Consolidation of Variable Interest Entities - an interpretation of ARB No. 51. FIN 46 requires that if any entity has a controlling financial interest in a variable interest entity, the assets, liabilities and results of activities of the variable interest entity should be included in the consolidated financial statements of the entity. FIN 46 provisions are effective for all arrangements entered into after January 31, 2003. For those arrangements entered into prior to January 31, 2003, FIN 46 provisions are required to be adopted at the beginning of the first interim or annual period beginning after June 15, 2003. The adoption of this statement will not impact the Company's financial statements for 2003.

In April 2003, the FASB issued Statement of Financial Accounting Standard No. 149 ("SFAS 149"), Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS 133. SFAS 149 is generally effective for derivative instruments, including derivative instruments embedded in certain contracts, entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The Company does not expect the adoption of SFAS 149 to have a material impact on its operating results or financial condition.

15

2.	SIGNIFICANT ACCOUNTING POLICIES (Continued)



(u)	Recently issued accounting pronouncements (continued)

In May 2003, the FASB issued Statement of Financial Accounting Standard No. 150 ("SFAS 150"), Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS 150 clarifies the accounting for certain financial instruments with characteristics of both liabilities and equity and requires that those instruments be classified as liabilities on the balance sheet. Previously, many of those financial instruments were classified as equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company does not expect the adoption of SFAS 150 to have a significant impact on its operating results or financial position.

On April 22, 2003, the FASB announced its decision to require all companies to expense the fair value of employee stock options. Companies will be required to measure the cost according to the fair value of the options. Although the new guidelines have not yet been released, it is expected that they will be finalized soon and be effective in 2004. When final rules are announced, the Company will assess the impact to its financial statements.



3.	BALANCE SHEET DETAILS

(a)	Accounts receivable and other





(b)	Inventories



16

3.	BALANCE SHEET DETAILS (Continued)



(c)	Restricted cash

Restricted cash consists of two cash deposits pledged with banks for letters of credit issued in the amount of $30,000 and $24,000. The deposits mature December 12, 2004 and February 28, 2005, respectively, and bear interest at 4% per annum.



(d)	Machinery and equipment





17

3.	BALANCE SHEET DETAILS (Continued)



(e)	Goodwill and other intangible assets

Intangible assets comprise goodwill and customer lists acquired in the purchase of AT&T's Canadian prepaid card operations. Although DataWave may intend to add customer names and other information to the list in the future, the expected benefits of the acquired customer list apply only to the customers on that list at the date of acquisition. Details of the cost and net book value of goodwill and other intangible assets are as follows:







(f)	Accounts payable and accrued liabilities





18

4.	COMMON SHARES



(a)	Authorized

100,000,000 common shares without par value



(c)	Share purchase options

Under the terms of the Stock Option Plan (the "Plan"), the Board of Directors may grant stock options to employees, officers, directors and independent consultants of DataWave and its subsidiaries for their contributions to DataWave. This includes options granted prior to the implementation of the Plan which were deemed to be re-granted under the Plan. Options granted under the Plan are not transferable by an optionee, and each option is exercisable only by such optionee. The expiry date will be fixed by the Board of Directors but will be not later than the tenth anniversary of the award date and the exercise price of each option will be not less than 100% of the fair market value on the date of grant, and will be determined by reference to the market price for the shares of DataWave for the ten trading days immediately preceding the day on which the TSX Venture Exchange receives the required notice that the Board granted the option. In no cases will an optionee be granted an option where the number of shares that may be purchased pursuant to the option exceed, when added to the number of shares available for purchase pursuant to options previously granted to the optionee which remain exercisable, 5% of DataWave's issued and outstanding share capital as of the award date of the option being granted. On plan initiation, approximately 5,370,000 common shares were reserved for issuance under the Plan and as at September 30, 2003 approximately 756,000 were available for issuance.

The changes in stock options were as follows:



19

4.	COMMON SHARES (Continued)

As at September 30, 2003, the following options to acquire common stock were outstanding:



5.	NET AGENCY SALES

DataWave's revenues are primarily generated from the resale of prepaid long distance and cellular telephone time, principally from the sale of prepaid calling cards and point of sale activated PINs. Sales of prepaid calling cards and point of sale activated PINs under third party brands where DataWave is not the primary obligor of the related phone service does not incur significant inventory risk and has no significant continuing obligation with respect to operation of the card subsequent to sale are recognized at the date of sale on a net basis. The resulting net agency revenue earned is calculated as the difference between the gross proceeds received and the cost of the related phone time paid to suppliers.





