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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

  x   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2004

OR

  ¨  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________                          

Commission file number: 000-31203

NET 1 U.E.P.S. TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)

President Place, 4^th Floor, Cnr. Jan Smuts and Bolton Avenue
Rosebank, Johannesburg, South Africa
(Address of principal executive offices, including zip code)

Registrant's telephone number, including area code: 27-11-343-2001

Securities registered pursuant to section 12(b) of the Act:
None

Securities registered pursuant to section 12(g) of the Act:
Common stock, par value US$0.001 per share

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act)
Yes  ¨  No  x  

State registrant's revenues for the year ended June 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 August 31, 2004 (US$1.25): US$215,502,361

APPLICABLE ONLY TO CORPORATE ISSUERS

The number of shares outstanding of the registrant's Common Stock, par value US$.001 per share (the "Common Stock"), as of August 31, 2004, was 140,267,157.

DOCUMENTS INCORPORATED BY REFERENCE

Risk Factors included in our Proxy Statement/Prospectus, File No. 333-112463, filed on 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.

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 I

ITEM 1. DESCRIPTION OF BUSINESS

Company History

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 distribution of social 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 their card in this province has increased from 0% prior to 2003 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 smart cards, we also sought to expand the range of products and services available to smart card holders. In 2001, we developed a suite 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 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). 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 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 provider of technologies and systems that create a secure and affordable transacting channel between formal businesses and the "un-banked" and "under-banked" populations of developing countries who have no or limited access to traditional 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 underdeveloped 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 corporate 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 African Reserve Bank (Labour Markets and 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 the bank account holders.

               Limited Infrastructure Needs. The biggest differentiating factor between our system and conventional banking is our system's ability to operate in an off-line manner, virtually eliminating the need for expensive communications infrastructure. Consequently, our UEPS enables us to penetrate the most underdeveloped or remote rural areas where the lack of 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.

               Improved 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 formal bank account.

               Security Features. Our system offers enhanced security in the form of:

• Biometric fingerprint identification as an alternative to personal 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.

               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 withdrawals, retail spending, debit orders, money transfers, prepaid facilities, savings and

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

• 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 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 correct beneficiary receives the intended payment and prevents the inclusion of duplicate entries in the data base. In addition, we undertake information management relating to payment status on behalf of our customers, and the UEPS is able to trace each transaction so that our customer can audit and otherwise verify transactions.

               As the UEPS is electronically based, it provides our corporate customers with opportunities to reduce costs that relate to administration and cash management, insurance of cash, transportation of cash, bank charges, the need to have large sums of cash on the premises and, in the case of central banks, the printing of currency. The removal of the financial 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 funeral and medical insurance, loans, etc. through formal financial organizations such as banks and insurance companies which would otherwise be unavailable. The wallet on a smart card can also be restricted as to how certain funds are used. This is particularly useful where our UEPS is used to implement loyalty schemes or other 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 method through which funds can be transferred from one smart card to another in a secure and off-line manner. The term "off-line" refers to transactions that are effected without the need to contact or communicate with the card issuer when the transactions occur, as the cards themselves perform the authorizations required. The FTS patent also describes how cards can be loaded or re-loaded with funds and how these can be redeemed for value in either 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.

               S2S 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 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.

               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

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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.

               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, we 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 source of revenue in the medium to long-term, as the key to our operations in Europe is based on our know-how and ability to exploit the technology rather than on its proprietary right. Accordingly, while we are disappointed in this ruling, it has not and is not expected to have a material adverse effect on us 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.36,788 on July 25, 2000. It currently remains in full force and effect, and we are not aware of any challenges to its enforceability.

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ITEM 2. PROPERTIES

               The Company does not own any administrative or manufacturing facilities. The Company leases properties throughout the Republic of South Africa ("RSA") and its corporate head office is 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 segment) throughout the RSA. The leases expire at various dates through to the year 2007.

ITEM 3. LEGAL PROCEEDINGS

               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 the subject.

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

               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:

20

PART II

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

               There is currently limited public trading of Net1's common stock on the OTC Bulletin Board under the symbol NUEP. As of August 31, 2004, the price per share of Net1's common stock quoted on the OTC Bulletin Board was US$1.25 per share and, there were 66 shareholders of record of our common stock. The Company's common stock traded on the Pink Sheets of the National Quotation System under the symbol NUEP from February 2000 to mid-December 2000. In mid-December 2000, the Company's common stock again traded on the OTC Bulletin Board as the Company complied with the OTC Bulletin Board Eligibility.

               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.