<PAGE>
================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-QSB

                QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004

                        COMMISSION FILE NUMBER 0001-22563

                               CDSI HOLDINGS INC.
        (Exact name of small business issuer as specified in its charter)

                DELAWARE                                   95-4463937
     (State or other jurisdiction of                   (I.R.S. Employer
     incorporation or organization)                  Identification Number)

    100 S.E. SECOND STREET, 32ND FLOOR
                MIAMI, FL                                    33131
 (Address of principal executive offices)                  (Zip Code)

                                 (305) 579-8000
                (Issuer's telephone number, including area code)

      CHECK WHETHER THE ISSUER (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY
SECTION 13 OR 15(d) OF THE EXCHANGE ACT DURING THE PRECEDING 12 MONTHS (OR FOR
SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND
(2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES[X] NO[ ]

      AS OF JULY 23, 2004, THERE WERE OUTSTANDING 3,120,000 SHARES OF THE
ISSUER'S COMMON STOCK, $.01 PAR VALUE.

================================================================================

<PAGE>

                               CDSI HOLDINGS INC.
                         QUARTERLY REPORT ON FORM 10-QSB
                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                             Page
                                                                             ----
<S>                                                                          <C>
PART I. FINANCIAL INFORMATION

  Item 1. Condensed Consolidated Financial Statements (Unaudited):

          Condensed Consolidated Balance Sheets as of June 30, 2004
             and December 31, 2003..........................................   2

          Condensed Consolidated Statements of Operations for the
             three months and six months ended June 30, 2004 and 2003.......   3

          Condensed Consolidated Statements of Cash Flows for the
             six months ended June 30, 2004 and 2003........................   4

          Notes to the Condensed Quarterly Consolidated Financial
             Statements.....................................................   5

  Item 2. Management's Discussion and Analysis of Financial
             Condition and Results of Operations............................   9

  Item 3. Controls and Procedures...........................................  13

PART II. OTHER INFORMATION

  Item 2. Changes in Securities and Small Business Issuer
                 Purchases of Equity Securities.............................  14

  Item 6. Exhibits and Reports on Form 8-K..................................  14

  SIGNATURE.................................................................  15
</TABLE>

<PAGE>

                               CDSI HOLDINGS INC.

                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                   June 30,     December 31,
                                                                                     2004          2003
                                                                                     ----          ----
<S>                                                                              <C>            <C>
                                     ASSETS:
Current assets:
   Cash and cash equivalents................................................     $   135,715    $   164,334
   Investment securities available for sale.................................           9,900         18,150
                                                                                 -----------    -----------
          Total assets......................................................     $   145,615    $   182,484
                                                                                 ===========    ===========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Accounts payable and accrued expenses....................................     $     9,625    $    13,525
                                                                                 -----------    -----------
          Total current liabilities.........................................           9,625         13,525
                                                                                 -----------    -----------

Commitments and contingencies...............................................              --             --

Stockholders' equity:
   Preferred stock, $.01 par value. Authorized 5,000,000
       shares; no shares issued and outstanding.............................              --             --
   Common stock, $.01 par value. Authorized 25,000,000
         shares; 3,120,000 shares issued and outstanding....................          31,200         31,200
   Additional paid-in capital...............................................       8,209,944      8,209,944
   Accumulated deficit......................................................      (8,115,054)    (8,090,335)
   Accumulated other comprehensive income...................................           9,900         18,150
                                                                                 -----------    -----------
          Total stockholders' equity........................................         135,990        168,959
                                                                                 -----------    -----------
          Total liabilities and stockholders' equity........................     $   145,615    $   182,484
                                                                                 ===========    ===========
</TABLE>

      See accompanying Notes to Condensed Consolidated Financial Statements

                                       2
<PAGE>

                               CDSI HOLDINGS INC.