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6.	SEGMENTED GEOGRAPHIC INFORMATION

(a)	Segmented information

DataWave manufactures and operates prepaid calling card merchandising machines and re-sells long distance telephone time through prepaid and other calling cards distributed through its machines, at retail locations and on a wholesale basis to third parties. DataWave considers its business to consist of one reportable operating segment, therefore these consolidated financial statements have not been segmented.



(b)	Geographic information

DataWave has long-lived assets and has earned revenue from sales to customers in the following geographic locations:







Long lived assets consist of machinery and equipment and goodwill.



(c)	Concentration of sales and economic dependence

During the period ended September 30, 2003, two customers comprise 20% of revenue (2002 - two customers comprise 47% of revenue) and 56% of accounts receivable (2002 - 30%).

21

7.	RELATED PARTY TRANSACTIONS

(a)	Supplier guarantees

An officer made a $400,000 secured interest-bearing loan to a supplier in September 2002. A portion of the loan remains outstanding at September 30, 2003.

8.	DIFFERENCES BETWEEN CANADIAN AND THE UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

These consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (US GAAP) which, in these consolidated financial statements, differ in certain material respects with those in Canada (Canadian GAAP).

Financial Statements, as restated and presented in accordance with US GAAP and as previously reported in Canadian GAAP, are as follows:

22

8.	DIFFERENCES BETWEEN CANADIAN AND THE UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued)



23

8.	DIFFERENCES BETWEEN CANADIAN AND THE UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued)



24

8.	DIFFERENCES BETWEEN CANADIAN AND THE UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued)



25

8.	DIFFERENCES BETWEEN CANADIAN AND THE UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued)

The following is a reconciliation:

Consolidated Balance Sheets



Consolidated Statements of Operations





26

8.	DIFFERENCES BETWEEN CANADIAN AND THE UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued)

Consolidated Statements of Cash Flows

There are no material differences between Canadian and U.S. GAAP which affect the statements of cash flows for the current period.

(a)	Foreign currency translation

Under U.S. GAAP foreign subsidiaries which operate in an economic environment where the principal currency is other than the U.S. dollar are translated into U.S. dollars using the current rate method. Translation gains and losses that result in changes to shareholders' equity are recorded as other comprehensive income and reported as part of shareholders' equity.

Under Canadian GAAP the Company translates its Canadian subsidiaries into U.S. dollars using the temporal method on the basis that these subsidiaries are integrated with the U.S. operations. Gains or losses on translation for items were included in income for previous accounting periods or are not realized are recorded as a deferred credit or charge.

(b)	Future income taxes

Under US GAAP tax rates applied in the calculation of future income taxes are those rates that are passed into law. Under Canadian GAAP substantially enacted rates are used. The Company has determined that there is no material effect on the consolidated financial statements.

(c)	Goodwill and other intangible assets

There are no material differences between Canadian and US GAAP which affect the recording of goodwill and other intangible assets except as provided for foreign currency translation note and as recorded in the reconciliation between Canadian and U.S. GAAP.

27



8.	DIFFERENCES BETWEEN CANADIAN AND THE UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued)

(d)	Stock-based compensation

Under U.S. GAAP the Company accounts for stock-based compensation, as outlined in Note 2 (r), in accordance with the intrinsic value method where compensation is measured as the amount by which the market price of the underlying stock exceeds the exercise price of the opinion on the date of grant; this compensation is amortized over the vesting period.

Under Canadian GAAP the Company accounts for stock-based compensation in accordance with CICA Handbook Section 3870, Stock-Based Compensation and Other Stock-Based Payments. This section establishes standards for the recognition, measurement and disclosure of stock-based compensation and other stock-based awards made in exchange for goods and services. The standard requires that all stock-based awards made to non-employees be measured and recognized using a fair value based method. The standard encourages the use of a fair value based method for all awards granted to employees, but only requires the use of a fair value based method for direct awards of stock, stock appreciation rights, and awards that call for settlement in cash or other assets. Awards that a company has the ability to settle in stock are recorded as equity, whereas awards that the entity is require to or has a practice of settling in cash are recorded as liabilities.

