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

Yesx   No¨

Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not 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-K or any amendment to this Form 10-K. 10-Kx

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

Yes¨  Nox

State registrant's revenues for the year ended December 31, 2003: $41,017June 30, 2004: US$131,098,000

State the aggregate market value of the voting stock held by non-affiliates of the registrant computed by reference to the closing bid price of its Common Stock as reported on the OTC Bulletin Board on March 5,August 31, 2004 ($9.90)(US$1.25): $72,589,552US$215,502,361

APPLICABLE ONLY TO CORPORATE ISSUERS

The number of shares outstanding of the registrant's Common Stock, par value $.001US$.001 per share (the "Common Stock"), as of March 5,August 31, 2004, was 15,852,856.140,267,157.

DOCUMENTS INCORPORATED BY REFERENCE

Our registration statementRisk Factors included in our Proxy Statement/Prospectus, File No. 333-112463, filed on Form S-4 (File No. 333-112463).February 3, 2004, incorporated by reference into Part II Item 7.

THIS ANNUAL REPORT FORM 10-K CONTAINS "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. ALL STATEMENTS, OTHER THAN STATEMENTS OF HISTORICAL FACTS, INCLUDED IN OR INCORPORATED BY REFERENCE INTO THIS FORM 10-K, ARE FORWARD-LOOKING STATEMENTS. IN ADDITION, WHEN USED IN THIS DOCUMENT THE WORDS "ANTICIPATE," "ESTIMATE," "INTENDS," "PROJECT" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES AND ASSUMPTIONS. SHOULD ONE OR MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY VARY MATERIALLY FROM THOSE ANTICIPATED, ESTIMATED OR PROJECTED.

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ALTHOUGH THE COMPANY BELIEVES THAT THE EXPECTATIONS WE INCLUDE IN SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, WE CANNOT ASSURE YOU THAT THESE EXPECTATIONS WILL PROVE TO BE CORRECT.

NET 1 U.E.P.S. TECHNOLOGIES, INC.

INDEX TO ANNUAL REPORT ON FORM 10-K
Year Ended June 30, 2004

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PART 1I

ITEM 1. DESCRIPTION OF BUSINESS

BACKGROUNDCompany History

Net 1 UEPS Technologies Inc. (“Net 1” or “the Company”Corporate History

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Operational History

               Given the lack of a payment system addressing the needs of the un-banked and the under-banked populations, we founded the company with a mission to provide a secure, universal and affordable transacting system, utilizing existing infrastructure within the financial services industry that enables people, regardless of income, to have access to goods and services that were previously inaccessible. Access to these goods and services should result in improved lifestyles and provide access to new, low-risk and profitable markets for businesses that use our systems.

               We developed the UEPS as a solution to the needs of the un-banked and the under-banked, which we first deployed in South Africa. Building a critical mass of smart card users was of paramount importance in order to make the system viable. This was achieved through several strategic acquisitions, allowing us currently to reach more than three million people. In May 1998, we acquired Net1 Southern Africa (Proprietary) Limited, a business focused on supplying smart cards and terminals and on servicing the Point of Sale (or "POS") terminal network of Nedcor Limited (or "Nedcor"), a major South African banking group. The acquisition allowed us to develop a significant relationship with Nedcor which may lead to potential joint ventures that will promote and utilize our technology.

               In 1999, we acquired Cash Paymaster Services (Proprietary) Limited, (or "CPS"), a business engaged in the Statedistribution of Floridasocial welfare grants. This acquisition achieved two critical objectives. The first being, the CPS's customer base of approximately 1.5 million people was issued with UEPS smart cards to help achieve a critical mass of smart card users. Secondly, we acquired a logistics and implementation infrastructure as part of CPS having significant expertise and experience.

               During the course of 1999 and 2000, in order to gain further exposure to a base of potential smart card users, we acquired Moneyline (Proprietary) Limited and New World Finance (Proprietary) Limited. These businesses extend cash loans for periods ranging from 30 days to several months, with the majority of loans having 30-day terms. Through these acquisitions, we gained access to a network of approximately 100 micro-lending branches in South Africa through which our micro-lending administration and payment products could be deployed.

               Once a critical mass of cardholders was achieved, we sought to create an infrastructure of POS terminals that would permit businesses and merchants to engage in smart card transactions with our cardholder base. In the Northern Cape in fiscal 2004, we implemented a "merchant rollout", supplying merchants with smart cards and POS terminals. With the increasing opportunity to

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conduct transactions using smart cards, the percentage of welfare and pension beneficiaries keeping value on May 5, 1997their card in this province has increased from 0% prior to acquire2003 to 60% as of June 2004. With the rollout of terminals at selected merchants in other provinces of South Africa, it is expected that more beneficiaries will use their smart cards for transacting with merchants.

               While rolling out the UEPS infrastructure and exploitsmart cards, we also sought to expand the range of products and services available to smart card holders. In 2001, we developed a non-exclusive worldwide licensesuite of financial services targeted at social welfare beneficiaries, utilizing our issued base of smart cards as a delivery channel. The products are marketed under various brands by our empowerment partners in the various provinces and include micro-loans, insurance and food parcels. This service has been implemented in the KwaZulu-Natal under the StarChoice brand name and in the Northern Cape under the Smart Life brand name. We currently have approximately 85,000 customers in these two provinces. According to research by the FinMark Trust, 29% of all South Africans have a form of burial saving or insurance policy, but the collection of policy premiums remains a problem for insurance companies due to the Universal Electronic Payment System (“UEPS”)limited penetration of bank accounts. However, with our offering, premiums can be deducted automatically from a person's smart card at pre-designated times. Under the various brand names, we grant loans on which we earn interest and we market insurance policies on behalf of insurers for which we collect both a commission (for the sale of a policy) and a fee (for the monthly premium deduction). Net 1 enteredGoing forward, we plan to grow and develop this business under different brands by launching new products and by introducing the service into the other provinces where we administer social welfare grants.

               We have also been able to recreate our business model successfully in other countries. We are currently at different stages of establishing UEPS cardholder bases and POS terminal infrastructures in Malawi, Mozambique, Zimbabwe, Ghana, Rwanda, Burundi and Latvia.

               We are a license agreement, dated May 19, 1997 (the “License Agreement”), with Net 1 Holdings, Net 1 Operations S.a.r.l.provider of technologies and Net 1 Investment Holdings (“Net 1 (Pty)”) (collectively,systems that create a secure and affordable transacting channel between formal businesses and the “Licensors”), whereby the licensors granted a non-exclusive license"un-banked" and "under-banked" populations of developing countries who have no or limited access to Net 1 fortraditional banking facilities. We have developed the UEPS that utilizes our smart card technology to provide a fully integrated payment, switching and settlement system suitable for multiple applications and services meeting the requirements of the un-banked and under-banked populations. Our payment system enables our customers to effect transactions "off-line" in exchangeunderdeveloped areas where traditional financial institutions and their services have limited penetration or are otherwise unavailable due to the lack of, or limited branch, Automated Teller Machines (or "ATM"), POS, support and communications infrastructures. All transactions effected through our UEPS occur between two cards at a POS rather than through a host mainframe (as with traditional banking and payment systems) since all of the relevant information necessary to perform a financial transaction is held on the smart cards, inclusive of the funds available, of the transacting card holders. The transfer of value between the cards accordingly can take place without any communication with an on-line host mainframe as all validations, audit trails, encryption, decryption and authorization take place or are generated between the cards themselves.

               Apart from requiring minimal infrastructure, the key features of our payment system that address the un-banked and under-banked populations' needs include:

In addition to having functionality tailored to the needs of the un-banked and under-banked populations, our payment system provides an outsourced solution for all mass payments that are required to be made to recipients without bank accounts, reduces administration and cash handling costs, facilitates information management regarding payment status and creates auditable transaction records. Accordingly, our UEPS positions us to be able to deliver to our customer base complete solutions in the fields of social security, wage distribution, banking, health care management, international money transfers, voting and identification systems.

               We have implemented our UEPS to administer, manage and distribute social welfare grants and pensions in five of the nine provinces of South Africa. This customer base exceeds 3 million clients that now have access to affordable financial services such as life insurance and short term loans. These customers can also use their cards at POS devices at participating merchants to

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purchase goods or draw cash. In addition, we have sold complete UEPS systems in Malawi, Mozambique, Zimbabwe, Ghana, Rwanda, Burundi and Latvia.

               In implementing a UEPS on behalf of a client, we provide and install the necessary hardware and customize the UEPS software to meet the needs of the client's environment. All installations require support services to adapt or tailor the interfaces between the UEPS and the client's existing infrastructure. We also provide ongoing services to our customer base, including the maintenance of the POS and ATM terminals, the supply of additional hardware such as POSs, ATMs, card readers and smart cards, marketing and sales support, business planning as well as other support services. Where we own and control the UEPS infrastructure (as we do in South Africa) we earn transaction or card fees from the use of the UEPS infrastructure. In some instances we also charge fees for loading value onto cards and receive fees for licensing the UEPS software to our customer base.

For the fiscal year ended June 30, 2004, we generated revenues of US$131 million and net income of US$13 million.

               We have approximately 2,100 employees, of which 1,350 are employed in the UEPS transaction-based activities, 600 persons are employed in UEPS-based financial services and 150 persons are employed in Hardware, software and related technology sales and FTS patents world wide (exceptcorporate activities. Approximately 37.83% (or 126 of 333) of our employees in the Northern Province that perform UEPS transaction-based activities are members of the South African Commercial Catering and Allied Workers Union ("SACCAWU"). We have a good relationship with SACCAWU.

               We operate in emerging market economies that have large untapped populations of people who have no access to banking facilities, known as the "un-banked", or very limited access to banking facilities, known as the "under-banked", because they cannot afford traditional bank accounts and banks have little or no infrastructure in the areas in which they reside. The rendering of a traditional banking service in these underdeveloped areas is not only expensive but sometimes not possible, as the basic infrastructure required (such as telecommunications) does not exist. Our UEPS provides a secure and affordable transacting and delivery channel which serves as a viable alternative to traditional banking and payment systems for the un-banked and under-banked populations, our target market. Many members of our target market do not have access to affiliated financial services despite being in receipt of regular monthly or weekly incomes. Examples of such un-banked or under-banked populations include recipients of government social security benefits such as old age pensions, national healthcare and unemployment insurance payments, as well as employees earning low to average wages.

               According to research done by ACNielson (FutureFact Marketscape Survey 2002) and the South AfricaAfrican Reserve Bank (Labour Markets and its surrounding territories)Social Frontiers April 2003), only 40% of South African adults have access to at least one form of basic bank account, compared to approximately 90% of adults in the United States. Other examples of emerging market economies with large un-banked populations include Brazil, India, Mexico and Indonesia. Furthermore, the distribution of bank accounts is significantly skewed towards higher income groups. These demographics are typical of emerging market economies where the majority of the population has little or no access to traditional banking services.

               Traditional payment systems offered by the major banking institutions do not address the key requirements of the un-banked and under-banked populations due to:

• the high costs associated with maintaining a bank account relative to customers' income levels;



• the requirement of significant infrastructure (including ATM's and communications systems) to settle transactions "on-line", which are often unavailable in underdeveloped areas;



• minimum income requirements to open an account;



• the need to have basic literacy, administration and record keeping abilities and English-language capacity to operate a bank account;



• lack of security protecting against fraudulent transactions associated with debit and credit cards; and



• the personal safety concerns of customers relating to the need to withdraw large amounts of cash at one time in order to avoid incremental transacting fees.

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               Accordingly, we believe that the key features of a banking and payment system servicing the "un-banked" and "under-banked" populations are:

• accessibility;



• low transaction costs;



• limited infrastructure needs;



• personal safety;



• security;



• convenience;



• functionality tailored to client needs; and



• simplicity.

Our payment system addresses all of these features to provide an effective alternative to traditional banking for the "un-banked" and "under-banked" population.

               Given the lack of a payment system addressing the needs of the un-banked and the under-banked populations, we founded the company with the mission to provide a secure, universal and affordable transacting system, utilizing existing infrastructure within the financial services industry, which enables people, regardless of income, to have access to goods and services that were previously unattainable. We reach our target market by offering our payment system primarily to organizations or governments with large customer bases. For example, both governments and businesses use our system to make social security or wage payments onto the UEPS smart cards of beneficiaries or employees, who can in turn use their UEPS cards for a range of functions, including:

• spending on goods in merchant outlets;



• buying prepaid telephone, water and electricity or other utility vouchers;



• securing short term loans facilities, as the system allows financiers to understand and manage the financial position of their customers thus reducing the associated credit risks;



• collecting third party payments such as debit orders for funeral insurance premiums or medical insurance contributions;



• transferring funds to other cardholders, bank account holders or other third parties;



• receiving funds from third parties from within or out of their country of residence;



• saving money and earning interest on the credit balance held on the savings wallet of the card;



• allocating funds to different wallets within their card for budgetary purposes;



• joining UEPS card loyalty schemes; and



• withdrawing cash.

Our UEPS is designed to address the needs of the un-banked and under-banked market

               We believe that the following features of our UEPS address the shortcomings faced by the un-banked and the under-banked populations inherent in traditional payment systems:

Enhanced Accessibility/Lower Transaction Costs.There are no minimum income requirements, making our UEPS solution accessible to all potential end-users. Moreover, no fixed monthly or annual fees are charged to the cardholder and transaction fees are generally recovered from the party accruing the most benefit (an employer, government, insurance company, merchant, or service provider), rather than from the cardholder. The only instance in which a cardholder would incur any cost is for a cash withdrawal, and these charges are significantly lower than those normally levied through a traditional bank account. In addition,

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our off-line system automatically lowers the cost of service delivery and the cost of the hardware required to implement the system and enables the system to administer very large transaction volumes at minimal cost. Conversely, on-line banking systems are forced to carry surplus capacity to cater for peak transacting times. On-line banking systems therefore carry significant additional infrastructure cost in relation to normal requirements (off-peak), and these costs are normally passed on to assign the Technology License Agreementbank account holders.

Limited Infrastructure Needs.The biggest differentiating factor between Visa International Service Associationour system and Net 1 Holdings, dated July 31, 1997 (the “Visa Agreement”)conventional banking is our system's ability to Net 1operate in exchangean off-line manner, virtually eliminating the need for 4,729,612 sharesexpensive communications infrastructure. Consequently, our UEPS enables us to penetrate the most underdeveloped or remote rural areas where the lack of Net 1 common stock. This transaction was never completed because certain conditions precedent were never satisfied.communications infrastructure is a major constraint to traditional financial institutions. In addition, since the terminals required for UEPS transactions act only as a power supply and communication channel for smart cards, thus requiring a minimal amount of processing capacity and memory, they can be manufactured at a much lower cost compared to other similar terminals, which generally require sophisticated tamper proof security and communication hardware components. Furthermore, the POS terminals do not require specialized technical expertise to be installed as these terminals can be bought "off the shelf" and installed by the vendor by following a few simple steps, thus eliminating the need for a sales and support team which traditionally support the merchant base.

On May 3, 2000, Net 1 entered intoImproved Personal Safety.Personal safety is improved by virtue of the consumer being able to receive monthly income payments directly onto the UEPS card rather than in cash, to store value on the UEPS card and use the card to transact, rather than withdrawing cash to transact. The consumer therefore gets the personal safety benefits not afforded by credit or debit cards, which can be cloned, schemed or stolen and which require to be operated in unison with a Patent and Technology Agreement with Net 1 Holdings, whereby Net 1 was granted a license for the U.S. FTS patent and the now invalid European patent. The 4,729,612 shares of Net 1 common stock previously offeredformal bank account.

               Security Features.Our system offers enhanced security in the above-referenced amended License Agreement were issued to Net 1 Holdings. At December 31, 2003, Net 1 Holdings beneficially owned 8,520,578 shares of Net 1 common stock, or 53.75% of the shares then outstanding. In addition, Net 1 has the exclusive marketing rights for the UEPS technology in all countries other than South Africa and its surrounding territories.form of:

• On February 26, 2001, Net 1 entered into an Outsourcing Agreement with Net 1(Pty). In October 2002, this agreement was replaced by a Distribution Agreement, effective as of July 1, 2002, pursuant to which Net 1 (Pty) was retained to provide Net 1 with marketing, sales, administrative and technical support as an accredited UEPS integrator in Net 1’s designated territories. As part of this agreement, Net 1 (Pty) receives 9.5% of fees collected by Net 1 on all new licenses and upgrades of existing licenses.

  As a development stage company, Net 1 is principally focused on trying to commercially exploit the FTS patents and UEPS technology in its designated territories. Net 1’s management has developed a detailed business plan and marketing strategy involving the development and implementation of the smart card systemBiometric fingerprint identification as an alternative to existingpersonal identification number ("PIN") codes;

• Encryption of transactions;

• Multiple audit trails that can track, reconcile and provide a back-up for transactions. Conventional systems store transactions on the terminal's memory that could result in losses for the merchant should the terminal be damaged. UEPS eliminates this problem as each transaction is recorded on both transacting smart cards, creating a multiple audit trail;

• Transaction cancellation and reversal functionality (transactions can be reversed immediately in the case of a transacting error); and

• A unique sequencing algorithm that ensures that transactions are processed according to the defined algorithmic sequence.

Greater Convenience.Our UEPS stores and manages all of the relevant information required to perform financial transactions on a client's smart card, and can therefore operate completely "off-line" (without the need for a data communication session to be active during the transaction) or "on-line" through the use of any communication infrastructure, including satellite, microwave, radio, land lines or any other communication channels. By contrast, the ATM and POS terminal networks utilized by traditional banking systems access all relevant information from a central host computer and therefore must operate "on-line." Since all transactions effected through our payment system occur between two cards without any communication with a host mainframe, transactions can take place at any time or place and are unaffected by the availability of communications infrastructures or transaction volumes (peak versus off-peak). All validation checks, audit trails, encryption and authorization take place between the cards themselves. The convenience of our payment system therefore lies in its ability to function effectively anywhere where there are two cardholders willing to transact with one another. Our cardholders are therefore able to receive income, to retain value and to spend without any bank branch, ATM or dial-up facility being available. In addition, the encryption security protocols enable cardholders to receive fund-loading instructions from a third party through any unsecured communications channel such as word of mouth, telephone, newspaper or any analogue or digital network if present. Such loading instructions consist of ten-digit codes that the cardholder enters into any UEPS-enabled terminal. Upon verification of the code presented, the card updates its balance automatically.

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Functionality Tailored to Client Needs.Our payment system is tailored to suit the needs of both those who need to distribute funds (such as the government with respect to social security grants or similar benefits and employers with respect to wages), and our target market end-users who need to utilize the funds. The system can be used as a universal platform to facilitate all existing financial delivery systems such as cash checks, credit cardswithdrawals, retail spending, debit orders, money transfers, prepaid facilities, savings and debit cards, utilizing

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budgeting thereby eliminating the proprietaryneed to carry multiple forms of payment. In addition, the UEPS technology includes functionality that allows:

• transparent and operatingautomatic recovery in the event of transaction failure resulting from terminal hardware or software problems;



• the smart card itself can be used as proof of purchase, replacing the need to print a receipt or a ticket to be used in transportation or the lottery;



• continuous debiting of value off the smart card, which allows for simultaneous vending and debiting in unattended environments such as fuel dispensing and telephony;



• speed of processing that is mandatory in applications such as transportation and access control; and



• open or restricted wallets that are required to meet the requirements of certain applications such as pension and welfare distribution and specific funding initiatives.

Simplicity.Our system offers UEPS smart card users the convenience of cash without the inherent risks and without the cost structure associated with a bank account. Utilization of the system is straightforward as the intervention required by a client is minimal. Fingerprint identification is offered as an alternative to PIN codes, terminals use illustrations instead of words (where possible) and local language choice is offered on the terminals. Registration procedures are equally straightforward with no paperwork required.

Key benefits of the UEPS for our corporate customers such as governments and employers and our card holders

               Our payment system provides an attractive solution to our corporate customers and our card holders for several reasons.

               We provide our corporate customers an outsourced solution to all mass payments to recipients without bank accounts which would otherwise require payments to be made in cash with all of the attendant security and safety issues associated with handling cash. To establish a social security payment system, for example, we assist in the enrollment, registration and validation of the beneficiaries by creating a biometric data base of finger prints of those who are eligible for payments under a particular program. The data base helps to prevent fraud insofar as it ensures that the “Net 1” brand.

