UNITED STATESSECURITIES
AND EXCHANGE COMMISSION
Washington, D.C. 20549FORM 10-KSB

## [Mark One]

| | [X] | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
| | --- | ------------------------------------------------------------------------------------

For the
fiscal year ended June 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
no. 0-22848

U.S.
WIRELESS DATA, INC.(Name of small
business issuer in its charter)

|Delaware                                                      | 84-1178691                           
|------------------------------------------------------------- | -------------------------------------
|(State or other jurisdiction of
incorporation or organization | (I.R.S. Employer
 Identification No.)

750
Lexington Avenue, New York, New York 10022
(Address of principal executive offices)   
   (Zip Code)

Registrants
telephone number, including area code:     (212)
750-7766

Securities
registered pursuant to Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Exchange Act$0.01 Par Value Common Stock
(Title of Class)

Check
whether the issuer (1) 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 90 days.     Yes 
[X]     No  [  ]

Check
if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.     [X]

The
issuers revenues for the fiscal year ended June 30, 2003 were $3,725,000.
The aggregate market value of the issuers voting common equity held as of
October 10, 2003 by non-affiliates of the Issuer was approximately
$3,679,000 based on the closing price of $0.22 as of October 10,
2003.

As
of October 10, 2003, the issuer had 17,630,382 shares of its $0.01 par
value common stock outstanding.

Transitional
Small Business Disclosure Format (check one):     Yes 
[  ]     No  [X]

DOCUMENTS INCORPORATED
BY REFERENCE:

The
following documents (or parts thereof) are incorporated by reference into the
following parts of this Form 10-KSB: Items 9-12 of Part III of this Annual
Report on Form 10-KSB are incorporated from the Registrants Proxy
Statement for the Annual Meeting of Stockholders, which Proxy Statement will be
mailed on or before October 28, 2003.

---

U.S.
Wireless Data, Inc.
ANNUAL REPORT ON FORM 10-KSB
FOR THE YEAR ENDED JUNE 30, 2003
INDEX

| | Page
| | ----

|                                                                        | 
|----------------------------------------------------------------------- | 
|PART I                                                                  | 
|Item 1.     DESCRIPTION OF BUSINESS                                     | 
|Item 2.     DESCRIPTION OF PROPERTY                                     | 
|Item 3.     LEGAL PROCEEDINGS                                           | 
|Item 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS         | 
|PART II                                                                 | 
|Item 5.     MARKET FOR COMMON EQUITY AND RELATED                        | 
|STOCKHOLDER MATTERS                                                     | 
|Item 6.     MANAGEMENTS DISCUSSION AND ANALYSIS                        | 
|Item 7.     FINANCIAL STATEMENTS                                        | 
|Item 8.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING | 
|AND FINANCIAL DISCLOSURE                                                | 
|Item 8A.   CONTROLS AND PROCEDURES                                      | 
|PART III                                                                | 
|Item 9.      DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT         | 
|Item 10.    EXECUTIVE COMPENSATION                                      | 
|Item 11.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND         | 
|MANAGEMENT AND RELATED STOCKHOLDER MATTERS                              | 
|Item 12.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS              | 
|Item 13.    EXHIBITS, LIST AND REPORTS ON FORM 8-K                      | 

The
Definitive Proxy Statement for the 2003 Annual Meeting of the Registrant which
will be filed with the Commission within 120 days after the close of the fiscal
year, is incorporated by reference into Part III.

2

---

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
1934 or Section 21E of the Securities Act of 1933, 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. Risks and uncertainties relating to
forward-looking statements are set forth in Item 6 under the caption Risk
Factors, below. 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.

PART I

ITEM 1.
DESCRIPTION OF BUSINESS

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 either too expensive or technologically unfeasible, or to
displace conventional telephone lines for increased speed, cost reduction and/or
convenience. These services and products may be utilized by conventional card
accepting retailers as well as emerging card accepting market segments such as
vending machines, quickservice (fast-food) and quick casual restaurants, taxis
and limousines, in-home service providers, door-to-door sales, contractors,
delivery services, sporting events, and outdoor markets. Our services and
products may also be used for gathering telemetric information such as mission
critical operational data on a real-time basis from remote equipment (e.g.,
vending machines).

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

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.

3

---

Going
Concern and Liquidity Uncertainties

We
need additional capital in the immediate future in order to continue operations.
Since our inception we have incurred significant losses and negative cash flow
from operations. As of June 30, 2003, we had an accumulated deficit of
approximately $143 million. At June 30, 2003 our principal source of liquidity
was approximately $602,000 in cash and cash equivalents. Based on our current
estimates of revenue levels, operating costs and other cash inflows and outlays,
and taking into account the remaining proceeds available to us from the bridge
facility discussed below, we will not have cash balances adequate for us to
continue operations beyond December 2003 without a sufficient capital infusion
by such time. 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.

The
availability of funds from a bridge facility (the Bridge Loan) is
pursuant to previously executed fully secured loan documentation in the amount
of $2.75 million with Brascan Financial Corporation (Brascan), a
subsidiary of Brascan Corporation, and advances under this Bridge Loan require
us to satisfy certain conditions on a going-forward basis. As of October
13, 2003, we have drawn down approximately $1.24 million against
the $2.75 million Bridge Loan commitment.

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

There
can be no guarantees or assurances that the contemplated financing will be
completed on the terms contemplated by the term sheets or at all, and upon such
an event, in the absence of alternative financing, we will be forced to cease
operations. The contemplated financing is subject to a number of conditions,
including, but not limited to, the execution of definitive financing
documentation and the successful completion of a reorganization of our capital
structure, which will include the restructuring of our currently issued and
outstanding Series C Convertible Preferred Stock and Series C Warrants. It is
also anticipated that the terms and provisions of the contemplated financing, if
completed, will have a substantial dilutive effect on the ownership interests of
our existing stockholders.

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

THE U.S.
WIRELESS DATA SUITE OF SOLUTIONS

Emerging Markets

Synapse
was designed to help the electronic payments industry open doors to new and
emerging markets. In recent years, card associations, card issuers, credit card
processors, and merchant acquirers have desired a way to penetrate a variety of
market segments that are still largely cash-driven. These segments include
mobile merchants, in-home and other mobile service providers, ground
transportation, quick service (fast-food) restaurants and casual dining
establishments, vending machines, and others. In the aggregate, we believe these
markets represent one of the final opportunities of significant growth for card
acceptance.

These
market segments have remained cash-oriented because of the technological gaps or
unattractive costs that have prevented them from employing cashless payment
systems. We developed our Synapse platform of services and products to bridge
the technological gaps with wireless solutions that deliver real-time
transaction authorizations, fast transaction speeds, and reduce operating costs
for the card accepting merchant. In doing so, we provide the transaction
processing industry with a valuable opportunity to reach these large and
untapped markets for card acceptance.

4

---

Leading the
Migration from Dial-Up to Wireless

In
addition to these new market initiatives, we are strategically positioned to
lead the migration from dial-up to wireless and other emerging line displacement
technologies in traditional retail POS environments. This universe of
fixed-location POS retailers (e.g. traditional storefront businesses) is of
special strategic importance to us, and is the focus of ongoing product
development and marketing efforts. There are more than 10 million existing POS
terminals currently being used throughout the United States. Our lead product in
this segment, the Synapse Enabler, is designed to enable retailers POS
terminals to communicate with their processors by means of wireless and other
emerging technologies rather than only on a dial-up basis. These
line-displacement products help retailers save money through reduced
telecommunications costs and improved customer service, which results from
faster transaction speeds.

Our
line displacement products also offer a significant financial inducement to the
bankcard industry, enabling merchant services providers to mark up the wireless
service, and resell it to the merchant at a profit. This opportunity is
significant in the payments industry because, for the first time, merchant
services providers can harvest telecom revenue from their merchant base. Given
the competitive nature of the reseller market, providing payment processors,
merchant acquirers and other sales entities with an additional line of revenue
offers significant motivation to convert existing accounts to wireless, and to
sell new or competitive accounts on the advantages that wireless delivers.

We
seek to win significant transaction volume in the Quick Service Restaurant
(fast-food and casual dining) industry, which has been identified as a $131
billion industry by the National Restaurant Association, and which is seeking an
efficient cashless payments solution. Our proprietary product for this industry
is currently being rolled out with a top payment processor. Known as the Synapse
Enabler T8, this product connects up to 8 traditional dial-up terminals to a
single wireless modem. Transactions are then processed via the Synapse wireless
service, which provides the much needed speed to meet the promise of quick
service.

In
addition to replacing the phone line for POS systems in fixed-location retail
environments, our products can also replace the dial-line that connects the
smaller, less expensive off-premise ATMs that are typically deployed for the
sole purpose of dispensing cash. By converting a dial-up ATM to wireless, the
ATM operator can: (i) achieve cost savings compared to the cost of
line-installation and monthly fees associated with a wired dial line; (ii)
improve efficiency by placing the ATM as soon as it is ordered, rather than
having to wait for the line to be installed; and (iii) relocate an
underperforming ATM much easier, saving significant time and money when
deploying an ATM. A new machine may be moved a number of times until a
profitable location is found.

Pepsi and
Other Vending Opportunities

We
plan to use our Synapse platform to transport data to provide solutions for
various non-payment applications or applications using a combination of payment
and non-payment data. On December 21, 2001, we announced a joint effort with
PepsiCo, Inc. (Pepsi) designed to (a) enable their soft drink
vending machines to accept credit cards, and (b) connect their vending machines
to an always-on wireless network, allowing bottlers and licensees to
gain real-time information about machine inventory and cash and credit card
transactions, as well as the machines operational status.

Because
accepting credit cards and other forms of cashless payments reduces the barriers
to consumption (e.g. not having enough or the appropriate cash on hand), Pepsi,
its bottlers and licensees expect to benefit from an increase in sales. So far,
pilot-testing has shown that Pepsi, its bottlers and licensees can also expect
to see increased profits, as it has been demonstrated that credit card
acceptance enables price increases to be implemented without forfeiting volume.
Further, through the telemetric capabilities (i.e., data gathering and
communications) of our product and service, bottlers and licensees can easily
ascertain the exact needs of each machine on a delivery route in real
time and adjust their inventory and planned stops for their route drivers,
accordingly. We believe that this level of monitoring and reporting can improve
operational efficiency and reduce operational costs.

Based
on statistics from various sources, Pepsi bottlers and licensees have deployed
over 1.3 million soft drink vending machines nationwide, of which approximately
650,000 are capable of utilizing our technology immediately. In addition, Pepsi
bottlers and licensees typically deploy approximately 50,000 to 100,000 new
vending machines each year, all of which may be retrofitted with our technology
or may have it installed at the time of manufacture. In addition, we believe
that Pepsis snack food vending subsidiary (Frito Lay) represents an
additional opportunity, as there are a large number of these vending machines
that are either in the field already, or that are shipped new each year.
There are 5.58 million vending machines in the U.S., according to the 2003
Automatic Merchandiser State of the Vending Industry Report, offering a
significant opportunity for the growth of credit card acceptance and other
services for vending machines.

5

---

THE SYNAPSE
PLATFORM

In
support of these and other initiatives, we developed Synapse: a reliable,
scalable, flexible proprietary platform to deliver a broad, integrated suite of
services to merchants, merchant acquirers, credit card processors, vending
machine deployers, ATM operators, distributors, and others.

We
developed Synapse to be highly customizable, enabling our customers to select
from among a broad range of services and products. Synapse encompasses a choice
of wireless networks, wireless hardware (i.e. line-displacement products and
wireless POS systems manufactured by third-parties), and a myriad of processors,
including credit card, debit card, loyalty card, gift card, or proprietary
hosts. Such flexibility enables our customers and end-users to have it
their way  a message that is unique in the industry and that is
communicated to the market through our Synapse tagline: Making Wireless
Easy.

Synapse
brings together multiple wireless networks, providing a latticework of wireless
coverage that delivers truly nationwide wireless service area in the U.S. While
each network offers its own individual coverage footprint, providing less than
100% coverage, the combination of these networks in Synapse assures the payments
industry of a single solution with the broadest coverage. By maximizing coverage
options for the payments industry, merchant services providers have solutions
for their customers regardless of where they conduct point of sale transactions.

Transaction
processors benefit from Synapse by not having to negotiate with each wireless
carrier to build and support connectivity, nor do they have to incur the upfront
and on-going costs associated with the maintenance of such multiple connections.
They simply connect to the Synapse platform as a single point of contact. As new
terminals and transaction types become available, each transaction processor
will be able to use their existing Synapse connection to gain wireless access
with virtually no development expense or effort. As Synapse enables both
traditional and emerging markets to utilize wireless payment processing,
wireless carriers benefit from an increase in traffic and simplified
connectivity to the processors.

In
addition to providing a wealth of turnkey merchant solutions, we are also making
wireless easy by supporting our solutions with an Internet-based customer
service infrastructure. We provide easy-to-use features on our website that make
setting up a merchant with a wireless terminal a simple and quick process for
our clients. Where once it involved multiple parties over several days to
activate a wireless terminal, activating a terminal on Synapse takes a few
moments through a single online interface. Most importantly, our website
features real-time transaction reporting (for most applications) that provides
our customers with an up-to-the minute view of transaction activity at their
customers point-of-sale.

We
also add additional convenience to our customers through internally developed
search engines that determine the quality of wireless coverage for various
carriers by zip code. This tool makes it easy for a merchant services provider
to compare network coverage strength and recommend the optimal solution to their
customer.

SERVICES AND
PRODUCTS

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

6

---

SynapseSM
Wireless Services

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

In
April 2003, we successfully converted, on behalf of a major payment processor,
approximately 7,400 existing wireless merchant terminals on Cingulars
Mobitex network to our Synapse service. Previously, the terminals had been
connected directly to the processor over the Mobitex wireless network. Now, the
terminals continue to use Cingulars Mobitex network, but the transactions
are routed to the processor via the Synapse host platform. The processor can now
leverage the value added services of Synapse including online management of the
wireless accounts, our 24/7 customer support desk and online reporting. This
conversion brings our total active sites to more than 30,000 at June 30, 2003.

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

Synapse
Enabler for 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 cashless payment
terminals. When compared to leased line connectivity, the Synapse Enabler offers
similar high-speed transaction processing with dramatically reduced monthly
communications costs.

The
Synapse Enabler T8 (T8) can convert as many as eight dial-up POS
terminals in one location to a single wireless connection. When compared to
dial-up 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. Currently, we have certified the T8 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 proprietary technology into devices such as vending machines to
create new opportunities for cashless payment and other data gathering services.
Vending machines in selected cities have been retrofitted with the Synapse
Enabler for Vending (SEV) as part of a program for Pepsi to
introduce cashless 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 SEV communicates with the
vending machines internal Data Exchange control boards 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, its
bottlers and licensees over a secure Internet connection. Increased sales and
margin through cashless payment acceptance, more efficiency in determining and
servicing daily routes, and information designed to keep machines operating at
peak performance are all expected results of the Synapse system for the vending
industry.

7

---

In
December 2002, we received our first trademark authorization from
Pepsi for our wireless cashless payment processing solution for vending
machines. The trademark authorization given by Pepsi authorizes our first
generation SEV for deployment by Pepsis bottling partners in their vending
machines throughout North America. The solution earned trademark authorization
after nearly two years of development and testing in various locations. We are
now finalizing certain operational and commercialization arrangements governing
the program for deployment of the second generation SEVs with Pepsi bottlers and
licensees. While we await completion of a final agreement with Pepsi and the
start of full commercialization of the program, we continue to build and deploy
units pursuant to purchase orders received from Pepsi. As such, over five
hundred units have already been deployed in test laboratories and certain test
markets by key Pepsi anchor bottlers and licensees. These markets include
Chicago, IL; Memphis, TN; Las Vegas, NV; St. Louis, MO and Orlando, FL. Also, we
have shipped an additional 250 units to Pepsi in late August 2003 for expected
installation in the quarter ending December 31, 2003.

Upon
completion of the final agreement with Pepsi, we expect to receive various
orders of unit deployments from Pepsi, its bottlers and licensees 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, TX; Cincinnati, OH; and
Providence, RI. 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 it allows drivers to 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 Corp.
that attaches to certain models of Motorola telephones utilizing the Nextel
network. The device provides mobile workers with the capability to swipe a
credit card and take payment with greater security, speed, and convenience while
also having access to Nextels standard cell phone, two-way voice messaging
and text messaging services. We believe that Creditels partnership with
Nextel and Motorola is ideal for the launch of this solution since Motorola
phones with service on the Nextel network are already popular with fleet-based
businesses. Motorola and Nextel will promote and sell the solution through their
dealer networks. Our Synapse Service provides Creditel with a payments gateway
to various credit card processors and other services. We have signed an
agreement with Creditel to be the exclusive payments gateway for the PowerSwipe
product 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 Super Bowl in January 2003 and in kiosks and merchandise tents
surrounding the Pro Bowl in February 2003. The product is now entering full
commercial launch.

Synapse
Adapter for POS or ATMs

The
Synapse Adapter is a proprietary device utilizing patented dial
tone-emulation technology licensed from AT&T Wireless to provide our clients
with a seamless plug and play solution for the conversion of dial-up
POS 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.

8

---

Product
sales of the Synapse Adapter trailed off substantially in the latter half of the
fiscal year ending June 30, 2002, and we no longer sell this product as it is
based on the CDPD wireless medium, which the existing U.S. wireless carriers
will ultimately migrate away from as they move to next generation technologies.
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 its CDPD
network and has stated that it intends to completely shutdown its CDPD network
in June 2004 and will migrate to its new GPRS network. Verizon Wireless has
announced that it intends to transition from its current CDPD data service to
its next generation CDMA data service and intends to completely shutdown its
CDPD network in December 2005. Currently, CDPD is supported by several other
carriers, including Alltel and Dobson Communications. Even though the decision
by AT&T Wireless and Verizon Wireless to withdraw their CDPD service will
geographically diminish CDPD availability, the other carriers, although expected
to eventually migrate to next generation service, may provide service for a
longer period. 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 Wireless, Verizon Wireless and other
carriers in the U.S. and in other countries. 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. 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.

STRATEGY

We
believe our experience and capabilities have established us as the early market
leader in providing wireless transaction products and services. Our strategy is
to extend our leadership position by using our engineering expertise, software
capabilities, marketing techniques and our other resources to move quickly into
new opportunities.

Our Major
Initiatives

Our
major initiatives to serve the emerging market for wireless cashless payments
and transaction processing include:

|o |  | Card acceptance on Pepsi and other vending machines with our SEV products and
related services.
|- |  | -----------------------------------------------------------------------------------------------

|o |  | Line displacement products, including our T8 product that enables multiple POS
terminals to share a single high-speed wireless connection at a fraction of the
cost of conventional phone lines.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o |  | The introduction of beltware solutions to the POS market, including
mobile phones and other devices fitted with card processing technology from USWD
and our partners (e.g., Creditel and their PowerSwipe, etc.).
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o |  | Connecting the leading wireless POS terminals and payment processors to our
platform.
|- |  | -------------------------------------------------------------------------------------

|o |  | Grow our network connectivity to include the new 3G networks such as CDMA and
GPRS.
|- |  | -----------------------------------------------------------------------------------

9

---

Supporting
Strategies

Our
strategy includes the following key elements:

|o |  | Continue to brand Synapse as the standard for wireless cashless payments and
transaction processing. By continuing to position Synapse as a neutral gateway
between end user devices (POS terminals, vending machines, beltware
solutions, ATMs and other devices), carriers, and processors, and by
enabling seamless connectivity among these parties, coupled with efficient
management features, we intend to establish USWD as the standard for wireless
cashless payments and transaction processing.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o |  | Leverage our current vending activities and relationships in an effort to
penetrate additional vending opportunities.
|- |  | ---------------------------------------------------------------------------------------------------------------------

|o |  | Leverage our established sales channels to further penetrate the market for
wireless POS. We generally sell our products and services to merchant acquirers,
independent sales organizations (ISOs), and payment transaction
processors. We focus our primary marketing efforts on the merchant acquirers and
ISOs that represent the vast majority of transaction activity in the electronic
payments marketplace. These companies resell the Synapse service as a turnkey
system directly to merchants.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o |  | Partner with POS terminal and ATM manufacturers to create Synapse compatible
products. A component in our success will be the availability of wireless
devices that can meet the requirements of our targeted market segments. Most
terminal manufacturers have developed Synapse certified devices. As part of our
device neutral strategy, we are partnering with these manufacturers
to continue developing products that are certified for use with the Synapse
platform.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o |  | Grow our list of Class A certifications with the industrys
leading payment processors. Class A solutions are fully supported by
the payment processor or merchant acquiring entity. This includes key services
such as end-user billing and first tier customer services. As such, they are
embraced by the ISO sales channel for the simplicity and ease with which they
are sold and supported.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o |  | Expedite and lead the transaction industrys migration of POS and ATM
connectivity from conventional landlines to wireless technology. We intend to
exploit the larger market of wired POS terminals and ATMs through our Synapse
Enabler products.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o |  | Explore opportunities to partner with companies that have complementary
technologies or that will assist us in adding sites and generating transaction
volume to enhance and extend our position in the industry.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o |  | Explore new market opportunities applicable to, and enhanced by, wireless (e.g.,
transportation, ATMs, vending and gaming, etc.), including markets for the
processing of other payment and/or non-payment applications such as telemetric
data, including usage and inventory data from utility or other meters and
vending machines, or electronic benefit transfer (EBT) transactions.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o |  | Monitor developments in the wireless arena, including the development of
next generation networks (such as CDMA, GPRS and Wi-Fi (802.11) and
seek arrangements to broaden our offerings, giving our customers a wider variety
of wireless network and carrier choices utilizing our Synapse products and
services.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o |  | Become a vehicle for the transportation of frequency and loyalty program
information.
|- |  | -------------------------------------------------------------------------------------

|o |  | Accommodate non-conventional payment and debit transactions.
|- |  | ------------------------------------------------------------

|o |  | Expand
into selected international markets.
|- |  | -------------------------------------------

10

---

SALES AND
MARKETING

We
market Synapse services and products to industry resellers, including card
processors, merchant acquiring banks and ISOs. These clients, in turn, market
and promote our services and products as a turnkey system directly to merchants.
In addition to our reseller channels, we jointly market the Synapse system with
bankcard associations, other card issuers, and wireless carriers. Our sales
strategy is to leverage these relationships, and to develop additional strategic
relationships, derived from business-to-business marketing, industry and trade
events, and referrals from our network of clients.

Our
target markets include:

|o |  | Mobile merchants.
|- |  | -----------------

|o |  | Conventional
retailers.
|- |  | -----------------------

|o |  | Vending machine owners/operators.
|- |  | ---------------------------------

|o |  | Quickservice
restaurants.
|- |  | -------------------------

|o |  | Traditional restaurants.
|- |  | ------------------------

|o |  | Delivery
services.
|- |  | ------------------

|o |  | Hotels.
|- |  | -------

|o |  | Financial
institutions.
|- |  | -----------------------

|o |  | Ski resorts.
|- |  | ------------

|o |  | ATM
processors.
|- |  | ---------------

|o |  | Transportation services such as taxicabs, limos, and buses.
|- |  | -----------------------------------------------------------

|o |  | Stadiums,
arenas and amusement parks.
|- |  | -------------------------------------

|o |  | Golf tournaments, racetracks and other events.
|- |  | ----------------------------------------------

|o |  | Traditional
landline-based merchants that desire high speed transactions, reduced
communications costs and/or Synapse online reports.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------

INDUSTRY
BACKGROUND AND CURRENT TRENDS

Historical
Growth of Card Acceptance

For
many years, payments and transaction processors, card issuers and merchant
acquirers have been inducing card accepting merchants to utilize electronic
draft capture (EDC) terminals to conduct safer online credit and
debit card transactions. As a result, the majority of the transaction dollars
from merchant locations accepting bankcards are processed by EDC terminals
commonly known as POS terminals. An EDC terminal magnetically reads the encoded
account information from the magnetic stripe on the back of a credit or debit
card and sends it, along with the transaction amount and terminal specification
data, to a front-end processor for electronic online authorization. The
front-end processor authorizes the card with the card issuer, electronically
captures the transaction data, generates an approval code and returns the data
to the terminal, which signals an attached electronic printer to print a
customer receipt.