There are no material differences between Canadian and U.S. GAAP which affect the disclosure of stock based compensation in note 2 (r).

28

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

The following discussion and analysis of our results of operations and financial position should be read in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this Report. Our consolidated financial statements are prepared in accordance with U.S. GAAP. All references to dollar amounts in this section are in U.S. dollars unless expressly stated otherwise.

Significant Accounting Policies

Our accounting policies are set out in Note 2 of the accompanying consolidated financial statements of DataWave Systems Inc. The preparation of financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Estimates are used for, but not limited to, accounting for doubtful accounts, assessing the recoverability of machinery and equipment, intangibles and goodwill, amortization, accruals for cost of time in excess of amounts billed by service providers, income and capital taxes and contingencies. Actual results could differ from those estimates.

Revenue and cost recognition

Our revenues are primarily generated from the resale of prepaid long distance and cellular telephone time, principally from the sale of prepaid calling cards and point of sale activated prepaid cellular PINs. Sales of prepaid calling cards and point of sale activated prepaid cellular PINs under third party brands, where we are not the primary obligor of the related phone service, do not incur significant inventory risk, have no significant continuing obligation with respect to services being rendered subsequent to sale, the price to the consumer is fixed and determinable and collection is reasonably assured, are recognized at the date of sale to the consumer on a net basis. The resulting net agency revenue earned is calculated as the difference between the gross proceeds received and the cost of the related phone time. Sales of Company or custom branded cards where we incur inventory risk but do not provide the related telephone time are recognized on the gross basis on the date of sale to the consumer when title to the card transfers, collectability of proceeds is reasonably assured, the full obligation to the phone service provider is fixed and determinable, and we have no significant continuing obligations. Revenues from certain prepaid phone cards where our obligation to the phone service provider is not fixed or determinable at the date of delivery is deferred and recognized on a gross basis when services have been rendered to the buyer, phone service is delivered and its cost determined, as the card is used or expires.

Effective April 1, 2002, we adopted the provisions of the Financial Accounting and Standards Board's Emerging Issues Task Force Issue 01-9, Accounting for Consideration Given by a Vendor to a Customer ("EITF 01-9"). Under EITF 01-9, our sales and other incentives are recognized as a reduction of revenue, unless an identifiable benefit is received in exchange. Previously, we included sales and other incentives as a component of cost of sales.

Product development costs

Product development costs are charged as an expense in the period in which they are incurred.

Impairment of long-lived assets

We review our long-lived assets, other than goodwill, for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. To determine recoverability, we compare the carrying value of the assets to the estimated future undiscounted cash flows. Measurement of an impairment loss for long-lived assets held for use is based on the fair value of the asset. Long-lived assets classified as held for sale are reported at the lower of carrying value and fair value less estimated selling costs. For assets to be disposed of other than by sale, an impairment loss is recognized when the carrying value is not recoverable and exceeds the fair value of the asset. For

29

goodwill, an impairment loss will be recorded to the extent that the carrying amount of the goodwill exceeds its fair value. For the six months ended September 30, 2003 and for each of the two years ended March 31, 2003 and 2002, no such impairment losses were identified.

Goodwill and other intangible assets

In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard No. 141 ("SFAS 141"), Business Combinations, and Statement of Financial Accounting Standard No. 142 ("SFAS 142"), Goodwill and Other Intangible Assets.

SFAS 141 requires that business combinations be accounted for under the purchase method of accounting and addresses the initial recognition and measurement of assets acquired, including goodwill and intangibles, and liabilities assumed in a business combination. We adopted SFAS 141 on a prospective basis effective July 1, 2002 with the effect as described in Note 3 (e).

SFAS 142 requires that goodwill and intangible assets with indefinite lives no longer be amortized. Instead, these amounts will be subject to a fair-value based annual impairment assessment.

Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives.