Management has also focused its efforts on attractingcorrect beneficiary receives the necessary capitalintended payment and prevents the inclusion of duplicate entries in the data base. In addition, we undertake information management relating to implement the business plan. On October 23, 2002, Net 1 retained Investec Bank Limited (“Investec”), an international merchant banking group, to provide corporate finance services and assistance in order to raise equity and/or debt funding for the company. This was unsuccessful and Investec and the company mutually agreed to terminate the engagement.

On April 30, 2003, Net 1 retained the Brait Group to provide advisory services and assistance in order to raise equity and/or debt funding for Net 1. On October 24, 2003, the Company announced that it is completing financial arrangements for the securing of approximately $150 million including amounts from Braitpayment status on behalf of funds under its management. The financing, comprisingour customers, and the capital raising of approximately $53 millionUEPS is able to trace each transaction so that our customer can audit and a share issuance in connectionotherwise verify transactions.

               As the UEPS is electronically based, it provides our corporate customers with the reinvestment option, of approximately $97 million will enable Net 1opportunities to make an offerreduce costs that relate to acquire substantially all of the assets of Net 1 Applied Technology Holdings Limited, a public company incorporated in South Africa (“Aplitec”), as well as providing working capital to enable Net 1 to expand its operationsadministration and develop its internal infrastructure on an international basis. Net 1, through the Brait Group, will raise the capital through sales of its common stock at $0.50 per share.

Net 1, through the Brait Group, has provided the board of directors of Aplitec with an offer to acquire substantially all the assets and all of the liabilities of Aplitec (excluding 300 million South African Rand (ZAR) plus enough cash as is necessary to pay ZAR 0.25 for each ordinary Aplitec share owned by a holder who elects to receive cash) for approximately $129 million through a combinationmanagement, insurance of cash, and share exchange offertransportation of cash, bank charges, the need to Aplitec’s shareholders also at a purchase price per sharehave large sums of $0.50. Aplitec is engaged incash on the sales, maintenance and development of UEPS smart card based products in South Africa and its surrounding territories with annual revenues of approximately $100 million. Aplitec has approximately 2,100 employees. Completion of the financing is subject to compliance with regulatory requirements in South Africapremises and, in the United States, including an increase incase of central banks, the authorized capitalizationprinting of Net 1 to permit the Net 1 securities to be issued. If the acquisition takes place, the stockholderscurrency. The removal of the Companyfinancial and administrative burdens attendant to cash can improve the productivity, safety and efficiency of business operations.

               In addition, our UEPS allows our card holders access to affordable financial services, such as of this date will own 4.78% of the outstanding common stockfuneral and medical insurance, loans, etc. through formal financial organizations such as banks and insurance companies which would otherwise be unavailable. The wallet on a fully diluted basis. In the short term, management has continued the suspension of various expenses, including payments under its consulting agreement with its chief executive officer, Claude Guerard.

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Management continues to strive to meet the following two business strategies:

The aforementioned Patent and Technology Agreement entitles Net 1 to receive all of Net 1 Holdings’ license sales revenue in an amount equal to Net 1 Holdings annual after tax net profit before amortization. This agreement has produced minimal revenues and Net 1 has suffered recurring operating losses as is normal in development stage companies. At December 31, 2003, Net 1 had a working capital deficiency of $517,463. If the proposed transactions discussed are not completed, Net 1 may not be able to continue as a going concern beyond the second quarter of 2004.

DESCRIPTION OF OUR BUSINESS

The following description of our business is intended to provide an understanding of our product and the direction of our initial marketing strategy. As Net 1 is in its developmental stages, any focus described in the following may change and different initiatives may be pursued although none are presently contemplated.

We intend to develop and implement a branded payment system utilizing our proprietary technology. The payment system network will operate under the name "Net 1." The Net 1 payment system will provide an alternative to existing payment systems such as credit cards, debit cards, bank wires, checks and cash. Net 1's initial focus will be on products where we do not expose ourselves to credit risk.

The Net 1 system employs cards that are similar to credit cards, but which have a computer chip embedded within them that can both store and process information. The Net 1 system is based on two components developed by the founders of Net 1, the FTS, for which patents have been obtained or applied for in certain jurisdictions, and the UEPS. The FTS describes a secure method of transferring funds from one smart card can also be restricted as to another without the need for the card-to-card transaction to be processed through a central computer issuing system, a so-called off-line transaction. Thehow certain funds are used. This is particularly useful where our UEPS is a suite of computer programs that incorporates the FTSused to deliver a fully integrated payment and settlement system.

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We will license our proprietary technology toimplement loyalty schemes or other entities which will issue Net 1 cards to their customers. Depending on the specifics of the application, as discussed below, funds are loaded onto the computer chip on the cardholder's card either by the cardholder or by others, including employers or governmental benefit providers. Once loaded with funds, the cardholder may pay for goods or services by transferring funds from his or her card to a merchant that accepts Net 1 cards.

Unlike other smart card based cash substitute schemes like Mondex® and VisaCash®, which have had unsuccessful pilot programs in the past, we believe that the technology underlying the Net 1 payment system offers a variety of benefits to the cardholder which makes the Net 1 system much more than merely a substitute for cash. For example:

• the Net 1 system is designed to be “loss tolerant”, so that if a card is lost or stolen,closed systems, whereby the funds loaded onto the card can only be spent at specific retailers or exchanged for predefined services.

                 Most importantly, formal users of our UEPS such as merchants, banks, insurance companies, money transfer agents, governments, local authorities, tax authorities and medical service providers gain access to a potential consumer base untouched by traditional transaction methodologies, as our UEPS becomes a replacement for a traditional banking account through which the above mentioned service providers normally operate.

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  Our Strategy

                 Our principal objective is to deploy an international payment system that provides a transacting platform and affordable and secure financial services to the unbanked and underbanked populations of the developing world. Our card holder target markets, which represent more than two-thirds of the world's population, are citizens who are currently un-banked or under-banked or who cannot afford the charges levied by formal banking institutions. To achieve global market penetration following our success in South Africa, we are pursuing the following strategy:

  Identifying key target markets. We are in the process of identifying key countries and regions in the developing world, where our payment system and applications can be best implemented to reach the unbanked and underbanked populations. We believe that, among other countries, Brazil, India, Mexico and Asia Pacific countries such as Indonesia present significant opportunities for our payment system, services and products due to their large populations and the limited technological infrastructure. Entering such markets would enable us to significantly increase our card holder base and the volume of transactions processed using the UEPS.

  Carefully selecting the entry method into target markets. We intend to leverage our first to market advantage and existing platforms in South Africa, Malawi, Mozambique, Zimbabwe, Ghana, Rwanda, Burundi and Latvia in order to move into neighboring countries and regions. We will seek to form partnerships or joint ventures with governments and corporations in our target jurisdictions to which we will license our systems for them to operate. We expect that our established presence in neighboring countries and the formation of partnerships and joint ventures with local players will enable us to gain a foothold from which we can launch our operations in a particular target market.

  Building a critical mass of smart card users with one application. As already accomplished in South Africa, we intend to build a critical mass of smart card-users within a target market as quickly as possible using a single fully independent application in order to achieve maximum market penetration. For example, we will seek to win contracts to implement payment systems for government programs having large numbers of users or populations, such as social security payments, pensions, utilities and voting/national identification applications, or for corporations with significant numbers of employees with respect to wage payments. Such contracts would typically include the licensing of our technology and the sale of the supporting hardware equipment to our corporate customers. These contracts will enable us to distribute UEPS smart cards to numerous members of the un-banked and under-banked populations. As the funds loaded on to the smart cards by our customer base are utilized by the cardholders in transactions and applications supported by the UEPS we will earn transaction fees on an ad valorem or fixed-fee basis.

  Extending the range of services available within target area by leveraging competitive advantages. Once a critical mass of end-users holding our smart cards is achieved, we will focus on expanding the range of services and products provided to the established smart card-user base, including prepaid electricity and water, prepaid telephone call units, short term loans, wage payment systems and insurance. In order to provide additional services and products, we will also extend our infrastructure within a country or region, for example, by selling card readers and POS terminals that accept payments by UEPS smart cards to merchants thereby enabling such merchants to sell goods and other financial services to our card holders. The infrastructure roll-out can be expanded by establishing relationships with post offices, banks and other financial institutions. Once the infrastructure is established our payment systems can be scaled up with minimal incremental expense. Extended ranges of services will position us to earn additional transaction fees from the same infrastructure.

  Establishing a global network from regional hubs. We expect that successfully established platforms in our primary target countries will form a base from which we will implement our payment system throughout the surrounding region. We intend to link regional hubs in order to establish a global network of our transacting technology platforms that can be integrated with traditional technologies and financial systems. Our technology is also suitable to serve higher income clients and can be used to administer national health insurance and to make secure internet payments.

  Our Technology

                 The fundamental purpose of our technology is to deliver an alternate method of banking that grants the majority of people of developing economies access to a myriad of vital services such as social security, wage payments, insurance products, finance and medical assistance. Our proprietary technology enables these services to be delivered securely in the most underdeveloped or rural environments, even in those that have little or no communications infrastructure, at a cost that is affordable by the poorest communities.

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                 The technological platform utilized to facilitate the delivery of the above mentioned services is based on three fundamental components: (1) the Funds Transfer System ("FTS") patent, (2) the UEPS and (3) the Security Protocol.

  FTS Patent

                 The FTS patent describes a third party and the card can be replaced once reported lost or stolen, and
  
  

• method through which funds can be securely transferred off-line from one card to another. A cardholder with a home card reader/terminal can pay for goods bought over the Internet from a merchant that accepts the card without the need to transmit personal account information over the Internet.

In addition, interest can be paid on account balances. The benefits that are inherent in the Net 1 system make it attractive to issuers, cardholders and merchants in geographically and economically diverse areas.

Since our inception, we have not yet been successful in raising the capital required to implement our business plan. No assurances can therefore be given that we will be successful in attracting capital or meeting our business objectives in the future. If the proposed transactions discussed above are not completed, Net 1 may not be able to continue as a going concern beyond the second quarter of 2004.

OUR TECHNOLOGY

Net 1's technological platform is based on two fundamental components:

FTS Patents. The FTS describe a method for the safe and secure transfer of funds from one smart card to another in a secure and off-line manner, which meansmanner. The term "off-line" refers to transactions that noare effected without the need to contact is requiredor communicate with the card issuer or authorization center atwhen the time oftransactions occur, as the transaction.cards themselves perform the authorizations required. The FTS incorporatespatent also describes how these cards can be loaded or re-loaded with funds as well asand how these funds can be redeemed for value in aeither banking or non-banking environments.

UEPS

               The UEPS is a suite of programs that make use of the FTS methodology to deliver an integrated information, payment, switching and settlement environment that underpins our transaction processing system. The programs of the UEPS include the software that operates on the smart cards and the POS terminals, as well as all of those that manage and control the host environment. In other words, all programs that are required to operate the UEPS, including the smart card functionality, the POS devices which allow our smart cards to transact with each other in an off-line manner and our back end host system that primarily provides an audit trail of all transactions effected, form part and parcel of our offering to our corporate customers or licensees.

               The primary strengths of the UEPS are its affordability, security and flexibility. The system is affordable because the computer chips on the smart cards contain all the software necessary to effect UEPS transactions, thereby allowing the POS terminals required to conduct these transactions to contain far fewer components and less circuitry than traditional POS devices. There is also a reduced need for processing power and on-board memory and on-line communication are not necessary thus eliminating the need for an internal or external modem and its associated hardware, maintenance and call costs. As a result, the UEPS terminals are relatively inexpensive, and do not require specialized technical expertise for installation. The UEPS reduces or eliminates the need for national infrastructures such as electricity, telephone or data transmission. The UEPS is secure because the funds in each smart card are protected from illegal access through fingerprint technology and every transaction is verified by the two smart cards involved in the transaction through state of the art cryptographic systems, in conjunction with protocols and techniques which we have developed. Finally, UEPS is flexible because transactions are completed off-line, thus eliminating virtually all restrictions where verified transactions can occur.

               The first version of UEPS was released in 1991, and included software to operate each smart card as well as the main payment system. The later versions of UEPS provide all of the functions necessary to issue and manage a smart card and terminal base as well as those needed to effect settlement between all of the operators and participants. UEPS is fully traceable and auditable and can provide advanced facilities such as loss tolerance and card based interest distribution. Finally, UEPS is scalable and can be made available to well established market leaders or as a starter kit to smaller organizations.

Security Protocol

               Our security protocol was designed to prevent opportunistic fraud and enforce the correct transaction flow. The symmetric triple data encryption standard, or DES, is used extensively in association with a native random number generator that ensures that all transactions are performed by using a random session key pair. The DES encryption algorithm can be easily modified to utilize alternative symmetric or asymmetric encryption algorithms such as the Rivest, Shamir and Adleman or elliptic curves. Each message exchanged during a transaction names both transacting parties, includes unique information to guarantee freshness and depends explicitly on all the messages that occur before it. For further technical details and evaluation, please refer to Bruce Scheiner's book entitled Applied Cryptography, second edition, published in 1996 by John Wiley & Sons.

UEPS Smart Card Functionality

               By combining these technologies, we have created a smart card application that incorporates and controls the functionality that is normally found on banking host systems. Our technology reverses the traditional role, whereby the card acts as an access mechanism to a host managed account, to that of controlling the account itself, while the host system is relegated to merely backing up and creating an audit trail for the card base.

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               As a result, our technology provides extensive and flexible functionality through a system that is practical, secure and fully auditable. The following list itemizes some of the unique and critical functions provided by our smart card technology:

• Transparent and automatic recovery that is used in the event of a transaction failure caused by either hardware or software failures. This feature is also utilized to provide a secure implementation for refunds and cash-back transactions at the POS.

• The smart card itself can be used as a proof of purchase, replacing the need for a separate ticket and ticketing system, for example, on buses, trains or the lottery.

• Continuous debit which allows for transactions to occur in unattended environments involving, for example, fuel dispensing, telephony or Internet sales, with charges being debited from the card on a duration or volume basis.

• High speed processing-critical in applications such as transportation and access control.

• Restricted wallets that are required to implement certain applications such as pension and welfare distribution systems or specific funding initiatives such as canteen systems or transportation subsidies.

• Mutual authentication that allows two UEPS smart cards to identify each other and simultaneously establish a unique randomized transaction key pair.

• Multiple audit trails that ensure that all transactions effected are delivered to the UEPS host to provide complete system integrity. This feature, which is transparent to customers and merchants alike, is effective even in the event that the POS device is destroyed due to an accident, sabotage or vandalism.

• Off-line loading which allows funds to be distributed through existing infrastructures such as the postal service, telephones, cellular phones, newspapers or a digital certificate printed on an employee's pay slip.

• Biometric identification, in the form of fingerprint recognition, as an alternative to the traditional PIN.

• Multiple "wallets," which are configurable options on our smart card, that allow the cardholder to transfer funds between up to 255 wallets for the purpose of budgeting, saving, or earmarking funds for restricted or dedicated usage.

• Automatic credit facility that enables a client card to automatically credit one of its wallets with a pre-defined amount on a given date.

• Interest calculation that enables a client card to calculate the interest due on a savings wallet's outstanding balance at any point in time and to credit itself with the amount calculated.

• Morphing functionality that enables a UEPS smart card to take on the personality of the systems utilized by other terminal networks, thus providing inter-operability between systems that support different standards.

• Automatic debit facility that enables a UEPS smart card to invoke pre-defined debit orders whenever the card is activated.

• Pre-paid facility that enables a UEPS smart card to distribute value to utility meters such as water and electricity but which also provides a feed-back mechanism from such meters for later processing by the utility providers.

               The functionality of our UEPS smart card technology supported by the card operating system we have developed, enables us to design, test and implement new products which, when used in association with each other, deliver complete solutions in the fields of government benefits distribution, wage distribution, banking, health care management, international money transfers, voting and citizen identification. The UEPS sold to clients is a platform with the potential to provide all of the products we sell, including social security, wage payments, canteen services, retail, fuel and transportation services. The following is a description of the stand-alone products available on our UEPS platform. All of the following products are currently available for use by our customer base and each of them, other than S2S Internet, S2S Transportation and S2S Money Transfers, are currently being used by customers.

               StatusS2S Pension and Welfare.S2S pension and welfare helps enhance the participation of social security recipients in the economy of their countries. The system seeks to eliminate previous deficiencies and improve the lifestyles of all its users. Social security beneficiaries are issued with UEPS smart cards that allow for the digital storage of their biometric fingerprint templates,

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enabling beneficiaries to access their social security grants securely at any time or place. S2S pension and welfare makes use of an optical fingerprint sensor technology to capture and verify beneficiaries. The fingerprint reader is programmed to create a random cryptographic session between itself and the smart card presented, thus limiting the possibility of fraud associated with the storage and subsequent illegal replay of digital templates. Once registered, beneficiaries have access to all the functionality delivered by their UEPS cards such as retail spending and pre-paid facilities and automatically qualify for a range of affordable financial services including insurance and short-term loans.

S2S Wage.S2S wage eliminates the need for cash through the introduction of electronic funds guaranteed by a financial institution. S2S wage removes cash at the source, normally being the place of employment, by allowing wages to be paid electronically, in either off-line or on-line environments, directly onto the UEPS smart card thereby removing the potential for fraud, crime and violence normally associated with cash payments. S2S wage can also increase productivity as little time is required to distribute electronic value when compared to cash pay packets and can substantially reduce the costs associated with the management, transportation, delivery and general handling of cash. S2S wage is ideal for employers that pay their staff in cash on a weekly, bi-weekly or monthly basis, and also for employees who do not qualify for or cannot afford traditional banking accounts.

S2S Canteen.The process involved in providing meals to large numbers of workers can be extremely costly and complicated, especially when this function is partially or totally subsidized by the employer concerned. As a result, many organizations have outsourced this function to administrators who provide daily balanced meals to significant numbers of employees. S2S canteen allows employers or meal administrators to monitor and control employee meal subsidies by removing the need to distribute, collect and account for cash. This cashless environment is safer and enables faster processing at cash registers by eliminating the need to accept, count and handle cash resulting in an increase in productivity of the total workforce.

S2S Retail.S2S retail has the primary function of transferring payments made for goods, services or cash dispensing, from a client smart card to a merchant smart card in a secure off-line manner. An audit trail of the transaction is created on both the client and merchant cards to guarantee system integrity. The transaction history file stored on a merchant card cannot be overwritten until it has been settled by using the Net1 off-line "milking" system or connecting on-line to the host. The milking system allows merchant cards to be settled off-line by allowing the transactions stored on these cards to be copied to the transaction file of the milking card. The milking card is then physically handed over to the central office in order for the host system to be updated or settled electronically through a communications data line if one is available. If none of these functions is possible at the time, the merchant can replace the merchant card with a new one. At the time of settlement, all transactions are stripped from the merchant card, aggregated and paid into the nominated bank account of the merchant. Merchants can select their smart card as their nominated bank account, in which case, the amount paid is added to the merchants' card thus eliminating the need for a conventional banking account.

S2S Fuel.S2S fuel allows bulk fuel suppliers, large employers and fleet operators to load monthly or weekly fuel allowances onto employees' UEPS smart cards. A dedicated wallet is used for this implementation to ensure that these funds can only be accepted at participating fuel stations and can only be used for the payment of fuel and oil or other goods specifically allowed by the system managers. Employers are thus guaranteed that fuel allowances can only be spent on fuel purchases with balancing and reconciliation reports being supplied daily.

S2S Distribution.S2S distribution is used to facilitate payments for goods delivered by wholesalers to merchants in both rural and urban environments. When the wholesale delivery is made, the wholesale merchant uses a battery operated POS device to debit the merchant's card and credit the wholesaler's card. This process is performed off-line and is completely secure. When the wholesaler delivery teams return to the depot, the day's transactions are settled to our system host and deposited into the selected bank account of the wholesaler. This is performed using an on-line electronic funds transfer device such as a POS or personal computer, or in the most underdeveloped or rural areas, by using our milking system or by going to a bank branch and manually settling the sales transactions.

S2S Prepaid Utilities.S2S prepaid utilities allow for the transfer of prepaid units and information between facilities' providers and their metering devices such as water and electricity meters. Pre-pay water and/or electricity meters are installed into clients' homes to allow them to manage and budget for the cost of these municipal services. Clients load funds onto a wallet on their UEPS smart cards specifically reserved for pre-paid utilities. Whenever water or electricity is required, the client inserts the UEPS smart card into the appropriate meter. The meter selects the pre-paid wallet and the number of units purchased is loaded into the meter's memory. During the transaction, the meter also supplies usage information to the smart card which is transmitted to the Net1 host at a later stage. This information is then forwarded to the utility providers for statistical usage analysis.