Today,
growth not only continues in traditional venues, recent developments in
technology and the market have spurred growth in new areas. We anticipate that
we will take advantage of the convergence of the following trends:

|o |  | Industry consolidation.
|- |  | -----------------------

|o |  | Continued
growth of card use and acceptance.
|- |  | --------------------------------------------

|o |  | Growth of wireless communications.
|- |  | ----------------------------------

|o |  | Advances in technology.
|- |  | -----------------------

11

---

Industry
Consolidation

As
with many fast growing industries, the transaction processing industry has
undergone rapid consolidation. The cost of maintaining EDC systems, merchant
requirements for improved customer service and the demands for additional
customer applications, has made it difficult for some banks and ISOs to remain
competitive. Many of these providers are unwilling or unable to invest the
capital required to meet these evolving demands, and are increasingly exiting
the transaction processing business or otherwise seeking alliance partners to
provide transaction processing for their customers. Many of the transaction
processors utilize and maintain legacy front-end systems that are difficult to
adapt to new technologies. Accordingly, transaction processors that utilize
these systems find it difficult to meet the increasing merchant demands for more
sophisticated products and services.

We
offer major processors, banks, and ISOs the ability to quickly implement a
wireless POS program. Our turnkey solution offloads the burden of development
and time-to-market traditionally associated with a major initiative being driven
by new technology. By outsourcing the development and maintenance of special
services, processors, banks, and ISOs can focus on quickly bringing new
revenue-enhancing products to the merchant marketplace.

Continued
Growth of Card Use and Acceptance

The
credit and debit card industry has experienced significant growth during the
last decade, with U.S. card purchase volume increasing from $441 billion in 1990
to almost $1.8 trillion in 2001 according to The Nilson Report. This trend is
expected to continue through 2011, by which time The Nilson Report projects
annual card volume will approximate $4.2 trillion in the U.S. This growth is
attributed to U.S. consumers adapting from cash to card-based payment methods.

According
to the Nilson Report, the number of U.S. consumer purchases is projected to grow
to 160 billion by 2012, up from 121 billion in 2002. Notably, the portion of
these payments transacted by card-based payment methods is expected to rise from
30% or 36 billion to 42% or 67 billion during the same period with almost half
coming from debit card usage.

We
have created a portfolio of services and products that link the point of sale
and card processors, loyalty companies and other transaction companies.
Accordingly, the forecasted growth in the usage of card payments should increase
the demand for the connectivity that USWD provides.

Merchant
demand for card acceptance solutions is being driven by the fact that consumers
tend to spend more when paying with cards than with cash. MasterCard and Visa
cards are now being accepted at locations such as the U.S. Postal Service,
municipalities, hospitals, parking garages and other places of business that
have historically not been appropriate for card acceptance. One example is the
fast-food industry, which currently has a low penetration rate with respect to
credit card acceptance due, in large part, to slow speeds associated with
dial-up technology. We view the fast-food industry as one of the many important
market segments for the deployment of Synapse services.

Also
adding to the rise in card acceptance is the migration of mobile transaction
processing from cash and checks to credit and debit cards. This trend has
paralleled Americas demand for convenience and desire to save time. The
retail point of sale is now expected to be located wherever the customer is
located  and it is expected to take plastic. Thus, a wide
range of business services such as towing, locksmiths, concessionaires, special
event vendors, in-home appliance repair services, mobile auto repair,
door-to-door sales, and delivery services depend almost exclusively on
completing the sales transactions at the card holders location. Because
Synapse wireless services are designed to make it easy for all parties to
facilitate card payment at the customer location, this segment of the industry
will continue to provide significant growth for our company.

Growth of
Wireless Communications

Worldwide
use of mobile communications is growing rapidly, including the development of
wireless Internet-enabled phones, personal digital assistants and two-way
pagers. According to the CTIA (Cellular Telecommunications & Internet
Association), worldwide wireless subscriptions have grown from 340 thousand in
1985 to more than 128 million in 2001.

12

---

These
hand-held devices are already finding a home in the payments-acceptance industry
through companies that are outfitting them with card-readers. Because these
devices will be somewhat less expensive than wireless POS terminals made by the
major terminal manufacturers, they will be a popular payment acceptance tool for
small businesses and companies that operate a fleet of vehicles. Like POS
terminals, these new devices will need connectivity to the payment processors to
complete a transaction. We expect Synapse to be a major payment gateway for
these devices and we seek strategic relationships with the providers of such
devices. In this regard, we are introducing solutions on products from Creditel
(cellular phone card accepting devices).

In
addition to the introduction of new wireless devices for mobile communications,
wireless has become an alternative to landline communications for merchants in
fixed locations. The growth of payment acceptance discussed earlier is driving
the need for more telecommunications services. Current dial-up technology is not
sufficient to support this growth. For example, transactions using dial-up
technology take an average of 15  20 seconds, which is too long for
fast-food and other queue sensitive businesses. Rewiring in order to take
advantage of improvements in technology is quite costly and time intensive. This
suggests that a growing percentage of the legacy terminals attached to telephone
lines will need to be replaced to meet the various technical and functional
demands of the changing marketplace. As a result, wireless technology is
emerging as a viable solution for merchants, including those currently
transmitting via conventional telephone lines.

Advances in
Technology

Advances
in technology are allowing for card acceptance where such acceptance has
heretofore been either too expensive or technologically unfeasible, or for the
ability to displace conventional telephone lines for increased speed, cost
reduction and/or convenience. Advances in technologies allow our services and
products to be utilized by conventional card accepting retailers as well as
emerging card accepting market segments.

In
addition , technological capabilities required for the rapid and efficient
creation, processing, handling, storage and retrieval of information are
becoming increasingly complex. These capabilities require large development and
capital expenditures, in addition to processing expertise, and have contributed
to a trend toward the outsourcing of processing services that benefits us.

KEY
DEVELOPMENTS DURING FISCAL 2003 TO DATE

July
2002

|o |  | Centrodyne and USWD introduces a new taxi meter fitted with our Synapse Enabler
for Transportation to enable real-time authorization of credit cards in taxies.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

August
2002

|o |  | PepsiAmericas (one of Pepsis three major bottlers in the U.S.) announces
placement of 80 new credit card-accepting vending machines in Chicago, IL.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------

|o |  | Adi Raviv is named as Executive Vice President & Chief Financial Officer.
|- |  | -------------------------------------------------------------------------

September
2002

|o |  | We sold the assets of NXT to Merchant-Link, a subsidiary of Paymentech, for $5
million.
|- |  | ---------------------------------------------------------------------------------------

|o |  | We signed a three-year agreement with Paymentech under which Paymentech or its
affiliates will purchase, at least, an aggregate of $3,472,500 of services and
products from us.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o |  | Vital Processing Services, a joint venture of TSYS and Visa USA, launches a new
wireless payment services program through agreement with us.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------

December
2002

|o |  | We received our first trademark authorization from Pepsi for our wireless credit
card processing and remote inventory management solution for vending machines.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

April
2003

|o |  | We were named Vendor of the Year by the Electronic Transaction
Association (ETA) at their annual meeting in Las Vegas.
|- |  | --------------------------------------------------------------------------------------------------------------------------

|o |  | We successfully convert approximately 7,400 wireless sites, for a major processor
using Cingulars Mobitex network, to our Synapse
service on the same wireless network.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

13

---

May
2003

|o |  | On behalf of Pepsi Bottling Group, we began the installation of a few hundred
units of our Synapse Enabler for Vending on vending machines located at various
venues in Las Vegas, including the Alladin and Paris hotels.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

June
2003

|o |  | We exceeded 30,000 active sites on our Synapse service.
|- |  | -------------------------------------------------------

August
2003

|o |  | We signed term sheets with Brascan contemplating a bridge loan of up to $2.75
million and the purchase of $12.5 of a newly issued Series D convertible
preferred stock representing at least 60% of our common stock on a fully diluted
basis.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

September
2003

|o |  | We signed the bridge loan agreement with Brascan and began drawing a portion of
such loan.
|- |  | ------------------------------------------------------------------------------------------

|o |  | We launch programs with Lipman USA to help merchants that use CDPD wireless data
networks to make the switch to new networks and devices before the major
wireless carriers phase out CDPD service.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

STRATEGIC
RELATIONSHIPS

A key
to our ability to provide complete wireless transaction services to our clients
are our relationships with certain third parties, many of whom are our clients.
These relationships take significant time and resources to develop and
implement. Having these relationships provides us with an advantage in getting
our products and services to market. We maintain the strategic relationships
described below:

Third Party
Processors

We are
aligned with all of the major credit card processors that are both the clients
for our solutions and our reseller partners. We have contracts with over 210
resellers, including eight of the top 10 merchant acquirers whose aggregate U.S.
market share in 2002 approximated 70% according to The Nilson Report. Our
clients process the vast majority of all POS and ATM transactions in the United
States and include: Bank of America, BuyPass, CardService International,
CardSystems, Concord EFS, First Data Merchant Services, First Horizon, Global
Payments, Lynk Systems, MSI, National Processing Company, Paymentech, Vital, and
many others. Our relationship involves certifying solutions to these processors
based on specific terminal/network combinations. Once certified to a Class
A level, these processors take over the support function for merchants
using these wireless devices in the field. By providing these organizations with
a simplified and expedient method of incorporating wireless services and
products into their marketing efforts and operations, we have become the leading
source of wireless POS solutions for the bankcard industry.

Wireless
Carriers

We
believe our relationships with wireless carriers are mutually beneficial. As a
result, we are generally able to negotiate for favorable rates and for
collaborative joint marketing initiatives. Typically, we have agreements to
purchase data network service at predetermined rates based on volume. We
currently offer wireless service utilizing the CDPD networks of AT&T
Wireless, Alltel and Verizon Wireless; the DataTAC network operated by Motient;
and the Mobitex network operated by Cingular. We monitor developments in the
wireless arena, including the development of next generation
networks (such as CDMA and GPRS) and seek arrangements to broaden our offerings,
giving our customers a wide variety of wireless network and carrier choices
utilizing our Synapse products and services. We are also exploring alternative
technologies such as satellite, Internet, Wi-Fi (803.11), DSL and cable.

Card Issuing
Organizations

Our
wireless efforts are also aligned with the card issuing organizations (Visa,
MasterCard, American Express, and Discover) whose aim is to spread card
acceptance to new, untapped markets, and who are investing significant resources
to that end. We maintain close relationships with these associations and
leverage our mutual interests in reaching new markets whenever possible.

14

---

Other
telecommunications carriers

We
also use traditional business services of various telecommunications carriers to
provide connectivity to and from the wireless carriers, processors, and others.

Terminal and
other device manufacturers or distributors

Our
services increase the usefulness of wired and wireless terminals or devices, and
accordingly, we believe our services will increase sales of these items. POSdevice manufacturers have therefore assisted us in various connectivity and
certification projects we have undertaken. POS equipment manufacturers with
which we have received support for certifications on a variety of processors and
networks include Ingenico/IVI, Intellect, Linkpoint, Lipman, Symphony, Thales,
and Tillsmith Systems. We also have relationships with other device
manufacturers or distributors, including Centrodyne and Pulsar (taxi meters),
and Creditel (card acceptors for cell phones).

MANUFACTURING

We
primarily employ an outsourced manufacturing strategy that relies on contract
manufacturers for manufacturing services. Our manufacturing operations primarily
consist of purchasing of certain materials, quality assurance of materials and
components, subassemblies, final assembly and testing of products. We have not
entered into any significant long-term contracts with any manufacturing service
provider. We generally do not commit to purchase materials in a particular
amount, or any quantities beyond certain amounts covered by orders or forecasts
that we submit covering discrete periods of time.

COMPETITION

Our
industry is new, rapidly evolving and it is likely that we will have an
increasing number of competitors in the future. Our industry is characterized by
constant technological innovation. To be successful in this emerging market, we
must be able to sufficiently differentiate ourselves from other service
providers.

The
principal competitive factors in the market, which we believe we possess
include:

|o |  | Connectivity to most major processors.
|- |  | --------------------------------------

|o |  | Certifications for most major terminal
brands and models.
|- |  | ---------------------------------------------------------

|o |  | Network gateways to major data network services.
|- |  | ------------------------------------------------

|o |  | Ability to deliver services when requested by customers.
|- |  | --------------------------------------------------------

|o |  | Contracts with over 210 resellers.
|- |  | ----------------------------------

|o |  | Operational capabilities for reliabilities, redundancy, quality of service, and
scalability.
|- |  | --------------------------------------------------------------------------------------------

|o |  | RF Design and Engineering expertise.
|- |  | ------------------------------------

|o |  | Recurring revenue business model.
|- |  | ---------------------------------

|o |  | Network and system engineering expertise.
|- |  | -----------------------------------------

|o |  | High
quality 24 hours/day, 7 days/week and 365 days/year customer service for
processors, merchant acquirers and ISOs.
|- |  | ----------------------------------------------------------------------------------------------------------------------

|o |  | Variety of services offered.
|- |  | ----------------------------

|o |  | Competitive price structures.
|- |  | -----------------------------

|o |  | Ability to maintain and expand distribution channels.
|- |  | -----------------------------------------------------

|o |  | Brand name recognition.
|- |  | -----------------------

|o |  | Continued
development and introduction of new state of the art products and services.
|- |  | -------------------------------------------------------------------------------------

|o |  | Network security.
|- |  | -----------------

We
believe that resellers (ISOs and direct sales organizations) prefer to
purchase solutions from a single vendor in order to address their
merchants needs. Our Synapse services support a broad range of devices and
our standards-based approach will continue to allow us to compete. We believe
that our strategic relationships with major payment processors and wireless
carriers enable us to provide interoperability among a broader spectrum of
applications than our current and potential competitors.

15

---

We
also believe we have several competitive advantages, including strong
relationships and alliances with most of the major processors, wireless
carriers, and device manufacturers or distributors. In addition, we are unique
in that we are neutral towards devices, carriers, processors, merchant acquirers
and ISOs.

Nevertheless,
we may not be successful in differentiating ourselves or achieving widespread
market acceptance of our business. We may also face competition from companies
attempting to replicate our Synapse concepts. Furthermore, enterprises that have
already invested substantial resources may be reluctant or slow to adopt our
approach which may replace, limit or compete with their existing systems.
Potential competitors may bundle their products or incorporate similar services
in a manner that is more attractive to our potential customers than purchasing
and utilizing our services. In addition, new competitors or alliances among
competitors may emerge and rapidly acquire significant market share. Our
competitors may be able to respond more quickly to new or emerging technologies
and changes in customer requirements than we can. There are no assurances that
we would be able to either develop products and services that are comparable or
superior to those offered by our current or future competitors or adopt new
technologies to meet evolving industry standards and changes in customer
requirements.

Some
of our potential competitors may have longer operating histories and
significantly greater financial, technical, marketing and other resources than
we do. In particular, carriers and POS manufacturers have extensive customer
bases and broad customer relationships that they can leverage, including
relationships with our potential customers. These companies sometimes have
significantly greater customer support service capabilities than we do. Due to
their greater financial resources some of these companies have the ability to
adopt aggressive pricing policies. As a result, in the future we may have to
adopt pricing strategies that compete with such companies to attract and retain
customers.

Finally,
as there are few substantial barriers to enter the wireless payments transaction
market, we expect to face additional competition from existing competitors and
new market entrants in the future.

EMPLOYEES

We had
40 full-time employees and 1 part-time employee as of June 30, 2003, with
primary locations in New York, New York, and Palmer Lake, Colorado. None of our
employees are represented by a labor union and we consider our employee
relations to be good.

COMPANY
HISTORY

We
were founded in July 1991 for the purpose of designing, manufacturing and
marketing wireless and portable credit card and check authorization terminals.
In December 1993, we completed an initial public offering, raising approximately
$12,200,000 through the sale of 1,650,000 shares of common stock. In October
2000, we reincorporated in Delaware.

Our
initial strategy was to manufacture and sell portable electronic payment
terminals to communicate via circuit switched cellular voice technology. We
designed, manufactured and marketed the POS-50(R), which was recognized as the
worlds first truly integrated and portable wireless credit card and check
authorization terminal. The product was launched in the first quarter of 1994
and was marketed through acquiring banks, POS hardware distributors, ISOs and by
us directly.

The
POS-50 allowed a merchant to electronically capture a credit card, debit card,
or check transaction at the point of sale, virtually anywhere cellular voice
service existed. Due to its portable and wireless nature, the POS-50 was well
suited for the small to medium-sized mobile retailer or service company.
Examples of POS-50 customers included craft show vendors, sporting event
concessionaires, towing services, cart and kiosk vendors, and essentially any
business on-the-go that wanted to safely accept credit and debit
cards for their products and services.

16

---

While
the POS 50 did receive much recognition from various sectors of the credit card
processing industry as the first truly wireless POS terminal, only approximately
7,000 devices were sold between 1994 and 1998. Our failure to attract broad
market acceptance for our new device and, hence, more terminal sales, stemmed
primarily from five factors: (a) the cost of the device was very expensive to
manufacture versus traditional POS terminals, therefore, the price to our
customers was very high; (b) lack of broad terminal application certification by
front-end processors; (c) slow transaction speed; (d) our primary focus on the
development of the POS-50 technology left inadequate resources to market and
promote the new wireless device to the credit card processing industry and (e)
little acceptance of wireless as a viable technology. Due to these five factors,
we were unable to capture broad market acceptance and realize meaningful levels
of sales of the POS-50 terminal.

Starting
in 1997, we attempted to reposition our business from being solely a
manufacturer of wireless POS terminals to becoming a provider of transaction
processing services. This realignment was sought to augment our one-time
equipment sales with recurring revenue generated by the sale of wireless credit
and debit card processing services to retail merchants. In doing so, we set out
to offer a one-stop wireless solution directly to card accepting
merchants. The suite of services offered included the sale of our own wireless
POS terminals, including a device called the TRANZ-Enabler, which adopted
Verifones wireline TRANZ devices to work wirelessly, the resale of the
newly introduced and speedier CDPD wireless services and the establishment of
credit card acceptance capabilities for merchant clients through our
relationships with two credit card acquiring institutions.

Throughout
1997 and 1998, we focused our resources on selling, directly to merchants, a
transaction processing solution consisting of a terminal, CDPD
airtime purchased from major cellular providers, and transaction processing
services. To accomplish this, we began marketing our products and services
through a series of distribution and joint marketing agreements with the major
CDPD service providers. This effort required the creation of a large,
regionalized sales organization that trained and supported data sales
representatives from each respective cellular carrier. GTE Wireless was the
first cellular organization mobilized to sell our products and services followed
by AT&T Wireless, Bell Atlantic Mobile and, ultimately, Ameritech. The sales
force primarily included individuals with wireless product expertise, rather
than, individuals skilled in the distribution of bank card products. In our
efforts to provide a turnkey solution to card accepting merchants, we had
inadvertently positioned our business in direct competition with the
industrys largest acquirers, banks and ISOs. This competitive stance
resulted in disappointing sales and the perception of us by the credit card
industry as a direct competitor and not a provider of value added services, thus
hampering our ability to sell our services to many players in the industry.

In
August 1998, faced with disappointing sales and high overhead expenses due to a
recently expanded sales-oriented headcount, we recognized the apparent danger of
our competitive posture and set out to re-orient ourselves as an enabler of the
marketplace.

In May
1999, Dean M. Leavitt, the founder and former President of US Data Capture, a
credit card processing company serving a broad spectrum of conventional card
acceptors and emerging markets, was hired as our Chairman and Chief Executive
Officer. Mr. Leavitt immediately began redirecting our resources in an effort to
build a device agnostic platform and have it become recognized as the standard
for the development, implementation and management of wireless transaction
processing solutions. To accomplish this goal, we have repositioned ourself as
an enabler of the merchant acquirer/ISO marketplace on a wholesale
basis and have, for the most part, discontinued our direct marketing activities
to end-user merchants. As part of this strategy, we have re-positioned our
business and technology to be completely neutral with respect to POS terminal
manufacturers, wireless carriers, front-end and back-end processors, and
merchant acquirers. In order to facilitate this process, we have begun aligning
ourself with terminal manufacturers, terminal deployment companies, front-end
processors, merchant acquirers and ISOs through the execution of Synapse
Agreements. As evidence of our neutrality strategy, we have de-emphasized
our development of proprietary terminals, focusing instead on our proprietary
Synapse host technology and the certification of other terminal
manufacturers products on the Synapse platform. Furthermore, in May 1999,
we entered into an agreement with Motient (formerly American Mobile) under which
we added that companys communications technology to our Synapse suite of
services, thereby officially signaling the end to our CDPD-only orientation. In
addition, as evidence of our neutrality with respect to merchant acquirers and
ISOs, we have de-emphasized credit card acquisition activities and, in July
1999, we sold one of our two merchant portfolios. We terminated our relationship
with the other portfolio during fiscal year 2001. As part of the strategy to
re-orient USWD as a neutral enabler of the credit card processing marketplace,
our financial model has been transformed from one that was based upon one-time
product sales revenues to one that now relies heavily upon the development of
recurring service revenues generated from Synapse-enabled sites.

17

---

In May
2000, the Company, in order to finance the on-going operations, finalized a
three-tranche private placement with Commonwealth Associates acting as the
placement agent. The private placement raised aggregate gross proceeds of
$55,866,000 through the sale of an aggregate of 558.66 Units sold at $100,000
per Unit. Each Unit consists of 10,000 shares of the Companys Series C
Preferred Stock (convertible into 16,667 shares of common stock on a post split
basis) and warrants to purchase common stock equal to 25% of the number of
shares into which the Series C Preferred Stock is convertible.

On
November 16, 2000, we acquired the assets and assumed certain liabilities of
Cellgate Technologies (Cellgate), a Delaware limited liability
company in a cash and stock transaction. With the acquisition of Cellgate and
its proprietary technology, we obtained the ability to accelerate our entry into
the fixed wireless market by providing wireless solutions to wired POS terminals
and ATMs being used at that time throughout the United States. We have since
written off all goodwill and most of the other assets relating to this
acquisition.

On
December 22, 2000, we acquired NXT Corporation in a stock-for-stock transaction.
NXT provides data services and landline-based connectivity for credit-card
transaction processing. As previously disclosed, effective as of the close of
business on August 31, 2002, we sold substantially all of the operating assets
and operating obligations associated with NXT to Paymentech for $5 million.

In December
2001, we announced a joint effort with Pepsi designed to (a) enable their soft drink
vending machines  to accept credit cards, and (b) connect their vending machines to an
always-on wireless network, allowing  bottlers and licensees to gain
real-time information about machine inventory and cash and credit card  transactions, as
well as the machines operational status.

RESEARCH AND
DEVELOPMENT AND NETWORK OPERATIONS CENTERS

Our
recent development efforts have been directed almost exclusively toward Synapse
services and products. Our team of talented engineers and programmers are
responsible for developing software, hardware, new applications and interface
technology that allows our platforms to communicate with the various front-end
card processors or other entities. Research and development costs approximated
$520,000 and $1,102,000 during the years ended June 30, 2003 and 2002,
respectively.

The
network operating centers serve as our hub for communications between the
parties to a transaction, including, for example, communications between
wireless terminals and credit card authorization processors. Included in our
primary network operating center are our customer care specialists. We train our
customer care specialists to support our clients with the operation of our
services and provide support seven days a week, twenty four hours a day.

PATENTS AND
TRADEMARKS

We
have applied for U.S. and international patent protection on various features of
the Synapse technology. Specifically, we now have three (3) pending U.S. patent
applications and six (6) pending foreign applications on the various processes
and systems (and components thereof) of the Synapse Technology, including the
proprietary Internet-based interface and the transaction message formatting and
communication protocol software that performs various functions related to
Synapse. In addition to our patent protection, our software is also protected
under copyright law. We may, from time to time, pursue additional intellectual
property protection on other hardware, software and/or processes we develop
where applicable.