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                        Three Months Ended              Six Months Ended
                                                    --------------------------    ----------------------------
                                                      June 30,       June 30,        June 30,      June 30,
                                                        2004           2003            2004          2003
                                                        ----           ----            ----          ----
<S>                                                 <C>            <C>             <C>            <C>
Revenues .......................................    $        --    $        --    $              $        --

Cost and expenses:
     General and administrative ................         13,156         15,205         25,436         29,633
                                                    -----------    -----------    -----------    -----------
                                                         13,156         15,205         25,436         29,633
                                                    -----------    -----------    -----------    -----------

Operating loss .................................        (13,156)       (15,205)       (25,436)       (29,633)
                                                    -----------    -----------    -----------    -----------

     Interest income ...........................            323            553            717          1,216
                                                    -----------    -----------    -----------    -----------

Net loss .......................................    $   (12,833)   $   (14,652)   $   (24,719)   $   (28,417)
                                                    ===========    ===========    ===========    ===========

Net loss per share (basic and diluted) .........    $     (0.00)   $     (0.00)   $     (0.01)   $     (0.01)
                                                    ===========    ===========    ===========    ===========

Shares used in computing net loss per share ....      3,120,000      3,120,000      3,120,000      3,120,000
                                                    ===========    ===========    ===========    ===========
</TABLE>

      See accompanying Notes to Condensed Consolidated Financial Statements

                                       3
<PAGE>

                               CDSI HOLDINGS INC.

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                  Six Months Ended
                                                              ------------------------
                                                                June 30,    June 30,
                                                                  2004        2003
                                                                  ----        ----
<S>                                                           <C>          <C>
Cash flows from operating activities:
   Net loss ..............................................    $ (24,719)   $ (28,417)
   Decrease in accounts payable and accrued expenses .....       (3,900)      (1,481)
                                                              ---------    ---------

Net cash used in operating activities ....................      (28,619)     (29,898)
                                                              ---------    ---------

Net cash from investing activities .......................           --           --
                                                              ---------    ---------

Net cash from financing activities .......................           --           --
                                                              ---------    ---------

Net decrease in cash and cash equivalents ................      (28,619)     (29,898)
Cash and cash equivalents at beginning of period .........      164,334      215,087
                                                              ---------    ---------

Cash and cash equivalents at end of period ...............    $ 135,715    $ 185,189
                                                              =========    =========
</TABLE>

      See accompanying Notes to Condensed Consolidated Financial Statements

                                       4
<PAGE>

                       CDSI HOLDINGS INC. AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

(1)   BUSINESS AND ORGANIZATION

      CDSI Holdings Inc. (the "Company" or "CDSI") was incorporated in Delaware
      on December 29, 1993. On January 12, 1999, the Company's stockholders
      voted to change the corporate name of the Company from PC411, Inc. to CDSI
      Holdings Inc. Prior to May 8, 1998, the Company's principal business was
      an on-line electronic delivery information service that transmits name,
      address, telephone number and other related information digitally to users
      of personal computers (the "PC411 Service"). On May 8, 1998, the Company
      acquired Controlled Distribution Systems, Inc. ("CDS"), a company engaged
      in the marketing and leasing of an inventory control system for tobacco
      products. In February 2000, CDSI announced CDS will no longer actively
      engage in the business of marketing and leasing the inventory control
      system. Effective November 12, 2003, the Company and its wholly-owned
      subsidiary CDS merged with the Company as the surviving corporation.

      At June 30, 2004, the Company had an accumulated deficit of approximately
      $8.1 million. The Company has reported an operating loss in each of its
      fiscal quarters since inception and it expects to continue to incur
      operating losses in the immediate future. The Company has reduced
      operating expenses and is seeking acquisition and investment
      opportunities. There is a risk the Company will continue to incur
      operating losses.

      CDSI intends to explore investments in other business opportunities. As
      CDSI has only limited cash resources, CDSI's ability to complete any
      acquisition or investment opportunities it may identify will depend on its
      ability to raise additional financing, as to which there can be no
      assurance. As of the date of this report, the Company has not identified
      any potential acquisition or investment. There can be no assurance that
      the Company will successfully identify, complete or integrate any future
      acquisition or investment, or that acquisitions or investments, if
      completed, will contribute favorably to its operations and future
      financial condition.