We have performed an impairment test of our goodwill and determined that no impairment of the recorded goodwill exists. Therefore, no impairment loss was recorded during the year ended March 31, 2003, nor for the six months ended September 30, 2003. The customer list is amortized over 6 years, our best estimate of its useful life, following the pattern in which the expected benefits will be consumed or otherwise used up.

Foreign currency translation

Our functional currency is the U.S. dollar since it is the currency of the primary economic environment in which the company operates. The accounts of the integrated wholly-owned subsidiary amounts denominated in foreign currencies are translated into United States dollars using the current method of foreign currency translation. Under this method, assets and liabilities are translated at the rate of exchange in effect at the balance sheet date. Transactions denominated in foreign currencies are translated at average rates for the period. Gains and losses from translation are included in operations in the period which they occur.

Where a subsidiary's functional currency is other than the U.S. dollar, amounts are translated into U.S. dollars at the rate of exchange in effect at the balance sheet date. Revenue and expenses are translated at the average rate for the year. Translation gains or losses are deferred and included as a separate component of shareholders' equity.

Future Income taxes

We follow the liability method of accounting for income taxes. Under this method, future income tax liabilities and future income tax assets are recorded based on temporary differences between the carrying amount of balance sheet items and their corresponding tax basis. In addition, the future benefits of income tax assets including unused tax losses are recognized, subject to a valuation allowance, to the extent that it is more likely than not that such losses will be ultimately utilized. Future income tax assets and liabilities are measured using enacted tax rates and laws that are expected to apply when the tax liabilities or assets are to be either settled or realized.

Results of Operations

Net Income was $161,125 for the quarter ended September 30, 2003 compared with $127,875 for the quarter ended September 30, 2002. For the six months ended September 30, 2003, net income was $277,979 compared with $230,124 for the same period last year.

The following table sets forth, for the periods indicated, certain components of the selected financial data of the Company as a percentage of total revenue:

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Three Months Ended September 30, 2003 compared to the Three Months Ended September 30, 2002

Revenues: Revenues were $4,693,396 for the quarter ended September 30, 2003 compared with $4,919,059 for the quarter ended September 30, 2002. Revenues in the quarter for the core business of prepaid long distance decreased in both Canada and the U.S. compared with same period last year.

Net revenues for the quarter in the United States from the retail sale of prepaid calling cards through our network of intelligent vending machines were $1,833,891 for the three months ended September 30, compared with $2,030,880 in the same period last year, a decrease of 10%. The decrease in revenues is a reflection of the economic slowdown in the U.S and more customers are using cellular phones for long distance needs. Free-standing machine revenue and recharge revenues both decreased slightly.

Net revenues in Canada decreased by 5% to $2,816,906 for the quarter ended September 30, 2003 compared to $2,951,905 for the quarter ended September 30, 2002. The decrease in revenue is attributable to the loss of some prepaid long distance business with a major customer. New revenues from net agency sales of wireless products and transaction fees were $518,479 for the three months.

Cost of Revenues: Cost of revenues was $2,853,554 or 61% of revenues, for the quarter ended September 30, 2003, compared to $3,448,252 or 70% of revenues, during the quarter ended September 30, 2002. Our cost of revenues consists primarily of payments to carriers who provide long distance telephone time,

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commissions to landlords and site agents for DTM and OTC placements and includes various service related and supply costs to maintain the DataWave System and POSA systems.

The overall cost of revenue was 57% in Canada, with cost of time being 54%. Cost of time decreased in the quarter but this was offset by an increase in other direct expenses.

The overall cost of revenue was 66% in the U.S. The U.S. business has a significant commission component of cost of revenues. Commissions and site rentals costs increased in the U.S. to 40% for the quarter from 36% of revenue for the prior year. This is a result of redeploying free-standing machines into higher volume locations and changes in the overall product mix.

General and Administrative: General and administrative expenses were $769,735 or 16% of revenues during the quarter ended September 30, 2003, compared to $606,788 or 12% of revenues during the same period last year. The increase is a result of increased accounting and legal costs required for regulatory compliance, and timing of certain payments.

Selling & Marketing: Selling and marketing expenses were $412,872 or 9% of revenues during the quarter ended September 30, 2003, as compared to $365,298 or 7% of revenues during the quarter ended September 30, 2002. The increase results from the hiring of additional sales staff for the Canadian marketplace.

