AFFINITY TECHNOLOGY GROUP INC - 10-K Annual Report

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

FORM 10-K

(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________.

Commission file number 0-28152

Affinity Technology Group, Inc.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of incorporation or organization)

57-0991269
(I.R.S. Employer Identification No.)

1053 B Sparkleberry Lane Extension
Columbia, SC 29223
(Address of principal executive offices)
(Zip code)

(803) 758-2511
(Registrant's telephone number, including area code)

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 $.0001 per share
(Title of class)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]

1

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not 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. [ ]

Indicate by check mark whether the registrant is an accelerated filer.
Yes [ ] No [ X ]

The aggregate market value of the Registrant's Common Stock held by
non-affiliates of the Registrant was approximately $2,150,000 as of June 30,
2004. For purposes of such calculation, persons who hold more than 10% of the
outstanding shares of Common Stock, directors and officers of the Registrant and
certain of their immediate family members have been treated as affiliates. This
determination is not conclusive.

There were 42,215,096 shares of the Registrant's Common Stock outstanding
as of March 15, 2005.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the Registrant's proxy statement with respect to the
2005 Annual Meeting of Stockholders of the Registrant have been incorporated by
reference herein.

2

Item 1 of this Form 10-K entitled "Business" and Item 7 of this Form 10-K
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Forward-looking statements are inherently uncertain and
actual results could differ materially from those expressed or implied by the
forward-looking statements. These forward-looking statements should be
considered in the context of the business risks set forth below in Item 1 of
this report under the caption "Business Risks."

Part I

Item 1. Business

Affinity Technology Group, Inc. (the "Company") was formed to develop and
market technologies that enable financial institutions and other businesses to
provide consumer financial services electronically with reduced or no human
intervention. Products and services previously offered by the Company include
its DeciSys/RT(R) loan processing system, which automated the processing and
consummation of consumer financial services transactions; the Affinity Automated
Loan Machine (the ALM), which allowed an applicant to apply for and, if
approved, obtain a loan in as little as ten minutes; the Mortgage ALM, which
allowed an applicant to apply for a mortgage loan; e-xpertLender(R), which
permitted a financial institution to make automated lending decisions through
its call centers and branches; iDEAL, which permitted automobile lenders to make
automobile lending decisions for loan applications originated at automobile
dealers; and rtDS, which permitted lenders to deliver credit decisions to
applicants over the Internet. Due to capital constraints, the Company has
suspended all efforts to further develop, market and operate these products and
services. The Company's last processing contract terminated in late 2002, and
the Company has no plans in the near term to engage in further sales or other
activities related to its products or services, other than to attempt to license
certain of the patents that it owns. Currently, the Company's business
activities consist exclusively of attempting to enter into license agreements
with third parties to license the Company's rights under certain of its patents.

In conjunction with its product development activities, the Company applied
for and obtained three patents. The Company has been granted two patents
covering its fully-automated loan processing systems (U. S. Patents No.
5,870,721 and 5,940,811). In August 2000, the U.S. Patent and Trademark Office
issued to the Company a patent covering the fully-automated establishment of a
financial account, including credit accounts (U. S. Patent No. 6,105,007). In
addition, in 1997 the Company acquired a patent that covers the automated
processing of an insurance binder through a kiosk (U. S. Patent No. 5,537,315).

Both of the Company's patents covering fully automated loan processing
systems have been subject to reexamination by the U.S. Patent and Trademark
Office (the "PTO") due to challenges to such patents by third parties. On
January 28, 2003, the Company received a Reexamination Certificate (U. S. Patent
No. 5,870,721 C1) from the PTO which formally concluded the reexamination of U.
S. Patent No. 5,870,721. On March 30, 2005, the Company received a Notice of
Intent to Issue Ex Parte Reexamination Certificate from the PTO indicating that
the reexamination of its other loan processing patent (U. S. Patent No.
5,940,811) had been closed. The Company expects to receive its Reexamination
Certificate in due course.

On March 26, 2004, the Company was notified by Federated Department Stores,
Inc. ("Federated") and Ameritrade Holding Corporation ("Ameritrade") that they
had jointly filed a request with the PTO to reexamine U. S. Patent No.
6,105,007. On June 23, 2004, the Company received notification that the PTO had
granted the request for reexamination. The Company has lawsuits pending against
Federated and Ameritrade in the Columbia Division of the United States District
Court for the State of South Carolina (the "Columbia Federal Court") in which it
claims that both Federated and Ameritrade infringe U. S. Patent No. 6,105,007.
The Company has jointly, with Federated and Ameritrade, requested the Columbia
Federal Court to stay the lawsuits against Federated and Ameritrade pending
resolution of the reexamination of U. S. Patent No. 6,105,007. It is likely that
it will take an extended period of time to complete the reexamination
proceedings and the related litigation with Federated and Ameritrade. Moreover,
the PTO's grant of Federated's and Ameritrade's request for reexamination of U.
S. Patent No. 6,105,007 will likely have a material adverse effect on the
Company's patent licensing program and its ability to attract additional capital
resources in order to continue its operations.

3

In November 2003, Household International, Inc. ("Household") filed a
declaratory judgment action against the Company in the United States District
Court in Wilmington, Delaware (the "Delaware Federal Court"). In its complaint
Household requested the Delaware Federal Court to rule that Household was not
infringing any of the claims of the Company's patents (U.S. Patent No. 5,870,721
C1, No. 5,940,811, and No. 6,105,007) and that the patents were not valid. The
Company filed counterclaims against Household claiming that Household infringes
U. S. Patent Nos. 5,870,721 C1, 5,940,811 and 6,105,007. The Company also filed
a motion with the Delaware Federal Court to transfer the case to the Columbia
Federal Court. In April 2004, the Delaware Federal Court granted the Company's
motion to transfer the case to Columbia Federal Court. As discussed above, the
PTO has granted the reexamination request filed by Federated and Ameritrade
relating to U. S. Patent No. 6,105,007. The Company has had discussions with
Household to jointly file a request with the Columbia Federal Court to stay the
Household action pending the resolution of the PTO's reexamination. The Company
believes that it is likely that the lawsuit will be stayed pending the
resolution of the reexamination of U. S. Patent No. 6,105,007.

It is possible that third parties may bring additional actions to contest
all or some of the Company's patents. The Company can make no assurances that it
will not lose all or some of the claims covered by its existing patents.

To date, the Company has generated substantial operating losses and has
been required to use a substantial amount of cash resources to fund its
operations. At December 31, 2004, the Company had cash and cash equivalents of
$62,756. As of March 31, 2005, the Company had almost completely exhausted its
remaining cash resources, and unless it secures additional capital immediately
it may have to consider alternatives for winding down its business, which may
include offering its patents for sale or filing for bankruptcy protection.
Moreover, the Company currently does not have the resources to repay the
principal and accrued interest outstanding under its convertible secured notes
(the "notes"), which have become due and payable in full as discussed in the
following paragraphs. If any of the holders of these notes takes action to
collect the amounts owed by the Company under these notes, the Company will be
forced to consider alternatives for winding down its business, which may include
offering its patents for sale or filing for bankruptcy protection.

In 2002, 2003, and the first quarter of 2004, the Company issued an
aggregate of $1,280,336 principal amount of convertible secured notes to certain
investors as part of its efforts to raise additional capital. These notes bear
interest at 8%, are convertible into the Company's common stock at a conversion
rate of $.20 per share, and are secured by the Company's equity interest in
decisioning.com, Inc., which owns the Company's patent portfolio. The
outstanding notes include a note in the principal amount of $125,000 acquired on
June 3, 2002 by the Company's Chief Executive Officer and a note in the
principal amount of $100,000 acquired on November 5, 2003 by a subsidiary of The
South Financial Group, which owns approximately 12% of the Company's outstanding
capital stock. Principal and interest under these notes generally becomes
payable in full on the second anniversary of the date on which these notes were
issued. However, under the terms of the notes, the full amount of principal and
interest under all notes becomes immediately due and payable in certain events,
including bankruptcy or similar proceedings involving the Company, a default in
the payment of principal and interest under any note, or a change in control of
the Company.

On June 2, 2004, notes with a principal amount of $756,336 became due and
payable. Additionally, on March 13, 2005 notes with a principal amount of
$200,000 became due and payable. The Company has had discussions with the
holders of these notes regarding the extension of the maturity date of these
notes. However, the Company has not been successful in reaching an agreement
with all of the holders of these notes regarding an extension of their maturity
date. Because the Company is currently in default regarding payment of principal
and interest due under certain of the notes, the full amount of principal and
interest outstanding under all notes has become due and payable. Accordingly,
the full amount of principal and accrued interest under all of these notes is
shown as a current liability of the Company as of December 31, 2004. As of
December 31, 2004, and December 31, 2003, the amount of principal and accrued
interest outstanding under all of the notes was $1,383,149 and $1,291,841,
respectively.

To remain viable, the Company must generate working capital through the
sale of patent licenses or by raising additional capital. To date, the Company
generally has been unable to enter into licensing agreements with potential
licensees upon terms that are acceptable to the Company. As discussed above, the
Company has been forced to become involved in litigation with alleged
infringers. The Company believes that these lawsuits may take an extended period
of time to complete, and no assurance can be given that the Company will have
the resources necessary to complete these lawsuits or that it will be successful
in obtaining a favorable outcome. Moreover, the ongoing reexamination of U. S.
Patent No. 6,105,007 will likely take an extended period of time to complete and
adversely affect the Company's ability to enter into other licensing agreements.
Accordingly, to remain viable it is critical that the Company raise additional
capital immediately. The uncertainties of these litigation matters, the
reexamination of U. S. Patent No. 6,105,007, and other factors affecting the
Company's short and long-term liquidity discussed above has impeded and will
likely continue to impede the Company's ability to raise additional capital. To
maintain the minimal resources necessary to support its current operations,
prosecute the reexamination of U. S. Patent No. 6,105,007, and execute a patent
licensing strategy, the Company does not believe that substantial additional
reductions in its operating expenses are feasible. No assurances can be given
that the Company will be able to raise additional capital or generate working
capital from its patent licensing business.