(2)   PRINCIPLES OF REPORTING

      The financial statements of the Company as of June 30, 2004 presented
      herein have been prepared by the Company and are unaudited. In the opinion
      of management, all adjustments, consisting only of normal recurring
      adjustments, necessary to present fairly the financial position as of June
      30, 2004 and the results of operations and cash flows for all periods
      presented have been made. Results for the interim periods are not
      necessarily indicative of the results for the entire year.

      These financial statements should be read in conjunction with the audited
      financial statements and notes thereto for the year ended December 31,
      2003 included in the Company's Form 10-KSB filed with the Securities and
      Exchange Commission (Commission File No. 0001-22563).

                                       5
<PAGE>

                       CDSI HOLDINGS INC. AND SUBSIDIARIES

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                   (UNAUDITED)

      USE OF ESTIMATES

      The preparation of the 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 date of the
      financial statements and the reported amounts of revenue and expenses
      during the reporting period. Actual results could differ from those
      estimates.

(3)   THINKDIRECTMARKETING TRANSACTION

      On November 5, 1998, the Company contributed the non-cash assets and
      certain liabilities of the PC411 Service to ThinkDirectMarketing, Inc.
      ("TDMI") (formerly known as Digital Asset Management, Inc.). The Company
      received preferred stock representing an initial 42.5% interest in TDMI in
      exchange for the contribution of the PC411 Service's net assets. The
      Company's carrying value in the net assets contributed to TDMI totaled
      $73,438. The Company recorded $462,360 as a capital contribution in
      connection with the transaction, which represented the Company's 42.5%
      interest in the capital raised by TDMI in excess of the carrying value of
      the Company's net assets contributed to TDMI. The Company agreed, under
      certain conditions, to fund up to $200,000 of an $800,000 working capital
      line. The Company funded $100,000 of the working capital line in the
      second quarter of 1999. In July 1999, the Company agreed to extend the
      maturity of its working capital line and was released from any further
      obligation to fund additional amounts under the working capital line.

      In October 2000, TDMI and Cater Barnard plc (formerly known as
      VoyagerIT.com) entered into an agreement whereby Cater Barnard purchased
      for $5,000,000 shares of TDMI's convertible preferred stock and
      convertible notes on various dates between November 10, 2000 and June 8,
      2001. On October 16, 2001, Cater Barnard agreed to use its best efforts to
      fund an additional $1,250,000 to TDMI by January 31, 2002 and on the same
      date, the TDMI stockholders granted Cater Barnard an option to purchase by
      January 31, 2002 all of TDMI's common stock not held by Cater Barnard for
      an aggregate purchase price of 78,750 shares of Convertible Preferred
      Stock of Dialog Group Inc. ("Dialog", formerly known as IMX
      Pharmaceuticals, Inc.). Dialog was then a majority-owned subsidiary of
      Cater Barnard to which Cater Barnard had transferred its interest in TDMI.
      The preferred stock was initially convertible into 1,575,000 shares of
      Dialog Common Stock.

      On January 31, 2002, Dialog acquired all the shares of TDMI it did not
      already own by exercising the option previously granted to Cater Barnard.
      CDSI received 8,250 shares of Dialog Class B Convertible Preferred Stock
      in exchange for its interest in TDMI. Each share of Dialog Class B
      Preferred Stock was entitled to receive an annual dividend of $4.00 on
      December 31 of each year. The dividend was payable at the option of Dialog
      in shares of its Common Stock. The shares of Dialog Class B Preferred
      Stock to be received by the Company were initially convertible into
      165,000 shares of Dialog Common Stock.

      On November 4, 2002, the holders of Dialog Class B Preferred Stock and
      Dialog agreed to (i) increase the number of common shares into which the
      Dialog Class B Preferred Stock is convertible from 1,575,000 to 3,150,000
      and (ii) eliminate the annual dividend on the Class B Preferred Stock. As
      a result, the Class B Preferred Stock held by CDSI became convertible into

                                       6
<PAGE>

                       CDSI HOLDINGS INC. AND SUBSIDIARIES

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                   (UNAUDITED)

      330,000 shares of Dialog Common Stock and, on February 7, 2003, CDSI
      converted its preferred shares into 330,000 shares of Dialog Common Stock.
      Based on public filings by Dialog, management currently estimates that
      CDSI's interest in Dialog is approximately 0.3% on a fully-diluted basis.

      As contemplated by the Investors' Rights Agreement dated January 31, 2002
      between Dialog and the former TDMI stockholders, Dialog filed a
      registration statement on June 25, 2003 with the Securities and Exchange
      Commission to register under the Securities Act of 1933, among other
      things, the Dialog shares held by CDSI as well as the Dialog Common Stock
      issuable on conversion of the Dialog Class B Preferred Stock held by the
      other former TDMI stockholders. The registration statement has not yet
      been declared effective. On August 18, 2003 and November 13, 2003, the
      Company filed a notice of proposed sale under Rule 144 of the Securities
      Act of 1933 with respect to its 330,000 shares of Dialog Common Stock. As
      of July 23, 2004, the Company had sold 25,000 shares of Dialog stock for
      $2,755 in the third quarter of 2004. See Note 4.

(4)   INVESTMENT SECURITIES AVAILABLE FOR SALE

      The Company's 330,000 shares of Dialog Common Stock may be sold by the
      Company pursuant to Rule 144(k) of the Securities Act of 1933. See Note 3.
      In accordance with Statement of Financial Accounting Standards No. 115,
      "Accounting for Certain Investments in Debt and Equity Securities", the
      Company has classified these shares as "Investment Securities Available
      for Sale" as of June 30, 2004. The Dialog Common Stock is carried at fair
      value, based on the last trade prior to June 30, 2004, and net unrealized
      gains are included as a component of stockholders' equity. However, no
      assurance can be given that the Company will ultimately realize fair value
      for its Dialog shares as there is only a limited trading market for the
      shares and the Company may not be able to sell any material portion of its
      shares at prevailing market prices.

(5)   RELATED PARTY TRANSACTIONS

      Certain accounting and related finance functions are performed on behalf
      of the Company by employees of New Valley Corporation, the principal
      stockholder of the Company. Expenses incurred relating to these functions
      are allocated to the Company and paid as incurred to New Valley based on
      management's best estimate of the cost involved. The amounts allocated
      were immaterial for all periods presented herein.

(6)   NET LOSS PER SHARE

      Basic loss per share of common stock is computed by dividing net loss
      applicable to common stockholders by the weighted average shares of common
      stock outstanding during the period (3,120,000 shares). Diluted per share
      results reflect the potential dilution from the exercise or conversion of
      securities into common stock.

      Stock options and warrants (both vested and non-vested) totaling 656,788
      shares at June 30, 2004 and 2003, respectively, were excluded from the
      calculation of diluted per share results presented because their effect
      was anti-dilutive. Accordingly, diluted net loss per common share is the
      same as basic net loss per common share.

                                       7
<PAGE>

                       CDSI HOLDINGS INC. AND SUBSIDIARIES

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                   (UNAUDITED)

(7)   COMPREHENSIVE LOSS

      Comprehensive loss of the Company includes net loss and changes in the
      value of investment securities available for sale that have not been
      included in net income. Comprehensive loss applicable to Common Shares for
      the three and six months ended June 30, 2004 and 2003 is as follows:

<TABLE>
<CAPTION>
                                               THREE MONTHS ENDED JUNE 30,     SIX MONTHS ENDED JUNE 30,
                                               ---------------------------    ---------------------------
                                                   2004          2003            2004            2003
                                                   ----          ----            ----            ----
<S>                                              <C>           <C>             <C>             <C>
Net loss ..................................      $(12,833)     $(14,652)       $(24,719)       $(28,417)
Net change in unrealized gain
      on investment securities ............        (4,950)           --          (8,250)             --
                                                 --------      --------        --------        --------

      Comprehensive loss ..................      $(17,783)     $(14,652)       $(32,969)       $(28,417)
                                                 ========      ========        ========        ========
</TABLE>

                                       8
<PAGE>

                       CDSI HOLDINGS INC. AND SUBSIDIARIES

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

Overview

      Based on public filings by Dialog Group Inc. (formerly known as IMX
Pharmaceuticals Inc.), management estimates that the Company owns an approximate
0.3% interest in Dialog on a fully diluted basis. Dialog is a provider of
relationship marketing communications services, business and consumer targeting
databases for the healthcare, financial, and other direct-to-consumer,
direct-to-professional, business markets. Dialog is registered under the
Securities Exchange Act of 1934 and is required to file periodic and other
information with the Securities and Exchange Commission (symbol "DLGG").
However, Dialog was delinquent in filing its Form 10-QSB for the quarter ended
September 30, 2003 which was not filed until January 26, 2004. As a result, its
Common Stock was delisted, effective December 31, 2003, from trading on the NASD
OTC Bulletin Board. Dialog was also delinquent in filing its Form 10-KSB for the
year ended December 31, 2003, which was not filed until April 29, 2004.

      The Company intends to seek new investments in other business
opportunities. As the Company has only limited cash resources, the Company's
ability to complete any acquisition or investment opportunities it may identify
will depend on its ability to raise additional financing, as to which there can
be no assurance. There can be no assurance that the Company will successfully
identify, complete or integrate any future acquisition or investment, or that
acquisitions or investments, if completed, will contribute favorably to its
operations and future financial condition.

THINKDIRECTMARKETING, INC.

      On November 5, 1998, the Company contributed substantially all the
non-cash assets and certain liabilities related to its on-line electronic
delivery information service to TDMI, and received preferred stock of TDMI. See
Note 3 to the unaudited condensed consolidated financial statements for
additional information concerning the Company's former investment in TDMI.

      On January 31, 2002, Dialog acquired all the shares of TDMI it did not
already own by exercising an option previously granted by the remaining TDMI
stockholders. The Company received preferred stock of Dialog in exchange for its
interest in TDMI. The preferred stock was convertible into Dialog common stock
and, on February 7, 2003, CDSI converted its Class B Preferred Shares into
330,000 shares of Dialog Common Stock. The Company's Dialog shares may be sold
by the Company pursuant to Rule 144(k) of the Securities Act of 1933. As of July
23, 2004, the Company has sold 25,000 shares of Dialog stock for $2,755 in the
third quarter of 2004. See Notes 3 and 4 to the unaudited condensed consolidated
financial statements.

                                       9
<PAGE>

                       CDSI HOLDINGS INC. AND SUBSIDIARIES

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS (CONTINUED)

Results of Operations

      REVENUES

      For the three and six months ended June 30, 2004 and 2003, the Company did
not generate revenues from operations.

      EXPENSES

      Expenses associated with corporate activities were $13,156 and $25,436 for
the three and six months ended June 30, 2004, respectively, as compared to
$15,205 and $29,633 for the same periods in the prior year. The expenses were
primarily associated with costs necessary to maintain a public company.

      INTEREST INCOME

      Interest income was $323 and $717 for the three and six months ended June
30, 2004, compared to $553 and $1,216 for the three and six months ended June
30, 2003. The decrease is due primarily to lower prevailing interest rates and
lower cash balances in 2004 versus 2003.

Liquidity and Capital Resources

      At June 30, 2004, the Company had an accumulated deficit of approximately
$8.1 million. The Company has reported an operating loss in each of its fiscal
quarters since inception and it expects to continue to incur operating losses in
the immediate future. The Company has reduced operating expenses and is seeking
acquisition and investment opportunities. No assurance can be given that the
Company will not continue to incur operating losses.

      The Company has limited available cash, limited cash flow, limited liquid
assets and no credit facilities. The Company has not been able to generate
sufficient cash from operations and, as a consequence, financing has been
required to fund ongoing operations. Since completion of the Company's initial
public offering of its common stock (the "IPO") in May 1997, the Company has
primarily financed its operations with the net proceeds of the IPO. The funds
were used to complete the introduction of the PC411 Service over the Internet,
to expand marketing, sales and advertising, to develop or acquire new services
or databases, to acquire CDS and for general corporate purposes.

      Cash used for operations for the six months ended June 30, 2004 and 2003
was $28,619 and $29,898, respectively. Included in the Company's accrued
liabilities as of June 30, 2004 is $525 of liabilities established in the
disposal of the Company's former business of marketing and leasing an inventory
control system for tobacco products. The Company evaluates its accruals on a
quarterly basis and makes adjustments when appropriate.

      The Company does not expect significant capital expenditures during the
year ended December 31, 2004.

                                       10
<PAGE>

                       CDSI HOLDINGS INC. AND SUBSIDIARIES

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS (CONTINUED)

      At June 30, 2004, the Company had cash and cash equivalents of $135,715.
The Company does not currently have any commitments for any additional
financing, and there can be no assurance that any such commitments can be
obtained. Any additional equity financing may be dilutive to its existing
stockholders, and debt financing, if available, may involve pledging some or all
of its assets and may contain restrictive covenants with respect to raising
future capital and other financial and operational matters.

      Inflation and changing prices had no material impact on revenues or the
results of operations for the six months ended June 30, 2004 and 2003.

      The Company's 330,000 shares of Dialog Common Stock may be sold pursuant
to Rule 144(k) of the Securities Act of 1933. In accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities", the Company has classified these shares as
"Investment Securities Available for Sale" as of June 30, 2004. The Dialog
Common Stock is carried at fair value ($9,900), based on the last trade prior to
June 30, 2004, and net unrealized gains are included as a component of
stockholders' equity. However, no assurance can be given that the Company will
ultimately realize fair value for its Dialog shares as there is only a limited
trading market for the shares and the Company may not be able to sell any
material portion of its shares at prevailing market prices. No assurances can be
given that an orderly trading market will be maintained for Dialog's Common
Stock as Dialog was delinquent in filing a quarterly report with the Securities
and Exchange Commission and, as a result, its shares have been delisted from the
NASD OTC Bulletin Board. Dialog was also delinquent in filing its Form 10-KSB
for the year ended December 31, 2003, which was not filed until April 29, 2004
and its Form 10-QSB for the quarterly period ended March 31, 2004, which was not
filed until May 18, 2004. As of July 23, 2004, the Company had sold 25,000
shares of Dialog stock for $2,755 in the third quarter of 2004.

      Management is currently evaluating alternatives to supplement the
Company's present cash and cash equivalents to meet its liquidity requirements
over the next twelve months. Such alternatives include seeking additional
investors and/or lenders and disposing of the shares of Dialog Common Stock held
by the Company. Although there can be no assurance, the Company believes that it
will be able to continue as a going concern for the next twelve months.

      The Company or its affiliates, including New Valley, may, from time to
time, based upon present market conditions, purchase shares of the Common Stock
in the open market or in privately negotiated transactions.

                                       11
<PAGE>

                       CDSI HOLDINGS INC. AND SUBSIDIARIES

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS (CONTINUED)

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

      The Company and its representatives may from time to time make oral or
written "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 (the "Reform Act"), including any
statements that may be contained in the foregoing "Management's Discussion and
Analysis of Financial Condition and Results of Operations", in this report and
in other filings with the Securities and Exchange Commission and in its reports
to stockholders, which represent the Company's expectations or beliefs with
respect to future events and financial performance. These forward-looking
statements are subject to certain risks and uncertainties and, in connection
with the "safe-harbor" provisions of the Reform Act, the Company has identified
under "Risk Factors" in Item 1 of the Company's Form 10-KSB for the year ended
December 31, 2003 filed with the Securities and Exchange Commission and in this
section important factors that could cause actual results to differ materially
from those contained in any forward-looking statements made by or on behalf of
the Company.