S2S Banking.Our S2S banking system enables traditional financial institutions to surpass the offerings of their competitors through the technological functionality provided by the UEPS solution. However, traditional financial institutions often use standardized banking packages that cannot easily be modified to accommodate the UEPS platform. S2S banking provides a virtual teller terminal interface that allows for seamless connectivity between the UEPS host system and any commercially

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available banking software. Once installed, financial institutions may issue UEPS smart cards without owning the infrastructure, modifying their systems or going through tedious implementation and pilot phases. Clients of these financial institutions can load funds from their existing bank accounts directly onto their smart cards using any POS terminals. The additional UEPS functionality becomes automatically available to all card users thus allowing the issuing institution a means of differentiating itself from competitors.

S2S Internet Payment.S2S internet payments enable UEPS smart card holders to perform all UEPS functions on the Internet in a completely secure manner. The security provided is independent and additional to the standard products that are available to secure internet based transactions. The security is "end-to-end" and occurs between the client's smart cards and that of the service providers. The system is thus protected from attacks that can be launched when using insecure and open channels, devices and networks, such as personal computers and the worldwide web. The functions provided by our S2S internet payments system include an entire range of purchasing options as well as advanced facilities such as continuous debit which allows service providers to charge on a "pay as you use" basis, making it possible to sell, rent or allow access to databases on a time and/or volume basis. This product, which includes a flexible method for guaranteeing payments, allows a new approach to selling products over the internet.

S2S Transportation.S2S transportation limits the possibility of theft by drivers or fare collectors and helps ensure that fares collected are banked, since the fares cannot be re-used for any other purpose. As a consequence of our full audit trail functionality, our system allows for groups of owners to form associations or co-operatives with significant purchasing power, enhancing their ability to negotiate discounts on maintenance services, fuel, insurance and new vehicles. The payment process is fast and does not require any customer authorization procedure apart from the presentation of the customer UEPS card. Speed of processing is mandatory in applications such as transportation to minimize queuing and maintain rigorous schedules. On long distance routes, where fares are of higher value, the funds can be stored in a PIN or biometric protected wallet.

S2S Money Transfers.S2S money transfers are used for the transfer of international and local funds from benefactors to beneficiaries. The funds are loaded electronically and securely onto the beneficiary smart card using biometric fingerprint as the identification methodology. The card can then be used at POS devices by using PIN and/or biometric fingerprint verification. To receive funds from abroad, the beneficiary must first be enrolled onto our system. The benefactor simply needs the beneficiary's smart card unique serial number in order to perform the transfer instruction. The encryption security protocol used enables beneficiaries to receive funds load instructions from the benefactors through a third party or any insecure communication channel such as telephone, newspaper or any analogue or digital network. For local transfers, cardholders can transmit funds to each other by simply invoking the transfer function at the POS equipment. A transfer from one client to another can be performed in less than five minutes and can be loaded to the benefactor's card twenty-four hours a day, seven days a week. Any of our POS devices situated in restaurants, garages and hotels, for example, can provide the offline loading functionality for the beneficiary.

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Our UEPS Platform

               The following diagram depicts how our UEPS platform is constructed.

               The UEPS sold to clients is a platform with the potential to provide all of the products we develop which, when grouped together, form complete systems serving the specific needs of various business segments. Depending on the requirements of a particular customer, we assist the customer in the set-up of its application which is tailored to provide only the products and services initially required, although the UEPS can later be updated to provide additional products. We outsource the hardware products we require, including smart cards, POS terminals, ATMs, PCs and back-end mainframes. However, we develop all of

our application software modules on different hardware platforms allowing us to be hardware independent and providing our customers with the latest and most economical hardware solutions.

Scalability

               Our UEPS can be implemented in different environments, from small closed systems to national implementations. In closed system environments, the UEPS front-end equipment is personal computer based and can therefore be implemented at relatively low cost. In these instances, we provide the back-end system on a transaction fee basis, thus limiting the overall set up cost. This approach can also be used whenever larger implementations are required but where the customer prefers to focus on marketing and selling its products rather than initially concentrating on operating the back-end host system. The cost to entry can thus be greatly reduced as the operations can first become profitable before expending large amounts of capital. On the other hand, large governmental institutions, financial institutions or medical insurers typically prefer to maintain control over the entire payment system and therefore invest in a full system implementation. The time to launch these projects tends to be longer due to the time that is required to train the end-user to operate the system.

               Once a UEPS is installed on behalf of a customer, we believe that we are well positioned to benefit from the scalability of the system as minimal changes are required to be made to the application base for the system to manage significantly greater numbers of users. We can therefore provide additional smart cards while leveraging on the existing cost base in a market. In addition, we have a dedicated team of technicians and developers and an infrastructure capable of supporting a significant volume of customers and their transactions. As a result, we expect to benefit from economies of scale that pertain to increases in the number of products and services using the infrastructures we sell and/or implement.

               Our business model allows us to generate revenue streams through the following areas:

• Hardware, software and related technology sales;

• UEPS transaction-based activities;

• UEPS-based financial services; and

• Equity participation.

               Each UEPS implementation allows us to earn revenue from the first tier of income streams, i.e. hardware, software and related technology sales to the fourth tier, namely equity participation, depending on our willingness to participate in the provision of financial services or our capital investment in the specific initiative. The first tier of income streams, hardware, software and related technology sales is derived from the installation of the infrastructure necessary to operate the UEPS and at least one of its intrinsic products. The second tier of income streams, UEPS transaction-based activitities, is obtained from ad valorem or fixed-rate fees charged for the processing of transactions that utilize the UEPS technology. The third tier of income streams, UEPS-based financial services, is directly linked to the provision of financial and other services facilitated by the UEPS platform such as earning interest on short term loans and the marketing and selling of insurance policies. The fourth and final tier of income streams is generated through our equity participation in the UEPS operator.

               We expect income from the first tier to be derived in the short term whilst the revenues generated from the subsequent tiers to take longer to mature as these are governed by the speed at which the business operator will develop its business plan. However, the total amount of revenue that can be generated is the smallest in tier one and increases throughout the tiers. The reason for this phenomenon is that as we move up through the tiers, we participate incrementally in all the business opportunities created by the UEPS and not only from the upfront and on-going hardware and software sales.

               See Item 7. for a summary of revenues per segment.

Hardware, software and related technology sales

               We have to date implemented UEPS systems in South Africa, Malawi, Ghana, Burundi, Rwanda, Mozambique, Latvia and the Commonwealth of Independent States. In implementing a system, we provide and install the hardware required to receive, allocate and forward transactions to the issuing financial institution, known as the UEPS switching infrastructure. The hardware includes both servers and storage capacity required for the processing, settlement and switching infrastructure as well as ATMs, POS terminals, fingerprint readers, personalization equipment and smart cards. We have relationships with various suppliers for

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our hardware including Stratus Technologies for the supply of high-end fault tolerant servers, SAGEM from whom we acquire POS terminals, cards, and fingerprint readers, ATMEL that supplies us with smart card microcontrollers, Xiring which provides us with pocket size battery operated personal readers or Personal Enquiry Terminals ("PETs"), De la Rue which supplies us with self service terminals and ATMs and many others.

               We also customize the UEPS software which includes the UEPS management system, the UEPS ATM and POS software and the UEPS applications software for the country specific requirements in which our client operates. All technology implementations include an element of support services as our programmers and technicians adapt or tailor the interfaces to our clients' existing infrastructure. Beyond the initial installation, we provide various ongoing services including the maintenance of the ATM and POS terminal base, the supply of additional hardware and smart cards, training, consulting and support services, and software development to address client-specific (but not necessarily UEPS) requirements.

               The Malawi contract was a significant breakthrough for us because it was the first time that an African central bank selected any smart card program for use as a national payment system. It was also the first use of the UEPS technology in a national switching environment which constitutes a system that allows for country-wide settlement of financial transactions between participating individuals or institutions and a central banking system using the biometric finger print identification methodology. The system provides solutions for both the banked and un-banked market segments of Malawi. To date, six financial institutions and British Petroleum (or "BP"), a bulk fuel supplier, have joined the system. A total of 200,000 smart cards, seven ATMs, and 350 POS terminals have been supplied and the issuance of smart cards is gathering momentum. The BP application was launched in April 2003 and is currently being deployed throughout Malawi. A total of 54 BP service stations have been equipped with the necessary POS equipment. The government of Malawi recently committed to pay the salaries of 150,000 government employees through the use of our smart cards.

               We continue to pursue opportunities to implement UEPS technologies internationally. We have been awarded a tender in Kenya to install a UEPS-based national health system requiring two million cards. The implementation of the tender has, however, been delayed due to the change of government in Kenya.

               We have a rolling contract with Nedcor relating to the outsourcing of their entire terminal management system, Stratus switching modules, software development, smart cards and terminal maintenance. We also supply hardware to Nedcor in the form of POS terminals and card readers.

               Where we own the switching infrastructure (as in South Africa), the initial installation of the payment system generally requires a significant investment. However, as we typically only implement systems where the initial application provides a critical mass of smart card holders, as with social security, the system can begin to generate transaction-based revenues at an early stage in its life cycle.

Software and Usage licensing. We require the operators of UEPS software each to obtain a license, for which we charge an annual fee. Our licensing fees are based either on the number of cards issued by the system operator or its customers or the number of transactions processed on the system. We will also license entities that seek to operate specific applications that use FTS Patentsintellectual property or the combined FTS/UEPS payment system. We anticipate that the license fees for these licenses will include a combination of annual fees as well as transaction fees.

Manufacture licensing. We also intend to license manufacturers to produce UEPS smart cards. We expect to collect a licensing fee for each card manufactured and to generate additional fees for access to product information and workshop materials. We also intend to license manufacturers of hardware of, among others, POS terminals and prepaid utility meter terminals, who wish to produce terminals capable of supporting FTS-based applications. We expect that fees for these manufacturer licenses will be charged in a variety of ways, including annual payments, per-terminal payments or transaction fees. Generally, the terminals used in connection with our payment system, unlike other payment systems, do not require a great deal of technology as the security process used by the payment system is managed in its entirety by the two smart cards involved in any given transaction. Manufacturers, therefore, can mass-produce low cost terminals for our payment systems. These potential revenues have now been limited to U.S.-based manufacturers, as the European FTS patent has been revoked. We do not currently have any material manufacturing licenses in place.

               Where we own and control the national UEPS switching infrastructure, as in South Africa, we levy a charge on each transaction processed by the system's infrastructure in a manner similar to the way banks levy a charge on each credit or debit

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card transaction. These charges include a processing fee in return for the processing of all transactions on behalf of our clients, including governments, micro-lenders, insurance companies, utility providers such as water and electricity and a technology fee in return for the usage of the intellectual property itself. In the event that the switch is not owned by us, we levy a technology fee only. As most of our implementations of payment systems and related services are associated with applications where value is regularly loaded onto the smart cards, we obtain a significant amount of our earnings from annuity-based income. Wage and social security payments are generally made at fixed times and therefore result in regular loading fees.

               Due to the limited number of services currently provided, almost all of the beneficiaries download the value onto their smart cards and then immediately withdraw the full amount as cash. Our revenue is therefore currently dependent on fees earned on the loading and redemption of value on the cards as well as the registration of beneficiaries rather than the provision of services.

               We use the UEPS to administer and distribute eight different social welfare grants in South Africa, including pensions, child grants and disability grants on behalf of the provincial governments. Provincial contracts are typically awarded for a period of three years, having a range between one and five years, with an option by the provincial government to extend the contract for two additional years. We currently hold five provincial government contracts, three of which are in the extension periods.

               We expect further growth in transaction fees derived from our existing businesses and customer base in the future. To date, social welfare beneficiaries in South Africa have not been able to transact significantly at merchants using the value stored on their smart cards and most beneficiaries withdraw the full value of the grant in cash. Our system has therefore not yet been exploited to its potential. With the current rollout of POS terminals at selected merchants, we expect an increasing number of beneficiaries to use their smart cards for transacting with merchants thereby realizing further benefit from our system. As smart card holders transact and debit the card of value, we will generate additional transaction fees, the aggregate value of which increases as the number of smart card holders increases. In addition, it has been well publicized that the South African government is accelerating its social security program to provide more South Africans with social security grants, in order to combat poverty. This will increase the number of our customers in South Africa and significantly increase the total value of social security benefits distributed and thus our potential to earn transaction fees.

               We expect significant growth in customer acquisition and transaction fees from new segments of the South African population that comprise those individuals that are employed but that do not have a banking account or cannot afford one. The size of this market is substantially larger than the pension and welfare market as it represents more than eight million South Africans. The average earning power of these targeted individuals is three to four times that of pensioners resulting in our ability to quadruple our average fee income per card issued. This is due to the fact that these individuals' disposable income is far greater than that of social security beneficiaries allowing us to offer a greater range of products from which we can derive income streams. For example, individuals in this income bracket spend more funds on food, have more debit orders, pay for both water and electricity, require larger loans and perform money transfers. Because our fees are normally based on "ad valorem" principles, the profitability of this market segment is therefore greatly increased as the amount of funds processed is larger and the cost of the infrastructure required remains constant. As we achieve penetration in this market segment, social security beneficiaries will also be able to utilize this infrastructure resulting in further cost savings for us in the pension and welfare business. Economies of scale will result, further increasing the profit margins of our existing businesses. Further market penetration can then be achieved at incremental cost resulting in even greater profit margins. The initial markets we are focusing on include the farming communities, the motor manufacturing industry, the textile industry and the payment of salaries and wages to government employees such as policemen, teachers, nurses and other public servants.

UEPS-based financial services

               As a consequence of not having access to traditional banking facilities, the un-banked and the under-banked populations have no access to services from any formal financial institutions, such as short to medium term loans, burial insurance and medical insurance. To meet these needs, we provide our smart card holders with short-term micro-loans and insurance products from which we generate interest income and commissions respectively. While the provision of these services is ancillary to our core competence, we will selectively provide these services in the event that we have the necessary resources and the returns are commensurate with the risks taken. Our strategy is to implement our technology in as many business fields as possible. To achieve this objective, we often find it necessary to enter directly into a specific business area to demonstrate how our technology can enhance its profitability. We accomplish this function by a) acquiring an existing business which we believe could benefit from our technology, b) changing the business processes of the business to incorporate our technology, c) implementing our technological solutions and d) demonstrating the effects of our technology on the bottom line of the business. Once this is achieved, we either promote our technological solutions to businesses of the same nature or/and we continue to grow the business unit for our own benefit. We therefore can generate revenue from either technology sales, the business itself, or both.

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Traditional Micro-lending. We operate a traditional micro-finance business in South Africa with more than 100 branches under the New World Finance and Moneyline brand names. This business extends cash loans for periods ranging from 30 days to up to 3 months, with the majority of loans being 30-day loans. The average interest rates charged to customers are 18-30% per month. These businesses operate on our Milpay Pay System, or MPS, of which more than 1,000 have been sold to the industry. The system is unique in that it enables the micro-lender to set up a salary budget account, or SBA, for the client into which the employer deposits employees' net salaries. The SBA allows loan deductions that are pre-authorized by the clients to be electronically transferred to the lending parties. This ensures that loan repayments are made every month and substantially lowers bad debt provisions, which provides an overall benefit to the micro-lender.

               The MPS module is linked to the National Loans Register, a database of micro-lending customers with existing loans, which was established by the Micro Finance Regulatory Council of South Africa to encourage responsible lending by micro-lenders and prevent customers from overextending themselves. The module also ensures that loans are not granted to persons with existing loans. In addition, payment slips are checked for other deductions before an affordability and lifestyle score are given to the potential customer. Based on these scores, the decision to grant a loan is made at the branch level.

               We believe that marketing this system to an entire industry is the first step to introducing our UEPS smart card technology in this market segment whereby the SBA will be replaced by one of the electronic wallets provided by our UEPS smart card. This scenario will replace traditional banking accounts and eliminate their inherent costs resulting in the banking of many more people that can then be provided micro-loans at minimal risk. The UEPS smart card can then be used to automatically calculate what loan, if any, can be offered to the cardholder without relying on complex scoring procedures and human intervention. This breakthrough could generate substantial new income streams for us as the technology becomes more universally implemented.

               Towards the end of 2001, we implemented this new methodology though our own initiative which targeted social welfare beneficiaries, utilizing our issued base of smart cards as a delivery channel. The products are marketed under various brands by our empowerment partners in the various provinces and include micro-loans, insurance and food parcels. This service has been implemented in KwaZulu-Natal under the StarChoice brand name and in the Northern Cape under the Smart Life brand name. We currently have approximately 85,000 customers in these two provinces. Under the various brand names, we grant loans on which we earn interest and we market insurance policies on behalf of insurers for which we collect both a commission (for the sale of a policy) and a fee (for the monthly premium deduction). Going forward, we plan to grow and develop this business under different brands by launching new products and by introducing the service into the other provinces where we administer social welfare grants.

               We have demonstrated in our South African operations that the increase in profitability of the businesses which apply our technology is much greater than the profit that we can generate from either the sale or the licensing of our technology. In some cases, the rise in the profitability of the businesses which implement our technology can be significant when compared with their initial performance. This is due to the fact that our technology can often be used to a) substantially reduce the costs associated with the existing business by minimizing its risks and simplifying its administration processes and b) by opening up new and untapped market segments which could not be accessed prior to the implementation of our technology. In addition, our technology can facilitate new business ventures which could not be implemented due to the lack of a technological solution which we can now provide. In these instances, it is difficult for us to derive income streams that are commensurate with the success of the new ventures. To alleviate this impasse, we shall in certain circumstances, take up an equity stake in new or existing ventures to ensure that we profit from our technology to the fullest extent.

               This strategy will ensure that we a) can be flexible in the pricing of our technological solutions, b) influence the business to utilize our technology to its full extent, c) share in the total profit of the business, d) continue to generate technology and licensing fees and e) profit in the upside that can be realized in the equity value of the underlying business. We believe that our equity holdings will ensure that we continue to supervise the adequacy and applicability of our technological solutions in different business segments and facilitate the growth of our technological footprint around the world

               In addition to competition that we face from the use of cash, checks, credit and debit cards, existing payment systems and the providers of financial services, we have identified a number of other products currently being produced that use smart card technology in connection with a fund transfer system. These include Mondex, Proton and EMV (which is being promoted by Visa, MasterCard and Europay). In South Africa, and specifically in the payment of social grants, our competitors also include

18

Allpay, which is responsible for social welfare payments in the Free State, Gauteng, and Western Cape provinces and a small portion of the Eastern Cape, and Empilweni which is responsible for payments in the Mpumalanga province.

               The Company's business activities and product offerings depend on its proprietary UEPS software. As a result, we have a large group of software engineers and developers who are constantly revising and improving the core UEPS software. We account for the development cost of software intended for sale in accordance with SFAS No. 86, "Accounting for Costs of Computer Software to be Sold, Leased, or Otherwise Marketed." SFAS 86 requires product development costs to be charged to expenses as incurred until technological feasibility is attained. Technological feasibility is attained when our software has completed system testing and has been determined viable for its intended use. The time between the attainment of technological feasibility and completion of software development has been short with immaterial amounts of development costs incurred during this period. Accordingly, the Company did not capitalize any development costs in fiscal 2003 or fiscal 2002, particularly because the main part of our development is the enhancement and upgrading of existing products.

               We account for the costs to develop software for internal use by the Company in accordance with Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use (SOP 98-1), issued by the AICPA. SOP 98-1 requires these costs to be expensed as incurred, except to the extent that these costs are incurred during the application development stage. All other costs including those incurred in the project development and post-implementation stages are expensed as incurred.

               A significant amount of judgment is required to separate research costs, new development costs and ongoing development costs based as the transition between these stages. A multitude of factors need to be considered by management, including an assessment of the state of readiness of the software and the existence of markets for the software. The possibility of capitalizing development costs in the future, within the criteria set by SFAS 86 or SOP 98-1, may have a material impact on the group's profitability in the period when the costs are capitalized, and in subsequent periods when the capitalized costs are amortized.

The FTS patents are registered in the United States, South Africa, Botswana, Namibia and Swaziland.

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               The European patent was filed in October 1990 and granted in December 1994. The European Patent Convention provides for an opposition period of nine months following the grant of a European patent, and six parties filed an opposition to the grant of the FTS patent. The case was heard before a Board of the Opposition Division in March 1998 and the patent was upheld. Following this decision, a number of the original opponents filed an appeal. The oral proceedings for the appeal were heard on October 10, 2002 and the Appeal Board reversed the earlier decision. The formal written decision from the Appeal Board was received on December 24, 2002. Consequently, the European patent has been revoked and there is no possibility of any further appeal.