4

The Company has been a defendant in a lawsuit brought by Temple Ligon, who
claims that the Company breached an agreement to give him a 1% equity interest
in the Company in consideration of services he claims to have performed in 1993
and 1994 in conjunction with the formation of the Company. In January 2004, this
litigation resulted in a jury verdict against the Company of $382,148. In
connection with the litigation and the resulting jury verdict, the Company filed
post-trial motions with the trial court in which, among other things, it claimed
that the jury verdict should be set aside. On July 23, 2004, the trial judge
granted the Company's motions, set aside the jury verdict, and ordered entry of
a judgment in favor of the Company. The plaintiff has appealed the trial judge's
ruling to the South Carolina Court of Appeals. If the Company becomes obligated
to pay more than an insignificant amount of damages in connection with this
litigation, it will be forced to consider alternatives for winding down its
business, which may include offering its patents for sale or filing for
bankruptcy protection.

The Company maintains an Internet site at http://www.affi.net, although the
contents of such web site are not incorporated into this report. The Company has
made its annual reports on Form 10-K, quarterly reports on Form 10-Q, and
current reports on Form 8-K and any amendments to these reports available
through its web site free of charge through a link to the SEC's web site.

The Company was incorporated as a Delaware corporation in 1994. Its
principal executive offices are located at 1053-B Sparkleberry Lane Extension,
Columbia, South Carolina 29223, and its telephone number is (803) 758-2511.
However, in April 2005, the Company expects to move its principal executive
offices to 8807 A Two Notch Road, Columbia, South Carolina 29223. Its telephone
number will remain unchanged.

Patent Licensing Agent

On May 27, 2003, decisioning.com entered into a legal representation
agreement with Withrow & Terranova, PLLC, pursuant to which decisioning.com
appointed Withrow & Terranova, PLLC as its exclusive representative for the
solicitation and negotiation of agreements to license decisioning.com's patents.
(This arrangement replaced the former patent licensing agent agreement between
decisioning.com and Information Ventures LLC d/b/a LPS Group, which was
terminated on April 30, 2003.) Under the agreement, Withrow & Terranova, PLCC
has agreed to promote, market, solicit, and negotiate the licensing of patents
with third parties and to represent decisioning.com as legal counsel in
connection with any patent litigation associated with the enforcement of the
patents. As compensation for its services under the agreement, Withrow &
Terranova will receive 25% of all revenues received by decisioning.com under any
patent agreements and 25% of all amounts paid in settlement of any patent
litigation commenced by the Company. The term of the agreement is for the life
of the patents, subject to either party's right to terminate the agreement for
"cause," as specified in the agreement, and without cause following the third
anniversary of the agreement. If the agreement is terminated by decisioning.com,
Withrow & Terranova, PLLC will be entitled to continue to receive compensation
attributable to patent agreements negotiated prior to termination and, if such
termination is without cause, compensation for certain future patent agreements.

5

Competition

The market for technologies that enable electronic commerce is highly
competitive and is subject to rapid innovation and technological change,
shifting consumer preferences, frequent new product introductions and
competition from traditional methods having all or some of the same features as
technologies enabling electronic commerce. Competitors in this market have
frequently taken different strategic approaches and have launched substantially
different products or services in order to exploit the same perceived market
opportunity. Until the market actually validates a strategy through widespread
acceptance of a product or service, it is difficult to identify all current or
potential market participants. There can be no assurance that the technologies
covered by the Company's patents will be competitive technologically or
otherwise.

Electronic commerce technologies in general, including the methods covered
by the Company's patents, compete with traditional methods for processing
financial transactions. The success of the Company's patent licensing efforts
will depend in part on consumer acceptance of electronic commerce and industry
use of systems that are covered by the Company's patents.

Intellectual Property

The Company was issued two patents in 1999 covering systems and methods for
real-time loan processing over a computer network without human intervention
("System and Method for Real-time Loan Approval", U.S. Patent No. 5,870,721, and
"Closed-loop Financial Transaction Method and Apparatus," U.S. Patent No.
5,940,811). Both of the Company's patents covering fully automated loan
processing systems expire in 2013 and have been subject to reexamination by the
PTO due to requests by third parties who have challenged the validity of the
patents. On January 28, 2003, the Company received a Reexamination Certificate
relating to the completion of the PTO's reexamination of U. S. Patent No.
5,870,721. On March 30, 2005, the Company received a Notice of Intent to Issue
Ex Parte Reexamination Certificate from the PTO indicating that the
reexamination of its other loan processing patent (U. S. Patent No. 5,940,811)
had been closed. The Company expects to receive its Reexamination Certificate
for this patent in due course.

In August 2000, the Company was issued a patent covering the automated
establishment of a financial account without human intervention ("Automatic
Financial Account Processing System", U.S. Patent No. 6,105,007). The patent
expires in 2013. On June 23, 2004, the Company was notified by the PTO that it
had granted a reexamination request previously filed by Federated Department
Stores, Inc. ("Federated") and Ameritrade Holding Corporation ("Ameritrade") to
reexamine U. S. Patent No. 6,105,007. The Company has lawsuits pending against
Federated and Ameritrade in the Columbia Division of the United States District
Court for the State of South Carolina (the "Court") in which it claims that both
Federated and Ameritrade infringe U. S. Patent No. 6,105,007. The Company has
jointly, with Federated and Ameritrade, requested the Court to stay the lawsuits
against Federated and Ameritrade pending resolution of the reexamination of U.
S. Patent No. 6,105,007. It is likely that it will take an extended period of
time to complete the reexamination proceedings and the related litigation with
Federated and Ameritrade. Moreover, the PTO's grant of Federated's and
Ameritrade's request for reexamination of U. S. Patent No. 6,105,007 will likely
have a material adverse effect on the Company's patent licensing program and its
ability to attract additional capital resources in order to continue its
operations.

Other parties may take actions to challenge the Company's patents. The
Company can make no assurances that it will not lose all or some of the claims
covered by its existing patents.

The Company also holds a patent, which expires in 2014, covering the
issuance of insurance products automatically through a kiosk ("Method and
Apparatus for Issuing Insurance from a Kiosk", U.S. Patent No. 5,537,315).

"DeciSys/RT", and "e-xpertLender" are registered trademarks of the Company
and "Affinity Technologies," "iDEAL," "rtDS," and "Affinity enabled" are
registered service marks of the Company.

The Company's success is completely dependent upon its ability to defend
and license its patents. There can be no assurance that the Company will be able
to protect its intellectual property. Moreover, there can be no assurance that
new technological innovations will not be developed and widely accepted by the
market which will render obsolete the types of systems and methods over which
the Company believes it has proprietary intellectual property rights.

6

Employees

At December 31, 2004, the Company employed 3 full-time employees, compared
to 2 full-time employees and 2 part-time employees at December 31, 2003. The
Company has no collective bargaining agreements.

Business Risks

In addition to the other information in this report, readers should
carefully consider the following important factors, among others, that in some
cases have affected, and in the future could affect, the Company's actual
results and could cause the Company's future results to differ materially from
those expressed in any forward looking statements made by, or on behalf of, the
Company.

Limited Capital Resources; Operating Losses

The Company has generated net losses of $68,678,032 since its inception and
has financed its operations primarily through net proceeds from its initial
public offering in May 1996 and cash generated from operations and other
financing transactions. Net proceeds from the Company's initial public offering
were $60,088,516.

To date, the Company has generated substantial operating losses and has
been required to use a substantial amount of cash resources to fund its
operations. At December 31, 2004, the Company had cash and cash equivalents of
$62,756. As of March 31, 2005, the Company had almost completely exhausted its
remaining cash resources, and unless it secures additional capital immediately
it may have to consider alternatives for winding down its business, which may
include offering its patents for sale or filing for bankruptcy protection.
Moreover, the Company currently does not have the resources to repay the
principal and accrued interest outstanding under its convertible secured notes,
which have become due and payable in full as discussed in the following
paragraphs. If any of the holders of these notes takes action to collect the
amounts owed by the Company under these notes, the Company will be forced to
consider alternatives for winding down its business, which may include offering
its patents for sale or filing for bankruptcy protection.

In 2002, 2003, and the first quarter of 2004, the Company issued an
aggregate of $1,280,336 principal amount of convertible secured notes to certain
investors as part of its efforts to raise additional capital. These notes bear
interest at 8%, are convertible into the Company's common stock at a conversion
rate of $.20 per share, and are secured by the Company's equity interest in
decisioning.com, Inc., which owns the Company's patent portfolio. The
outstanding notes include a note in the principal amount of $125,000 acquired on
June 3, 2002 by the Company's Chief Executive Officer and a note in the
principal amount of $100,000 acquired on November 5, 2003 by a subsidiary of The
South Financial Group, which owns approximately 12% of the Company's outstanding
capital stock. Principal and interest under these notes generally becomes
payable in full on the second anniversary of the date on which these notes were
issued. However, under the terms of the notes, the full amount of principal and
interest under all notes becomes immediately due and payable in certain events,
including bankruptcy or similar proceedings involving the Company, a default in
the payment of principal and interest under any note, or a change in control of
the Company.

On June 2, 2004, notes with a principal amount of $756,336 became due and
payable. Additionally, on March 13, 2005 notes with a principal amount of
$200,000 became due and payable. The Company has had discussions with the
holders of these notes regarding the extension of the maturity date of these
notes. However, the Company has not been successful in reaching an agreement
with all of the holders of these notes regarding an extension of their maturity
date. Because the Company is currently in default regarding payment of principal
and interest due under certain of the notes, the full amount of principal and
interest outstanding under all notes has become due and payable. Accordingly,
the full amount of principal and accrued interest under all of these notes is
shown as a current liability of the Company as of December 31, 2004. As of
December 31, 2004, and December 31, 2003, the amount of principal and accrued
interest outstanding under all of the notes was $1,383,149 and $1,291,841,
respectively.

7

To remain viable, the Company must generate working capital through the
sale of patent licenses or by raising additional capital. To date, the Company
generally has been unable to enter into licensing agreements with potential
licensees upon terms that are acceptable to the Company. As a result, the
Company has been forced to become involved in litigation with alleged
infringers. The Company believes that these lawsuits may take an extended period
of time to complete, and no assurance can be given that the Company will have
the resources necessary to complete these lawsuits or that it will be successful
in obtaining a favorable outcome. Moreover, the ongoing reexamination of U. S.
Patent No. 6,105,007 will likely take an extended period of time to complete and
adversely affect the Company's ability to enter into other licensing agreements.
Accordingly, to remain viable it is critical that the Company raise additional
capital immediately. The uncertainties of these litigation matters, the
reexamination of U. S. Patent No. 6,105,007, and other factors affecting the
Company's short and long-term liquidity discussed above has impeded and will
likely continue to impede the Company's ability to raise additional capital. To
maintain the minimal resources necessary to support its current operations,
prosecute the reexamination of U. S. Patent No. 6,105,007, and execute a patent
licensing strategy, the Company does not believe that substantial additional
reductions in its operating expenses are feasible. No assurances can be given
that the Company will be able to raise additional capital or generate working
capital from its patent licensing business.