We also have
U.S.  service mark  registrations  for the services we provide under the titles:
"CardMeter",  "E-Processing  for the new  millennium" and
"Making Wireless Easy".

18

---

Currently,
we own U.S. design patent no. 408812 on the TRANZ Enabler housing (issued in
April 1999), although we no longer build or sell this product. In addition, an
Intellectual Property License Agreement with AT&T Wireless grants us a
non-exclusive worldwide license to certain proprietary technology of AT&T
Wireless for use in the provision of wireless data financial transactions using
AT&T Wirelesss service. The technology is currently utilized with the
Companys Synapse Adapter, which was acquired in the acquisition of
Cellgate. The term of the agreement was extended to the fifth anniversary of the
closing date of the Companys acquisition of Cellgate. Subject to the terms
of this agreement, AT&T Wireless cannot license the patents to a third
party, except for certain instances, provided the Company maintains certain
minimum quantities of deployed units at certain anniversary dates, or, at the
Companys election, pays a fee for any shortfall. The value of this
agreement, however, has been greatly impacted by AT&T Wirelesss
announcement of no longer accepting CDPD-based activations beginning April 1,
2003, and the projected termination of their CDPD-based service in June 2004.

The
markets in which we compete are characterized by rapidly changing technology, a
large number of patents, and frequent claims and related litigation regarding
patent and other intellectual property rights. There can be no assurance that
our patents and other proprietary rights will not be challenged, invalidated or
circumvented, that others will not assert intellectual property rights to
technologies that are relevant to us, or that our rights will give us a
competitive advantage. In addition, the laws of some foreign countries may not
protect our proprietary rights to the same extent as the laws of the United
States. The risks associated with patents and intellectual property are more
fully discussed in the section of this report entitled Risk Factors.

GOVERNMENT
REGULATION

We are
not currently subject to direct federal, state or local government regulation,
other than regulations that apply to businesses generally. To the extent that we
produce products (equipment), we will be subject to FCC regulations for radio
transmissions and would seek certification from Underwriters Laboratories Inc.,
an independent not-for profit product safety and certification organization. The
wireless network carriers with whom we contract with to provide airtime, our
providers of other telecommunications services, and some of our hardware and
device suppliers are subject to regulation by the Federal Communications
Commission. Changes in FCC regulations could affect the availability of wireless
coverage or other services these carriers are willing or able to sell to us. We
could also be adversely affected by developments in regulations that govern or
may in the future govern the Internet, the allocation of radio frequencies, or
the placement of cellular towers. Also, changes in these regulations could
create uncertainty in the marketplace that could reduce demand for our services
or increase the cost of doing business as a result of costs of litigation or
increased service delivery cost or could in some other manner have a material
adverse effect on our business, financial condition, or results of operations.

IMPACT OF
ENVIRONMENTAL LAWS

We do
not believe that we are substantially affected by environmental laws and do not
expect any material impact as a result of such laws.

INSURANCE

We
believe that we maintain the type and amount of insurance customary in our
industry, including coverage for general liability, product liability, property
and casualty, business interruption, and workers compensation. Although
there can be no assurance that our property damage insurance will adequately
compensate us for losses that we may incur, we consider our insurance coverage
to be adequate both as to risks and amounts.

ITEM 2.
DESCRIPTION OF PROPERTY

FACILITIES:

We
currently (or during the periods discussed herein) lease office and operating
space at the following locations:

|                     
|---------------------
|
|New York, New York   
|                     
|Palmer Lake, Colorado
|                     
|Bethesda, Maryland   
|                     

19

---

The
New York and Colorado leases expire in May 2010 and October 2005, respectively.
In August 2003, we eliminated the Bethesda lease and associated sublease through
a lease termination agreement with the landlord. The lease termination agreement
required us to make a $625,000 cash payment to the landlord in order to be
released from our obligation under the lease.

ITEM 3.
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 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No
matter was submitted to a vote of our stockholders during the fourth quarter of
our fiscal year ended June 30, 2003.

20

---

PART II

ITEM 5.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

(a)
Market Information.

Our $0.01
par value common stock (the common stock) is traded in the
over-the-counter market and quoted on the OTC Electronic Bulletin Board under
the symbol USWE. The following table sets forth, for the fiscal
quarters indicated, the range of high and low closing prices for the common
stock. These quotations have been obtained from the OTC Electronic Bulletin
Board and reflect inter-dealer prices (in dollars), without any retail mark-up,
mark-down or commissions, and may not necessarily represent actual transactions.

| | Fiscal 2003 | High           | Low
| | ----------- | -------------- | ---
| |             | Fourth quarter |    
| |             | Third quarter  |    
| |             | Second quarter |    
| |             | First quarter  |    
|
| |             | Fourth quarter |    
| |             | Third quarter  |    
| |             | Second quarter |    
| |             | First quarter  |    

There
is no public trading market for our Series C Preferred Stock or any of our
securities other than the common stock.

(b)
Holders.

As of
October 10, 2003, there were 251 holders of record of the Common Stock. There
were also an undetermined number of holders who hold their stock in nominee or
street name.

(c)
Dividends.

We
have not declared cash dividends on our common stock since our inception and we
do not anticipate paying any cash dividends in the foreseeable future.

If any
dividend is declared on the Common Stock, the holders of the Series C Preferred
Stock will be entitled to receive dividends pari passu out of legally available
funds as if each such share of Series C Preferred Stock had been converted to
Common Stock. No dividend shall be paid on the Common Stock at a rate greater
than the rate at which dividends are paid on the Series C Preferred Stock (based
on the number of shares of Common Stock into which the Series C Preferred Stock
is convertible on the date the dividend is declared). Dividends on the Series C
Preferred Stock will be noncumulative.

(d)
Securities Authorized for Issuance Under Equity Compensation Plans

The following
table sets forth information regarding outstanding options, warrants and rights,
and shares reserved for future issuance under our existing equity compensation
plans as of June 30, 2003. Our stockholder approved equity compensation plans
consist of the 2002 Stock Option Plan, the 2000 Stock Option Plan and the 1992
Stock Option Plan.  We have a number of options and warrants which were
granted pursuant to equity compensation plans not approved by security holders
and such securities are aggregated in the table below.

21

---

|                         
|-------------------------
|
|                         
|
|                         
|Equity compensation plans
|approved by security     
|holders                  
|                         
|Equity compensation plans
|not approved by security 
|holders                  
|                         
|Total                    
|                         

We had
authorized the issuance of equity securities under the compensation plans listed
below without the approval of security holders:

On
September 12, 1998, we issued a 2,083 share common stock purchase warrant to
entrénet Group, LLC, exercisable at $9.60 per share. The warrant was
fully vested and expired September 3, 2003.

On May
3, 1999, as part of an employment agreement, we issued warrants to our Chief
Executive Officer, to purchase up to 1,343,750 shares of our common stock. Half
of the warrants, or 671,875, are exercisable at $3.50 per share, the market
price of the underlying stock on the date of grant. The second 671,875 warrants
have an exercise price of $5.86 per share. The warrants are fully vested and
expire May 3, 2009.

On
January 20, 2000, we issued a 5,625 share common stock purchase warrant to RBB
Bank as an inducement to redeem shares of Series B Preferred Stock and 6%
Debentures held by RBB Bank, exercisable at $6.00 per share. The warrant is
fully vested and expires on July 6, 2004.

On
February 15, 2000, we issued an 87,500 share non-qualified common stock option
(not under a Stock Option Plan) to an executive officer. The options are
exercisable at $9.72 per share, which equals the fair market value at the date
of grant, with one third of the shares vesting annually. The options expire on
the earlier of ten years from the grant date or one year after cessation of the
optionees relationship with the Company.

On
March 28, 2000, we issued a 3,750 share common stock purchase warrant to an
investor relations firm, exercisable at $21.376 per share. The warrant is fully
vested and expires March 27, 2006.

On
March 28, 2000, we issued a 12,500 share common stock purchase warrant to an
executive search firm, exercisable at $21.376 per share. The warrant is fully
vested and expires March 27, 2005.

On
March 29, 2000, we issued each of the four new members of the Board a
nonqualified stock option for 62,500 shares of our common stock. The options are
exercisable at $6.00 per share, vest one third per yearly anniversary date
following grant date and expire on the earlier of ten years from the grant date
or one year after cessation of the optionees relationship with the
Company. Due to Michael Falks resignation from the Board on March 7, 2002,
and Edwin Coopermans resignation from the Board on January 13, 2003,
option shares aggregating 125,000 shares remain outstanding.

On
March 31, 2000, we issued a 37,500 share common stock purchase warrant to an
investor, exercisable at $9.12 per share. The warrant is fully vested and
expires April 30, 2004.

22

---

On May
3, 2000, we issued a 3,750 share common stock purchase warrant to an investor,
exercisable at $6.00 per share. The warrant is fully vested and expires April
30, 2004.

On May
3, 2000, we issued a 2,500 share common stock purchase warrant to an investor,
exercisable at $6.00 per share. The warrant is fully vested and expires April
30, 2004.

On May
4, 2000, we issued a 6,250 share common stock purchase warrant to an executive
search firm, exercisable at $12.750 per share. The warrant is fully vested and
expires May 3, 2005.

On May
31, 2000, as part of their compensation related to the private placement,
Commonwealth Associates and Peter J. Solomon Securities Company Limited received
warrants to purchase an aggregate of 167.599 Units (which are identical to the
units sold in the Private Placement). The warrants were exercisable at $100,000
per unit commencing on the date of issuance and expire May 31, 2007. Effective
September 7, 2000, the warrants to purchase units consisting of (a) Series C
Convertible Preferred Stock and (b) additional warrants to purchase common stock
at $6.00 per share were amended so that such warrants are now exercisable, at
$6.00 per share, solely for the total number (3,491,625) of shares of common
stock into which the underlying Series C Convertible Preferred Stock and
warrants would have been convertible and exercisable. The change did not change
the aggregate number of shares of common stock which the holders would have
received upon exercise in full of the unit purchase warrants and conversion and
exercise in full of the underlying securities. The change also does not affect
the aggregate purchase price, which such holders would have paid for the
underlying common stock.

On
June 30, 2000, we issued a 25,000 share common stock purchase warrant to a
consultant for consulting services, exercisable at $9.875 per share. The warrant
is fully vested and expires June 30, 2005.

On
July 16, 2002, we issued a 50,000 share common stock purchase option to an
investment bank for investment-banking services, exercisable at $0.66 per share.
The option is fully vested and expires July 16, 2007. On October 1, 2002, we
issued a 100,000 share common stock purchase option to American Express in
connection with our sale of NXT, exercisable at $0.40 per share. The option is
fully vested and expires October 1, 2007.

On
October 24, 2002, we issued a 164,000 share common stock purchase option to our
counsel as a reduction of $80,000 of outstanding legal fees for services
performed, exercisable at $0.66 per share. The option is fully vested and
expires October 24, 2007.

On
October 24, 2002, we issued common stock purchase options aggregating 884,886
shares (865,046 remained outstanding as of June 30, 2003) to employees to offset
a reduction of approximately $442,000 in salaries for the twelve-month period
beginning November 1, 2002, exercisable at $0.66 per share. The options vested
one twelfth per month and expire on October 24, 2012.

(e)
Recent Sales of Unregistered Securities.

During
fiscal 2003, there were no sales of our securities which were not registered
under the Securities Act of 1933, as amended.

23

---

ITEM 6.
MANAGEMENTS DISCUSSION AND ANALYSIS

OVERVIEW

U.S.
Wireless Data, Inc. (USWD or the Company) provides
wireless transaction delivery and gateway services to the payment 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 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.

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

RESULTS OF
OPERATIONS FOR THE YEAR ENDED JUNE 30, 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 30,500 as of June 30, 2003, an increase of
15,900 or 109% from the same date of the prior year, following the conversion in
April 2003 of approximately 7,400 wireless sites, for a major processor using
Cingulars Mobitex network, to our Synapse service on the same wireless
network. This conversion is expected to increase future activations and
transactions due to the fact that new wireless activations for this customer
will be made through our Synapse service.

Gross
Activations

Gross
activations for the year ended June 30, 2003, were 23,200 compared to 12,100 for  the
prior fiscal year, an increase of 11,100 or 92%. Excluding the conversion  discussed
above, activations increased by 3,700 or 31%.

24

---

Transactions

Transactions
processed for the year ended June 30, 2003, were approximately 7,321,000, an
increase of 2,141,000 or 41% from the prior fiscal year. This increase was
primarily due to the growth in active sites. Transaction volume is expected to
increase in the next fiscal year due to expected continued growth in active
sites and the inclusion of a full year of transactions from the units converted
in April 2003.

Product
Sales in Units

Product
sales in units for the year ended June 30, 2003, were 395, a decrease of 1,250
units or 76% from 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 point-of-sale (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 enable POS terminals or non-wireless devices to accept
credit cards wirelessly, including vending machines, taximeters, and other
integrated devices. Sales of the Synapse Enabler increased by 98 units to 335
units for the year ended June 30, 2003 as compared to the prior fiscal year.
Product sales are expected to gradually increase as we move to the
commercialization of our (i) Synapse Enabler for Vending through PepsiCo, Inc.,
its bottlers and licensees, (ii) Synapse Enabler for POS, and (iii) introduction
of the Creditel PowerSwipe product and related service into the payments
processing industry.

EBITDA

EBITDA
is included in a later discussion below.

REVENUE

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

Total
Revenues

Total
revenues were $3,725,000 for the year ended June 30, 2003, as compared to
$2,521,000 for the prior fiscal year. This improvement from the prior fiscal
year represents a $1,204,000 or 48% increase. 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 year. Revenues are discussed in more detail below.

25

---

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

|                       | For the year ended    June 30, |    
|---------------------- | ------------------------------ | ---
|
|Revenues               |                                |    
|Activation fees        |                                | 7  
|Monthly fees           |                                | 71 
|Transaction fees       |                                | 7  
|Other fees             |                                | 6  
|                       |                                |    
|Total service revenues |                                | 91 
|Product sales          |                                | 9  
|                       |                                |    
|Total revenues         |                                | 100
|                       |                                |    
|                       |                                |    

Service
Revenues

Revenue
from services for the year ended June 30, 2003 increased to $3,404,000 from
$1,951,000 for the prior fiscal year, a $1,453,000 or 75% 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 $280,000 for the year ended June 30, 2003, a $33,000 or 11%
decrease as compared to the prior fiscal year. The amortization of revenue from
activation fees for fiscal 2003 as compared to the prior fiscal year were
reduced by an increase in the amortization period 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. We did not earn activation
fees from the units converted in April 2003 since the activation fees were
waived as an inducement for the conversion.

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 $2,650,000 for the year ended June 30, 2003, a $1,188,000 or 81%
increase as compared to 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.

26

---

Transaction
Fees.Revenue from transaction fees for the year ended June 30, 2003, was
$252,000, compared to $154,000 during the prior fiscal year, a $98,000 or 64%
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 year ended June 30, 2003 was $222,000,
compared to $22,000 during the prior fiscal year, a $200,000 increase. The
increase is a result of certain administrative and other charges to certain
clients.

Product Sales

Product sales
are primarily derived from the sale  of our proprietary wireless devices, the Synapse
Enabler and the Synapse  Adapter. Revenue from product sales decreased for the year ended
June 30, 2003  to $321,000 from $570,000 during the prior fiscal year, a $249,000 or 44%
decrease. Product sales for the year ended June 30, 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). The decrease was attributed to the  substantial decrease of sales of the
Synapse Adapter, partially offset by sales  of the Synapse Enabler and other products.
See Gross Profit below for a further  discussion regarding the Synapse Adapter and
products purchased on behalf of a  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 Synapse Enablers, and certain
carrier and other costs. Total gross profit for the year ended June 30, 2003 was
$1,033,000, compared to a loss of $2,253,000 for the prior fiscal year, a
$3,286,000 increase. This increase in total gross profit was primarily due to
the decrease in the write-down of inventory of Synapse Adapters and other
CDPD-based inventory. For the years ended June 30, 2003 and 2002, gross profit
was reduced by write-downs of inventory of $579,000 and $3,481,000. Without the
write-downs of inventory, the improvement in total gross profit was primarily
attributed to the growth of active sites for Synapse services. The increase was
partially offset by the decrease in gross profit from product sales. Gross
profit from services for the year ended June 30, 2003 was $1,600,000, compared
to $1,127,000 for the prior fiscal year, a $473,000 or 42% increase. The
improvement in gross profit from services was discussed earlier in this section.
Product sales of the Synapse Adapter trailed off substantially in fiscal 2003,
and we no longer sell this product since it is based on the CDPD wireless
medium, which the existing wireless carriers will ultimately migrate away from
as they move to next generation technologies. In fiscal 2002, we recorded a
charge of $3,481,000 to write-down the inventory of Synapse Adapters to the
value of the number of units the Company expected to realize over the remaining
expected life of this product. 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. Verizon Wireless intends to shutdown their CDPD
network in December 2005. As a result, at December 31, 2002, we recorded a
charge of $333,000 to completely write-off our inventory of Synapse Adapters and
other CDPD-based inventory. At June 30, 2003, we took a charge of $246,000 to
write-down certain other inventory.

27

---

Gross
profit from product sales for the year ended June 30, 2003 was negative
$567,000, compared to negative $3,380,000 for the prior fiscal year, a
$2,813,000 or 83% improvement. A significant portion of the negative gross
profit from product sales is due to the write-downs of inventory. Without the
inventory write-downs, the decrease was attributed to the lack of sales of the
Synapse Adapter, partially offset by sales of Synapse Enabler products. In
addition, product sales for fiscal 2003 included approximately $103,000 for 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 year ended        June 30, |     
|------------------ | ---------------------------------- | ----
|
|Gross margin       |                                    |     
|Services           |                                    | 47  
|Product sales      |                                    | (176
|Total gross margin |                                    | 27  

Total
gross margin (gross profit as a percentage of total revenues) for the year ended
June 30, 2003 increased to 27.7% from (89.4)%. This increase was attributed to
the reduction in the write-down of inventory as well as by the greater
percentage of total revenue attributable to monthly fees due to the growth in
active sites. Excluding the write-downs of inventory, the decrease in gross
margin was primarily attributed to changes in certain customer pricing plans
that led to lower service margins, and lower margin product revenues. In
addition, product sales for fiscal 2003 included the sale of certain third party
products purchased on behalf of a client and sold at cost to such client.

Gross
margin from services was 47.0% for the year ended June 30, 2003 compared to
57.8% for the prior fiscal year. This reduction was primarily attributed to the
mix of rates charged to our clients, including a reduction in rates for certain
clients, and the associated number of active sites for each client.

Gross
margin from product sales was (176.6)% for the year ended June 30, 2003,
compared to (593.0)% for the prior fiscal year. Excluding the inventory
write-downs, the decrease was 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. In addition, product sales for fiscal 2003 included the sale of
certain third party products purchased on behalf of a client and sold at cost to
such client.

28

---

OPERATING
EXPENSES

Total
operating expenses for the year ended June 30, 2003 decreased to $10,245,000  from
$21,392,000, a decrease of $11,147,000 or 52% compared to the prior fiscal  year. The
decrease was due to cost reduction efforts and efficiency gains,  including reductions in
staff; a reduction in impairment charges against  intangible assets relating to our
acquisition of Cellgate Technologies LLC  (Cellgate); and a reduction in the
amortization expense recorded in  relation to goodwill and intangible assets. 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 year ended June 30, 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
$7,488,000 for the  year ended June 30, 2003  compared to $9,932,000 for the prior fiscal
year, a  $2,444,000 or 25% decrease. The  decrease is primarily attributed to the
reduction of staff, the reduction in  compensation of staff and our continued  cost
reduction efforts.

The
amortization of non-cash compensation of directors of $469,000 for the year
ended June 30, 2003 decreased by $606,000 or 56% from the prior fiscal year. The
decrease was primarily related to the completion of the non-cash compensation
amortization, and the reversal of a portion of the previous amortization,
related to the resignation of a director in January 2003 who had received
options in March 2000.

Selling,
general, and administrative expenses including non-cash compensation of  directors, were
$7,957,000 for the year ended June 30, 2003 compared to  $11,007,000 for the prior fiscal
year, a $3,050,000 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 $520,000 for the
year  ended June 30, 2003 compared to $1,102,000 for the prior fiscal year, a  $582,000,
or 53% 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

Depreciation
and amortization for the year ended June 30, 2003 was $1,063,000, compared to
$3,671,000 for the prior fiscal year, a $2,608,000 or 71% decrease. The
improvement in depreciation and amortization is discussed below in this section.

29

---

Amortization
of intangibles includes amortization of goodwill and intellectual property,
including core technology, customer relationships, and contract rights.
Amortization of intangibles were $178,000 for the year ended June 30, 2003,
compared with amortization of goodwill and intangibles of $2,889,000 for the
prior fiscal year, a $2,711,000 or 94% decrease. For the year ended June 30,
2002, a significant part of the amortization included amortization relating to
goodwill and intangibles generated by the 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 another charge of $836,000 in fiscal 2003 against goodwill and
intangibles related to our acquisition of Cellgate, remaining intangible assets
of $45,000 at June 30, 2003 are being amortized over a six-month remaining life.

Depreciation
and amortization of fixed assets, leasehold improvements and capitalized
software were $885,000 for the year ended June 30, 2003, compared with $782,000
for the prior fiscal year, a $103,000 or 13% 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.

Restructuring

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

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

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

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

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

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

30

---

The balance
of the restructuring accrual was paid in August 2003.

Impairment
of Intangible Assets

As
discussed in the Gross Profit discussion above, product sales of the
Synapse Adapter trailed off substantially in the latter half of fiscal 2002. In
the fourth quarter of the year ended June 30, 2002, we recorded an impairment
charge of $5.7 million for goodwill and other intangibles to write-down the
value of the acquired assets of Cellgate to managements estimate of fair
value. As discussed earlier, the remaining useful life of CDPD-based products
was believed to be limited. As a result, in fiscal 2003 we recorded an
additional impairment charge of $836,000. The remaining value of intangibles of
$45,000 as of June 30, 2003 will be amortized over their estimated remaining
life of six months.

OTHER

Interest
income for the year ended June 30, 2003 was $42,000, compared to $274,000 for
the prior fiscal year, a $232,000 or 85% decrease. 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.

Interest
expense for the year ended June 30, 2003 was $133,000, compared to $587,000 for
the prior fiscal year, a $454,000 or 77% decrease. 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 year ended June 30, 2003 was income of $303,000,
compared to an expense of $48,000 for the prior fiscal year. Other income
(expense), net consists primarily of: (a) rental income for sublet facilities of
$112,000 for the year ended June 30, 2003 compared to $64,000 for the prior
fiscal year, a $48,000 increase due to the sublet of a portion of our current
offices in New York; (b) income relating to a transition services agreement that
was executed in connection with the sale of NXT of $220,000 for the year ended
June 30, 2003 and $0 for the same period in the prior fiscal year; and (c) tax
expense for the year ended June 30, 2003 of $34,000 compared to $135,000 for the
prior fiscal year.

LOSS
FROM CONTINUING OPERATIONS

Loss
from continuing operations of $9,000,000 for the year ended June 30, 2003
decreased $15,006,000 or 63% from the prior fiscal year. The decrease in loss
was primarily attributed to the increase in service revenue from the growth of
active sites, the realization of the cost reduction efforts and efficiency
gains, the reduction in the amortization expense recorded in relation to
goodwill and intangible assets, and the reduction in write-downs of inventory
and impairments of intangible assets.

31

---

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. For the year ended June 30, 2003,
operations resulted in income of $362,000 as compared to $321,000 for the prior
fiscal year. The increase in net results 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. For the year ended June 30, 2003, gain on sale of
discontinued operations of $58,000 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. For the year ended June
30, 2002, loss on sale of discontinued operations of $1,867,000 represents the
difference between gross proceeds received of $5,000,000 cash from the sale of
substantially all of the operating assets and operating obligations associated
with NXT, less estimated transaction costs of $872,000, and the net carrying
value of assets and liabilities sold of $5,995,000.