      The Company's plans and objectives are based, in part, on assumptions
involving judgments with respect to, among other things, future economic,
competitive and market conditions and future business decisions, all of which
are difficult or impossible to predict accurately and many of which are beyond
the control of the Company. Although the Company believes that its assumptions
underlying the forward-looking statements are reasonable, any of the assumptions
could prove inaccurate and, therefore, there can be no assurance that the
forward-looking statements included in this report will prove to be accurate. In
light of the significant uncertainties inherent in the forward-looking
statements included herein, particularly in view of the Company's limited
operations, the inclusion of such information should not be regarded as a
representation by the Company or any other person that the objectives and plans
of the Company will be achieved. Readers are cautioned not to place undue
reliance on such forward-looking statements, which speak only as of the date on
which such statements are made. The Company does not undertake to update any
forward-looking statement that may be made from time to time on its behalf.

                                       12
<PAGE>

ITEM 3. CONTROLS AND PROCEDURES

      Under the supervision and with the participation of the Company's
management, including its principal executive officer and principal financial
officer, the Company has evaluated the effectiveness of its disclosure controls
and procedures as of the end of the period covered by this report, and, based on
that evaluation, its principal executive officer and principal financial officer
have concluded that these controls and procedures are effective. There were no
changes in the Company's internal control over financial reporting during the
period covered by this report that have materially affected, or are reasonably
likely to materially affect, the Company's internal control over financial
reporting.

      Disclosure controls and procedures are the Company's controls and other
procedures that are designed to ensure that information required to be disclosed
by it in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified
in the Securities and Exchange Commission's rules and forms. Disclosure controls
and procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by it in the reports that it
files or submits under the Exchange Act is accumulated and communicated to its
management, including its principal executive officer and principal financial
officer, as appropriate to allow timely decisions regarding disclosure.

                                       13
<PAGE>

                       CDSI HOLDINGS INC. AND SUBSIDIARIES

                           PART II. OTHER INFORMATION

Item 2. Changes in Securities and Small Business Issuer Purchases of Equity
        Securities

        No securities of the Company that were not registered under the
        Securities Act of 1933 have been issued or sold by the Company during
        the quarter ended June 30, 2004. No securities of the Company were
        repurchased by the Company, or an affiliated purchaser, during the
        quarter ended June 30, 2004.

Item 6. Exhibits and Reports on Form 8-K

        (a) Exhibits

        31.1  Certification of Chief Executive Officer, Pursuant to Exchange Act
              Rule 13a-14(a), as Adopted Pursuant to Section 302 of the
              Sarbanes-Oxley Act of 2002.

        31.2  Certification of Chief Financial Officer, Pursuant to Exchange Act
              Rule 13a-14(a), as Adopted Pursuant to Section 302 of the
              Sarbanes-Oxley Act of 2002.

        32.1  Certification of Chief Executive Officer, Pursuant to 18 U.S.C.
              Section 1350, as Adopted Pursuant to Section 906 of the
              Sarbanes-Oxley Act of 2002.

        32.2  Certification of Chief Financial Officer, Pursuant to 18 U.S.C.
              Section 1350, as Adopted Pursuant to Section 906 of the
              Sarbanes-Oxley Act of 2002.

        (b) Reports on Form 8-K

            None.

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<PAGE>

                                    SIGNATURE

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

                                           CDSI HOLDINGS INC.
                                           (Registrant)

Date: July 23, 2004                        By: /s/ J. Bryant Kirkland III
                                               --------------------------------
                                               J. Bryant Kirkland III
                                               Vice President, Treasurer
                                               and Chief Financial Officer
                                              (Duly Authorized Officer and
                                                 Chief Accounting Officer)

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