The Company has been a defendant in a lawsuit brought by Temple Ligon, who
claims that the Company breached an agreement to give him a 1% equity interest
in the Company in consideration of services he claims to have performed in 1993
and 1994 in conjunction with the formation of the Company. In January 2004, this
litigation resulted in a jury verdict against the Company of $382,148. In
connection with the litigation and the resulting jury verdict, the Company filed
post-trial motions with the trial court in which, among other things, it claimed
that the jury verdict should be set aside. On July 23, 2004, the trial judge
granted the Company's motions, set aside the jury verdict, and ordered entry of
a judgment in favor of the Company. The plaintiff has appealed the trial judge's
ruling to the South Carolina Court of Appeals. If the Company becomes obligated
to pay more than an insignificant amount of damages in connection with this
litigation, it will be forced to consider alternatives for winding down its
business, which may include offering its patents for sale or filing for
bankruptcy protection.

In order to fund its operations, the Company may need to raise additional
funds through the issuance of additional equity securities, in which case the
percentage ownership of the stockholders of the Company will be reduced,
stockholders may experience additional dilution, or such equity securities may
have rights, preferences or privileges senior to common stock. There can be no
assurance that additional financing will be available on terms acceptable to the
Company or at all. If adequate funds are not available or not available on
acceptable terms, the Company may be unable to continue operations.

Dependence on Patent Licensing Program

Due to capital constraints, the Company has suspended efforts to deploy its
loan processing products and services. The Company's business activities
currently consist exclusively of attempting to license certain of its patents.
The Company's prospects are dependent on its ability to finance and execute a
sustainable patent licensing program. Even though the Company believes there are
companies that may be using systems, processes and methods covered by the
Company's patents, it is not known whether the Company will be able to enter
into any new licensing agreements. Moreover, the Company may not have the
resources to sustain its patent licensing program, enforce its patent rights,
finance any related litigation, or successfully negotiate patent licenses on
terms that will generate meaningful future revenues.

The Company is further subject to the risk that negotiations to license its
patents may be lengthy and that it may be necessary for the Company to become
involved in litigation to assert and protect its intellectual property rights.
To date, the Company generally has been unable to enter into licensing
agreements with alleged licensees upon terms that are acceptable to the Company.
As a result, the Company has been forced to become involved in litigation with
alleged infringers. Currently, the Company is involved in three patent
litigation actions. The Company believes that these lawsuits may take an
extended period of time to complete. Moreover, at the request of two of the
alleged infringers (Federated and Ameritrade), the PTO has determined to
reexamine the Company's patent covering the fully automated establishment of a
financial account (U.S. Patent No. 6,105,007). It is likely that it will take an
extended period of time to complete the reexamination proceedings and the
related litigation with Federated and Ameritrade. No assurance can be given that
the Company will have the resources necessary to complete these lawsuits or that
it will be successful in obtaining a favorable outcome. Prolonged patent
litigation or reexaminations conducted by the PTO could have a material adverse
effect on the Company's business, operating results and financial position.

8

Challenges to Patents

Both of the Company's patents covering fully-automated loan processing
systems have been subject to reexamination by the PTO due to requests by third
parties who have challenged the validity of the patents. On January 28, 2003,
the Company received a Reexamination Certificate relating to the completion of
the PTO's reexamination of U. S. Patent No. 5,870,721. On March 30, 2005, the
Company received a Notice of Intent to Issue Ex Parte Reexamination Certificate
from the PTO indicating that the reexamination of its other loan processing
patent (U. S. Patent No. 5,940,811) had been closed. The Company expects to
receive its Reexamination Certificate for this patent in due course.

On March 26, 2004, the Company was notified by Federated and Ameritrade
that they had jointly filed a request with the PTO to reexamine U. S. Patent No.
6,105,007. On June 23, 2004, the Company received notification that the PTO had
granted the request for reexamination. The Company has lawsuits pending against
Federated and Ameritrade in the Columbia Division of the United States District
Court for the State of South Carolina in which it claims that both Federated and
Ameritrade infringe U. S. Patent No. 6,105,007. The Company has jointly, with
Federated and Ameritrade, requested the Court to stay the lawsuits against
Federated and Ameritrade pending resolution of the reexamination of U. S. Patent
No. 6,105,007. It is likely that it will take an extended period of time to
complete the reexamination proceedings and the related litigation with Federated
and Ameritrade. Moreover, the PTO's grant of Federated's and Ameritrade's
request for reexamination of U. S. Patent No. 6,105,007 will likely have a
material adverse effect on the Company's patent licensing program and its
ability to attract additional capital resources in order to continue its
operations.

In November 2003, Household International, Inc. ("Household") filed a
declaratory judgment action against the Company in United States District Court
in Wilmington, Delaware (the "Delaware Federal Court"). In its complaint
Household requested the Delaware Federal Court to rule that Household was not
infringing any of the claims of the Company's patents (U.S. Patent No. 5,870,721
C1, No. 5,940,811, and No. 6,105,007) and that the patents were not valid. The
Company filed counterclaims against Household claiming that Household infringes
U. S. Patent Nos. 5,870,721 C1, 5,940,811 and 6,105,007. The Company also filed
a motion with the Delaware Federal Court to transfer the case to the Columbia
Federal Court. In April 2004, the Delaware Federal Court granted the Company's
motion to transfer the case to Columbia Federal Court. As discussed previously,
the PTO has granted the reexamination request filed by Federated and Ameritrade
relating to U. S. Patent No. 6,105,007. The Company has had discussions with
Household to jointly file a request with the Columbia Federal Court to stay the
Household action pending the resolution of the PTO's reexamination. The Company
believes that it is likely that the lawsuit will be stayed pending the
resolution of the reexamination of U. S. Patent No. 6,105,007.

It is possible that third parties may bring additional actions to contest
all or some of the Company's patents. The Company may lose all or some of the
claims covered by its existing patents as a result of existing or future
challenges. The loss of all or some of its claims or a significant limitation of
such claims could have a material adverse effect on the Company's ability to
execute a successful patent licensing program. Moreover, if other parties
request reexaminations of or otherwise challenge the Company's patents in the
future, the Company is subject to the risk that such proceeding may not be
resolved to the Company's satisfaction on a timely basis, if at all. Any such
proceeding may have a material adverse effect on the Company's business,
operating results and financial position. Moreover, in the event a challenge to
the Company's patents results in a significant loss of all or some of its
claims, the Company's only remedy may be to contest the decision, which would
likely be a lengthy process. Due to the Company's limited capital resources, it
is unlikely that the Company could successfully contest the decision without
additional cash resources. Accordingly, a decision by the PTO to limit all or
some of the Company's patent claims could have a material adverse effect on the
Company's business, operating results and financial position.

9

Dependence on E-Commerce Technologies

The Company's patents are specific to the e-commerce businesses of the
financial services industry and generally cover the automated establishment of
loans, financial accounts and credit accounts using specific e-commerce related
systems, processes and methods. The market for products and services that enable
e-commerce is subject to change and technological development, shifting consumer
preferences, new product introductions and competition from traditional products
and services having all or some of the same features as products and services
which enable e-commerce. It is possible that new products or technologies may be
developed that may render obsolete the systems, processes and methods over which
the Company believes it has intellectual property rights. Moreover, the delivery
of products and services through e-commerce channels is not fully developed, and
competition from traditional channels to deliver these same products and
services is intense. Any wide-scale rejection of e-commerce channels by
consumers will have a material adverse effect on the Company's business,
operating results and financial position.

Dependence on Third Parties

Patent licensing is a highly technical and specialized business which
requires the Company to rely on the services of third parties. In May 2003, the
Company appointed Withrow & Terranova, PLLC as its exclusive patent licensing
agent. Under the terms of the agreement, Withrow & Terranova, PLLC has agreed,
among other things, to perform market research, initiate the sales of patent
license agreements, negotiate patent licensing arrangements with third parties,
and represent the Company as legal counsel in connection with the enforcement of
its patents. Accordingly, the Company is dependent on Withrow & Terranova, PLLC
to successfully execute its patent licensing program. Additionally, the
agreement requires Withrow & Terranova, PLLC to coordinate the engagement of
experts, on terms satisfactory to the Company, if litigation becomes necessary
to enforce the Company's patent rights. The success of the Company's patent
licensing program and enforcement of its patents may depend on the satisfactory
retention and efforts of experts. Moreover, experts frequently request and
charge significant fees.

Potential for Fluctuation in Quarterly Results

Since its inception, the Company's quarterly results have fluctuated and
have not been susceptible to meaningful period-to-period comparisons. The
Company believes that it may continue to experience significant fluctuations in
its quarterly operating results in the foreseeable future. The Company
anticipates that its period-to-period revenue and operating results will depend
on numerous factors including the ability of the Company to successfully
negotiate and enter into patent licensing agreements and the timing, terms and
the pricing attributes of any such agreements.

The Company believes that period-to-period comparisons of its operating
results are not meaningful and should not be relied upon as an indication of
future performance. The uncertainty regarding the extent and timing of revenues
coupled with the risk of substantial fluctuations in its quarterly operating
results may have a material adverse effect on the price of the Company's Common
Stock in the future.

Dependence on Key Employees

The Company is highly dependent on the services of its Chairman, President
and Chief Executive Officer, Joseph A. Boyle. The Company does not have an
employment agreement with Mr. Boyle or "key man" insurance on his life. The
complete loss of the services of Mr. Boyle could have a material adverse effect
upon the Company's business, operating results and financial condition. In
addition, the Company's financial condition would likely adversely affect the
Company's ability to retain or recruit employees and executives.

10

Risk of Substantial Dilution

The Company has issued convertible notes that are convertible into common
stock at $0.20 per share, which could be substantially less than the market
price of the common stock at the time of conversion. The issuance of stock at a
price that is less than the market price could have an immediate adverse effect
on the market price of the Company's common stock. In addition, the Company has
issued options and warrants to acquire shares of its common stock, and the
Company may issue additional warrants in connection with financing arrangements
and may grant additional stock options under its stock option plan that may
further dilute the Company's common stock. The exercise of such warrants and
options would have a dilutive effect on the Company's common stock. Also, to the
extent that persons who acquire shares under all the foregoing agreements sell
those shares in the market, the price of the Company's shares may decrease due
to additional shares in the market.