               As a result of this ruling, Net 1we will not be able to collect any patent royalties in the European Union. However, our business plan and forecast do not account for such royalties as a major source of revenue in the medium to long-term, as the key to Net 1’sour operations in Europe is based on itsour know-how and ability to exploit the technology rather than on its proprietary right. Accordingly, while Net 1 iswe are disappointed in this ruling, it has not and is not expected to have a material adverse effect on Net 1us in the medium or long-term.

               The FTS patents in South Africa, Botswana, Namibia and Swaziland were granted on September 25, 1991, March 9, 1993, April 7, 1993 and December 9, 1992, respectively. These patents remain in full force and effect, and we are not aware of any challenges to their enforceability.

               The FTS patent in the United States was granted on December 29, 1992. A reissue patent was granted under number Re. 36,788Re.36,788 on July 25, 2000. It currently remains in full force and effect, and Net 1 iswe are not aware of any challenges to its enforceability.

UEPS. The UEPS technology is a suite of software programs that incorporates the FTS patents into a fully integrated payment and settlement system. The primary strengths of UEPS are its affordability, security and flexibility. The system is affordable because transactions occur between the computer chips embedded in the two smart cards involved. Because the computer chips on the smart cards contain the software necessary to enable UEPS transactions, the terminals required to enable these transactions contain far fewer components and circuitry compared to traditional Point of Sale terminals. There is also a reduced need for processing power and on-board memory and, therefore, on-line communication (i.e. internal modem) is not necessary. As a result, the UEPS terminals are relatively inexpensive, and do not require specialized technical expertise for installation. This eliminates the need for existing infrastructures such as electricity, telephone or data transmission. The payment system is secure because all transactions are verified (i.e. confirmation of the actual transfer of the funds) between the two smart cards, which are involved in the transaction using advanced hardware tamper protection and cryptographic systems, together with protocols and techniques developed by the founders of the technology. The UEPS also allows for pin code or biometric (fingerprint) verification of the cardholder at the time of transacting, which further enhances the security of the system. Finally, UEPS is flexible because transactions are completed offline, thus eliminating virtually all restrictions on where verified transactions can occur.19

ITEM 2. PROPERTIES

               The first version of UEPS was released in 1991, and included software to both operate each smart card as well as the main payment system network. UEPS provides all of the functions necessary to issue and manage a smart card and terminal base as well as those needed to effect settlement between all of the operators and participants. UEPS is

7

fully traceable and auditable and can provide advanced facilities such as loss tolerance and interest distribution. Finally, UEPS is scalable and can be made available to well established market leaders or as a starter kit to smaller organizations.

Net 1 owns the exclusive right to market and sell the technology worldwide excluding South Africa and its surrounding territories and the right to license the U.S. FTS patent.

IDENTIFIED SOURCES OF REVENUE

Net 1 has identified several potential general sources of revenue including:

Net 1 Holdings has received license usage fees during calendar year 2002 from Visa International Service Association and FTS licensees for Latvia, Burundi, Malawi, Rwanda and the CIS states. None of the other sources of revenue has yet been developed and there can be no assurance that any will develop.

Manufacture Licensing. Licenses will be required by all manufacturers that produce smart cards that incorporate into their embedded computer chip applications that utilize the FTS patents. Net 1 intends to charge a fee to smart card manufacturers for each smart card produced by such manufacturer that includes the FTS application. In addition, it is anticipated that a yearly fee will also be charged which will entitle the manufacturers to product information and workshop materials from Net 1.

Manufacturers of point of sale terminals and prepaid utility meter terminals who wish to produce terminals capable of supporting FTS based applications will be licensed by Net 1. It is anticipated that these manufacturer licenses will be based on a variety of payment systems including, for example, annual payments, per-terminal payments or transaction fees, depending upon the particular circumstances. Generally, the terminals used in connection with the FTS/UEPS based payment system, unlike other payment systems, do not require a great deal of technology as the security process used by the payment system is managed in its entirety by the two smart cards transacting at the time. Manufacturers, therefore, can mass-produce low cost terminals for the Net 1 FTS/UEPS payment systems. These potential revenues have now been limited to manufacturers that are U.S. based as the European FTS patent has been revoked.

Usage Licensing. We will license entities that will operate specific applications that use FTS intellectual property or the combined FTS/UEPS payment system. We anticipate that the license fees for these licenses will include a combination of annual fees as well as transaction fees.

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Net 1 receives revenue from Net 1 Holdings from all sales of licenses equal to Net 1 Holdings annual after tax net profit before amortization as certified by its auditors in its annual financial statement. Net 1 will recognize the revenue in the period when the audited financial statements of Net 1 Holdings become available and will report the revenue on a net basis as the Company is acting as an agent for Net 1 Holdings as per the Patent and Technology agreement dated May 3, 2000.

Net 1 Holdings has received license usage fees during calendar year 2002 from FTS licensees in Latvia, Burundi, Malawi, Rwanda and the CIS states.

For fiscal 2003, Net 1 recorded revenues of $41,017 from Net 1 Holdings.

Joint Ventures. We will explore opportunities to form joint ventures with entities within particular geographic territories. The joint venturer would then act as a system operator in that territory. Under this scenario we will act as a licensor and may have an equity interest or other participation in the licensee. It is contemplated that we will enter into technology and know-how transfer agreements in exchange for our interest in the joint venture and the other joint venture partner or partners will contribute capital and other expertise necessary to exploit the technology in the given territory.

Hardware Sales. We will pursue arrangements with smart card and terminal manufacturers which will enable us to purchase these items of hardware in volume at preferential prices. We contemplate selling these items to our licensees, passing along a portion of the price savings. These revenues will only become possible if we are able to raise the funds we require to operate the Company as per the business plan.

MARKET FOCUS

In an effort to allocate our resources in an efficient manner, management of Net 1 has identified two distinct markets for our products based on the benefits that cardholders, merchant cardholders and others would find desirable from the payment system. Net 1 has developed marketing strategies to develop these two markets.

          The first and primary set of markets for the technology is the “less developed markets”, which are characterized by a lack of reliable, extensive and inexpensive telecommunications and related infrastructure systems. These markets have relatively little penetration of credit or debit cards, and a large portion of the population does not have access to traditional banking services. Aplitec has substantial experience in developing and tailoring UEPS applications to meet the specific needs of potential clients in these environments. Net 1 intends to leverage Aplitec’s experience to secure new contracts in other less developed markets.

          The second set of markets is the “more developed markets.” These markets have reliable, extensive and inexpensive telecommunications networks, a considerable penetration of credit and debit card services, and the vast majority of their populations have access to banking products.

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Less Developed Markets. Net 1’s present competition in the less developed markets is principally cash. In addition, other companies are developing smart-card based systems for these markets, some of which may become competitive. The less developed markets comprise the great majority of the world’s population, and there is generally no alternative to cash in these markets. Due to their lack of infrastructure, these markets have not been particularly attractive to alternative payment systems such as debit and credit cards. Net 1 believes that its product is particularly well suited for these markets, and while individual transactions may be smaller than in developed markets, the volume of these transactions is potentially much greater, representing a significant opportunity for attaining licensing fees and joint ventures.

          Net 1’s goal in these markets is to provide a payment system to the population as an alternative to cash. Cash is expensive to handlein terms of the costs associated with administering a cash float and is particularly prone to theft. Moreover, since people in less developed markets do not have access to traditional banking products, they therefore do not deposit their money in secure savings accounts on which they earn interest. The Net 1 UEPS system can enhance the lives of the populations of these developing markets by affording them much greater security with respect to their money and making available banking products such as interest bearing savings accounts. In addition, by simplifying the administrative burden and removing the costs associated with handling cash, Net 1’s system will result in significant savings to employers, governments and merchants. A significant focus of Net 1 in these markets, therefore, is to identify local licensees and/or joint venture partners that it believes will be in a position to effectively market the payment system to employers and governments.

          Net 1’s general strategy is to market the UEPS system to those who presently transfer money to others, like employee wages or government benefits. These entities would enter into arrangements with a card issuer, who would then issue cards to their employees or beneficiaries. The wages or benefits for these cardholders would then be loaded onto their cards, thus avoiding the need for the distribution of cash or checks. The funds loaded onto the cards could then be used at local merchants that accept the card for purchases of goods and services. Cash could also be obtained from the card at local banks or retail establishments. The goal is to develop a large installed cardholder base in the most efficient manner. Once a region has a sufficient number of cardholders, additional merchants can be solicited and the payment system expanded. As the cardholder base grows, additional benefits inherent in the UEPS will become recognized and the system will continue to grow. Net 1 is also exploring initiatives in these markets to utilize the UEPS in connection with public transportation, taxis and prepaid utility services such as telephones, electricity and water.

The Developed Markets. Our principal competition in the developed markets is the existing base of credit and traditional debit cards, as well as cash, checks and other forms of payment. In addition, several other companies are developing smart card-based payment systems. In order to effectively compete in this market, an alternative payment system must offer some identifiable benefit to the cardholder and the merchant cardholder. We believe that our product offers substantial benefits over existing payment

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systems in connection with payments for goods and services over the Internet and other selected environments.

          One significant impediment to the growth of commerce over the Internet is the reluctance of consumers to broadcast sensitive credit or debit account information. Moreover, Internet transactions settled by credit card are not generally verified, resulting in increased costs for the on-line merchant. There is a need in this market for a payment system which can provide on-line merchants with instant, verified transfers of payments from customers, while not requiring the customer to transmit any information over the Internet which can identify the customer’s payment account. We believe that the Net 1 FTS/UEPS payment system can meet these objectives as well as provide additional benefits to on-line consumers and merchants.

          We envision a system in which consumers can use their existing account at a financial institution to load their cards with funds. This procedure will be able to operate in many different ways, depending on the relationship between Net 1 and the specific financial institution. If no relationship exists, a simple debit or stop order could be used to allow the cardholder to load his or her UEPS smart card through a simple Internet application, utilizing any personal computer equipped with a smart card reader. In the case where the financial institution is a licensee of Net 1, the debit or stop order would not be required to achieve the above mentioned result. Interest rates and other incentives could be offered to cardholders as an incentive to maintain higher balances on their UEPS smart cards. Internet merchants would then be able to accept guaranteed payments for the goods or services they offer over the Internet. Merchants and service providers would be able to deposit these payments in any financial institution on a daily basis. Cardholders would be protected against the unauthorized use of their card and would always maintain a full audit trail of all their transactions.

          Our Internet payment solution is similar to our standard off-line POS transaction. Our ability to readily adapt UEPS to Internet transactions is due to the patented end-to-end security protocol that ensures that any active communication can only be interpreted by the cardholder and the merchant cardholders. We believe that the risk of fraud, repudiation or non-payment is less than competing systems.

          Net 1 intends to have a system that can provide payment functionality in pay-as-you-use services. These services include, for example, access to databases or other information systems, professional advice or advanced software or special application systems. There are other competing systems that have been proposed for these markets. Our continuous debit function could ensure that payment is made while the service is being used. This same functionality can be used in applications such as fuel dispensing and telephonic communication.

We intend to market this product to on-line retailers and service providers and will develop a final product based on the specifications for the system required by these entities. Once there is a sufficient installed base of cards, Net 1 will then broaden its focus to conventional banking and retail applications in these markets.

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COMPETITION

In addition to competition that we face from the use of cash, checks, credit and debit cards and other existing payment systems, we have identified a number of other products currently being produced that use smart card technology in connection with a fund transfer system. These include Mondex, Proton and EMV, which represent products from Visa, MasterCard and Europay. We believe that the UEPS technology can be distinguished from these competitors in a number of significant ways.

          The most significant advantages of Net 1’s products are the following:

          In addition, the UEPS technology includes functionality that allows:

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• transparent and automatic recovery in the event of transaction failure resulting from terminal hardware or software problems;
  
  
• the smart card itself can be used as proof of purchase, replacing the need for a separate ticket and ticketing system, for example, on buses, trains or the lottery;
  
  
• continuous debiting of value off the smart card, which in turn allows for simultaneous vending and debiting in unattended environments such as fuel dispensing and telephony;
  
  
• speed of processing that is mandatory in applications such as transportation and access control; and
  
  
• open or restricted purses that are required to implement certain applications such as pension and welfare distribution and specific funding initiatives.

ITEM 2. DESCRIPTION OF PROPERTIES

Net 1 does not own any properties. We rentadministrative or manufacturing facilities. The Company leases properties throughout the Republic of South Africa ("RSA") and its corporate head office facilitiesis located in Johannesburg. All our RSA wholly owned subsidiary corporate head offices are located at the same address. Our subsidiaries lease one manufacturing facility (relating to the UEPS transaction-based activities segment) and 162 depots (52 relating to the UEPS transaction based activities segment and 110 relating to the UEPS-based financial services on an as-needed basissegment) throughout the RSA. The leases expire at 744 West Hastings Street, Vancouver B.C. Canada from Gilmour, McKay Roberts Consulting Limited, one of our financial consultants. We rent this office on a month-to-month basis at a rate of $1,000 per month.various dates through to the year 2007.

ITEM 3. LEGAL PROCEEDINGS

Net 1               There are no material pending legal proceedings, other than ordinary routine litigation incidental to our business, to which we are a party or of which any of our property is not involved in, nor is it aware of, any significant legal or arbitration proceedings which are pending or threatened and which may have, or have had in the twelve-month period preceding this report, a material effect upon the financial position of Net 1 and its subsidiaries or affiliates.subject.

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

Not Applicable.               A special meeting of shareholders of the Company was held on May 27, 2004. At the meeting stockholders were asked to:

1. authorize an amendment to Net1's articles of incorporation to (a) increase Net1's authorized shares of common stock, par value US$0.001 per share, from 100,000,000 to 500,000,000 shares, par value US$0.001 per share, to allow for additional shares of common stock of Net1 to be issued in connection with the proposed transactions, (b) increase Net1's authorized shares of preferred stock, par value US$0.10 per share, from 3,000,000 to 300,000,000 shares of preferred stock, par value US$0.10 per share, to allow for a sufficient number of shares of preferred stock to be issued in connection with the Aplitec acquisition, and (c) modify the par value of the shares of preferred stock that may be issued by Net1 from US$0.10 per share to US$0.001 per share;
2. authorize the issuance and terms of 192,967,138 shares of special convertible preferred stock of Net1 in connection with the Aplitec acquisition;
3. authorize the issuance of 105,661,428 shares of common stock of Net1 to the Brait Consortium, through its representative, SAPEF III International G.P. Limited, in exchange for a capital contribution of US$52.8 million;
4. approve the 2004 Stock Incentive Plan; and
5. act upon such other business as may properly come before the meeting or any adjournment or postponement of the meeting.

No shareholders were present in person at the meeting held on May 27, 2004. Proxies for 13,575,022 of the total outstanding shares of 15,852,856 were received from shareholders and thus in terms of the bylaws of the company a quorum was present. The vote was certified by the Inspector of Election on May 27, 2004.

The following is a summary of the results of the voting related to the matters described above:

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND RELATED SHAREHOLDER MATTERSISSUER PURCHASES OF EQUITY SECURITIES

There is currently limited public trading of Net 1'sNet1's common stock on the OTC Bulletin Board under the symbol NUEP. As of February 27,August 31, 2004, the price per share of Net 1Net1's common stock quoted on the OTC Bulletin Board was $9.00US$1.25 per share and, there were 5666 shareholders of record of our common stock. OurThe Company's common stock traded on the Pink Sheets of the National Quotation System under the symbol NUEP from February 2000 to mid- Decembermid-December 2000. In mid-December 2000, ourthe Company's common stock again traded on the OTC Bulletin Board as the Company complied with the OTC Bulletin Board EligibilityEligibility.

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Rule.               The following table sets forth the high and low bid quotations for the common stock for the periods indicated. These quotations reflect prices between dealers and do not include retail mark-ups, mark-downs, and commissions and may not necessarily represent actual transactions.

Net 1's               Net1's transfer agent is Florida Atlantic Stock Transfer Inc.,Bank of New York, located at 7130 Nob Hill Road, Tamarac, Florida, 33321.One Wall Street, New York, New York, 10286. The Bank of New York is the transfer agent for the common stock and the special convertible preferred stock.

Net 1               Net1 has not paid any dividends on its shares of common stock since its incorporation and presently intends to retain future earnings if any, to finance the expansion of business. Net 1Net1 does not anticipate that any cash dividends will be paid in the foreseeable future. The future dividend policy will depend on ourthe Company's earnings, capital requirements, expansion plans, financial condition and other relevant factors.

               As authorized by matter 3 in Item 4. above, 105,661,428 shares of common stock were issued to the Brait Consortium at an issue price US$52.8 million (US$0.50 per common share). The Brait Group exercised its option to receive 5,000,000 shares of common stock at a price of US$0.50 per share as part consideration of its transaction fees. These shares were issued and exempt from registration under the Securities Act of 1933, pursuant to Section 4(2) of that Act.

               During June 2004, Net1 issued 8,720,936 shares of common stock to employees as stock awards for no consideration, and issued 8,720,936 options to purchase shares of common stock at US$0.50 per share.

Special Convertible Preferred Stock

               As authorized by matter 2 in Item 4 above, 192,967,138 special convertible preferred shares were issued in June 2004. These shares rank:

• on parity, without preference and priority, with Net 1's common stock with respect to dividend rights or rights upon liquidation, dissolution or winding up of Net 1; and
  
• junior in preference and priority to each other class or series of preferred stock or other equity security of Net 1 under terms that may be determined by the board of directors to expressly provide that such other security will rank senior in preference or priority to the special convertible preferred stock with respect to dividend rights or rights upon liquidation, dissolution or winding up of Net 1.

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Conversion of Special Convertible Preferred Stock to Common Stock

               Special convertible preferred stock is convertible into shares of common stock on a one-for-one basis upon the occurrence of a trigger event, which is defined as any one of the following events: (i) notification by the reinvesting Aplitec shareholder of the intention to convert some or all of such holder's units in the South African Trust; (ii) the abolition or relaxation of Excon regulations such that South African residents would be permitted to directly hold shares of non-South African companies; or (iii) the liquidation, insolvency or other winding up of either New Aplitec or Net1. In exchange for each share of special convertible preferred stock that is converted, Net1 will receive:

• 1.228070 New Aplitec B class shares; and
• such holder's interest in the New Aplitec B Class Loan accounts, which is equal to (A) the aggregate principal amount of New Aplitec B Class Loans, plus any accrued interest, minus any repayment or previous transfer of New Aplitec B Class Loans to Net 1, divided by (B) the number of New Aplitec B class shares outstanding at such time.

               No fractional shares of common stock shall be issued upon conversion of the special convertible preferred stock, unless Net 1's board of directors shall otherwise determine to issue fractional shares. In lieu of fractional shares, Net 1 will pay cash equal to such fractional amount multiplied by the fair market value per share of common stock on the date of conversion. If more than one share of special convertible preferred stock is being converted at one time by the same holder, then the number of full shares issuable upon conversion will be calculated on the basis of the aggregate number of shares converted at that time.

               Net 1 will reserve and keep available out of its authorized but unissued shares of common stock the full number of shares of common stock deliverable upon the conversion of all outstanding special convertible preferred stock.

               Upon conversion, all rights with respect to shares for special convertible preferred stock will cease. Converted shares will be cancelled and have the status of authorized but unissued preferred stock, without designation as to series until such shares are once more designated as part of a particular series by the board of directors.

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Summary of Investor Rights(*)

* - refer to the Umbrella Agreement, dated November 10, 2003, includes as Exhibit 2.8 for full details of investor rights.

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ITEM 6. SELECTED HISTORICAL FINANCIAL DATA

The following selected financial data should be read together with “Management’s"Management's Discussion and Analysis or Plan of Operation”,Financial Condition and Results of Operations," the consolidated financial statements and notes thereto and other financial information included elsewhere in this Annual Report on Form 10-K or Net 1’s previously filed Annual Reports on Form 10-KSB10-K. The consolidated statements of operations data set forth below of the Company for the fiscal years ended December 31,June 30, 2004, 2003 and 2002 2001 and 2000.the consolidated balance sheet data as of June 30, 2004 and 2003 have been derived from Net 1 U.E.P.S. Technologies, Inc. audited consolidated financial statements which are included elsewhere in this Annual Report on Form 10-K. The Statementsconsolidated statement of Operationsoperations data set forth below of Net 1 for the fiscal years ended December 31, 2003, 2002,June 30, 2001 and 2000 and 1999, and the Balance Sheetconsolidated balance sheet data as of December 31, 2003,June 30, 2002, 2001 2000 and 19992000 have been derived from Net 1’sAplitec's audited consolidated financial statements which are not included in this Annual Report on Form 10-K

Consolidated Statements of Operations Data
(in US$ thousands, except per share data)

* the basic and diluted earnings per share and cash flow per share have been restated as a result of transaction described in notes 1 and 10 to the financial statements.
(1) Net income attributable to common stockholders for 2003 includes an extraordinary item of $0.9 million and the results of a change in accounting policy of $0.3 million as a result of the adoption and application ofStatement of Financial Accounting Standards No. 142 Goodwill and Other Intangible Assets.
(2) the cash dividend per share has been restated as a result of the transaction described in note 1 and 10 to the financial statements. The cash dividend per share for 2004 has been calculated based on 192,967,138 Aplitec shares and represents the dividend paid to shareholders of Aplitec as a result of the transaction.