NET
LOSS

For
the year ended June 30, 2003, net loss totaled $8.58 million or $0.52 per share
as compared to a net loss of $25.55 million or $1.92 per share for the prior
fiscal year.

EBITDA

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

The
EBITDA loss for the year ended June 30, 2003 was $7.4 million as compared to the
prior fiscal year of $21.4 million. This improvement in EBITDA loss of $14.0
million or approximately 66% is primarily attributed to the increase in revenues
and a reduction of cost of revenues and operating expenses as discussed in prior
sections.

32

---

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

|                                   | For the year ended June 30, |            
|---------------------------------- | --------------------------- | -----------
|
|Net loss                           |                             | $(8,580,000
|Subtract interest income           |                             | (42,000    
|Add interest expense               |                             | 133,000    
|Add taxes included in other income |                            
|(expense), net                     |                             | 34,000     
|Depreciation and amortization      |                             | 1,063,000  
|                                   |                             |            
|EBITDA loss                        |                             | $(7,392,000
|                                   |                             |            
|                                   |                             |            

LIQUIDITY
AND CAPITAL RESOURCES

We
need additional capital in the immediate future in order to continue operations.
Since our inception we have incurred significant losses and negative cash flow
from operations. As of June 30, 2003, we had an accumulated deficit of
approximately $143 million. At June 30, 2003 our principal source of liquidity
was approximately $602,000 in cash and cash equivalents. Based on our current
estimates of revenue levels, operating costs and other cash inflows and outlays,
and taking into account the remaining proceeds available to us from the bridge
facility discussed below, we will not have cash balances adequate for us to
continue operations beyond December 2003 without a sufficient capital infusion
by such time. 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.

In
August 2003, we signed term sheets with Brascan Financial Corporation
(Brascan), a subsidiary of Toronto, Canada-based Brascan
Corporation, to arrange for the purchase of $12.5 million of a newly issued
Series D Preferred Stock representing at least 60% of our equity. The term
sheets contemplate that we enter into a strategic alliance with MIST Inc.,
Brascans subsidiary, and a provider of card issuance and payment
processing products and gateway services to banks, non-bank card issuers and the
payment processing industry. The term sheets contemplate that Brascan would
provide a bridge loan to allow us to continue operations while negotiating a
definitive Series D Preferred Stock purchase agreement and to satisfy the
anticipated closing conditions. In addition, the term sheets contain provisions
with respect to break-up fees, non-solicitation and other miscellaneous matters.

On
September 16, 2003, we entered into a Term Loan and Security Agreement (the
Bridge Loan) with Brascan, pursuant to which Brascan agreed to lend
us up to $2.75 million, at an interest rate of 7.5% per annum payable monthly,
with cash payments commencing March 28, 2004. The loan is secured by a general
security interest in all of our assets and is due March 16, 2005. A portion of
the funds was used to repay a demand loan in the principal amount of $300,000
previously made to us on August 28, 2003, which was necessary in order to enable
us to continue operations. The remaining portion of the loan will provide us
with the working capital necessary to continue operations until December 2003.
As of October 13, 2003, we have drawn down approximately $1.24 million against
the $2.75 million Bridge Loan commitment. The Bridge Loan contains various
covenants which include, among others, (i) a material adverse change clause,
(ii) a minimum monthly revenue requirement of approximately $380,000, and (iii)
a minimum net worth requirement of not less than negative $2 million. As of
October 13, 2003, the Company was in compliance with these covenants. We are
currently in technical default under the Bridge Loan with respect to two
post-closing covenants (relating to receiving a landlord waiver for our New York
facility and completing the actions necessary to subject certain of our funds to
a blocked account arrangement) that we are still in the process of satisfying.
However, we have received informal assurances from Brascan that it will provide
additional time to satisfy such covenants and will not pursue any actions with
respect to a default at this time.

33

---

In
connection with this financing, Brascan received a warrant for 10 million shares
of common stock exercisable at $.15 per share. The warrant is exercisable only
if the Series D financing is not consummated by December 31, 2003 or if we were
to be acquired or were to sell substantially all of our assets. If the warrant
becomes exercisable, it will expire on September 16, 2008. Brascan will have
certain demand and piggyback registration rights as to the shares of common
stock underlying the warrant. The warrant was issued pursuant to certain
exceptions contained in the full ratchet anti-dilution provisions of the Series
C Convertible Preferred Stock and Series C Warrants and therefore, we believe
the issuance of the warrant will not trigger such anti-dilution provisions.

The
equity financing contemplated by the term sheets would involve the issuance to
Brascan or its affiliates shares of a newly issued Series D convertible
preferred stock for $12.5 million. The proceeds from the contemplated financing
will be used to repay the $2,750,000 bridge loan and for general working capital
purposes. It is anticipated that the Series D preferred stock will be
convertible at any time, at Brascans option, into at least 60% of the
shares of our common stock, on a fully diluted basis. If the contemplated
financing is successfully completed, Brascan or its designee will become our
majority stockholder. It is anticipated that the terms and provisions of the
contemplated financing, if successful, will have a substantial dilutive effect
on the ownership interests of our existing stockholders.

There
can be no assurances that the contemplated financing will be completed on the
terms contemplated by the term sheets or at all. The contemplated financing is
subject to a number of conditions, including, but not limited to, the execution
of definitive financing documentation and the successful completion of a
reorganization of our capital structure, which will include the restructuring of
our currently issued and outstanding Series C Convertible Preferred Stock and
Series C Warrants.

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

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

34

---

Paymentech
is obligated, subject to certain conditions, to purchase goods or services from
us or our affiliates over a three (3) year period commencing September 1, 2002,
in an amount aggregating at a minimum $3,472,500, with Paymentech obligated to
pay us at least $1,000,000 during the first year, in installments of $83,333 per
month, at least $1,150,000 during the second year, in installments of $95,833
per month, and at least $1,322,500 during the third year, in installments of
$110,208. Paymentech has made such payments and is expected to continue to make
such payments on a timely basis.

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

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

Cash
Flows

For
the year ended June 30, 2003, cash decreased by $2,260,000 to $602,000. For the  year
ended June 30, 2002, cash decreased by $15,343,000 to $2,862,000.

35

---

Net cash  used
in operating activities was $5,565,000 during the year ended June 30, 2003.  This
primarily consisted of net operating losses and decreases in accounts  payable, partially
offset by non-cash charges for depreciation and amortization,  non-cash compensation for
directors and consulting, the losses related to an  inventory write-down and impairment
of intangible assets, and a decrease in  accounts receivable.

Net cash used
in operating activities was $11,461,000  during the year ended June 30, 2002. This
primarily consisted of net operating  losses and decreases in accounts payable, accrued
liabilities, and charges  against the restructuring accrual, partially offset by non-cash
charges for  depreciation and amortization, loss on sale of discontinued operations,
non-cash  compensation, impairment of goodwill and intangibles, and the write-down of
inventory.

Net cash
provided by investing activities was $3,808,000 for the year  ended June 30, 2003. This
was primarily comprised of the net proceeds from the  sale of NXT, partially offset by
payments related to the acquisition of NXT. Net  cash used in investing activities was
$3,493,000 for the year ended June 30,  2002. This was primarily comprised of acquisition
costs, purchases of equipment  and an increase in restricted cash.

Net
cash used in financing activities for the year ended June 30, 2003 of $503,000
was comprised of the payments for capital leases. Net cash used in financing
activities was $389,000 for the year ended June 30, 2002. This was primarily
comprised of payment of obligations for capital leases, partially offset by
proceeds from the exercise of stock warrants.

CRITICAL
ACCOUNTING POLICIES

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

Intangibles
and Long-Lived Assets

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.

36

---

Identifiable
intangible net assets consist of completed technology, 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.

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 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. The Company
adopted this standard 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 in the first quarter of fiscal 2003. The
remaining intangibles at June 30, 2003 are 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 fiscal year ended 2003 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 fiscal year
ended June 30, 2002, the Companys net loss and net loss per share would
have been as follows:

|                                  | Year ended June 30, |                   
|--------------------------------- | ------------------- | ------------------
|
|Net loss, as reported             |                     | $   (8,580,000    
|Add back amortization of goodwill |                     | --                
|                                  |                     |                   
|Pro forma adjusted net loss       |                     | $   (8,580,000    
|                                  |                     |                   
|                                  |                     |                   
|Net loss per share                |                    
|As reported                       |                     | $            (0.52
|Add back amortization of goodwill |                     | --                
|                                  |                     |                   
|Pro forma                         |                     | $            (0.52
|                                  |                     |                   
|                                  |                     |                   

Inventory
Valuation

Inventory
is stated at the lower of cost or market, cost being determined by the first-in,
first-out method. 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 been unsuccessful
in moving any significant volume of units. 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. In the fourth quarter of the fiscal year ended June 30,
2002, the Company recorded a charge of $3,481,000 to write-down the inventory of
Synapse Adapters to the value of the number of units the Company expected to
sell over the remaining expected life of this product.

37

---

As of
April 1, 2003, AT&T Wireless is no longer activating new units on their CDPD
network and they stated that they intend to completely shutdown their CDPD
network in June 2004. Verizon Wireless has stated that they intend to completely
shutdown their CDPD network in December 2005. As a result, in the quarter ended
December 31, 2002, we recorded a charge of $333,000 to completely write-down the
remaining inventory of Synapse Adapters and other CDPD-based inventory. In
addition, we took a charge of $246,000 to write-down certain other inventory
that management believed would not be recoverable from projected operations.

Revenue
Recognition

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

We derive
revenue primarily from two sources: service revenues and product (equipment) sales.

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

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

Product sales.
Product sales (i.e., sales of equipment) are primarily derived from the sale of our
proprietary Synapse Adapter and Synapse Enabler products. Revenues from product sales
are recognized upon shipment and acceptance.

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.

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

38

---

At
June 30, 2003, the Company had four fixed stock-based compensation plans. The
exercise price of each option granted pursuant to these plans was equal to the
market price of the Companys common stock on the date of grant.
Accordingly, pursuant to APB No. 25, no compensation cost has been recognized
for such grants. Had compensation cost been determined based on the fair value
at the grant dates for such awards consistent with the method prescribed by SFAS
No. 123, the Companys net loss and loss per share for the periods
indicated would have been as follows:

|                                           | Year ended June 30, |                     
|------------------------------------------ | ------------------- | --------------------
|
|Loss from continuing operations            |                     | $     (9,000,000    
|Income (loss) from discontinued operations |                     | 420,000             
|                                           |                     |                     
|Net loss, as reported                      |                     | $     (8,580,000    
|Deduct: Total stock-based compensation     |                    
|expense determined under fair value        |                    
|based method                               |                     | (2,899,000          
|                                           |                     |                     
|Pro forma net loss                         |                     | $    (11,479,000    
|                                           |                     |                     
|                                           |                     |                     
|Per share, as reported                     |                    
|From continuing operations                 |                     | $              (0.55
|From discontinued operations               |                     | 0.03                
|                                           |                     |                     
|Net                                        |                     | $              (0.52
|                                           |                     |                     
|                                           |                     |                     
|Per share, pro forma                       |                    
|From continuing operations                 |                     | $              (0.73
|From discontinued operations               |                     | 0.03                
|                                           |                     |                     
|Net                                        |                     | $              (0.70
|                                           |                     |                     
|                                           |                     |                     

In
determining the 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 years ended June 30, 2003 and 2002, respectively.

RECENT
ACCOUNTING PRONOUNCEMENTS

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 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 the
Company for the fiscal year ending June 30, 2004. The Company has not determined
the effect, if any, that this statement will have on its results of operations
or financial condition.

39

---

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 results
of operations or financial condition.

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 on October 1, 2003. The Company does not have any
variable interest entities, and, accordingly, the adoption of FIN 46 is not
expected to have an impact on the Companys results of operations or
financial condition.

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

40

---

In May
2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No.
150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Many of those instruments
were previously classified as equity. This statement will become effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
shall be effective at the beginning of the first interim period beginning after
June 15, 2003. The adoption of this statement is not expected to have a material
impact on the Companys results of operations or financial condition.

QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

41

---

RISK FACTORS

Investing
in our stock is highly speculative and risky. You should be able to bear a
complete loss of your investment. Before making an investment decision, you
should carefully consider the following risk factors. If any event or
circumstance described in the following risk factors actually occurs, it could
materially adversely affect our business, operating results and financial
condition. The risks and uncertainties described below are not the only ones
that we face. There may be additional risks and uncertainties not presently
known to us or those we currently believe are immaterial which could also have a
negative impact on our business, operating results and financial condition.

We
need additional capital in the immediate future.

We
need additional capital in the immediate future in order to continue operations.
Since our inception we have incurred significant losses and negative cash flow
from operations. As of June 30, 2003, we had an accumulated deficit of
approximately $143 million. At June 30, 2003 our principal source of liquidity
was approximately $602,000 in cash and cash equivalents. Based on our current
estimates of revenue levels, operating costs and other cash inflows and outlays,
and taking into account the remaining proceeds available to us from the bridge
loan discussed above, we will not have cash balances adequate for us to continue
operations beyond December 2003 without a sufficient capital infusion by such
time. 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, or we may even be required to cease operations altogether.

Although
we recently entered into a Bridge Loan agreement with Brascan, the funds
available under such agreement, assuming continued compliance with the loan
agreement, will only be sufficient to allow us to continue our current
operations until December 2003. In addition to and in connection with the loan
agreement, we also signed a term sheet with Brascan to arrange for the purchase
of $12.5 million of a newly issued Series D preferred stock representing at
least 60% of our equity. The bridge loan was intended to provide us with working
capital while the negotiation of definitive Series D preferred stock
documentation occurred. It is anticipated that the Series D preferred stock will
be convertible at any time, at Brascans option, into at least 60% of the
shares of our common stock, on a fully diluted basis. If the contemplated
financing is successfully completed, Brascan or its designee will become our
majority stockholder. It is anticipated that the terms and provisions of the
contemplated financing, if successful, will have a substantial dilutive effect
on the ownership interests of our existing stockholders.

There
can be no assurances that the contemplated financing will be completed on the
terms contemplated by the term sheets or at all. The contemplated financing is
subject to a number of conditions, including, but not limited to, the execution
of definitive financing documentation and the successful completion of a
reorganization of our capital structure, which will include the restructuring of
our currently issued and outstanding Series C preferred stock and Series C
Warrants.

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

A
default on the Bridge Loan with Brascan will cause the loss of all of our
assets.

The Bridge
Loan provided to us by Brascan is on a fully secured basis. If an event of
default occurs pursuant to the terms and provisions of the loan, then Brascan
may be able to seize and take control of all of our assets, including our
accounts receivables and ownership of our existing intellectual property, such
as our technologies, applications, platforms of services and products. We are
currently in technical default under the Bridge Loan with respect to two
post-closing covenants (relating to receiving a landlord waiver for our New York
facility and completing the actions necessary to subject certain of our funds to
a blocked account arrangement) that we are still in the process of
satisfying. However, we have received informal assurances from Brascan that it
will provide additional time to satisfy such covenants and will not pursue any
actions with respect to a default at this time. The loss of our assets including
our right to receive our accounts receivables or the loss of ownership of our
intellectual property rights would have a material adverse effect on our
business, financial condition and results of operations and would require us to
cease operations altogether.

42

---

Any
financing arrangement will cause substantial dilution.

The
equity financing contemplated by the term sheet with Brascan previously
identified would involve the issuance to Brascan or its affiliates of shares of
a newly issued Series D convertible preferred stock for $12.5 million. The
proceeds from the contemplated financing will be used to repay the $2,750,000
bridge loan and for general working capital purposes. Upon closing of the
contemplated financing, and pursuant to the terms and conditions of definitive
Series D preferred stock financing documentation, Brascan or its designee will
become our majority stockholder. It is anticipated that the terms and provisions
of the contemplated financing will allow Brascan to convert into at least 60%
shares of our common stock, on a fully diluted basis, which will have a
substantial dilutive effect on the ownership interests of our existing
stockholders.

Antidilution
provisions in our Series C preferred stock and warrants may hinder our financing
efforts.

Our
outstanding Series C preferred stock and the related warrants contain provisions
pursuant to which they receive, subject to enumerated exceptions, full
ratchet antidilution protection for the issuance of common stock and
common stock equivalents at prices below the conversion price of the Series C
preferred stock and the exercise price of the warrants, which in both cases, is
$6.00 per share. For example, if we issued common stock in a financing for $1.00
per share, the conversion and exercise prices of the Series C preferred stock
and the warrants would be reduced from $6.00 per share to $1.00 per share and
the securities would become convertible into six times the current number of
shares of common stock with regard to the Series C preferred stock. Although
there are carve-outs from the antidilution provisions for certain issuances, or
the antidilution provisions may be waived by the holders of a majority of such
securities, in light of the current market price of our common stock, any
financing without such a waiver or that does not qualify for one of the
carve-outs will result in substantial dilution to the holders of our securities.
In light of the contemplated financing, as previously identified, and the
substantial impediment to a financing posed by the terms of the Series C
preferred stock and warrants, it will be necessary for us to restructure our
currently issued and outstanding Series C preferred stock and warrants in
exchange for a substantial reduction in the conversion and exercise price of
such securities. If we do so, such transaction would cause substantial dilution
to the current holders of our securities, as we would be issuing substantially
more shares of our common stock than we would if the conversion ratio or the
exercise price remained at $6.00.

We
have never been profitable, and there is no assurance that we will generate
significant revenues or profits in the future.

We
have never been profitable and have incurred substantial losses and negative
cash flow from operations since our inception. We had an accumulated deficit of
approximately $143 million at June 30, 2003 and had a net loss of $8.58 million
and $25.55 million for the years ended June 30, 2003 and 2002, respectively. Our
Synapse services and products are relatively new and there is no history upon
which to judge their prospects. There is no assurance we will generate
significant revenues from our services, products, or otherwise, or that we will
ever become profitable. There can be no assurance that our services or products
will gain market acceptance.

The
success of our business plan is uncertain.

The
success of our business plan, which is to concentrate on trying to develop a
recurring revenue stream from our customers use of our services, is
dependent on our platforms being utilized by processors, merchant acquirers
independent sales organizations (ISOs) and other entities in
sufficient quantities to generate profits. To date, the revenues generated from
our products and services have not covered the level of our expenditures. The
failure to successfully implement our business plan would have a material
adverse effect on our business, operating results and financial condition.

Approximately
23% of our revenue for the year ended June 30, 2003 was generated from one
customer and, accordingly, the loss of such customer could adversely affect our
revenues.

For
the year ended June 30, 2003, one customer accounted for approximately 23% of
our revenues. Although we are seeking to broaden our client base, no assurance
can be made that our efforts will be successful or that this current client will
not continue to account for a large concentration of our revenues. If any one
customer accounts for a significant portion of our revenues, the loss of such
customer could adversely affect our business, operating results, and financial
condition.

43

---

There
is no assurance that the market will accept our systems.

We
plan to generate our revenue from the sales of services and products relating to
wireless credit card and other transaction processing. The market for providing
this service is in the early stages of development and it is difficult to
predict the rate at which this market will grow, if at all. Future competitors
are likely to introduce services that compete with the services offered by us.
Demand for these services could be affected by numerous factors outside of our
control, including, among others, market acceptance by prospective customers,
the introduction of new or superior competing technologies or services that are
available on more favorable pricing terms than those being offered by us, and
the general condition of the economy. Any market acceptance for our services may
not develop in a timely manner or may not be sustainable. Our success will
likely depend on our ability to sell our services to processors, merchant
acquirers and ISOs, as well as an increase in the availability of terminals that
interface with our platforms. New or increased competition may result in market
saturation, more competitive pricing, or lower margins. Our business, operating
results and financial condition would be materially and adversely affected if
the market for our services fails to grow, grows more slowly than anticipated,
or becomes more competitive, or if targeted clients do not accept our products
and services even if a substantial market develops.

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, as of April 1,
2003, AT&T Wireless no longer activates any new accounts on CDPD and they
stated that they intend to completely shutdown their CDPD network in June 2004.
Verizon Wireless has announced that it intends to transition from its current
CDPD data service to its next generation CDMA data service and intends to
completely shutdown their CDPD network in December 2005. Currently, CDPD is
supported by carriers other than AT&T Wireless and Verizon Wireless,
including Alltel and Dobson Communications. Even though the decisions of
AT&T Wireless and Verizon Wireless to withdraw their CDPD service will
geographically diminish CDPD availability, the other carriers, although expected
to eventually migrate to next generation service, may provide service for a
longer period. 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 Wireless, Verizon Wireless 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.

Because
our business is not currently diversified, if our wireless payments transaction
delivery processing business does not succeed, our business may fail.

We are
currently in the payments transaction services industry, and accordingly, there
is no diverse portfolio of products or services on which to rely if our systems
fail. If our systems fail, we would fail unless we develop new products or
services and a new business plan.

We
may not be able to protect our proprietary technology, which could enable others
to more easily compete with us.

Our
performance and ability to compete are dependent to a significant degree on our
proprietary technology. We rely on our patents/patent applications, copyrights,
service marks, trademarks, trade secrets and similar intellectual property as
critical to our success, and rely on patent, trademark and copyright law, trade
secret protection and confidentiality and/or license agreements with our
employees, customers, partners and others to protect our proprietary rights. Our
inability to protect our proprietary rights adequately could have a material
adverse effect on our business.

44

---

To
that end, regarding our currently pending patent applications, there can be no
assurance that a patent will issue on these applications, either domestically or
abroad, or that patents will issue from any patent application filed by our
licensors or us in the future, or that the scope of any claims granted in any
patent issued to us or issued to our licensors will provide meaningful
proprietary protection or a competitive advantage to us. There can be no
assurance that the validity or enforceability of patents issued or licensed to
us will not be challenged by others or, if challenged, will be upheld by a
court. In addition, there can be no assurance that competitors will not be able
to circumvent any patents issued or licensed to us. Regarding any service marks
for which we may seek protection, there is no assurance that we will be able to
secure significant protection for any marks.

The
agreements we have entered into with our employees, consultants, customers,
partners and others generally include confidentiality and non-disclosure
provisions, and limit access to and distribution of our documentation and other
proprietary information. There can be no assurance that the steps taken by us
will prevent misappropriation of our technology or that agreements entered into
for that purpose will be enforceable.

Accordingly,
notwithstanding the precautions we have taken, it might be possible for a third
party to copy or otherwise obtain and use our proprietary information without
authorization or to develop similar technology independently. Policing
unauthorized use of our technology is difficult. The laws of other countries may
afford us little or no effective protection of our intellectual property.
Effective trademark, service mark, copyright and trade secret protection may not
be available in every country in which our products and services are made
available. In the future, we may also need to file lawsuits to enforce our
intellectual property rights, protect our trade secrets, and determine the
validity and scope of the proprietary rights of others. Such litigation, whether
successful or unsuccessful, could result in substantial costs and diversion of
resources, which could have a material adverse effect on our business, operating
results, and financial condition.

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 payments 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.

Component
shortages or cost increases could curtail or adversely affect production.

From
time to time, supply for key components in products lags behind worldwide
demand. In the event that supply of a key material component is delayed or
curtailed, or should our capital needs prevent us from ordering with sufficient
lead time or the cost of such materials materially increase, our ability to ship
the related product in desired quantities and in a cost effective and timely
manner could be adversely affected.

Unanticipated
delays in product schedules could affect product demand.

The
process of developing new products and services is complex and often uncertain.
Successful product transitions and deployment of new products requires accurate
predictions of the product development schedule as well as volumes, product mix,
customer demand, and configuration. We may also anticipate demand and perceived
market acceptance that differ from a products realizable customer demand
and revenue stream. Further, in the face of intense competition in the industry,
any delay in a new product rollout could decrease any advantage we may have to
be the first to market. A failure on our part to carry out a product rollout in
the time frame anticipated and in quantities appropriately matching current
customer demand could directly affect the overall future demand for the product
and the profitability of our operations.