Volatility of Stock Price and Risk of Litigation

The Company's common stock price has been volatile and has experienced
substantial and sudden fluctuations in response to a number of events and
factors. In addition, the stock market has experienced significant price and
volume fluctuations that have especially affected the market prices of equity
securities of many companies directly and indirectly involved in the high
technology industry, and that often have been unrelated to the operating
performance of such companies. These broad market fluctuations have adversely
affected and may continue to adversely affect the market price of the Company's
common stock. In the past, following periods of volatility in the market price
of a company's securities, securities class action litigation has often been
instituted against such a company. Such litigation could result in substantial
costs and a diversion of management's attention and resources, which would have
a material adverse effect on the Company's business, operating results and
financial condition.

Anti-Takeover Provisions

Certain provisions of Delaware law and the Company's Certificate of
Incorporation and bylaws could have the effect of making it more difficult for a
third party to acquire, or of discouraging a third party from attempting to
acquire, control of the Company. Such provisions could limit the price that
certain investors might be willing to pay in the future for shares of the
Company's common stock. These provisions of Delaware law and the Company's
Certificate of Incorporation and bylaws may also have the effect of discouraging
or preventing certain types of transactions involving an actual or threatened
change of control of the Company (including unsolicited takeover attempts), even
though such a transaction may offer the Company's stockholders the opportunity
to sell their stock at a price above the prevailing market price. Certain of
these provisions allow the Company to issue preferred stock with rights senior
to those of the common stock and other rights that could adversely affect the
interests of holders of common stock without any further vote or action by the
stockholders. The issuance of preferred stock, for example, could decrease the
amount of earnings or assets available for distribution to the holders of common
stock or could adversely affect the rights and powers, including voting rights,
of the holders of the common stock. In certain circumstances, such issuance
could have the effect of decreasing the market price of the common stock, as
well as having the anti-takeover effects discussed above.

Item 2. Properties

The Company's principal executive offices are located at 1053 B
Sparkleberry Lane Extension in Columbia, South Carolina. Such office space
encompasses approximately 1,200 square feet and is currently under a
month-to-month lease. The Company also leases warehouse space located in
Columbia, South Carolina, which encompasses approximately 4,000 square feet.
Such space is under a month-to-month lease. In April 2005, the Company expects
to move its principal executive offices to 8807 A Two Notch Road, Columbia,
South Carolina 29223, which it will occupy under a month-to-month lease.

Item 3. Legal Proceedings

The Company and its founder, Jeff Norris, are defendants in a lawsuit filed
by Temple Ligon on November 30, 1996 in the Court of Common Pleas for the County
of Richland in Columbia, South Carolina. Mr. Ligon claims, among other things,
that the Company and Mr. Norris breached an agreement to give him a 1% equity
interest in the Company in consideration of services Mr. Ligon claims to have
performed in 1993 and 1994 in conjunction with the formation of the Company, and
seeks monetary damages of $5,463,000. This lawsuit initially resulted in a jury
verdict against the Company of $68,000. However, Mr. Ligon subsequently
requested and was granted a new trial. In January 2004, this lawsuit resulted in
another jury verdict against the Company of $382,148. In connection with the
litigation and the resulting jury verdict, the Company filed post-trial motions
with the trial court in which, among other things, it claimed that the jury
verdict should be set aside. On July 23, 2004, the trial judge granted the
Company's motions, set aside the jury verdict, and ordered entry of a judgment
in favor of the Company. The plaintiff has appealed the trial judge's ruling to
the South Carolina Court of Appeals. If the Company becomes obligated to pay
more than an insignificant amount of damages in connection with this litigation,
it will be forced to consider alternatives for winding down its business, which
may include offering its patents for sale or filing for bankruptcy protection.

11

In June 2003, the Company filed a lawsuit against Federated Department
Stores, Inc., and certain of its subsidiaries alleging that Federated has
infringed one of the Company's patents (U. S. Patent No. 6,105,007). In
September 2003, the Company filed a similar lawsuit against Ameritrade Holding
Corporation and its subsidiary, Ameritrade, Inc., alleging infringement of the
same patent. Both lawsuits were filed in the United States District Court in
Columbia, South Carolina, and both seek unspecified damages. On March 26, 2004,
the Company was notified by Federated and Ameritrade that they had jointly filed
a request with the PTO to reexamine U. S. Patent No. 6,105,007. On June 23,
2004, the Company received notification that the PTO had granted the request for
reexamination. The Company has jointly, with Federated and Ameritrade, requested
the Court to stay the lawsuits against Federated and Ameritrade pending
resolution of the reexamination of U. S. Patent No. 6,105,007. It is likely that
it will take an extended period of time to complete the reexamination
proceedings and the related litigation with Federated and Ameritrade. Moreover,
the PTO's grant of Federated's and Ameritrade's request for reexamination of U.
S. Patent No. 6,105,007 will likely have a material adverse effect on the
Company's patent licensing program and its ability to attract additional capital
resources in order to continue its operations.

In November 2003, Household International, Inc. ("Household") filed a
declaratory judgment action against the Company in United States District Court
in Wilmington, Delaware (the "Delaware Federal Court"). In its complaint
Household requested the Delaware Federal Court to rule that Household was not
infringing any of the claims of the Company's patents (U.S. Patent No. 5,870,721
C1, No. 5,940,811, and No. 6,105,007) and that the patents were not valid. The
Company filed counterclaims against Household claiming that Household infringes
U. S. Patent Nos. 5,870,721 C1, 5,940,811 and 6,105,007. The Company also filed
a motion with the Delaware Federal Court to transfer the case to the Columbia
Federal Court. In April 2004, the Delaware Federal Court granted the Company's
motion to transfer the case to Columbia Federal Court. As discussed previously,
the PTO has granted the reexamination request filed by Federated and Ameritrade
relating to U. S. Patent No. 6,105,007. The Company has had discussions with
Household to jointly file a request with the Columbia Federal Court to stay the
Household action pending the resolution of the PTO's reexamination. The Company
believes that it is likely that the lawsuit will be stayed pending the
resolution of the reexamination of U. S. Patent No. 6,105,007.

Item 4. Submission of Matters to a Vote of Security Holders

Not applicable.

Executive Officers of the Registrant

Name Age Position with the Company
- ---- ---- -------------------------
Joseph A. Boyle 51 Chairman, President, Chief Executive Officer,
and Chief Financial Officer
S. Sean Douglas 36 Executive Vice President and Chief Operating
Officer

Joseph A. Boyle became President and Chief Executive Officer of the Company in
January 2000 and Chairman in March 2001. Mr. Boyle has also served as Chief
Financial Officer of the Company since September 1996. Mr. Boyle also held the
title of Senior Vice President from September 1996 to January 2000. Mr. Boyle
has previously served as Secretary and Treasurer of the Company. To conserve the
Company's limited financial resources, Mr. Boyle has from time to time reduced
his time commitment to and compensation received from the Company. Since January
3, 2005, Mr. Boyle has performed consulting services for a local financial
institution. From April 2003 to August 2004, Mr. Boyle also was a partner of
Elliott Davis, LLC a South Carolina public accounting firm. Prior to joining the
Company, Mr. Boyle served as Price Waterhouse, LLP's engagement partner for most
of its Kansas City, Missouri, financial services clients and was a member of the
firm's Mortgage Banking Group. Mr. Boyle was employed by Price Waterhouse, LLP
from June 1982 to August 1996.

12

S. Sean Douglas became Executive Vice President and Chief Operating Officer of
the Company in March 2003. Mr. Douglas also held the title of Senior Vice
President of Finance, Operations and Administration of the Company from March
2002 to March 2003. From January 2000 to March 2002, Mr. Douglas held the title
of Vice President and Controller of the Company. From November 1995 to January
2000 Mr. Douglas was the Company's accounting manager.

Part II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters, and
Issuer Purchases of Equity Securities

(a) Since February 12, 2001, the Company's common stock has traded on the
OTC Bulletin Board under the symbol "AFFI." The Company's common stock
traded on the Nasdaq SmallCap Market from March 27, 2000 to February
12, 2001. Prior to March 27, 2000, the Company's common stock was
traded on the Nasdaq National Market. The following table presents the
high and low sales prices of the Company's Common Stock for the
periods indicated during 2004 and 2003 as reported by the OTC Bulletin
Board. As of March 10, 2005, there were 452 stockholders of record of
the Common Stock.

Sales Price Per Share
---------------------
High Low
2004 ---- ----
First Quarter 0.17 0.09
Second Quarter 0.12 0.06
Third Quarter 0.07 0.04
Fourth Quarter 0.09 0.04
2003
First Quarter 0.27 0.09
Second Quarter 0.23 0.15
Third Quarter 0.19 0.12
Fourth Quarter 0.17 0.09

The Company has never paid dividends on its capital stock. The Company
intends to retain earnings, if any, for use in its business and does
not anticipate paying any cash dividends in the foreseeable future.

On October 6, 2004, AMRO International, S.A. converted $25,000
principal amount and $4,683 of accrued interest under an 8%
convertible note issued by the Company to AMRO into an aggregate of
148,417 shares of the Company's common stock. Under the terms of the
note, principal and interest converted into shares of common stock at
$.20 per share. Such shares were issued by the Company in reliance on
an exemption from registration set forth in Section 3(a)(9)of the
Securities Act of 1933.

On February 22, 2005, AMRO International, S.A. converted $25,000
principal amount and $5,439 of accrued interest under an 8%
convertible note issued by the Company to AMRO into an aggregate of
152,194 shares of the Company's common stock. Under the terms of the
note, principal and interest converted into shares of common stock at
$.20 per share. Such shares were issued by the Company in reliance on
an exemption from registration set forth in Section 3(a)(9)of the
Securities Act of 1933.

(b) Not applicable

(c) Not applicable

13

Item 6. Selected Financial Data

The following table presents selected financial data of the Company for the
periods indicated. The following financial data should be read in conjunction
with the information set forth under "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the Company's Consolidated
Financial Statements and Notes thereto and other information included elsewhere
in this report.