Selected Historical Financial Data of Net 1

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Additional Operating Data:

Balance Sheet
Total assets	87,470		795,623		90,902		114,039		12,784
Total liabilities	145,720		185,353		158,227		348,306		528,920
Shareholders’ equity	(58,250	)	610,270		(67,325	)	(234,267	)	(516,136	)
Shares outstanding at year-end	10,873,244		15,852,856		15,852,856		15,852,856		15,852,856

(in US$ thousands)

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONFINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s discussion               The following is management's discussions and analysis contains various forward-looking statements within the meaning of the Securitiesfinancial position and Exchange Actresults of 1934. These statements consistoperations of any statement other than a recitation of historical fact and can be identified by the use of forward-looking terminology such as “may,” “except,” “anticipate,” “estimate” or “continue” or use of negative or other variations of comparable terminology. Management cautions that these statements are further qualified by important factors that could cause actual results to differ materially from those contained in forward-looking statements, that these forward-looking statements are necessarily speculative, and there are certain risks and uncertainties that could cause actual events or results to differ materially from those referred to in forward-looking statements.

Company. The following discussiondiscussions and analysis should be read in conjunction with the financial statements of the Company and the notes thereto appearing elsewhere.elsewhere in this Form 10-K.

Net 1Overview

               On June 7, 2004, the Company completed, from a legal perspective, the acquisition of Aplitec. Subsequent to the completion of the acquisition, 99.2% of Aplitec shareholders elected to reinvest in the Company. As a result, Aplitec is deemed to be the accounting acquirer of the Company. From an accounting perspective, June 7, 2004 is considered to be the consummation date of the reverse acquisition, as this was the date when the acquisition was completed. Therefore these management discussions and analysis analyze the activities of Aplitec for the year under review, with the activities of the Company included from June 7, 2004.

               The Company, through its subsidiaries, employs specialized smart card technologies utilizing the UEPS to add efficiency to a development stage company,myriad of commercial activities that involve banking and payment systems, money transfers and other electronic data applications. Our mission is to provide a secure, universal and affordable transacting system, utilizing existing infrastructures, which will provide people, regardless of income with access to services and goods that were previously unattainable. Access to these goods and services should result in improved lifestyles and provide access to new, low risk and profitable markets for suppliers that use our systems.

Introduction

Our business generates revenues from four inter-related but independent activities or segments, namely: UEPS transaction-based activities, UEPS-based financial services, Hardware, software and related technology sales, and Corporate eliminations.

               Through our subsidiaries, we are involved in the administration, management and payment of social welfare grants on behalf of provincial governments in five of the nine provinces of South Africa.

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               Our UEPS-based financial services activities include the provision of financial services to social grant recipients through our smart card delivery channel. We also operate a traditional micro-lending business with more than 100 branches located throughout South Africa.

               Through our Hardware, software and related technology sales activities, we provide customers with the technological solutions which they require to operate all, or portions of the UEPS.

               Corporate consists of head office activities that cannot be allocated to other activities as well as accounting adjustments that do not relate to the other activities, as well as inter-company eliminations.

UEPStransaction-based activities
               This segment consists primarily of our contracts to distribute social welfare payments in South Africa through CPS, its primary operating subsidiary. CPS utilizes the UEPS technology to administer and distribute social welfare grants in five of South Africa's nine provinces. South African social welfare grants consist of eight different grant types, including social security, child support and disability grants. Provincial contracts are typically awarded for a period of three years, with an option by the provincial government to extend the contract for an additional two years. The current status of these contracts is:

               We currently have approximately 45% of the market share in South Africa for the distribution of social welfare grants (including grants distributed by the South African Post Office and the formal banking sector).

               A smart card-based biometric (fingerprint) identification system is used to verify beneficiaries and effect payments of social welfare grants onto individual smart cards, with each card enacting as an account for the beneficiary. The beneficiary then has the choice of either converting the electronic value to cash using automated cash dispensers or effecting electronic payments through the smart card for a range of services such as the purchase of goods, loan repayments and insurance premium payments. The system's biometric verification and audit capabilities effectively combat the risks of fraud and theft traditionally associated with cash.

               Historically, due to the limited operatingnumber of services available, almost all of the beneficiaries downloaded the value onto their smart cards and then immediately withdrew the full amount as cash. Our revenue has therefore been limited to fees earned on the loading and redemption of value on the cards as well as the registration of beneficiaries rather than the provision of services. We are, however, aggressively expanding the services available to beneficiaries and the revenue earned by us from the provision of transactional services (such as debit orders, point of service spending and money transfers) will increase accordingly in the future. The direct costs associated with the existing activities are primarily cash handling costs such as security, transport of cash, banking fees and insurance. Fixed costs consist of salaries and property rental.

UEPS-based financial historyservices
Provision of smart card accounts.As described in UEPS transaction-based activities above, we provide a smart card UEPS-based account to all social welfare beneficiaries in the five provinces where CPS delivers a service. A portion of the fee earned for the delivery of the service is for the provision of the UEPS account and is subjecttherefore classified as a UEPS-based financial service. The fixed costs associated with the provision of these accounts are primarily the depreciation of the computer equipment and salaries associated with the operation of these accounts.

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UEPS-based lending. Towards the end of fiscal 2001, we developed a suite of financial services targeted at social welfare beneficiaries, utilizing our issued base of UEPS smart cards as a delivery channel. The products are marketed under various brands by our empowerment partners in the various provinces and include micro-loans, insurance and food parcels. This service has been implemented in the KwaZulu-Natal under the StarChoice brand name and in the Northern Cape under the Smart Life brand name. We plan to grow and develop this business by launching new products into the provinces in which we administer social welfare grants.

Traditional Micro-lending. We operate a traditional micro-finance business, with more than 100 branches throughout South Africa, under the New World Finance and Moneyline brand names. These branches extend short-term loans for periods ranging from 30 days up to 3 months, with the majority of loans being 30-day loans.

               These businesses operate on our Milpay Pay System, or "MPS", which is also marketed to third party micro-lenders. The system is unique in that it enables the micro-lender to set up a "salary budget account", or "SBA", for the client into which the employer deposits an employee's net salary. The SBA can be either a traditional bank account with any banking institution or our smart card. The SBA allows a loan deduction, which is pre-authorized by the client, to be electronically transferred to the risks, uncertaintiesauthorized party. This ensures that loan repayments are made every month and problems frequently encountered by companiessubstantially lowers the risk of bad debts. The remaining sum can then be retained in early stages of operation. Net 1’s historical results of operationsthe bank account or smart card, or transferred to another account. The MPS includes a credit-vetting module that is linked to the South African National Loans Register. This ensures that loans are not necessarily indicativegranted to people with existing loans. In addition, payment slips are checked for other deductions before an affordability (i.e. loan as a percentage of net income) and lifestyle score are given to the potential customer. Based on these scores, the decision to grant a loan is made at the branch level.

Hardware, software and related technology sales
                We have developed a range of technological competencies to service our own internal needs and to provide links with our client enterprises. Technology sales refer to the supply of the resultshardware and software required to implement our UEPS. We have, to date, implemented our UEPS in Malawi, Ghana, Burundi, Rwanda, Mozambique, Zimbabwe, Latvia and the Commonwealth of operationsIndependent States.

               When a UEPS system is implemented in a country, we normally provide the hardware for the back-end switching and settlement system, customize the UEPS software to be expectedsuit the local conditions (UEPS management system, ATM integrations, POS integration), customize the applications suite for the client's specific requirements (e.g. banking, retail, wage payment) and supply the smart cards terminals and all other UEPS related equipment. All technology sales include an element of support services as programmers and technicians need to adapt or tailor interfaces to the client's existing systems. Ongoing ad hoc services, including maintaining smart card equipment, consulting and support services, and software development are provided to these clients who pay for these services as and when delivered.

               A major local customer serviced by this division is Nedcor, one of South Africa's largest banks by asset size. We have an arrangement with Nedcor relating to the outsourcing of its entire terminal management system, Stratus front-end switching modules, software development, smart cards and terminal maintenance. We also supply hardware to Nedcor in the future.form of POS terminals and card readers.

IntroductionCorporate/Eliminations
               This segment consists of any corporate / head office activities and accounting adjustments that can't be ascribed directly to any of the other segments, as well as any inter-segment eliminations.

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Results of Operations

          Net RevenuesFiscal Year Ended June 30, 2004 Compared to Fiscal Year Ended June 30, 2003

          Net 1 has identified several potentialExecutive Summary

               There are two critical factors that had a significant impact on the consolidated results for fiscal 2004 as presented elsewhere in this document:

• The reorganization costs associated with the acquisition of Aplitec; and



• The impact of the fluctuation in the exchange rate between the South African Rand (ZAR) and United States Dollar (US$).

Reorganization costs
               The total reorganization costs incurred by the Company in terms of the acquisition of Aplitec during fiscal 2004 amounted to US$ 11.13 million. The full amount of these transaction costs was expensed during fiscal 2004. In addition, certain taxes had to be paid to the South African Revenue Services as a result of the acquisition of Aplitec, which amounted to US$4 million. These taxes are included in the income tax expense line in the statement of operations and relate primarily to Capital Gains Tax paid as a result of the transaction. The consolidated net income and earnings per share therefore includes the full effect of these reorganization costs and taxes. If these once-off reorganization costs and taxes are disregarded, the net income after taxes for the group would have amounted to US$28.4 million and the basic earnings per share (for common stock and convertible preferred stock) would have amounted to US$0.14.

ZAR /US$ exchange rate
               During fiscal 2004, the ZAR (the functional currency of the Company), appreciated significantly against the US$ (the reporting currency of the group) in comparison with fiscal 2003, as demonstrated by the following table and graph:

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Combined effect of reorganisation costs and exchange rate fluctuation

               The effect of the reorganization costs and taxes (Capital Gains Tax ("CGT") and the appreciation of the ZAR : US$ exchange rate is demonstrated in the table below, where certain financial data for both fiscal 2004 and fiscal 2003 have been restated using a common exchange rate of US$ 1.00 = ZAR 7.00. Please refer to "Use of non-GAAP financial information" below for further discussion on these measures.

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Use of non-GAAP financial information

Certain non-GAAP measures were used in compiling the table above to evaluate our operations for fiscal 2003 and fiscal 2004. These are:

• The fiscal 2003 and fiscal 2004 results were restated at a constant exchange rate of US$ 1.00 = ZAR 7.00. This exchange rate was elected for demonstrative purposes as the underlying exchange rate used when the re-investment offer was made to the Aplitec shareholders was at the rate of US$ 1.00 = ZAR 7.00. The average exchange rates for these periods for GAAP purposes are US$ 1.00 = ZAR 6.91825 for fiscal 2004 and US$ 1.00 = ZAR 9.05678 for fiscal 2003. The difference between the GAAP and non-GAAP measure is apparent from the table above.
• The reorganization costs of US$ 11.1 million and taxes related to the reorganization amounting to US$4 million in fiscal 2004 were excluded against our reported numbers in one of the columns of the table above to demonstrate the impact of this significant event, which we do not anticipate to recur in the foreseeable future.
• Basic earnings per common share for all shares issued and basic earnings per special convertible preferred share for all shares issued have been calculated using the full number of shares in issue to illustrate the effect of all shares that have been issued to date, as a large number of these shares were issued shortly before fiscal year end 2004. The number of shares used for the calculation of both these earnings per share numbers is 328.2 million shares, compared to the weighted number of shares used for US GAAP purposes of 201.5 million shares.

               We report our results in the following four segments: UEPS transaction-based activities, UEPS-based financial services, Hardware, software and related technology sales, and Corporate/ Eliminations. Our management prepares financial statements for management purposes in ZAR, and our chief operating decision-maker evaluates the segment performance using ZAR. For purposes of meaningful analysis, we have provided certain amounts in both ZAR and US$. Unless otherwise noted, the rates of exchange used in determining these US$ amounts were:

Revenue and Operating Profit

               Revenue comprises sales to customers, fees and interest earned on loans granted. Operating profit takes into account cost of IT processing, servicing and support, selling, general sources ofand administrative expenses, depreciation and amortization, and reorganization charges. For fiscal 2004, consolidated revenue including:and operating profit increased as follows:

Net 1 Holdings has received license usage fees               The increase in revenue and operating profit is primarily due to higher volumes in our UEPS transaction-based activities and UEPS-based financial services. The increase in operating profit margin from 25.7% in fiscal 2003 to 27% is primarily due to improved efficiencies across all activities, as well as a significantly improved contribution from our contract to pay social welfare grants in the Eastern Cape Province, which was in establishment phase during fiscal 2003. Despite the significantly higher volumes across our businesses, employee costs, which is our largest single expense, increased by 8.9% compared to fiscal 2003 from Visa International Service AssociationZAR 138.3 million (US$ 15.3 million) to ZAR 150.6 million (US$ 22.0 million).

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The relative growth in revenue and FTS licensesthe contributions of our business activities to operating profit are illustrated below:

UEPS transaction-based activities
Revenue and operating profit from UEPS transaction-based activities increased as follows for Latvia, Burundi, Malawi, Rwanda and Nigeria.fiscal 2004:

This was due to the following key drivers in our social welfare grant payments activities:

None•           Full operation of Eastern Cape contract: The implementation of our social welfare grant payment system in the Eastern Cape Province became fully operational in fiscal 2004, which dramatically increased the number of benefits processed during the year to 5,482,237 transactions, compared with 1,050,833 in the prior fiscal period.

•Significantly higher volumes in existing contracts: We experienced significant growth in most of the other sourcesprovinces where we administer payments of revenue has yet been developedsocial welfare grants. This growth is mainly due to new qualifying criteria announced in 2003 by the South African government that increased the eligibility for child support grants. In total, the volume of payments processed during fiscal 2004 increased by 43% to 33,439,462 compared to the same period in fiscal 2003.

•Annual price increase adjustments: Under our Service Level Agreements with provincial governments, we are entitled to annual price increases based upon factors such as average grant size, volumes and there can be no assurance that any will develop.the South African Consumer Price Index, or "CPI" rates.

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          Manufacture LicensingThe higher volumes in existing contracts, as well as the price increases relative to fiscal 2003, are detailed below:

Licenses will be required               The operating profit margin of our UEPS transaction-based activities for fiscal 2004 improved to 30.3% from 20.6% in fiscal 2003. This improvement is due the reduced losses on the Eastern Cape contract, which had suffered significant losses during fiscal 2003 as a result of the significant establishment costs and very low volumes during the implementation period. The increased cost incurred by all manufacturers that produce smart cards that incorporate into their embedded computer chip applications that utilizeus during the FTS patents. Net 1 intends to charge a fee to smart card manufacturers for each smart card produced by such manufacturer that includes the FTS application. In addition, it is anticipated that a yearly fee will also be charged which will entitle the manufacturers to product information and workshop materials from Net 1.

Manufacturersfirst half of POS terminals and prepaid utility meter terminals who wish to produce terminals capable of supporting FTS based applications will be licensed by Net 1. It is anticipated that these manufacturer licenses will be based on a variety of payment systems including, for example, annual payments, per-terminal payments or transaction fees, depending upon the particular circumstances. Generally, the terminals usedfiscal 2004 in connection with the FTS/process of optimizing the logistics of the Eastern Cape implementation (i.e. number of vehicles, number of payment points and number of beneficiaries at each payment point), also resulted in reducing the losses suffered by this venture during the last six months of fiscal 2004. During November 2003 to February 2004, we also converted our operations in the Limpopo province to a full smart card-based payment system. As capital expenditures in the Limpopo and Eastern Cape provinces are depreciated and the logistical planning in the Eastern Cape is improved, we expect our operating profit margins from UEPS transaction-based activities to improve.

UEPS-based financial services
               The revenue and operating profit from the UEPS-based financial services activities for fiscal 2004 changed as follows compared to the fiscal 2003:

These activities derive revenue from the provision of UEPS smart card-based accounts provided to our customers, UEPS-based lending and traditional microlending.

               Revenue from the provision of smart card based accounts grew in proportion to the higher number of beneficiaries serviced through our social welfare payment system, unlike othercontracts. A total number of 3,066,581 UEPS smart card based accounts were active at June 30, 2004, compared to 1,852,624 active accounts as at June 30, 2003. The significant increase in the number of active accounts is primarily due to the conversion of the beneficiaries serviced in the Limpopo province to a full smart card-based payment system. A total of 840,320 accounts had been activated in this province at June 30, 2004.

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Revenue from UEPS-based lending improved as a result of strong growth in our loan portfolio as we expanded the areas where this service is offered. By contrast, the loan portfolio of the traditional micro-lending businesses declined as a result of our strategic decision not to aggressively grow this business. The key indicators of these businesses are illustrated below:

               Operating profit margin for the financial services division increased during this period to 43.6%, compared to 37.6% in the prior year, primarily due to the increased profitability of the provision of smart card based UEPS accounts, and the change in the mix of the debtors book from the lower margin and higher risk traditional micro-lending to the higher margin and lower risk UEPS-based lending. Both the provision of UEPS smart card based UEPS accounts and UEPS-based lending are volume driven and profitability improves as volumes increase, as most costs are fixed. The change in the contribution of the various components to revenue and the change in the operating profit margin from fiscal 2003 to fiscal 2004 are illustrated in the table below:

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Hardware, software and related technology sales
The revenue and operating profit from the Hardware, software and related technology sales activities for fiscal 2004 changed as follows compared to the fiscal 2003:

               These activities have limited annuity-based revenues (i.e. royalty income) and are dependent on signing new contracts and/or the expansion of UEPS systems do not requirealready implemented.

               The revenue decrease was expected due to a great dealsignificant change in the product mix, from low margin hardware sales to high margin software sales. As a result, the operating profit for these activities improved and the margin increased to 43.6% from 37.6% in fiscal 2003.

               A significant local customer serviced through these activities is Nedcor, one of technologySouth Africa's four largest banks, which outsources certain processing and development services to us. The Nedcor business remained fairly static during fiscal 2004. On July 27, 2004, it was announced by Nedcor and ourselves that we had been contracted to supply Nedcor with 18,500 Point of Sale devices, 5,600 pin-pads and 66,000 merchant smart cards. The revenue from this contract is estimated at ZAR 66.95 million (approximately US$ 10.7 million) and will likely be realized during the second and third quarters of fiscal 2005.

Corporate/Eliminations
               The main component of the corporate segment for fiscal 2004 is the reorganization costs of ZAR 73.7 million (US$ 11.1 million) as described in the security process usedexecutive summary above and detailed in note 20 of the financial statements. In fiscal 2003, the main components of corporate were the relevant head office expenses and inter-segment eliminations.

Interest Received and Finance Costs

               Interest received consists of interest received on surplus cash, while finance costs consists of interest paid on short-term borrowings. We have a unique cash flow cycle due to our obligations to pre-fund the payments of social welfare grants in the KwaZulu-Natal and Eastern Cape provinces. We provide the funds required for the grant payments on behalf of these provincial governments from our own cash resources and are reimbursed within two weeks by the payment system is managedKwaZulu-Natal and Eastern Cape governments, thus exposing it to these provinces' credit risk. These obligations result in its entirety by the two smart cards transacting at the time. Manufacturers, therefore, can mass-produce low cost terminalsa peak funding requirement, on a monthly basis, of approximately ZAR 250 million (US$ 36.1 million) for the Net 1 FTS/UEPSKwaZulu-Natal contract and ZAR 180 million (US$ 26 million) for the Eastern Cape contract. The funding requirements are at peak levels for the first two weeks of every month during the year. The significantly higher payment systems. These potential revenues have now been limited to manufacturers that are U.S.-based asvolumes in KwaZulu-Natal during the European FTS patent has been revoked.