45

---

Our
services rely on an emerging infrastructure that could encounter capacity
constraints or system failures, which could adversely affect our reputation and
market acceptance of our product.

We
utilize a variety of technologies, infrastructures, and products in providing
our services, including wireless networks, dedicated lines, web servers,
Internet information servers, local area networks, data storage devices and
proprietary applications. If these systems experience difficulties, capacity
constraints or service interruptions, it could have a detrimental impact on our
business, operating results, and financial condition.

The
satisfactory performance, reliability, and availability of our network
infrastructure are critical to our reputation and our ability to attract and
retain customers and maintain adequate customer service levels.

Any
system interruptions or quality defects would reduce the quantity and/or quality
of services rendered and the attractiveness of our product offerings, and would
have a material adverse effect on our reputation, business, operating results,
and financial condition.

We
are dependent on outside parties for our communications infrastructure.

Our
ability to retain and attract card processors, merchant acquiring banks, ISOs
and others to our products and services is dependent upon, among other things,
the performance of cellular, digital wireless and landline communication
networks and credit card or other processing networks used by us. Any system or
network failure that causes interruption or slower response time of our services
could result in reduced usage and could reduce the attractiveness of our
offerings to consumers. Additionally, the telecommunications industry is
currently experiencing a period of uncertainty and rationalization.

The
recent growth in cellular and digital wireless traffic has caused periods of
decreased performance requiring wireless providers to upgrade and expand their
infrastructures.

If
wireless usage continues to increase rapidly, the wireless infrastructure may
not be able to support the demands placed on it by this growth and its
performance and reliability may decline. Consequently, the emergence and growth
of the market for our services is dependent on future improvements to the entire
wireless network. Many companies in that industry are in financial distress. To
the extent we rely on such companies, we may be negatively impacted by the
general economic environment and by the difficulties impacting that industry or
the failure of one or more of these companies.

We
will have to keep pace with new products and rapid technological change in order
to remain competitive in the marketplace.

Our
future success will depend upon our ability to keep pace with technological
developments, respond to evolving merchant demands and adopt new industry
standards, including next generation wireless data services. Failure
to anticipate or respond adequately to new industry standards, technological
developments or significant delays in product development could damage our
potential position in the marketplace, make our existing products or products
under development obsolete or unmarketable, and could result in less revenue or
an inability to generate profits. With our current financial and technical
resources, we may not be able to develop or market new services or enhancements
to our existing service offerings. It is possible that we could experience
significant delays in these endeavors. Any failure to successfully develop and
market services and service enhancements could have a material adverse effect on
our business, operating results, and financial condition. In this regard,
AT&T Wireless has advised us and others that it intends to transition from
its current CDPD data service to its next generation GPRS data service.
Accordingly, we may incur additional costs and expenses, or delays or
interruptions in providing our services, while we migrate to other CDPD
providers or to other wireless services such as CDMA or GPRS.

We
face potential competition and pricing pressures from larger, well financed, and
recognized companies and we may not be able to compete successfully if such
potential competitors enter the market.

The
market for our products and services is highly competitive, including pressure
to maintain competitive pricing structures for credit card processing services.
We have identified potential competitors that may be logical candidates to
develop similar products and services. Few barriers to entry in our business are
substantial and companies with significantly greater financial, technical,
marketing, manufacturing, and human resources, as well as those with far greater
name recognition than us, may attempt to enter the market. We believe that our
ability to compete depends on quality of service, price, distribution channels
and brand recognition. There can be no assurance that we will be able to compete
successfully in the market.

46

---

We
depend on recruiting and retaining key management and technical personnel and we
may not be able to develop new services or support existing services if we
cannot hire or retain qualified employees.

Our
success depends to a large degree upon the skills of our senior management team
and current key employees. We depend particularly upon Dean M. Leavitt, our
Chief Executive Officer. We have an employment agreement with Mr. Leavitt and
with certain of our other employees. We do not maintain key person life
insurance for any of our officers or key employees other than Mr. Leavitt. The
loss of any of our key executives or employees, the use of proprietary or trade
secret data by former employees who compete with us, or the failure to attract,
integrate, motivate, and retain additional key employees could have a material
adverse effect on our business, operating results, and financial condition.
Because of the technical nature of our services and the dynamic market in which
we compete, our performance depends on attracting and retaining key employees.
Competition for qualified personnel in the wireless data, software and
electronic payments processing industries may be intense at times and finding
qualified personnel with experience in these three industries may be even more
difficult. We believe there are only a limited number of individuals with the
requisite skills in these three fields, and it may be difficult to hire and
retain these persons.

We
might not be able to manage our growth.

We
anticipate a period of significant growth and the resulting strain on our
managerial, operational, financial, and other resources could be significant.
Success in managing this expansion and growth will depend, in part, upon the
ability of senior management to manage our growth effectively. Any failure to
manage our growth and expansion could have a material adverse effect on our
business, operating results and financial condition.

In
addition to managing our company-wide growth, we must continue to develop and
expand our systems and operations to accommodate expected growth in the use of
our products and services. Due to the limited deployment of some of our services
to date, the ability of our systems and operations to connect and manage a
substantially larger number of customers while maintaining superior performance
is unknown. Any failure on our part to develop and maintain our wireless
transaction service as we experience rapid growth could significantly reduce
demand for our services and materially adversely affect our revenue.

Our
use of wireless, wireline, and Internet technologies could pose security issues
regarding data transmission and reporting.

Utilization
of our products and services involves the transmission of payment transactions
via wireless or wired networks and our servers from the merchants device
to the payment processor and back. Data transmitted wirelessly is transmitted in
an encrypted format through secure channels. The reporting and utility functions
accessible via the Internet are designed with a variety of security precautions,
and the end-users card number is not contained in the database accessible
via the Internet. However, a significant barrier to the growth of wireless data
services or transactions on the Internet or by other electronic means has been
the need for secure transmission of confidential information. Our systems could
be disrupted by unauthorized access, computer viruses and other accidental or
intentional actions. We may incur significant costs to protect against the
threat of security breaches or to alleviate problems caused by such breaches. If
a third party were able to misappropriate personal or proprietary information or
credit card information, we could be subject to claims, litigation or other
potential liabilities that could materially adversely impact our revenue and may
result in the loss of customers.

We
may be subject to liability for transmitting information, and our insurance
coverage may be inadequate to protect us from this liability.

We may
be subject to claims relating to information transmitted over systems we develop
or operate. These claims could take the form of lawsuits for defamation,
negligence, copyright or trademark infringement or other actions based on the
nature and content of the materials. Although we carry general liability
insurance, our insurance may not cover potential claims of this type or may not
be adequate to cover all costs incurred in defense of potential claims or to
indemnify us for all liability that may be imposed.

47

---

Our
business is dependent on our relationship with wireless and wireline carriers.

A
significant aspect of our strategy is to be able to market our products and
services as working with all major wireless protocols. Our business depends, in
part, on our ability to purchase sufficient capacity from the wireless and
wireline carriers and the security and reliability of their systems. If our
current arrangements with wireless and wireline carriers are terminated, if we
are unable to enter into arrangements with any new carriers, or if the terms of
our arrangements are altered or prices are increased, it may have a material
adverse effect on our business, operating results and financial condition.
Additionally, these carriers may develop or employ new technologies, or
implement new industry standards (including next generation wireless
services) that may require us to pay additional fees for such services or
prevent us from employing the services of these carriers which would have a
material adverse effect on our business, operating results, and financial
condition.

The
benefits derived from any acquisition or strategic alliance may be less than the
price we pay and may result in excessive expenses if we do not successfully
integrate them. The costs and management resources we expend in connection with
such integrations may exceed our expectations.

Acquisitions
and strategic alliances may have a significant impact on our business, financial
condition, and results of operations. The value of acquisitions may be less than
the amount we pay for them if there is:

|o |  | A decline of their position in the respective markets; or
|- |  | ---------------------------------------------------------

|o |  | A decline in general of the markets they serve.
|- |  | -----------------------------------------------

The
expenses associated with these transactions may be greater and their revenue may
be smaller than expected if:

|o |  | We fail to assimilate any acquired assets with our pre-existing business;
|- |  | -------------------------------------------------------------------------

|o |  | We lose key employees of these companies or ours as a result of acquisitions;
|- |  | -----------------------------------------------------------------------------

|o |  | Our managements attention is diverted by other business concerns; or
|- |  | ---------------------------------------------------------------------

|o |  | We assume unanticipated liabilities related to any acquired assets.
|- |  | -------------------------------------------------------------------

In
addition, the companies we may acquire may be subject to the other business
risks we describe in this section, which may adversely impact such business.
Further, we cannot guarantee that we will realize the benefits or strategic
objectives we are seeking to obtain if we make any acquisitions.

We
may be adversely impacted by government regulation, including regulation of the
wireless infrastructure and the Internet.

We are
not currently subject to direct regulation by the Federal Communications
Commission or any other governmental agency, other than regulations applicable
to business in general. However, in the future, we may become subject to
regulation by the FCC or another regulatory agency. In addition, the wireless
carriers who supply us airtime are subject to regulation by the FCC and
regulations that affect them could increase our costs or reduce our ability to
continue selling and supporting our services.

The
laws governing Internet transactions remain largely unsettled. The adoption or
modification of laws or regulations relating to the Internet could adversely
affect our business, operating results, and financial condition by increasing
our costs and administrative expenses. It may take years to determine whether
and how existing laws such as those governing intellectual property, privacy,
libel, consumer protection, and taxation apply to the Internet. Laws and
regulations directly applicable to communications or commerce over the Internet
are becoming more prevalent. We must comply with new regulations in the United
States, as well as any other regulations adopted by other countries where we may
do business. The growth and development of the market for online commerce may
prompt calls for more stringent consumer protection laws, both in the United
States and abroad, as well as new laws governing the taxation of Internet
commerce. Compliance with any newly adopted laws may prove difficult for us and
may harm our business, operating results, and financial condition.

We
face risks relating to general economic conditions.

We
face risks related to general economic and market conditions, including the
potential impact of the status of the economy. Any negative general economic
conditions could have a material adverse effect on our business, operating
results and financial condition.

48

---

The
market for our stock could suffer because there may be too many available
shares.

We had
approximately 17,628,716 and 14,813,927 total shares of common stock outstanding
as of June 30, 2003 and 2002, respectively, of which approximately
16,721,104 and 12,645,596 shares are in the public float, respectively. We
have a substantial number of additional shares of common stock that are either
presently outstanding or issuable upon conversion or exercise of other
securities that were issued as restricted securities, most of which
are currently saleable under SEC Rule 144. We are currently overdue with respect
to our obligation to register common stock underlying the Series C preferred
stock and related warrants sold in the private placement completed in May 2000
though, pursuant to SEC Rule 144k, the shares of Common Stock underlying the
Series C Preferred Stock may be sold and the shares of Common Stock underlying
the Series C Preferred Stock Warrants may be sold if those warrants are
exercised by means of a cashless exercise mechanism. The registration and
subsequent sale of such securities may increase the number of shares traded in
the market and may thereby adversely affect the market for our common stock.

Anti-takeover
provisions.

Our
Articles of Incorporation authorize the issuance of up to 25,000,000 shares of
preferred stock. Our Board is empowered, without stockholder approval, to issue
a new series of preferred stock with dividend, liquidation, conversion, voting
or other rights, which could adversely affect the voting power or other rights
of the holders of common stock. Such authority, together with certain provisions
of Delaware law and of our Articles of Incorporation and bylaws, may have the
effect of delaying, deterring or preventing a change in control, may discourage
bids for the common stock at a premium over the market price, and may adversely
affect the market price, and the voting and other rights of the holders, of the
common stock. We are currently exploring various financings and, if successful,
will issue additional shares of our preferred stock or common stock. In the
current financing environment it is likely that such a financing would be for a
new class of preferred stock. Under the Delaware Business Corporation Act, the
Board of Directors of a Delaware corporation may issue rights, options, warrants
or other convertible securities (hereinafter rights) entitling the
holders of the rights to purchase, receive or acquire shares or fractions of
shares of the corporation or assets or debts or other obligations of the
corporation, upon such terms as are determined by the Board. The Board is free,
subject to its fiduciary duties to stockholders, to structure the issuance or
exercise of the rights in a manner which may exclude significant
stockholders, as defined, from being entitled to receive such rights or to
exercise such rights or in a way which may effectively prevent a takeover of the
corporation by persons deemed hostile to management. Nothing presently contained
in our Articles of Incorporation prohibits the Board from using these types of
rights in this manner.

We
have never paid cash or common stock dividends and are unlikely to do so for the
foreseeable future.

We
have never paid cash or other dividends on our common stock. It is our intention
to retain any earnings to finance the operation and expansion of our business,
and therefore, we do not expect to pay any cash dividends in the foreseeable
future.

Volatility
of common stock.

Our
common stock is traded in the over-the-counter market and quoted on the OTC
Bulletin Board (OTCBB) under the symbol USWE. The
trading volume of the common stock historically has been limited and sporadic,
and the stock prices have been volatile. For example, during the fiscal years
ended June 30, 2003 and 2002, the common stock has traded at prices ranging from
and $0.12 to $1.42 and $0.52 to $5.46, respectively. As a result of the limited
and sporadic trading activity, the quoted price for the common stock on the
OTCBB is not necessarily a reliable indicator of its fair market value.

49

---

ITEM 7.
FINANCIAL STATEMENTS

|                                                          | 
|--------------------------------------------------------- | 
|Independent Auditors Reports                             | 
|Consolidated Balance Sheets as of June 30, 2003 and 2002  | 
|Consolidated Statements of Operations for the years       | 
|ended June 30, 2003 and 2002                              | 
|Consolidated Statements of Cash Flows for the years ended | 
|June 30, 2003 and 2002                                    | 
|Consolidated Statements of Stockholders Equity           | 
|for the years ended June 30, 2003 and 2002                | 
|Notes to Consolidated Financial Statements                | 

50

---

INDEPENDENT
AUDITORS REPORT

To the Board of
Directors and Stockholders ofU.S. Wireless Data, Inc.New York, New York

We
have audited the accompanying consolidated balance sheets of U.S. Wireless Data,
Inc. (the Company) as of June 30, 2003 and 2002, and the related
consolidated statements of operations, stockholders equity, and cash flows
for the years then ended. These financial statements are the responsibility of
the Companys management. Our responsibility is to express an opinion on
these financial statements based on our audits.

We
conducted our audits in accordance with auditing standards generally accepted in
the United States of America. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our
opinion, the consolidated financial statements present fairly, in all material
respects, the financial position of the Company as of June 30, 2003 and 2002 and
the results of its operations and its cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of
America.

The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 1 to the consolidated
financial statements, the Companys substantial recurring losses from
operations since inception and working capital deficiency at June 30, 2003,
raise substantial doubt about its ability to continue as a going concern.
Managements plans concerning these matters are also described in Note 1.
The consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

/s/ Deloitte & Touche
LLP

October 13,
2003New York, New York

51

---

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

|                                                               | June 30, |                 
|-------------------------------------------------------------- | -------- | ----------------
|
|ASSETS                                                         |          |                 
|Current assets:                                                |         
|Cash and cash equivalents                                      |          | $        602,000
|Accounts receivable, net of allowance for                      |         
|doubtful accounts of $18,000 and $293,000                      |         
|at June 30, 2003 and 2002, respectively                        |          | 306,000         
|Due from factor                                                |          | 140,000         
|Inventory, net                                                 |          | 137,000         
|Deferred cost of revenue                                       |          | 63,000          
|Prepaids and other current assets                              |          | 535,000         
|Assets held for sale                                           |          | --              
|                                                               |          |                 
|Total current assets                                           |          | 1,783,000       
|Property and equipment, net                                    |          | 1,374,000       
|Restricted cash                                                |          | 1,081,000       
|Intangible assets, net                                         |          | 45,000          
|Other assets                                                   |          | 26,000          
|                                                               |          |                 
|Total assets                                                   |          | $     4,309,000 
|                                                               |          |                 
|                                                               |          |                 
|LIABILITIES AND STOCKHOLDERS EQUITY                           |         
|Current liabilities:                                           |         
|Accounts payable                                               |          | $        833,000
|Accrued liabilities                                            |          | 892,000         
|Accrued restructuring expense, current portion                 |          | 560,000         
|Customer advances                                              |          | 685,000         
|Deferred revenue                                               |          | 159,000         
|Obligation under capital lease, current portion                |          | 179,000         
|Purchase price payable                                         |          | --              
|                                                               |          |                 
|Total current liabilities                                      |          | 3,308,000       
|Accrued restructuring expense, less current portion            |          | --              
|Obligation under capital lease, less current portion           |          | 390,000         
|Deferred rent expense                                          |          | 195,000         
|Other liabilities                                              |          | 151,000         
|                                                               |          |                 
|Total liabilities                                              |          | 4,044,000       
|                                                               |          |                 
|Commitments and contingencies (Note 21)                        |         
|Stockholders equity:                                          |         
|Preferred stock, 25,000,000 shares authorized:                 |         
|Series C convertible, at $.01 par value, liquidation value     |         
|$10.00 per share, aggregating $35,487,000 and $39,413,000      |         
|at June 30, 2003 and June 30, 2002, respectively; 8,450,000    |         
|shares authorized, 3,548,700 and 3,941,325 issued and          |         
|outstanding at June 30, 2003 and June 30, 2002, respectively   |          | 36,000          
|Common stock, 200,000,000 shares authorized at $.01 par value; |         
|17,628,716 and 14,813,927 shares issued and outstanding at     |         
|June 30, 2003 and June 30, 2002, respectively                  |          | 176,000         
|Additional paid-in capital                                     |          | 142,688,000     
|Unearned compensation                                          |          | --              
|Accumulated deficit                                            |          | (142,635,000    
|                                                               |          |                 
|Total stockholders equity                                     |          | 265,000         
|                                                               |          |                 
|Total liabilities and stockholders equity                     |          | $     4,309,000 
|                                                               |          |                 
|                                                               |          |                 

Accompanying
notes are an integral part of the financial statements

52

---

# U.S.
WIRELESS DATA, INC.CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                              | For the years ended June 30, |                
|------------------------------------------------------------- | ---------------------------- | ---------------
|
|Revenues                                                      |                              |                
|Service revenues                                              |                             
|Activation fees                                               |                              | $      280,000 
|Monthly fees                                                  |                              | 2,650,000      
|Transaction fees                                              |                              | 252,000        
|Other fees                                                    |                              | 222,000        
|                                                              |                              |                
|Total service revenues                                        |                              | 3,404,000      
|Product sales                                                 |                              | 321,000        
|                                                              |                              |                
|Total revenues                                                |                              | 3,725,000      
|                                                              |                              |                
|Cost of revenues                                              |                             
|Services                                                      |                              | 1,804,000      
|Product sales                                                 |                              | 309,000        
|Write-down of inventory                                       |                              | 579,000        
|                                                              |                              |                
|Total cost of revenues                                        |                              | 2,692,000      
|                                                              |                              |                
|Gross profit                                                  |                              | 1,033,000      
|                                                              |                              |                
|Operating expenses                                            |                             
|Selling, general and administrative                           |                             
|(Exclusive of non-cash compensation for directors)            |                              | 7,488,000      
|Non-cash compensation for directors                           |                              | 469,000        
|                                                              |                              |                
|Total selling, general and administrative                     |                              | 7,957,000      
|Depreciation and amortization                                 |                              | 1,063,000      
|Research and development                                      |                              | 520,000        
|Restructuring (recovery) expense                              |                              | (131,000       
|Impairment of goodwill and intangible assets                  |                              | 836,000        
|                                                              |                              |                
|Total operating expenses                                      |                              | 10,245,000     
|                                                              |                              |                
|Loss from operations                                          |                              | (9,212,000     
|Interest income                                               |                              | 42,000         
|Interest expense                                              |                              | (133,000       
|Other income (expense), net                                   |                              | 303,000        
|                                                              |                              |                
|Loss from continuing operations                               |                              | (9,000,000     
|                                                              |                              |                
|Discontinued operations:                                      |                             
|Income from discontinued operations                           |                              | 362,000        
|Gain (loss) on sale of discontinued operations                |                              | 58,000         
|                                                              |                              |                
|Income (loss) from discontinued operations                    |                              | 420,000        
|                                                              |                              |                
|Net loss                                                      |                              | $(8,580,000    
|                                                              |                              |                
|                                                              |                              |                
|Basic and diluted net loss per share:                         |                             
|Loss from continuing operations                               |                              | $         (0.55
|Income (loss) from discontinued operations                    |                              | $          0.03
|                                                              |                              |                
|Net loss per share                                            |                              | $         (0.52
|                                                              |                              |                
|                                                              |                              |                
|Weighted average common shares outstanding, basic and diluted |                              | 16,351,000     
|                                                              |                              |                
|                                                              |                              |                

Accompanying
notes are an integral part of the financial statements

53

---

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

|                                                           | For the years ended June 30, |             
|---------------------------------------------------------- | ---------------------------- | ------------
|
|CASH FLOWS FROM OPERATING ACTIVITIES:                      |                              |             
|Net loss                                                   |                              | $(8,580,000 
|Adjustments to reconcile net loss to net cash used in      |                             
|operating activities:                                      |                             
|Depreciation and amortization                              |                              | 1,063,000   
|Depreciation and amortization from discontinued operations |                              | --          
|Gain (loss) on sale of discontinued operations             |                              | (134,000    
|Bad debt expense                                           |                              | 48,000      
|Deferred rent                                              |                              | 14,000      
|Non-cash compensation for directors                        |                              | 469,000     
|Non-cash consulting and other                              |                              | 303,000     
|Impairment of goodwill and intangibles                     |                              | 836,000     
|Write-down of inventory                                    |                              | 579,000     
|Loss on settlement of notes receivable                     |                              | 67,000      
|Loss on asset disposal                                     |                              | --          
|Changes in assets and liabilities:                         |                             
|Accounts receivable                                        |                              | 1,006,000   
|Due from factor                                            |                              | (140,000    
|Inventory                                                  |                              | 84,000      
|Deferred cost of revenue                                   |                              | (18,000     
|Prepaids and other current assets                          |                              | (270,000    
|Other assets                                               |                              | 9,000       
|Accounts payable                                           |                              | (1,047,000  
|Accrued liabilities                                        |                              | (74,000     
|Accrued restructuring expense                              |                              | (389,000    
|Customer advances                                          |                              | 435,000     
|Deferred revenue                                           |                              | 70,000      
|Other current liabilities                                  |                              | --          
|Other liabilities                                          |                              | 104,000     
|                                                           |                              |             
|Net cash used in operating activities                      |                              | (5,565,000  
|                                                           |                              |             
|CASH FLOWS FROM INVESTING ACTIVITIES:                      |                             
|Proceeds from the sale of NXT                              |                              | 5,000,000   
|Payment of expenses for sale of NXT                        |                              | (738,000    
|Purchase of property and equipment                         |                              | (63,000     
|Increase (decrease) in restricted cash                     |                              | 86,000      
|Payment for acquisition, net of cash acquired              |                              | (477,000    
|Increase in deposits                                       |                              | --          
|                                                           |                              |             
|Net cash provided by (used in) investing activities        |                              | 3,808,000   
|                                                           |                              |             
|CASH FLOWS FROM FINANCING ACTIVITIES:                      |                             
|Payments of obligations under capital lease                |                              | (503,000    
|Proceeds from exercise of warrants and options             |                              | --          
|                                                           |                              |             
|Net cash used in financing activities                      |                              | (503,000    
|                                                           |                              |             
|Net decrease in cash and cash equivalents                  |                              | (2,260,000  
|Cash and cash equivalents, beginning of year               |                              | 2,862,000   
|                                                           |                              |             
|Cash and cash equivalents, end of year                     |                              | $    602,000
|                                                           |                              |             
|                                                           |                              |             

Accompanying
notes are an integral part of the financial statements

54

---

# U.S.
WIRELESS DATA, INC.CONSOLIDATED STATEMENTS OF
STOCKHOLDERS EQUITYFor the years ended June 30, 2003 and 2002

|                                      | Series CConvertiblePreferred StockShares       Amount | Common StockShares       Amount | AdditionalPaid-inCapital | UnearnedCompensationand Contra Equity | 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 |                                                      
|for directors                         |                                                       | --                              |                          | --                                    |                    | --                        |   | --       
|Cancellation of options issued to     |                                                      
|Board member                          |                                                       | --                              |                          | --                                    |                    | --                        |   | --       
|Issuance of options for services      |                                                       | --                              |                          | --                                    |                    | --                        |   | --       
|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                          |                                                       | --                              |                          | --                                    |                    | --                        |   | --       
|Issuance of options for services      |                                                       | --                              |                          | --                                    |                    | --                        |   | --       
|Amortization of non-cash investment   |                                                      
|banking services                      |                                                       | --                              |                          | --                                    |                    | --                        |   | --       
|Issuance of options related to the    |                                                      
|sale of NXT                           |                                                       | --                              |                          | --                                    |                    | --                        |   | --       
|Issuance of common stock to former    |                                                      
|NXT shareholders                      |                                                       | --                              |                          | --                                    |                    | 2,241,658                 |   | 22,000   
|Retirement of common stock in         |                                                      
|settlement of notes receivable        |                                                       | --                              |                          | --                                    |                    | (81,818                   | ) | (1,000   
|Conversion of Series C convertible    |                                                      
|preferred stock                       |                                                       | (392,625                        | )                        | (3,000                                | )                  | 654,949                   |   | 6,000    
|Net loss                              |                                                       | --                              |                          | --                                    |                    | --                        |   | --       
|                                      |                                                       |                                 |                          |                                       |                    |                           |   |          
|BALANCE AT JUNE 30, 2003              |                                                       | 3,548,700                       |                          | $ 36,000                              |                    | 17,628,716                |   | $ 176,000
|                                      |                                                       |                                 |                          |                                       |                    |                           |   |          
|                                      |                                                       |                                 |                          |                                       |                    |                           |   |          

Accompanying
notes are an integral part of the financial statements

55

---

U.S.
WIRELESS DATA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFor the years ended June 30, 2003 and 2002

NOTE 1
 THE COMPANY

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

Going
Concern and Liquidity Uncertainties

The
Company needs additional capital in the immediate future in order to continue
operations. Since the Companys inception, the Company has incurred
significant losses and negative cash flow from operations. As of June 30, 2003,
we had an accumulated deficit of approximately $143 million. At June 30, 2003
the Companys principal source of liquidity was approximately $602,000 in
cash and cash equivalents. Based on managements current estimates of
revenue levels, operating costs and other cash inflows and outlays, and taking
into account the remaining proceeds available to the Company from the bridge
facility discussed below, the Company will not have cash balances adequate for
it to continue operations beyond December 2003 without a sufficient capital
infusion by such time. Managements concerns about capital may lead it to
take additional steps to cut costs and, depending on whether it is successful in
its efforts to raise additional capital, may require the Company to eliminate or
curtail certain of our projects and take additional steps to conserve cash that
may adversely affect the Companys operations.