Year Ended December 31,
2004 2003 2002 2001 2000
---------------------------------------------------------------------
Statement of Operations Data:
Revenues $ 287,298 $ 517,647 $ 185,960 $ 1,285,944 $ 1,723,075
Cost and expenses:
Cost of revenues 64,265 1,765 16,846 63,751 344,931
Research and development - - - 496,441 683,600
Impairment loss - - - 448,945 2,608,773
Selling, general and
administrative expenses 732,285 996,711 1,406,841 3,847,807 6,791,767
---------------------------------------------------------------------
Total costs and expenses 796,550 998,476 1,423,687 4,856,944 10,429,071
---------------------------------------------------------------------
Operating loss (509,252) (480,829) (1,237,727) (3,571,000) (8,705,996)
Interest income 1,967 694 1,643 10,101 64,155
Interest expense (95,990) (80,373) (70,334) (115,557) (26,277)
Litigation accrual reversal 386,148 - - - -
---------------------------------------------------------------------
Loss from continuing operations (217,127) (560,508) (1,306,418) (3,676,456) (8,668,118)
Income (loss) from operations of
discontinued subsidiary - - - 467,188 (534,978)
Gain on disposal of subsidiary - - - 891,569 -
---------------------------------------------------------------------
Net loss $ (217,127) $ (560,508) $ (1,306,418) $ (2,317,699) $ (9,203,096)
=====================================================================
Loss per share - basic and diluted
Continuing operations $ (0.01) $ (0.01) $ (0.03) $ (0.10) $ (0.29)
=====================================================================
Net loss per share $ (0.01) $ (0.01) $ (0.03) $ (0.06) $ (0.30)
=====================================================================
Shares used in computing
net loss per share 41,926,272 41,512,897 40,707,108 38,004,089 30,242,054
=====================================================================

14

December 31,
2004 2003 2002 2001 2000
---------------------------------------------------------------------
Balance Sheet Data:
Cash and cash equivalents $ 62,756 $ 578,398 $ 156,780 $ 27,720 $ 646,198
Working capital (1,524,772) (909,356) (82,512) 117,477 2,216,854
Total assets 121,240 618,002 234,848 927,657 5,638,453
Convertible debenture - - - 225,090(1) 951,456
Convertible notes 1,383,149(3) 1,291,841(2) 868,427 - -
Capital stock of subsidiary
held by minority investor - - - - 22,668
Stockholder's equity (deficiency) (1,513,523) (1,329,579) (908,230) 343,438 2,326,314

- -----------------------------------

(1) Amounts outstanding under the convertible debenture as of December 31, 2001,
were classified as a current liability and, accordingly are included in the
working capital of the Company at December 31, 2001, set forth above.

(2) $756,336 of the amount outstanding under the convertible notes as of
December 31, 2003, was classified as a current liability and, accordingly is
included in the working capital of the Company at December 31, 2003, set
forth above.

(3) All amounts outstanding under the convertible notes as of December 31, 2004,
were classified as a current liability and, accordingly are included in the
working capital of the Company at December 31, 2004, set forth above.

15

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

Overview

The Company was formed in 1994 to develop and market technologies that
enable financial institutions and other businesses to provide consumer financial
services electronically with reduced or no human intervention. Due to capital
constraints, the Company has suspended efforts to deploy products and services
that use its loan processing system, DeciSys/RT, in order to focus its efforts
exclusively on attempting to license certain of its patents.

In conjunction with its product development activities, the Company applied
for and obtained three patents. The Company has been granted two patents
covering its fully-automated loan processing systems (U. S. Patents No.
5,870,721 and 5,940,811). In August 2000, the U.S. Patent and Trademark Office
issued to the Company a patent covering the fully-automated establishment of a
financial account, including credit accounts (U. S. Patent No. 6,105,007). In
addition, in 1997 the Company acquired a patent that covers the automated
processing of an insurance binder through a kiosk (U. S. Patent No. 5,537,315).

Both of the Company's patents covering fully automated loan processing
systems have been subject to reexamination by the U.S. Patent and Trademark
Office (the "PTO") due to challenges to such patents by third parties. On
January 28, 2003, the Company received a Reexamination Certificate (U. S. Patent
No. 5,870,721 C1) from the PTO which formally concluded the reexamination of U.
S. Patent No. 5,870,721. On March 30, 2005, the Company received a Notice of
Intent to Issue Ex Parte Reexamination Certificate from the PTO indicating that
the reexamination of its other loan processing patent (U. S. Patent No.
5,940,811) had been closed. The Company expects to receive its Reexamination
Certificate with respect to this patent in due course.

On March 26, 2004, the Company was notified by Federated and Ameritrade
that they had jointly filed a request with the PTO to reexamine U. S. Patent No.
6,105,007. On June 23, 2004, the Company received notification that the PTO had
granted the request for reexamination. The Company has lawsuits pending against
Federated and Ameritrade in the Columbia Division of the United States District
Court for the State of South Carolina (the "Columbia Federal Court") in which it
claims that both Federated and Ameritrade infringe U. S. Patent No. 6,105,007.
The Company has jointly, with Federated and Ameritrade, requested the Columbia
Federal Court to stay the lawsuits against Federated and Ameritrade pending
resolution of the reexamination of U. S. Patent No. 6,105,007. It is likely that
it will take an extended period of time to complete the reexamination
proceedings and the related litigation with Federated and Ameritrade. Moreover,
the PTO's grant of Federated's and Ameritrade's request for reexamination of U.
S. Patent No. 6,105,007 will likely have a material adverse effect on the
Company's patent licensing program and its ability to attract additional capital
resources in order to continue its operations.

In November 2003, Household International, Inc. ("Household") filed a
declaratory judgment action against the Company in United States District Court
in Wilmington, Delaware (the "Delaware Federal Court"). In its complaint
Household requested the Delaware Federal Court to rule that Household was not
infringing any of the claims of the Company's patents (U.S. Patent No. 5,870,721
C1, No. 5,940,811, and No. 6,105,007) and that the patents were not valid. The
Company filed counterclaims against Household claiming that Household infringes
U. S. Patent Nos. 5,870,721 C1, 5,940,811 and 6,105,007. The Company also filed
a motion with the Delaware Federal Court to transfer the case to the Columbia
Federal Court. In April 2004, the Delaware Federal Court granted the Company's
motion to transfer the case to Columbia Federal Court. As discussed previously,
the PTO has granted the reexamination request filed by Federated and Ameritrade
relating to U. S. Patent No. 6,105,007. The Company has had discussions with
Household to jointly file a request with the Columbia Federal Court to stay the
Household action pending the resolution of the PTO's reexamination. The Company
believes that it is likely that the lawsuit will be stayed pending the
resolution of the reexamination of U. S. Patent No. 6,105,007.

It is possible that third parties may bring additional actions to contest
all or some of the Company's patents. The Company can make no assurances that it
will not lose all or some of the claims covered by its existing patents.

To date, the Company has generated substantial operating losses and has
been required to use a substantial amount of cash resources to fund its
operations. At December 31, 2004, the Company had cash and cash equivalents of
$62,756. As of March 31, 2005, the Company had almost completely exhausted its
remaining cash resources, and unless it secures additional capital immediately
it may have to consider alternatives for winding down its business, which may
include offering its patents for sale or filing for bankruptcy protection.
Moreover, the Company currently does not have the resources to repay the
principal and accrued interest outstanding under its convertible secured notes,
which have become due and payable in full as discussed in the following
paragraphs. If any of the holders of these notes takes action to collect the
amounts owed by the Company under these notes, the Company will be forced to
consider alternatives for winding down its business, which may include offering
its patents for sale or filing for bankruptcy protection.

16

In 2002, 2003, and the first quarter of 2004, the Company issued an
aggregate of $1,280,336 principal amount of convertible secured notes to certain
investors as part of its efforts to raise additional capital. These notes bear
interest at 8%, are convertible into the Company's common stock at a conversion
rate of $.20 per share, and are secured by the Company's equity interest in
decisioning.com, Inc., which owns the Company's patent portfolio. The
outstanding notes include a note in the principal amount of $125,000 acquired on
June 3, 2002 by the Company's Chief Executive Officer and a note in the
principal amount of $100,000 acquired on November 5, 2003 by a subsidiary of The
South Financial Group, which owns approximately 12% of the Company's outstanding
capital stock. Principal and interest under these notes generally becomes
payable in full on the second anniversary of the date on which these notes were
issued. However, under the terms of the notes, the full amount of principal and
interest under all notes becomes immediately due and payable in certain events,
including bankruptcy or similar proceedings involving the Company, a default in
the payment of principal and interest under any note, or a change in control of
the Company.

On June 2, 2004, notes with a principal amount of $756,336 became due and
payable. Additionally, on March 13, 2005 notes with a principal amount of
$200,000 became due and payable. The Company has had discussions with the
holders of these notes regarding the extension of the maturity date of these
notes. However, the Company has not been successful in reaching an agreement
with all of the holders of these notes regarding an extension of their maturity
date. Because the Company is currently in default regarding payment of principal
and interest due under certain of the notes, the full amount of principal and
interest outstanding under all notes has become due and payable. Accordingly,
the full amount of principal and accrued interest under all of these notes is
shown as a current liability of the Company as of December 31, 2004. As of
December 31, 2004, and December 31, 2003, the amount of principal and accrued
interest outstanding under all of the notes was $1,383,149 and $1,291,841,
respectively.

To remain viable, the Company must generate working capital through the
sale of patent licenses or by raising additional capital. To date, the Company
generally has been unable to enter into licensing agreements with potential
licensees upon terms that are acceptable to the Company. As a result, the
Company has been forced to become involved in litigation with alleged
infringers. The Company believes that these lawsuits may take an extended period
of time to complete, and no assurance can be given that the Company will have
the resources necessary to complete these lawsuits or that it will be successful
in obtaining a favorable outcome. Moreover, the ongoing reexamination of U. S.
Patent No. 6,105,007 will likely take an extended period of time to complete and
adversely affect the Company's ability to enter into other licensing agreements.
Accordingly, to remain viable it is critical that the Company raise additional
capital immediately. The uncertainties of these litigation matters, the
reexamination of U. S. Patent No. 6,105,007, and other factors affecting the
Company's short and long-term liquidity discussed above has impeded and will
likely continue to impede the Company's ability to raise additional capital. To
maintain the minimal resources necessary to support its current operations,
prosecute the reexamination of U. S. Patent No. 6,105,007, and execute a patent
licensing strategy, the Company does not believe that substantial additional
reductions in its operating expenses are feasible. No assurances can be given
that the Company will be able to raise additional capital or generate working
capital from its patent licensing business.

The Company has been a defendant in a lawsuit brought by Temple Ligon, who
claims that the Company breached an agreement to give him a 1% equity interest
in the Company in consideration of services he claims to have performed in 1993
and 1994 in conjunction with the formation of the Company. In January 2004, this
litigation resulted in a jury verdict against the Company of $382,148. In
connection with the litigation and the resulting jury verdict, the Company filed
post-trial motions with the trial court in which, among other things, it claimed
that the jury verdict should be set aside. On July 23, 2004, the trial judge
granted the Company's motions, set aside the jury verdict, and ordered entry of
a judgment in favor of the Company. The plaintiff has appealed the trial judge's
ruling to the South Carolina Court of Appeals. If the Company becomes obligated
to pay more than an insignificant amount of damages in connection with this
litigation, it will be forced to consider alternatives for winding down its
business, which may include offering its patents for sale or filing for
bankruptcy protection.

17

Critical Accounting Policies

The Company applies certain accounting policies which are critical in
understanding the Company's results of operations and the information presented
in the consolidated financial statements. The Company considers critical
accounting policies to be those that require more significant judgments and
estimates in the preparation of its financial statements and include the
valuation reserve on net deferred tax assets. The Company records a valuation
allowance to reduce its deferred tax assets to the amount that it estimates is
more likely than not to be realized. As of December 31, 2004, the Company
recorded a valuation allowance that reduced its deferred tax assets to equal its
deferred tax liability.

Results of Operations

Revenues. The Company's revenues from continuing operations were $287,298,
$517,647 and $185,960 for the years ended December 31, 2004, 2003, and 2002,
respectively. The types of revenue recognized by the Company are as follows:

Years ended December 31,
2004 2003 2002
----------------- ----------------- -----------------
% of % of % of
Amount Total Amount Total Amount Total
---------- ------ ---------- ------ ---------- ------
Transaction fees $ - - $ - - $ 104,878 56.4
Patent license revenue 267,647 93.2 17,647 3.4 25,000 13.4
Other income 19,651 6.8 500,000 96.6 56,082 30.2
---------- ------ ---------- ------ ---------- ------
$ 287,298 100.0 $ 517,647 100.0 $ 185,960 100.0
========== ====== ========== ====== ========== ======

Transaction fees. The Company recognized no transaction fee revenue in 2003
or 2004. During 2002 the Company provided transaction processing services to one
customer that used the Company's e-xpertLender system. The contract with the
customer terminated in October 2002.

Patent license revenue. The Company recognized revenues of $267,647 from
its patent licensing activities in 2004. Of the total amount recognized,
$250,000 was related to a settlement agreement with an institution that formerly
maintained a system that permitted consumers to apply for credit cards over the
Internet and is non-recurring. Additionally, in 2004, 2003 and 2002, the Company
recognized patent licensing revenue associated with the annual fee from one
patent license agreement executed in 1999.

Other income. In 2004, other income consisted exclusively of non-recurring
miscellaneous income items primarily associated with the sale of equipment no
longer needed in the operation of the Company's business. In 2003, other income
of $500,000 related exclusively to amounts received by the Company as a result
of the settlement of a lawsuit. In 2002 other income consisted primarily of
non-recurring miscellaneous income items and certain insignificant recurring
income items such as fees charged for the routine maintenance of products in
service.

Costs and Expenses

Costs of Revenues. Costs of revenues from continuing operations for the
years ended December 31, 2004, 2003, and 2002 were $64,265, $1,765 and $16,846,
respectively. Cost of revenues includes the direct costs associated with the
generation of specific types of revenue and the allocation of certain indirect
costs when such costs are specifically identifiable and allocable to revenue
producing activities. During the three years ended December 31, 2004, the nature
and amounts of costs, as well as gross profit margins, associated with certain
revenue producing activities varied significantly due to changes in the nature
of the Company's operations.

18

Costs of revenues and the percentage of the costs of revenues to total
costs of revenues for the years ended December 31, 2004, 2003, and 2002 are as
follows:

Year ended December 31,

2004 2003 2002
----------------- ----------------- -----------------
% of % of % of
Amount Total Amount Total Amount Total
---------- ------ ---------- ------ ---------- ------
Transaction fees $ - - $ - - $ 14,346 85.2
Patent license revenue 64,265 100.0 1,765 100.0 2,500 14.8
---------- ------ ---------- ------ ---------- ------
$ 64,265 100.0 $ 1,765 100.0 $ 16,846 100.0
========== ====== ========== ====== ========== ======

Costs of transaction fees. The Company had no transaction fee revenue or
related costs in 2004 and 2003. In 2002 the cost of transaction fees consisted
primarily of the direct costs incurred by the Company to process loan
applications through its systems. Such direct costs were associated with
services provided by third parties and included the cost of credit reports,
fraud reports and communications networks used by the Company. During 2002 the
Company provided transaction processing services to one customer that used the
Company's e-xpertLender system. The contract with the customer terminated in
October 2002.

Costs of patent license revenue. Costs of patent license revenue recognized
in 2004, 2003, and 2002 consist of the patent licensing agent's commissions.

General and Administrative Expenses. General and administrative ("G&A")
expenses related to continuing operations for the year ended December 31, 2004,
were $732,285, compared to $996,711 and $1,406,841 for the years ended December
31, 2003 and 2002, respectively.

G&A expenses during 2004 consisted primarily of personnel expense of
approximately $272,000; professional fees of approximately $321,000;
depreciation and amortization expense of approximately $8,000; rent expense of
approximately $41,000; and insurance and taxes of approximately $61,000.

G&A expenses during 2003 consisted primarily of personnel expense of
approximately $266,000; professional fees of approximately $269,000;
depreciation and amortization expense of approximately $15,000; rent expense of
approximately $54,000; insurance and taxes of approximately $72,000; and
litigation accruals of approximately $318,000.

G&A expenses during 2002 consisted primarily of personnel expense of
approximately $434,000; professional fees of approximately $303,000;
depreciation and amortization expense of approximately $138,000; rent expense of
approximately $101,000; and insurance and taxes of approximately $159,000.

The decrease in G&A in 2004 compared to 2003 and 2003 compared to 2002 is
due the continued reduction of the Company's workforce over the past three years
and curtailment of other expenses. G&A expenses were lower in all material
categories in 2004 compared to 2003, except for personnel expense and
professional fees. The approximately $6,000 increase in personnel expense in
2004 compared to 2003 was attributable to the full-time employment of the
Company's President and CEO for four months in 2004 compared to three months in
2003. The approximately $52,000 increase in professional fees in 2004 compared
to 2003 was primarily attributable to legal expenses incurred with relation to
the Temple Ligon trial. G&A expenses were lower in all material categories in
2003 compared to 2002, except for litigation accruals associated with the Temple
Ligon trial.

Interest Income

Interest income associated with operations was $1,967, $694 and $1,643
during 2004, 2003, and 2002, respectively, and primarily reflects interest
income attributable to cash balances. The increase in interest income in 2004
compared to 2003 and the decrease in interest income in 2003 compared to 2002 is
primarily attributed to the increase and decrease, respectively, in average cash
balances maintained during the year.

19

Interest Expense

Interest expense associated with continuing operations was $95,990, $80,373
and $70,334 in 2004, 2003, and 2002, respectively. Interest expense is primarily
associated with the interest on a $1 million convertible debenture issued in
November 2000 that was satisfied on June 3, 2002, and the interest on $1,280,336
aggregate principal amount of convertible notes issued in installments in June
2002 ($830,336), March 2003 ($200,000), August 2003 ($25,000), November 2003
($150,000), December 2003 ($50,000), and January 2004 ($25,000). The increase in
interest expense in 2004 compared to 2003 and 2003 compared to 2002 is
attributable to the interest on the convertible notes issued in 2003 and 2004 in
the aggregate principal amount of $425,000 and $25,000, respectively.

Litigation Accrual Reversal

The Company has been a defendant in a lawsuit which resulted in a jury
verdict against the Company in January 2004. The Company had recorded a reserve
for the estimated loss in this litigation of $386,148 as a result of the jury
verdict. In July 2004 the trial judge ruled on post-trial motions submitted by
the Company and set aside the jury verdict, and accordingly, in the third
quarter of 2004, the Company reversed the $386,148 accural and recognized a like
amount as other income.

Income Taxes

The Company has recorded a valuation allowance for the full amount of its
net deferred income tax assets as of December 31, 2004, 2003, and 2002, based on
management's evaluation of the recognition criteria as set forth in Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes."

Liquidity and Capital Resources

The Company has generated net losses of $68,678,032 since its inception and
has financed its operations primarily through net proceeds from its initial
public offering in May 1996 and cash generated from operations and other
financing transactions. Net proceeds from the Company's initial public offering
were $60,088,516.

To date, the Company has generated substantial operating losses and has
been required to use a substantial amount of cash resources to fund its
operations. At December 31, 2004, the Company had cash and cash equivalents of
$62,756. As of March 31, 2005, the Company had almost completely exhausted its
remaining cash resources, and unless it secures additional capital immediately
it may have to consider alternatives for winding down its business, which may
include offering its patents for sale or filing for bankruptcy protection.
Moreover, the Company currently does not have the resources to repay the
principal and accrued interest outstanding under its convertible secured notes,
which have become due and payable in full as discussed in the following
paragraphs. If any of the holders of these notes takes action to collect the
amounts owed by the Company under these notes, the Company will be forced to
consider alternatives for winding down its business, which may include offering
its patents for sale or filing for bankruptcy protection.

In 2002, 2003, and the first quarter of 2004, the Company issued an
aggregate of $1,280,336 principal amount of convertible secured notes to certain
investors as part of its efforts to raise additional capital. These notes bear
interest at 8%, are convertible into the Company's common stock at a conversion
rate of $.20 per share, and are secured by the Company's equity interest in
decisioning.com, Inc., which owns the Company's patent portfolio. The
outstanding notes include a note in the principal amount of $125,000 acquired on
June 3, 2002 by the Company's Chief Executive Officer and a note in the
principal amount of $100,000 acquired on November 5, 2003 by a subsidiary of The
South Financial Group, which owns approximately 12% of the Company's outstanding
capital stock. Principal and interest under these notes generally becomes
payable in full on the second anniversary of the date on which these notes were
issued. However, under the terms of the notes, the full amount of principal and
interest under all notes becomes immediately due and payable in certain events,
including bankruptcy or similar proceedings involving the Company, a default in
the payment of principal and interest under any note, or a change in control of
the Company.

20

On June 2, 2004, notes with a principal amount of $756,336 became due and
payable. Additionally, on March 13, 2005 notes with a principal amount of
$200,000 became due and payable. The Company previously initiated discussions
with the holders of these notes regarding the extension of the maturity date of
these notes. However, the Company has not been successful in reaching an
agreement with all of the holders of these notes regarding an extension of their
maturity date. Because the Company is currently in default regarding payment of
principal and interest due under certain of the notes, the full amount of
principal and interest outstanding under all notes has become due and payable.
Accordingly, the full amount of principal and accrued interest under all of
these notes is shown as a current liability of the Company as of December 31,
2004. As of December 31, 2004, and December 31, 2003, the amount of principal
and accrued interest outstanding under all of the notes was $1,383,149 and
$1,291,841, respectively.

To remain viable, the Company must generate working capital through the
sale of patent licenses or by raising additional capital. To date, the Company
generally has been unable to enter into licensing agreements with potential
licensees upon terms that are acceptable to the Company. As a result, the
Company has been forced to become involved in litigation with alleged
infringers. The Company believes that these lawsuits may take an extended period
of time to complete, and no assurance can be given that the Company will have
the resources necessary to complete these lawsuits or that it will be successful
in obtaining a favorable outcome. Moreover, the ongoing reexamination of U. S.
Patent No. 6,105,007 will likely take an extended period of time to complete and
adversely affect the Company's ability to enter into other licensing agreements.
Accordingly, to remain viable it is critical that the Company raise additional
capital immediately. The uncertainties of these litigation matters, the
reexamination of U. S. Patent No. 6,105,007, and other factors affecting the
Company's short and long-term liquidity discussed above has impeded and will
likely continue to impede the Company's ability to raise additional capital. To
maintain the minimal resources necessary to support its current operations,
prosecute the reexamination of U. S. Patent No. 6,105,007, and execute a patent
licensing strategy, the Company does not believe that substantial additional
reductions in its operating expenses are feasible. No assurances can be given
that the Company will be able to raise additional capital or generate working
capital from its patent licensing business.

The Company has been a defendant in a lawsuit brought by Temple Ligon, who
claims that the Company breached an agreement to give him a 1% equity interest
in the Company in consideration of services he claims to have performed in 1993
and 1994 in conjunction with the formation of the Company. In January 2004, this
litigation resulted in a jury verdict against the Company of $382,148. In
connection with the litigation and the resulting jury verdict, the Company filed
post-trial motions with the trial court in which, among other things, it claimed
that the jury verdict should be set aside. On July 23, 2004, the trial judge
granted the Company's motions, set aside the jury verdict, and ordered entry of
a judgment in favor of the Company. The plaintiff has appealed the trial judge's
ruling to the South Carolina Court of Appeals. If the Company becomes obligated
to pay more than an insignificant amount of damages in connection with this
litigation, it will be forced to consider alternatives for winding down its
business, which may include offering its patents for sale or filing for
bankruptcy protection.

Net cash used during the year ended December 31, 2004, to fund operations
was approximately $558,000, compared to approximately $44,000 and $457,000 for
2003 and 2002, respectively. In 2003, the Company received $500,000 in
conjunction with the settlement of a lawsuit which significantly reduced cash
used to fund its operations. At December 31, 2004, 2003, and 2002, cash and
liquid investments were $62,756, $578,398 and $156,780, respectively, and
working capital was ($1,524,772), ($909,356) and ($82,512), respectively. For
purposes of determining working capital at December 31, 2004 and 2003,
$1,383,149 and $851,514, respectively, of principal and accrued interest under
the Company's convertible notes are included as current liabilities.

21

Contractual Obligations

The following table sets forth the Company's long-term debt and other
obligations at December 31, 2004.

Payment Due By Period
-----------------------------------------------------
More than
Total Less than 1 year 1-3 years 3-5 years 5 years
-----------------------------------------------------------------
Long-Term Debt Obligations (1) $ 1,383,149 $ 1,383,149 $ - $ - $ -
Operating Lease Obligations 5,353 5,353 - - -
Purchase Obligations 4,260 4,260 - - -
-----------------------------------------------------------------
Total $ 1,392,762 $ 1,392,762 $ - $ - $ -
=================================================================

(1) Long-term debt obligations consist of the Company's convertible notes,
including accrued interest, which have become immediately due and payable.

Item 7(a). Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

Item 8. Financial Statements and Supplemental Data

The report of Independent Registered Public Accounting Firm and
consolidated financial statements are set forth below (see item 15(a) for list
of financial statements and financial statement schedules):

22

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders
Affinity Technology Group, Inc.
Columbia, South Carolina

We have audited the accompanying consolidated balance sheets of Affinity
Technology Group, Inc. and subsidiaries (collectively, the "Company"), as of
December 31, 2004 and 2003, and the related consolidated statements of
operations, changes in stockholders' equity (deficiency), and cash flows for
each of the years in the three-year period ended December 31, 2004. The
Company's audit also included the financial statement schedule listed in the
Index at Item 15(a)(2). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
the Company as of December 31, 2004 and 2003, and the consolidated results of
its operations and its cash flows for each of the years in the three-year period
ended December 31, 2004, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred recurring operating losses, has
an accumulated deficit, and has certain convertible notes in default. These
matters raise substantial doubt about the ability of the Company to continue as
a going concern. Management's plans in regard to these matters are also
discussed in Note 1. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.

/s/ SCOTT McELVEEN L.L.P.

Columbia, South Carolina
March 18, 2005

23

Affinity Technology Group, Inc. and Subsidiaries

Consolidated Balance Sheets

December 31,
2004 2003
-----------------------------
Assets
Current assets:
Cash and cash equivalents $ 62,756 $ 578,398
Prepaid expenses 47,235 20,121
-----------------------------
Total current assets 109,991 598,519
Property and equipment, net 11,249 18,336
Other assets - 1,147
-----------------------------
Total assets $ 121,240 $ 618,002
=============================

Liabilities and stockholders' deficiency
Current liabilities:
Accounts payable $ 21,502 $ 76,056
Accrued expenses 277,329 565,136
Accrued compensation and related benefits 139,890 92,700
Convertible notes 1,181,336 756,336
Current portion of deferred revenue 14,706 17,647
-----------------------------
Total current liabilities 1,634,763 1,507,875
Convertible notes - 425,000
Deferred revenue - 14,706

Commitments and contingent liabilities
Stockholders' deficiency:
Common stock, par value $0.0001; authorized 60,000,000
shares, issued 44,230,910 shares in 2004 and 44,032,493
shares in 2003 4,423 4,403
Additional paid-in capital 70,665,373 70,632,210
Treasury stock, at cost (2,168,008 shares at
December 31, 2004 and 2003) (3,505,287) (3,505,287)
Accumulated deficit (68,678,032) (68,460,905)
-----------------------------
Total stockholders' deficiency (1,513,523) (1,329,579)
-----------------------------
Total liabilities and stockholders' deficiency $ 121,240 $ 618,002
=============================

See accompanying notes.

24

Affinity Technology Group, Inc. and Subsidiaries

Consolidated Statements of Operations

Years ended December 31,
2004 2003 2002
-------------------------------------------
Revenues:
Transactions $ - $ - 104,878
Patent license revenue 267,647 17,647 25,000
Other income 19,651 500,000 56,082
-------------------------------------------
287,298 517,647 185,960
-------------------------------------------
Costs and expenses:
Cost of revenues 64,265 1,765 16,846
General and administrative expenses 732,285 996,711 1,406,841
-------------------------------------------
796,550 998,476 1,423,687
-------------------------------------------

Operating loss (509,252) (480,829) (1,237,727)
Other income (expenses):
Interest income 1,967 694 1,643
Interest expense (95,990) (80,373) (70,334)
Litigation accrual reversal 386,148 - -
-------------------------------------------
Net loss $ (217,127) $ (560,508) $ (1,306,418)
===========================================
Net loss per share - basic and diluted $ (0.01) $ (0.01) $ (0.03)
===========================================
Shares used in computing net loss per share 41,926,272 41,512,897 40,707,108
===========================================

See accompanying notes.

25

Affinity Technology Group, Inc. and Subsidiaries

Consolidated Statements of Stockholders' Equity (Deficiency)

Common Stock
---------------------
Total
Additional Common Stockholders'
Paid-in Stock Treasury Accumulated Equity
Shares Amount Capital Warrants Stock Deficit (Deficiency)
----------------------------------------------------------------------------------------

Balance at December 31, 2001 42,399,363 $ 4,240 $ 70,386,464 $ 52,000 $ (3,505,287) $ (66,593,979) $ 343,438
Issuance of common stock
as executive compensaton 500,000 50 44,950 - - - 45,000
Issuance of common stock
as finder's fees 150,000 15 9,735 - - - 9,750
Net loss - - - - - (1,306,418) (1,306,418)
----------------------------------------------------------------------------------------
Balance at December 31, 2002 43,049,363 4,305 70,441,149 52,000 (3,505,287) (67,900,397) (908,230)
Expiration of warrants - - 52,000 (52,000) - - -
Note payable conversion to
common stock 409,796 41 81,918 - - - 81,959
Issuance of common stock as
board service compensation 283,334 28 25,472 - - - 25,500
Issuance of common stock
for consulting services 250,000 25 22,475 - - - 22,500
Issuance of common stock
as finder's fees 40,000 4 9,196 - - - 9,200
Net loss - - - - - (560,508) (560,508)
----------------------------------------------------------------------------------------
Balance at December 31, 2003 44,032,493 4,403 70,632,210 - (3,505,287) (68,460,905) (1,329,579)
Note payable conversion to
common stock 148,417 15 29,668 - - - 29,683
Issuance of common stock
as finder's fees 50,000 5 3,495 - - - 3,500
Net loss - - - - - (217,127) (217,127)
----------------------------------------------------------------------------------------
Balance at December 31, 2004 44,230,910 $ 4,423 $ 70,665,373 $ - $ (3,505,287) $ (68,678,032) $ (1,513,523)
========================================================================================

See accompanying notes.

26

Affinity Technology Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows

Years ended December 31,
2004 2003 2002
-----------------------------------------
Operating activities
Net loss $ (217,127) $ (560,508) $ (1,306,418)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 8,181 14,859 137,557
Impairment loss 1,147 - -
Writedown of software development costs - - 656
Provision for doubtful accounts - - 7,519
Inventory valuation allowance - - 100,379
Deferred revenue (17,647) (17,647) 50,000
Litigation accrual reversal (386,148) - -
Other (14,497) 12,311 127,830
Changes in current assets and liabilities:
Accounts receivable - 5,666 445,921
Other assets (27,114) 22,663 71,707
Accounts payable (54,554) 55,315 (119,017)
Accrued expenses 103,024 378,463 72,867
Accrued compensation and related benefits 47,190 45,331 (45,730)
-----------------------------------------
Net cash used in operating activities (557,545) (43,547) (456,729)
-----------------------------------------
Investing activities
Purchases of property and equipment (1,697) (4,724) (9,284)
Proceeds from sale of property and equipment 18,600 44,889 8,810
-----------------------------------------
Net cash provided by (used in) investing activities 16,903 40,165 (474)
-----------------------------------------
Financing activities
Proceeds from convertible notes 25,000 425,000 625,000
Payments on notes payable to third parties - - (38,737)
-----------------------------------------
Net cash provided by financing activities 25,000 425,000 586,263
-----------------------------------------
Net (decrease) increase in cash (515,642) 421,618 129,060
Cash and cash equivalents at beginning of year 578,398 156,780 27,720
-----------------------------------------
Cash and cash equivalents at end of year $ 62,756 $ 578,398 $ 156,780
=========================================

Supplemental cash flow information:
Income taxes paid $ - $ - $ -
=========================================
Interest paid $ - $ - $ 14,630
=========================================

See accompanying notes.

27

Affinity Technology Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

1. The Company - Going Concern

The Company was formed to develop and market technologies that enable
financial institutions and other businesses to provide consumer financial
services electronically with reduced or no human intervention. Products and
services previously offered by the Company include its DeciSys/RT(R) loan
processing system, which automated the processing and consummation of consumer
financial services transactions; the Affinity Automated Loan Machine (the ALM),
which allowed an applicant to apply for and, if approved, obtain a loan in as
little as ten minutes; the Mortgage ALM, which allowed an applicant to apply for
a mortgage loan; e-xpertLender(R), which permitted a financial institution to
make automated lending decisions through its call centers and branches; iDEAL,
which permitted automobile lenders to make automobile lending decisions for loan
applications originated at automobile dealers; and rtDS, which permitted lenders
to deliver credit decisions to applicants over the Internet. Due to capital
constraints, the Company has suspended all efforts to further develop, market
and operate these products and services. The Company's last processing contract
terminated in late 2002, and the Company has no plans to engage in further sales
or other activities related to its products or services, other than to attempt
to license certain of the patents that it owns. Currently, the Company's
business activities consist exclusively of attempting to enter into license
agreements with third parties to license the Company's rights under certain of
its patents.

In conjunction with its product development activities, the Company applied
for and obtained three patents. The Company has been granted two patents
covering its fully-automated loan processing systems (U. S. Patents No.
5,870,721 and 5,940,811). In August 2000, the U.S. Patent and Trademark Office
issued to the Company a patent covering the fully-automated establishment of a
financial account, including credit accounts (U. S. Patent No. 6,105,007). In
addition, in 1997 the Company acquired a patent that covers the automated
processing of an insurance binder through a kiosk (U. S. Patent No. 5,537,315).

Both of the Company's patents covering fully automated loan processing
systems have been subject to reexamination by the U.S. Patent and Trademark
Office (the "PTO") due to challenges to such patents by third parties. On
January 28, 2003, the Company received a Reexamination Certificate (U. S. Patent
No. 5,870,721 C1) from the PTO which formally concluded the reexamination of U.
S. Patent No. 5,870,721. On March 30, 2005, the Company received a Notice of
Intent to Issue Ex Parte Reexamination Certificate from the PTO indicating that
the reexamination of its other loan processing patent (U. S. Patent No.
5,940,811) had been closed. The Company expects to receive its Reexamination
Certificate for this patent in due course.

On March 26, 2004, the Company was notified by Federated and Ameritrade
that they had jointly filed a request with the PTO to reexamine U. S. Patent No.
6,105,007. On June 23, 2004, the Company received notification that the PTO had
granted the request for reexamination. The Company has lawsuits pending against
Federated and Ameritrade in the Columbia Division of the United States District
Court for the State of South Carolina (the "Columbia Federal Court") in which it
claims that both Federated and Ameritrade infringe U. S. Patent No. 6,105,007.
The Company has jointly, with Federated and Ameritrade, requested the Columbia
Federal Court to stay the lawsuits against Federated and Ameritrade pending
resolution of the reexamination of U. S. Patent No. 6,105,007. It is likely that
it will take an extended period of time to complete the reexamination
proceedings and the related litigation with Federated and Ameritrade. Moreover,
the PTO's grant of Federated's and Ameritrade's request for reexamination of U.
S. Patent No. 6,105,007 will likely have a material adverse effect on the
Company's patent licensing program and its ability to attract additional capital
resources in order to continue its operations.

In November 2003, Household International, Inc. ("Household") filed a
declaratory judgment action against the Company in United States District Court
in Wilmington, Delaware (the "Delaware Federal Court"). In its complaint
Household requested the Delaware Federal Court to rule that Household was not
infringing any of the claims of the Company's patents (U.S. Patent No. 5,870,721
C1, No. 5,940,811, and No. 6,105,007) and that the patents were not valid. The
Company filed counterclaims against Household claiming that Household infringes
U. S. Patent Nos. 5,870,721 C1, 5,940,811 and 6,105,007. The Company also filed
a motion with the Delaware Federal Court to transfer the case to the Columbia
Federal Court. In April 2004, the Delaware Federal Court granted the Company's
motion to transfer the case to Columbia Federal Court. As discussed previously,
the PTO has granted the reexamination request filed by Federated and Ameritrade
relating to U. S. Patent No. 6,105,007. The Company has had discussions with
Household to jointly file a request with the Columbia Federal Court to stay the
Household action pending the resolution of the PTO's reexamination. The Company
believes that it is likely that the lawsuit will be stayed pending the
resolution of the reexamination of U. S. Patent No. 6,105,007.

28

It is possible that third parties may bring additional actions to contest
all or some of the Company's patents. The Company can make no assurances that it
will not lose all or some of the claims covered by its existing patents.

To date, the Company has generated substantial operating losses and has
been required to use a substantial amount of cash resources to fund its
operations. At December 31, 2004, the Company had cash and cash equivalents of
$62,756. The Company has almost completely exhausted its remaining cash
resources, and unless it secures additional capital immediately it may have to
consider alternatives for winding down its business, which may include offering
its patents for sale or filing for bankruptcy protection. Moreover, the Company
currently does not have the resources to repay the principal and accrued
interest outstanding under its convertible secured notes, which have become due
and payable in full as discussed in the following paragraphs. If any of the
holders of these notes takes action to collect the amounts owed by the Company
under these notes, the Company will be forced to consider alternatives for
winding down its business, which may include offering its patents for sale or
filing for bankruptcy protection.

In 2002, 2003, and the first quarter of 2004, the Company issued an
aggregate of $1,280,336 principal amount of convertible secured notes to certain
investors as part of its efforts to raise additional capital. These notes bear
interest at 8%, are convertible into the Company's common stock at a conversion
rate of $.20 per share, and are secured by the Company's equity interest in
decisioning.com, Inc., which owns the Company's patent portfolio. The
outstanding notes include a note in the principal amount of $125,000 acquired on
June 3, 2002 by the Company's Chief Executive Officer and a note in the
principal amount of $100,000 acquired on November 5, 2003 by a subsidiary of The
South Financial Group, which owns approximately 12% of the Company's outstanding
capital stock. Principal and interest under these notes generally becomes
payable in full on the second anniversary of the date on which these notes were
issued. However, under the terms of the notes, the full amount of principal and
interest under all notes becomes immediately due and payable in certain events,
including bankruptcy or similar proceedings involving the Company, a default in
the payment of principal and interest under any note, or a change in control of
the Company.

On June 2, 2004, notes with a principal amount of $756,336 became due and
payable. Additionally, on March 13, 2005 notes with a principal amount of
$200,000 became due and payable. The Company previously initiated discussions
with the holders of these notes regarding the extension of the maturity date of
these notes. However, the Company has not been successful in reaching an
agreement with all of the holders of these notes regarding an extension of their
maturity date. Because the Company is currently in default regarding payment of
principal and interest due under certain of the notes, the full amount of
principal and interest outstanding under all notes has become due and payable.
Accordingly, the full amount of principal and accrued interest under all of
these notes is shown as a current liability of the Company as of December 31,
2004. As of December 31, 2004, and December 31, 2003, the amount of principal
and accrued interest outstanding under all of the notes was $1,383,149 and
$1,291,841, respectively.

To remain viable, the Company must generate working capital through the
sale of patent licenses or by raising additional capital. To date, the Company
generally has been unable to enter into licensing agreements with potential
licensees upon terms that are acceptable to the Company. As a result, the
Company has been forced to become involved in litigation with alleged
infringers. The Company believes that these lawsuits may take an extended period
of time to complete, and no assurance can be given that the Company will have
the resources necessary to complete these lawsuits or that it will be successful
in obtaining a favorable outcome. Moreover, the ongoing reexamination of U. S.
Patent No. 6,105,007 will likely take an extended period of time to complete and
adversely affect the Company's ability to enter into other licensing agreements.
Accordingly, to remain viable it is critical that the Company raise additional
capital immediately. The uncertainties of these litigation matters, the
reexamination of U. S. Patent No. 6,105,007, and other factors affecting the
Company's short and long-term liquidity discussed above has impeded and will
likely continue to impede the Company's ability to raise additional capital. To
maintain the minimal resources necessary to support its current operations,
prosecute the reexamination of U. S. Patent No. 6,105,007, and execute a patent
licensing strategy, the Company does not believe that substantial additional
reductions in its operating expenses are feasible. No assurances can be given
that the Company will be able to raise additional capital or generate working
capital from its patent licensing business.

29

The Company has been a defendant in a lawsuit brought by Temple Ligon, who
claims that the Company breached an agreement to give him a 1% equity interest
in the Company in consideration of services he claims to have performed in 1993
and 1994 in conjunction with the formation of the Company. In January 2004, this
litigation resulted in a jury verdict against the Company of $382,148. In
connection with the litigation and the resulting jury verdict, the Company filed
post-trial motions with the trial court in which, among other things, it claimed
that the jury verdict should be set aside. On July 23, 2004, the trial judge
granted the Company's motions, set aside the jury verdict, and ordered entry of
a judgment in favor of the Company. The plaintiff has appealed the trial judge's
ruling to the South Carolina Court of Appeals. If the Company becomes obligated
to pay more than an insignificant amount of damages in connection with this
litigation, it will be forced to consider alternatives for winding down its
business, which may include offering its patents for sale or filing f