          Usage Licensing

We will license entities that will operate specific applications that use FTS patent or the UEPS technology. We anticipate that the license fees for these licenses will include a combination of annual feesperiod, as well as transaction fees.full operational implementation of the Eastern Cape contract, increased our pre-funding requirements that resulted in an increase in finance costs from ZAR 49.5 million (US$ 5.5 million) in fiscal 2003 to ZAR 81.5 million (US$ 11.8 million) in fiscal 2004.

Net 1 receives revenueInterest on surplus cash increased from Net 1 HoldingsZAR 73.1 million (US$ 8.1 million) to ZAR 106.4 million (US$ 15.4 million), primarily due to the higher average cash on hand balances during fiscal 2004 compared with fiscal 2003. Cash on hand increased from all sales of licenses equalZAR 405.7 million (US$ 54.3 million) on June 30, 2003 to Net 1 Holdings annual after tax net profit before amortization. Net 1 will recognizeZAR 503.7 (US$ 80.3 million) on June 30, 2004. Surplus cash held by the revenueSouth African operations is invested in overnight call accounts in the period whenSouth African money market, and surplus cash held by non-South African companies is invested in the international money market.

Taxation

               Total tax expense for fiscal 2004 increased from ZAR 85.8 million (US$ 9.5 million) in fiscal 2003 to ZAR 186.8 million (US$ 26 million), mainly due to our increased profitability and the large tax payments relating to the reorganization, as described in the executive summary above. The majority of the reorganization expenses are also not allowed as deductions for tax purposes, which further increased the amount of tax payable and the effective tax rate.

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Minority Interests

               No income was attributable to minority interests during fiscal 2004, as we acquired all of these minority interests during fiscal 2003.

Fiscal Year Ended June 30, 2003 Compared to Fiscal Year Ended June 30, 2002

ZAR /US$ exchange rate
During fiscal 2003, the ZAR (the functional currency of the group), appreciated against the US$ (the reporting currency of the group) in comparison with fiscal 2002, as demonstrated by the following table and graph:

               We report our results in the following four segments: UEPS transaction-based activities, UEPS-based financial services, Hardware, software and related technology sales, and Corporate/ Eliminations. Our management prepares financial statements for management purposes in ZAR, and our chief operating decision-maker evaluates the segment performance using ZAR. For purposes of Net 1 Holdings become availablemeaningful analysis, we have provided certain amounts in both ZAR and will reportUS$. Unless otherwise noted, the revenue on a net basis as Net 1 is acting as an agent for Net 1 Holdings as per the Patent and Technology Agreement dated May 3, 2000.

Net 1 Holdings has received license usage fees during 2003 from Visa International Service Association and FTS licensees for Latvia, Burundi, Malawi, Rwanda and Nigeria.

In 2003, Net 1 recorded revenuesrates of $41,017 from Net 1 Holdings.

          Joint Ventures

We will explore opportunities to form joint ventures with entities within particular geographic territories. The joint venturer would then act as a system operatorexchange used in that territory. Under this scenario we will act as a licensor and may have an equity interest or other participation in the licensee. It is contemplated that we will enter into technology and know-how transfer agreements in exchange for our interest in the joint venture and the other joint venture partner or partners will contribute capital and other expertise necessary to exploit the technology in the given territory.determining these US$ amounts were:

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Revenue and Operating Profit
               Revenue comprises sales to customers, fees and interest earned on loans granted. Operating profit takes into account cost of IT processing, servicing and support; selling, general and administrative expenses, depreciation and amortization and reorganization charges. For fiscal 2003, consolidated revenue and operating profit increased as follows:

               The increase in revenue and operating profit is primarily due to higher volumes in our UEPS transaction-based activities and UEPS based financial services. The marginal increase in operating profit margin from 24.8% in fiscal 2002 to 25.7% is primarily due to improved efficiencies across all activities, but influenced negatively by the losses suffered by our contract to pay social welfare grants in the Eastern Cape Province, which was in establishment phase during fiscal 2003. Employee costs, our largest single expense, increased 6.94% in fiscal 2003 from ZAR 129.3 million (US$ 12.7 million) to ZAR 138.3 million (US$ 15.3 million), following a 7.5% annual inflation adjustment to employees' salaries in October 2002.

The relative growth in revenue and the contributions from our activities to operating profit are illustrated below:

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UEPS transaction-based activities
               Revenue and operating profit from UEPS transaction-based activities increased as follows for fiscal 2003:

The increase in revenue in this segment during fiscal 2003 is due to the following key drivers in our social welfare grant payments activities:

•     New Eastern Cape contract: In November 2002, we commenced the implementation of a social welfare grant payment system in the Eastern Cape Province. At year-end, we processed benefits for 469,918 beneficiaries. The Eastern Cape contract generated revenue of ZAR 47.1 million (US$ 4.6 million) in the last eight months in fiscal 2003.

•     Significantly higher volumes in existing contracts: We experienced significant growth in most of the other provinces where it administers payments of social welfare grants. This growth is mainly due to new qualifying criteria announced by the South African government aimed at increasing the number of citizens eligible for social welfare grants.

•     Annual price increase adjustments: Under our Service Level Agreements with provincial governments, we are entitled to annual price increases based upon factors such as average grant size, volumes and the South African Consumer Price Index, or "CPI" rates.

The higher volumes in our existing contracts, as well as the fiscal 2003 price increases, are detailed below:

The operating profit margin of our transaction-based activities decreased in fiscal 2003 to 20.6% from 26.1% in fiscal 2002.

               We incurred significant costs in connection with the commencement of the Eastern Cape social welfare payment system. This is typical for businesses that have significant up-front implementation costs but cannot begin collecting revenue until implementation is complete. This business model exerts pressure on our operating profit margin during the early stages of a new contract. Efficiency and profitability will increase over time as more customers are converted to our payment system. We expect the conversion period in the Eastern Cape to take 14 months to complete.

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               The losses experienced in the Eastern Cape were marginally offset by the improved profitability of our social welfare payment contracts in other provinces. As these contracts are now well beyond their establishment phases, we continue to improve the efficiencies of these systems through strict cost control measures and improved logistical planning. We try to keep any increases in operational, selling, general and administrative expenses below the total annual price increase rates under these contracts. A further positive effect on this activities operating profit margin is the fact that our selling, general and administrative expenses remained predominantly fixed in fiscal 2003, while our revenue from these contracts benefited from the significant increase in volumes.

Hardware, Salessoftware and related technology sales
               The revenue and operating profit from the hardware, software and related technology sales activities for fiscal 2003 changed as follows compared to the fiscal 2002:

These activities have limited annuity-based revenues and are dependent on signing new contracts and/or the expansion of UEPS systems already implemented.

Net 1 will pursue arrangements               The decrease in revenue was expected given the very successful UEPS implementation in Malawi in 2002. While we successfully implemented systems in Mozambique and Latvia in 2003, these were much smaller than the Malawi system. The implementation of the Malawi system resulted in some additional revenue in fiscal 2003 as we continue to provide smart cards and related equipment for that system.

               Nedcor, a significant local customer serviced by this activity, outsources certain processing and development services to us. The Nedcor business remained fairly static during fiscal 2003.

               The decrease in the operating profit margin in these activities was mainly due to a significant change in our product mix. The implementation of the national UEPS-based payment system in Malawi, which dominated the 2002 results, yielded significantly high margin revenue for that year. During fiscal 2003, systems were implemented in Latvia and Mozambique, but these were much smaller than the Malawi system. As a result, our low-margin products such as hardware sales and our outsourcing business with Nedcor, which remained fairly static during the year, had a significant impact on the margins reported for fiscal 2003.

UEPS-based financial services
               The revenue and operating profit from the UEPS-based financial services activities for fiscal 2003 changed as follows compared to the fiscal 2002:

               This activity derives revenue from the provision of UEPS smart card and terminal manufacturers which will enable us to purchase these items of hardware in volumes at preferential prices. We contemplate selling these itemsbased accounts to our licensees, passing alongcustomers, UEPS-based lending and traditional microlending.

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               Revenue from the provision of UEPS smart card based accounts grew in proportion to the higher number of beneficiaries serviced through our social welfare payment contracts. A total number of 1,852,624 UEPS smart card based accounts were active at June 30, 2003, compared to 1,154,088 active accounts as at June 30, 2002. The significant increase in the number of active accounts is primarily due to the implementation of the smart card-based payment system in the Eastern Cape. A total of 469,910 accounts had been activated in this province at June 30, 2003.

               Revenue from UEPS-based lending improved as a result of strong growth in our loan portfolio as we expanded the areas where this service is offered. By contrast, the loan portfolio of the traditional micro-lending businesses remained fairly static as a result of our strategic decision not to aggressively grow this business. The key indicators of these businesses are illustrated below:

               Operating profit margin for the financial services activities increased during this period to 37.6%, compared to 19.6% in the prior year, primarily due to the increased profitability of the provision of UEPS smart card based accounts, and the change in the mix of the debtors book from the lower margin and higher risk traditional micro-lending to the higher margin and lower risk UEPS-based lending. Both the provision of UEPS smart card based accounts and UEPS-based lending is volume driven and profitability improves as volumes increase, as most costs are fixed. The change in the contribution of the various components to revenue and the change in the operating profit margin from fiscal 2002 to fiscal 2003 are illustrated in the table below:

               The following important factors contributed to the significant changes in the operating profit margins of the UEPS-based lending and traditional micro-lending activities:

•              The UEPS-base lending initiative was profitable, on a monthly basis, for the entire 2003 fiscal year. During the first half of fiscal 2002, this activity was in the start-up stage and therefore incurred significant costs. Accordingly, the operating profit margin of this initiative improved significantly from the break-even result achieved during fiscal 2002.

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•               The traditional micro-lending activity exhibited significant improvements in operating profit margins following a management change in the latter part of fiscal 2002. This new management focused heavily on cost controls and managing bad debt. A dedicated collection department was also established, which produced significant cost savings during fiscal 2003 as the amount of doubtful accounts written off and provisions for doubtful debts (calculated on the same basis as in previous years) was significantly reduced, while meaningful progress was made with the recovery of debts written-off in prior fiscal periods. The cost of running an internal department is also considerably less than our previous practice of outsourcing this function.

Corporate / Eliminations
               In fiscal 2003, the main components of corporate were the relevant head office expenses and inter-segment eliminations. This segment also includes the cost of settling the outstanding share options issued to empowerment groups at the time of Aplitec's listing, which expired on December 31, 2002, and were not exercised. As a result, an aggregate of ZAR 5.3 million (US$ 0.6 million) was paid to holders of these options.

Interest Received and Finance Costs
               The significantly higher payment volumes in KwaZulu-Natal during fiscal 2003, as well as the implementation of the Eastern Cape contract, increased our pre-funding requirements, which resulted in an increase in finance costs in fiscal 2003 from ZAR 19 million (US$ 1.9 million) to ZAR 49.5 million (US$ 5.5 million).

     Interest on surplus cash increased in fiscal 2003 from ZAR 33.1 million (US$ 3.3 million) to ZAR 73.1 million (US$ 8.1 million), primarily due to an increase of ZAR 106 million (US$ 11.7 million) in cash on hand, as well as significantly higher interest rates earned on deposits. We also maximized our interest income through the commencement in fiscal 2002 of a cash management system, which allows for the overnight set-off of all cash balances and overdrafts across all of our subsidiaries except for micro-lending subsidiaries. Any cash balances related to unpaid social welfare grants received from provincial governments where we do not pre-fund such grants (i.e. North West Province, Northern Cape Province and Limpopo) are excluded from our cash management system and overnight set-off, as the ownership of these accounts remains with the provincial governments. The surplus cash as determined by the cash management system is automatically invested into an overnight call account, as discussed above. Although interest is calculated on our net cash balance, the interest cost of the overdraft pre-funding accounts for the KwaZulu-Natal and Eastern Cape contracts are calculated as part of the set-off calculation and disclosed as finance costs in our financial statements. The full benefit of this cash management arrangement was realized in fiscal 2003.

Taxation
               Total taxes paid in fiscal 2003 increased from ZAR 43.3 million (US$ 4.3 million) to ZAR 69.1 million (US$ 7.6 million), mainly due to our increased profitability.

The increase in the effective tax rate for fiscal 2003 was mainly due to non-deductible expenses of ZAR 10.2 million (US$ 1.1 million), including ZAR 5.3 million (US$ 0.6 million) resulting from the settlement of share options.

Minority Interests
               Income attributable to minority interests increased in fiscal 2003 from ZAR 1.7 million (US$ 0.2 million) to ZAR 4.1 million (US$ 0.5 million), due to the increased profitability of four subsidiaries that are involved in the social welfare payment business with outside shareholders. During the 2003 fiscal year, the minority interests in three of these subsidiaries were acquired for a total consideration of ZAR 12.4 million (US$ 1.4 million), which should lead to a significant reduction in income attributable to minority interests in fiscal 2004.

Liquidity and Capital Resources

Operations
               Cash flows from operating activities in fiscal 2004 totaled ZAR 290.4 million (US$ 41.8million), compared to ZAR 159.8 million (US$ 17.6 million) in fiscal 2003. This increase is primarily due to higher levels of revenue and operating profit and an increase in net interest earned, partially offset by an increase in working capital (increased receivables and inventory, partially offset increased payables), and by higher taxes and the payment of dividends during fiscal 2003. The slight increase in inventory was due to higher levels of spares stock at year end. The increase in receivables was due to a portion of the price savings. These revenues will only become possible if weJune 2004 Eastern Cape pre-funding owing to Net1 by the Eastern Cape government, as well as higher pre-payments for smart cards bought for the Limpopo contract, which are ablepaid for monthly, as part of the service fee, over the duration of the contract period. Payables increased mainly due to raise the funds we require to operate Net 1 as perbulk of the business plan.reorganization costs that were not paid at year end.

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          Operating ExpensesInvesting

Net 1’s operating expenses consist primarily of statutory expenses, administrative expenses, business development expenses
               Cash used in investing activities in fiscal years 2004 and travel expenses. In addition, Net 1 historically has incurred operating expenses2003 was ZAR 39.7 million (US$ 5.7 million) and ZAR 67.0 million (US$ 7.4 million), respectively. This decrease was due to a ZAR 56.9 million (US$ 8.3 million) capital expenditure in fiscal 2003 related to its outsourcing agreementsstart-up costs on the Eastern Cape contract.

Investing activities during fiscal 2004 consisted mainly of:

• capital expenditure of ZAR 19.4 million (US$ 2.8 million)
• a loan of ZAR 11.4 million (US$ 1.6 million) to The Permit Group (Proprietary) Limited ("Permit") to enable the acquisition by Permit of 95% of the issued share capital of New Era Life Insurance Company Ltd.
• the acquisition of contract rights in the Limpopo province amounting to ZAR 9.0 million (US$ 1.3 million).

Financing
               Net cash raised from the issue of common stock and a consulting agreement with Claude Guerard, its Chief Executive Officer.

Aspreferred stock of ZAR 336.8 million (US$ 53.7 million) in fiscal 2004 was the result of the capitalization issue to the Brait consortium to enable the acquisition of Aplitec by the Company. The cash distribution and dividend paid to shareholders during fiscal 2004 consist of ZAR 456.0million (US$ 72.7 million) as a result of conditions specifiedthe acquisition of Aplitec and ZAR 35.5 million (US$ 5.1 million) paid to Aplitec shareholders as a dividend in terms of Aplitec's dividend policy at the time. All cash raised from the issue of share capital in fiscal 2003 was due to the issuance of ordinary shares under the Aplitec employee share incentive scheme. The dividend paid during fiscal 2003 was in terms of Aplitec's dividend policy at the time.

               Since we are highly cash generative and maintain large cash reserves (ZAR 405.7million (US$ 54.3 million) at the end of fiscal 2003 and ZAR 503.8 million (US$ 80.3 million) at the end of fiscal 2004), we finance all operations, research and development, working capital, capital expenditure and acquisitions through internally generated cash reserves. We have no debt to service and only require external funding when our pre-funding requirements in the reportKwaZulu-Natal and Eastern Cape provinces exceed the available cash on hand. We have various debt facilities, including a ZAR 500 million (US$ 79.7 million) revolving credit facility.

               We have access to capital from a range of external sources, including share issuances and debt facilities. We take the following factors into account when considering external financing:

               The significant increase in social welfare grant beneficiaries in the KwaZulu-Natal and Eastern Cape provinces may require external financing in the medium to long-term for the pre-funding of these grants payments. We are confident that our cash reserves, current overdraft facilities and access to external financing will be sufficient to fund its medium to long-term activities and expansion plans.

Off-balance Sheet Arrangements
The Company has no off-balance sheet arrangements.

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Capital Expenditures
                Capital expenditures in fiscal years 2004, 2003 and 2002 were as follows:

               We operate in an environment where our contracts for the payment of social welfare grants require substantial capital investment to establish its operational infrastructure when a contract commences. Further capital investment is required when the number of beneficiaries increase to the point where the maximum capacity of the Company’s auditors, Net 1’s independent accountantsoriginal infrastructure is exceeded.

               Our fiscal 2004 spending was mainly due to expansion in all provinces, as we experienced significant growth in the number of customers we have expressed substantial doubtto service. Our fiscal 2003 spending was mainly due to start-up costs in the Eastern Cape Province. The 2002 spending was mainly due to expansion in the KwaZulu-Natal and Limpopo provinces, where we experienced significant growth in the number of customers we had to service.

               Our other business activities require relatively little capital investment. The most notable exception was the capital expenditure incurred to establish the UEPS-based lending initiative within the financial services division during fiscal 2002.

               All our capital expenditures for the past three fiscal years were funded through internally generated funds. We have no outstanding capital commitments at the end of fiscal 2004.

               Capital spending for fiscal 2005 is expected to be incurred primarily in connection with the equipment required to service the increased number of beneficiaries in all provinces. This capital spending is expected to be funded through internally generated funds.

Contingent Liabilities, Commitments and Contractual Obligations
                The following table presents the Company's Contingent Liabilities, Commitments and Contractual Obligations as toof June 30, 2004:

               Our outstanding capital commitments at the Company’s ability to continue as a going concern.end of fiscal years are: 2004 - nil; 2003 - nil and 2002 - $1.2 million. These commitments will be funded from cash generated from operations. There are no other purchase commitments, obligations or specific capital commitments for the next three years.

Critical Accounting PoliciesDividends
Our discussion and analysis offuture dividend policy will depend on our earnings, capital requirements, expansion plans, financial condition and resultsother relevant factors. The future dividend policy also has to comply with the South African Exchange Control Authorities ("Excon") approval of operationsthe Aplitec acquisition, which determines that dividends may be declared by the New Aplitec board of directors only

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if (i) such declaration is based uponapproved by a majority of the holders of New Aplitec B class preference shares, (ii) all loan accounts have been paid by New Aplitec and (iii) such dividends do not exceed 50% of New Aplitec's annual earnings. However, because the New Aplitec board will be appointed by Net1, Net1 will ultimately determine whether any dividends are declared by New Aplitec, subject to the above conditions. Any dividends declared by New Aplitec will be distributed to the holders of A class and B class preference shareholderspro ratain accordance with their respective ownership interests in New Aplitec.

               Aplitec's dividend policy in fiscal 2003 and 2002 was to declare regular annual dividend payments of between 25% to 33% earnings. Aplitec declared a dividend of ZAR 0.15 (US$ 0.015) per share in fiscal 2003 and ZAR 0.11 (US$ 0.01) per share in fiscal 2002.

Acquisitions and Dispositions
               •Disposal of security guarding business: During January 2002, Aplitec sold the assets and liabilities of its security guarding business for a total cash consideration of ZAR 4.913 million (US$ 0.7 million).

               •Acquisition of remaining CPS interests: During January 2003, Aplitec acquired the minority interests in CPS (KwaZulu-Natal), CPS (Northern Cape) and CPS (Northern). These acquisitions consolidated Aplitec's social welfare payment businesses under a single holding company, thus improving operating and tax efficiency. Profits (attributable to the minority interests acquired) were recognized and consolidated from January 1, 2003.

Equity-accounted investment
               On April 1, 2004, Aplitec purchased 43% of the issued share capital of the Permit Group (Proprietary) Limited ("Permit") for $10. A loan of approximately $0.8 million, bearing interest at the current South African prime rate, 11.5% at year end, and with no fixed repayment terms, was made to Permit in April 2004 and the proceeds of this loan were used to purchase 43% of a 95% interest in New Era Life Insurance Company Limited ("New Era"), a provider of various insurance products to the South African market. Aplitec believes that this equity investment will enhance its ability to offer UEPS-based financial services to its card holders.