In
August 2003, the Company signed term sheets with Brascan Financial Corporation
(Brascan), a subsidiary of Toronto, Canada-based Brascan
Corporation, to arrange for the purchase of $12.5 million of a newly issued
Series D Preferred Stock representing at least 60% of the Companys equity.
The term sheets contemplate that the Company enters into a strategic alliance
with MIST Inc., Brascans subsidiary, and a provider of card issuance and
payment processing products and gateway services to banks, non-bank card issuers
and the payment processing industry. The term sheets contemplate that Brascan
would provide a bridge loan to allow the Company to continue operations while
negotiating a definitive Series D Preferred Stock purchase agreement and to
satisfy the anticipated closing conditions. In addition, the term sheets contain
provisions with respect to break-up fees, non-solicitation and other
miscellaneous matters.

56

---

U.S.
WIRELESS DATA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFor the years ended June 30, 2003 and 2002

On
September 16, 2003, the Company entered into a Term Loan and Security Agreement
(the Bridge Loan) with Brascan, pursuant to which Brascan agreed to
lend the Company up to $2.75 million, at an interest rate of 7.5% per annum
payable monthly, with cash payments commencing March 28, 2004. The loan is
secured by a general security interest in all of the Companys assets and
is due March 16, 2005. A portion of the funds was used to repay a demand loan in
the principal amount of $300,000 previously made to the Company on August 28,
2003, which was necessary in order to enable the Company to continue its
operations. The remaining portion of the loan will provide the Company with the
working capital necessary to allow it to continue operations until December
2003.

In
connection with this financing, Brascan received a warrant for 10 million
shares of common stock exercisable at $.15 per share. The warrant is exercisable
only if the Series D financing is not consummated by December 31, 2003 or if the
Company were to be acquired or were to sell substantially all of its assets. If
the warrant becomes exercisable, it will expire on September 16, 2008. Brascan
will have certain demand and piggyback registration rights as to the shares of
common stock underlying the warrant. The warrant was issued pursuant to certain
exceptions contained in the full ratchet anti-dilution provisions of the Series
C Convertible Preferred Stock and Series C Warrants and therefore, the Company
believes the issuance of the warrant will not trigger such anti-dilution
provisions (see anti-dilution provisions in Note 12). As of October 13, 2003,
the Company has drawn down approximately $1.24 million against the $2.75 million
Bridge Loan commitment. The Bridge Loan contains various covenants which
include, among others, (i) a material adverse change clause, (ii) a minimum
monthly revenue requirement of approximately $380,000, and (iii) a minimum net
worth requirement of not less than negative $2 million. As of October 13, 2003,
the Company was in compliance with these covenants. The Company is currently in
technical default under the Bridge Loan with respect to two post-closing
covenants (relating to receiving a landlord waiver for the Companys New York facility and
completing the actions necessary to subject certain of the Companys funds to a
blocked account arrangement) that the Company is still in the
process of satisfying. However, the Company has received informal assurances
from Brascan that it will provide additional time to satisfy such covenants and
will not pursue any actions with respect to a default at this
time.

The
equity financing contemplated by the term sheets would involve the issuance to
Brascan or its affiliates of shares of a newly issued Series D convertible
preferred stock for $12.5 million. The proceeds from the contemplated financing
will be used to repay the $2,750,000 bridge loan and for general working capital
purposes. It is anticipated that the Series D preferred stock will be
convertible at any time, at Brascans option, into at least 60% of the
shares of the Companys common stock, on a fully diluted basis. If the
contemplated financing is successfully completed, Brascan or its designee will
become the Companys majority stockholder. It is anticipated that the terms
and provisions of the contemplated financing, if successful, will have a
substantial dilutive effect on the ownership interests of the Companys
existing stockholders.

There
can be no assurances that the contemplated financing will be completed on the
terms contemplated by the term sheets or at all. The contemplated financing is
subject to a number of conditions, including, but not limited to, the execution
of definitive financing documentation and the successful completion of a
reorganization of our capital structure, which will include the restructuring of
the Companys currently issued and outstanding Series C Convertible
Preferred Stock and Series C Warrants.

57

---

U.S.
WIRELESS DATA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFor the years ended June 30, 2003 and 2002

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

NOTE 2
 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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).

In May
2002, the Company adopted a formal plan to sell its wholly owned subsidiary 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 and related
operating obligations associated with its wholly-owned subsidiary, NXT, to
Paymentech, L.P. (Paymentech). NXT provides data services and
landline-based connectivity for credit-card transaction processing. NXT has been
classified as a discontinued operation in the accompanying consolidated
financial statements.

Basis of
Presentation

The
accompanying financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America.

Use of
Estimates

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.

Reclassifications

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

Cash and
Cash Equivalents

Investments
in money market funds and highly liquid investments purchased with an original
maturity of three months or less are classified as cash equivalents. Cash
equivalents are carried at cost, which approximates fair value. The Company
maintains all of its cash balances with major financial institutions, which are
insured by the Federal Deposit Insurance Corporation up to $100,000. Uninsured
balances aggregate approximately $387,000 at June 30, 2003.

58

---

U.S.
WIRELESS DATA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFor the years ended June 30, 2003 and 2002

Inventory

Inventory
is stated at the lower of cost or market, cost being determined by the first-in,
first-out method. Allowances are established to reduce the recorded cost of
obsolete and slow moving inventory to its net realizable value.

Goodwill and
Other Intangible 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 be tested for
impairment at least annually. In addition, the standard includes provisions for
the reclassification of certain existing intangibles as goodwill and the
reassessment of the useful lives of existing recognized intangibles. SFAS No.
142 is effective for fiscal years beginning after December 15, 2001. The Company
adopted this standard on July 1, 2002. As a result of the write-off of all of
the Companys goodwill during the year ended June 30, 2002 (see Note
6), the adoption of SFAS No. 142 did not have an impact on the Company in
the first quarter of fiscal 2003. The remaining intangibles at June 30, 2003 are
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 operating results for periods prior to the
fiscal year ended 2003 do not reflect the effect of SFAS No. 142. Had the
Company been accounting for goodwill under the provisions of SFAS No. 142 for
the fiscal year ended June 30, 2002, the Companys net loss and net loss
per share would have been as follows:

|                                  | Year ended June 30, |                   
|--------------------------------- | ------------------- | ------------------
|
|Net loss, as reported             |                     | $   (8,580,000    
|Add back amortization of goodwill |                     | --                
|                                  |                     |                   
|Pro forma adjusted net loss       |                     | $   (8,580,000    
|                                  |                     |                   
|                                  |                     |                   
|Net loss per share                |                    
|As reported                       |                     | $           (0.52)
|Add back amortization of goodwill |                     | --                
|                                  |                     |                   
|Pro forma                         |                     | $           (0.52)
|                                  |                     |                   
|                                  |                     |                   

Property and
Equipment

Property
and equipment are stated at cost. Equipment and furniture are depreciated on a
straight-line basis over their estimated useful lives (generally three to seven
years). Leasehold improvements are amortized on a straight-line basis over the
term of the lease, or the estimated useful lives, whichever is shorter.
Maintenance and repairs are charged to operations as incurred.

59

---

U.S.
WIRELESS DATA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFor the years ended June 30, 2003 and 2002

Long-Lived
Assets

Identifiable
intangible net assets consist of completed technology, trademarks, and acquired
customers. As discussed below, effective July 1, 2001 the Company adopted the
provisions of Statement of Financial Accounting Standards (SFAS) No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets.
In accordance with the provisions of SFAS No. 144, the Company evaluates
long-lived assets for an impairment annually or if certain circumstances
indicate that the carrying amount of an asset may not be fully recoverable. If
the estimated fair value of the asset is less than its carrying value plus the
cost to dispose, an impairment loss is recognized as the amount by which the
carrying amount of the asset plus the cost to dispose exceeds fair value.

Revenue
Recognition

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

The Company
derives revenue from two primary sources: service fees and product (equipment) sales.

Services.
Service fees consist of: (a) one-time, non-refundable service activation fees;
(b) monthly minimum subscription fees for the availability of service; (c) fees
for transactions delivered on wireless or other methods through the
Companys hosts; and (d) other fees, including administration and other
fees for certain wireless services, certain charges for telecommunications
connections between the Company and a party, and installation fees and expenses.
Service fees are generated from the Companys Synapse Service. Service
activation fees are recognized ratably over the estimated average life of a
customer contract. During the year ended June 30, 2003, the Company changed its
estimate of average customer contract life from six to twelve months. This
change did not have a material impact on revenues from activation fees. All
other service revenues are recognized as services are provided.

Product Sales.
Product sales (i.e., sales of equipment) are primarily derived from the sale of USWDs
proprietary Synapse Adapter and Synapse Enabler products. Revenues from product sales
are recognized upon shipment and acceptance.

Customer
Concentration

During
fiscal 2003 and 2002, one customer accounted for approximately 23% and 30% of
revenues, respectively. At June 30, 2003, approximately $76,000 remained unpaid
from this customer, which was received after year-end.

Cost of
Revenues

Cost
of revenues for services consist primarily of the cost for the initial setup and
ongoing communications costs associated with terminals connected through Synapse
as well as the costs of certain non-wireless carriers associated with revenues.
Cost of revenues for product sales consist primarily of the costs of production
of products, such as the Synapse Adapter and the Synapse Enabler, and other
direct costs of sales such as shipping.

60

---

U.S.
WIRELESS DATA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFor the years ended June 30, 2003 and 2002

Research and
Development Costs

Research
and development costs are expensed as incurred. Research and development costs
approximated $520,000 and $1,102,000 during the years ended June 30, 2003 and
2002, respectively.

Advertising
and Promotion

Costs
of advertising are expensed as incurred. Advertising and promotion expense for
the years ended June 30, 2003 and 2002 amounted to approximately $223,000 and
$215,000, respectively.

Income Taxes

The
Company follows SFAS No. 109, Accounting for Income Taxes. Under the
asset and liability method of SFAS No. 109, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Since the Company has no prior
history of profits, management has recorded a full valuation allowance as it is
more likely than not that the deferred tax assets will not be realized.

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 SFAS No.
123, Accounting for Stock Based-Compensation and SFAS No. 148,
Accounting for Stock-Based Compensation. Restricted stock or stock
awards are recorded as compensation expense over the vesting period, if any,
based on the market value on the date of grant.

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

At
June 30, 2003, the Company had four fixed stock-based compensation plans. The
exercise price of each option granted pursuant to these plans was equal to the
market price of the Companys common stock on the date of grant.
Accordingly, pursuant to APB No. 25, no compensation cost has been recognized
for such grants. Had compensation cost been determined based on the fair value
at the grant dates for such awards consistent with the method prescribed by SFAS
No. 123, the Companys net loss and loss per share for the periods
indicated would have been as follows:

61

---

U.S.
WIRELESS DATA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFor the years ended June 30, 2003 and 2002

|                                           | Year ended June 30, |                     
|------------------------------------------ | ------------------- | --------------------
|
|Loss from continuing operations            |                     | $     (9,000,000    
|Income (loss) from discontinued operations |                     | 420,000             
|                                           |                     |                     
|Net loss, as reported                      |                     | $     (8,580,000    
|Deduct: Total stock-based compensation     |                    
|expense determined under fair value        |                    
|based method                               |                     | (2,889,000          
|                                           |                     |                     
|Pro forma net loss                         |                     | $    (11,479,000    
|                                           |                     |                     
|                                           |                     |                     
|Per share, as reported                     |                    
|From continuing operations                 |                     | $             (0.55)
|From discontinued operations               |                     | 0.03                
|                                           |                     |                     
|Net                                        |                     | $             (0.52)
|                                           |                     |                     
|                                           |                     |                     
|Per share, pro forma                       |                    
|From continuing operations                 |                     | $             (0.73)
|From discontinued operations               |                     | 0.03                
|                                           |                     |                     
|Net                                        |                     | $             (0.70)
|                                           |                     |                     
|                                           |                     |                     

In
determining the 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 years ended June 30, 2003 and 2002, respectively.

Fair Value
of Financial Instruments

The
carrying value of the Companys financial instruments, including accounts
receivable, accounts payable, deferred revenue, accrued liabilities and other
liabilities, approximate their fair values due to their relatively short
maturities.

Accounting
Pronouncements

In
August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144, supersedes SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, 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 Accounting Research Bulletin 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. The Company adopted SFAS No. 144 in the fiscal year ended June 30,
2002. As a result, the operating results of NXT and the related loss on sale of
NXTs assets has been reported as discontinued operations in the
accompanying consolidated financial statements and the assets of NXT have been
separately classified as Assets held for sale.The adoption
of SFAS No. 144 did not have any other effect on the Companys results of
operations or financial condition.

62

---

U.S.
WIRELESS DATA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFor the years ended June 30, 2003 and 2002

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 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 the
Company for the fiscal year ending June 30, 2004. The Company has not determined
the effect, if any, that this statement will have on its results of operations
or financial condition.

In June 2002,
the FASB issued SFAS No. 146,  "Accounting  for Costs  Associated with Exit or
Disposal  Activities."  SFAS No.  146 supersedes Emerging Issues Task Force Issue
No. 94-3,  "Liability  Recognition for Certain Employee  Termination Benefits  and
Other Costs to Exit an Activity  (including  Certain  Costs  Incurred in a
Restructuring)."  SFAS No. 146 requires  that  costs  associated  with an exit or
disposal  plan be recognized  when incurred  rather than at the date of a commitment to
an  exit or disposal plan. SFAS No. 146 is to be applied  prospectively to exit or
disposal  activities  initiated after December  31, 2002.  The adoption of SFAS No. 146
did not have a material  impact on the  Companys  results of operations or financial
condition.

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 results
of operations or financial condition.

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.

63

---

U.S.
WIRELESS DATA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFor the years ended June 30, 2003 and 2002

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 on October 1, 2003. The Company does not have any
variable interest entities, and, accordingly, the adoption of FIN 46 is not
expected to have an impact on the Companys results of operations or
financial condition.

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

In May
2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No.
150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Many of those instruments
were previously classified as equity. This statement will become effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
shall be effective at the beginning of the first interim period beginning after
June 15, 2003. The adoption of this statement is not expected to have a material
impact on the Companys results of operations or financial condition.

NOTE 3
 SALE OF ACCOUNTS RECEIVABLE

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

64

---

U.S.
WIRELESS DATA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFor the years ended June 30, 2003 and 2002

NOTE 4
 INVENTORY

|                       | June 30, |          
|---------------------- | -------- | ---------
|
|Inventory consists of: |          |          
|Raw materials          |          | $  83,000
|Work in process        |          | 13,000   
|Finished goods         |          | 41,000   
|                       |          |          
|                       |          | $137,000 
|                       |          |          
|                       |          |          

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 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. In the fourth quarter of the
fiscal year ended June 30, 2002, the Company recorded a charge of $3,481,000 to
write-down the inventory of Synapse Adapters to the value of the number of units
the Company expected to realize over the remaining expected life of this
product.

As of
April 1, 2003, AT&T Wireless is no longer activating new units on their CDPD
network and has stated that they intend to completely shutdown their CDPD
network in June 2004. In addition, Verizon Wireless has stated that they intend
to completely shutdown their CDPD network in December 2005. As a result, in the
quarter ended December 31, 2002, the Company recorded a charge of $333,000 to
completely write-down the remaining inventory of Synapse Adapters and other
CDPD-based inventory. In addition, the Company recorded a charge of $246,000 to
write-down certain other inventory that management believed would not be
recoverable from projected operations.

NOTE 5
 PROPERTY AND EQUIPMENT

|                                   | June 30, |            
|---------------------------------- | -------- | -----------
|
|Property and equipment consist of: |          |            
|Equipment and furniture            |          | $ 2,964,000
|Leasehold improvements             |          | 478,000    
|Less accumulated depreciation      |         
|and amortization                   |          | (2,068,000 
|                                   |          |            
|                                   |          | $ 1,374,000
|                                   |          |            
|                                   |          |            

65

---

U.S.
WIRELESS DATA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFor the years ended June 30, 2003 and 2002

Depreciation
and amortization expense related to property and equipment was $885,000 and
$782,000 for the years ended June 30, 2003 and 2002, respectively.

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 years ended June 30,
2003 and 2002. Amortization expense related to intangible assets was $178,000
for the year ended June 30, 2003 and $2,889,000 for the year ended June 30,
2002.

Intangibles
related to the acquisition of Cellgate

In the
fourth quarter of the year ended June 30, 2002, the Company recorded an
impairment charge of $5,701,000 for goodwill and other intangible assets to
write-down the value of the acquired assets of Cellgate Technologies LLC
(Cellgate) to managements estimate of fair value. The
remaining $1,059,000 of intangibles as of June 30, 2002 was to have been
amortized over the estimated remaining useful life of four years.

As
indicated in Note 4, 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 the CDPD-based products was believed to be limited. As
a result, at December 31, 2002, the Company recorded an additional impairment
charge of $836,000. The following reflects the activity in intangibles for the
periods presented.

|                      | Year ended June 30, 2003 |            |  |            
|--------------------- | ------------------------ | ---------- |  | -----------
|
|Intellectual property |                          | $2,579,000 |  | $(1,698,000
|Goodwill              |                          | 406,000    |  | (406,000   
|                      |                          |            |  |            
|Total                 |                          | $2,985,000 |  | $(2,104,000
|                      |                          |            |  |            
|                      |                          |            |  |            
|
|
|Intellectual property |                          | $6,250,000 |  | $(1,520,000
|Goodwill              |                          | 2,436,000  |  | (406,000   
|                      |                          |            |  |            
|Total                 |                          | $8,686,000 |  | $(1,926,000
|                      |                          |            |  |            
|                      |                          |            |  |            

Intangibles
related to the acquisition of NXT

The
net carrying amount of $5,927,000 as of June 30, 2002 of goodwill and other
intangible assets relating to the NXT acquisition was classified as Assets
held for sale. Since the net proceeds from the sale of NXT did not exceed
the carrying value of the related net assets, a loss on disposition of NXT of
$1,867,000 had been recorded as of June 30, 2002 (see Note 21). The
following reflects the activity in intangibles for the year ended June 30, 2002.

66

---

U.S.
WIRELESS DATA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFor the years ended June 30, 2003 and 2002

|                        | GrossCarryingAmount | AccumulatedAmortization | Net CarryingAmount
|----------------------- | ------------------- | ----------------------- | ------------------
|Intellectual property   |                     | $ 3,886,000             |                   
|Marketing related       |                     | 1,700,000               |                   
|Goodwill                |                     | 2,952,000               |                   
|Balance reclassified to |                    
|"Assets held for sale"  |                     | (8,538,000              | )                 
|                        |                     |                         |                   
|Total                   |                     | $             --        |                   
|                        |                     |                         |                   
|                        |                     |                         |                   

As of
June 30, 2002, Assets held for sale were written-down by $1,867,000
(see note 21).

NOTE 7
 ACCRUED LIABILITIES

|                                 | June 30, |         
|-------------------------------- | -------- | --------
|
|Accrued liabilities consists of: |          |         
|Accrued professional fees        |          | $283,000
|Accrued telecom services         |          | 260,000 
|Accrued compensation             |          | 133,000 
|Other                            |          | 216,000 
|                                 |          |         
|                                 |          | $892,000
|                                 |          |         
|                                 |          |         

NOTE 8 
ACCRUED RESTRUCTURING EXPENSE

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

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

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

67

---

U.S.
WIRELESS DATA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFor the years ended June 30, 2003 and 2002

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

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

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

The balance
of the restructuring accrual was paid in August 2003.

NOTE 9
 CAPITAL LEASE OBLIGATION

In
November 2000, the Company purchased the assets and assumed liabilities of
Cellgate. Included in the assumed liabilities were leases related to equipment
used in the ordinary course of business. In addition, NXT entered into capital
leases for certain computer and network equipment, which expired on various
dates through 2002.

On
July 29, 1999, Cellgate entered into a Master Purchase and Lease Agreement with
Tellus Technology Inc. (Tellus) and Varilease Corporation
(Varilease) in which Tellus agreed to sell to Varilease and
Varilease agreed to lease to the Company wireless IP modem adapters (the
Synapse Adapters). In connection therewith, Cellgate entered into a
separate Master Lease Agreement with Varilease to lease Synapse Adapters. On
April 4, 2002, the Company entered an agreement with Varilease to extend the
term of the lease for an additional twelve months. On October 25, 2002, the
Company paid the lessor $462,000, which included the application of a $52,000
deposit held by the lessor, to buy out the first five of eleven leases.

In
July 2003, the Company paid $24,000 representing six monthly installments of
interest due from May 25th to October 25th. The lessor agreed to
defer all principal payments until November 25, 2003. In the event that the
Company raises net debt or net equity in the amount of $2 million or more, up to
and including $5 million dollars, prior to November 25, 2003, the Company shall
immediately commence making additional monthly payments aggregating
approximately $26,000 to the lessor. In the event that the Company raises net
equity in an amount in excess of $5 million dollars at any time during the terms
of the remaining leases, all amounts due under the remaining leases shall be
immediately due and payable to the lessor.

68

---

U.S.
WIRELESS DATA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFor the years ended June 30, 2003 and 2002

Future
minimum lease payments on capital leases are as follows:

|                                  | 
|--------------------------------- | 
|For fiscal year ending June 30:   | 
|2003                              | 
|2004                              | 
|2005                              | 
|                                  | 
|Total minimum payments required   | 
|Less amount representing interest | 
|                                  | 
|Present value of net minimum      | 
|lease payments                    | 
|Less current installments         | 
|                                  | 
|Obligations under capital leases, | 
|excluding current installments    | 
|                                  | 
|                                  | 

NOTE 10
 OTHER LIABILITIES

Other
liabilities of $151,000 at June 30, 2003, consist of (i) deposits of $66,000 due
to the sub-lessee of the former office space in Bethesda, which was subsequently
transferred to the landlord in August 2003 under the term of a lease termination
agreement, (ii) deposits of $10,000 due to the sub-lessee of the office space in
New York, and (iii) $75,000 due to an investment-banking firm for past services.
Other liabilities at June 30, 2002, consist of a $47,000 deposit due to the
sub-lessee of the former office space in Bethesda.

NOTE 11
 STOCKHOLDERS EQUITY

On
October 6, 2000, authorized capital was increased to 225,000,000 shares,
200,000,000 of which are $.01 par value common stock and 25,000,000 of which are
$.01 par value preferred stock. At June 30, 2003, the only preferred stock
issued and outstanding is the Series C Convertible Preferred Stock.

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 of NXT.

NOTE 12
 SERIES C CONVERTIBLE PREFERRED STOCK

Commonwealth
Associates, L.P. (Commonwealth) acted as placement agent in the
Private Placement pursuant to which an aggregate of 558.66 Units were sold at
$100,000 per Unit for aggregate gross proceeds of $55,866,000. The Private
Placement was closed in three tranches on March 17, 2000, March 28, 2000 and May
31, 2000. Each Unit consists of 10,000 shares of the Companys Series C
Preferred Stock (which is initially convertible into 16,667 shares of Common
Stock) and warrants to purchase Common Stock equal to 25% of the number of
shares into which the Series C Preferred Stock is convertible.

69

---

U.S.
WIRELESS DATA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFor the years ended June 30, 2003 and 2002

The
warrants issued in connection with the Private Placement (the Unit
Warrants) are exercisable for a period of seven years for an aggregate
number of shares of Common Stock equal to 25% of the number of shares into which
the Series C Preferred Stock are convertible, at an exercise price equal to the
then applicable conversion price. The initial exercise price is $6.00 per share,
subject to adjustment under the same circumstances as the conversion price of
the Series C Preferred Stock. The Unit Warrants are callable for a nominal price
at the Companys option on 30 days notice to the holders of the Unit
Warrants if (a) the average closing bid price of the Companys Common Stock
for 20 consecutive trading days exceeds 300% of the exercise price, as adjusted,
(b) the Companys Common Stock is trading on a national securities exchange
or Nasdaq SmallCap or National Market Systems, and (c) a registration statement
covering the shares issuable upon exercise of the Unit Warrants has been
declared effective and the shares issuable upon exercise of the Unit Warrants
are not otherwise subject to any lock-up restrictions.

The
Company is obligated to file a registration statement with respect to the shares
of Common Stock issuable upon conversion of the Series C Preferred Stock and
exercise of the Unit Warrants under the Securities Act of 1933 within twelve
months of the closing of the Private Placement. The investors also have certain
piggyback registration rights with respect to the shares of Common
Stock issuable upon conversion of the Series C Preferred Stock and the exercise
of the Unit Warrants. As of June 30, 2003, the Company has not registered the
Common Stock underlying the Series C Preferred Stock and related Unit Warrants
as required by the agreement.

Several
of the Companys officers and directors purchased Units in the Private
Placement. Dean M. Leavitt, the Companys Chairman and Chief Executive
Officer purchased 2.5 Units, Charles I. Leone, the Companys Executive Vice
President, Chief Administrative Officer and Secretary purchased 1 Unit and
Robert E. Robichaud, the Companys former Chief Financial and Accounting
Officer, Treasurer and Secretary purchased 0.75 of a Unit. Edwin Cooperman, a
former member of the Board, purchased 1 Unit and each of Michael S. Falk and Amy
Newmark, the first a former member of the Board and the second a present member
of the Board, purchased 2.5 Units. Barry Kaplan, also a current member of the
Board, purchased 25 Units. Mr. Kaplan also received from Commonwealth at no
charge a warrant to purchase 1.5 Units exercisable at $100,000 per Unit (from
the warrants Commonwealth received as compensation for services in the Private
Placement).

As
part of its compensation, Commonwealth received warrants to purchase 139.664
Units, exercisable at $100,000 per Unit, a commission of $3,910,620, which is 7%
of the gross proceeds raised in the Private Placement, and a structuring fee of
$1,675,980, which is 3% of the gross proceeds raised in the Private Placement.
Pursuant to a prior agreement with Peter J. Solomon Securities Company Limited
(PJSC) relating to financing transactions entered into by the
Company, the Company issued to PJSC warrants to purchase 27.935 Units at
$100,000 per Unit and a fee of $400,000. The warrants are exercisable commencing
on the date of issuance and for seven years thereafter. The Company valued all
of the unit warrants, in the aggregate at a fair value of $6.15 million.

70

---

U.S.
WIRELESS DATA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFor the years ended June 30, 2003 and 2002

As a
condition to the completion of the Private Placement, the Company agreed that
the exercise price of a warrant owned by Dean M. Leavitt, the Companys
Chairman and Chief Executive Officer, to purchase 671,875 shares of Common Stock
should be reduced from $12.00 per share to the market price of the Common Stock
on January 4, 2000. In March 2000, the FASB issued Interpretation No. 44
Accounting for Certain Transactions Involving Stock Compensation.
The interpretation was not effective until July 1, 2000. Had the interpretation
been in effect on the date of the repricing, the warrant would have been
considered a variable warrant at that time. In compliance with this new
interpretation, the Company recorded this as a variable warrant and will adjust
compensation expense based upon the Common Stock price difference from the
closing Common Stock price on July 1, 2000 versus the closing Common Stock price
at any measurement date multiplied by the number of outstanding warrants at the
measurement date. On June 30, 2003, the closing stock price was less than the
closing stock price at July 1, 2000, therefore, no compensation expense has been
recorded.

As a
result of previous financing arrangements and the Private Placement, Mr. Falk,
through his direct ownership in the Company and his control of Commonwealth, is
deemed to control the Company.

Authorization
and Stated Value

On
March 10, 2000, the Company authorized 8,450,000 shares as Series C Convertible
Preferred Stock with a stated value of $0.01 per share.

Liquidation
Value

In the
event of a liquidation, dissolution or winding up of the Company, either
voluntary or involuntary, the holders of the Series C Preferred Stock will be
entitled to receive for each of their shares, prior and in preference to any
distribution to the holders of the Common Stock or other series of preferred
stock, a Liquidation Value equal to $10.00 per share, plus any accrued and
unpaid dividends.

Optional
Conversion

Each
Series C Preferred Stock is convertible, at the option of the holder into a
number of shares of Common Stock determined by dividing (A) the Liquidation
Value by (B) the Conversion Price ($6.00 per share) which is subject to
adjustment for stock splits, recapitalizations and other similar events. During
fiscal year 2003, 392,625 preferred shares were converted into 654,949 shares of
common stock. During fiscal year 2002, 1,573,150 preferred shares were converted
into 2,621,743 shares of common stock.

Automatic
Conversion

The
Series C Preferred Stock automatically converts into shares of Common Stock at
the then Conversion Price if, commencing three months after the Initial Closing,
the average closing bid price of the Common Stock exceeds 300% of the Conversion
Price for 20 consecutive trading days. In addition, the Series C Preferred Stock
automatically converts into shares of Common Stock at the Conversion Price upon
a public offering of the Companys securities raising gross proceeds in
excess of $30,000,000.

71

---

U.S.
WIRELESS DATA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFor the years ended June 30, 2003 and 2002

Ranking

The
Company cannot create or authorize any other stock ranking senior to the Series
C Preferred Stock.

Anti-dilution

In the
event of any capital reorganization or reclassification of the Company, or any
consolidation or merger of the Company, or sale, transfer, or lease of all or
substantially all of its assets which affects the holders of Common Stock in
such a way that entitles them to receive stock, securities, or assets with
respect to or in exchange for their shares, then the holder of the Series C
Preferred Stock shall have the right to purchase and receive such securities or
assets as would have been issued and payable if the holders of the Series C
Preferred Stock had converted their shares into Common Stock immediately prior
to such reorganization, reclassification, consolidation, merger, or sale.

If at
any time the Company distributes to holders of Common Stock (i) securities, (ii)
property, or (iii) cash, without fair payment, then the holders of the Series C
Preferred Stock, upon conversion, shall be entitled to receive such securities,
property or cash that they would have received if they had converted their
shares into Common Stock immediately prior to the distribution.

In the
event the Company at any time issues additional Common Stock, preferred stock,
options, warrants or convertible securities after the date or issuance of the
Series C Preferred Stock, at a purchase price lower than the Conversion Price,
then, subject to certain exceptions, the Conversion Price will be automatically
reduced to such lower purchase price and the number of shares issuable upon
conversion of the Preferred Shares shall be increased proportionately.

The
anti-dilution rights may be waived by a vote of the holders of at least 20% of
the Series C Preferred Stock.

Voting Rights

The
holders of Series C Preferred Stock are entitled to one vote per share of Common
Stock issuable upon conversion of the Series C Preferred Stock as of the record
date for any such vote on all matters submitted to a vote of shareholders of the
Company, and the holders of Series C Preferred Stock will vote as a single class
with the holders of Common Stock on all matters, except as otherwise required
under applicable law and except that the holders of the Series C Preferred Stock
are entitled to elect two directors.

Distribution
and Dividends

If any
dividend is declared on the Common Stock, the holders of the Series C Preferred
Stock will be entitled to receive dividends pari passu out of legally available
funds as if each such share of the Series C Preferred Stock had been converted
to Common Stock. No dividend shall be paid on the Common Stock at a rate greater
than the rate at which dividends are paid on the Series C Preferred Stock.
Dividends to the holder of Series C Preferred Stock will be non-cumulative.

72

---

U.S.
WIRELESS DATA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFor the years ended June 30, 2003 and 2002

Modifications
and Waivers

The
terms of the Series C Preferred Stock may be amended, modified or waived by
agreement of the Company, the Commonwealth and a committee, to be designated by
the Commonwealth whose members hold in the aggregate not less than 20% of the
outstanding Series C Preferred Stock and 20% of the outstanding Unit Warrants
(the Committee), provided, however, that no such amendment,
modification or waiver which would decrease the number of Conversion Shares
issuable upon the exercise of the Series C Preferred Stock, or increase the
Conversion Price therefore (other than as a result of the waiver or modification
of any anti-dilution provisions) may be made without approval of the holders of
at least 50% of the outstanding Series C Preferred Stock.

NOTE 13
 STOCK OPTIONS

During
the year ended June 30, 2003, 1,503,182 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 approximately $442,000 in
salaries for the twelve-month period beginning November 1, 2002.

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 recorded as an 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%.

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 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%.

73

---

U.S.
WIRELESS DATA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFor the years ended June 30, 2003 and 2002

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%.

For
the year ended June 30, 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.

Stock Option
Plans

In
December 2002, the Company adopted a new combined incentive and a non-qualified
stock option plan (the 2002 Stock Option Plan), which provides for
the issuance of up to 3,500,000 shares of Common Stock under the plan. As of
June 30, 2003, there were no option grants issued under the 2002 Stock Option
Plan. Although options remain outstanding under the 1992 Stock Option Plan and
the 2000 Stock Option Plan, as of June 30, 2003 the Company no longer issues new
grants under those plans. Options granted under the plans generally vest over a
period of three years and must be exercised no later than ten years from the
date of grant.

The
following table summarizes information for stock options outstanding under the
plans and outside the plans at June 30, 2003:

|               | Outstanding Options | Options Exercisable |     |      |    
|-------------- | ------------------- | ------------------- | --- | ---- | ---
|
|$0.00 - $0.65  |                     | 6                   | .29 | $ 0  | .51
|$0.66 - $0.66  |                     | 8                   | .35 | $ 0  | .66
|$0.67 - $1.00  |                     | 6                   | .31 | $ 0  | .81
|$1.01 - $2.00  |                     | 7                   | .20 | $ 1  | .62
|$2.01 - $4.00  |                     | 7                   | .72 | $ 2  | .25
|$4.01 - $7.50  |                     | 7                   | .12 | $ 7  | .24
|$7.51 - $26.00 |                     | 6                   | .31 | $ 11 | .48
|               |                     |                     |     |      |    
|               |                     |                     |     |      |    
|               |                     |                     |     |      |    
|               |                     |                     |     |      |    

74

---

U.S.
WIRELESS DATA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFor the years ended June 30, 2003 and 2002

Stock
option transactions relating to options granted under the plans and other stock
options (discussed below) for the years ended June 30, 2003 and 2002 were as
follows:

1992 Stock
Option Plan

|                             | Number ofShares | WeightedAverage ExercisePrice PerShare
|---------------------------- | --------------- | --------------------------------------
|Balance at June 30, 2001     |                 | 347,884                               
|Granted                      |                 | --                                    
|Exercised                    |                 | (18,750                               
|Cancelled                    |                 | (116,564                              
|                             |                 |                                       
|Balance at June 30, 2002     |                 | 212,570                               
|Granted                      |                 | 250,000                               
|Exercised                    |                 | --                                    
|Cancelled                    |                 | (60,625                               
|                             |                 |                                       
|Balance at June 30, 2003     |                 | 401,945                               
|                             |                 |                                       
|                             |                 |                                       
|Exercisable at June 30, 2003 |                 | 214,445                               
|                             |                 |                                       
|                             |                 |                                       
|2000 Stock Option Plan       |                 |                                       
|Balance at June 30, 2001     |                 | 2,608, 400                            
|Granted                      |                 | 1,229,462                             
|Exercised                    |                 | (177,987                              
|Cancelled                    |                 | (378,978                              
|                             |                 |                                       
|Balance at June 30, 2002     |                 | 3,280,897                             
|Granted                      |                 | 483,296                               
|Exercised                    |                 | --                                    
|Cancelled                    |                 | (963,527                              
|                             |                 |                                       
|Balance at June 30, 2003     |                 | 2,800,666                             
|                             |                 |                                       
|                             |                 |                                       
|Exercisable at June 30, 2003 |                 | 1,987,801                             
|                             |                 |                                       
|                             |                 |                                       

The
following option activity relates to options issued by the Company, which are
unrelated to the foregoing plans.

|                             | Number ofShares | WeightedAverage ExercisePrice PerShare
|---------------------------- | --------------- | --------------------------------------
|Balance at June 30, 2001     |                 | 355,207                               
|Granted                      |                 | --                                    
|Exercised                    |                 | (17,707                               
|Cancelled                    |                 | (41,667                               
|                             |                 |                                       
|Balance at June 30, 2002     |                 | 295,833                               
|Granted                      |                 | 1,198,886                             
|Exercised                    |                 | --                                    
|Cancelled                    |                 | (103,173                              
|                             |                 |                                       
|Balance at June 30, 2003     |                 | 1,391,546                             
|                             |                 |                                       
|                             |                 |                                       
|Exercisable at June 30, 2003 |                 | 1,103,202                             
|                             |                 |                                       
|                             |                 |                                       

75

---

U.S.
WIRELESS DATA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFor the years ended June 30, 2003 and 2002

NOTE 14
 STOCK WARRANTS

The
following table summarizes information about stock warrants outstanding at June
30, 2003:

|Range of exercise price |  | Number Outstandingand Exercisable | Weighted AverageExercise Price | Average RemainingContractual Life (yrs)
|----------------------- |  | --------------------------------- | ------------------------------ | ---------------------------------------
|$0.00 - $3.50           |  |                                   |                                | 671,875                                
|$3.51 - $5.99           |  |                                   |                                | 671,875                                
|$6.00 - $6.00           |  |                                   |                                | 6,017,766                              
|$6.01 - $21.38          |  |                                   |                                | 87,083                                 
|                        |  |                                   |                               
|                        |  |                                   |                                | 7,448,599                              
|                        |  |                                   |                               
|                        |  |                                   |                               

Provided
below are stock warrant transactions for the years ended June 30, 2003 and 2002.

|                             | Number ofShares | Weighted AverageExercise Price
|---------------------------- | --------------- | ------------------------------
|Balance at June 30, 2001     |                 | 7,581,625                     
|Granted                      |                 | --                            
|Exercised                    |                 | --                            
|Cancelled                    |                 | (92,917                       
|                             |                 |                               
|Balance at June 30, 2002     |                 | 7,488,708                     
|Granted                      |                 | --                            
|Exercised                    |                 | --                            
|Cancelled                    |                 | (40,109                       
|                             |                 |                               
|Balance at June 30, 2003     |                 | 7,448,599                     
|                             |                 |                               
|                             |                 |                               
|Exercisable at June 30, 2003 |                 | 7,448,599                     
|                             |                 |                               
|                             |                 |                               

As
part of their compensation related to the Private Placement, Commonwealth and
PJSC received warrants to purchase an aggregate of 167.599 Units (which are
identical to the units sold in the Private Placement). The warrants are
exercisable at $100,000 per Unit commencing on the date of issuance and for
seven years thereafter. The Company valued all of the unit warrants, in the
aggregate, at $6.15 million.

Effective
September 7, 2000, unit purchase warrants to purchase units consisting of (a)
Series C Convertible Preferred Stock and (b) additional warrants to purchase
Common Stock at $6.00 per share were amended so that such warrants are now
exercisable, at $6.00 per share, solely for the total number (3,491,625) of
shares of Common Stock into which the underlying Series C Convertible Preferred
Stock and warrants would have been convertible and exercisable. The modified
warrants are held by Commonwealth and PJSC. The change does not change the
aggregate number of shares of Common Stock, which the holders would have
received upon exercise in full of the unit purchase warrants and conversion and
exercise in full of the underlying securities. The change also does not affect
the aggregate purchase price, which such holders would have paid for the
underlying Common Stock. The change in the agreement did not provide additional
value to the warrant holders, therefore, the Company did not give accounting
recognition to the change.

76

---

U.S.
WIRELESS DATA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFor the years ended June 30, 2003 and 2002

NOTE 15
 NET LOSS PER SHARE

Loss
per common share is computed in accordance with the provisions of SFAS No. 128,
Earnings per Share. SFAS No. 128 establishes standards for the
computation, presentation, and disclosure of earnings per share. Basic per share
amounts are computed by dividing the net loss available to common stockholders
by the weighted average number of common shares outstanding during the year.
Diluted per share amounts incorporate the incremental shares issuable upon the
assumed exercise of the Companys stock options and warrants and assumed
conversion of convertible securities. During 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.

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

|                                                                 | June 30,2003 | June 30,2002
|---------------------------------------------------------------- | ------------ | ------------
|Common shares outstanding                                        |              | 17,629,000  
|Series C Preferred Stock outstanding in common stock equivalents |              | 5,914,000   
|                                                                 |              |             
|                                                                 |              | 23,543,000  
|                                                                 |              |             
|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                                              |              | 285,000     
|Executive                                                        |              | 1,344,000   
|                                                                 |              |             
|Total warrants                                                   |              | 7,449,000   
|                                                                 |              |             
|Options                                                          |             
|Outstanding, 1992 Option Plan                                    |              | 402,000     
|Outstanding, 2000 Option Plan                                    |              | 2,801,000   
|Outstanding, 2002 Option Plan (3,500,000 authorized)             |              | --          
|Outstanding, Non-Plan                                            |              | 1,391,000   
|                                                                 |              |             
|Total options                                                    |              | 4,594,000   
|                                                                 |              |             
|                                                                 |              |             
|Common stock contingently issuable for acquisitions              |              | --          
|                                                                 |              |             
|                                                                 |              |             
|Total                                                            |              | 35,586,000  
|                                                                 |              |             
|                                                                 |              |             

77

---

U.S.
WIRELESS DATA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFor the years ended June 30, 2003 and 2002

NOTE 16
 INCOME TAXES

At
June 30, 2003 and 2002, the Company had net operating loss carry-forwards for
federal and state income tax purposes of approximately $81 million and $72
million, respectively. Annual utilization of the loss carry-forwards is subject
to significant limitations due to changes in the Companys ownership.
Future changes in ownership could further limit the utilization of these net
operating loss carry-forwards. If unused, the carry-forwards will expire between
2009 and 2022.

The
Company incurred Delaware and other state and local taxes of $34,000 and
$178,000 for the year ended June 30, 2003 and 2002, respectively.

Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes, and operating loss and tax credit
carry-forwards. The tax effects of significant items comprising the
Companys deferred taxes are as follows:

|                                  | June 30, |                     
|--------------------------------- | -------- | --------------------
|
|Deferred tax assets               |          |                     
|Net operating loss carry-forwards |          | $ 27,512,000        
|Intangible assets                 |          | 2,706,000           
|Inventory reserves                |          | 1,410,000           
|Loss on disposition of subsidiary |          | --                  
|Accrued restructuring expense     |          | 224,000             
|Other                             |          | (74,000             
|                                  |          |                     
|                                  |          | $ 31,778,000        
|Valuation allowance               |          | (31,778,000         
|                                  |          |                     
|                                  |          | $                 --
|                                  |          |                     
|                                  |          |                     

Realization
of deferred tax assets is dependent upon future earnings. The Company has
recorded a full valuation allowance against the deferred tax assets since
management believes that it is more likely than not that these assets will not
be realized. Accordingly, no income tax benefit has been recorded because of the
valuation allowance. The valuation allowance increased during fiscal 2003 and
2002 by $1,948,000 and $9,526,000 respectively, due to additional losses for
which no tax benefits were recorded.

78

---

U.S.
WIRELESS DATA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFor the years ended June 30, 2003 and 2002

A
reconciliation between the statutory tax rate and the effective tax rate for the
periods indicated is presented below:

|                           | Year ended        June 30, |    
|-------------------------- | -------------------------- | ---
|
|Federal statutory tax rate |                            | 35 
|State taxes                |                            | 7  
|Valuation allowance        |                            | (42
|                           |                            |    
|Effective tax rate         |                            | -- 
|                           |                            |    
|                           |                            |    

NOTE 17
 EMPLOYEE BENEFIT PLAN

The
Company maintains a qualified Section 401(k) Savings Plan. The Plan allows
eligible employees to contribute up to 15% of their salaries on a pre-tax basis,
subject to certain limitations imposed by current tax law and regulations.
During the fiscal years 2003 and 2002, the Company contributed $26,000 and
$81,000, respectively, to the Plan.

NOTE 18
 RELATED PARTY TRANSACTIONS

No
fees were paid to Commonwealth during fiscal year 2003 or 2002. See additional
disclosures of related party transactions in the Notes entitled Series C
Convertible Preferred Stock and the Note entitled Stock
Options relating to options granted to the Board of Directors.

The Company
receives payments for services provided to two shareholders,  Paymentech,  a subsidiary
of First USA Inc. and its  subsidiary,  Merchant-Link,  Inc.  ("Merchant-Link")
and American Express Travel Related Services Company, Inc. ("Amex"). In  May
2003, Amex sold its  shareholdings in the Company.  The Company  obtained these
relationships as part of the acquisition  of NXT in December 2000.

Paymentech

During
the years ended June 30, 2003 and 2002, NXT recorded approximately $100,000 and
$863,000, respectively, in revenue from Paymentech for transaction fees, monthly
data transport services, leased line revenue, and software development services.

During
the years ended June 30, 2003 and 2002, the Company, excluding NXT, recorded
approximately $301,000 and $0, respectively, in revenue from Paymentech for
Synapse services and product purchases.

Accounts
receivable from Paymentech were approximately $0 and $48,000 at June 30, 2003
and 2002, respectively. Included in Customer advances at June 30,
2003 is $538,000 of advances from Paymentech. Also see Notes 21 and
22 for additional information.

79

---

U.S.
WIRELESS DATA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFor the years ended June 30, 2003 and 2002

Merchant-Link

NXT
provides Merchant-Link with transaction transport services as contracted for in
a service agreement dated June 21, 1996. NXT leased office space from
Merchant-Link, which expired on August 30, 2001. During the years ended June 30,
2003 and 2002, NXT recorded costs related to the leased office space and network
monitoring fees of $0 and $56,000, respectively. During the years ended June 30,
2003 and 2002, NXT recorded revenue from Merchant-Link of approximately $835,000
and $3,731,000, respectively. Accounts receivable from Merchant-Link were
approximately $0 and $369,000 at June 30, 2003 and 2002, respectively. The
Company also recognized $213,000 in fees for the transition discussed in Note
21.

Amex

Pursuant
to an agreement with Amex dated January 29, 1996 as amended on October 16, 1997,
February 11, 1999, May 10, 1999, December 30, 1999, May 24, 2000, August 22,
2000 and December 22, 2000, NXT provides to and receives from Amex various
services related to transport and management of credit card transactions. During
the years ended June 30, 2003 and 2002, NXT recorded revenue from Amex of
approximately $0 and $27,000, from transaction management fees, leased line
reimbursements, software development and other services. NXT also recognized
costs of sales to Amex of approximately $627,000 and $3,648,000 for transaction
transport services, host connection fees and transaction commissions during the
years ended June 30, 2003 and 2002, respectively. Included in accounts payable
was approximately $0 and $869,000 due to Amex, and $0 and $25,000 included in
accounts receivable due from Amex, as of June 30, 2003 and 2002, respectively.

NOTE 19
 SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental
disclosure of cash flow information:

$118,000
and $593,000 was paid in cash for interest for the year ended June 30, 2003 and
2002, respectively.

Supplemental
disclosure of non-cash financing and investing activities:

Year ended June
30, 2003

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

| | 2. | Issuance
of 2,241,658 shares of Common Stock to former NXT shareholders.
| | -- | ------------------------------------------------------------------------

| | 3. | Issuance
of 329,000 options for services.
| | -- | -----------------------------------------

| | 4. | Retirement
of 81,818 common shares received in connection with settlement of notes receivable.
| | -- | ----------------------------------------------------------------------------------------------

80

---

U.S.
WIRELESS DATA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFor the years ended June 30, 2003 and 2002

Year ended June
30, 2002

|1. |  | Conversion
of 1,573,150 shares of Series C Preferred Stock into 2,621,743 shares of Common Stock.
|-- |  | -------------------------------------------------------------------------------------------------

|2. |  | Issuance
of 468,750 shares of Common Stock to Cellgate shareholders, valued at approximately
$1,642,000.
|-- |  | --------------------------------------------------------------------------------------------------------

|3. |  | Issuance
of 150,000 options for services.
|-- |  | -----------------------------------------

NOTE 20
 COMMITMENTS AND CONTINGENCIES

The
Company has entered into leases for facilities. Future minimum lease payments
and sublease income under non-cancelable operating leases as of June 30, 2003
(excluding the former Bethesda facility), are as follows:

|                                | FacilityLeases | Less SubleasedFacilities | Net
|------------------------------- | -------------- | ------------------------ | ---
|For fiscal year ending June 30: |                |                          |    
|2004                            |                | $   690,000              |    
|2005                            |                | 695,000                  |    
|2006                            |                | 695,000                  |    
|2007                            |                | 667,000                  |    
|2007                            |                | 667,000                  |    
|Thereafter                      |                | 1,278,000                |    
|                                |                |                          |    
|Total minimum payments required |                | $4,692,000               |    
|                                |                |                          |    
|                                |                |                          |    

Rent
expense for the years ended June 30, 2003 and 2002 was $720,000 and $774,000,
respectively.

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

Included
in restricted cash is $625,000, which is held as collateral for the Bethesda
facility. In accordance with the lease termination agreement for the Bethesda
facility, this amount was paid to the landlord in August 2003.

On
November 16, 2000, the Company acquired the assets and assumed certain
liabilities of Cellgate, a Delaware limited liability company in a cash and
stock transaction. The acquisition was accounted for under the purchase method
of accounting and accordingly, the acquired assets and assumed liabilities have
been recorded at their estimated fair values. The purchase price included
$1,250,000 cash and 562,500 shares of the Companys common stock, valued at
the closing at an aggregate of $1,969,000. The acquisition of Cellgate provided
for the payment of additional consideration based on a future minimum value of
$16.00 per share for shares of USWD Common Stock issued in the transaction. As a
result, on November 16, 2001 and December 10, 2001, the Company issued 468,750
shares of the Companys common stock and paid $2,812,500 in cash,
respectively in settlement of this contingent obligation.

81

---

U.S.
WIRELESS DATA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFor the years ended June 30, 2003 and 2002

On
December 22, 2000, the Company acquired NXT in a stock for stock transaction,
accounted for under the purchase method of accounting. The assets acquired and
the liabilities assumed have been recorded at their estimated fair values as of
the date of the acquisition. The shareholders of NXT, including holders of
certain phantom stock rights in NXT exchanged their shares of Common Stock of
NXT and such rights, for an aggregate of 1,125,000 shares of USWDs Common
Stock valued at an aggregate of approximately $2,109,000. In accordance with the
terms of the agreement relating to the Companys acquisition of NXT, under
certain circumstances, depending on the price of the Companys Common
Stock, a maximum in cash of $500,000 and approximately 2,242,000 shares of the
Companys Common Stock, valued at $4,203,000 may be issued two (2) years
from closing. In addition to the 1,125,000 shares of Common Stock exchanged for
the acquisition of NXT, the Company also exchanged options for approximately
76,000 shares of its Common Stock, which were fully vested on the change of
control, at exercise prices ranging from $7.50 to $33.07 per share. The holders
of such options may also be entitled, upon exercise of their options, to
additional consideration depending on the Daily Average Price of USWD common
stock for the twenty (20) consecutive trading days immediately preceding
December 21, 2002. The value was considered to be nominal. As a result, on
December 23, 2002, 2,241,658 shares of common stock were issued to the former
NXT shareholders and on January 15, 2003, $500,000 was paid to the former
shareholders of NXT in full settlement of this contingent obligation.

The
Company has employment agreements with four of its executive officers. The
agreements are for initial terms of one to three years, with automatic one-year
extensions after the initial term. As of June 30, 2003, the employment
agreements commit the Company to annual salary compensation of $623,000. The
agreements include provisions for severance payments upon nonrenewal or
termination under certain conditions.

The
Company has committed to reimburse a third party 50%, up to a maximum of
$300,000, for certain agreed upon development costs. Management is currently
negotiating the amount and terms of payment of the Companys obligation,
which, if successful, the Company believes will enable the Company to reduce the
amount due to $150,000 and to reduce the amount due against future services
provided to such third party.

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

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

82

---

U.S.
WIRELESS DATA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFor the years ended June 30, 2003 and 2002

NOTE 21
 SALE OF NXT

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

As the
Company had actively been seeking a buyer at June 30, 2002, 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 and the
results of operations of NXTs operations and the related loss on sale of
NXTs assets have been reported as discontinued operations for all periods
presented in the accompanying consolidated financial statements. Revenues and
loss from operations of NXT are as follows:

|                       | Year ended June 30, |           
|---------------------- | ------------------- | ----------
|
|Revenues               |                     | $1,224,000
|Income from operations |                     | 362,000   

Assets
of NXT held for sale were as follows:

|                                   | June 30, 2002
|---------------------------------- | -------------
|Fixed assets                       |              
|Goodwill                           |              
|Identified intangibles             |              
|                                   |              
|Carrying value of assets           |              
|Write-down of assets held for sale |              
|                                   |              
|Assets held for sale               |              
|                                   |              
|                                   |              

As a
result of the NXT transaction, the Company recorded a loss of $1,809,000 from
the sale, with no tax benefit assumed.

Paymentech
is obligated under the Agreement, subject to certain conditions, to purchase
goods or services from the Company or its affiliates over a three (3) year
period that commenced September 1, 2002, in an amount aggregating a minimum of
$3,472,500. Paymentech is obligated to pay the Company at least $1,000,000
during the first year, in installments of $83,333 per month, at least $1,150,000
during the second year, in installments of $95,833 per month, and at least
$1,322,500 during the third year, in installments of $110,208. Paymentech has
made such payments as scheduled and is expected to continue to make such
payments on a timely basis. Payments from Paymentech in excess of goods and
services provided to date aggregating $538,000 have been classified as
Customer advances in the consolidated balance sheet at June 30,
2003.

83

---

U.S.
WIRELESS DATA, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFor the years ended June 30, 2003 and 2002

NOTE 22
 SUBSEQUENT EVENTS

On
August 18, 2003, the Company borrowed $150,000 from the finance company with
which it has the Factoring Agreement. The loan was repaid on September 11, 2003.

In
August 2003, the Company received an advance of $167,000 from Paymentech
representing guaranteed payments due for September and October 2003. The Company
agreed to a $25,000 reduction in the scheduled amount due in return for the
early advance. The Company has also agreed to apply any unapplied balance to
future services.

84

---

ITEM 8.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND ACCOUNTING FINANCIAL DISCLOSURE

Not Applicable.

ITEM 8A.
CONTROLS AND PROCEDURES

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

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

PART III

ITEM 9.
DIRECTORS AND EXECUTIVE OFFICERS

The
information required by this Item will be included in our Proxy Statement for
the 2003 Annual Meeting of the Shareholders under the caption Directors
and Executive Officers which will be filed with the Securities and
Exchange Commission no later than 120 days after the close of the fiscal
year ended June 30, 2003, and is incorporated herein by reference.

ITEM 10.
EXECUTIVE COMPENSATION

The
information required by this Item will be included in our Proxy Statement for
the 2003 Annual Meeting of the Shareholders under the caption Executive
Compensation which will be filed with the Securities and Exchange
Commission no later than 120 days after the close of the fiscal year
ended June 30, 2003, and is incorporated herein by reference.

ITEM 11.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND  RELATED STOCKHOLDER
MATTERS

The
information required by this Item will be included in our Proxy Statement for
the 2003 Annual Meeting of the Shareholders under the caption Security
Ownership of Certain Beneficial Owners and Management which will be filed
with the Securities and Exchange Commission no later than 120 days after
the close of the fiscal year ended June 30, 2003, and is incorporated herein by
reference. The information required by this Item with regard to Section 201(d)
of Regulation S-B of the Act, Securities Authorized for Issuance Under
Equity Compensation Plans, is included in Item 5(d) of Part II hereof.

ITEM 12.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The
information required by this Item will be included in our Proxy Statement for
the 2003 Annual Meeting of the Shareholders under the caption Certain
Relationships and Related Transactions which will be filed with the
Securities and Exchange Commission no later than 120 days after the close
of the fiscal year ended June 30, 2003, and is incorporated herein by reference.

85

---

ITEM 13.
EXHIBITS, LIST AND REPORTS ON FORM 8-K

(a)
Exhibits

ExhibitNumber         Description of Exhibit

|3.1 |  | Certificate of Incorporation
(12)
|--- |  | ---------------------------------

|3.2 |  | Certificate of Amendment to
the Certificate of Incorporation (12)
|--- |  | -----------------------------------------------------------------

|3.3 |  | Bylaws (10)
|--- |  | -----------

|4.1 |  | Specimen Common Stock Certificate (13)
|--- |  | --------------------------------------

|4.2 |  | 1992 Stock Option Plan, as
amended (1)
|--- |  | --------------------------------------

|4.3 |  | Form of Stock Option
Agreement under 1992 Stock Option Plan (6)
|--- |  | ---------------------------------------------------------------

|4.4 |  | 2000 Stock Option Plan
(including forms) (10)
|--- |  | ---------------------------------------------

|4.5 |  | 2002 Option Plan (including
forms) (18)
|--- |  | ---------------------------------------

|4.6 |  | Form of Common Stock
Purchase Warrant issued to John Liviakis and Robert Prag as of August 4, 1997
(2)
|--- |  | ------------------------------------------------------------------------------------------------------

|4.7 |  | Agreement to Amend Stock
Purchase Warrant effective April 1, 1998 with James Walters (3)
|--- |  | ----------------------------------------------------------------------------------------

|4.8 |  | Form of Common Stock
Purchase Warrants issued to Certain Holders of Series A Preferred Stock
participating in the modifications to the terms of the Series A Preferred Stock
(which was effective as of September 17, 1998) (4)
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.9 |  | Form of Common Stock
Purchase Warrant issued to Charles Burtzloff in conjunction with the $500,000
loan made to us as of November 1, 1998 (4)
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------

|4.10 |  | Form of Unit Warrant (7)
|---- |  | ------------------------

|4.11 |  | Form of Subscription Agreement (7)
|---- |  | ----------------------------------

|4.12 |  | Form of Placement Agent Warrant (7)
|---- |  | -----------------------------------

|4.13 |  | Form of Peter J. Solomon Securities Company Limited Warrant (7)
|---- |  | ---------------------------------------------------------------

|4.14 |  | Form of Bold Street, LLC Warrant (7)
|---- |  | ------------------------------------

|4.15 |  | Form of Warrant Amendment Agreement, dated as of September 7, 2000, by and
between us and unit 4.15
purchase warrant holders (8)
|---- |  | --------------------------------------------------------------------------------------------------------------------------------

|4.16 |  | Common Stock Purchase Warrant issued to Dean M. Leavitt as of May 3, 1999 (5)
|---- |  | -----------------------------------------------------------------------------

|4.17 |  | Form of Nonqualified Stock Option Certificate issued to Edwin M. Cooperman dated March 29, 2000 (9)
|---- |  | ---------------------------------------------------------------------------------------------------

|4.18 |  | Form of Nonqualified Stock Option Certificate issued to Barry A. Kaplan dated March 29, 2000 (9)
|---- |  | ------------------------------------------------------------------------------------------------

|4.19 |  | Form of Nonqualified Stock Option Certificate issued to Amy L. Newmark dated March 29, 2000 (9)
|---- |  | -----------------------------------------------------------------------------------------------

|4.20 |  | Form of Nonqualified Stock Option Certificate issued to Charles I. Leone dated February 15, 2000 (9)
|---- |  | ----------------------------------------------------------------------------------------------------

|4.21 |  | Form of Common Stock Purchase Warrant (originally issued to Dean M. Leavitt as of May 3, 1999),
as re-executed as of January 4, 2000 to reflect repricing authorized as of such date (9)
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.22 |  | Form of Common Stock Purchase Warrant for 22,500 shares issued to RBB Bank dated January 20, 2000 (9)
|---- |  | -----------------------------------------------------------------------------------------------------

|4.23 |  | Form of Common Stock Purchase Warrant for 15,000 shares issued to Lippert/Heilshorn & Associates,
Inc. dated March 28, 2000 (9)
|---- |  | -------------------------------------------------------------------------------------------------------------------------------

86

---

ExhibitNumber          Description of Exhibit

|4.24 |  | Form of Common Stock Purchase Warrant for 50,000 shares issued to Cornell Consulting
International, Inc. dated March 28, 2000 (9)
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------

|4.25 |  | Form of Common Stock Purchase Warrant for 25,000 shares issued to Cornell Consulting
International, Inc. dated May 4, 2000 (9)
|---- |  | ------------------------------------------------------------------------------------------------------------------------------

|4.26 |  | Form of Nonqualified Stock Option Certificate issued to Heidi R. Goth (dated October 24, 2002) (19)
|---- |  | ---------------------------------------------------------------------------------------------------

|4.27 |  | Form of Nonqualified Stock Option Certificate issued to Dean M. Leavitt (dated October 24, 2002) (19)
|---- |  | -----------------------------------------------------------------------------------------------------

|4.28 |  | Form of Nonqualified Stock Option Certificate issued to Charles I. Leone (dated October 24, 2002) (19)
|---- |  | ------------------------------------------------------------------------------------------------------

|4.29 |  | Form of Nonqualified Stock Option Certificate issued to Mark R. Shultz (dated October 24, 2002) (19)
|---- |  | ----------------------------------------------------------------------------------------------------

|4.30 |  | Warrant Certificate, dated September 16, 2003, between us and Brascan Financial Corporation (20)
|---- |  | ------------------------------------------------------------------------------------------------

|10.1 |  | Form of Amended and Restated Employment Agreement between us and Dean M. Leavitt dated December
20, 2000 (14)
|---- |  | -------------------------------------------------------------------------------------------------------------

|10.2 |  | Indemnification Agreement between us and Dean M. Leavitt entered into as of May 3, 1999 (5)
|---- |  | -------------------------------------------------------------------------------------------

|10.3 |  | Form of Employment Agreement between us and Charles I. Leone dated November 8, 2002 *
|---- |  | -------------------------------------------------------------------------------------

|10.4 |  | Form of Employment Agreement between us and Heidi R. Goff dated October 10, 2001 (15)
|---- |  | -------------------------------------------------------------------------------------

|10.5 |  | Form of Employment Agreement between us and Adi Raviv dated August 15, 2002 (17)
|---- |  | --------------------------------------------------------------------------------

|10.6 |  | Form of lease agreement for the 20th floor at 750 Lexington Avenue dated May 22, 2000 (11)
|---- |  | ------------------------------------------------------------------------------------------

|10.7 |  | Asset Purchase Agreement dated August 31, 2002 (Sale of NXT) (16)
|---- |  | -----------------------------------------------------------------

|10.8 |  | Term and Loan Security Agreement, dated September 16, 2003, between us and Brascan Financial
Corporation (20)
|---- |  | -------------------------------------------------------------------------------------------------------------

|10.9 |  | Term Note made by us, dated September 16, 2003 (20)
|---- |  | ---------------------------------------------------

|10.10 |  | Registration Rights Agreement, dated September 16, 2003 between us and Brascan Financial
Corporation (20)
|----- |  | ---------------------------------------------------------------------------------------------------------

|10.11 |  | Trade Name Letter, dated September 16, 2003, between us and Brascan Financial Corporation (20)
|----- |  | ----------------------------------------------------------------------------------------------

|10.12 |  | Copyright Security Agreement, dated September 16, 2003, between us and Brascan Financial
Corporation (20)
|----- |  | ---------------------------------------------------------------------------------------------------------

|10.13 |  | Trademark Security Agreement, dated September 16, 2003, between us and Brascan Financial
Corporation (20)
|----- |  | ---------------------------------------------------------------------------------------------------------

|10.14 |  | Patent Security Agreement, dated September 16, 2003, between us and Brascan Financial Corporation
(20)
|----- |  | ------------------------------------------------------------------------------------------------------

|31.1 |  | Certification of Chief Executive Officer *
|---- |  | ------------------------------------------

|31.2 |  | Certification of Chief Financial Officer *
|---- |  | ------------------------------------------

|32.1 |  | Certification of Principal Executive Officer pursuant to U.S.C. Section 1350 *
|---- |  | ------------------------------------------------------------------------------

|32.2 |  | Certification of Principal Financial Officer pursuant to U.S.C. Section 1350 *
|---- |  | ------------------------------------------------------------------------------

___________________________

*
Filed herewith.

|** |  | Confidential treatment for certain portions of this document were granted to us
pursuant to Commission Rule 24b-2 promulgated under of the Securities Exchange
Act of 1934 and/or Rule 406 promulgated under the Securities Act of 1933, as
identified on the first page of the document, and at the specific item in the
document for which such treatment has been requested. The omitted material was
filed separately with the Commission pursuant to Rules 24b-2 and/or 406.
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(1) |  | Incorporated by reference from the like-named exhibit filed as Exhibit C to our
Definitive Revised Proxy Statement for the 1997 Annual Meeting of Stockholders
held on February 6, 1998, filed on January 14, 1998.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

87

---

|(2) |  | Incorporated by reference from the like-named exhibit filed with our
Registration Statement on Form SB-2 (SEC File No. 333-52625) as of May 14, 1998.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Incorporated by reference from the like-named exhibit filed with Amendment No. 1
to our Registration Statement on Form SB-2 (SEC File No. 333-52625) as of July
16, 1998.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Incorporated by reference from the like-named exhibit filed with our Annual
Report on Form 10-KSB for the Fiscal Year Ended June 30, 1998, filed on December
18, 1998.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | Incorporated by reference from the like-named exhibit filed with our
Registration Statement on Form SB-2 (SEC File No. 333-81897), filed on June 30,
1999.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) |  | Incorporated by reference from the like-named exhibit filed with our Annual
Report on Form 10-KSB for the Fiscal Year Ended June 30, 1999, filed on October
14, 1999.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) |  | Incorporated by reference from the like-named exhibit filed with our Current
Report on Form 8-K/A Reporting an Event of March 28, 2000, filed on April 18,
2000.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) |  | Incorporated by reference from the like-named exhibit filed with our Current
Report on Form 8-K Reporting an Event of September 7, 2000, filed on September
19, 2000.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) |  | Incorporated by reference from the like-named exhibit filed with our Quarterly
Report on Form 10-QSB for the fiscal quarter ended March 31, 2000, filed on May
15, 2000.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10) |  | Incorporated by reference from the like-named exhibit filed with our Definitive
Proxy Statement for the 1999 Annual Meeting of Stockholders held on September 7,
2000, filed on August 9, 2000.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(11) |  | Incorporated by reference from the like-named exhibit filed with our Annual
Report on Form 10-KSB for the Fiscal Year Ended June 30, 2000, filed on
September 28, 2000.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(12) |  | Incorporated by reference from the like-named exhibit filed with our Quarterly
Report on Form 10-QSB for the fiscal quarter ended September 30, 2000, filed on
November 14, 2000.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(13) |  | Incorporated by reference from the like-named exhibit filed with our
Registration Statement on Form S-8, filed on December 8, 2000.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------

|(14) |  | Incorporated by reference from the like-named exhibit filed with our Annual
Report on Form 10-KSB for the Fiscal Year Ended June 30, 2001, filed on
September 28, 2001.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(15) |  | Incorporated by reference from the like-named exhibit filed with our Quarterly
Report on Form 10-QSB for the fiscal quarter ended December 31, 2001, filed on
February 14, 2002.
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(16) |  | Incorporated by reference from the like-named exhibit filed with our Current
Report on Form 8-K Reporting an Event of August 31, 2002, filed on September 5,
2002.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(17) |  | Incorporated by reference from the like-named exhibit filed with our Annual
Report on Form 10-KSB for the Fiscal Year Ended June 30, 2002, filed on
September 30, 2002.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(18) |  | Incorporated by reference from the like-named exhibit filed with our Definitive
Proxy Statement for the 2002 Annual Meeting of Stockholders held on December 17,
2002, filed on October 28, 2002.
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(19) |  | Incorporated by reference from the like-named exhibit filed with our
Registration Statement on Form S-8, filed on March 10, 2003.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------

|(20) |  | Incorporated by reference from the like-named exhibit filed with our Current
Report on Form 8-K Reporting an Event of September 16, 2003, filed on September
16, 2003.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

(b)
Reports on Form 8-K

None.

88

---

## 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.

Dated:  October
14, 2003

| | U.S.
WIRELESS DATA, INC.
/s/ Dean M. Leavitt
Dean M. Leavitt
Chief Executive Officer
| | --------------------------------------------------------------------------------------------------

In accordance with the
requirements of the Securities Exchange Act of 1934, this Report has been signed
below by the following persons in the capacities and on the dates indicated.

|Signatures            | Title | Date                                
|--------------------- | ----- | ------------------------------------
|/s/ Dean M. Leavitt   |       |                                     
|Dean M. Leavitt       |       | Chief Executive Officer and Chairman
|                      |       | of the Board of the Company         
|                      |       | (Principal Executive Officer)       
|/s/ Adi Raviv         |      
|Adi Raviv             |       | Executive Vice President and        
|                      |       | Chief Financial Officer             
|                      |       | (Principal Financial Officer)       
|/s/ Barry A. Kaplan   |      
|Barry A. Kaplan       |       | Director                            
|/s/ Amy L. Newmark    |      
|Amy L. Newmark        |       | Director                            
|/s/ Chester N. Winter |      
|Chester N. Winter     |       | Director                            

89

---