Product Development: Product development expenses were $370,878 (8% of revenues) during the quarter ended September 30, 2003, compared to $299,078 (6% of revenues) during the quarter ended September 30, 2002. Increases in operational support for the POS roll-out in Canada and continued development for new products result in higher costs for the period.

Depreciation and Amortization: Depreciation and amortization expense increased to $198,899 or 4% of revenues during the quarter ended September 30, 2003, from $61,754 or 1% of revenues for the quarter ended September 30, 2002. The increase is the result of our investment in POS terminals and the supporting network infrastructure that started in November 2002 will be written of on a straight line basis over three years.

Amortization of intangible assets was $21,022 for the fiscal quarter ended September 30, 2003. Intangible assets comprise goodwill and customer lists acquired in the purchase of AT&T's Canadian prepaid card operations.

Other Income: Other Income for the quarter ending September 30, 2003 of $66,199 is primarily cash discounts received from suppliers for early payment. This was previously included in cost of revenues.

Six Months Ended September 30, 2003 compared to the Six Months Ended September 30, 2002

Revenues: Revenues were $8,817,254 for the six months ended September 30, 2003 compared with $9,356,209 for the same period last year. Revenues in the six months for the core business of prepaid long distance decreased in both Canada and the U.S. compared with same period last year.

Net revenues in the United States from the retail sale of prepaid calling cards through our network of intelligent vending machines were $3,343,607 for the six months ended September 30, 2003 compared with $4,025,857 in the same period last year, a decrease of 17%. The decrease in revenues is a reflection of the economic slowdown in the U.S and more customers are using cellular phones for long distance needs. Free-standing machine revenue and recharge revenues both decreased slightly. Point of sale and over-the-counter unit revenues declined as did promotional and miscellaneous revenues.

Our United States revenues are substantially dependent upon the number of unit placements and locations offering prepaid calling cards in the United States.

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Net revenues in Canada increased less than 1% to $5,468,832 for the six months ended September 30, 2003 compared to $5,454,449 for the six months ended September 30, 2002. A decrease in revenue attributable to the loss of some prepaid long distance business with a major customer was offset by new revenues from net agency sales of wireless products and transaction fees.

During fiscal 2003, we successfully introduced point of sale technology to the Canadian marketplace for the authorization of prepaid phone cards and for the sale of prepaid cellular PINs. Point of sale terminals installed generated transaction fee revenue of $779,959 for the six months.

Cost of Revenues: Cost of revenues was $5,303,506 or 60% of revenues, for the six months ended September 30, 2003, compared to $6,365,461 or 68% of revenues, during the same period last year. Our cost of revenues consists primarily of payments to carriers who provide long distance telephone time, commissions to landlords and site agents for DTM and OTC placements and includes various service related and supply costs to maintain the DataWave System and POSA systems.

The overall cost of revenue was 57% in Canada, with cost of time being 56%. Cost of time decreased in the quarter but this was offset by an increase in other direct expenses.

The overall cost of revenue was 64% in the U.S. The U.S. business has a significant commission component of cost of revenues. Commissions and site rentals costs increased in the U.S. to 40% for the six months from 36% of revenue for the prior year. This is a result of redeploying free-standing machines into higher volume locations and changes in the overall product mix.

General and Administrative: General and administrative expenses were $1,408,064 or 16% of revenues during the six months ended September 30, 2003, compared to $1,338,509 or 14% of revenues during the same period last year. The increase is a result of increased accounting and legal costs required for regulatory compliance.

Selling & Marketing: Selling and marketing expenses were $824,137 or 9% of revenues during the six months ended September 30, 2003, as compared to $730,825 or 8% of revenues during the same period last year. The increase results from the hiring of additional sales staff for the Canadian marketplace.

Product Development: Product development expenses were $746,036 (8% of revenues) during the six months ended September 30, 2003, compared to $558,132 (6% of revenues) during the same period last year. Increases in operational support for the POS roll-out in Canada and continued development for new products result in higher costs for the period.

Resources have been focused on programs to develop new networks, platforms and relationships for supporting stored value card-based transaction programs and point of sale card programs.

Depreciation and Amortization: Depreciation and amortization expense increased to $362,444 or 4% of revenues during the six months ended September 30, 2003, from $118,783 or 1% of revenues for the quarter ended September 30, 2002. The increase is the result of our investment in POS terminals and the supporting network infrastructure that started in November 2002 will be written of on a straight line basis over three years.

Amortization of intangible assets was $49,116 for the six months ended September 30, 2003. Intangible assets comprise goodwill and customer lists acquired in the purchase of AT&T's Canadian prepaid card operations. The customer list is being amortized on a straight-line basis over six years. We periodically evaluate the recoverability of the carrying value of the intangible assets (goodwill and customer list) by assessing whether the projected cash flows are sufficient to recover the unamortized costs of these assets. The net book value of intangible assets was $2,226,840 at September 30, 2003.

Other Income: Other Income for the six months ending September 30, 2003 includes $66,199 in cash discounts received from suppliers for early payment. This was previously included in cost of revenues.

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Liquidity and Capital Resources

We have financed our operations, including development, from cash flow generated from our operating activities during fiscal 2003 and 2002. We have a working capital deficit of $121,684 at September 30, 2003 compared with a deficit of $281,350 at March 31, 2003. We use cash to pay trade payables, finance the expansion of our wholesale Canadian prepaid long distance phone operations into small independent retail stores; and finance our entrance into wholesale point of sale prepaid cellular sales in the Canadian marketplace.

Cash and cash equivalents at September 30, 2003 were $1,999,280 compared with $2,139,063 at March 31, 2003.

Our operating activities provided cash of $340,975 during the six months ended September 30, 2003 compared with a use of $354,944 during the six months ended September 30, 2002. The increase in operating cash flow is due to an increase of $2,247,956 in accounts payable for point of sale products. The increase in accounts payable resulted from more favourable credit terms negotiated during the second quarter. Accounts receivable increased by $1,671,077 due to sales of cellular products and inventories increased by $305,621 for point of sale products. Prepaid expenses increased by $198,475 and deferred revenues decreased by $331,619 during the twelve month period.

Cash used for investing in capital expenditures for machinery and equipment was $572,201 in the six months compared with $153,250 in fiscal 2003. The increase in the six months is attributable to capital expenditures for terminals used to dispense point of sale prepaid cellular PINs in Canada. We completed installation of more than 1,200 point of sale terminals in Canada during the six months which brings our total point of sale terminals installed in Canada to approximately 1,800.

Our material long-term obligations include operating lease commitments for office space, computer and office equipment. During the quarter, we finalized our lease commitment and payment obligations for our Vancouver office space after fiscal 2004. Our contractual obligations as of September 30, 2003 were:



While there is no certainty that the general revenue will be sufficient to cover all of the anticipated expenses, we believe that we currently have sufficient cash resources and working capital to meet our ongoing obligations as they become due. We have announced the establishment of Nextwave Card Corp., a joint venture with National Money Mart; this will require an investment of our resources and may require the use of cash, which is impacted by the available cash flow from operations.

We expect to continue using cash flow generated from our operations to further finance the expansion of our wholesale point of sale prepaid cellular business in the Canadian market and possibly the U.S. market. Typical cash flow terms are net 30 days for the purchase of inventory from suppliers and net 10 days for

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collections from customers. The inability to extend credit from vendors limits our working capital and cash flow to expand the business. We negotiated an extension of credit during the second quarter of 2003. As this business expands, we will need to purchase additional inventory and point of sale terminals. A risk to our liquidity is that customers do not pay on-time creating a temporary negative cash flow situation. Furthermore, significant expansion of the wholesale point of sale prepaid cellular business in Canada is in part dependent upon expansion of credit limits from vendors to finance the purchase of PINs for inventory. Another risk to liquidity is the seasonality of revenues. Sales in the 3rd and 4th fiscal quarters in both the U.S. and Canada are seasonally lower than the 1st and 2nd quarters.

A continued decline in the travel-related industry, which our U.S. revenues are dependent upon, and general softness in the U.S. and Canadian economies could continue to pressure our cash levels. Our cash flow from operations is impacted by our gross margin on sales. Pricing competition may reduce revenue. Our ability to negotiate supply contracts will impact our gross margin, net income and operating cash flow.

Additionally, our working capital and capital requirements will depend upon numerous factors, including the level of resources that we devote to the continued development of our network system and the development of new products and new technology, and the overall structure of potential future strategic alliances and acquisitions of products or other businesses.

We believe that we currently have sufficient cash resources and working capital to meet our ongoing obligations as they become due during the 2004 fiscal year. Depending on the overall structure of potential future product initiatives, strategic alliances and acquisitions, we may have additional capital requirements related to funding these potential future product initiatives, strategic alliances and acquisitions of products or other businesses. Accordingly, we may seek funding from a combination of sources, including equity and debt financing. No assurances can be given that additional funding will be available or, if available, at terms acceptable to us. If adequate capital is not available, our business can be materially and adversely affected.

Effect of Inflation

In our view, at no time during any of the last three fiscal years has inflation had a material impact on our sales, earnings or losses from operations, or net earnings.

Trend Information

Comparable revenues are expected to grow slowly.

Revenues generated from the sale of prepaid long distance phone cards through the free-standing machines in the U.S. are static and may decline. Revenues generated from the promotional sale of prepaid long distance phone cards continue to decline. Cost of time, which is the major component of cost of revenue, is expected to decline somewhat as a result of renegotiating lower rates. However, the overall cost of revenue is expected to increase as a percent of sales due to higher sales commission costs.

Revenues generated from the bulk sale of preactivated prepaid phone cards to retail establishments in Canada are expected to grow slowly and continued pricing pressure in the Canadian marketplace is expected to have an adverse effect on margins. The implementation and roll-out of point of sale technology in Canada will continue and increase market share for prepaid phone cards. Sales of prepaid cellular PINs will increase.

Product Development costs are expected to continue at similarly high levels due to the continued development of our network system, the InOneCard.com web site, and the development of new products.

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Item 3 Controls and Procedures.

As required by Rule 13a-15 under the Exchange Act, within the 90 days prior to the filing date of this report, we have carried out an evaluation of the effectiveness of the design and operation of our company's disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of our company's management, including our company's president and chief executive officer. Based upon that evaluation, our company's president and chief executive officer concluded that our company's disclosure controls and procedures are effective, as of the end of period covered by this report. There have been no significant changes in our company's internal controls or in other factors, which could significantly affect internal controls subsequent to the date we carried out our evaluation.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our company's reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our company's reports filed under the Exchange Act is accumulated and communicated to management, including our company's president and chief executive officer as appropriate, to allow timely decisions regarding required disclosure.

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PART I   OTHER INFORMATION





|Exhibit Number | Description                                                                                                    
|-------------- | ---------------------------------------------------------------------------------------------------------------
|3.1            | Certificate of Continuance, Articles of Continuance, Notice of Address and Notice of Directors and Officers (1)
|2.2            | Bylaws No. 1 (1)                                                                                               
|21.1           | Subsidiaries                                                                                                   
|               | DataWave Services (Canada) Inc., incorporated pursuant to the laws of British Columbia                         
|               | DataWave Systems (U.S.) Inc., incorporated pursuant to the laws of Nevada                                      
|               | CXP Canada Inc., incorporated pursuant to the laws of Canada                                                   
|               | Cardxpress Vending, Inc., incorporated pursuant to the laws of Delaware                                        
|31.1**         | Certification pursuant to Section 302 of the Sarbanes - Oxley Act of 2002 of Josh Emanuel                      
|31.2**         | Certification pursuant to Section 302 of the Sarbanes - Oxley Act of 2002 of John Gunn                         
|32.1**         | Certification pursuant to Section 906 of the Sarbanes - Oxley Act of 2002 of Josh Emanuel and John Gunn        

**Filed herewith

(1)	Incorporated by reference from our Form 20-F Annual Report, filed on August 31, 2001

(b) 	Reports on Form 8-K -

On July 1, 2003, we furnished a Current Report on Form 8-K to announce our fiscal year results for the year to March 31, 2003.

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SIGNATURES

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

DataWave Systems Inc.
(Registrant)

By /s/ Josh Emanuel
Chairman and Chief Executive Officer

Date November 12, 2003

By /s/ John Gunn
General Manager, Chief Financial Officer

Date November 12, 2003