Employee Benefits
The Company does not provide health or retirement benefits to any of its employees.

Insurance
               The Company annually assesses its risk exposure. During fiscal years 2004, 2003 and 2002, all risks were adequately covered by third party insurers, except where the cost of insurance coverage was considered excessive in relation to the probability and extent of loss. This is true with respect to our cash and cash-in-transit risks, which has become virtually impossible to procure from local and international underwriters.

The main categories of our insurance are:

Critical Accounting Policies
               The Company's annual financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statementsStates GAAP, which requires management to make estimates and assumptions about future events that affect the reported amounts of assets, liabilities, revenue and expenses. On an on-going basis, we evaluate our estimates, including those related to depreciation, amortization, asset valuation allowances, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying valuesamount of assets and liabilities that are not readily apparent fromand disclosure of contingent assets and liabilities. As future events and their effects cannot be determined with absolute certainty, the determination of estimates requires management's judgment based on a variety of assumptions and other sources. Actual results may differ from these estimates under different assumptions or conditions. We believedeterminants such as historical experience, current and expected market conditions and certain scientific evaluation techniques. Management believes that the following critical accounting policies affectare critical due to the degree of estimation required and the impact of these policies on the understanding of the results of our more significant judgmentsoperations.

Deferred Taxation
               The Company estimates its tax liability through the calculations done for the determination of its current tax liability when tax returns are filed, together with assessing temporary differences resulting from the different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities which are disclosed on our balance sheet.

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Management then has to assess the likelihood that deferred tax assets will be recovered from future taxable income. To the extent that Net1 believes recovery is unlikely, a valuation reserve will be created. The carrying value of our net deferred tax assets assumes that it will be able to generate sufficient future taxable income, based on estimates usedand assumptions. Management has considered future taxable income and ongoing feasible tax strategies in determining the need for the valuation allowance, but in the preparation of our financial statements.

Comprehensive Income

SFAS No. 130, “Reporting Comprehensive Income,” establishes standards for the reporting and display of comprehensive income and its componentsevent that we were to determine that it would be able to realize deferred tax assets in the financial statements. As at October 31, 2002, the Company has no items that represent comprehensive income and, therefore, hasfuture, a valuation allowance may not included a schedule of comprehensivebe required which would reduce net income in the financial statements.period that such determination is made.

Recent Accounting Pronouncements

FASB has issued SFAS No. 147, 148Accounts Receivable and 149 but, because they have no relationshipProvision for Doubtful Debts
               The Company maintains a provision for doubtful debts in its micro-lending business resulting from the inability of certain of its clients to make the operationsrequired payments. Our current policy is to provide for the full outstanding amount for all debts which are outstanding for 150 days and longer which as of June 30, 2004 totaled ZAR 52.4 million (US$ 8.4 million), which is a 7.5% increase over the amount outstanding at June 30, 2003 (ZAR 48.8 million or US$ 6.5 million) and a 24.4% increase over the amount outstanding at June 30, 2002 (ZAR 42.1 million or US$ 4.1 million). Net1 considers this policy to be appropriate taking into account factors such as historical bad debts, current economic trends and changes in our customer payment patterns. Should the ability of our clients to make payments when due deteriorate in the future, additional provisions may be required. A significant amount of judgment is required to assess the ultimate recoverability of these receivables, including on-going evaluation of the Company,creditworthiness of each client.

Research and Development
               The Company's business activities and product offerings depend on its proprietary UEPS software. As a result, we are not including a descriptions of these statements and their potential impact on the Company’s operations.

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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). The requirements of SFAS No. 150 apply to issuers’ classification and measurement of freestanding financial instruments, including those that comprise more than one option or forward contract. SFAS No. 150 does not apply to features that are embedded in a financial instrument that is not a derivative in its entirety. SFAS No. 150 is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatory redeemable financial instruments of non-public entities. It is to be implemented by reporting the cumulative effect of a change in an accounting principal for financial instruments created before the issuance date of SFAS No. 150 and still existing at the beginning of the interim period of adoption. Restatement is not permitted. The adoption of this standard is not expected to have a material effect onlarge group of software engineers and developers who are constantly revising and improving the Company’s resultscore UEPS software. We account for the development cost of operations or financial position.

Property, Plant and Equipment

Computer equipment is amortized over five years on a straight-line basis.

Long-Lived Assets

Costs to acquire exclusive license rights to specific technology are considered “Long-Lived” assets and are capitalized as incurred. These costs are amortized on a straight-line basis over five years. Intangible assets are evaluated in each reporting period to determine if there were events or circumstances which would indicate a possible inability to recover the carrying amount. Such evaluation is based on various analyses including assessing the Company’s ability to bring the commercial applications to market, related profitability projections and undiscounted cash flows relating to each application which necessarily involves significant management judgment.

Basic and Diluted Net Income (Loss) per Share

The Company computes net income (loss) per sharesoftware intended for sale in accordance with SFAS No. 128, “Earnings per Share” (SFAS 128).86, "Accounting for Costs of Computer Software to be Sold, Leased, or Otherwise Marketed." SFAS 12886 requires presentationproduct development costs to be charged to expenses as incurred until technological feasibility is attained. Technological feasibility is attained when our software has completed system testing and has been determined viable for its intended use. The time between the attainment of both basictechnological feasibility and diluted earnings per shares (EPS) oncompletion of software development has been short with immaterial amounts of development costs incurred during this period. Accordingly, the faceCompany did not capitalize any development costs in fiscal 2003 or fiscal 2002, particularly because the main part of our development is the income statement. Basic EPS is computed by dividing net income (loss) availableenhancement and upgrading of existing products.

               We account for the costs to common shareholders (numerator)develop software for internal use by the weighted average numberCompany in accordance with Statement of common shares outstanding (denominator)Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use (SOP 98-1), issued by the AICPA. SOP 98-1 requires these costs to be expensed as incurred, except to the extent that these costs are incurred during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the periodapplication development stage. All other costs including stock options, using the treasury stock method, and convertible preferred stock, using the if-converted method. In computing Diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential common shares if their effect is antidilutive.

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Foreign Currency Transactions/Balances

Transactions in currencies other than the U.S. dollar are translated at the rate in effect on the transaction date. Any balance sheet items denominated in foreign currencies are translated into U.S. dollars using the rate in effect on the balance sheet date.

Financial Instruments

The Company’s financial instruments consist of cash, accounts payable, accrued liabilities and advances from a related party. Unless otherwise noted, it is management’s opinion that the Company is not exposed to significant interest, currency or credit risks arising from these financial instruments. The fair value of cash, accounts payable and accrued liabilities and advances from a related party approximates their carrying value due to immediate or short-term maturity of these financial instruments.

Tax Accounting

Potential benefits of income tax losses are not recognizedthose incurred in the accounts until realization is more likely than not.project development and post-implementation stages are expensed as incurred.

The Company had adopted Statement               A significant amount of Financial Accounting Standards No. 109 (“SFAS 109”) as of its inception. The Company has incurred net operating losses as scheduled below:

Pursuant to SFAS 109, the Companyjudgment is required to compute tax asset benefits for net operating losses carried forward. Potential benefitseparate research costs, new development costs and ongoing development costs based as the transition between these stages. A multitude of net operating losses have not been recognized in these financial statements because the Company cannotfactors need to be assured it is more likely than not it will utilize the net operating losses carried forward in future years.

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The componentsconsidered by management, including an assessment of the net deferred tax asset atstate of readiness of the end of December 31, 2003, 2002 and 2001,software and the statutory tax rate, the effective tax rate and the elected amountexistence of the valuation allowance are scheduled below:

Revenue Recognition

The Company recognizes revenue in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” (“SAB 101”). Revenue is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed, and collectability is reasonably assured.

The Company had applied, up until June 30, 2002, Emerging Issues Task Force Issue 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent” (“ETIF 99-19”). The Company sold licenses on behalf of Net 1 Holdings and, acting as an agent, recorded revenue on a net basis in accordance with EITF 99-19. Revenue, up to June 30, 2002, was equal to Net 1 Holdings prior year annual after tax net profit before amortization as certified by its independent auditors.

Results of Operations
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

Management continues to be actively involved in negotiations to secure sufficient equity and/or debt financing to fund Net 1’s business plan.

On April 30, 2003, Net 1 retained the Brait Group to provide advisory services and assistance in order to raise equity and/or debt funding for Net 1. On October 24, 2003, the Company announced that it is completing financial arrangementsmarkets for the securingsoftware. The possibility of approximately $150 million, including amounts from the Brait Consortium. The financing, comprising the capital raising of approximately $53 million and a share issuance in connection with the reinvestment option, of approximately $97 million will enable Net 1 to make an offer to acquire Aplitec, as well as providing working capital to enable Net 1 to expand its operations and develop its internal infrastructure on an international basis. Net 1, through the Brait Group, will raise the capital through sales of its common stock at $0.50 per share.

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Net 1, through the Brait Group, has provided the board of directors of Aplitec with an offer to acquire substantially all the assets and all of the liabilities of Aplitec (excluding ZAR 300 million of cash plus enough cash as is necessary to pay holders of Aplitec shares an additional amount equal to ZAR 0.25 (US $0.04) for each ordinary Aplitec share for which such Aplitec shareholder elects the cash option) for approximately $129 million through a combination of cash and share exchange offer to Aplitec’s shareholders also at a purchase price per share of $0.50. Aplitec is engagedcapitalizing development costs in the sales, maintenance and development of UEPS smart card based products in South Africa and its surrounding territories with revenues of approximately $100 million. Aplitec has approximately 2,100 employees. Completion offuture, within the financing is subject to compliance with regulatory requirements in South Africa and in the United States, including an increase in the authorized capitalization of Net 1 to permit the shares to be issued.

In the short term, management has continued the suspension of various expenses, including its consulting agreement with its chief executive officer, Claude Guerard.

Management continues to be actively involved in negotiations with potential clients in view of reaching two main targets:

• To establish partnership agreements with IT services and financial services entities, which would provide the total technical support requiredcriteria set by Net 1’s licensees to launch and develop their own applications basedSFAS 86 or SOP 98-1, may have a material impact on the FTS and the related UEPS technology and service.
  
  
• To develop Net 1’s licensee network on a worldwide basis. We have granted licenses in Latvia, Burundi, Ghana, Rwanda and Malawi, and are currently in negotiations with potential licensees in other countries of Africa. An Australian organization has approached Net 1 for an FTS license for Australia and New Zealand. Negotiations continue regarding the possible grant of licenses for territories in the Pacific Rim.

Revenue

Net 1 received revenue from Net 1 Holdings from all sales of licenses equal to Net 1 Holdings’ annual after tax net profit before amortization. Net 1 recognized the revenuegroup's profitability in the period when the financial statements of Net 1 Holdings become availablecosts are capitalized, and will report the revenue on a net basis as Net 1 is acting as an agent for Net 1 Holdings pursuant to a Patent and Technology Agreement dated May 3, 2000. Effective July 1, 2002, Net 1 entered into a new Distribution Agreement with Net 1 (Pty), which replaced a previous agreement. Under this Agreement, Net 1 (Pty) markets, sells and implements UEPS systems on behalf of Net 1. Any license fees arising from sales by Net 1 (Pty) are paid to Net 1 via Net 1 Holdings, for which Net 1 (Pty) receives a commission of 9.5% of all license fees paid by the customer for the duration of the license’s existence. This fee is only applicable for new licenses and upgrades of existing licenses.

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Net 1’s revenue decreased by $116,548 in 2003 from $157,565 to $41,017. This is due to a decrease in license fees and an increase in related expenses, as shown in the following chart:

The loss of license fees from the CIS States is due to a dispute with the local system operator, BGS Smart Card Systems Ges.m.b.H., who claims that the revocation of the European FTS patent relieves it from the obligation to pay licensee fees to Net 1. Net 1 is currently evaluating its options on this matter. The loss of license fees from Latvia relates to the issuing of a credit note during Net 1 Holdings fiscal 2002 for an invoice raised during Net 1 Holdings fiscal 2001 for $50,000 as a result of a dispute between Net 1 and the system operator in Latvia, Netcard. The parties agreed to waive the license fees raised by Net 1 Holdings during fiscal 2001 and that an invoice for license fees totaling $50,000 for fiscal 2002 should be raised. The net effect of the credit note and the new invoice raised is therefore zero.

The increase in general and administrative expenses was due to payments totaling $3,325 to Net 1 (Pty) under the Distribution Agreement, as well as costs related to Net 1’s patent registrations.

Administrative Expenses

Administrative expenses decreased in 2003 from $324,507 to $322,886. This was due to the following:

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• Travel expenses decreased by $24,530 due to management’s efforts to minimize operating expenses.
  

Net Loss

The significant decrease in revenue combined with the slight reduction in administrative expenses resulted in a net loss of $281,869 in 2003. This compares with a net loss of $166,942 for 2002. The potential benefits of income tax losses, amounting to $95,880 in 2003 and $56,541 in 2002, have not yet been recognized, and there is significant uncertainty as to whether we will realize these benefits.

Liquidity and Capital Resources

Cash used for operating activities in 2003 was $136,399, compared to $54,468 in 2002. This increase was primarily due to higher operating losses, partially offset by an increase in accounts payable and accrued liabilities due to the postponement of the payment of consulting fees to our Chief Executive Officer.

Cash from financing activities was $127,802 in 2003, compared to cash used in financing activities of $91,703 in 2002. This reversal is due to the cash flow constraints experienced by Net 1 during 2003 and the subsequent payment of $36,099 of Net 1’s administrative expenses by Net 1 Holdings, which Net 1 now owes to Net 1 Holdings. This amount does not accrue interest and is due on demand.

The primary source of Net 1’s cash has been through the sale of equity. Net 1 anticipates raising $52.8 million from the sale of 105,661,428 shares of Net 1 common stock to the Brait Consortium during the current fiscal year. Currently, Net 1 does not have available any established lines of credit with banking institutions.

Net 1 believes that its current cash position, as well as payments due from Net 1 Holdings, are not sufficient to meet its cash needs on a short-term basis or to implement any part of its business plan. Additionally, Net 1’s management believes that it is currently unable to meet its long-term liquidity needs. Should the proposed transactions not be completed, Net 1 expects that it will be forced to cease all business operations by the end of the second quarter of 2004.

If the proposed transactions discussed above are not completed, Net 1 may not be able to continue as a going concern beyond the second quarter of 2004.

Contingent Liabilities, Commitments and Contractual Obligations

Net 1 does not have any capital commitments. Net 1’s only contractual obligations and contingent liabilities arise from its appointment of an affiliate of the Brait Group as its financial advisor in connection with the Aplitec acquisition. For its services, the Brait Group will receive a fee based on a percentage of the capital raised to finance the Aplitec acquisition, in addition to a corporate finance fee of ZAR 1.15 million (US $170,750). If the proposed transactions are consummated, the Brait Group will be paid a fee of approximately $3.9 million. The Brait Group has the option of applying up to $2.5

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million of its capital raising fee to purchase 5 million shares of Net 1 common stock at a purchase price of $0.50 per share.

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

During 2002, management was actively involved in negotiations to secure sufficient equity and/or debt financing to fund Net 1’s business plans. On October 23, 2002, Net 1 retained Investec Limited (“Investec”), an international merchant banking group, to provide corporate finance services and assistance in order to raise equity and/or debt funding for Net 1. Subsequently, on February 12, 2003, Investec and Net 1 mutually agreed to terminate the engagement. During 2002, Net 1 continued to pursue various negotiations to secure necessary funding either through equity/debt financing or a joint venture arrangement to develop its business.

In the short term, management has postponed various expenses including the consulting agreement with Claude Guerard and its Outsourcing Agreement with Net 1 (Pty).

In October 2002, Net 1 cancelled its Outsourcing Agreement with Net 1 (Pty) and both companies entered into a Distribution Agreement with an effective date of July 1, 2002. Net 1 (Pty), at its entire discretion and when it deems appropriate and under the terms and conditions as stipulated in the Distribution Agreement, will provide Net 1, with marketing, sales, administrative and technical support as an accredited UEPS integrator for any country in the world other than South Africa, Namibia, Botswana, Lesotho, Swaziland, Mozambique and Zimbabwe. Net 1 will pay Net 1 (Pty) an amount equal to 9.5% of the license fee paid by the customer for the duration of the license’s existence. This fee is only applicable for new licenses and upgrades of existing licenses. Net 1 also settled its indebtedness to Net 1 (Pty) for services rendered up to July 2002 for an amount of $50,000.

Management continues to be actively involved in negotiations in view of reaching two main targets required for the future of Net 1:

• To establish a partnership agreement with IT services and financial services entities that would provide the total technical support required by Net 1’s licensees to launch and develop their own applications based on the FTS patent and the related UEPS technologies and services. Net 1’s first partnership agreement was the Distribution Agreement which became effective July 1, 2002 with Net 1 (Pty), for any country in the world except South Africa and its surrounding territories.
  
  
• To develop Net 1’s licensee network on a worldwide basis. We have granted licenses in Latvia, Burundi, Ghana, Rwanda and Malawi, and are currently in negotiations with potential licensees in several countries of Africa. An Australian organization has approached Net 1 for an FTS license for Australia and New Zealand. Negotiations continue regarding the possible grant of licenses for territories in the Pacific Rim.
  

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Revenue

Net 1 is still in its development stage, and principal activities have produced revenues of $157,673, which represent license fees collected by Net 1 Holdings during 2001. License fees collected by Net 1 Holdings, during calendar year 2002 total $41,017 and have been accounted for during Net 1’s 2003 fiscal year.

Net 1 receives revenue from Net 1 Holdings from all sales of licenses equal to Net 1 Holdings annual after tax net profit before amortization as certified by its auditors in its annual financial statement. Net 1 recognized the revenue in the periodperiods when the audited financial statements of Net 1 Holdings become available and will report the revenue on a net basis as Net 1 is acting as an agent for Net 1 Holdings as per the Patent and Technology Agreement dated May 3, 2000.

Administrative Expenses

Administrative expenses have decreased $353,088 from $677,595 in the year 2001 to $324,507 during the year 2002. This decrease resulted primarily from a reduction in business development expenses and travelcapitalized costs as well as the cancellation of the above-referenced Outsourcing Agreement with Net 1 (Pty). The fees paid under this Agreement reduced from $356,938 in 2001 to $75,047 in 2002 (prior to its cancellation). Management intends to keep operating expenses at the lowest possible level by developing outsourcing policies.

Other

Management continues its efforts to secure the funding required to exploit the FTS/UEPS technology on a worldwide basis. During 2002, Net 1 held meetings with Jones Gable Securities, Gruntal Securities and Thompson Kernaghan to explore possible funding opportunities. None of these meetings were successful.

Strategic alliances, joint ventures and/or investments in companies having expertise in IT services, financial services and proven market penetration are currently being explored.amortized.

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

Results of Operations

In 2001 and 2000, management of Net 1 was intensively involved in negotiations to secure sufficient equity and/or debt financing to fund Net 1’s business plans. In 2001, management suspended payments under the Consulting Agreement with its chief executive officer, Claude Guerard and terminated its Outsourcing Agreement with Net 1 (Pty), Net 1’s UEPS integrator for the Central Europe, Middle East and African regions.

Management sought to enter into strategic alliances to achieve two main targets:

Revenue

During 2001 and 2000, Net 1 was in its development stage. Planned principal activities did not generate revenues in 2001 or 2000.

Net 1 received revenue from Net 1 Holdings from all sales of licenses equal to Net 1 Holdings annual after tax net profit before amortization as certified by its auditors in its annual financial statement. Net 1 recognized the revenue in the period in which the audited financial statements of Net 1 Holdings became available and reported such revenue on a net basis as Net 1 acted as an agent for Net 1 Holdings as per the Patent and Technology agreement dated May 3, 2000.

Net 1 Holdings did not receive license usage fees during calendar years 2001 or 2000 from FTS/UEPS licensees. Consequently, Net 1 was not able to generate any fees from these licenses.

Administrative Expenses

Administrative expenses increased $341,385 from $336,210 in 2000 to $677,595 during 2001. The increase resulted primarily from an increase in business development expenses, administrative costs, consulting fees, and fees paid to Net 1 (Pty) pursuant to an Outsourcing Agreement, under which Net 1 (Pty) provided certain advertising, marketing, bookkeeping and technical advisory services to Net 1. Management succeeded in keeping operating expenses at the lowest possible level during 2000 and 2001 by outsourcing for necessary services.

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Other

In October 2000, Net 1 raised $1,000,000 by issuing 250,000 shares at $4.00 per share by way of a private placement.

Liquidity and Capital Resources

The primary source of Net 1’s cash has been through the sale of equity. As of December 31, 2002, Net 1 did not have available any established lines of credit with banking facilities.

Net 1 recognized revenue of $157,673 for the fiscal year ended December 31, 2002 from license fees collected through December 31, 2001 by Net 1 Holdings. For the fiscal year ending December 31, 2003, Net 1 expects to receive $41,017 from sales of licenses.

Net 1’s cash position decreased $37,235 from $57,289 at December 31, 2001 to $20,054 at December 31, 2002. The cash was used to fund operating expenses.

Net 1 anticipates raising additional funds from the sale of equity during 2003 and 2004. To the extent raised, such capital will be used for working capital.

Net 1 believes that its current available cash position and revenues due from Net 1 Holdings is sufficient to meet its cash needs on a short-term basis, but Net 1 will need a substantial amount of additional capital to pursue its business plans in any meaningful manner.

Net 1’s ability to continue as a going concern is dependent upon Net 1’s ability in the near future to (i) raise additional funds through equity financings, loans or joint venture agreements, involving affiliates, controlling shareholders, and related or unrelated parties, and (ii) further develop markets for its products.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.RISK

Market               The Company seeks to reduce its foreign currency exposure through a policy of matching, to the extent possible, assets and liabilities denominated in foreign currencies. In addition, the Company uses financial instruments in order to economically hedge its exposure to exchange rate and interest rate fluctuations arising from its operations. The Company is also exposed to credit risks.

               All risks described above and how the Company seeks to protect itself is discussed below.

Foreign Exchange Risk

               New Aplitec is subject to foreign currency exchange risk because it purchases inventories that it is required to settle in foreign currencies, primarily the Euro and United States dollar. New Aplitec has used forward contracts in order to limit its

44

exposure to the ZAR/ USD and ZAR/ EUR exchange rate fluctuations from foreign currency transactions. As of June 30, 2004, 2003 and 2002, the outstanding foreign exchange contracts are as follows:

Translation Risk

               Translation risk relates to the risk that the results of the Company will vary significantly as the Company reporting currency is the US$ and the majority of its operations are transacted in ZAR. The US$:ZAR exchange rate has fluctuated significantly over the past 3 years and it is impossible to determine future exchange rates and the impact that these rates will have on operations.

Interest Rate Risk

               As a result of its normal borrowing and leasing activities, Aplitec's operating results are exposed to fluctuations in interest rates, which Aplitec manages primarily through its regular financing activities. Aplitec generally representsmaintains limited investment in cash equivalents and has occasionally invested in marketable securities. Typically, for every 1% increase in the South African Reserve Bank's REPO rate, Aplitec's interest expense on pre-funding social welfare grants in the KwaZulu Natal and Eastern Cape provinces increases by US$10,550 per month, while interest earned per month on any surplus cash increases by US$11,852 per US$14.4 million (ZAR 100 million).

Credit risk

               Credit risk relates to the risk of loss that may result from the potential change in value of a financial instrumentAplitec would incur as a result of fluctuationsnon-performance by counterparties. Aplitec maintains credit risk policies with regard to its counterparties to minimize overall credit risk. These policies include an evaluation of a potential counterparty's financial condition, credit rating, and other credit criteria and risk mitigation tools as deemed appropriate.

               In regards to credit risk on financial instruments, Aplitec maintains the policy to enter into such transactions only with South African and European financial institutions that have a credit rating of BBB or better, as determined by Standard & Poor's.

Microlending Credit Risk

               The Company is exposed to credit risk in interest rates and market prices. We have not traded or otherwise transacted in derivatives not do we expectits microlending activities, which provides unsecured short-term loans to do so in the future subject to adjustments in policy considerations as they relate to the possiblequalifying customers. Aplitec acquisition. We have established policies and internal processes related to the managementmanages this risk by assigning each prospective customer a "creditworthiness score," which takes into account

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a variety of market risks which we will use in the normal course of our business operations.

Interest Rate Risk

The fair value of long-term debt is subject to interest rate risk. As we currently do not have any long-term debt, and do not anticipate incurringfactors such as part of our current operations, we believe a change in interest rates would not have a material impactemployment status, salary earned, other debts and total expenditures on our financial condition, future results of operations or cash flows.normal household and lifestyle expenses.

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Foreign Currency Exchange Risk

Our revenues to date have been from Net 1 Holdings and have been denominated in US dollars. In the future as our business develops, our results of operations may be impacted by the fluctuating exchange rates of foreign currencies. Unfavorable changes in the exchange rate of a foreign currency against the US dollar will result in lower revenue when translated into US dollars. If in the future, currency fluctuations were to become significant, we would engage in hedging activities to reduce our foreign currency exposure, including the possible use of foreign exchange contracts.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See "IndexInformation in response to Financial Statements" for the financial statements includedthis item is provided elsewhere in this Form 10-K.report.

Supplementary Financial Information.

The following table presents selected quarterly information for the periods indicated. This information has been derived from the Company’s unaudited quarterly financial statements and audited year-end financial statements, which in the opinion of management includes all adjustments necessary for a fair presentation of such information. The quarterly per share later presented below was calculated separately and may not sum to the annual figures presented in the year-end financial statements. These operating results are also not necessarily indicative of results for any future period.

Three Months Ended

(Diluted loss per share has not been presented as the result is anti-dilutive.)

(Diluted loss per share has not been presented as the result is anti-dilutive.)

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not Applicable.               Net1's Board of Directors annually considers the selection of the Company’s independent auditors. On June 28, 2004 the Board decided to no longer engage Manning Elliot Chartered Accountants as Net1's independent auditors and engaged Deloitte and Touche South Africa (“Deloitte”) to serve as Net1's independent auditors for 2004.

               Fisher Hoffman audited Aplitec’s financial statement for the two years ended June 30, 2003 and 2002. Fisher Hoffman's reports on Aplitec's consolidated financial statements for the 2003 and 2002 fiscal years did not contain an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles, except as noted therein with regards the segment report and earnings per share disclosures.

               During Aplitec's 2003 and 2002 fiscal years and through November 30, 2003 (the date of Aplitec's annual report adjusted for the US GAAP adjustments for the year ended June 30, 2003), there were no disagreements with Fisher Hoffman on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which, if not resolved to Fisher Hoffman's satisfaction, would have caused them to make reference to the subject matter in connection with their report on Aplitec's consolidated financial statements for such years,; and there were no reportable events, as listed in Item 304(a)(1)(v) of SEC Regulation S-K.

               Aplitec provided Fisher Hoffman with a copy of the foregoing disclosures. Attached as Exhibit 16 to this Form 10-K is a copy of Fisher Hoffman's letter dated September 28, 2004 stating its agreement with such statements.

               Deloitte was engaged by Aplitec to advise on the application of accounting principles regarding (i) the factors relevant to the identification of the accounting acquirer in the proposed transaction, pursuant to which the Company through New Aplitec, would acquire substantially all of the assets and liabilities of Aplitec, and (ii) the classification of certain securities issued by New Aplitec (as part of the proposed transaction referred to above) as either equity or liability in the consolidated financial statements of the Company if Aplitec were to be the accounting acquirer. During Aplitec’s 2003 and 2002 fiscal years and through June 28, 2004, Aplitec did not consult Deloitte with respect to the application of accounting principles to any other specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on Net1's consolidated financial statements, or any other matters or reportable events listed in Items 304(a)(2)(i) and (ii) of SEC Regulation S-K.

ITEM 9A. CONTROLS AND PROCEDURES

EvaluationDisclosure Controls and Procedures. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission (“SEC”). Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosure.

               Our management, including the CEO and CFO, does not expect that our disclosure controls or our internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. The inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies and procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Within               As of the 180 days prior toend of the filing date ofperiod covered by this report, our management, with the Companyparticipation of our chief executive officer and chief financial officer, carried out an evaluation of the effectiveness of the design and operation of itsour disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. This evaluation was done13a-15 promulgated under the supervision and with the participation of the Company’s Principal Financial Officer, Mr. David Anthony.Exchange Act. Based upon this evaluation, heour chief executive officer and our chief financial

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officer concluded that the Company'sour disclosure controls and procedures arewere (1) designed to ensure that material information relating to our company is accumulated and made known to our management, including our chief executive officer and chief financial officer, in a timely manner, particularly during the period in which this report was being prepared and (2) effective, in gathering, analyzing and disclosingthat they provide reasonable assurance that information neededwe are required to satisfydisclose in the Company's disclosure obligationsreports that we file or submit under the Exchange Act.

Changes in internal controls

There were no significant changesAct is recorded, processed, summarized and reported within the time periods specified in the Company'sSEC’s rules and forms.

Internal Controls.There has been no change in our internal controlscontrol over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act) during our fiscal year ended June 30, 2004, that has materially affected, or in other factors that could significantlyis reasonably likely to materially affect, those controls since the most recent evaluation of such controls.our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

               Not applicable.

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth the names, ages and positions of our executive officers and directors. Directors will be elected at our annual meeting of shareholders and serve for one year or until their successors are elected and qualify. Officers are elected by the board of directors and their terms of office are, except to the extent governed by employment contract, at the discretion of the board of directors.

Claude Guerard, the former Chief Executive Officer and Director and David Anthony, the former Secretary, resigned their positions effective June 28, 2004.

Executive officers are appointed by, and serve at the discretion of, Net1's board of directors.

Biographical Information

Dr. Serge Christian Pierre Belamanthas been a director of Net 1Net1 since its inception in May 1997. From May 1997, toand was its chief executive officer until October 2000, Mr. Belamant also served as Chief Executive

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Officer of Net 1.2000. From June 1997 to present, Mr.Dr. Belamant has also served as Chief Executive Officerchief executive officer and a director of Net 1 Applied Technology Holdings Limited, a company listed on the Johannesburg Stock Exchange.Aplitec. From 1996 to 1997, Mr.Dr. Belamant served as a consultant in the development of COPAC (Chip Off-Line Pre-Authorized Card), a product currently being marketed internationally by Visa International. From October 1989 to September 1995, Mr.Dr. Belamant served as the managing director of Net 1 Products (Pty) Ltd.,Net1 Investment Holdings (Proprietary) Limited, a privately owned South African company specializing in the development of advanced technologies in the field of transaction processing and payment systems. Mr.Dr. Belamant also serves on the board of a number of other companies that are closely related to the smart card business worldwide. Mr.business. Dr. Belamant spent ten years working as a computer scientist for Control Data Corporation where he won a number of international awards. Later, he was responsible for the design, development, implementation and operation of the Saswitch Automated Teller MachineATM network in South Africa that rates today as the third largest ATM switching system in the world. Mr.Dr. Belamant has patented a number of inventions besides the FTS ranging from biometrics to gaming as well as the FTS. Mr.related inventions. Dr. Belamant has more than twenty years of experience in the fields of operations research, security, biometrics, artificial intelligence and on-line and off-line transaction processing systems. Serge Belamant is the non-executive Chairman of the Board of the Company.

Claude Guerard has served as our director since August 1998 and as CEO since October 2000. From December 1996 to October 1999, Mr. Guerard served as Vice President of Gemplus S.C.A., a company in the smart card industry. During this period, Mr. Guerard also served as the Chief Executive Officer of Gemplus' South African division, Chief Executive Officer of Gemplus Gmbh, and general manager of Gemplus' Central and Eastern Europe division. From 1990 to 1996, Mr. Guerard was Chief Executive Officer and Chairman of AM International France, a subsidiary of AM International Corp., a Chicago based multinational graphics and printing company. Mr. Guerard also has sales and management experience in computer/technology and related industries having worked for 13 years at IBM and 8 years with Nashua Corp., a company engaged in the sales and service of office equipment.

David Anthony has served as Net 1's Secretary and Treasurer since May 1997. From 1991 to 1997, Mr. Anthony was the sole proprietor of an independent financial consulting firm specializing in structuring and funding emerging growth companies, primarily in North America. Previously, from 1986 to 1991, Mr. Anthony was the founder of Professional Canadian Investment Group (Procan), a venture capital firm based in Vancouver, British Columbia.

The Board of Directors met in meetings or acted pursuant to unanimous written consent on four occasions during the past twelve months.

Board Committees: We do not as yet have an audit committee or a compensation committee and accordingly, the Board of Directors as an entirety constituted Net 1’s audit committee. None of the members of our Board of Directors qualify as an “audit

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committee financial expert.” However, as and when we elect independent directors, we expect to organize these committees.

Assuming the acquisition of Aplitec, Net 1 will take all steps necessary to increase the size of its board of directors to 10 members and to elect three nominees of the Brait Consortium. After the closing of the proposed transactions, Net 1’s board will consist of 10 members, including, among them, Dr. Serge Belamant, who currently is Net 1’s chairman of the board and the chief executive officer of Aplitec, and Herman Kotze, who is currently the financial director of Aplitec. Mr. Claude Guerard will resign as Chief Executive Officer of Net 1, but he may continue as a director after completion of the proposed transactions.

Net 1 intends to appoint a number of independent directors to its board prior to the consummation of the proposed transactions. If any independent director becomes unable to serve prior to closing, his or her successor will be nominated by the remaining independent directors. Future vacancies of independent directors between annual meetings will be filled by a majority vote of Net 1’s board of directors.

Given the limited number of personnel of Net 1 and its expectations as to completion of the acquisition of Aplitec, the adoption of an ethics policy will be formulated at that time.

Employment Agreements.

Serge Christian Pierre Belamant and Andre Peter Mansvelt. Since Net 1's inception in May 1997, it was decided that no employment agreement would be entered into between Serge Christian Pierre Belamant or the late Andre Peter Mansvelt and Net 1 until the funding necessary to operate the company would be secured. Although Mr. Belamant continues to perform his duties as the non executive Chairman of Net 1, he has not been remunerated to date in any form whatsoever.

Claude Guerard. Our majority shareholder, Net 1 Holdings S.a.r.l. entered into a consulting and advisory agreement with Mr. Guerard on October 1, 1999. The term of the agreement was to extend from October 1999 to January 2000. The agreement was extended for two further terms to January 2001 and January 2002. Currently, the agreement is on a month-to-month basis. In this agreement, Net 1 Holdings S.a.r.l. agreed to pay Mr. Guerard $12,500 per month. Mr. Guerard was responsible for the restructuring of the Company and now provides general management services. On October 25, 1999, Net 1 Holdings S.a.r.l. assigned to the Company all rights and liabilities under the consulting agreement. In 2002, we paid Mr. Guerard $12,500 under this agreement and postponed payments of $137,500, which we continue to owe. In 2003, we postponed payments of $150,000 to Mr. Guerard, which we continue to owe.

Executive Officers of Net 1 Upon Completion of Aplitec Acquisition:

The following table sets forth the names, ages and positions of each of Net 1’s executive officers upon completion of the proposed transactions. Mr. Guerard will step down as CEO but may continue as a non-executive director.

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Executive officers will be appointed by, and serve at the discretion of Net 1’s board of directors.

Herman Gideon Kotzeis currently the chief financial directorofficer, treasurer and secretary of Aplitecthe Company and a member of the AplitecNet1 executive committee. Mr. Kotze is a Chartered Accountant who joined Aplitec in December 1998 as a strategic financial analyst. He was appointed to the board as Group Financial Director in January 2000. Mr. Kotze served his articles from 1993 to 1997 at KPMG in Pretoria, where he was the audit manager for several major corporations in the manufacturing, mining, retail and financial services industries. During 1998, he joined the Industrial Development Corporation of South Africa Limited (“IDC”("IDC") as a business analyst. His main duties at the IDC were the evaluation and investigation of ventures requiring funding from the IDC, from small manufacturing concerns to huge multinationallarge-scale projects, as well as the structuring and implementation of loan and equity products for these concerns. He was appointed to the board of Net1 on June 7, 2004.

Brenda StewartAnthony Charles Ballhas been the chief executive of the Brait Group since March 2000. In this capacity, he led the raising and governance of the Brait Group's private equity funds and is currentlyresponsible for a directornumber of Net 1 Investment Holdingsthe Brait Group's private equity investments. Prior to assuming this current position, Mr. Ball served as joint Deputy Chairman of the Brait Group from 1998 to March 2000. Prior to joining Brait, Mr. Ball was the chief executive of Capital Partners, which was the predecessor company to Brait and Net 1 Holdings. Shewhich pioneered the private equity market in South Africa, from 1991 to 1998. Mr. Ball began his career with Deloitte & Touche Consulting (1986-1991), where he co-founded its Strategy Group. Mr. Ball is also a member of the board of Brait

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S.A., Brait South Africa Limited, New Aplitec, Afgri Limited, the Reclamation Group (Pty) Limited and Shoe City (Pty) Limited. He was appointed to the board of Net1 on June 7, 2004.

Chad Leonard Smarthas been a principal of Brait's Private Equity Funds, where he has been involved in numerous private equity transactions. Mr. Smart joined Brait Private Equity in 1998. Prior to assuming his current position, Mr. Smart was a Manager at Pricewaterhouse from 1995 to June 1998, where he covered a full spectrum of financial services activities including mergers and acquisitions. Mr. Smart is qualified in South Africa as a Chartered Accountant and is also a Chartered Financial Analyst. He is a member of the board of Brait South Africa Limited, New Aplitec and the Reclamation Group (Pty) Limited. He was appointed to the board of Net1 on June 7, 2004.

Brenda Stewartis currently the senior vice-president of marketing and sales for the Company and a member of the Net1 executive committee. Mrs. Stewart joined Aplitec in 1997 and has worked for the last 20 years with Dr. Belamant while at Volkskas Industrial Bank, SASWITCH, Net 1Net1 Southern Africa, Net 1Net1 Solutions and Net 1 (Pty).Net1 Investment Holdings (Proprietary) Limited. Her primary function is to manage all marketing and sales activities for the Aplitec Group.Company. Her secondary function is to oversee implementation and operation of country-wide projects, such as Malawi and Mozambique, as well as pension and welfare systems. Her skills involve in-depth knowledge of marketing sales, project management, operations, implementation, maintenance/repair, customer support, financial management, administration and tax, as well as a vast understanding of the UEPS technology.

Nitin Somais the senior vice president of information technology for the Company and a member of the AplitecNet1 executive committee. Mr. Soma joined Aplitec in 1997, specializing in transaction switching and interbank settlements. He has represented Nedcor Bank in the development of technical specifications for the South African Interbank Standards. He is also responsible for the ATM settlement process to balance ATMs with the host as well as other card users. Mr. Soma designed the Stratus Back-End System for Aplitec.

COMPLIANCE WITH SECTION               There is no family relationship between any of the officers and directors.

               The Board of Directors met in meetings or acted pursuant to unanimous written consent on twelve occasions during the past twelve months.

               Board Committees: We do not as yet have an audit committee or a compensation committee and accordingly, the Board of Directors as an entirety constituted Net1's audit committee. None of the members of our Board of Directors qualify as an "audit committee financial expert." However, as and when we elect independent directors, we expect to organize these committees.

               All the employees of the Company are employed by New Aplitec and are bound by the New Aplitec Code of Ethics.

Employment Agreements.

Dr. Serge Christian Pierre Belamant and Andre Peter Mansvelt. Since Net1's inception in May 1997, it was decided that no employment agreement would be entered into between Dr. Serge Christian Pierre Belamant or the late Andre Peter Mansvelt and Net1 until the funding necessary to operate the company would be secured. Dr. Belamant performs the duties of the executive Chairman of Net1

               The Company will enter into employment agreements with each of Dr. Belamant, Herman Kotze, Brenda Stewart and Nitin Soma, which agreements will set forth certain terms and conditions of these individuals' employment, including the amount and form of their compensation. Otherwise, the form and amount of compensation that we will pay to each of our executive officers in any future period will be determined by the compensation committee, when constituted, of the Company's board of directors.

Compliance with Section 16(a) OF THE SECURITIES EXCHANGE ACT OFof the Securities Exchange Act of 1934

Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to the Company under Rule 16a-3(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") during the fiscal year ended December 31, 2003June 30, 2004 and Forms 5 and amendments thereto furnished to the Company with respect to the fiscal year ended December 31, 2003,June 30, 2004, as well as any written representation from a reporting person that no

32 

Form 5 is required, the Company is not aware of any person that failed to file on a

50

timely basis, as disclosed in the aforementioned Forms, reports required by Section 16(a) of the Exchange Act during the fiscal year ended December 31, 2003.June 30, 2004.

ITEM 11. EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table sets forth information relating to all compensation awarded to, earned by or paid by us during the last fivethree fiscal years, to: (a) our Chief Executive Officer; and (b) each of our fourthree most highly compensated executive officers: