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UNITED STATESSECURITIES OF EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-K

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

For the fiscal year ended June 30, 2006

or

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

For the transition period
from                                   
to

Commission file number:000-31203

NET 1 UEPS TECHNOLOGIES,
INC.(Exact name of registrant as specified in its charter)

|Florida                           | 98-0171860         
|--------------------------------- | -------------------
|(State or other jurisdiction      | (I.R.S. Employer   
|of incorporation or organization) | Identification No.)

President Place, 4thFloor, Cnr. Jan
Smuts Avenue and Bolton Road Rosebank, Johannesburg, South Africa(Address of principal executive offices)

Registrants telephone number, including area code: 011-27-11-343-2000

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

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

Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [X] No
[   ]

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Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act. Yes
[   ] No [X]

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

Indicate by check mark if disclosure of delinquent filers in
response to Item 405 of Regulation S-K, (§229.405 of this chapter) 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 a large
accelerated filer, an accelerated filer, or a non-accelerated filer. See
definition of accelerated filer and large accelerated filer in Rule 12b-2 of
the Exchange Act (check one):

[X] Large accelerated filer [   ] Accelerated filer
[   ] Non-accelerated filer

Indicate by check mark whether the registrant is a shell company
  (as defined in Rule 12b-2 of the Exchange 
  Act). Yes [   ] No [X]

The aggregate market value of the registrant's common stock held
by non-affiliates of the registrant as of December 30, 2005 (the last
business day of the registrants most recently completed second fiscal quarter)
was $744,765,145. This calculation does not reflect a determination that
persons are affiliates for any other purposes.

As of July 31, 2006, 49,952,186 shares of the registrants
common stock, par value $0.001 per share, and 6,959,792 shares of the
registrants special convertible preferred stock, par value $0.001 per share,
which are convertible into common stock on a one-for-one basis, were
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain specified portions of the definitive Proxy Statement to
be delivered to shareholders in connection with the 2006 Annual Meeting of
Shareholders are incorporated by reference in Part III.

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NET 1 UEPS TECHNOLOGIES, INC.

INDEX TO ANNUAL REPORT ON FORM 10-K Year Ended June 30,
2006

|                                                                                                                                 | Page
|-------------------------------------------------------------------------------------------------------------------------------- | ----
|PART
      I                                                                                                                     |     
|Item
      1. Business                                                                                                           | 2   
|Item
      1A. Risk Factors                                                                                                      | 32  
|Item
      1B. Unresolved Staff Comments                                                                                         | 47  
|Item
      2. Properties                                                                                                         | 48  
|Item
      3. Legal Proceedings                                                                                                  | 48  
|Item
      4. Submission of Matters to a Vote of Security Holders                                                                | 48  
|                                                                                                                                 |     
|PART II                                                                                                                          |     
|Item
      5. Market for Registrants Common Equity, Related Shareholder Matters and
      Issuer Purchases of Equity Securities | 49  
|Item
      6. Selected Financial Data                                                                                            | 50  
|Item
      7. Managements Discussion and Analysis of Financial Condition and Results
      of Operations                        | 52  
|Item
      7A. Quantitative and Qualitative Disclosures About Market Risk                                                        | 83  
|Item
      8. Financial Statements and Supplementary Data                                                                        | 84  
|Item
      9. Changes in and Disagreements with Accountants on Accounting and
      Financial Disclosure                         | 85  
|Item
      9A. Controls and Procedures                                                                                           | 85  
|Item
      9B. Other Information                                                                                                 | 87  
|                                                                                                                                 |     
|PART
      III                                                                                                                   |     
|Item
      10. Directors and Executive Officers of the Registrant                                                                | 88  
|Item
      11. Executive Compensation                                                                                            | 88  
|Item
      12. Security Ownership of Certain Beneficial Owners and Management and
      Related Shareholder Matters              | 88  
|Item
      13. Certain Relationships and Related Transactions                                                                    | 88  
|Item
      14. Principal Accountant Fees and Services                                                                            | 88  
|                                                                                                                                 |     
|PART
      IV                                                                                                                    |     
|Item
      15. Exhibits and Financial Statement Schedules                                                                        | 89  
|                                                                                                                                 |     
|Signatures                                                                                                                       | 91  
|Financial
      Statements                                                                                                       | F-1 

1

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PART I

FORWARD LOOKING STATEMENTS

In
addition to historical information, this Annual Report on Form 10-K contains
forward-looking statements that involve risks and uncertainties that could cause
our actual results to differ materially. Factors that might cause or contribute
to such differences include, but are not limited to, those discussed in Item 1A.
Risk Factors. In some cases, you can identify forward-looking statements by
terminology such as may, will, should, could, would, expects,
plans, intends, anticipates, believes, estimates, predicts,
potential or continue or the negative of such terms and other comparable
terminology. You should not place undue reliance on these forward-looking
statements, which reflect our opinions only as of the date of this Annual
Report. We undertake no obligation to release publicly any revisions to the
forward-looking statements after the date of this Annual Report. You should
carefully review the risk factors described in other documents we file from time
to time with the Securities and Exchange Commission, including the Quarterly
Reports on Form 10-Q to be filed by us in our 2007 fiscal year, which runs from
July 1, 2006 to June 30, 2007.

ITEM 1. BUSINESS

Overview

We
provide our universal electronic payment system, or UEPS, as an alternative
payment system for the unbanked and under-banked populations of developing
economies. We believe that we are the first company worldwide to implement a
system that can enable the estimated four billion people who generally have
limited or no access to a bank account to enter affordably into electronic
transactions with each other, government agencies, employers, merchants and
other financial service providers. To accomplish this, we have developed and
deployed the UEPS. This system uses secure smart cards that operate in real-time
but offline, unlike traditional payment systems offered by major banking
institutions that require immediate access through a communications network to a
centralized computer. This offline capability means that users of our system can
enter into transactions at any time with other card holders in even the most
remote areas so long as a smart card reader, which is often portable and
offline, is available. In addition to payments and purchases, our system can be
used for banking, health care management, international money transfers, voting
and identification.

We
generate our revenues by charging transaction fees to government agencies,
employers, merchants and other financial service providers, by providing
financial services such as loans and insurance products and by selling hardware,
software and related technology. Our technology is widely used in South Africa
today, where we have over 3.6 million clients in five provinces who receive
social welfare grants using our smart cards and increasingly use their smart
cards at participating merchants to receive and spend their grants. As part of
our strategy to expand into new geographical markets, during fiscal 2006, we
announced the formation of joint ventures in Namibia, Botswana and Nigeria to
operate UEPS smart card-based switching systems in those countries. As these
UEPS systems become operational, we expect to generate revenues from sales of
equipment, software and related technology to the joint ventures and from our
share of the revenues earned by the ventures from operation of the switching
systems.

On
July 3, 2006, we acquired Prism Holdings Limited, or Prism, a South African
public company, which focuses on the development and provision of secure
transaction technology, solutions and services. Prisms core competencies around
secure online transaction processing, cryptography and integrated circuit card
(chip/smart card) technologies are principally applied to electronic commerce
transactions in the telecommunications, banking, retail, petroleum and utilities
market sectors. These technologies form the cornerstones of the trusted
transactions environment and provide us with the building blocks for developing
secure end-to-end payment solutions. We believe that Prism will help us expand
our merchant footprint in South Africa, extend our ability to deliver solutions
across the entire spectrum of transaction processing and assist us in expanding
our international operations. Since we completed the Prism acquisition after the
close of our 2006 fiscal year, Prisms operations are not reflected in our
financial statements as of and for the year ended June 30, 2006.

We
are headquartered in Johannesburg, South Africa. Net 1 UEPS Technologies, Inc.
was incorporated in 1997 as a Florida corporation and is the successor to
operations originally begun in 1989. Under --Corporate History below, we
describe the historical development of our business, including the June 2004
acquisition of Net 1 Applied Technologies Holdings Limited, or Aplitec, which
was a South African public company. All references to Net1,, the Company,
we, us, or our are references to Net 1 UEPS Technologies, Inc. and its
consolidated subsidiaries, collectively, except as otherwise indicated or where
the context indicates otherwise.

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Market Opportunity

According
to the United States Census Bureau, the worlds population currently exceeds 6.5
billion people. Yet of this total, it has been reported that over four billion
people earn less than the purchasing parity equivalent of two dollars per day.
In general, these people either have no bank account or very limited access to
banking services. This situation arises when banking fees are too high relative
to an individuals income, a bank account provides little or no meaningful
benefit or there is insufficient infrastructure to provide banking services
economically in the individuals geographic location. We refer to these people
as the unbanked and the under-banked. These individuals generally receive wages,
welfare benefits, money transfers or loans in the form of cash and conduct
commercial transactions, including buying food and clothing, in cash.

The
use of cash, however, presents significant problems. In the case of recipients,
they generally have no secure way of protecting their cash other than by
converting it immediately into goods, carrying it with them or hiding it. In
cases where an individual has access to a bank account, the typical deposit,
withdrawal and account fees meaningfully reduce the money available to meet
basic needs. For government agencies and employers, using cash to pay welfare
benefits or wages results in significant expense due to the logistics of
obtaining that cash, moving it to distribution points and protecting it from
theft.

The
use of cash or lack of access to a bank account can dramatically increase the
cost to, and in some cases completely prevent, individuals from engaging in
basic financial transactions. These basic transactions include the routine
payment of insurance premiums, the transfer of money to relatives and the use of
credit. Without a bank account, it is also difficult for an individual to obtain
a loan on attractive terms since that individual lacks a credit history and
usually cannot present a reliable means of repayment to the lender.

For
governments, assistance programs face significant challenges when dependent on
the use of cash. In addition to the costs and difficulties of using cash,
corruption becomes an even more challenging problem since there is no clear
audit trail. In fact, the absence of an electronic system for the distribution
of goods, including foodstuff or medicine, or welfare benefits presents a
significant obstacle to ensuring the fair and reliable implementation of
government policy or deployment of foreign aid.

Traditional
payment systems offered today by the major banking institutions do not address
the key requirements of the unbanked and the under-banked populations. In
addition to the high cost of maintaining a bank account relative to a customers
income level, customers must generally have basic literacy, administrative and
record-keeping abilities and a minimum income level. Additionally, banks operate
through online transaction settlement systems, which are often unavailable or
costly to implement in undeveloped areas. Finally, having a bank account does
not eliminate the need for significant quantities of cash in many instances
because customers must withdraw large sums at one time to avoid incremental
transaction fees.

Our Solution

We
believe that we are the first company to enable the affordable delivery of
financial products and services to the worlds unbanked and under-banked people.
Our approach takes full advantage of moving processing away from a centralized
point to the computer chip embedded on a smart card. A smart card reader, or POS
device, is used to enable communication between smart cards in real-time during
a transaction and indirectly with our mainframe computer at a later time. This
architecture has significant implications in terms of the products and services
that we can deliver compared to those offered by banking institutions or other
card providers.

First,
our system enables offline transactions, which is essential in serving the
unbanked and under-banked. Second, it means that while offline, the smart card
can engage in sophisticated transaction processing, using data encryption and
biometric fingerprint protection to ensure security. In fact, our smart cards
can calculate the interest owed to the card holder for having funds recorded
onto our system without ever coming online. Third, with all of the software and
transaction records on the smart card, the POS device itself requires far fewer
components, circuitry and memory, substantially reducing costs. Fourth, each
transaction is recorded on both participating smart cards, copied in subsequent
transactions to additional smart cards, and ultimately reported to our mainframe
computer. This creates a full audit trail that significantly reduces the
potential for corruption, theft and fraud. Lastly, instead of having to build
the overall system to handle peak loads, our system further reduces costs by
smoothing the transaction flow over time.

We
believe that our solution delivers benefits to each of the users of our system,
including:

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Individuals.There is no minimum income requirement for individuals to use our smart
card, making our solution universally accessible. It is also inexpensive since
the overall cost of the system is much less than widely available solutions,
including cash, bank accounts and bank cards that require online access. Our
solution additionally has the advantage of working everywhere, including remote
areas where many unbanked and under-banked people live. Even more importantly,
our solution is secure and smart cards are replaceable. This means that
individuals do not have to fear that their money will be stolen or that they
will be charged for fraudulent transactions as all transactions are verified
biometrically through fingerprints. Since the smart card performs all of the
required computing processing and contains all of the different service
features, the smart card can be tailored to meet the needs of the individual.
Card holders can also receive interest on their card balances, a benefit not
available to them when transacting solely in cash. We believe our solution has
the potential to enhance significantly the living standards of the unbanked and
under-banked by reducing transaction costs and providing them with new and
additional financial products and services.

Merchants
and Financial Service Providers. Merchants derive several different benefits
from our system. Our system decreases the amount of cash they must hold,
improving security and reducing expenses, such as cash deposit fees and cash
losses. By providing financial services through our POS devices, merchants also
benefit from new income streams at no additional incremental cost. In addition,
our system provides a record of transactions that is useful for administrative
purposes. For formal financial service providers, the use of smart cards
provides opportunities to directly sell products and services to a market that
was previously difficult to reach. For instance, insurance companies can offer
their products with the premium deducted directly from the individuals smart
card. In the case of lending, administrative costs are decreased along with the
expense of holding cash. Again, the collection of payments can occur directly
from the smart card, reducing credit risk and helping to establish credit
history.

Employers.
Our system enables employers to eliminate cash from the wage payment process.
This reduces expenses by avoiding cash handling and management, the need to
insure, secure and transport that cash and the bank transaction fees associated
with obtaining cash in the first place. The process of paying employees using
cash is also time consuming, taking up to half a day per pay period in some
instances. The use of our system eliminates this process and thereby increases
productivity. In addition, because cash payments are distributed in packets to
employees, disputes can arise as to the amount of cash in the packet. Our system
also eliminates this problem since the amount reflected on the card holders
accounts are recorded on the back-end system and then distributed on the smart
cards. Finally, employers frequently provide additional services to their
employees out of necessity, particularly loans. Our system enables other service
providers to deliver these products.

Government
Agencies.A fundamental policy goal for almost any government is to enhance
the welfare of the poorest citizens in the country. Yet the use of cash is a
poor method for delivering social welfare grants since it is difficult to track,
and the recipients endure a range of expenses and dangers that reduce their
options. By using our system, government agencies enjoy reduced costs in the
delivery of benefits to recipients by eliminating the use of cash while
increasing the options available to the recipient. This use of our system
intrinsically increases the welfare that government agencies can provide from
the same amount of taxes collected. Our system also has the potential to
increase the amount of taxes collected by bringing informal businesses into the
formal economy. The presence of a full audit trail also means that government
agencies can combat corruption. Moreover, the use of smart cards for the
delivery of additional services, including insurance products, means that
regulatory bodies can expand their oversight of transactions for individuals who
are frequently least able to protect themselves. In regard to medical benefits,
our system provides comprehensive inventory management and has the potential to
improve the treatment of patients significantly. For instance, we have deployed
an artificial intelligence program on our smart cards used for the treatment of
HIV/AIDS in South Africa that can be used to adjust a patients prescription
based on data entered by a trained medical worker through the POS device.

Our Business Strengths

We
believe our business strengths include:

Technology
Leadership. We believe we are the first company to develop, implement and
operate an affordable, flexible and secure electronic payment system for the
unbanked and under-banked that works offline. Of equal importance, our smart
cards are secured through biometric fingerprint authentication and have a broad
range of additional functionality through the use of wallets that can be
turned on as needed or as services become available. We can deliver these
services to the unbanked population at a fraction of the cost of traditional
systems. Our ability to implement an HIV/AIDS system on the same smart card as
financial services demonstrates the flexibility of our approach. In addition, we
have validated the security of our smart cards along with our overall system,
forming the foundation for a trusted solution. Independent third parties have
reviewed and published our security protocols and we have refined our system in
a way to provide system integrity over the life of the smart cards. From our
inception in 1989 to date, we have not suffered any security breaches or losses
of transactions or funds on our

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system. Our recent acquisition of Prism gives us access to
Prisms well-established core cryptography, software, hardware, embedded chip,
wireless and payment expertise.

Proven
Solution. Our system is proven and has been increasingly used. Today over
3.6 million clients in South Africa receive monthly welfare or pension payments
through our system under contracts with five provinces. Historically, welfare
and pension recipients would only download cash from smart cards, but since we
began our merchant acquiring initiative in July 2004, these recipients
increasingly choose to use their smart cards at merchant locations, which
generates additional revenue for us. During the year ended June 30, 2005, the
number of our clients that opted to receive their grants through our retail
infrastructure grew to approximately 474,000 clients and for the year ended June
30, 2006, the retail infrastructure was utilized by approximately 849,000
clients. For the years ended June 30, 2006 and 2005, the total value of
transactions processed through our UEPS merchant network was approximately $614
million and $133 million, respectively. As of June 30, 2006, we had 4,038 POS
devices installed at 2,381 participating retail merchants compared to June 30,
2005, when we had 3,235 POS devices installed at 1,880 participating retail
merchants

Versatile
Application.Once an individual begins using our smart card, we become a
logical provider of a broad range of additional products and services. For
instance, a card holder using our system for the administration of medical
treatment can also use the same smart card for receiving welfare payments or
wages as well as making purchases. Because use of each smart card is secured
biometrically, the smart card can also be used for identification and voting.
The additional uses mean that once we have enrolled and delivered a smart card
to an individual, our revenue potential increases significantly beyond the
initial service for which that individual has signed up.

Broad
Appeal that Drives Opportunities.Becauseour system provides
economic benefits to all participants, we believe there are strong incentives
for government agencies and employers to adopt our system in many developing
countries. Our solution is also appealing because a single deployment enables
the delivery of a broad array of new services to those who are potentially most
in need of them, often at a lower cost than alternative distribution methods.

Increasing
Returns to Scale. The initial establishment of our system in a province or
country requires upfront expenditures for computers, distribution infrastructure
and card holder registration. Once in place, though, the cost to us of supplying
additional products to users is low. For instance, if a customer receives
welfare payments on one of our smart cards and then chooses to purchase
insurance through our system, there is almost no additional expense for us to
deduct the insurance premium regularly. As a result, the operating margin for
that customer increases significantly, offset only by any marketing or
administrative costs associated with that product.

Our Strategy

We
intend to provide the leading system for the worlds estimated four billion
unbanked and under-banked people to engage in electronic transactions globally.
To achieve this goal, we intend to pursue the following strategies:

Disciplined
Approach to New Markets. We carefully evaluate new opportunities in order to
deploy our business development resources effectively. We believe there are
significant opportunities for our system in the developing countries of Africa,
Central and South America and the Asia-Pacific Rim, where the unbanked and
under-banked comprise a majority of the population. Where we believe it makes
sense, we will use partnerships or make acquisitions to accelerate our entry
into new markets. During our 2006 fiscal year, we established, together with
local investors, companies to create and implement UEPS systems in three African
countries, Namibia, Botswana and Nigeria.

Unlock
Target Markets with a Key Product. The first step in establishing our system
within a new province or country is to establish a broad base of smart card
users around a single application. One of our preferred routes is to secure
contracts to implement payment systems for government programs having large
numbers of potential card holders. We believe another effective route will be
the delivery of medical management applications, such as for HIV/AIDS. However,
we are not dependent on government agencies to establish an initial base.
Employers are widely examining our system to address their wage payment
challenges and we are currently pursuing opportunities to deliver this solution.
Similarly, banking institutions implement the UEPS banking application and
distribute smart cards to their clients to replace ageing legacy systems,
including paper or book- based systems.

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Expand
Our Products Within the Markets We Serve. With the establishment of a strong
base of card holders and related infrastructure, we can then move to providing
additional products and services. As part of broadening our card holders
options, we will also sell our smart card readers and POS devices to merchants
to enable them to enter into transactions. Additionally, we will work to
establish relationships with post offices, banks and other financial service
providers with the goal of making our system ubiquitous in the markets we serve.

Provide
Products and Services Ourselves Where the Profit Potential is Compelling.
Our system can dramatically reduce transaction costs and improve data collection
for a broad set of products and services. We intend to offer those products and
services ourselves where the profit potential is significant. For instance, we
engage in lending in South Africa. We are able to offer this service at a lower
interest rate than competitors due to our ability to deduct interest and
principal directly from a borrowers smart card and our knowledge of that
individuals payment history.

Establish
Partnerships or Make Acquisitions When Appropriate. As part of our
disciplined approach to growing our presence globally, we will evaluate and
enter into partnerships where we can draw on local knowledge and infrastructure
to drive the rapid adoption of our system. We believe that this will enable us
to focus on our core strength in technology as well as product development and
delivery. In some instances, we will make acquisitions where we believe that our
approach will enable us to gain customers and realize operational benefits
rapidly from the deployment of our more efficient solution.

Our Technology

We
developed our technology to enable the affordable delivery of financial products
and services to the worlds unbanked and under-banked people. Our proprietary
technology is designed to provide the secure delivery of these products and
services in the most under-developed or rural environments, even in those that
have little or no communications infrastructure. Unlike a traditional credit or
debit card where the operation of the account occurs on a centralized computer,
each of our smart cards effectively operates as an individual bank account for
all types of transactions. All transactions that take place through our system
occur between two smart cards at the point of service, or POS, as all of the
relevant information necessary to perform and record transactions reside on the
smart cards.

The
transfer of money or other information can take place without any communication
with a centralized computer since all validation, creation of audit records,
encryption, decryption and authorization take place on, or are generated
between, the smart cards themselves. Importantly, the cards are protected
through the use of biometric fingerprint identification, which is designed to
ensure the security of funds and card holder information. Transactions are
generally settled by merchants and other commercial participants in the system
by sending transaction data to a mainframe computer on a batch basis.
Settlements can be performed online or offline. The mainframe computer provides
a central database of transactions, creating a complete audit trail that enables
us to replace lost smart cards while preserving the notional account balance,
and to identify fraud.

***System
Components***

Our
platform consists of three fundamental components: (1) our FTS patent, (2) our
UEPS and (3) our security protocol.

FTS
Patent. The FTS patent describes a method by which funds can be transferred
from one smart card to another in a secure and offline manner. The term
offline refers to transactions that are effected without the need to contact
or communicate with the issuer when the transactions occur, as the smart cards
themselves perform the authorizations required. The FTS patent also describes
how smart cards can be loaded or re-loaded with funds and how these can be
redeemed for value in either banking or non-banking environments.

UEPS.
Our UEPS is a suite of software programs that make use of the FTS methodology to
deliver an integrated information, payment, switching and settlement environment
that underpins our transaction processing system. Our software principally runs
on three devices: the smart card, the POS device and the back-end system
mainframe. When we sell a complete system to a customer or license our
technology, we provide all of the software required to operate the UEPS,
including the smart card functionality, the POS devices that allow our smart
cards to transact with each other in an offline manner and our back-end system
that primarily stores an audit trail of all transactions effected.

The
primary strengths of the UEPS are its affordability, security and flexibility.
The system is affordable because the computer chips on the smart cards contain
all the software necessary to process UEPS transactions, thereby allowing the
POS devices required to conduct these transactions to contain far fewer
components and less circuitry than traditional POS devices. There is also a
reduced need for processing power and on-board memory given that online
communication is not necessary. This eliminates the need for an internal or
external modem and its associated hardware, maintenance and call costs. As a
result, the

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UEPS terminals are relatively inexpensive and do not require
specialized technical expertise for installation. The UEPS also reduces or
eliminates the need for national infrastructures, including electricity,
telephone or data transmission. The UEPS is secure because the funds in each
smart card are protected from illegal access through biometric fingerprint
technology. In addition, every transaction is verified by the two smart cards
involved in the transaction using state-of-the-art cryptographic systems in
conjunction with protocols and techniques that we have developed. Finally, our
UEPS is flexible because transactions are completed offline, eliminating
virtually all restrictions where verified transactions can occur.

We
released the first version of our UEPS in 1991. It included software to operate
each smart card as well as the main payment system. Later versions of our UEPS
provided all of the functions necessary to issue and manage a smart card and
terminal base as well as those needed to effect settlement between all of the
operators and participants. Our UEPS is fully traceable and auditable. It can
also provide advanced capabilities including loss tolerance and smart card-based
interest distribution. Finally, our UEPS is scalable and capable of working in
small applications including a hospital setting as well as large settings such
as country-wide implementations.

Security
Protocol. Our security protocol was designed to prevent opportunistic fraud
and enforce the correct transaction flow. The symmetric triple data encryption
standard, or DES, is used extensively in association with a native random number
generator that ensures that all transactions are performed by using a random
session key pair. The DES encryption algorithm can be easily modified to use
alternative symmetric or asymmetric encryption algorithms such as the Rivest,
Shamir and Adleman or elliptic curves. Each message exchanged during a
transaction names both transacting parties, includes unique information to
guarantee freshness and depends explicitly on all the messages that occur before
it.

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Our UEPS Platform

The following diagram depicts how our UEPS platform is
constructed.

UEPS PLATFORMFully-functional and integrated payment and settlement
      system, capable of operating all UEPS products and systems.




COMPLETE SYSTEMSCombination of products meeting a clients particular
      requirements.


STAND-ALONE PRODUCTSFinancial transaction applications (S2S products).


FUNCTIONALITYCombination of Hardware and Operating Systems on smart
      cards enable the creation of UEPS applications which can be customized for
      the particular needs of a client.


OPERATING SYSTEMSThird-party software.
    UEPS software programmed by us.


SMART CARDS(Hardware)Cards sourced from
      third-party vendors.


HARDWAREPOS devices, ATMs,
      back-end computer systems sourced from third-party vendors.


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The
UEPS we sell to clients is a platform with the potential to provide all of the
products we develop which, when grouped together, form complete systems serving
the specific needs of various business segments. Depending on the requirements
of a particular customer, we assist the customer in the setup of its application
which is tailored to provide only the products and services initially required,
although the UEPS can later be updated to provide additional products. We
outsource the manufacturing of the hardware components of our system, including
smart cards, POS devices, automated teller machines, or ATMs, PCs and back-end
mainframes. However, we have developed all of our application software modules
so that they will run on different hardware platforms which allows us to be
hardware-independent and to provide our customers with the latest and most
economical hardware solutions.

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

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

***UEPS
Smart Card Functionality***

We
have combined these technologies to create a smart card application that
incorporates and controls the functionality that is normally found on banking
host systems. Our technology reverses the traditional approach where the card
acts as an access mechanism to a host-managed account. Instead, the smart card
controls the account itself while the host system is relegated to backing up and
creating an audit trail for the smart card base.

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

Identification,
Authentication, Non-Repudiation and Affirmation of UEPS Transactions.
Traditional payment systems provide customers with paper receipts that reflect
transaction details. Customers normally keep these receipts to reconcile their
monthly account statements. During reconciliation, customers can detect
fraudulent transactions and errors by matching account entries against their
paper receipts, which may lead to disputes, financial losses and the repudiation
of transactions. Fraud committed by people taking advantage of the inherent
security weaknesses of traditional payment systems increases the cost of
managing transactions effected through these systems. As a result, financial
institutions and other system participants must invest significant resources to
minimize the risk associated with fraud and errors.

A
fundamental element of the UEPS is that all payment and money transfer
transactions take place between two UEPS smart cards  the smart card to be
debited and the smart card to be credited. During the transfer of value between
the two smart cards, the transaction is written to a dedicated history file on
each of the smart cards. These history files are subsequently used to ensure
settlement either directly or through the activation of the UEPS multiple
streams audit trail feature. Thus, smart card holders can reconcile their
monthly accounts directly from the smart cards transaction history file. Also,
each smart card authorizes all debit transactions through the presentation and
verification of one of the card holders biometric fingerprint templates that
are stored in the smart card, and each UEPS transaction is signed by both smart
cards. Taken together, these features of the UEPS help prevent the fraudulent
creation, duplication or alteration of a transaction, as well as any potential
repudiation of a transaction. As a result, the UEPS helps to minimize the costs
associated with account management and inquiry resolution and helps ensure that
customers do not incur losses from undetected errors, fraud or transaction
mismanagement.

Continuous
Debit. People with limited economic means or unestablished credit histories
may find it difficult to obtain access to public utility services such as
telephone, fuel, water or electricity unless they purchase pre-paid units for
these services. A prepaid unit of service may be a liter of fuel, a kiloliter of
water, ten minutes of electricity or a two minute local phone call, and may

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need to be used within a specified period of time before it
expires. Pre-paying for services can deprive purchasers of flexibility to
redeploy their funds to meet other financial needs.

The
continuous debit feature of the UEPS eliminates the need for customers to buy
pre-paid units by allowing them to use their smart cards to pay for these
services as and when they need and use them. All a customer needs to do is to
insert his smart card into the utility equipment and the smart card will debit
itself whenever a unit of service is used. The continuous debit feature provides
significant financial flexibility to customers and can be tailored to be used in
any pay as you go environment, including Internet access.

Continuous
debit transactions are typically a large number of small transactions that can
quickly fill up the space on a smart cards transaction file. We eliminated this
problem by designing the UEPS to minimize the file space that these transactions
require by enabling subsequent transactions to replace and aggregate with
earlier ones, thereby treating multiple transactions as one global transaction.

Multiple
and Restricted Wallets. Unbanked people who keep their cash at home risk the
loss of their funds from misplacement, theft or disasters such as floods or
fires, which can have a devastating impact on their financial lives. Keeping
funds at home does not generate any interest income and cannot help demonstrate
financial responsibility or provide collateral security for the extension of
credit. Finally, keeping funds in cash can make it more difficult for people to
segregate their funds for specific purposes, whereas having one or more bank
accounts can facilitate budgeting for various categories of expenses.

The
multiple wallet feature allows card holders to use their smart cards to help
manage their budgets. Up to 255 wallets can be configured and activated per card
holder depending on the electrically erasable programmable read-only memory, or
EEPROM, available on the particular smart card. Each of the wallets can be
configured to meet the specific requirements of the card holder, and can be used
for interest-generating savings, pre-paid utilities, medication management,
credit, debit orders and for many other purposes. In addition, a wallet can be
either protected or unprotected. Protected wallets require the biometric
verification of the card holder to effect transactions. Unprotected wallets are
normally used for low value transactions such as transportation for which speed
of processing is critical.

Since
the audit trail of all transactions performed by the active wallets is stored on
the smart cards history file, card holders can provide third parties with a
comprehensive record of their transaction histories, which can help evidence
payments, such as insurance premiums and demonstrate a regular income stream
from wages or other sources. This audit trail can provide unbanked people the
opportunity to obtain affordable services from formal financial service
providers which might otherwise deny or limit services to them.

Wallets
can also be restricted. Restricted wallets allow transactions to be performed
only at specific merchants. For example, if an employer desire to subsidize an
employees transportation costs, a wallet can be configured that permits the
holder to spend the value loaded into that wallet only at specified
transportation points. Restricted wallets can also be used by governments to
prevent social welfare grant recipients from using payment for particular goods
or services.

Offline
Loading. The use of payment systems that depend on online authorizations is
difficult to implement in developing economies and countries that do not have
advanced or reliable telecommunication infrastructures. Online systems include
magnetic stripe-based solutions that are widely used in first world economies
and require that all transactions, including retail sales, the dispensing of
cash, the loading of value to smart cards and the authorization of credit
transactions, be performed only at self-service terminals, or SSTs, ATMs or POS
devices that operate online. Thus, online systems cannot be used to provide
financial or banking services to the millions of people, such as those in
developing countries, that live in geographical areas that have little or no
infrastructure. Most smart card systems therefore, such as EMV, also operate
online. We believe that this reliance on online communication has limited the
exploitation of smart card technology, has resulted in high system
implementation and operational costs and has not addressed many of the needs of
the worlds unbanked population.

Our
offline loading feature has been designed to solve these problems associated
with reliance on limited infrastructures and allows value to be distributed
through existing infrastructures such as the postal service, fixed line
telephones, cellular phones, verbal communication and newspapers. Our solution
is a unique ten-digit signature code that the UEPS back-end system generates to
enable specific amounts to be loaded to specific smart cards. When a ten-digit
signature code is presented at any offline POS device to the smart card for
which it was created, the code will, after validation, allow the smart card to
credit one or a number of its internal wallets in the appropriate amount.

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The
offline loading function can be used to transfer funds remotely for payments
such as wages, pensions, welfare grants, refunds and third party transfers. When
a number of ten-digit signature codes are created for a specific smart card,
each ten-digit signature code can then only be applied to that smart card once.
Ten-digit signature codes can be presented to a smart card in a different order
from the one in which the codes were created but can be effected only by that
particular smart card.

Biometric
Identification. The magnetic stripe credit and debit card systems available
today use a written signature or a personal identification number, or PIN, in an
effort to verify the customers identity minimize the repudiation of
transactions. However, PINs can be compromised, magnetic stripes can be cloned
and if a card is stolen together with its PIN number, the card can be used to
transact until it is reported stolen or its offline limits are reached. The PIN
and card can also be used to gain access to back-end account information to
defraud further the genuine card holder. Therefore, positive offline card holder
verification is critical to ensure that a payment system does not effect
fraudulent transactions. At the same time, the system must ensure that the
genuine card holders transactions are not rejected.

As
an alternative form of customer identification, the UEPS supports biometrics in
the form of fingerprint recognition. Biometric scanners are used to record a
customers fingerprint images. The fingerprint templates that result are stored
in the holders smart card and used for identification whenever the smart card
is used.

Before
a smart card is issued, the following fingerprint recordation process occurs:

- All ten fingers are captured, with three fingerprint images captured per
  finger.
- The three fingerprint images for each finger are consolidated and filtered
  to create the best image for that finger. This results in ten-high quality
  fingerprint images.
- The ten fingerprint images are scored and the four highest scoring images
  are used to generate fingerprint templates. A fingerprint template is a unique
  geometric representation of one fingerprint.
- The card holder is verified against these four templates using the highest
  fingerprint matching threshold to ensure the best recordation process. This
  process assists to eliminate the false rejection of genuine card holders due
  to initial bad fingerprint template recordation.
- The four fingerprint templates are signed by an issuing UEPS smart card
  and stored on the card holders smart card.

When a
transaction is performed, the card holders fingerprints are verified against
those stored on the smart card. The verification process occurs in a secure
session between the smart card and the fingerprint scanner. During the
verification phase, a moderate matching threshold is used to compensate for the
changes in the card holders fingerprint conditions.

Our
biometric identification feature is designed to protect our card holders against
fraud, helps eliminate transaction repudiation and reduces the complexity
associated with hot card management systems and hot line centers, as well as the
cost of the systems that are utilized to deal with stolen and lost cards.

Automatic
Credit. The distribution of social welfare benefits, unemployment insurance,
food parcels or vouchers and medical supplies is personnel intensive.
Furthermore, beneficiaries must present themselves regularly at designated
distribution locations in order to receive their benefits. These requirements
create a number of operational and logistical problems, which increase the
direct or indirect costs for system owners, operators and members, including:

- The costs of transporting beneficiaries and payment personnel to and from
  distribution points;
- The time beneficiaries must spend waiting in line at distribution points
  rather than working or engaging in other activities;
- The need to provide adequate staff, water, toilets, medical emergency
  services, shelters and security at distribution points;
- The need to provide personnel to deal with beneficiary communications and
  inquiries; and
- The need to create itineraries and schedules for payment delivery
  personnel, as well as to establish distribution centers and purchase vehicles
  to travel to distribution points.

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Thus,
governments incur significant costs in distributing social welfare payments at
fixed or movable locations, and banking institutions must spend large sums to
provide branches and ATMs where their customers can obtain cash. Many of these
costs cannot be passed onto the client. We have developed the capacity in the
UEPS to facilitate the distribution of cash at retail merchants in a manner that
eliminates or reduces the need for social welfare beneficiaries and customers to
travel to a specific ATM location, reduces merchants costs of depositing excess
cash and that enables banks to reduce their costs associated with providing,
maintaining and servicing brick and mortar infrastructures.

We
developed our automatic credit feature to allow our smart card holders to
receive regular, fixed amount payments at POS devices that may not have the
capability to perform online functions. The participants in an automatic credit
transaction are the automatic credit initiator, the smart card holder and the
merchant. The automatic credit initiator is the issuer which creates an
automatic credit instruction for a particular wallet of a specific card holder.
The smart card holder is the beneficiary of the automatic credit instruction
which has been approved by the initiator. The merchant is any retailer which
participates in the UEPS system and has a POS device for a card holder to
activate automatic credit instructions.

Card
holders go to designated points to register for an automatic credit instruction.
While at the POS device, the credit initiator submits an application for an
automatic credit instruction to the back-end system. The application can occur
offline or online. Once the back-end system has validated the beneficiarys
information, it creates an automatic credit instruction signature which is sent
back to the POS device and is then recorded on the smart card. On the day that
the card holder is due to receive a payment, the card holder inserts his smart
card into any POS device. In the event that the automatic credit instruction is
due and valid, the smart card of the card holder is automatically loaded.

Interest
on Card. Unbanked people transact mainly with cash. One of the most
fundamental disadvantages of cash is that it cannot generate interest income for
the holder and that its value depreciates with inflation. The UEPS was designed,
in essence, to be an alternative to a formal banking account that allows a smart
card holder to earn interest on the value contained in his various wallets. The
ability to earn interest provides an incentive for people to maintain balances
on their smart cards rather than convert the full balances to cash or to unload
them to a traditional banking account where they would not earn any
interest.

There
are numerous possible types of interest calculations, including simple,
compound, continuous, minimum balance, average balance, daily and monthly
interest. The UEPS uses the compound interest methodology, calculated daily on
the previous days closing balance. In order to calculate interest correctly,
the client smart card requires a host date certificate, or HDC. This date
originates from the back-end system, and is updated on the merchant smart card
when it settles its transactions. The merchant smart card in turn passes the HDC
to the card holders smart card, which enables the client smart card to
calculate the interest for any wallet that bears interest. The system is
designed to ensure that the client smart card only calculates the interest using
the latest HDC, and not any date given to it from an unsettled or inactive
merchant smart card. Once interest is added to an interest-bearing wallet, a
notification record is written to the card holders smart card history file and
forwarded to the merchant smart card for settlement. This record informs the
back-end system of the interest amount credited.

UEPS
Morphing. The UEPS is proprietary. It is designed for a specific market that
requires specific features and as such is not compliant or compatible with other
smart card systems. If it were compatible with other systems, the usefulness of
the UEPS would be as limited as these other systems and could not provide a
solution for the unbanked populations of the world. However, we have designed
the UEPS in such a way so that it can inter-operate with other standard payment
systems such as EMV, one of the more widely-used standards in the banking
sector. In the future, smart card holders may wish to use their smart cards in
environments that are currently enabled for other smart card-based payment
systems. The UEPS morphing feature allows our smart cards to transact at EMV POS
devices as if our smart cards were in fact EMV smart cards. Our card holders can
thus transact at EMV POS devices but the functionality provided at these POS
devices is limited to that offered by the EMV system. Our smart cards, when
required, can morph into the standards supported by the POS devices thus
minimizing the cost of deploying another POS infrastructure.

Our
UEPS morphing feature is not merely a collection of multiple applications
grouped together into a single smart card. This feature also enables
inter-operability between these applications. The EMV standard is mainly an
online application that requires offline card authentication, online host
authorization and online card issuer authentication. The EMV payment application
is invoked by the POS device using the application selection methodology. The
UEPS smart card can recognize the type of environment in which it is used
through the command structure passed to it from the ATM, SST, POS device or any
other smart card reader conducting the transaction. Once the smart card has
sensed the system in use, it immediately morphs this application and behaves as
such for the duration of the transaction. The morphing feature is not limited to
EMV, but can also be used with CEPS, Visa Horizon and Mondex, among other
systems. It places the UEPS card holder in a unique position to possess a single
smart card, and use it at any POS device, ATM or SST of his choice, without
having to have different smart cards for every payment application.

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Automatic
Debit. Currently, payees experience various administrative problems and
other challenges in collecting payments due to them through the formal banking
system for insurance premiums, micro-loan payments and governmental statutory
deductions for items such as unemployment insurance. In addition, collectors
suffer payment losses as a result of insufficient funds, closed accounts, or
charge back transactions, and may incur significant personnel costs for
employees to attempt to collect from non-payors. Payees may find that their
accounts are incorrectly debited, unauthorized debits are made or they pay high
fees for debit orders which are not processed.

For
unbanked people, their problems are often even greater since their only means of
payment is cash. To pay a premium, they have to present themselves at the office
of the financial service provider and pay their premium in cash. These offices
are typically in urban areas and therefore unbanked people have to pay for
transportation in order to make their monthly payments. Carrying substantial
amounts of cash over long distances involves risks of theft and loss.

We
created the automatic debit feature to allow a smart card to reduce the balance
in any of its active wallets on a specific date and for a predetermined amount.
This function can take place in an offline environment at any POS device. The
automatic debit feature reduces the risks associated with collection of
insurance premiums and other regularly scheduled payments by ensuring that any
funds loaded to the smart card are first used to service the automatic debit
before being transferred for the card holders general use.

The
participants in an automatic debit transaction are the automatic debit
initiator, the merchant and the smart card holder. The automatic debit initiator
is the issuer which will create an automatic debit instruction for a particular
wallet of a specific smart card holder. The merchant is any retailer which is a
participant in the system and has a POS device for a card holder to activate
automatic debit instructions. The card holder is the person who must pay the
premium or other payment.

Card
holders register for automatic debit instruction at the offices of the automatic
debit initiator. While at the POS device, they submit an application for an
automatic debit instruction to the back-end system. This can occur offline or
online. Once the back-end system has validated the beneficiarys information, it
creates an automatic debit instruction signature which is sent back to the POS
device and is then recorded on the smart card. On the day that the card holder
is due to pay a premium or other payment, the card holder inserts his smart card
into any POS device. In the event that the automatic debit instruction is due,
the smart card of the card holder is automatically debited.

Multiple
Streams Audit Trails for Offline UEPS Transactions. The UEPS, as an offline
system, must ensure that all transactions effected offline are settled, at some
point in time, by the back-end system. Settlement is critical to guarantee that
no funds can be lost by card holders even when a POS device, its paper audit
trail or its merchant smart card is lost, stolen or destroyed. Importantly,
smart card transactions, including automatic credits, automatic debits, interest
accruals, agent transfers, cash downloads and purchases, all have a financial
effect on individual smart card balances and must therefore be settled in order
to preserve system integrity. The UEPS multiple streams audit trail
functionality is designed to ensure that the replacement smart card contains the
correct amount of funds when a lost, stolen or defective card is replaced.

The
UEPS provides the ability to activate multiple streams audit trails through POS
device profile downloading. Multiple streams audit trails are distributed
through the active smart card base and are completely transparent to all card
holders. Multiple streams audit trails can only be implemented on smart cards
which have an adequate amount of EEPROM memory as the size of the transaction
file created on smart cards will at least double. The multiple streams audit
trails functionality is especially useful in environments where either the POS
device is offline or may be damaged or destroyed due to the harsh environmental
conditions in which it operates or where there is a perceived risk that the POS
device may be stolen.

When a
client smart card is inserted into any POS device to perform one or more
transactions, including a sale, load, unload, automatic credit, automatic debit
or interest accrual transaction, the current transaction is written to both the
client and the merchant smart cards. The previous transaction performed by the
client smart card at another POS device is also written to the currently
transacting merchant smart card transaction file as a piggy back record. The
previous transaction or transaction group written to the merchant smart card
from another client is also written to the client smart card of the currently
transacting client.

This
process ensures that each transaction or transaction group effected on a client
smart card is distributed directly to a second merchant smart card and
indirectly to a third merchant smart card. The third transfer occurs by writing
the transaction or transaction group to another client smart card which in turn
transfers the same to a different merchant smart card. The number of different
audit trails streams can be selected through the POS device or merchant
profiles.

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Upon
settlement of the merchant smart card, the transactions which were performed at
other merchants will therefore also be settled. Each merchant smart card becomes
the carrier for transactions that have occurred at other merchants. All client
smart cards become the multiple streams that facilitate the movement of
transaction data among unrelated merchant smart cards. This process occurs in an
offline environment.

In
the event of the loss or destruction of any POS device or its associated
merchant smart card or paper audit trail, all transactions that have been piggy
backed can be recovered through the settlement of other merchant smart cards.
The speed at which these transactions can be recovered will depend on how
frequently the client smart cards that are used to piggy back transactions
have transacted at other UEPS merchants. The multiple streams audit trails
functionality provides complete and independent audit trails that help prevent
fraud by single or colluding parties.

Transparent
and Automatic Recovery for Offline UEPS Transactions. The UEPS, as an
offline system, must ensure that all transactions effected offline complete
successfully or that, in the event of a failure, the transaction in progress can
be restarted without any loss being incurred by either the client or merchant
concerned. Failure of the POS device or the premature removal of either of the
smart cards involved during a transaction may lead to the client smart card
being debited without the corresponding credit being reflected on the merchant
smart card. Although the premature removal of either of the smart cards can be
prevented by introducing motorized smart card readers, the cost involved is
prohibitive and the solution does not address other possible failures due to POS
device hardware problems or power failures, which are common in areas with
unreliable power infrastructures.

The
UEPS is designed to recover failed transactions through its transparent and
automatic recovery feature. This feature is activated during the session key
establishment phase that occurs whenever two smart cards transact. During the
session key establishment phase, each smart card generates an eight-byte natural
random number and triple-DES encrypts it with its generic UEPS key pair. These
two encrypted blocks are then exchanged by the two smart cards, and once
decrypted, used by each smart card to generate a random DES key pair. This new
key pair is used to exchange further information between the smart cards until
the transaction is completed.

During
the next phase, each smart card passes to the other its smart card unique serial
number and its current transaction counter. At this stage, the client smart card
is now able to determine if the last transaction written to its transaction file
was indeed also effected on the merchant smart card. If not, the client smart
card simply unrolls its last transaction thus restoring the correct data image
as it was prior to the transaction. This feature can also be used whenever a POS
device is disabled for whatever reason. In this instance, the two smart cards
can simply be inserted into any other working POS device and the two smart cards
will automatically re-synchronize themselves. Further transaction processing can
then resume normally. As a result of this feature, transactions such as
transaction cancellation and reversals can be performed offline in a secure
manner.

Mechanics of Loading, Spending and Settlement

The
following describes how card holders can load value onto their smart cards and
spend the value they receive. It also describes how merchants settle
transactions with our back-end system.

Loading.
  All card holders that receive social welfare grants or whose employers participate
  in our system can load their smart cards at any POS device located in merchant
  stores. Card holder can load their smart cards in several different ways. If
  the card holders electronic value was created through the ten-digit signature
  code, then the card holder has three options. He can effect an online auto load,
  in which case the POS device connects in real time to the back-end system, which
  then forwards any available ten-digit signature codes present in the account
  of the card holder. These codes will be loaded to the smart card automatically.
  If the communications network is erratic or unreliable, ten-digit signature
  codes can be downloaded to the POS device of a nearby participating merchant
  where and when the network is operational. The card holder can then perform
  an offline auto load whereby any ten-digit signature codes present in the POS
  device will be loaded to his smart card. If a network connection is not available,
  the card holder can key in his ten-digit signature code and amount to be loaded.
  In all scenarios the smart card will be credited only if the ten-digit signature
  code is decrypted successfully by the smart card. If the card holders
  smart card is initialized with one or a number of automatic credit instructions,
  the smart card will credit itself as we describe under Automatic Credit
  feature.

Spending.Once value has been loaded to a smart card, card holders may purchase goods
or services, make cash withdrawals, initiate money transfers, request automatic
loans, effect third party payments and invoke automatic credits and debit
orders, all offline at any participating merchant store. To perform a
transaction, the card holder inserts his smart card into the top smart card
reader of the POS device and selects the appropriate function. Biometric
fingerprint identification is required for most functions to protect card
holders against the unintended or fraudulent usage of their funds. A printed
receipt displays the details of the transaction performed and includes other
system audit trail information.

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Settlement.
As spending on a UEPS smart card occurs offline, the settlement of the merchant
transactions with the back-end system needs to take place within the two day
window settlement period provided for in the contract, or as and when the
merchant smart card becomes full. Settlement can be performed online or offline.
Merchants who have access to a network infrastructure can use the settlement
option on their POS devices to connect to the back-end system and settle their
merchant smart cards online. During the settlement process, merchants choose
whether to have the funds settled deposited to a traditional bank account or
transferred to a client smart card.

Once
the merchant selects the settlement option, the transactions are stripped off
the merchant smart card, and the accumulated transaction values, less the
transaction fees which the merchant is contractually required to pay to us, are
paid to the merchant. Payment occurs either through the countrys traditional
banking clearing system, by check or is credited to the merchants client smart
card for immediate or future use. The last option is extremely beneficial for
rural merchants who purchase their goods from larger wholesalers. Their funds
are, upon settlement, immediately available. Therefore, they can purchase goods
using their client smart card and/or withdraw cash at other participating
merchants. Merchants who do not have access to a network infrastructure can
insert their merchant smart card into any POS device that has online
connectivity and perform the settlement process. Many merchants can share any
POS device.

If
a merchant does not have access to a communication network, the merchant can use
our milking function with a milking smart card. This smart card has greater
functionality than a regular smart card and therefore requires a large memory
chip for storing multiple transactions, hot card files, a freshness
certificate, and any other variables, including fees and/or interest rates that
need to be updated on merchant smart cards which operate in deep rural areas.
The milking smart card is inserted in the bottom smart card reader of a POS
device and the merchant inserts the merchant smart cards to be milked into the
top smart card reader. During this settlement process, the transactions are
stripped from the transaction history file of the merchant smart card and at the
same time, the new hot card file, freshness certificate, fee structure, interest
rates and any other parameter that requires modification are updated. The
milking smart card is then physically handed over to the central office in order
to update the back-end system. At the time of settlement, all transactions are
stripped from the merchant smart card, aggregated and paid into the nominated
bank account of the merchant. Merchants can select their client smart card as
their nominated account, in which case the amount to be paid is added to the
merchants client smart card.

We
have designed and developed a dual functionality smart card called the Net1
Combi-Card for use in rural environments and for very small merchant stores or
hawkers. Hawkers are typically small merchants that sell food or merchandise
from a stand on the side of road or on a pavement. This smart card is
initialized with both merchant and client functionality. While trading, the
merchant section of the smart card is used for transaction storage which once
settled will allow the merchant to use the same smart card to perform purchases
or any other financial function.

Our Products

The
following table summarizes each of our smart card to smart card, or S2S,
products, including

- the market introduction date;
- the key features of the product;
- the features of our UEPS technology which each product uses;
- the types of fees we charge or currently plan to charge for the product;
  and
- the target markets for the product:

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Product
      Year of Market
      Introduction
      Features
      Types of Fees
      Target MarketsS2S Pension and Welfare
    • 2000-2004
    • Ten-Digit Signature Codes 
            Offline and Online 
           Loading 
        • Automatic Credit 
        • Multiple Audit Trail 
        • Mutual Authentication 
        • Transparent and 
           Automatic Recovery 
        • Biometric Identification
    • Loading Fee per 
           Beneficiary 
        • Sales of Smart cards 
        • Registration and 
           Enrollment
    • Government 
        • Social Welfare Grant 
           BeneficiariesS2S Wage Payment
    • 2005
    • Ten-Digit Signature Codes 
            Offline and Online 
           Loading 
        • Multiple Wallets 
        • Restricted Wallets 
        • Multiple Audit Trails 
        • Mutual Authentication 
        • Transparent and 
           Automatic Recovery 
        • Biometric Identification 
        • Interest Calculations
    • Wage Loading Fee per 
           Employee per Month 
        • Equipment Sales per 
           Payroll Clerk plus POS 
           Terminals for the Payment 
           of Wages in the Field or 
           Factory 
        • Sales of Smart cards 
        • Mass Registration and 
           Enrollment per Employee 
           if Performed by us 
        • Monthly Smart Card 
           Account Fee per Employee 
           per Month
    • Employers 
        • EmployeesS2S Cash Advance
    • 2006
    • Ten-Digit Signature Codes 
            Offline and Online 
           Loading 
        • Multiple Wallets 
        • Restricted Wallets 
        • Multiple Audit Trails 
        • Mutual Authentication 
        • Transparent and 
           Automatic Recovery 
        • Biometric Identification 
        • Automatic credit scoring 
        • Automatic debit and credit 
        • Interest Calculations
    • Interest earned if we 
           assume the credit risk 
        • Loading fee per cash 
           advance 
        • Debit order fee 
        • Sales of Smart cards 
        • Mass Registration and 
           Enrollment per Employee 
           if Performed by us 
        •
    • Employers 
        • EmployeesS2S Loans to Card
    • 2006
    • Ten-Digit Signature Codes 
            Offline and Online 
           Loading 
        • Multiple Wallets 
        • Restricted Wallets 
        • Multiple Audit Trails 
        • Mutual Authentication 
        • Transparent and 
           Automatic Recovery 
        • Biometric Identification 
        • Automatic credit scoring 
        • Automatic debit and credit 
        • Interest Calculations 
        • Electronic card audit trail 
           of all active loans 
        • Enforcement of minimum 
           disposable income rules
    • Interest earned if we 
           assume the credit risk 
        • Loading fee per cash 
           advance 
        • Debit order fee 
        • Sales of Smart cards 
        • Mass Registration and 
           Enrollment per Employee 
           if Performed by us 
        •
    • Financial institutions 
        • Employees


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Product
      Year of Market Introduction
      Features
      Types of Fees
      Target MarketsS2S Medical Management,
      Patient Monitoring and Distribution
    • 2005
    • Multiple Wallets 
        • Restricted Wallets 
        • Multiple Audit Trails 
        • Mutual Authentication 
        • Transparent and 
           Automatic Recovery 
        • Biometric Identification
    • Technology Processing 
           Fee per Smart Card per 
           Month (Volume Based) 
        • UEPS Software Fee 
           (Volume Based) 
        • Database Capturing 
           Module per Patient 
        • Patient License Fee per 
           Hospital/Clinic/Health 
           Care Facility 
        • Equipment Sales for 
           Hospital/Clinic and Health 
           Care Facility 
        • Sales of Smart cards
    • Non-Governmental 
            Organizations 
        • Government Paid 
           Contractors 
        • GovernmentsS2S Retail and Wholesale
    • 2004
    • Ten-Digit Signature Codes 
            Offline and Online 
           Loading 
        • Automatic Credit 
        • Multiple Wallets 
        • Restricted Wallets 
        • Multiple Audit Trails 
        • Mutual Authentication 
        • Transparent and 
           Automatic Recovery 
        • Biometric Identification 
        • Interest Calculations 
        • Settlement  Offline and 
           Online
    • Merchant Transaction Fee 
        • Cash Withdrawal Fee from 
           UEPS Card Holders 
           Excluding Social Grant 
           Recipients 
        • Hardware Equipment 
           Sales or Rentals 
        • Smart Card Sales 
        • Installation & Training Fee 
        • Reports and Banking Fees 
        • Monthly Card Account 
           Fee per Retailer per Month
    • Retailers 
        • Wholesale Retailers 
        • UEPS Client Card HoldersS2S Insurance System
    • 2004
    • Multiple Audit Trails 
        • Mutual Authentication 
        • Transparent and 
           Automatic Recovery 
        • Biometric Identification 
        • Settlement  Offline and 
           Online
    • Insurance Merchant 
           Transaction Fee 
        • Debit Order Collection Fee 
        • Hardware Equipment 
           Sales or Rentals 
        • Smart card Sales 
        • Installation and Training 
           Fee 
        • Reports and Banking Fees
    • Insurance 
           Underwriter/Broker 
           (External Insurance 
           Merchants)


The
following describes in more detail how our S2S products work and the benefits of
each product.

***S2S
Pension and Welfare***

S2S
Pension and Welfare provides a secure and affordable transacting channel between
social welfare grant beneficiaries, governmental agencies and formal businesses.
Through this product, we distribute social welfare benefits to the unbanked and
under-banked populations, and allow the recipients of these benefits to transact
with formal businesses.

How
it works. We enroll social welfare grant beneficiaries by issuing them a
UEPS smart card that digitally stores their biometric fingerprint templates on
the smart card, enabling them to access their social welfare grants securely at
any time or place. The smart card, with its pre-printed and unique serial
number, or USN, is issued to the beneficiary on site. Optical fingerprint sensor
technology identifies and verifies beneficiaries. The fingerprint reader is
programmed to create a random cryptographic session between itself and an
inserted smart card, thereby limiting the possibility of fraudulent storage and
replay of digital templates.

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The
smart card provides the holder with access to all of the UEPS functionality,
which includes the ability to have the smart card funded with wage, pension or
welfare payments, make retail purchases, enjoy the convenience of pre-paid
facilities and qualify for a range of affordable financial services, including
insurance and short-term loans. The smart card also offers the card holder the
ability to make debit order payments to a variety of third parties, including
utility companies, schools and retail merchants, with which the holder maintains
an account. The card holder can also use the smart card as a savings account.
Depending on a countrys specific requirements, holders load their smart card
using one of two methods  ten-digit signature code creation or automatic
credit. We describe both of these methods under Our Technology  UEPS Smart
Card Functionality  Offline Loading and  Automatic Credit.

When
the ten-digit signature code method is used, the government agency submits to us
a simple payroll file containing the beneficiarys identity number and the value
of the grant. We then process this file and, using the identification number of
each beneficiary, create a ten-digit signature code. The ten-digit signature
code can only be loaded on to the smart card for which it was created. These
ten-digit signature codes can be distributed to the memory of POS devices or
other compatible devices, including fixed or mobile ATM dispensers or remote
personal computers, by accessing a communication network such as satellite,
X.25, TCP/IP or GPRS-GSM. Thereafter, the beneficiary can load the smart card
offline. If a GPRS  GSM communication network is available, the beneficiary can
load the smart card online.

The
beneficiary simply inserts a smart card into the POS device and is prompted to
present his fingerprint. If the fingerprint matches the one stored on the smart
card, the smart card is loaded with the ten-digit signature code created for
that particular smart card. The POS device then prints a receipt that outlines
the amount of the grant paid to the beneficiary.

The
automatic credit feature allows a smart card holder to receive regular,
fixed-amount payments such as welfare grants or other benefits, food parcels,
meal vouchers and/or medical supplies at POS devices that operate offline.
Automatic credit instructions are recorded on the smart card at the time they
are granted by the issuer. Each automatic credit instruction recorded embodies a
number of parameters such as the amount and the wallet to be credited, the
frequency at which the credit should occur and the commencement and expiration
date of the instruction.

When
the beneficiary inserts a smart card into a POS device or any other compatible
device, the automatic credit feature will be automatically invoked. During this
process, each automatic credit instruction previously recorded on the smart card
will be reviewed. If all related parameters such as timing, commencement and
expiration date are all correct the smart card is credited with the funds due.
When this happens, the transaction is recorded immediately on the merchant smart
card present in the POS device at the time that the beneficiarys smart card is
credited. Since the electronic funds have been created offline, automatic credit
transactions must be forwarded to the back-end system through a merchant
settlement or through our multiple audit trail facility. We are able to claim
the actual funds loaded to beneficiaries smart cards from the government agency
at the end of each business day because the back-end system is informed of all
of the electronic values created.

Benefits.
Our S2S Pension and Welfare system provides numerous benefits to governments
agencies and beneficiaries. The system offers provincial governments a reliable
service at a reasonable price. For beneficiaries, our smart card offers
convenience, security, affordability and flexibility. They can avoid long
waiting lines at payment locations and do not have to get to payment locations
on scheduled payment dates to receive cash. They do not lose money if they lose
their smart cards, since a lost smart card is replaceable and the biometric
fingerprint identification technology helps prevent fraud. Their personal
security risks are reduced since they do not have to safeguard their cash.
Beneficiaries have access to affordable financial services, can save and earn
interest on their smart cards and can perform money transfers to friends and
relatives living in other provinces. Finally, beneficiaries pay no transaction
charges to load their smart cards, perform balance inquiries, make purchases or
downloads or effect monthly debit orders. For us, the system allows us to reduce
our operating costs by reducing the amount of cash we have to transport.

***S2S
Wage Payment***

S2S
Wage Payment allows an employer to pay employee wages electronically, either
online or offline, by transferring the precise amount of the wage payment
directly onto a smart card, thus eliminating the need for the employer to store
and handle cash at the workplace. We originally designed this product for
unbanked and under-banked workforces and their employers. However, employers of
employees who often have bank accounts have expressed interest in this product
as well, which we attribute to its affordability, convenience and security.

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How
it works. Employees of participating employers receive smart cards which we
issue to them. We download a ten-digit signature code for each employee wage
payment to a POS device, and the employer takes the POS device to the pay site
on payday. The employee inserts his smart card into the POS device which then
searches for any ten-digit signature codes created for that particular smart
card. Once the POS device locates and decrypts the ten-digit signature code, it
immediately loads the smart card with the wage payment. The POS device prints a
receipt which acts as a pay stub by including the amount of the wage paid and
any deductions made. The receipt also indicates the balance of the savings
wallet, if available. The process takes up to six seconds from insertion of the
smart card to completion of printing. Personal identification through finger
print authentication is not necessary to perform a load as the ten-digit
signature code is uniquely linked to the USN number of the employees smart
card.

Benefits.
S2S Wage Payment provides numerous benefits to employers and to employees. For
employers, the system helps to increase productivity in the work environment and
reduce administration and labor costs associated with the management,
transportation, delivery and general handling of cash. Electronic payment
requires less time than manual distribution of cash pay packets, thereby
reducing the amount of employee downtime. Employers in rural and semi-rural
areas no longer need to incur the inconvenience and expense of transporting
their employees to urban areas to enable them to receive their wages from ATMs
nor to have to advance funds whenever these ATMs run out of cash. In addition,
the system is configurable for each employer so that the database can be split
up into departmental or company sub-databases, if required.

Further,
employers of unbanked and under-banked employees are frequently put into a
position of having to provide savings, loans, burial insurance and other
financial services to their workers. With S2S wage payment, the employee can opt
to have a portion of his wage loaded directly to a separate savings wallet on
the smart card. Interest is calculated on the current daily balance and paid
monthly to the card holder. The card holder can also qualify for an affordable
loan, provided by us or another participating service provider, which is loaded
onto his smart card. The smart card informs the back-end system of the monthly
loan repayment which is applied against the wage after loading the amount due to
the smart card. Finally, instead of the employer having to negotiate the most
cost effective burial insurance for his employees, he can take advantage of the
insurance we negotiate with selected insurance companies on behalf of many
employers. The issuance of the insurance policy is recorded in the chip of the
smart card. For employees, S2S wage payment offers all of the benefits described
above under S2S Pension and Welfare. Additional benefits include fees for cash
withdrawals that are typically lower than bank charges for the same transaction.

***S2S
Cash Advance***

The
S2S Cash Advance product will provide an issuer with the facility to offer small
monthly cash advances to UEPS cardholders at UEPS POS terminals installed at
participating merchants, bank branches and the offices of micro-financiers.

The
product allows the cardholder to receive a cash advance, calculated offline by
the client's card, taking into account the monthly salary or wage income
previously received by the card as well as any current deductions in respect of
short or medium term loans. For example, when the next wage is paid on the card,
the full amount of the previously granted cash advance plus associated finance
charges will be automatically deducted and remitted to the financier. The card
holder will then be in a position to qualify for a new cash advance as and when
required.

How
it works. When a client presents his/her client card in the top slot
of the POS device and the client selects the Cash Advance function on the POS
device, the POS device will interrogate the client card for a previous Cash
Advance that has not been repaid via debit order instructions. If a Cash Advance
exists, this transaction will be denied. The POS device will prompt the client
to select one of the Cash Advance options. The POS screen will display the Cash
Advance option as well as the Cash Advance amount calculated. Once a Cash
Advance has been granted and the client has been successfully biometrically
verified, the client card will credit itself with the amount of the Cash
Advance.

Benefits.
S2S Cash Advance has many benefits for card holders, merchants and financiers.
For card holders, the system provides a cost effective and flexible method to
apply for a Cash Advance at any registered merchant, bank branch or
micro-financier that participates in the system. The system gives a card holder
convenient access to credit as the credit check is performed by the client card
itself in order to grant the Cash Advance, at an affordable low interest rate
charged. Merchants benefit through the creation of a new revenue stream as they
will be paid a fee for each Cash Advance loaded. Finally, the system benefits
financiers as it provides a cost effective way of granting affordable Cash
Advances without the cost of labor, stationary, infrastructure and
administration.

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***S2S
Loans to a Card***

The
S2S Loans to a Card was designed for financiers to be able to participate in our
SmartSwitch systems and utilize the UEPS technology to minimize the cash amount
being paid out to their clients in respect of loans. Loans which are being made
to cardholders can be loaded electronically on to their smart cards instead of
dispensing cash.

How
it works. In order to participate in the system, the financiers will have to
be registered onto the SmartSwitch system. A legal contract is completed between
SmartSwitch and the Financier/ Merchant stating the specific hardware equipment
requirements. Arrangements are made between SmartSwitch and the Financier/
Merchant for installation, implementation and training of the product.

In
order to perform offline loads to a client card, the first step will be to
request the amount of electronic funds required for the days/weeks transfers
to cards. The amount required plus a fee levied by SmartSwitch must be paid into
a nominated bank account of SmartSwitch as stipulated in the merchant contract.
If the fee is not included, the SmartSwitch system will automatically deduct the
fee from the total funds requested. The merchant / financier will advise
SmartSwitch as soon as funds have been transferred into the nominated bank
account in the contract. The value will be credited to the financier /
merchants instant bank account, or IBA, held on the back-end system and linked
to the Merchant/Agent Card Reference Number. Using the POS device, the merchant
will select the option to perform a funds load transaction for the value
required. The POS will go online to the system host, access the funds available
in the merchant IBA and load the merchants agent transfer card accordingly.
When a loan is granted, the client card is inserted into the top reader of the
POS device and the amount of the loan is transferred electronically from the
merchant/agent card to the client card. A slip is printed verifying the amount
of the loan loaded. The client can then perform a limited cash withdrawal if
required and utilize the balance at merchant stores for spending and/or cash
withdrawals. A sales transaction for the monthly repayment of the loan can be
performed immediately, limiting the risks and costs involved in finding the
client for repayment purposes or a third party deduction file will be forwarded
to SmartSwitch. At the end of each business day, merchants will be required to
settle their merchant agent cards to the SmartSwitch system host for reporting
purposes.

Benefits.
The benefits of S2S Loans to a Card are multiple. The system reduces cash held
at a lending branch as there is no need to dispense cash to the client in
respect of a loan. The loan value is electronically loaded to the smart card.
The risks associated with fraud and theft is minimized as there is no need to
hold large amounts of cash on the premises. Instead of collecting cash, the
monthly loan repayment can be performed electronically by performing a sales
transaction using the same POS device or third party deduction. The result is a
reduction in overall operating costs as security and insurance costs are
reduced. The system also prevents the granting of fraudulent loans as biometric
fingerprint verification is required from both the cardholder and the agent
merchant card managing the loan. Finally, the merchant has easy access to a full
audit trail of all electronic loans loaded from the merchant card to the
cardholders card and detailed management reports are made available to the
merchant on a daily and monthly basis.

***S2S
Medical Management***

Our
S2S Medical Management product applies the UEPS technology in a non-financial
environment to facilitate the management, distribution and control of the
anti-retroviral, or ARV, drugs used to combat HIV/AIDS. The system is designed
to operate in the deepest rural areas where no meaningful infrastructure exists.
It is also designed to form a basis for the implementation of other drug
distribution programs.

Governments
and charitable organizations face many challenges in the distribution and
control of ARV drugs. Patients who do not strictly adhere to the required drug
regimen for the rest of their lives face the risk of drug resistance, which can
lead to death. The toxicity of ARV drugs requires effective patient monitoring.
Data needs to be collected to evaluate the effectiveness of drugs available for
treatment.

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How
it works.We issue smart cards to participating hospitals, dispensaries and
doctors and to their AIDS/HIV patients. The smart cards use biometric
fingerprint identification technology and act as portable electronic medical
record books that allow patients to be serviced anywhere without relying on
centralized systems and communications networks. The smart cards carry all
patient-related information, including personal details, drug regimens,
prescriptions, visitation history, doctors details, dispensary information and
other data. This data allows us to populate and update databases that track each
patients progress, each doctors performance, each and every prescription
dispensed and each dispensarys drug inventory levels. The system monitors
patient activities, and is designed to ensure the integrity of data, reduce
fraud, manage drug inventories and, control drug delivery, ensure patient
anonymity and privacy, and distribute payment for goods and services. Each day,
all registration information, changes to patient information, and information
regarding drug dispensation is encrypted and communicated to our back-end system
for batch processing. Once validated this information is forwarded directly to a
confidential server managed by the government and/or funding organizations.

Benefits.S2S Medical Management offers many benefits to government organizations,
medical professionals and health care workers, and patients. For government
organizations, the system helps save money by improving the efficiency of ARV
drug distribution and by reducing the potential for fraud and falsification of
data. For medical professionals and health care workers, the system facilitates
the real time but offline registration of patients and the storage of crucial
patient information, such as the patients last visit date, changes in
information such as height and weight and the most recent prescription. For
patients, the portability of the electronic medical record allows them to be
treated anywhere, without relying on centralized systems and communications
networks. The system, which is provided free of charge to the patient, is
designed to ensure patient privacy. Finally, our technology preserves the
patients information, even if the smart card is lost.

***S2S
Retail and Wholesale***

Our
S2S Retail and Wholesale product enables retailers, wholesalers and financial
service providers to effect commercial transactions with one another and with
unbanked and under-banked customers. Many merchants who service the unbanked and
under-banked operate in underdeveloped areas where traditional financial
institutions and their products are unavailable or limited due to the lack of
communication infrastructures. In addition, these merchants do not meet the
selection criteria imposed by financial service providers, including banks and
credit card companies, either for financial reasons or because they cannot meet
or adhere to the rules and regulations these formal institutions demand. The
system permits participants, which include merchants, wholesalers and financial
service providers to effect payments for goods and services, and to dispense
cash from one smart card to another in a secure offline manner. The system is
designed to eliminate unauthorized use by ensuring that all transactions are
biometrically approved by the card holders. The system guarantees integrity by
providing an audit trail for each transaction that is stored on both the
customer and merchant smart cards.

How
it works.The participants in this system are merchants whom we enroll and
consumers who are smart card holders. When we enroll a merchant, we issue a
smart card to the merchant that contains its profile as well as the stores
merchant reference number and install an appropriate POS device that takes into
account the type of power and communications infrastructure available at the
merchants location. The POS device is either battery-operated or uses a
municipal power supply. All our POS devices can use GSM/GPRS, TCP/IP, X.25 or
satellite networks to perform loading and settlement functions. The smart card
is inserted in the bottom smart card reader of the POS device to perform on-line
transactions with customers. We sign a contract with each merchant that is
tailored to the needs of each merchant, reflecting the number of stores to be
serviced and the specific hardware we agree to install. We provide each merchant
with installation, system implementation and training. We also provide merchants
with our marketing material for display at their locations so that their
customers know that the merchant offers our services. The transactions stored on
merchant smart cards cannot be overwritten until they have been settled by using
our offline milking facility or connecting online to the back-end system.

Benefits.S2S Retail and Wholesale provides numerous benefits to merchants and to
customers. A growing smart card base offers merchants a larger number of
customers who can shop in their stores. The system also provides them with the
opportunity to realize new income streams from the fees they collect by
providing at their locations our broad range of financial services and products,
including cash downloads, money transfers, loans and burial insurance. Finally,
their security risks and expenses associated with handling cash can be
significantly reduced, including banking charges and communications costs. The
benefits of the system for customers are a combination of the ones we describe
above under S2S Pension and Welfare and S2S Wage Payment.

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***S2S
Insurance***

Our
S2S Insurance intermediary product enables unbanked and under-banked consumers
to obtain affordable and reliable burial insurance policies. In South Africa,
cultural reasons make burial insurance important to many people. Our system
enables insurance companies to access this customer base. The insurance industry
is subject to various laws and regulations which are designed to protect
policyholders and our system ensures compliance with these laws and regulations
by utilizing the key features of the UEPS technology.

How
it works. In order to participate in the system, card holders and insurance
brokers must be enrolled in our system. The broker enrollment procedure is
similar to the procedure we use for merchants. The insurance brokers merchant
smart card is created centrally and loaded with the brokers burial insurance
product options. Individual brokers receive smart cards which digitally store
their biometric fingerprint templates on the smart card. After completion of the
enrollment process, we issue an insurance merchant smart card to the insurance
broker. We provide the insurance broker with installation, implementation and
training.

When
an applicant applies for an insurance policy, the insurance broker explains
relevant information, including the different policy options, waiting options
and the 30-day cooling off period. The 30-day cooling off period allows the
policy holder who has decided to buy a policy issued by another insurance
company to change is mind and to keep the original policy instead. The system
informs all parties involved, including the brokers for the previous insurer and
the new insurer that the client is in a 30-day cooling off period. This makes
the insurance broker of the previous insurer aware of the clients intention,
and allows the insurance broker to contact the client in an effort to keep the
client.

When a
broker sells a policy to a client, the first check performed by the smart card
is to ascertain if the client has already signed up for a similar product, which
may be accomplished offline. If not, the client accepts the new policy by
presenting his fingerprint for verification by the smart card. The broker also
presents his fingerprint to prove that he sold the policy and thereby allow him
to receive his sales commission. The system then writes the policy number and
details, including the amount of the premium, to the card holders smart card.
This reduces the risk of future disputes regarding the policy. When an insured
individual dies, the beneficiary presents the identity document, the insureds
smart card and death certificate, and the original policy document. This
information is checked against the information stored on the smart card by
simply inserting the deceaseds smart card into a POS device and printing the
data associated with burial policy information. If valid, the claim is paid out
to the beneficiary immediately.

Benefits.
Our S2S Insurance intermediary product offers numerous benefits to insurance
brokers and policyholders. For brokers, the system provides improved access to
its potential client base, minimizes the risks associated with fraud through
biometric fingerprint identification, facilitates legal compliance and provides
a secure channel for collection of premiums. In addition, brokerage commissions
can be managed through the system. The benefits for policyholders are generally
the same as for customers as described above under S2S Retail and Wholesale.
In addition, because the system reduces premium collection risk to the insurance
company, it provides consumers with access to more affordable insurance products
of a higher quality than would otherwise be available.

Prism Products

Prism
has traditionally been a product-focused business. Our recent acquisition of
Prism gives us access to the Prism product base, which we intend to integrate
into our UEPS product and service offerings. The current main Prism products
are:

***Chip
and wireless***

Prism
is a supplier of chip cards into the South African and other international
markets. Prism works with mobile network operators, card manufacturers and
semiconductor manufacturers to provide card technology, solutions and software
that enable mobile telephony, mobile transactions and value-added services to
take place in a trusted, secure and convenient manner. Prisms chip products and
technology include operating system and application development, card
manufacture and production, from concept and design through, printing, packaging
and distribution. At the core of Prisms chip business is the strategy of
licensing chip software to a wide spectrum of other industry participants.

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Prisms
Voucherless Top-Up, or VTU, solution facilitates mobile phone-based prepaid
airtime vending. The VTU technology enables prepaid cell phone users to purchase
additional airtime simply, securely and conveniently. The vendor uses its Global
Systems for Mobile Communications, or GSM, handset to purchase bulk airtime from
a mobile network operator. Airtime value, as opposed to a virtual voucher, is
then transferred directly from the vendors cellular handset to that of the
customer. When the vendor runs out of airtime value, it is a simple task to
purchase more to resell to customers.

***Easypay***

Prism
owns 74.9% of EasyPay (Proprietary) Limited, or EasyPay, which operates the
largest bank-independent financial switch in Southern Africa. EasyPay focuses on
the provision of high-volume, secure and convenient payment, prepayment and
value-added services to the South African market. EasyPays infrastructure
connects into all major South African banks and switches both debit and credit
card electronic funds transfer, or EFT, transactions for some of South Africas
leading retailers and petroleum companies. It is a South African Reserve Bank,
or SARB, approved third-party payment processor.

In
addition to its core business of transaction processing and switching, EasyPay
provides a complete end-to-end reconciliation and settlement service to its
customers. This service includes dynamic reconciliation as well as easy-to-use
report and screen-query tools for down-to-store-level, management and control
purposes.

The
EasyPay suite of services includes:

- EFT - EasyPay switches credit, debit and fleet card transactions for
  leading South African retailers and petroleum companies;
- EasyPay Bill Payment - As part of its value-added services offering,
  EasyPay has developed and operates a consumer bill payment service introduced
  at retail point-of sale over 10 years ago. Known and marketed as EasyPay,
  the service is integrated into a large number of national retailers, mobile
  channels and is available over the internet at www.easypay.co.za. EasyPay
  processes monthly account payment transactions for approximately 200 different
  bill issuers including major local Authorities, telephone companies,
  utilities, medical service providers, traffic departments, mail order
  companies, banks and insurance companies;
- EasyPay Prepaid Electricity - This service enables local utility companies
  such as Eskom Holdings Limited, or Eskom, and a growing number of local
  authorities on a national basis to sell prepaid electricity to their
  customers;
- Prepaid Airtime - EasyPay vends airtime at retail POS for all the South
  African network operators;
- Electronic Gift Voucher - EasyPay supports the electronic generation,
  issuance and redemption of paper or card-based gift vouchers;
- EasyPay Licenses - EasyPay enables the issuance of new South African
  Broadcasting television licenses and the capturing of existing license details
  within retail environments via a web-based user interface;
- Third Party Switching and Processing Support  EasyPay switches
  transactions from retail POS systems to the relevant back-end systems; and
- Hosting Services - EasyPays infrastructure supports the hosting of
  payment servers and applications on behalf of third parties, including
  financial institutions.

EasyPay
provides 24x7x365 monitoring and support services, reconciliation, automated
clearing bureau, or ACB, settlement, reporting, full disaster recovery and
redundancy services.

23

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***Payment
Solutions***

******Prisms
  secure integrated POS payment products and systems include:

- FlexiLANE  A core component of the Prism Electronic Payment System
  architecture is an in-store controller ideally suited to multi-lane retail and
  petroleum station environments. The in-store controller forms an interfacing
  and concentration layer between a group of distributed terminal devices and a
  centralized payment and value added service, or VAS, aggregator. This helps
  large retailers and petroleum companies to overcome the challenges associated
  with processing multiple transactions from multiple access devices using
  multiple tender types;
- FlexiGATE  A terminal and payment gateway that manages the routing of all
  FlexiLANE traffic and enables retailers to supply VAS such as airtime top-up,
  electricity payment and bill payment;
- FlexiPOS  An innovative retail solution that allows the retailer's
  various payment and VAS solution requirements to be streamlined into a single
  payment terminal. Prism FlexiPOS transforms the POS terminal into a convenient
  and consumer friendly place of purchase, place of payment and place of
  service;
- VeriFone - Prism is the VeriFone partner for the Sub-Saharan and Indian
  Ocean Island regions. In addition, and as a complementary technology, Prism
  has recently become a value-added reseller of VIVOtech contactless payments
  and solutions. The regions of representation will be Africa and South East
  Asia; and
- EMV  Prism payment technology helps ensure that retailers together with
  their acquirers meet the requirements of upgrading software, terminals and
  security for conformity with the latest international chip card standards.

***Transaction
security***

Prisms
Triple Data Encryption Standard , or TDES, and EMV security initiatives are
conducted by a specialized business unit through close collaboration with
suppliers of payment processing devices to help their technologies meet the
stringent security standards required by the card associations. As a Thales
e-Security Gold partner, Prism is a value added reseller of Thales transaction
security technology into the Southern African region.

Prism's
self-developed range of PIN encryption devices, card acceptance modules and
outdoor payment terminals are primarily aimed at the retail and petroleum
sectors. These devices and modules are suited for high-speed transaction
processing requirements, acceptance of multiple payment tokens, value-added
services at point of transaction, and adherence to stringent transaction
security and payment association standards such as TDES and EMV.

Sales and Marketing

We
market our products and services primarily through our own sales and service
organization which is headed by Brenda Stewart, our Senior Vice President, Sales
and Marketing.

We
have 41 employees in the Sales and Marketing division, who operate from our
head-office in South Africa and from our regional offices in South Africa,
Namibia and the USA.

Our
sales & marketing activities are currently focused on the sales of UEPS
systems into the international market, with specific emphasis on Africa. We
focus on identifying, defining and activating an entry point in a specific
country to commence operations.

Competition

In
addition to competition that we face from the use of cash, checks, credit and
debit cards, existing payment systems and the providers of financial services,
we have identified a number of other products currently being produced that use
smart card technology in connection with a funds transfer system and the
companies that promote them. These include EMV, a system that is being promoted
by Visa International Service Association, MasterCard International and Europay
International; Mondex International Limited, a subsidiary of MasterCard; and
Proton World International N.V., a subsidiary of STMicroelectronics Belgium N.V.
In South Africa, and specifically in the payment of social welfare grants, our
competitors also include AllPay Consolidated Investment Holdings (Pty) Ltd.,
which is responsible for social welfare payments in the Free State, Gauteng and
Western Cape provinces and a small portion of the Eastern Cape province, and
Empilweni Payout Services, which is responsible for payments in the Mpumalanga
province.

24

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The
incumbent South African retail banks operate a joint initiative to create a
common banking product to offer to the significant portion of South Africas
population that does not have access to traditional banking services, or the
unbanked. This bank account, generally referred to as the Mzansi account, was
introduced in October 2004 and offers limited transactional capabilities at
reduced charges, when compared to the accounts traditionally offered by these
banks. According to the FinScope 2005 survey 550,000 people (approximately 2% of
the adult population) in South Africa claim to have an Mzanzi account, although
the exact number of accounts is unknown. The social welfare beneficiaries who
are currently paid through our smart card system may elect to use these accounts
to receive their grants.

We
also may face competition from companies to which we have licensed rights to our
technology, including Visa and BGS Smart Card Systems AG. Moreover, as our
product offerings increase and gain market acceptance, banks in South Africa and
other jurisdictions in which we operate may seek governmental or other
regulatory intervention if they view us as infringing on their funds transfer
businesses.

Research and Development

Our
business activities and product offerings depend on our proprietary UEPS
software. As a result, we have a large group of software engineers and
developers who are constantly revising and improving the core UEPS software and
its functionality.

We
believe that our smart card system is the most advanced system of its kind in
the world today. However, we use a number of hardware platforms that are not
proprietary to us and which are continuously being improved. These platforms
include smart cards micro-controllers, POS devices, biometric readers and other
back-end computer hardware. We continually work to take advantage of these
improvements in our attempt to stay at the head of the competitive curve. A
faster micro-controller on a smart card may allow us to process transactions
faster and with more security. A larger memory smart card allows us to store
more transactions and to load larger software applications. Larger memories also
allow our smart cards to be used for more than one application at a time, thus
eliminating the cost and the management of multiple smart card systems.

Our
smart card system is designed to manage tokens of value such as cash, credit,
savings, medical history, identification criteria, finger print templates and
insurance policies. Security is therefore of prime importance as any breach
would result in the loss of our system integrity. This would be followed by a
loss of confidence and credibility that would jeopardize our growth and market
penetration. We therefore continue to advance our security protocols and
algorithms to combat the potential attacks that have currently been identified.
These include crypto- analysis techniques as well as reverse engineering.
Attacks such as the latest differential power analysis, or DPA, must also be
circumvented.

We
continue our research in new and more secure algorithms, such as the Rivest,
Shamir and Adleman, or RSA, as well as new competitive asymmetric algorithms
such as elliptic curves. We develop and implement these techniques ourselves and
own the software that we create.

Lastly,
we continue to study the needs of our target market and develop new UEPS
features that satisfy these needs. As our UEPS system is implemented in more and
more developing countries, we create greater connectivity between our systems to
subsequently activate international transactions and cross-border money
transfers.

Intellectual Property

Our
success depends in part on our ability to develop and maintain a competitive
intellectual property advantage over potential competitors in the electronic
financial services industry. We believe that we have developed the first payment
system based on technology that is protected by our FTS patents. We rely on
know-how, including trade secrets and other confidential information, continuing
technological innovation and licensing opportunities to further develop our
proprietary position. Our ability and the ability of our licensors to obtain
intellectual property protection for the UEPS technology and related processes,
including any improvements to and developments of them, to operate without
infringing the intellectual property rights of others and to prevent others from
infringing our intellectual property rights will be important factors to our
success.

25

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The
FTS patents, which include aspects of the UEPS technology, have been issued in
the United States, Hong Kong, South Africa, Botswana, Namibia and Swaziland. The
FTS patent in the United States was granted as U.S. Patent No. 5,175,416 on
December 29, 1992. The patent was reissued as U.S. Patent No. RE36,788 on July
25, 2000, and will expire on May 17, 2011. It currently remains in full force
and effect, and we are not aware of any challenges to its enforceability. The
FTS patent in Hong Kong was granted on December 11, 1998, and will expire in
2010. The Hong Kong FTS patent is jointly owned by us and the estate of a
co-inventor. The FTS patents in South Africa, Botswana, Namibia and Swaziland
were granted on September 25, 1991, March 9, 1993, April 7, 1993 and December 9,
1992, respectively. These patents remain in full force and effect, and we are
not aware of any challenges to their enforceability. The FTS patent will expire
in 2007 in Namibia and in 2009 in South Africa, Botswana and Swaziland.

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

As
a result of this ruling, BGS, the local system operator in the Commonwealth of
Independent States, or CIS, has stopped paying us any patent royalties. However,
our business plan and forecast do not account for such royalties as a source of
revenue in the medium to long-term, as the key to our operations in Europe is
based on our know-how and ability to exploit the technology rather than on the
European patent. Accordingly, we do not expect this ruling to have a material
adverse effect on us in the future.

Aspects
of the UEPS technology are described in U.S. Patent No. RE36,788. This patent,
entitled Funds Transfer System, is directed to a method of transferring funds
between financial institutions via a smart card. In particular, the method
includes linking a smart card (first device) to a first financial institution,
debiting an account held at the financial institution and recording a
corresponding credit value in the smart card. The smart card is then linked to a
second, similar device, wherein the credit value in the smart card is reduced
and a corresponding credit value is recorded in the second device. The second
device is then linked to a second financial institution, wherein the credit
value in the second device is reduced and a corresponding credit value is
recorded in an account held at the second financial institution. The smart card
and the second device each store at least a portion of a program which is run in
a synchronized interactive manner between the devices.

In
1997, we entered into a technology license agreement with Visa International
Service Association, or Visa. Under that agreement, Visa purchased a
non-exclusive, perpetual, worldwide license to our technology rights that are
defined in the agreement to mean all our then-current worldwide patent rights,
copyrights, mask work rights, trade secrets and other intellectual property
rights relating to our UEPS technology. This Visa license includes an exclusive,
perpetual, worldwide license under our patents, as defined in the agreement,
licensed to Visa that is exclusive to the financial services industry, as
defined in the agreement. The agreement defines patents as meaning our current
worldwide patents and patent rights, including U.S. Patent No. 5,171,416,
including without limitation, enhancements, improvements and expansions to all
of the licensed patents and any foreign patent applications corresponding to any
patent associated with any of our products or services that use technology
related to financial services or can be used in the financial services industry.
The agreement defines financial services industry as persons or companies that
are directly or indirectly making loans; taking deposits; selling, brokering, or
factoring securities, insurance, mortgages or receivables; and providing payment
services, such as issuing charge cards, credit cards, payment cards, debit cards
or any other system that could compete with such payment methods. Our Visa
agreement grants back to us the non-exclusive right under our Visa-licensed
patents to make, use and sell our payment systems and other products in the
financial services industry as defined in the agreement. In our Visa agreement,
Visa agrees not to grant a sublicense to any payment system to any entities in
the financial services industry who are not members of Visa already if such
entity already has a right to use such payment systems from us. The agreement
permits Visa to sublicense our licensed technology rights to any of its member,
any entity in the financial services industry or any entity outside of the
financial services industry that provides products to Visa or its sublicensees.
The agreement prohibits us from licensing our technology rights, not just our
licensed patents, to any of Visas competitors, including MasterCard, Europay,
American Express Company, Discover Financial Services, Diners Club International
Credit Card Co., Carte Blanche Card or JCB International Credit Card Co. or any
of their parents, subsidiaries or affiliates. We have also licensed our foreign
FTS patents in South Africa, Botswana, Namibia and Swaziland to Visa, Nedbank
and First National Bank of South Africa.

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The
patent position of companies like ours is generally uncertain and involves
complex legal and factual questions. Our ability to maintain and solidify a
proprietary position for our technology will depend on our success in obtaining
effective claims and enforcing those claims once granted. The FTS patents and
related patents that may issue in the future, or those licensed to us, may be
challenged, invalidated or circumvented, which could limit our ability to stop
competitors from marketing our product or the length of term of patent
protection that we may have for our processes. In addition, the rights granted
under any issued patents may not provide us with proprietary protection or
competitive advantages against competitors with similar technology. Because of
the extensive time required for development and testing of a potential product,
it is possible that, before any of our products can be commercialized, any
related patent may expire or remain in force for only a short period following
commercialization, thereby reducing any advantage of the patent.

We
hold trademarks in South Africa, Botswana, Namibia, Lesotho, Swaziland and
France.

We
own the exclusive copyrights in the current version of the UEPS programs,
subject to any copyrights in preexisting materials in earlier versions of the
UEPS programs that are jointly owned by us and other parties under various
agreements. Effective October 1, 1990, we entered into an agreement with
Metrolink (Proprietary) Limited, a Nedbank subsidiary, assigning Metrolink the
then-current copyrights in the UEPS programs with respect to South Africa,
Namibia, Botswana, Lesotho, Swaziland, Mozambique and Zimbabwe. Under this
agreement with Metrolink, we retained the worldwide copyright rights in the UEPS
programs outside of the seven listed countries, and acquired the worldwide
copyright rights in the Metrolink system (later known as the Megalink system)
for all countries outside of the same seven listed countries.

In
July 1997, we confirmed our joint ownership with Nedbank of the copyright
ownership in the then-current UEPS programs on a worldwide basis and agreed with
Nedbank that neither Nedbank nor we had any obligation to share with each other
any income or other monies either of us derived from the UEPS software. Then, on
July 11, 2000, we agreed again by written agreement with Nedbank that all
copyrights in the then-current UEPS programs as of June 2000 would be jointly
owned by Nedbank and us. Since July 2000, there have been no further agreements
respecting copyright ownership in the UEPS programs. We are the sole copyright
owner of all original material in the UEPS programs developed by us since July
2000.

Financial Information about Geographical Areas and Operating
Segments

For
each of the years ended 2006, 2005 and 2004, we derived substantially all of our
revenues from customers located in South Africa and substantially all of our
assets were located in South Africa. See Note 17 to our consolidated financial
statements included in this Annual Report on Form 10-K for financial information
about our operating segments.

Employees

As
of June 30, 2006, we had 1,763 employees. On a segmental basis, 190 employees
were part of our management, 1,230 were employed in transaction-based
activities, 199 were employed in financial services and 144 were employed in
smart card, hardware, software and related technology sales and corporate
activities.

On
a functional basis, six of our employees were part of executive management, 41
were employed in sales and marketing, 84 were employed in finance and
administration, 114 were employed in information technology and 1,518 were
employed in operations.

As
of June 30, 2006, 183 of 289, or 63.3%, of our employees in the Limpopo Province
who were performing transaction-based activities were members of the South
African Commercial Catering and Allied Workers Union, or SACCAWU. We believe we
have a good relationship with our employees and SACCAWU.

As
of July 3, 2006, Prism had 295 employees which increases our number of employees
to 2058.

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Corporate history

Net
1 UEPS Technologies, Inc. was incorporated in Florida in May 1997. Until June 7,
2004, Net 1 UEPS Technologies, Inc. was a development stage company and its
business consisted only of acquiring a license to the U.S. FTS patent and
obtaining an exclusive marketing agreement for the universal electronic payment
system, or UEPS, technology outside South Africa, Namibia, Botswana and
Swaziland. On June 7, 2004, through a newly-formed subsidiary, Net 1 Applied
Technologies South Africa Limited, or New Aplitec, we acquired substantially all
of the assets and assumed all of the liabilities of Net 1 Applied Technologies
Holdings Limited, or Aplitec, a public company listed on the JSE Securities
Exchange South Africa. Aplitec owned the FTS patent in South Africa, Namibia,
Botswana and Swaziland and one of its subsidiaries was the other party to the
marketing agreement described above. The primary purpose of the Aplitec
transaction was to consolidate into one company the intellectual property rights
relating to the FTS patent and the UEPS technology, to establish a first-mover
advantage in developing economies for the commercialization of the UEPS
technology, and to exploit market opportunities for growth through strategic
alliances and acquisitions. In the Aplitec transaction, the former shareholders
of Aplitec obtained a majority voting interest in Net 1 UEPS Technologies, Inc.
Generally accepted accounting principles require that the company whose
shareholders retain a majority interest in a combined business be treated as the
acquirer for accounting purposes. Consequently, this transaction has been
accounted for as a reverse acquisition. The Aplitec transaction is described in
more detail below.

Between
1998 and 2000, Aplitec made three strategic acquisitions for the purpose of
building a critical mass of smart card users. In May 1998, Aplitec acquired Net1
Southern Africa (Proprietary) Limited, a supplier of smart cards and terminals
which serviced the POS terminal network of Nedbank Limited, or Nedbank, a major
South African banking group. This transaction allowed us to develop a
relationship with Nedbank.

In
1999, Aplitec acquired Cash Paymaster Services (Proprietary) Limited, or CPS, a
company engaged in the distribution of social welfare grants on behalf of
several of the provincial governments of South Africa. This transaction enabled
Aplitec to convert CPSs customer base of approximately 1.5 million people from
a cash distribution system to a smart card-based system, and to acquire a
logistics and implementation infrastructure. Aplitec began converting grant
beneficiaries shortly after the acquisition. Conversion has allowed us to
eliminate a portion of the costs we incur in connection with the distribution of
cash, and thus to reduce our operating costs. The conversion has also provided
us with the opportunity to sell products and services to these same
customers.

During
the course of 1999 and 2000, Aplitec acquired Moneyline (Proprietary) Limited
and New World Finance (Proprietary) Limited, each of which was engaged in the
microlending business. Microlending involves extending cash loans for periods
ranging from 30 days to several months. Aplitec made these acquisitions
primarily for the purpose of gaining exposure to an additional base of potential
smart card users in order to deploy its microlending administration and payment
products. We have actively engaged in converting traditional microlending
customers to UEPS-based lending, which has also helped us improve the profit
margins on our lending business by reducing the expenses associated with
non-collection of traditional loans.

After
completing these three acquisitions, we sought to create an infrastructure of
point of sale, or POS, terminals that would permit businesses and merchants to
engage in smart card transactions with their card holder base. In June 2004, we
implemented a merchant rollout in the Northern Cape province of South Africa,
supplying merchants with smart cards and POS terminals in order to permit smart
card holders to transact with one another. With the increasing opportunity to
conduct transactions using smart cards, by June 30, 2004, approximately 60% of
welfare and pension beneficiaries in the Northern Cape province had kept value
on their cards on at least one occasion rather than immediately converting their
entire payments to cash. With the subsequent rollout of terminals at selected
merchants in other provinces of South Africa, more beneficiaries have started
using their smart cards for transacting with merchants.

At
the same time that we were building the UEPS infrastructure and distributing our
smart cards, we were also seeking to expand the range of products and services
available to smart card holders. In 2001, we developed a suite of financial
services targeted at social welfare beneficiaries, utilizing our issued base of
smart cards as a delivery channel. We currently have approximately 78,000
customers in these two provinces, to whom we make loans on which we earn
interest and to whom we sell insurance policies on behalf of insurers for which
we collect both a commission for the sale of a policy and a fee for the monthly
premium deduction. According to research by the FinMark Trust, 29% of all South
Africans have a form of burial saving or insurance policy, but the collection of
policy premiums remains a problem for insurance companies due to the limited
penetration of bank accounts. However, using the UEPS technology allows
automatic deduction of premiums from a persons smart card at pre-designated
times. Going forward, we plan to grow and develop this business under different
brands by launching new products and by introducing the service to social
welfare beneficiaries in the other provinces where we administer social welfare
grants and to employees utilizing our wage payment system.

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We
have also begun to expand our business into other countries. Our technology is
operated by third parties in Malawi, Mozambique, Zimbabwe, Ghana, Rwanda,
Burundi and Latvia. We are currently at different stages of establishing UEPS
card holder bases and POS device infrastructures with partners in Nigeria,
Namibia and Botswana. Our preferred approach to enter a new country or market is
to identify an entry point for our products and services that will result in
rapid acceptance by a new card holder base. At the same time, we also identify
suitable partners who exhibit one or more of the following qualities:

- access to a client base that has a need for our products and services;
- ability to fund a proportion of the capital expenditures and operating
  costs required to establish a new venture; or
- expert knowledge of the culture, political and economic dynamics of the
  country or market they operate in.

We
then incorporate an appropriate corporate entity, usually under the name
SmartSwitch (if available) with the shareholding proportions determined by the
funding committed by ourselves and our partners. We enter into shareholder
agreements with our partners and service level agreements with our clients prior
to the commencement of activities. When all the shareholders have transferred
their respective capital contributions through a combination of capital and loan
contributions, as determined in the shareholders agreements, we appoint a local
management team in collaboration with our partners and commence with the
establishment of the infrastructure required to operate a UEPS system. This
process generally takes three to six months, depending on the size of the system
required and the number of products and services that will be initially
introduced. We sell the core UEPS system, as well as related hardware,
customization and training to the corporate entity on normal commercial terms.
The management team of the corporate entity is responsible for the initial
implementation, the daily operations of the business and the continued growth of
the venture through the introduction of new products and services, as the card
holder base expands. Depending on the nature and size of our shareholding, we
either consolidate or equity account the results of these corporate
entities.

On
June 7, 2004, we acquired the business of Aplitec for a purchase price of
approximately $127.5 million. Under the exchange control regulations of SARB,
South African reinvesting shareholders were not permitted to hold our securities
directly. Therefore, in order to comply with these regulations, these
reinvesting shareholders received, through an interest in a South African trust,
securities of New Aplitec, consisting of B class loan accounts and B class
preference shares. The A class loan accounts and A class preference shares of
New Aplitec are held by Net1. These reinvesting holders also obtained the right
to receive, for no additional consideration, shares of our special convertible
preferred stock which are held by a Cayman Islands trust. We refer to the B
class loan accounts, B class preference shares and special convertible preferred
stock that we and New Aplitec issued in the transaction as the linked units.
The special convertible preferred stock is convertible on a one-for-one basis
into our common stock upon the occurrence of a trigger event, and holders are
entitled to vote on an as-converted basis. Upon conversion of the special
convertible preferred stock into shares of our common stock upon the occurrence
of a trigger event, the linked unit holder cedes to Net1 the B class loan
accounts and B class preference shares that were part of the linked unit. A
trigger event includes any of the following: (1) giving of a conversion notice
by a linked unit holder, (2) the abolition or relaxation of SARBs exchange
control regulations or (3) the liquidation of New Aplitec or Net1.

We
describe our special convertible preferred stock and the New Aplitec B class
loans and B class preference shares in more detail in note 10 to our
consolidated financial statements included in this Annual Report on Form 10-K.

In
connection with the Aplitec transaction, the total number of our pre-reverse
stock split outstanding shares of capital stock increased from 15.9 million
shares prior to the transaction to 328.2 million after the transaction. Of these
328.2 million shares, we issued 193.0 million shares of our special convertible
preferred stock. Our special convertible preferred stock is structured so as to
be economically equivalent to common stock and has substantially the same rights
as our common stock. During the period from the completion of the Aplitec
transaction through June 30, 2006, an aggregate of 24,846,091 shares of special
convertible preferred stock were converted into an equal number of shares of
common stock, and the number of outstanding shares of special convertible
preferred stock was correspondingly reduced.

In
  July 2006, we acquired Prism Holdings Limited, a South African public company
  which focuses on the development and provision of secure transaction technology,
  solutions and services. We describe the acquisition in more detail in Item 7Management’s
  Discussion and Analysis of Financial Condition and Results of OperationsOverview--Prism
  Acquisition.

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Available information

We
maintain an Internet website at www.net1ueps.com. Our annual report on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports are available free of charge through the SEC
filings portion of our website, as soon as reasonably practicable after they
are filed with the Securities and Exchange Commission. The information posted on
our website is not incorporated into this Annual Report on Form 10-K.

Executive Officers and Significant Employees of the
Registrant

The
table below presents our executive officers, their ages and their titles:

|Name                     | Age | Title                                                           
|------------------------ | --- | ----------------------------------------------------------------
|Dr. Serge C.P. Belamant  | 52  | Chief executive officer,
      chairman and director            
|Mr. Herman G. Kotze      | 36  | Chief financial officer, treasurer, secretary
      and director
|Ms. Brenda L. Stewart    | 48  | Senior vice president sales and
      marketing                 
|Mr. Nitin Soma           | 39  | Senior vice president information technology                    
|Mr. David A. Schwarzbach | 37  | Vice president business
      development  Americas            

The table below presents our key employees, their ages and
their titles:

|Name                    | Age | Title                                        
|----------------------- | --- | ---------------------------------------------
|Mr. Alvin W. Els        | 47  | Chief executive officer                      
|Mr. Jan Hnizdo          | 35  | Chief financial officer                      
|Mr. Graham McKay        | 51  | Chief technology officer                     
|Mr. Michael P. Serrao   | 48  | Business development director                
|Mr. Michael A. Smith    | 45  | Managing director : Easypay                  
|Mr. Llewelyn Walters    | 45  | Group sales director                         
|Dr. Gerhard J. Claassen | 47  | Managing director: Transaction
      security
|Mr. M. Shipanga         | 38  | Vice president business development  Africa 

Dr.
Belamant has been a director since our inception in May 1997, our chief
executive officer since October 2000 and the chairman of our board since
February 2003. He has also been a director of our subsidiary, Net 1 Applied
Technologies South Africa Limited, or New Aplitec, since its inception in June
2004. From June 1997 until June 2004, Dr. Belamant served as chief executive
officer and a director of Net 1 Applied Technology Holdings, or Aplitec. From
1996 to 1997, Dr. Belamant served as a consultant in the development of Chip
Off-Line Pre-Authorized Card, or COPAC, a Visa product. From October 1989 to
September 1995, Dr. Belamant served as the managing director of Net 1 (Pty)
Limited, a privately owned South African company specializing in the development
of advanced technologies in the field of transaction processing and payment
systems. Dr. Belamant also serves on the board of a number of other companies
that perform welfare distribution services and the provision of microfinance to
customers. Dr. Belamant spent ten years working as a computer scientist for
Control Data Corporation where he won a number of international awards. Later,
he was responsible for the design, development, implementation and operation of
the Saswitch ATM network in South Africa that rates today as the third largest
ATM switching system in the world. Dr. Belamant has patented a number of
inventions besides the FTS ranging from biometrics to gaming-related inventions.
Dr. Belamant has more than twenty-five years of experience in the fields of
operations research, security, biometrics, artificial intelligence and online
and offline transaction processing systems. Dr. Belamant holds a PhD in
Information Technology and Management.

Mr.
Kotze has been a director and our secretary, treasurer and chief financial
officer since June 2004. Mr. Kotze is a member of the South African Institute of
Chartered Accountants, or SAICA, who joined Aplitec in November 1998 as a
strategic financial analyst. He has also been a director of New Aplitec since
June 2004. From January 2000 until June 2004, he served on the board of Aplitec
as Group Financial Director. Mr. Kotze served his articles from 1993 to 1997 at
KPMG in Pretoria, South Africa, where he was the audit manager for several major
corporations in the manufacturing, mining, retail and financial services
industries. During 1998, he joined the Industrial Development Corporation of
South Africa Limited, or IDC, as a business analyst. His main duties at the IDC
were the evaluation and investigation of ventures requiring funding from the
IDC, from small manufacturing concerns to huge multinational projects, as well
as the structuring and implementation of loan and equity products for these
concerns.

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Ms.
Stewarthas served as our Senior Vice President of Marketing and Sales since
June 2004. Ms. Stewarts primary function is to manage all marketing and sales
activities for us. Her secondary function is to oversee implementation and
operation of specific projects such as Namibia and Botswana as well as our
pension and welfare systems. Ms. Stewart was a director of Net 1 Investment and
a director of Net 1 Holdings which were subsidiaries of Aplitec until June 2004.
Ms. Stewart joined Aplitec in 1997, and has worked with Dr. Belamant for over 20
years at various companies including, Volkskas Industrial Bank, SASWITCH and Net
1 Southern Africa, Net 1 Solutions and Net 1 Investment.

Mr.
Soma has served as our Senior Vice President of Information Technology since
June 2004. Mr. Soma joined Aplitec in 1997. He specializes in transaction
switching and interbank settlements. Mr. Soma represented Nedcor Bank in
assisting with the technical specifications for the South African Interbank
Standards. He is also responsible for the ATM settlement process to balance
ATMs with the host as well as balance the host with different card users. Mr.
Soma designed the Stratus Back-End System for Aplitec, and is responsible for
the Nedbank Settlement System for the Point of Sales Devices. Mr. Soma has over
10 years of experience in the development and design of smart card payment
systems.

Mr.
Schwarzbachhas served as our Vice President of Business Development since
January 2006. Prior to January 2006, he served as an Executive Director of
Morgan Stanley for nearly six years. Mr. Schwarzbach worked in both the
Investment Banking Division and Global Capital markets with a broad range of
companies, including many in the technology and financial services sectors.

Mr.
Shipanga has served as our Vice President of Business Development in Africa
since December 2005. He most recently served as the Chief Executive Officer of
Nedbank Namibia and as the Chief Executive Officer of the City of Windhoek, the
capital of Namibia. Mr. Shipanga has over 12 years of executive management
experience. In view of the strategic role that Mr. Shipanga has played in the
public, private and financial sectors throughout Namibia, he has been seconded
on a part time basis as the Executive Chairman of SmartSwitch Namibia (Pty)
Limited, or SmartSwitch Namibia.

Mr.
  Elshas been Prism's Chief Executive Officer since 1994 and acted as Executive
  Chairman of the Prism Group until April 2002. He is a member of SAICA and joined
  Linkdata Limited, or Linkdata, as Financial Director in 1991 and was instrumental
  in orchestrating the 1994 management buyout of Linkdata to form Prism Payment
  Technologies Limited.

Mr.
Hnizdojoined Prism as Executive Director - Finance in May 2002. Prior to
joining Prism he spent two years as Group Financial Manager of I-Fusion Holdings
Limited and was promoted to Group Financial Director in November 2000. He is a
member of SAICA and spent five years at KPMG, of which the last two years he
served as an audit manager on various engagements in South Africa.

Mr.
  McKay has 28 years experience in the information, communication and technology,
  or ICT, industry of which 20 years have been in secure electronic payment technologies.
  Prior to the formation of Prism, he worked on several major payment systems
  projects in North America and South Africa. Since the establishment of Prism,
  he has been responsible for technology strategy and delivery. He is responsible
  for Prism's smart card and wireless businesses.

Mr.
Serrao has played a key role within many areas of Prism, particularly the
creation and operation of Prism Wireless (the original mobile commerce arm of
the company). He spent 13 years with Eskom's engineering investigations division
before he moved to Linkdata where he participated in the management buyout.

Mr.
Smith is the managing director of EasyPay and has been with Easypay since
1998. He worked as a support engineer on large-scale computer systems. Following
this, he spent ten years in various financial, logistics and ICT roles across
industries of accounting, telecommunications, printing and fast moving consumer
goods.

Mr.
Walters joined Prism in November 2001 and was appointed Group Sales Director
in April 2002. He has spent the majority of his 21 year career in information
technology sales and related activities. Prior to November 2001, he was based in
the United Kingdom and was the Regional Sales Manager for EMEA Region at
VeriFone, Inc., or VeriFone. He began his career at VeriFone as the general
manager for South Africa and prior to this managed a number of ICLs largest
accounts.

Dr.
Claassen joined Prism in August 2000 as Senior Security Architect. He was
appointed Managing Director of the Transaction Security Business Unit during
September 2002. He has been active in the crypto field since 1985, as a crypto
projects officer with the South African Defence Force, as project leader on data
security projects at Telkom Limited, and as senior and chief cryptologist at the
South African Communication Security Agency.

31

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**ITEM
1A. RISK FACTORS**

INVESTING
IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CONSIDER
CAREFULLY THE FOLLOWING RISK FACTORS, AS WELL AS THE OTHER INFORMATION IN THIS
FORM 10-K, BEFORE DECIDING TO INVEST IN OUR SHARES OF COMMON STOCK. IF ANY OF
THE FOLLOWING RISKS ACTUALLY OCCURS, OUR BUSINESS, FINANCIAL CONDITION AND
RESULTS OF OPERATIONS WOULD SUFFER. IF THIS HAPPENS, THE TRADING PRICE OF
OUR COMMON STOCK WOULD LIKELY DECLINE AND YOU MIGHT LOSE ALL OR PART OF YOUR
INVESTMENT IN OUR COMMON STOCK.

The South African Social Security
Agency, or SASSA, is expected to begin, in the near future the process of
conducting a national tender for the award of contracts to distribute social
welfare grants. If we were not to receive contracts to continue to distribute
these grants in each of the provinces where we currently distribute them, or if
we do win these contracts, but the terms are not as favorable to us as our
current contracts, our financial condition, results of operations and cash flows
would be materially and adversely affected.

We
currently derive a majority of our revenues from contracts to distribute social
welfare grants on behalf of five of the nine provincial governments of South
Africa. For the foreseeable future, our revenues, results of operations and cash
flows will depend on this concentrated group of customers. During the years
ended June 30, 2006, 2005 and 2004, we derived approximately 77%, 79% and 82%,
respectively, of our revenues from payments made to us by these provinces under
our government social welfare contracts.

The
South African national government created SASSA in 2004 to consolidate at the
central government level the administration of social welfare grants. SASSA has
recently begun the process of conducting a national tender for the distribution
of social welfare grants in which bidders will have the opportunity to bid for
all of South African or on a province-by-province basis. In late July 2006,
SASSA published a request for pre-qualification of bidders, or RFQ which
included a proposed timetable for pre-qualifying bidders, distributing requests
for proposals, or RFPs, from pre-qualified bidders and evaluating RFP
submissions, indicating that the process should be completed by late November
2006. However, in mid-August 2006, SASSA withdrew the RFQ. SASSA did not
indicate when it would re-publish the RFQ or otherwise recommence the tender
process.

Once
SASSA recommences the tender process, there can be no assurance that the tender
will result in our receiving contracts to continue to distribute social welfare
grants in each of the five South African provinces where we currently distribute
them. Even if we do receive new contracts, we cannot predict the terms that such
contracts will contain. Any new contract we receive may contain pricing or other
terms, such as provisions relating to early termination, that are not as
favorable to us as the contracts under which we currently operate. The time and
attention required by our management in connection with the tender process and
the uncertainty surrounding the tender process may have a disruptive effect on
our business. In addition, although we believe that our existing contracts will
be extended if the tender process is not completed on time, there can be no
assurance whether such extensions will in fact occur, or if they do, what the
length or terms of such extensions will be.

Moreover,
because we incur a significant portion of the expenses associated with these
contracts during the initial implementation phase, we have historically enjoyed
higher profit margins on these contracts after the completion of the
implementation period, which averages approximately 18 months. Therefore, to the
extent that we are not successful in obtaining new provincial contracts, or if a
new contract were to be terminated for any reason during the implementation
period, our profit margins would also be adversely affected.

Finally,
if we were to be awarded one or more contracts by SASSA, an unsuccessful
tenderor could seek to challenge the award, which could result in the contract
being set aside or could require us to expend time and resources in an attempt
to defeat any such challenge. For example, the November 2002 award to us of the
Limpopo provincial contract, which was executed in 2003,was challenged by a
disqualified bidder for the contract. A South African court set aside the
contract in 2005, although the courts ruling was suspended and the contract was
reinstated as a result of an appeal of the ruling by the province. Nevertheless,
the court challenge created uncertainty, consumed management time and attention
and required us to incur substantial legal expenses.

32

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***Our
strategy of partnering with companies outside South Africa may not be
successful.***

In
order for us to expand our operations into foreign markets, it may be necessary
for us to establish partnering arrangements with companies outside South Africa.
During fiscal 2006, we established three such partnerships in Namibia, Botswana
and Nigeria, and we are currently exploring a number of other opportunities to
implement UEPS systems and to participate as an investor in these projects. The
success of these endeavors is, however, subject to a number of factors over
which we have little or no control, such as finding suitable partners with the
appropriate financial, business and technical backing and continued governmental
support for planned implementations. In some countries, finding suitable
partners and obtaining the appropriate support from the government involved may
take a number of years before we can commence implementation. Some of these
partnering arrangements may take the form of joint ventures in which we receive
a minority interest. Minority ownership carries with it numerous risks,
including dependence on partners to provide knowledge of local market conditions
and to facilitate the acquisition of any necessary licenses and permits, as well
as the inability to control the joint venture vehicle and to direct its policies
and strategies. Such a lack of control could result in the loss of all or part
of our investment in such entities. In addition, our foreign partners may have
different business methods and customs which may be unfamiliar to us and with
which we disagree. Our joint venture partners may not be able to implement our
business model in new areas as efficiently and quickly as we have been able to
do in South Africa. Furthermore, limitations imposed on New Aplitec by South
African exchange control regulations, as well as limitations imposed on us by
the Investment Company Act of 1940, may limit our ability to establish
partnerships or entities in which we do not obtain a controlling interest. In
addition, certain of our licensees, including BGS and Visa, have become our
competitors and this could occur with our joint venture partners in the
future.

We
have lost license fees in the CIS as a result of a dispute with BGS, the local
system operator, which claims that the revocation of the European FTS patent
relieves it from the obligation to pay us licensee fees. We believe that the
licensing fees due from BGS relate to its use of our UEPS technology rather than
the FTS patent and, therefore, we are currently evaluating our options on this
matter.

***We
will face integration and other challenges associated with our recent
acquisition of Prism***

On
July 3, 2006, we completed the Prism acquisition. Integration of Prisms
business operations into our own will pose several challenges for us. We expect
that the integration will require significant management time and attention and
may disrupt our existing businesses by diverting management away from day-to-day
operations. The difficulties of integration may be increased by the geographical
distances between South Africa and some of Prisms operations which are located
on other continents. We will face challenges associated with integrating
different corporate cultures and personnel with disparate business backgrounds.
We may also not be able to maintain Prisms key employees or customers or to
realize some or all of the cost efficiencies or synergies that we anticipated
when we agreed to acquire Prism. In addition, we may need to record write-downs
from future impairments of intangible assets, which could reduce our future
reported earnings. We may also have liabilities or experience adverse operating
issues that we may have failed to discover during due diligence prior to the
acquisition. As we have only recently completed the Prism acquisition, we may
not have fully identified all of the risks or other issues that could adversely
affect us as a result of the acquisition.

***We
may not maintain our current level of profitability or rates of growth.***

We
believe that our continued profitability and growth will depend in large part on
our ability to do the following:

| | - | continue to enroll new smart
        card users and participating merchants in South Africa;                                                                                 
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | - | achieve growth in the number
        and value of transactions processed using our smart cards;                                                                              
| | - | expand our business internationally
        by properly identifying new markets and business partners for those markets;                                                     
| | - | hire and train personnel capable
        of marketing, installing and integrating our solution, supporting customers
        and managing operations;                        
| | - | continue to expand the range
        of applications that use our technology and to market these applications
        successfully; and                                      
| | - | manage the costs of our business,
        including the costs associated with maintaining and developing our technology
        and expanding our operations internationally.

If
we are not able to achieve any or all of the above, our profitability and/or
growth rate will likely decline.

33

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Changes
in current government regulations relating to social welfare grants could
adversely affect our revenues and cash flows.

We
derive a substantial portion of our current business from the distribution of
social welfare grants onto smart cards in South Africa and the transaction fees
resulting from use of these smart cards. Because social welfare eligibility and
grant amounts are regulated by the government, any changes to or
reinterpretations of the government regulations relating to social welfare may
result in the non-renewal or reduction of grants for certain individuals, or a
determination that currently eligible social welfare grant recipients are no
longer eligible. If any of these changes were to occur, the number of smart
cards in use could decrease, the amount of money on any particular smart card
could decrease or the amount of transactions effected on any particular smart
card may decrease, all of which could result in a reduction of our revenues and
cash flows.

We
may have difficulty managing our growth which could limit our ability to
increase sales and cash flow.

We
have recently been experiencing significant growth, both in the scope of our
operations and size of our organization. This growth is placing significant
demands on our management, as well as on our operational resources. In order to
achieve our business objectives, however, we anticipate that we will need this
growth to continue. Continued growth would increase the challenges involved in:

| | - | implementing appropriate operational and financial
      systems;                        
| | - | -----------------------------------------------------------------------------------------
| | - | expanding our sales and marketing infrastructure
      and capabilities;                 
| | - | providing adequate training and supervision to
      maintain high quality standards; and
| | - | preserving our culture and values.                                                       

Additionally,
continued growth will place significant additional demands on our management and
our financial and operational resources, and will require that we continue to
develop and improve our operational, financial and other internal controls. If
we cannot scale and manage our business appropriately, we will not experience
our projected growth and our financial results may suffer.

There
are risks relating to operating in South Africa that could adversely affect our
business, operating results, cash flows and financial condition.

Our
primary operations are located in South Africa and we currently generate
substantially all of our revenues from our operations in South Africa. As a
result, we are subject to any political, economic and regulatory uncertainties
in South Africa.

The
changing political and social environment. South Africa faces certain
social, political and economic challenges, which may adversely affect our
business, operating results, cash flows and financial condition. The country is
experiencing high levels of unemployment and there are significant differences
in the level of economic and social development among its people, with large
parts of the population, particularly in the rural areas, having limited access
to education, healthcare, housing and other basic services. Furthermore, South
Africa faces challenges in building adequate infrastructure. These problems,
together with a shortage of skilled labor, may in the future have an adverse
impact on productivity.

Inflation
and interest rates. The economy of South Africa is currently characterized
by low inflation and interest rates. As of May 2006, the inflation rate was
approximately 3.9% . The Reserve Banks base lending rate is currently
approximately 8.0% per annum. However, the economy of South Africa in the past
has been, and in the future may be, characterized by high rates of inflation and
high interest rates. High rates of inflation could increase our South
African-based costs and decrease our operating margins. High interest rates
could adversely affect our ability to obtain cost-effective debt financing in
South Africa.

34

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Regulatory
uncertainty regarding black economic empowerment. The South African
government, over the past five years, has been developing an economic
indigenization program referred to as black economic empowerment, or BEE. BEE is
regulated pursuant to an Act of the South African Parliament, namely the
Broad-Based Black Economic Empowerment Act 53 of 2003, or the BBBEE Act. The
BBBEE Act recognizes two distinct mechanisms for the achievement of BEE
objectives: (1) codes of good practice issued under the Act and (2) sectoral
transformation charters developed by specific industry sectors and which may be
recognized by the Minister of Trade and Industry if they have been developed by
the major stakeholders in the relevant industry and advance the objectives of
the BBBEE Act. Draft codes of good practice have recently been published for
public comment, but none of them is, as yet, enforceable. The information and
communication technology sector, or ICT sector, and the financial services
sector have both developed sectoral transformation charters, but they have not
yet been published in the Government Gazette and, consequently, they do not
currently enjoy any formal status. The ICT sector has attempted to ensure as
great a degree of comparability between its sectoral transformation charter and
the draft codes of good practice, thereby assuring the probable publication of
that charter in the Government Gazette by the Minister of Trade and Industry. By
contrast, there are no indications that the financial services sector has made
any attempt to achieve significant alignment between its transformation charter
and the draft codes of good practice. Once the codes of good practice become
law, all businesses in South Africa will be subject to those codes unless they
form part of a sector in respect of which the Minister of Trade and Industry has
published an industry charter in the Government Gazette as a code of good
practice. The current uncertainty as to the final form of the regulatory regime
poses a risk, but there are indications that the regime will be settled in the
next 12 months. We are likely to be subject to the ICT sectors charter if this
document is published in the Government Gazette as a code of good practice. This
charter applies, among others, to companies that manufacture equipment for, or
provide services relating to, the electronic capturing, transmission and display
of data and information. Compliance with the charter is not enforced through
civil or criminal sanction, but only through its effect on the ability to secure
contracts in the public and private sectors. One of the components of BEE is
that a certain percentage of ownership by black South Africans or historically
disadvantaged South Africans of our South African business should be achieved
over a period of time which is generally thought to be ten to 15 years. Although
BEE is not expropriatory in nature, there may be a dilutive effect to current
shareholders in the South African business and there may be a cost associated
with increasing the level of black shareholders or historically disadvantaged
South Africans, both of which factors may represent a risk. However, given that
non-BEE compliance may place in jeopardy existing and future South African
public and private sector contracts, the loss of which could cause a loss of
revenue, the attendant risk associated with BEE non-compliance is material.

Exchange
control regulation. South Africas exchange control regulations restrict the
export of capital from South Africa, the Republic of Namibia and the Kingdoms of
Lesotho and Swaziland, known collectively as the Common Monetary Area.
Transactions between South African residents, including companies, and
non-residents of the Common Monetary Area are subject to exchange controls
enforced by SARB. In October 2004, the South African exchange control
regulations were liberalized by the abolishment of exchange control limits on
new investments outside of South Africa by South African companies. However,
according to the circular giving notice of this liberalization, SARB retains an
oversight function, the exact nature of which is not entirely clear from the
circular. According to the circular, South African companies investing outside
of South Africa must now apply to SARB only for monitoring purposes and for the
approval of SARB pursuant to existing foreign direct investment criteria,
including demonstrated benefit to South Africa. SARB reserves the right to
stagger capital outflows relating to very large investments outside of South
Africa by South African companies, so as to manage any potential impact on the
foreign exchange market. Also, these liberalization measures permit South
African companies to retain, outside of South Africa, dividends received in
relation to shares held by them in non-South African companies.

South
African exchange controls are expected to continue for the foreseeable future.
The South African government, however, has committed itself to gradually
relaxing exchange controls, and significant relaxations have occurred in recent
years. Nevertheless, under the current exchange control regulations, our
management may be limited in its ability to consider strategic options and our
shareholders may not be able to realize the premium over the current trading
price of our shares.

Although
Net 1 UEPS Technologies, Inc. is a U.S. corporation and is not itself subject to
these regulations, the ability of New Aplitec to raise and deploy capital
outside the Common Monetary Area is restricted. As of June 30, 2006,
approximately 80.2% of our cash and cash equivalents were held by New Aplitec
and its subsidiaries. During the year ended June 30, 2006, substantially all of
our revenues were generated by New Aplitec and its subsidiaries. In particular,
New Aplitec will generally not be permitted to export capital from South Africa
or to hold foreign currency without the approval of SARB, unless such export of
capital or foreign currency holding is permitted by the October 2004
liberalization measures. This restriction may affect New Aplitecs ability to
pay dividends to Net 1 UEPS Technologies, Inc. Moreover, although the
requirement that SARB approve investments by South African companies outside of
South Africa has been relaxed, this requirement could restrict our future
international expansion.

35

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SARB
approval is required for New Aplitec to receive loans from and repay loans to
non-residents of the Common Monetary Area. In addition, New Aplitec may not use
income earned in South Africa to repay or service foreign debts, without SARBs
approval. Repayment of principal and interest on such loans will usually be
approved at the time of the granting of such loans, where the payment is limited
to the amount borrowed and a market related rate of interest. New Aplitec will
also need SARB approval to raise capital involving a currency other than South
African rand, which approval may be provided subject to conditions. Thus, unless
we can obtain funding at the Net 1 UEPS Technologies, Inc. level, these
restrictions could prevent us from obtaining adequate funding on acceptable
terms for acquisitions and other business opportunities outside South Africa.

Trade
unions and labor laws. Most of South Africas major industries are
unionized, and the majority of employees belong to trade unions. In the past,
trade unions have had a significant impact on the collective bargaining process
as well as on social and political reform in South Africa in general. We
currently have approximately 183 unionized employees which represents
approximately 10.4% of our workforce. Although in recent years we have not
experienced any labor disruptions, such labor disruptions may occur in the
future. In addition, the cost of complying with labor laws may adversely affect
our operations.

Regional
instability. Historically, there has been regional, political, and economic
instability in the countries surrounding South Africa. Such political or
economic instability in neighboring countries could affect the social, political
and economic conditions in South Africa, for example, as a result of
immigration, and this could have a negative impact on our ability to manage our
operations in the country.

HIV/AIDS.
HIV/AIDS and tuberculosis, which is exacerbated in the presence of HIV/AIDS, are
major healthcare challenges in South Africa and other sub-Saharan countries. HIV
infection among women in antenatal clinics throughout South Africa has risen
from 1% in 1990 to nearly 25% in 2000. According to the most recent research
published by the Medical Research Council of South Africa, over five million
South Africans were HIV positive in 2004, resulting in a total population
prevalence rate of approximately 11%. Under South African law, we are generally
prohibited from testing employees to determine their HIV status. Due to the high
prevalence of HIV/AIDS in South Africa, we may incur costs relating to the loss
of personnel and the related loss of productivity as well as the costs relating
to recruiting and training of new personnel. We are not able to quantify these
costs accurately and cannot assure you that the costs we will incur in
connection with this epidemic will not have a material adverse effect on us and
our financial condition.

36

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There
are risks relating to other countries in which we intend to operate that could
adversely affect our future business, operating results, cash flows and
financial condition.

We
intend to expand operations into countries and regions, including African
countries outside South Africa, South America, Southeast Asia and Central
Europe, that are subject to significantly differing political, economic and
market conditions. Specific country and regional risks that may have a material
impact on our business, operating results, cash flows and financial condition
include:

| | - | political and economic instability;                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | - | loss due to civil strife, acts
        of war, guerrilla activities and insurrection;                                                                                
| | - | competition from existing market
        participants that may have a longer history in or greater familiarity
        with the foreign markets we enter;            
| | - | government interventions and
        protectionism;                                                                                                                  
| | - | potential adverse changes in
        laws and regulatory practices, including import and export license requirements,
        tariffs, legal structures and tax laws;
| | - | cancellation of contractual
        rights;                                                                                                                          
| | - | trade barriers;                                                                                                                                                      
| | - | difficulties in staffing and
        managing operations;                                                                                                            
| | - | import and export restrictions;                                                                                                                                      
| | - | adverse tax consequences;                                                                                                                                            
| | - | the lack of well-developed legal
        systems which could make it difficult for us to enforce our intellectual
        property and contractual rights;           
| | - | security and safety of employees;                                                                                                                                    
| | - | restrictions on the right to
        convert or repatriate currency or export assets;                                                                                
| | - | greater risk of uncollectible
        accounts and longer collection cycles;                                                                                         
| | - | currency fluctuations;                                                                                                                                               
| | - | indigenization and empowerment
        programs;                                                                                                                     
| | - | logistical and communications
        challenges;                                                                                                                    
| | - | changes in labor conditions;                                                                                                                                         
| | - | discrimination against U.S.
        companies; and                                                                                                                   
| | - | exposure to liability under
        U.S. securities laws, including the Foreign Corrupt Practices Act.                                                               

Many
of these countries and regions are in various stages of developing institutions
and legal and regulatory systems that are characteristic of democracies.
However, institutions in these countries and regions may not yet be as firmly
established as they are in democracies in the developed world. Many of these
countries and regions are also in the process of transitioning to a market
economy and, as a result, are experiencing changes in their economies and their
government policies that can affect our investments in these countries and
regions. Moreover, the procedural safeguards of the new legal and regulatory
regimes in these countries and regions are still being developed and, therefore,
existing laws and regulations may be applied inconsistently. In some
circumstances, it may not be possible to obtain the legal remedies provided
under those laws and regulations in a timely manner.

As
the political, economic and legal environments remain subject to continuous
development, investors in these countries and regions face uncertainty as to the
security of their investments. Any unexpected changes in the political or
economic conditions in these or neighboring countries or others in the region
may have a material adverse effect on the international investments that we have
made or may make in the future, which may in turn have a material adverse effect
on our business, operating results, cash flows and financial condition.

Volatility
in the South African Rand to U.S. dollar exchange rate may adversely affect our
reported operating results.

The
South African rand, or ZAR, is the primary operating currency for our business
operations while our financial results are reported in U.S. dollars. Because our
sales are primarily denominated in ZAR, a decline in the value of the ZAR
against the U.S. dollar may have a significant adverse effect on our reported
results of operations. During the three years ended June 30, 2006, the ZAR/U.S.
dollar exchange rate has been volatile , refer to Item 7 Currency Exchange
Rate InformationActual exchange ratestable 3 and the graph beneath table 3.

37

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As
a result, although our reported results of operations were positively affected
by currency fluctuations for the 2005 fiscal year compared to fiscal 2004, these
fluctuations adversely affected our reported results for fiscal 2006 as compared
to fiscal 2005. These fluctuations may make it more difficult for investors and
others to understand how our business has performed without regard to these
currency exchange rate changes. We expect that exchange rate volatility will
continue in the foreseeable future.

Trends
in sales and profits may experience significant fluctuations as the rate of
exchange between the ZAR and the U.S. dollar fluctuates. We cannot assure you
what effect, if any, changes in the exchange rate of the ZAR against the U.S.
dollar will have on our results of operations and financial condition.

We
do not currently engage in any currency hedging transactions intended to reduce
the effect of fluctuations in foreign currency exchange rates on our results of
operations, other than economic hedging relating to our inventory purchases
which are settled in U.S. dollars or euros. We have used forward contracts in
order to hedge our economic exposure to the ZAR/U.S. dollar and ZAR/euro
exchange rate fluctuations from these foreign currency transactions. We cannot
guarantee that we will enter into hedging transactions in the future or, if we
do, that these transactions will successfully protect us against currency
fluctuations.

The
loss of the services of Dr. Belamant or any of our other executive officers
would adversely affect our business.

Our
future financial and operational performance depends, in large part, on the
continued contributions of our Chief Executive Officer and Chairman, Dr. Serge
Belamant, as well as Mr. Herman Kotze, our Chief Financial Officer, Ms. Brenda
Stewart, our Senior Vice President-Marketing and Sales, and Mr. Nitin Soma, our
Senior Vice President-Information Technology. Many of our key responsibilities
are performed by these four individuals, and the loss of the services of any of
them could disrupt our development efforts or business relationships and our
ability to continue to innovate and to meet customers needs, which could have a
material adverse effect on our business and financial performance. We do not
have employment agreements with our executive officers, any of whom may
terminate their employment at any time, nor do we maintain any key person life
insurance policies.

We
face a highly competitive employment market and may not be successful in
attracting and retaining a sufficient number of skilled employees, particularly
in the technical and sales areas and senior management.

Our
future success depends on our ability to continue to develop new products that
use our UEPS technology and to market these products to our target users. In
order to succeed in our product development and marketing efforts, we need to
identify, attract, motivate and retain sufficient numbers of qualified technical
and sales personnel. An inability to hire and retain such technical personnel
would adversely affect our ability to enhance our existing intellectual
property, to introduce new generations of technology and to keep abreast of
current developments in technology. Demand for personnel with the range of
capabilities and experience we require is high and there is no assurance that we
will be successful in attracting and retaining these employees. The risk exists
that our technical skills and sales base may be depleted over time because of
natural attrition. Furthermore, social and economic factors in South Africa have
led, and continue to lead, numerous qualified individuals to leave the country,
thus depleting the availability of qualified personnel in South Africa. In
addition, our multi-country strategy will also require us to hire and retain
highly qualified managerial personnel in each of these markets. If we cannot
recruit and retain people with the appropriate capabilities and experience and
effectively integrate these people into our business, it could negatively affect
our product development and marketing activities.

We
pre-fund the payment of social welfare grants on behalf of our South African
government customers and any payment defaults by these customers would adversely
affect our operations.

We
use our internal cash resources and facilities to fund the payment of social
welfare grants under our contracts with the KwaZulu-Natal and Eastern Cape
provincial governments. We recover these funds from the KwaZulu-Natal provincial
government on a seven-day cyclical basis and from the Eastern Cape provincial
government on a 14-day cyclical basis. Therefore, these pre-funding obligations
expose us to the risk of default by the applicable provincial government. In
addition, the number of social welfare grant beneficiaries in these provinces
increased significantly during fiscal 2006, which increased our pre-funding
requirements. Although no provincial government has ever defaulted on a
repayment of funds at the end of the payment cycle, we cannot guarantee that
such a default will not occur in the future. Any such default could have a
material adverse effect on us, our financial position and results of operations.

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Our
ability to operate our wage payment and insurance products businesses may be
limited by existing South African banking and financial services laws and
regulations.

The
South African retail banking market is highly regulated, but the South African
government has identified the need to service the unbanked market through the
liberalization of the regulatory environment in order for retailers and
non-banking service providers to innovate products and delivery channels for the
unbanked market. However, under current law and regulations, a portion of our
South African wage payment business activities in the unbanked market requires
us to be registered as a bank in South Africa or to have access to an existing
banking license. We are not currently so registered, nor do have access to an
existing license, and therefore are not entitled to perform these activities in
South Africa and may face prosecution if we do. We have appointed expert
advisers to assist us in identifying and executing the most appropriate
methodology to obtain access to a license. While we believe that we will be able
to obtain access to this license, there is a possibility that our methodology
may not be successful or that a grant of the license may be delayed. In
addition, the South African Financial Advisory and Intermediary Services Act,
2002, requires persons who give advice regarding the purchase of financial
products or who act as intermediaries between financial product suppliers and
consumers in South Africa to register as financial service providers. We have
applied for a license under this Act in order to continue to provide advice and
intermediary services in respect of the financial products on which we advise
and the payment processing services we provide in South Africa on behalf of
insurers and other financial product suppliers. While the license application is
pending, we are entitled to continue this part of our business in South Africa.
If we fail to obtain this license, we may be stopped from continuing this part
of our business in South Africa.

We
may face competition from the incumbent retail banks in South Africa in the
unbanked market segment.

The
incumbent South African retail banks recently announced a joint initiative to
create a common banking product to offer to the significant portion of South
Africas population that does not have access to traditional banking services,
or the unbanked. This bank account, generally referred to as the Mzansi
account, was introduced in October 2004 and offers limited transactional
capabilities at reduced charges, when compared to the accounts traditionally
offered by these banks. According to the FinScope 2005 survey 550,000 people
(approximately 2% of the adult population) in South Africa claim to have an
Mzanzi account, although the exact number of accounts is unknown. The social
welfare beneficiaries who are currently paid through our smart card system may
elect to use these accounts to receive their grants. A decision by a substantial
number of these beneficiaries to elect to use these accounts rather than our
smart card system may have a material adverse effect on our financial condition,
cash flows and results of operations.

***We
may face increased competition as our sales and product offerings increase.***

In
addition to competition that we face from the use of cash, checks, credit and
debit cards, existing payment systems and the providers of financial services,
we have identified a number of other products currently being produced that use
smart card technology in connection with a funds transfer system and the
companies that promote them. These include EMV, a system that is being promoted
by Visa International Service Association, MasterCard International and Europay
International; Mondex International Limited, a subsidiary of MasterCard; and
Proton World International N.V., a subsidiary of STMicroelectronics Belgium N.V.
In South Africa, and specifically in the payment of social welfare grants, our
competitors also include AllPay Consolidated Investment Holdings (Pty) Ltd.,
which is responsible for social welfare payments in the Free State, Gauteng and
Western Cape provinces and a small portion of the Eastern Cape province, and
Empilweni Payout Services, which is responsible for payments in the Mpumalanga
province. We also may face competition from companies to which we have licensed
our technology, including Visa and BGS Smart Card Systems AG. Moreover, as our
product offerings increase and gain market acceptance, banks in South Africa and
other jurisdictions in which we operate may seek governmental or other
regulatory intervention if they view us as infringing on their funds transfer or
other businesses.

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Patent
competition may adversely affect our products or processes, and limited patent
protection, a lack of proprietary protection and the potential to incur costly
litigation could be harmful to our operations.

Our
products and technology have unique characteristics and structures and, as a
result, are subject to patent protection, the extent of which varies from
country to country. During the life of a patent, a product is only subject to
competition by non-infringing products. However, aggressive patenting by our
competitors and potential patent piracy may threaten protected products and
processes and may result in an increased patent infringement risk, especially in
emerging economies such as those where we currently operate. The expiration of a
patent may also result in increased competition in the market for the previously
patented products and processes. The patents for our FTS will expire, at the
latest, in Namibia in 2007; in South Africa, Botswana, Swaziland and Hong Kong
in 2009; and in the United States in 2011. In addition, our European Union FTS
patent has been challenged and revoked. Consequently, we do not have any patent
protection in the member countries of the European Union. Additionally, we could
have difficulty asserting the Hong Kong patent as it is not registered in our
name and it could be difficult to record our ownership of that patent. Further,
BGS, the local system operator in the Commonwealth of Independent States has
stopped paying licensing fees to us on the grounds that the revocation of the
European FTS patent relieves it from the obligation to pay such fees, although
we believe that the licensing fees relate to BGSs use of our UEPS technology
rather than the FTS patent. There is a risk that a similar refusal to pay our
licensing fees can occur elsewhere. Moreover, although we have certain patent
rights in the United States, these are not expected to have significant utility
in our business given that our management does not expect the U.S. market to
become a material part of our business in the future. Each of these factors
could have a material adverse effect on our business, operating results, cash
flows and financial condition. In addition, to date, we have relied not only on
patent protections, but also on trade secret, trademark and copyright laws, as
well as nondisclosure, licensing and other contractual arrangements to protect
the proprietary aspects of our solutions. Other than the patents discussed
above, we do not own any other patents that protect important aspects of our
current solutions. We will, however, prepare patent applications where possible
for technology related to our smart cards and UEPS system when we believe it is
appropriate to do so. These applications and contractual arrangements and our
reliance on these laws may not be successful.

Litigation
to enforce our intellectual property rights or protect our trade secrets could
result in substantial costs and may not be successful. Any loss of or inability
to protect intellectual property in our technology could diminish our
competitive advantage and also seriously harm our business, operating results,
cash flows and financial condition. In addition, the laws of certain foreign
countries may not protect our intellectual property rights to the same extent as
do the laws of South Africa, Namibia, Botswana, Swaziland, the United States and
the European Union. Our means of protecting our intellectual property rights in
South Africa, Namibia, Botswana, Swaziland, the United States and the European
Union or any other country in which we operate, may not be adequate to fully
protect our intellectual property rights. Similarly, if third parties claim that
we infringe their intellectual property rights, we may be required to incur
significant costs and devote substantial resources to the defense of such
claims. We may be required to discontinue using and selling any infringing
technology and services, to expend resources to develop non-infringing
technology or to purchase licenses or pay royalties for other technology. In
addition, if we are unsuccessful in defending any such third-party claims, we
could suffer costly judgments and injunctions that could materially adversely
affect our business, results of operations or financial condition.

The
copyrights and certain related intellectual property rights in earlier versions
of our UEPS software are jointly owned and potentially subject to non-exclusive
rights, which may reduce our future revenues.

While
we own the exclusive copyrights in the current version of the UEPS software,
these copyrights are subject to the preexisting copyrights in the earlier
versions of our software that are owned jointly by us and Nedbank. As joint
owners of the copyrights in these earlier versions of our software that existed
prior to July 2000, there is a risk that Nedbank could license these works to
others and otherwise commercially exploit these earlier works. Under our Nedbank
agreements, Nedbank also acquired the right to request a license of our South
African and U.S. FTS patents and of all technology and know-how relating to the
UEPS described in those earlier patents from us for entities partly owned by
Nedbank that are located anywhere within South Africa and neighboring countries.
Under these licenses, Nedbank would pay us a license fee, with us supplying
smart cards or being paid a royalty if the cards are obtained from a third
party. If Nedbank licenses our works to others or otherwise commercially
exploits our technology and know-how related to UEPS, our future revenues may be
reduced.

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Our
current license agreement with Visa imposes long-term restrictions on our
ability to license rights in our technology and could inhibit our ability to
realize additional revenue from these rights in our technology.

In
1997, we entered into a technology license agreement with Visa. Under that
agreement, Visa purchased a non-exclusive, perpetual, worldwide license to our
technology rights, as defined in the agreement, relating to our UEPS technology
and an exclusive, perpetual, worldwide license under our patents, as defined in
the agreement, licensed to Visa that is exclusive to the financial services
industry, as defined in the agreement. Our Visa agreement grants back to us the
non-exclusive right under our Visa-licensed patents to make, use and sell our
payment systems and other products in the financial services industry as
discussed in the agreement. In our Visa agreement, Visa agrees not to grant a
sublicense to any payment system to any entities in the financial services
industry who are not members of Visa already if such entity already has a right
to use such payment systems from us. The agreement permits Visa to sublicense
our licensed technology rights to any of its members, any entity in the
financial services industry or any entity outside of the financial services
industry that provides products to Visa or its sublicensees. The agreement
prohibits us from licensing our technology rights, not just our licensed
patents, to any of Visas competitors, including MasterCard, Europay, American
Express Company, Discover Financial Services, Diners Club International Credit
Card Co., Carte Blanche Card or JCB International Credit Card Co. or any of
their parents, subsidiaries or affiliates. We may need Visas consent, not to be
unreasonably withheld, in order to transfer or assign our rights and obligations
under the agreement. As this agreement does not contain a termination date and
contains restrictions on our ability to license our technology rights in the
financial services industry and to competitors of Visa, we may not be able to
realize the full value of our technology rights.

Our
license agreement with Visa substantially impacts our ability to defend and
enforce our patents licensed to Visa and could substantially inhibit our ability
to protect the rights in our technology.

Under
our license agreement with Visa, we are restricted from suing Visa, its members
and any third-party vendors or customers of Visa or its members for infringement
of our technology rights licensed to Visa in connection with their manufacture,
use or sale of any product or service offered by Visa. The license also grants
Visa sole discretion with regard to enforcement of any of the licensed
technology rights against third parties in the financial services industry.
Under the agreement, Visa has the right to control the prosecution and
maintenance of the patents and related patent applications we have licensed to
Visa in all jurisdictions, and we are obligated to cooperate and support any of
Visas actions in this regard. This arrangement could substantially impact our
ability to defend these patents, and could make enforcement actions against our
competitors more difficult.

We
depend upon third-party suppliers, making us vulnerable to supply shortages and
price fluctuations, which could harm our business.

We
obtain our smart cards, POS devices and the other hardware we use in our
business from a limited number of suppliers, and do not manufacture this
equipment ourselves. We generally do not have long-term agreements with our
manufacturers or component suppliers. If our suppliers become unwilling or
unable to provide us with adequate supplies of parts or products when we need
them, or if they increase their prices, we may not be able to find alternative
sources in a timely manner and could be faced with a critical shortage. This
could harm our ability to implement new systems and cause our revenues to
decline. Even if we are able to secure alternative sources in a timely manner,
our costs could increase. A supply interruption or an increase in demand beyond
current suppliers capabilities could harm our ability to distribute our
equipment and thus, to acquire a new source of customers who use our UEPS
technology. Any interruption in the supply of the hardware necessary to operate
our technology, or our inability to obtain substitute equipment at acceptable
prices in a timely manner, could impair our ability to meet the demand of our
customers, which would have an adverse effect on our business.

***Escalating
pricing pressures from our retail customers may adversely affect our business.***

We
have experienced pressure from our retail merchant customers seeking to
negotiate the fees we charge them. This pricing pressure could cause us to
reduce the level of the fees we charge to these customers, which could adversely
impact our revenues and profit margins.

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***System
failures, including breaches in the security of our system, could harm our
business.***

We
may experience system failures from time to time, and any lengthy interruption
in the availability of our back-end system computer, could harm our revenues and
profits, and could subject us to the scrutiny of our government customers.
Frequent or persistent interruptions in our services could cause current or
potential customers and users to believe that our systems are unreliable,
leading them to avoid our technology altogether, and could permanently harm our
reputation and brands. These interruptions would increase the burden on our
engineering staff, which, in turn, could delay our introduction of new
applications and services. Finally, because our customers may use our products
for critical transactions, any system failures could result in damage to our
customers businesses. These customers could seek significant compensation from
us for their losses. Even if unsuccessful, this type of claim could be time
consuming and costly for us to address.

Although
our systems have been designed to reduce downtime in the event of outages or
catastrophic occurrences, they remain vulnerable to damage or interruption from
earthquakes, floods, fires, power loss, telecommunication failures, terrorist
attacks, computer viruses, computer denial-of-service attacks and similar
events. Some of our systems are not fully redundant, and our disaster recovery
planning may not be sufficient for all eventualities.

Protection
against fraud is of key importance to the purchasers and end users of our
solutions. We incorporate security features, including encryption software,
biometric identification and secure hardware, into our solutions to protect
against fraud in electronic transactions and to provide for the privacy and
integrity of card holder data. Our solutions may be vulnerable to breaches in
security due to defects in the security mechanisms, the operating system and
applications or the hardware platform. Security vulnerabilities could jeopardize
the security of information transmitted using our solutions. If the security of
our solutions is compromised, our reputation and marketplace acceptance of our
solutions will be adversely affected, which would cause our business to suffer,
and we may become subject to damage claims. We have not yet experienced any
security breaches affecting our business.

Despite
any precautions we may take, the occurrence of a natural disaster or other
unanticipated problems with our system could result in lengthy interruptions in
our services. Our current business interruption insurance may not be sufficient
to compensate us for losses that may result from interruptions in our service as
a result of system failures.

We
may not be able to exploit technological advances quickly and successfully,
which could impair our competitive position and operations.

Most
of our operations depend on the use of advanced technological methods, which
must keep pace with rapid technological changes, new product introductions by
competitors, evolving industry and government performance and security standards
and changes in customer and end-user requirements. The use of the appropriate
advanced technological procedures can affect, among other things, the
competitiveness of our products, the safety of transactions performed using our
products, the continuity of our operations and the capacity and efficiency of
our production.

We
believe that new technologies may emerge and that existing technologies may be
further developed in the fields in which we operate. Unexpected rapid changes in
employed technologies that affect our operations and product range could render
the technologies we use obsolete or less competitive in the future. Difficulties
in accessing new technologies may impede us from implementing them and
competitive pressures may force us to implement these new technologies at a
substantial cost. In addition, limited access to sources of new capital to
acquire new technologies may adversely affect our results of operations and
financial condition.

We
cannot predict the effect of technological changes on our business or on our
ability to provide competitive products. Our ability to meet the competition
will depend on our timely and cost-effective implementation of new technological
advances. It will also depend on our success in commercializing these advances
in spite of competition we face by patents registered by our competitors. If we
are unable to implement new technologies in a timely or cost-efficient basis or
penetrate new markets in a timely manner in response to changing market
conditions or customer requirements, we could experience a material adverse
effect on our business, operating results, cash flows and financial condition.

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We
may incur material losses in connection with our distribution of cash to
recipients of social welfare grants.

Many
social welfare recipients use our services to access cash using their smart
cards. We use armored vehicles to deliver large amounts of cash to rural areas
across South Africa to enable these welfare recipients to receive this cash. In
some cases, we also store the cash that will be delivered by the armored
vehicles in depots overnight or over the weekend to facilitate delivery to these
rural areas. We cannot insure against the risk of loss or theft of cash from our
delivery vehicles as we have not identified any insurance underwriters willing
to accept this risk. Therefore, we will bear the full cost of any loss or theft
in connection with the delivery process, and such loss could materially and
adversely affect our financial condition, cash flows and results of operations.
During the years ended June 30, 2006, 2005 and 2004, we incurred losses in
connection with our cash delivery system of $2.1 million, $2.1 million and $4.2
million, respectively.

***We
may not recover outstanding amounts owed to our micro-finance businesses.***

We
operate a traditional micro-finance business, with approximately 85 branches
throughout South Africa. These branches extend short-term loans for periods
ranging from 30 days to four months at loans bearing interest rates of 15% to
30% per month. Despite the fact that we attempt to reduce credit risk by
employing credit profiling techniques, the rate of default on loans has been
high due to the high credit risk of these borrowers and the difficulty of
collecting outstanding repayments. We may therefore not recover some or all of
the principal and interest amounts currently owed by our borrowers, which on
June 30, 2006, totaled $3.7 million. Our inability to recover some or all of
these amounts may have a material adverse effect on our financial position and
results of operations.

We
may undertake other acquisitions that could increase our costs or liabilities or
be disruptive to our business.

One
of our strategies is to pursue selective acquisitions. Although we do not
currently have any commitments, contracts or understandings to acquire any
specific businesses or other material operations, we have made a number of
acquisitions in the past and will consider other acquisitions in the future. We
may not be able to locate suitable acquisition candidates at prices that we
consider appropriate or to finance acquisitions on terms that are satisfactory
to us. If we do identify an appropriate acquisition candidate, we may not be
able to successfully negotiate the terms of an acquisition, finance the
acquisition or, if the acquisition occurs, integrate the acquired business into
our existing business. Acquisitions of businesses or other material operations
may require debt financing or additional equity financing, resulting in
additional leverage or dilution of ownership. Integration of acquired business
operations could disrupt our business by diverting management away from
day-to-day operations. The difficulties of integration may be increased by the
necessity of coordinating geographically dispersed organizations, integrating
personnel with disparate business backgrounds and combining different corporate
cultures. We also may not be able to maintain key employees or customers of an
acquired business or realize cost efficiencies or synergies or other benefits
that we anticipated when selecting our acquisition candidates. In addition, we
may need to record write downs from future impairments of intangible assets,
which could reduce our future reported earnings. At times, acquisition
candidates may have liabilities or adverse operating issues that we fail to
discover through due diligence prior to the acquisition.

***We
may not be able to realize the anticipated benefits from the Prism acquisition***

We
anticipate several benefits from the Prism acquisition, including:

- enhancing our geographical penetration in South Africa via Prisms
  terminals located in semi-urban stores, and thereby strengthen our merchant
  acquiring footprint;
- expand our product lines to include services such as Prisms prepaid
  water, electric and mobile phone business;
- take advantage of Prisms smart card manufacturing capabilities;
- increase the total number of transactions we process and are capable of
  processing;
- augment and bolster our management team, technical staff and development
  professionals;
- amplify our technological advantage by providing us with access to Prisms
  SIM card patented cell phone technology; and
- expand our market reach into new geographical areas such as the
  Philippines, Indonesia and Malaysia through Prisms existing operations.

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There
can be no assurance that any of these or other anticipated benefits will
materialize and we cant give any indication of the time frame we will require
to achieve any of these benefits. The acquisition, development, adoption,
exploitation and distribution of new and existing technology may take long
periods of time and may require significant capital investments.

Prism
has a concentrated customer base, especially for its terminal base and card
sales, and the loss of any significant customer may expose us to material
financial, credit or performance risks and impair our ability to realize any
benefits from Prisms customer base.

Prisms card manufacturing business, which constitutes 13% of the pro-forma
operating profit of the company, is exposed to significant competitive risk from
low-cost/high volume producers in other regions. Prism currently provides GSM
cards to local South African and international customers. Prism may not be able
to compete successfully with these low-cost/high volume producers and may lose
the revenues and profits generated by this business.

Prism
relies on third party platforms that we do not own or control and are subject to
constraints within a number of our core regions. If these facilities fail to
provide us with adequate capacity, we may be restricted in our ability to
deliver key services to our customers and we may either incur additional costs
or forego revenues. Conversely, improvements to certain third party systems
could also reduce revenue.

Prisms
services and technologies may not achieve widespread commercial success or its
products or services may not appeal to enough customers, may not be available at
competitive prices, may not function as expected or may not be delivered in a
timely fashion

EasyPay is subject to substantial governmental regulation
and may be adversely affected by liability under, or any future inability to
comply with, existing or future regulations or requirements

Prisms
business is subject to extensive regulation. Compliance with the requirements
under these various regulatory regimes may cause us to incur significant
additional costs and failure to comply with such requirements could result in
the shutdown of the non-complying facility, the imposition of liens, fines
and/or civil or criminal liability.

Since we have only recently completed the Prism
acquisition and have not yet filed audited financial statements of Prism or
financial information showing the pro forma effect of the acquisition on our
historical financial statements, you may not be able to evaluate the financial
impact of the acquisition on us

Under
applicable SEC rules, we will be required to file no later than September 19,
2006, an amendment to the Form 8-K that we filed reporting the acquisition,
which amendment must include audited financial statements of Prism and financial
information showing the pro forma effect of the acquisition on our historical
results of operations as if the transaction had been completed on July 1, 2005,
the beginning of our last fiscal year and on our financial condition as if the
transaction had been completed on June 30, 2006. While we are currently in the
process of preparing the required financial statements and pro forma financial
information and expect to timely file the Form 8-K/A, until we actually file the
Form 8-K/A, you will not be in a position to evaluate Prisms historical
financial position, results of operations or cash flows or to evaluate the pro
forma impact of the acquisition on our historical financial position or results
of operations.

***We
may be subject to privacy laws in South Africa and other jurisdictions in which
we operate.***

Our
collection, storage and processing, and any disclosure of, customer and employee
personal information must comply with South Africas privacy laws, which are at
various stages of legislative and judicial development. However, South African
common law and the South African Constitution do recognize an individuals right
to privacy, and there are some statutes and other regulations which have been
enacted that apply to us and the way we operate our business. For example, one
statute sets out a framework for the electronic collection, processing, storage
and disclosure of personal information. Although compliance with this statute is
voluntary, a South African court could determine that we would be violating an
individuals right to privacy if we do not operate in compliance with this
framework. In addition, South African law requires that we must keep
confidential the HIV status of the people that participate in our HIV/AIDS
program.

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New
privacy laws may be enacted in the future which could adversely affect the way
we do business, and we could be required to devote substantial management time
and resources to comply with these new laws. In addition, if we violate, or are
judged to have violated, the privacy rights of people whose information we
collect, store and process, we could become liable for damages, which could have
a material adverse effect on our financial condition, cash flows or results of
operations.

Our
international operations require us to comply with a number of U.S. and
international regulations.

We
need to comply with a number of international regulations in countries outside
of the United States. In addition, we must comply with the Foreign Corrupt
Practices Act, or FCPA, which prohibits U.S. companies or their agents and
employees from providing anything of value to a foreign official for the
purposes of influencing any act or decision of these individuals in their
official capacity to help obtain or retain business, direct business to any
person or corporate entity or obtain any unfair advantage. Any failure by us to
adopt appropriate compliance procedures and ensure that our employees and agents
comply with the FCPA and applicable laws and regulations in foreign
jurisdictions could result in substantial penalties and/or restrictions in our
ability to conduct business in certain foreign jurisdictions. The U.S.
Department of The Treasurys Office of Foreign Asset Control, or OFAC,
administers and enforces economic and trade sanctions against targeted foreign
countries, entities and individuals based on U.S. foreign policy and national
security goals. As a result, we are restricted from entering into transactions
with certain targeted foreign countries, entities and individuals except as
permitted by OFAC which may reduce our future growth.

We
may be required to raise additional financing by issuing new securities with
terms or rights superior to those of our shares of common stock, which could
adversely affect the market price of our shares of common stock.

We
may require additional financing to fund future operations, including expansion
in current and new markets, programming development and acquisition, capital
costs and the costs of any necessary implementation of technological innovations
or alternative technologies. Because of the early stage of development of our
operations and exposure to market risks associated with economies in emerging
markets, we may not be able to obtain financing on favorable terms or at all. If
we raise additional funds by issuing equity securities, the percentage ownership
of our current shareholders will be reduced, and the holders of the new equity
securities may have rights superior to those of the holders of shares of common
stock, which could adversely affect the market price and voting power of shares
of common stock. If we raise additional funds by issuing debt securities, the
holders of these debt securities would similarly have some rights senior to
those of the holders of shares of common stock, and the terms of these debt
securities could impose restrictions on operations and create a significant
interest expense for us.

We
may have difficulty raising necessary capital to fund operations as a result of
market price volatility for our shares of common stock.

In
recent years, the securities markets in the United States have experienced a
high level of price and volume volatility, and the market price of securities of
many companies have experienced wide fluctuations that have not necessarily been
related to the operations, performances, underlying asset values or prospects of
such companies. For these reasons, our shares of common stock can also be
expected to be subject to volatility resulting from purely market forces over
which we will have no control. If our business development plans are successful,
additional financing may be required to continue to develop and exploit existing
and new technologies and to expand into new markets. The exploitation of our
technologies may, therefore, be dependent upon our ability to obtain financing
through debt and equity or other means.

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Our
quarterly operating results may fluctuate significantly as a result of factors
outside of our control, which could cause the market price of our common stock
to decline.

We
expect our revenues and operating results to vary from quarter to quarter. As a
consequence, our operating results in any single quarter may fall below the
expectations of securities analysts and investors, which could cause the price
of our common stock to decline. Factors that may affect our operating results
include:

| | - | demand for and acceptance of our new product
        offerings;                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------
| | - | delays in the implementation and delivery
        of our products and services, which may impact the timing of our recognition
        of revenue;
| | - | variations in product mix and cost during
        any period;                                                                                     
| | - | development of new relationships and maintenance
        and enhancement of existing relationships with customers and strategic
        partners; 
| | - | difficulties with component supplies, manufacturing
        or distribution;                                                                      
| | - | deferral of customer contracts in anticipation
        of product or service enhancements;                                                        
| | - | timing of commencement, implementation or
        completion of major implementation projects;                                                    
| | - | the relative mix of net revenues from established
        markets, including South Africa, and unestablished markets;                             
| | - | fluctuations in currency exchange rates;                                                                                                          
| | - | the fixed nature of many of our expenses;
        and                                                                                             
| | - | industry and economic conditions, including
        competitive pressures and inventory obsolescence.                                             

In
particular, differences in relative growth rates between our businesses in our
established markets for certain products and unestablished markets may have a
significant effect on our operating results, particularly our reported operating
profit percentage, in any individual quarter, with unestablished market sales
typically carrying lower margins in the initial phases of our operations in a
new area or the introduction of a new product to an area in which we already
operate. Certain transactions are difficult to predict and may have a
significant effect on our operating results. Sales of this nature include
hardware sales to customers and to our SmartSwitch investments and cause
fluctuations in revenue and operating income when they occur.

The
period between our initial contact with a potential customer and the sale of our
products or services to that customer tends to be long and may be subject to
delays which may have an impact on our revenues.

The
period between our initial contact with a potential customer and the purchase of
our products and services is often long and subject to delays associated with
the budgeting, approval and competitive evaluation processes that frequently
accompany significant capital expenditures. A lengthy sales cycle may have an
impact on the timing of our revenues, which may cause our quarterly operating
results to fall below investor expectations. A customers decision to purchase
our products and services is often discretionary, involves a significant
commitment of resources, and is influenced by customer budgetary cycles. To sell
our products and services successfully we generally must educate our potential
customers regarding the uses and benefits of our products and services, which
can require the expenditure of significant time and resources; however, there
can be no assurance that this significant expenditure of time and resources will
result in actual sales of our products and services.

We
may become subject to a U.S. tax liability for failing to withhold on certain
distributions on instruments issued in connection with the Aplitec transaction.

There
is no statutory, judicial or administrative authority that directly addresses
the tax treatment of non-U.S. holders that elected to receive units in a trust
representing beneficial interests in B class preference shares and B class loan
accounts issued by New Aplitec pursuant to the reinvestment option in connection
with our acquisition of Aplitec. We believe these interests should be treated
for United States federal income tax purposes as, and we did treat them as,
separate and distinct interests in New Aplitec. As such, we and our affiliates
do not presently intend to withhold any amounts for U.S. federal taxes in
respect of any distributions paid on such interests. There is a risk, however,
that these interests, together with the special convertible preferred stock, may
be treated as representing a single direct equity interest in us for U.S.
federal income tax purposes. In such case, distributions received with respect
to the B class preference shares and B class loan accounts could be subject to
U.S. federal withholding tax, and we could be liable for failure to withhold
such taxes in our capacity as withholding agent. In addition, our failure to
collect and remit U.S. federal withholding tax may also subject us to penalties.

46

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Shipments
of our electronic payment systems may be delayed by factors outside of our
control, which can harm our reputation and our relationships with our customers.

The
shipment of payment systems requires us or our manufacturers, distributors or
other agents to obtain customs or other government certifications and approvals
and, on occasion, to submit to physical inspection of our systems in transit.
Failure to satisfy these requirements, and the very process of trying to satisfy
them, can lead to lengthy delays in the delivery of our solutions to our direct
or indirect customers. Delays and unreliable delivery by us may harm our
reputation in the industry and our relationships with our customers.

Force
majeure events, such as terrorist attacks, other acts of violence or war,
political instability and health epidemics may adversely affect us.

Terrorist
attacks, war and international political instability, along with health
epidemics, may disrupt our ability to generate revenues. These events may
negatively affect our ability to maintain sales revenue and to develop new
business relationships. Because a substantial and growing part of our revenues
is derived from sales and services to customers outside of the United States and
we have our electronic payment systems manufactured outside the United States,
terrorist attacks, war and international political instability anywhere may
decrease international demand for our products and inhibit customer development
opportunities abroad, disrupt our supply chain and impair our ability to deliver
our electronic payment systems, which could materially adversely affect our net
revenues or results of operations. Any of these events may also disrupt global
financial markets and precipitate a decline in the price of our common stock.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None

47

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ITEM 2. PROPERTIES

Our
corporate headquarters facility consists of approximately 6,000 square feet in
Johannesburg, South Africa. We also lease properties throughout South Africa,
including a 1,200 square foot manufacturing facility in Lazer Park and 137 depot
facilities. As a result of our recent acquisition of Prism, we now also lease
additional office space in Johannesburg, Cape Town and Durban, South Africa and
Kuala Lumpur, Malaysia and a manufacturing facility in Springs, South Africa.
These leases expire at various dates through the year 2006 and 2010,
respectively. We believe we have adequate facilities for our current business
operations.

ITEM 3. LEGAL PROCEEDINGS

On
July 20, 2005, the South African High Court set aside the service level
agreement between Cash Paymaster Services (Northern) (Proprietary) Limited, or
CPS N, and the Department of Health and Welfare of the Province, or the
Department. The courts ruling followed an application by Empilweni Payout
Services (LP) (Pty) Limited, or Empilweni, a disqualified bidder for the current
contract, asking the court, among other things, to set aside the action of the
Limpopo Province Tender Board, or the Tender Board, that awarded the contract to
CPS N. Empilwenis application alleged that the Tender Board acted improperly in
awarding the tender to CPS N. Empilweni did not seek relief against CPS N or
allege wrongdoing by CPS N. Empilwenis application was opposed by the Tender
Board, the Department, the Premier of the Province and CPS N.

The
courts ruling was suspended as a result of filing leave to appeal on July 25,
2005 by the Province, the Premier of the Province and the Tender Board. As a
result, the contract was reinstated pending the outcome of the appeal. The court
directed the Tender Board, the Department and CPS N each to pay a portion of
Empilwenis costs of the action, which were not be material to us. This order
was suspended pending the outcome of the appeal.

Although
the court set aside the contract, the court did not grant Empilwenis request to
direct the Tender Board to readvertise the tender or to readjudicate the tender,
and in effect left it to the discretion of the Tender Board as to whether it
wishes to invite new tenders. The Province has emergency powers to award a
contract without commencing a formal tender process. In April 2006, we signed a
new contract with the Limpopo provincial government for the distribution of
social welfare grants until December 31, 2006. The terms and conditions of the
new contract are substantially the same as the contract awarded in November 2002
and executed in March 2003.

There
have been reports in the South African press, first reported in 2004 and more
recently in articles relating to the setting aside of the Limpopo contract, that
the Directorate of Special Investigations, a South African government agency,
has been investigating allegations that Northern Corporate Investment Holdings,
a former shareholder in CPS N, made payments to a trust through which the
African National Congress in the Province and a former premier of the Province
may have benefited. We have fully cooperated with the investigating authorities
by providing requested documentation and have received confirmation that we are
not in any way implicated in the investigation.

There
are no material pending legal proceedings, other than ordinary routine
litigation incidental to our business, to which we are a party or of which any
of our property is the subject.

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

There
were no matters submitted to a vote of our security holders during the fourth
quarter of the year ended June 30, 2006.

48

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PART II

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

Our
common stock is traded on the Nasdaq Global Select Market under the symbol
UEPS and has been traded on Nasdaq since August 3, 2005. Prior to August 3,
2005, our common stock was quoted on the OTC Bulletin Board, or OTCBB. From
December 2000 until June 10, 2005, our OTCBB symbol was NUEP.OB and from June
13, 2005, the effective date of our 1-for-6 reverse stock split, until August 2,
2005, our OTCBB symbol was NOUT.OB.

According
to the records of our transfer agent, as of July 31, 2006, there were 42
shareholders of record of our common stock.

The
following table sets forth, for the periods indicated, the high and low sales
prices of our common stock as reported by Nasdaq since our Nasdaq listing, and
prior to our Nasdaq listing, the high and low bid quotations of our common stock
on the OTCBB. With respect to OTCBB quotations, these quotations reflect prices
between dealers and do not include retail mark-ups, mark-downs, and commissions
and may not necessarily represent actual transactions. All share and per share
information presented in this Form 10-K has been retroactively restated to
reflect the effect of our 1-for-6 reverse stock split.

Period
    High
    LowQuarter ended September 30,
      2004
    $14.10
    $6.66Quarter ended December 31, 2004
    $16.20
    $5.94Quarter ended March 31, 2005
    $21.30
    $10.56Quarter ended June 30, 2005
    $18.60
    $13.68Quarter ended September 30,
      2005
    $29.60
    $16.40Quarter ended December 31, 2005
    $29.95
    $19.07Quarter ended March 31, 2006
    $33.75
    $28.10Quarter ended June 30, 2006
    $32.40
    $23.70


Our
transfer agent is The Bank of New York, One Wall Street, New York, New York,
10286.

We have not paid any dividends on our shares of common stock
during our last two fiscal years and presently intend to retain future earnings
to finance the expansion of the business. We do not anticipate paying any cash
dividends in the foreseeable future. The future dividend policy will depend on
our earnings, capital requirements, expansion plans, financial condition and
other relevant factors. New Aplitecs future dividend policy also has to comply
with the restrictions placed by SARB as a condition of its approval of the
Aplitec transaction. These restrictions will apply until such time as all of our
special convertible preferred stock has been converted into common stock. These
restrictions provide that dividends may be declared by the New Aplitec board of
directors only if (i) declaration of the dividend is approved by a majority of
the holders of New Aplitec B class preference shares, (ii) all loan accounts
have been paid by New Aplitec and (iii) the dividend does not exceed 50% of New
Aplitecs annual earnings. In addition, under South African law, New Aplitec
will only be entitled to pay a dividend if it meets the solvency and liquidity
tests set out in the South African Companies Act. However, because the New
Aplitec board will be appointed by Net 1 UEPS Technologies Inc., which will
ultimately determine whether any dividends are declared by New Aplitec, subject
to the above conditions. Any dividends declared by New Aplitec will be
distributed to the holders of A class and B class preference shareholders pro
rata in accordance with their respective ownership interests in New Aplitec.

*Repurchases
of Equity Securities*

On
May 25, 2006, we repurchased 147,973 of our shares of common stock from Morgan
Stanley & Co. Incorporated at a purchase price of $26.75 per share. This
purchase was made contemporaneously with the sale of an aggregate of 1,104,399
shares of our common stock by employees, officers and directors pursuant to Rule
144 under the Securities Act of 1933 through a block trade with Morgan
Stanley.

49

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ITEM 6. SELECTED FINANCIAL DATA

The
following selected financial data should be read together with Item 7--
Managements Discussion and Analysis of Financial Condition and Results of
Operations and Item 8- Financial Statements and Supplementary Data.

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

Year Ended June 302006
      
      
      2005
      
      
      2004
      
      
      2003
      
      
      2002Revenue
      $
      196,098
      
      $
      176,290
      
      $
      131,098
      
      $
      74,924
      
      $
      51,793Cost of goods sold, IT processing, servicing and support
      
      50,619
      
      
      50,682
      
      
      39,134
      
      
      25,935
      
      
      14,170General and administrative charges
      
      48,627
      
      
      45,897
      
      
      39,677
      
      
      26,399
      
      
      21,637Depreciation & amortization
      
      5,710
      
      
      6,591
      
      
      5,676
      
      
      3,323
      
      
      3,128Costs related to public offering and Nasdaq
        listing
      
      1,529
      
      
      1,817
      
      
      -
      
      
      -
      
      
      -Reorganization costs(1)
      
      -
      
      
      -
      
      
      11,113
      
      
      -
      
      
      -Operating income
      
      89,613
      
      
      71,303
      
      
      35,478
      
      
      19,267
      
      
      12,858Interest, net
      
      5,889
      
      
      2,389
      
      
      3,640
      
      
      2,600
      
      
      1,381Income before taxes
      
      95,502
      
      
      73,692
      
      
      39,118
      
      
      21,867
      
      
      14,239Income tax expense
      
      36,653
      
      
      29,666
      
      
      25,927
      
      
      9,473
      
      
      5,554Income from continuing operations
      
      59,232
      
      
      44,562
      
      
      13,278
      
      
      11,942
      
      
      8,518Net income attributable to shareholders(2)
      
      59,232
      
      
      44,562
      
      
      13,278
      
      
      13,117
      
      
      8,518Income from continuing operations per share
        (3):Basic
      $
      1.05
      
      $
      0.81
      
      $
      0.40
      
      $
      0.37
      
      $
      0.27Diluted
      $
      1.03
      
      $
      0.80
      
      $
      0.38
      
      $
      0.37
      
      $
      0.27Cash dividend per share (3)
      
      -
      
      
      -
      
      $
      1.14
      
      $
      0.12
      
      $
      0.08


(1) These costs comprise legal, accounting, regulatory and
other professional fees related to the Aplitec transaction, as well as a charge
of $4.4 million related to the issuance of other stock-based awards under our
2004 Stock Incentive Plan. (2) Net income attributable to common
shareholders for 2003 includes an extraordinary item of $0.9 million and the
results of a change in accounting policy of $0.3 million as a result of the
adoption and application of Statement of Financial Accounting Standards No.
142 Goodwill and Other Intangible Assets. (3) Basic and diluted income
from continuing operations and cash dividends per share for 2004, 2003 and 2002
were previously restated to reflect the issuance of shares of common stock and
special convertible preferred stock in connection with the Aplitec transaction
and the one-for-six reverse stock split effected on June 13, 2005. (4)
Financial Accounting Standards Board Statement No. 123(R) (revised 2004),
Share-Based Payment, was adopted in 2006 in accordance with the modified
prospective method and the 2006 data includes a charge of $0.2 million in
respect of stock-based compensation. Prior periods were not restated and are
therefore not presented on a comparable basis.

50

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Additional Operating Data:(in thousands, except
percentages)

Year ended June 30,2006
      
      
      2005
      
      
      2004
      
      
      2003
      
      
      2002Cash flows provided by operating activities
      $
      75,777
      
      $
      38,142
      
      $
      41,895
      
      $
      17,644
      
      $
      11,753Cash flows used in from investing activities
      
      5,505
      
      
      3,397
      
      
      5,721
      
      
      7,393
      
      
      880Cash flows provided by (used in) financingactivities
      $
      29,723
      
      $
      (19
      )
      $
      (24,060
      )
      $
      (2,266
      )
      $
      528Operating income margin
      
      46%
      
      
      40%
      
      
      27%
      
      
      26%
      
      
      25%


Consolidated Balance Sheet Data:(in thousands)

Year Ended June 30,2006
      
      
      2005
      
      
      2004
      
      
      2003
      
      
      2002Cash and cash equivalents
      $
      189,735
      
      $
      107,749
      
      $
      80,282
      
      $
      54,313
      
      $
      32,150Total current assets
      
      240,718
      
      
      150,664
      
      
      117,412
      
      
      78,705
      
      
      45,480Total assets
      
      269,979
      
      
      181,754
      
      
      152,632
      
      
      98,359
      
      
      56,496Total current liabilities
      
      43,123
      
      
      34,353
      
      
      47,831
      
      
      19,861
      
      
      10,178Total debt
      
      -
      
      
      -
      
      
      252
      
      
      -
      
      
      -Total shareholders equity
      $
      209,010
      
      $
      137,002
      
      $
      95,588
      
      $
      70,504
      
      $
      41,724


51

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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

The
following discussion and analysis should be read in conjunction with Item 6 
Selected Financial Data and Item 8  Financial Statements and Supplementary
Data. In addition to historical consolidated financial information, the
following discussion and analysis contains forward-looking statements that
involve risks, uncertainties and assumptions. See  1A. Risk Factors. In
accordance with U.S. generally accepted accounting principles, or US GAAP, we
accounted for the Aplitec transaction as a reverse acquisition, which requires
that the company whose shareholders retain a majority voting interest in a
combined business be treated as the acquirer for accounting purposes. Therefore,
for all periods after June 7, 2004, our consolidated financial statements and
the discussion and analysis below reflect the operations of Net 1 UEPS
Technologies, Inc. and its consolidated subsidiaries and, for prior periods,
reflect the operations of Aplitec and its consolidated subsidiaries, but not Net
1 UEPS Technologies, Inc.

Overview

We
provide our universal electronic payment system technology as an alternative
payment system to the un-banked and under-banked populations of developing
economies. We believe that we are the first company worldwide to implement a
system that can enable the estimated four billion people who generally have
limited or no access to a bank account to effect affordably electronic
transactions with one another, government agencies, employers, merchants and
other financial services providers. To do this, we have developed and deployed
the universal electronic payment system, or UEPS. This system uses secure smart
cards that operate in real time but offline, unlike traditional payment systems
offered by major banking institutions that require immediate access through a
communications network to a centralized computer. This offline capability means
that users of our system can enter into transactions at any time with other card
holders in even the most remote areas so long as a portable offline card reader
is available. In addition to payments and purchases, our system can be used for
banking, health care management, international money transfers, voting and
identification.

South
Africa is the first major market where we achieved significant success and a
high penetration rate in the areas we targeted. We believe that our operating
experience in South Africa demonstrates the success of our business model in a
developing economy. According to estimates published by Statistics South Africa,
as of mid-2006, South Africa had a population of approximately 47.4 million
people, of which an estimated 50% lived below the poverty line and, as of
September 2005, the South African unemployment rate is estimated at
approximately 26.7% . The success we have achieved in South Africa has primarily
resulted from servicing the needs of the poorest section of the population 
those who are dependent on government social welfare grants. We have designed
and implemented a complete business model involving the payment, and subsequent
spending, of these grants through our smart cards and UEPS technology, which
provides us with the opportunity to earn multiple sources of revenue and
provides our card holders with affordable functionality and lifestyle
improvement. The South African government is also actively involved in a number
of initiatives which may present us with opportunities to export our South
African achievements, such as the New Partnership for Africas Development and
the India-Brazil-South Africa Dialogue Forum, which is currently considering the
establishment of an economic trade bloc between these three countries.

In
July 2004, we began a major drive to install POS devices at merchants located in
rural areas where the majority of our card holders spend their social welfare
grants. The ability of our card holders to load their grants at these retailers
and to spend these grants securely on goods and services, without the need to
withdraw the full amount in cash, represents one of the basic underlying
principles of the UEPS functionality. We believe that the installation of these
POS devices has resulted in a significant improvement in the lifestyle of our
card holders, while introducing a new revenue source for us in the form of
merchant acquiring and other transaction fees. Use of the POS devices also
lowers our costs by reducing the amount of cash we need to deliver to social
welfare beneficiaries in cash at our mobile paypoints. We discuss the progress
of our merchant acquiring efforts since implementation of these efforts under
Progress of Our Merchant Acquiring Project.

52

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The implementation of new UEPS systems, particularly in developing economies
outside our current markets, is a vital component of our future growth. We have
implemented or are in the process of implementing our systems on the African
continent outside South Africa. During fiscal 2006, we formed joint ventures
with government entities and financial institutions to operate UEPS smart
card-based switching systems in Namibia, Botswana and Nigeria. These joint
ventures, which are described in more detail under International Expansion,
are in various stages of development and operation.

On
July 3, 2006, we acquired Prism, which we believe will help us expand our
merchant footprint in South Africa, extend our ability to deliver solutions
across the entire spectrum of transaction processing and assist us in expanding
our international operations throughout Africa, Asia and Europe. Since we
completed the Prism acquisition after the close of our 2006 fiscal year, Prisms
operations are not reflected in our financial statements as of and for the year
ended June 30, 2006. We have also begun to explore strategic partnership and
business opportunities across the Americas.

Sources of Revenue

We
have structured our business and our business development efforts around four
related but separate approaches to deploying our technology. In our most basic
approach, we act as a supplier, selling our equipment, software, and related
technology to a customer. As an example, in Malawi we sold a complete UEPS to
the Central Bank, which owns and operates the resulting transaction settlement
system. The revenue and costs associated with this approach is reflected in our
Hardware, software and related technology sales segment.

We
have found that we have greater revenue opportunities, however, by acting as
service provider instead of a supplier. In this approach we own and operate the
UEPS ourselves, charging one-time and on-going fees for the use of the system
either on a fixed or ad valorem basis. This is the case in South Africa, where
we distribute welfare grants on behalf of the provincial governments and
employers on a fixed basis, but charge a fee on an ad valorem basis for goods
purchased using our smart card. The revenue and cost associated with this
approach are reflected in our Smart card accounts, Transaction-based activities
and Financial services segments. Three of the provincial governments provide
more than 10 per cent of our total revenues and the loss of any one of these
customers may have a material adverse effect on us.

Because
our smart cards are designed to enable the delivery of more advanced services
and products, we are also willing to supply those services and products where
the profit potential is compelling. For instance, we act as a lender today. This
is an example of the third approach that we have taken. Here we can act as the
principal in operating a business that can be better delivered through our UEPS.
We can also act as an agent, for instance, in the provision of insurance
policies. In both cases, the revenue and costs associated with this approach are
reflected in our Financial services segment.

Finally,
we have entered into business partnerships or joint ventures, such as
SmartSwitch Namibia and SmartSwitch Botswana, to introduce our solution to new
markets. In these situations, we take an equity position in the business while
also acting as a supplier of technology. In evaluating these types of
opportunities, we seek to maintain a highly disciplined approach, carefully
selecting partners, participating closely in the development of the business
plan and remaining actively engaged in the management of the new business. In
most instances, the joint venture or partnership owns the UEPS, including the
back-end system. We account for our equity investments using the equity method.

We
believe that this flexible approach enables us to drive adoption of our solution
while capturing the value created by the implementation of our technology.

***South
African Provincial Contracts***

We
currently derive the majority of our revenues from our contracts with various
South African provincial governments. The South African national government
passed legislation in 2004 for creation of the South African Social Security
Agency, or SASSA. The primary purpose of SASSA is to consolidate at the central
government level the administration of social welfare grants.

53

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SASSA
commenced operations on April 1, 2006 and has recently begun the process of
conducting a national tender for the distribution of welfare grants in which
bidders will have the opportunity to bid for all of South Africa or on a
province-by-province basis. In late July 2006, SASSA published a request for
pre-qualification of bidders, or RFQ, which included a proposed timetable for
pre-qualifying bidders, distributing requests for proposals, or RFPs, from
pre-qualified bidders and evaluating RFP submissions, indicating that the
process should be completed by late November 2006. However, in mid-August 2006,
SASSA withdrew the RFQ. SASSA did not indicate when it would re-publish the RFQ
or otherwise recommence the tender process. We believe that our successful
record with our provincial government contracts will provide us with a good
opportunity to benefit from the transition to national administration of social
welfare grants because we may be able to obtain contracts to distribute grants
in provinces with which we do not currently have a contractual relationship.
However, there is a chance that a national tender could lead to our losing one
or more of our current contracts if SASSA decides to appoint a single (or other)
contractor to provide social welfare grant distribution and we are not chosen.
During this transition period, which we estimate to be approximately twelve
months, our existing provincial government contracts will continue to be
governed by their respective terms.

During
the transition period to SASSAs national administration, when a provincial
government contract expires, whether at its originally scheduled expiration date
or at the end of any applicable extension period, we must successfully re-tender
in order to retain the contractual relationship. Usually, such a tender must be
submitted as part of a competitive tender process. The fact that we previously
held a particular contract does not necessarily mean that it will be awarded to
us again. To date, we have successfully renewed every provincial government
contract which we have been awarded. In addition, there have been occasions when
a contract has not been formally renewed prior to its originally scheduled
expiration date or expiration of the extension period, as is currently the case
with the Eastern Cape, and North West contracts, but in each of these cases we
and the provincial government have continued to operate under the terms of the
expired contract until the execution of a new contract or conclusion of a formal
extension notice.

On
April 6, 2006, we announced the signing of a new contract with the Limpopo
provincial government for the distribution of social welfare grants until
December 31, 2006. The new contract may be extended by the Limpopo government to
coincide with the implementation of a national tender by SASSA. On May 10, 2006,
we announced that we had signed an extension letter with the Kwa-Zulu Natal
provincial government for the distribution of social welfare grants until
December 31, 2006. The terms and conditions of the extension are similar to
those included in the Service Level Agreement signed between the Department of
Social Welfare and Population Development, Kwa-Zulu Natal and Cash Paymaster
Services (KwaZulu-Natal) (Proprietary) Limited.

The
following table shows the current status of each of our provincial government
contracts:

Table 1
    KwaZulu-Natal
    Limpopo
    North West
    Northern Cape
    Eastern CapeOriginal year of contract award
    1992
    1996
    1995
    1997
    2002Date acquired by Net1
    October 1998
    October 1998
    October 1998
    October 1998
    n/aDate of first Net1 contract
    January 2000
    December 2003
    July 2000
    January 2000
    November 2003UEPS smart card implementation date
    January 2000
    January 2004
    October 2000
    September 2001
    November 2003Merchant acquiring rollout date
    December 2004
    March 2005
    June 2005
    July 2004
    October 2004Current contract expiration date
      (including extensions)
    December 2006
    December 2006
    December 2006
    December 2006
    ExpiredFurther possible extensions
    Negotiable
    Negotiable
    Negotiable
    Negotiable
    NegotiableNumber of beneficiaries 
        grants paid by CPS (as of June 
        30, 2006)
    1,586,542
    960,416
    273,031
    127,474
    706,233


We
believe that based on the number of beneficiaries, we currently have
approximately 45% of the market share in South Africa, for the distribution of
social welfare grants. Our main competitors are the South African Post Office
and the formal banking sector.

54

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***Progress
of Our Merchant Acquiring Project***

We
have completed the installation of our POS terminals at the majority of those
merchant locations we deem the most important to service the bulk of our
cardholder base. The productivity of the existing terminal base continues to
improve, as is evident from the increase in the number of transactions processed
per POS terminal installed. We believe that the existing terminal base still has
spare capacity and that the upward trend in transactions per terminal will
continue. Our ongoing POS deployment plan is now focused on secondary locations
and retailers, where we will install fewer terminals over a longer period of
time.

Through
our merchant acquiring initiative, beneficiaries are able to load their grants
onto their cards as soon as the grant payment file is activated, which typically
happens during the week preceding the commencement of a calendar month. We
recognize the fee revenue related to the distribution of welfare grants when the
beneficiaries load the grants to their cards. The general exception to this rule
is the January payment cycle, when the payment file is normally activated during
the first week of January and not the last week of December. Our annual results
were not affected as twelve full payment cycles were included our fiscal 2006
results.

The
key statistics and indicators of our merchant acquiring project on a quarterly
basis during the last 18 months in each of the South African provinces where we
distribute social welfare grants are summarized in the table below:

|Table 2                                               |  | Mar.    |  |  | Jun.      |  |  | Sept.     |  |  | Dec.      |  |  | Mar.      |  |  | Jun.      | 
|----------------------------------------------------- |  | ------- |  |  | --------- |  |  | --------- |  |  | --------- |  |  | --------- |  |  | --------- | 
|                                                      |  | 2005    |  |  | 2005      |  |  | 2005      |  |  | 2005      |  |  | 2006      |  |  | 2006      | 
|                                                      |  |         |  |  | NC, EC,   |  |  | NC, EC,   |  |  | NC, EC,   |  |  | NC, EC,   |  |  | NC, EC,   | 
|                                                      |  | NC, EC  |  |  | KZN, L    |  |  | KZN, L    |  |  | KZN, L    |  |  | KZN, L    |  |  | KZN, L    | 
|Province included (1)                                 |  | and KZN |  |  | and NW    |  |  | and NW    |  |  | and NW    |  |  | and NW    |  |  | and NW    | 
|Total POS devices installed                           |  | 2,406   |  |  | 3,235     |  |  | 3,959     |  |  | 3,929     |  |  | 3,905     |  |  | 4,038     | 
|Number of participating UEPS retail locations         |  | 1,441   |  |  | 1,880     |  |  | 2,303     |  |  | 2,366     |  |  | 2,352     |  |  | 2,381     | 
|Value of transactions processed through POS           |  |         |  |  |           |  |  |           |  |  |           |  |  |           |  |  |           | 
|devices during the quarter
      (2) (in $ 000)      |  | 45,529  |  |  | 87,643    |  |  | 118,585   |  |  | 118,396   |  |  | 187,841   |  |  | 189,649   | 
|Value of transactions processed through POS           |  |         |  |  |           |  |  |           |  |  |           |  |  |           |  |  |           | 
|devices during the completed
      pay cycles for the |  |         |  |  |           |  |  |           |  |  |           |  |  |           |  |  |           | 
|quarter (3) (in $ 000)                               |  | 44,433  |  |  | 85,408    |  |  | 112,950   |  |  | 127,765   |  |  | 171,022   |  |  | 187,769   | 
|Value of transactions
      processed through POS     |  |         |  |  |           |  |  |           |  |  |           |  |  |           |  |  |           | 
|devices during the quarter (2) (in ZAR 000)          |  | 273,800 |  |  | 559,988   |  |  | 772,071   |  |  | 781,251   |  |  | 1,158,546 |  |  | 1,225,168 | 
|Value of transactions
      processed through POS     |  |         |  |  |           |  |  |           |  |  |           |  |  |           |  |  |           | 
|devices during the completed pay cycles for
      the |  |         |  |  |           |  |  |           |  |  |           |  |  |           |  |  |           | 
|quarter (3) (in ZAR 000)                             |  | 267,040 |  |  | 547,462   |  |  | 734,172   |  |  | 840,695   |  |  | 1,055,203 |  |  | 1,213,026 | 
|Number of grants paid through POS devices             |  |         |  |  |           |  |  |           |  |  |           |  |  |           |  |  |           | 
|during the quarter (2)                                |  | 631,252 |  |  | 1,143,937 |  |  | 1,449,675 |  |  | 1,496,384 |  |  | 2,518,296 |  |  | 2,554,616 | 
|Number of grants paid through POS devices             |  |         |  |  |           |  |  |           |  |  |           |  |  |           |  |  |           | 
|during the completed pay
      cycles for the quarter |  |         |  |  |           |  |  |           |  |  |           |  |  |           |  |  |           | 
|(3)                                                   |  | 639,929 |  |  | 1,308,807 |  |  | 1,703,262 |  |  | 1,855,192 |  |  | 2,288,883 |  |  | 2,537,377 | 
|Average number of grants
      processed per terminal |  |         |  |  |           |  |  |           |  |  |           |  |  |           |  |  |           | 
|during the quarter (2)                                |  | 344     |  |  | 406       |  |  | 403       |  |  | 379       |  |  | 643       |  |  | 643       | 
|Average number of grants
      processed per terminal |  |         |  |  |           |  |  |           |  |  |           |  |  |           |  |  |           | 
|during the completed pay cycles for the
      quarter |  |         |  |  |           |  |  |           |  |  |           |  |  |           |  |  |           | 
|(3)                                                   |  | 349     |  |  | 464       |  |  | 474       |  |  | 470       |  |  | 584       |  |  | 639       | 

(1) NC = Northern
  Cape, EC = Eastern Cape, KZN = KwaZulu-Natal, L = Limpopo, NW = North West.
             (2) Refers to events
  occurring during the quarter (i.e., based on three calendar months). 
             (3) Refers to events
  occurring during the completed pay cycle. As discussed above the grant payment
  file is typically activated during the week preceding the commencement of a
  calendar month.

55

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The
following chart presents the number of POS devices installed and the average
spend per POS device, per pay cycle, during the 18 month period ended
June 30, 2006:



The
following chart presents the number of POS devices installed and the average
spend per POS device, per calendar month, during the 18 month period
ended June 30, 2006:



56

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The following chart presents the growth in the value of loads
at merchant locations and the transactions (expenditures) processed through our
installed base of POS devices, per pay cycle, during the 18 month period
ended June 30, 2006:



The
following chart presents the growth in the value of loads at merchant locations
and the transactions (expenditures), per calendar month, processed
through our installed base of POS devices during the 18 month period ended June
30, 2006:



57

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The
following graph presents the number of social welfare grants loaded at merchant
locations, per pay cycle, for the 18 month period ended June 30, 2006:



The
following graph presents the number of social welfare grants loaded at merchant
locations, per calendar month, for the 18 month period ended June 30,
2006:



58



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***International
Expansion***

*Namibia*

During
the first quarter of fiscal 2006, we formed SmartSwitch Namibia to launch and
operate a national UEPS smart card-based switching and settlement system in
Namibia. We own 50% of SmartSwitch Namibia and the other 50% is owned by Namibia
Post Limited, or NamPost, a government entity which provides post office and
banking services across Namibia. The Service Level Agreement between SmartSwitch
Namibia and NamPost was finalized and signed during the second quarter of fiscal
2006. Our marketing and information technology teams began implementation and
testing of the switch in the second quarter of fiscal 2006 and operations in
Namibia commenced in February 2006. SmartSwitch Namibia provided NamPost with a
UEPS banking platform. In February 2006, SmartSwitch Namibia began the process
of issuing a UEPS smart card to approximately 300,000 of NamPosts customers.
The UEPS system will also be offered to employers, retailers, medical insurance
companies and other government institutions.

The
system, the first of its kind in Namibia, is intended to improve the banking
system in the country. NamPost, as the first customer of the switch, is expected
to increase its market share in the financial services arena and position itself
as the leading service provider for the un-banked and under-banked citizens of
Namibia.

Together
with NamPost we have capitalized SmartSwitch Namibia with approximately $4.7
million (ZAR 34.0 million at June 30, 2006, foreign exchange rates), in start-up
capital and loans, which was contributed equally by both parties. The proceeds
have been utilized by SmartSwitch Namibia for the acquisition of hardware and
software from us and for general working capital purposes.

As
we own 50% of SmartSwitch Namibia, we are required under US GAAP to eliminate
50% of the net income generated from sales to SmartSwitch Namibia. In accordance
with US GAAP, we will recognize this net income from these hardware and software
sales during the period in which the hardware and software we have sold to
SmartSwitch Namibia is utilized in its operations, or has been sold to third
party customers, as the case may be.

SmartSwitch
Namibia officially commenced operations during February 2006. During the year
ended June 30, 2006, licenses, software and hardware were made available for
collection to SmartSwitch Namibia and we have recognized net income related to
these licenses, software and hardware sales. We do not expect to sell any
additional hardware to SmartSwitch Namibia during fiscal 2007.

Phase
1 of the project involves the transfer of all of NamPosts banking products to
the smart card, offering affordability, security, simplicity and flexibility.
Negotiations are currently underway with other financial institutions and
companies that wish to participate as customers of SmartSwitch Namibia. We
expect the suite of smart card applications to include banking, retail, money
transfers, third party bill payments, wages and social security grants.

*Botswana*

During
the third quarter of fiscal 2006, we formed SmartSwitch Botswana (Proprietary)
Limited, or SmartSwitch Botswana, to launch and operate a national UEPS smart
card-based switching and settlement system in Botswana. We own 50% of the
company and the other 50% is owned by Capricorn Investment Holdings (Botswana)
Proprietary Limited, or Capricorn, which owns 100% of Botswana-based Bank
Gaborone Limited and the majority holding in a number of financial services
companies operating in Botswana.

We
believe that SmartSwitch Botswana will be the first system of its kind in
Botswana and we expect that it will have a substantial impact on the financial
industry in Botswana. Capricorn, as the first user of the UEPS technology in
Botswana, has advised us that it believes that it can substantially increase its
market share in the financial services industry and position its group as the
front runner in serving the un-banked and under-banked citizens of Botswana. The
initial smart card applications offered to Capricorns customer base will
include banking and a suite of financial services and products such as
micro-finance, short- and long-term insurance, health care, third party
deductions, third party payments, money transfers, wage payments and retail.

Together
with Capricorn we have capitalized SmartSwitch Botswana with approximately $2.4
million (BWP 15.4 million), at June 30, 2006, foreign exchange rates), in
start-up capital and loans, which was contributed equally by both parties. The
proceeds will be utilized by SmartSwitch Botswana for the acquisition of
hardware and software from us and for general working capital purposes.

Phase
1 of the project will focus on the migration of all Capricorns financial
services products to the UEPS smart card, offering affordability, security,
simplicity and flexibility. As of June 30, 2006, SmartSwitch Botswana had not
commenced operations and we have not provided any licenses, software or hardware
to the company. We do not expect SmartSwitch Botswana to generate earnings when
it commences operations during the first quarter of fiscal 2007.

59

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*Nigeria*

During
the fourth quarter of fiscal 2006, we entered into a shareholders agreement with
Diamond Bank Plc and Innovative Capital & Investments Limited, to create
SmartSwitch Nigeria Limited, or SmartSwitch Nigeria, to launch and operate a
national UEPS smart card-based switching and settlement system in Nigeria. We
will initially own 51% of SmartSwitch Nigeria, but have invited two other large
Nigerian banks to participate as shareholders which may result in a dilution of
our shareholding. The initial capital required for SmartSwitch Nigeria is
approximately $18.0 million, comprising $14.0 million for the UEPS-related
hardware and software and $4.0 million for the first years working capital
requirements.

One
of SmartSwitch Nigerias initial objectives is to have an impact on the
financial industry in Nigeria, where approximately 90% of the population of 140
million people is un-banked and transacts in cash. SmartSwitch Nigerias other
objectives will be to deploy the UEPS technology through several applications,
including banking, health care, money transfers, pre-paid utilities and
telephony and voting.

We
expect SmartSwitch Nigeria to become operative during the second quarter of
fiscal 2007.

*Other
Countries*

We
have also implemented UEPS systems in Ghana, Rwanda, Burundi, Malawi and
Mozambique, some of which are considered among the poorest countries in the
world. In Malawi, our system has been implemented by the Reserve Bank of Malawi
as a national payment system. We are not actively involved as either investors
or operators in any of these systems, which were implemented prior to fiscal
2006.

***Prism
Acquisition***

On
  July 3, 2006, we completed our acquisition of Prism for an aggregate cash consideration
  of $95.2 million (ZAR 687.0 million) at the July 3, 2006 $/ZAR exchange rate
  for all outstanding Prism shares and share options. Due to a number of technical,
  timing and regulatory matters the following amendments have been made to the
  agreement between ourselves and Prism signed on March 3, 2006:

- clauses 7.3.1 to 7.3.2.5 requiring the reinvestment of proceeds from the
    sale of Prism shares in our stock by Prism Executives have been removed;
- the number of options to be granted to Prism Executives and other staff
    has been reduced to 904,674 from 1,050,000; and
- the definition of Fair Market Value has been changed to the average of the
    high and low sale price as quoted on the Nasdaq Global Market on August 24,
    2006.

We
believe that the acquisition of Prism will provide us with a number of important
strategic benefits including the following:

Merchant
Footprint in South Africa. Prism owns a 74.9% interest in EasyPay, the
largest bank-independent financial switch in Southern Africa. Prism has reported
that this switch processed 358 million transactions during its fiscal year ended
June 30, 2006 on behalf of retailers, bill issuers and financial institutions.
With the addition of EasyPay our overall footprint in South Africa will extend
from the deep rural areas to the urban environment. We intend to upgrade the
existing POS devices in the Prism merchant acquiring network to accommodate UEPS
based smart cards. We believe this will significantly enhance our wage payment
program once we launch that service.

Technology.
Prism currently has several important technologies that we believe will extend
our ability to deliver solutions across the entire spectrum of transaction
processing from our existing offline, smart card based offerings to Visa and
MasterCard transactions. We also believe that the Prism acquisition will enable
us to enter entirely new areas. In particular, Prism licenses its intellectual
property to makers of global system for mobile communications, or GSM,
subscriber identity module, or SIM, computer chips. We believe that Prism's
global market share for SIMs (inclusive of licensing and the manufacturing of
physical SIM cards) to be approximately 2%. Prism's customers include the
largest mobile operator in the Philippines, where Prism operating system works
on the majority of SIM's in use. In addition, Prism has a number of innovative
payment technologies relating to mobile phones including VTU. This product
enables individuals to purchase mobile phone minutes and resell them from their
mobile phone to other subscribers without the need for additional authorization
codes.

International.
Prism currently operates in Africa, Asia and Europe and has an office in
Malaysia. We believe that Prisms existing infrastructure will assist us in the
expansion of our international operations.

60

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We
are continuing to analyze the integration of Prism into our current operations.
We believe that there are a number of potential synergies that can be derived
from our acquisition of Prism. These synergies will, in our view, enable us to
activate a more aggressive offensive and defensive strategy in South Africa. The
offensive aspect of our strategy will focus on our wage payment system
initiative which we believe will be greatly enhanced. The defensive aspect of
our strategy will focus on continuing to play a critical role in the switching
and settling of formal credit and debit card transactions on behalf of formal
banks and large retail stores. We also are of the view that we will be
positioned to capitalize on the convergence of technologies such as the cellular
phone, the UEPS and banking whereby we will be able to provide services to all
segments of the population regardless of their earning power or place of
residence. In addition, we expect that these synergies may produce new income
streams.

Because
the transaction closed after the close of our 2006 fiscal year, the operations
of Prism are not included in our financial statements as of and for the year
ended June 30, 2006. We expect to file audited financial statements of Prism and
pro forma financial information in accordance with the requirements of the
Securities and Exchange Commission on or before September 19, 2006. The
financial impact of the Prism acquisition on our actual results of operations
for fiscal 2007 will depend on numerous factors, including the following:

- the extent to which we experience revenue growth from Prisms operations;
- cost savings, if any, which we are able to achieve as a result of the
  combination of Prisms operations with ours;
- the allocation of the difference between the purchase price and the fair
  value of Prisms identifiable assets and liabilities to goodwill;
- amortization of acquired intangible assets; and
- the impact of the 904,674 stock options awarded to executives and other
  employees of Prism.

***Progress
of wage payment implementation***

The
implementation of our wage payment in South Africa requires us to be registered
as a bank in South Africa, or to have access to an existing deposit taking
license. We are currently pursuing all available avenues to either obtain our
own license, or gain access to one. These approaches include:

- applying for a new banking license;
- purchasing an existing banking license; and
- entering into a joint venture arrangement with an existing banking
  institution to gain access to its banking license.

These
alternatives all have different inherent risks and timing considerations.
Accordingly, we cannot predict when or if we may be able to obtain or gain
access to a license and commence the implementation of our wage payment system
in South Africa. During the year, we conducted extensive negotiations with one
of the four largest banks in South Africa regarding the formation of a joint
venture in order to enable us to use its banking license.

Although
we believe that many aspects of such a joint venture would be beneficial to both
parties, we concluded that our long-term interests would not be best served by
this arrangement because South African banking regulations would prefer that the
joint venture be controlled by the bank. We continue to have discussions with
other large banking groups; however, we believe that it is unlikely that we will
reach a business arrangement that will provide sufficient economic advantages
for us and that will not adversely impact our future growth or our strategic
direction. We believe that the strength, flexibility and practicality of our
technology allows us to market, distribute and manage financial products at a
significantly lower cost than the cost currently incurred by these banks and
therefore to compete directly with them. We are not prepared to either limit our
markets or our technological solutions in order to convince a large retail bank
to allow us to utilize its banking license.

We
also believe that SARB is unlikely to grant any new banking licenses until the
Basel 2 requirements have been implemented by all banks currently registered in
South Africa. We believe that this compliance status will not be reached prior
to the third or fourth quarter of fiscal 2007, and may be further delayed. We
are therefore currently seeking to identify existing but smaller banks which
share our vision, mission statement and long-term objectives and which do not
perceive us as a threat to their existing business, target markets or technology
platforms. We therefore, if necessary, will seek to obtain an equity stake in
one of these existing banks in order to gain access to a banking license and to
the national payment system.

There
have been recent press reports that the Dedicated Banks Act draft legislation
will be tabled for approval by the South African Parliament in the near future.
If approved, this new act will allow the creation of second-tier banks that
require reduced levels of capitalization and compliance. If we do not have
access to an existing banking license when the Dedicated Banks Act becomes
effective, we will apply for a new license as soon as the process has been
defined.

61

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***Involvement
with USAID***

On
September 27, 2005, the Washington D.C.-based Presidents Emergency Plan for
AIDS Relief, through the U.S. Agency for International Development, or USAID,
announced a contract to strengthen the lifeline of essential drugs and supplies
for people living with and affected by HIV/AIDS and other infectious diseases in
developing countries. The contract, called the Supply Chain Management System,
or, SCMS, was awarded by USAID to the Partnership for Supply Chain Management,
or PfSCM, of which we are a member.

PfSCM
is an organization formed by JSI Research and Training Institute, Inc., or JSI,
and Management Sciences for Health, both U.S.-based non-profit organizations
with extensive experience in public health and logistics management in
developing countries. PfSCMs project team includes 17 institutions from the
private sector, non-profit, and faith-based communities.

The
Secure Technology Advancing Treatment, or STAT, system, which we have developed
with JSI over the course of the past two years, was included in PfSCMs proposal
for the SCMS as a viable solution for incorporation into individual country
plans.

The
implementation of the SCMS is a complex process and we cannot yet provide an
indication regarding overall timing or the exact form of our ultimate
participation. We anticipate, however, that pricing for our service in the
public health setting will be substantially less than what we receive today for
the distribution of welfare grants in South Africa. In the near term, we
continue to discuss with SCMS senior management a pilot deployment of our
technology in one of the SCMS target countries to demonstrate the solution
within the SCMS. The SCMS senior management team, however, is evaluating
multiple technologies to collect patient level data, which could serve as
alternatives to STAT.

We
continue to work with JSI in South Africa to implement our technology in more
hospitals, clinics and pharmacies while issuing cards to more and more affected
individuals. These implementations allow us to continue to enhance our systems
functionality which we believe will assist us in the longer term to resell it to
other organizations that wish to control the distribution and management of
goods and services. We are also of the view that our products continue to play a
vital role in fighting the devastation which has resulted from the HIV/AIDS
pandemic.

Description of Our Business and Operating Segments

We
analyze our business and operations in terms of four inter-related but
independent operating segments: (1) transaction-based activities, (2) smart card
accounts, (3) financial services, and (4) hardware, software and related
technology sales. In addition, corporate and corporate office activities that
are impracticable to ascribe directly to any of the other operating segments, as
well as any inter-segment eliminations are included in corporate/ eliminations.

***Transaction-Based
Activities***

The
transaction-based activities operating segment consists primarily of our
contracts to distribute social welfare payments in South Africa through our
subsidiary Cash Paymaster Services (Proprietary) Limited, or CPS, and its
operating subsidiaries. CPSs operating subsidiaries utilize the UEPS technology
to administer and distribute social welfare grants in five of South Africas
nine provinces. Revenues from transaction-based activities include all fees that
we earn from provincial governments and participating retail merchants from
recurring UEPS transactions that we process through our back-end system, such as
the payment of social welfare grants, debit orders, payment of wages, point of
sale spending, distribution of medicine, money transfers and prepayment of
utility bills. The expenses associated with transaction-based activities are
primarily variable expenses such as security and guarding expenses we incur to
help insure the security of the cash we transport and the safety of our
employees who transport the cash, banking fees we incur when we withdraw and
redeposit cash, insurance and fixed expenses such as salaries and property
rental.

Historically,
a substantial majority of the revenues we derive from transaction-based
activities has consisted of the service delivery component of the fee we charge
to the provincial governments with whom we contract for the distribution of
social welfare grants. The portion of the fee that relates to the provision of
the smart card account is included in the smart card accounts segment.
Transaction fees from participating merchants increased as a result of social
welfare beneficiaries electing to receive their grants from a POS installed at
merchants participating in our recently implemented POS infrastructure instead
of visiting a pay-site. In addition, our cost base reduced as a result of social
welfare beneficiaries receiving their grants at participating merchants instead
of at a pay-site.

62

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South
African social welfare grants consist of eight different grant types, including
social security, child support and disability grants. A smart card-based
biometric, or fingerprint, identification system is used to verify beneficiaries
and effect payments of social welfare grants onto individual smart cards, with
each card acting as an account for the beneficiary. The beneficiary then has the
choice of either converting the electronic value to cash using automated cash
dispensers or effecting electronic payments through the smart card for a range
of services such as the purchase of goods, loan repayments and insurance premium
payments. The systems biometric verification and audit capabilities help to
reduce the risks of fraud and theft traditionally associated with the use and
storage of cash.

Historically,
due to the limited number of services available, almost all of the beneficiaries
have downloaded the value of their grant payments onto their smart cards and
then immediately accessed the full amount as cash. Our revenue has therefore
been limited to fees we earn on the loading and redemption of value on the cards
as well as the registration of beneficiaries rather than the provision of other
services. We are, however, aggressively expanding the services available to
beneficiaries to include debit orders, point of service spending and money
transfers. We believe that by making these services available to beneficiaries,
we have the potential to earn additional revenues in the future.

Our
UEPS retail application deployed into merchant stores throughout the Northern
Cape, Eastern Cape, KwaZulu-Natal, Limpopo and North West provinces of South
Africa allows all our card holders to load their social welfare grants or
salaries onto their smart cards at any participating merchant. Once their smart
cards have been loaded, card holders have the flexibility to either purchase
goods or receive cash offline.

We
believe that the support from South African merchants has been highly favorable
and we have signed contracts with merchants in rural, semi-urban and urban
areas, including large chain stores. Potential benefits to merchants from
participation in the system include increased sales from a growing smart card
client base, reduced banking charges, reduced communications and reconciliation
costs and a reduction of the risks associated with fraud and theft.

Participating
merchants can also generate new income streams for themselves by selling a range
of financial products that we offer.

***Smart
Card Accounts***

Our
smart card accounts operating segment derives revenue from the provision of
smart card accounts to our card holders, which currently primarily consist of
social welfare grant beneficiaries. As described under Transaction-Based
Activities above, we provide a smart card account to all social welfare
beneficiaries to whom we distribute payments. A portion of the fee we earn for
the delivery of the service is for the provision of the smart card account and
is therefore included in the smart card accounts operating segment. The fixed
costs included in this operating segment are primarily computer
equipment-related and personnel costs associated with the operation of the smart
card accounts.

***Financial
Services***

Our
financial services operating segment derives revenues from providing financial
services to card holders through our smart card delivery channel. These
financial services consist primarily of short-term loans and life insurance
products. We provide the loans ourselves and generate revenue from the interest
earned on these loans. We sell life insurance products on behalf of registered
underwriters and earn revenue through the commissions we receive on the sale of
policies. The fees we earn for the collection of insurance policy premiums
through our debit order system is included in the transaction-based activities
operating segment. The fixed expenses associated with the financial services
operating segment consist primarily of costs of administrative personnel and
depreciation of computer equipment.

We
also operate a traditional microlending business with approximately 85 branches
located throughout South Africa. These branches extend short-term loans for
periods ranging from 30 days up to four months, with the majority of loans being
30-day loans. The fixed costs associated with the provision of these accounts
are primarily the leasing of office premises and salaries associated with the
extension of microlending loans.

63

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***Hardware,
Software and Related Technology Sales***

We
have developed a range of technological competencies to service our own internal
needs and to provide links with our client enterprises. We derive revenues from
the hardware, software and related technology sales operating segment by
providing to customers the hardware and software required to implement our
system. Typical components for a system installation are:

•
  hardware for the back-end switching and settlement system;

•
  customization of the UEPS software to suit local conditions, including UEPS
  management system, automated teller machine, or ATM, integration and POS device
  integration;

•
  customization of an applications suite to clients specific requirements,
  such as banking, retail or wage payments;

•
  ongoing software and hardware support/maintenance; and

•
  license fees.

One
  of our largest customers in this segment is Nedbank Limited, one of South Africa’s
  largest banks by asset size. We have an arrangement with Nedbank relating to
  the outsourcing of its entire POS device management system, front-end switching
  Stratus computer platform, development of their software systems, smart cards
  and POS device maintenance. We also supply hardware to Nedbank in the form of
  POS devices and card readers on an ad hoc basis.

Description of Income Statement Line Items

***Revenue***

Revenue
includes (1) fees from provincial governments and participating merchants for
transactions effected using our smart cards, including payment of social welfare
grants and purchasing goods and services; (2) one time fixed fees we charge to
provincial governments and employers for providing a smart card account to each
card holder; (3) interest we earn on UEPS-based and traditional microlending and
commissions from life insurance products that we sell on behalf of registered
underwriters and (4) proceeds from the sale of hardware, software (including
license fees) and related technology.

***Cost
of Goods Sold, IT Processing, Servicing and Support***

Cost
of goods sold, IT processing, servicing and support includes all costs we incur
to provide our systems. The most significant elements of these costs include (1)
security and guarding expenses which we incur to help protect the security of
the cash we transport and the safety of our employees who transport the cash,
(2) banking expenses we incur when we withdraw and redeposit cash, (3)
transportation expenses we incur, including fuel, maintenance and insurance for
the automotive vehicles that travel throughout the provinces to distribute
social welfare payments, (4) personnel expenses other than for our executive and
administration employees, (5) rental and utilities for the facilities we operate
and (6) inventory expenses, which consist primarily of spare parts to perform
hardware repairs.

***General
and Administration***

General
and administration expenses consist primarily of (1) personnel expenses for our
executive and administration employees, (2) costs associated with our head
office facility, (3) costs associated with the compliance with the
Sarbanes-Oxley Act of 2002, or Sarbanes, particularly Section 404 of Sarbanes,
(4) professional fees, such as audit, legal, advisory and tax and (5) marketing
and travel expenses.

***Depreciation
and Amortization***

Depreciation
and amortization consists of depreciation of property, plant and equipment and
amortization of intangible assets.

***Costs
Related to Public Offering and Nasdaq Listing***

These
costs consist of the portion of the legal, accounting, regulatory and filing
fees and other expenses incurred related to our public offering and Nasdaq
listing in August 2005.

64

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***Reorganization
Charges***

These
expenses consist primarily of fees we incurred in connection with the Aplitec
transaction, including financial advisory fees, legal and accounting fees,
printing expenses and filing fees.

***Interest
Income, Net***

Interest
income consists of interest we receive on our surplus cash in our bank accounts,
net of the interest we pay on short-term borrowings. Interest income we earn
from our business of providing short-term loans is included in revenue and is
not included in interest income.

***Income
Taxes***

We
account for income taxes using the asset and liability method. This approach
recognizes the amount of taxes payable or refundable for the current year, as
well as deferred tax assets and liabilities for the future tax consequence of
events we recognize in the financial statements and tax returns. Deferred income
taxes are adjusted to reflect the effects of changes in tax laws or enacted tax
rates. The tax rate in South Africa varies depending on whether income is
distributed. The income tax rate is currently 29%, but upon distribution an
additional tax of 12.5% is due based on the amount of dividends declared, net of
dividends received during a dividend cycle. The decrease in the statutory rate
of taxation for South African domiciled companies from 30% to 29% for all fiscal
years ending on or after April 1, 2005 was promulgated on July 19, 2005, which
has resulted in a decrease in our distributed rate from 37.78% to 36.89% . The
effect of this change is shown in our 2006 taxation charge.

***Earnings
from Equity-Accounted Investments***

We
use the equity method to account for investments in a company when we have a
significant influence, but not control, over the operations of the investee
company. Under the equity method, we initially record the investment at cost on
our balance sheet. We reflect in our statements of operations our proportionate
share of the investee companys net income or loss and we adjust the carrying
value of the investment to reflect this net income or loss. Our interest in
equity-accounted investments is summarized as follows:

|Entity name                                           | Interest
|----------------------------------------------------- | --------
|Permit Group 2 (Proprietary) Limited, or
      Permit | 43.16%  
|SmartSwitch Namibia                                   | 50.00%  
|SmartSwitch Botswana                                  | 50.00%  

Permit
owns 95% of the common stock of New Era Life Insurance Company, a provider of
various insurance products to the South African market.

Critical Accounting Policies

Our
annual financial statements have been prepared in accordance with US GAAP, which
requires management to make estimates and assumptions about future events that
affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities. As future events and their effects cannot be
determined with absolute certainty, the determination of estimates requires
managements judgment based on a variety of assumptions and other determinants
such as historical experience, current and expected market conditions and
certain scientific evaluation techniques. Management believes that the following
accounting policies are critical due to the degree of estimation required and
the impact of these policies on the understanding of the results of our
operations.

***Deferred
Taxation***

We
estimate our tax liability through the calculations done for the determination
of our current tax liability when tax returns are filed, together with assessing
temporary differences resulting from the different treatment of items for tax
and accounting purposes. These differences result in deferred tax assets and
liabilities which are disclosed on our balance sheet. Management then has to
assess the likelihood that deferred tax assets will be recovered from future
taxable income. To the extent that we believe recovery is unlikely, we create a
valuation reserve. The carrying value of our net deferred tax assets assumes
that we will be able to generate sufficient future taxable income, based on
estimates and assumptions. Management has considered future taxable income over
a five year forecasting period and ongoing feasible tax strategies in
determining the need for the valuation allowance, but in the event that we were
to determine that we would be able to realize deferred tax assets in the future,
a valuation allowance may not be required which would increase net income in the
period that such determination is made.

65

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***Accounts
Receivable and Provision for Doubtful Debts***

We
  maintain a provision for doubtful debts in our microlending business resulting
  from the inability of certain of our clients to make the required payments.
  Our policy is to provide for the full outstanding amount for all debts which
  are outstanding for 150 days and longer. As of June 30, 2006, the full amount
  of such debt outstanding totaled $6.7 million (ZAR 48.8 million), which is a
  6% decrease, in ZAR terms, over the amount outstanding at June 30, 2005 ($7.8
  million or ZAR 51.9 million). We consider this policy to be appropriate taking
  into account factors such as historical bad debts, current economic trends and
  changes in our customer payment patterns. Additional provisions may be required
  should the ability of our clients to make payments when due deteriorate in the
  future. A significant amount of judgment is required to assess the ultimate
  recoverability of these receivables, including on-going evaluation of the creditworthiness
  of each client.

***Research
and Development***

Our
business activities and product offerings depend on our proprietary UEPS
software. As a result, we have a large group of software engineers and
developers who are constantly revising and improving the core UEPS software. We
account for the development cost of software intended for sale to licensees in
accordance with SFAS No. 86, Accounting for Costs of Computer Software to be
Sold, Leased, or Otherwise Marketed, or SFAS 86. SFAS 86 requires product
development costs to be charged to expenses as incurred until technological
feasibility is attained. Technological feasibility is attained when our software
has completed system testing and has been determined viable for its intended
use. The time between the attainment of technological feasibility and completion
of software development has been short with immaterial amounts of development
costs incurred during this period. Accordingly, we did not capitalize any
development costs during the years ended June 30, 2006, 2005 or 2004,
particularly because the main part of our development is the enhancement and
upgrading of existing products.

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

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

**Recent
accounting pronouncements**

*Recent
accounting pronouncements adopted*

Refer
to Note 2 of our consolidated financial statements included under Item 8 Financial Statements and Supplementary Data for a full description of
recent accounting pronouncements, including the expected dates of adoption and
effects on financial condition, results of operations and cash flows.

*Recent
accounting pronouncements not yet adopted as of June 30, 2006*

Refer
to Note 2 of our consolidated financial statements included under Item 8 Financial Statements and Supplementary Data for a full description of
recent accounting pronouncements not yet adopted as of June 30, 2006, including
the expected dates of adoption and effects on financial condition, results of
operations and cash flows.

66

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Currency Exchange Rate Information

***Actual
exchange rates***

The
actual exchange rates for and at the end of the periods presented were as
follows:

Table 3
      
      Year
        ended June 30,2006
      
      
      2005
      
      
      2004ZAR : $ average exchange rate
      
      6.4283
      
      
      6.2219
      
      
      6.9001Highest ZAR : $ rate during period
      
      7.5323
      
      
      6.9473
      
      
      7.8030Lowest ZAR : $ rate during period
      
      5.9256
      
      
      5.5350
      
      
      6.0576Rate at end of period
      
      7.2701
      
      
      6.6840
      
      
      6.2750




***Translation
exchange rates***

We
are required to translate our results of operations from ZAR to U.S. dollars on
a monthly basis. Thus, the average rates used to translate this data for the
years ended June 30, 2006, 2005 and 2004, vary slightly from the averages shown
in the table above. The translation rates we use in presenting our results of
operations are the rates shown in the following table:

Year endedTable 4
      
      June
        30,2006
      
      
      2005
      
      
      2004Income and expense items: $1 = ZAR .
      
      6.4127
      
      
      6.2096
      
      
      6.9183Balance sheet items: $1 = ZAR
      
      7.2701
      
      
      6.6840
      
      
      6.2750


67

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Results of operations

The
discussion of our consolidated overall results of operations is based on amounts
as reflected in our audited consolidated financial statements which are prepared
in accordance with U.S. GAAP. Our discussion analyzes our results of operations
both in U.S. dollars, as presented in the consolidated financial statements, and
supplementally in ZAR, because ZAR is the functional currency of the entities
which contribute the majority of our profits and is the currency in which the
majority of our transactions are initially incurred and measured. Due to the
significant impact of currency fluctuations between the U.S. dollar and ZAR on
our reported results and because we use the U.S. dollar as our reporting
currency, we believe that the supplemental presentation of our results of
operations in ZAR is useful to investors to understand the changes in the
underlying trends of our business. Our results of operations for the year ended
June 30, 2006 do not reflect the operations of Prism as we completed that
acquisition after the end of the 2006 fiscal year. Prisms operations will be
included in our consolidated financial statements from July 3, 2006.

***Year
Ended June 30, 2006 Compared to Year Ended June 30, 2005***

The
following factors had a significant impact on our results of operations for the
year ended June 30, 2006 as compared to the prior year:

- weakening of the South African rand, or ZAR, our functional currency,
  against the U.S. dollar, our reporting currency, which had a negative impact
  on our reported revenues and net income in U.S. dollars;
- increase in revenues from sales of hardware to Nedbank;
- revenues from hardware and software sales to SmartSwitch Namibia;
- decrease in margins in our traditional micro-lending operations; and
- continued adoption of our merchant acquiring project by cardholders, which
  resulted in higher volumes in our transaction-based activities.

**Consolidated
overall results of operations**

This
discussion is based on the amounts which were prepared in accordance with US
GAAP.

The
following tables show the changes in the items comprising our statements of
operations, both in U.S. dollars and in ZAR:

|                                                          |  | In United States Dollars | 
|--------------------------------------------------------- |  | ------------------------ | 
|Table 5                                                   |  | (US
      GAAP)          | 
|                                                          |  | Year ended June 30,      | 
|                                                          |  | 2006                     | 
|                                                          |  | $ 000                   | 
|Revenue                                                   |  | 196,098                  | 
|Cost of goods sold, IT processing, servicing and support. |  | 50,619                   | 
|General and administration                                |  | 48,627                   | 
|Depreciation and amortization                             |  | 5,710                    | 
|Costs related to public offering and Nasdaq
      listing |  | 1,529                    | 
|Operating income                                          |  | 89,613                   | 
|Interest income, net                                      |  | 5,889                    | 
|Income before income taxes                                |  | 95,502                   | 
|Income tax expense                                        |  | 36,653                   | 
|Income before earnings from equity-accounted              |  |                          | 
|investments                                               |  | 58,849                   | 
|Earnings from equity-accounted investments                |  | 383                      | 
|Net income                                                |  | 59,232                   | 

68

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|                                                          |  | In South African Rand | 
|--------------------------------------------------------- |  | --------------------- | 
|Table 6                                                   |  | (US
      GAAP)       | 
|                                                          |  | Year ended June 30,   | 
|                                                          |  | 2006                  | 
|                                                          |  | ZAR                   | 
|                                                          |  | 000                  | 
|Revenue                                                   |  | 1,257,525             | 
|Cost of goods sold, IT processing, servicing and support. |  | 324,607               | 
|General and administration                                |  | 311,833               | 
|Depreciation and amortization                             |  | 36,616                | 
|Costs related to public offering and Nasdaq
      listing |  | 9,805                 | 
|Operating income                                          |  | 574,664               | 
|Interest income, net                                      |  | 37,765                | 
|Income before income taxes                                |  | 612,429               | 
|Income tax expense                                        |  | 235,046               | 
|Income before earnings from equity-accounted              |  |                       | 
|investments                                               |  | 377,383               | 
|Earnings from equity-accounted investments                |  | 2,456                 | 
|Net income                                                |  | 379,839               | 

Analyzed
in ZAR, the increase in revenue and cost of goods sold, IT processing, servicing
and support for the year ended June 30, 2006, was primarily due to the higher
volumes in our transaction-based activities, a greater number of UEPS-based
smart card holders and increased hardware, software and related technology sales
activity .

The
increase in operating income margin to 46% for the year ended June 30, 2006,
from 40% for the year ended June 30, 2005, was primarily due to improved
efficiencies across most activities, the continued adoption of our merchant
acquiring initiative, the sale of hardware and high-margin software to
SmartSwitch Namibia and a significantly improved contribution from our contract
to pay social welfare grants in the Eastern Cape province. We do not expect that
our operating income margin will increase significantly for the 2007 fiscal
year, before taking into account the effect of the Prism acquisition.

General
and administration expenses increased during the year ended June 30, 2006 from
the prior year due to compliance with Sarbanes, expenditure on non-executive
directors fees resulting from the election of independent directors to our
board, increased legal fees, increased auditor fees, increased bonuses,
directors and officers insurance premiums, establishment of a presence in North
America, an increase in the number of head office staff and salary increases.

We
completed our public offering and Nasdaq listing in August 2005. In addition to
the $1.8 million (ZAR 11.3 million) incurred during the fourth quarter of fiscal
2005, we incurred an additional $1.50 million (ZAR 9.8 million) during fiscal
2006, related to legal fees, printing costs, registration and filing and
accounting fees.

We
incurred Sarbanes compliance costs of approximately $1.0 million and $0.8
million during the years ended June 30, 2006 and 2005.

Property,
plant and equipment acquired to provide administration and distribution services
to our customers is depreciated over the shorter of expected useful life and the
contract period with the provincial government. We are currently in an extension
phase with most of our contracts and the majority of our property, plant and
equipment related to the administration and distribution of social welfare
grants has been written off. Accordingly, depreciation and amortization expense
has decreased during the year ended June 30, 2006 compared with the year ended
June 30, 2005. This reduction in depreciation is partially offset by the
increase in depreciation of our participating merchant POS terminals during the
year ended June 30, 2006.

Interest
on surplus cash for the year ended June 30, 2006 decreased to $14.6 million (ZAR
93.6 million) from $16.4 million (ZAR 101.7 million) for the year ended June 30,
2005, due to the adjustment in the South African prime interest rate from an
average of approximately 11.0% per annum for the year ended June 30, 2005, to
10.5% per annum for the year ended June 30, 2006. The effect of the decrease in
the interest rate on interest received was partially offset by higher average
cash balances during the year ended June 30, 2006.

During
the year ended June 30, 2006, our pre-funding obligation increased but our
finance costs decreased due to the decrease in the South African prime interest
rate and improved centralized cash management. Finance costs decreased from
$14.0 million (ZAR 86.8 million) for the year ended June 30, 2005, to $8.7
million (ZAR 55.8 million) for the year ended June 30, 2006.

We
expect our interest on surplus cash to decrease and our finance costs to
increase in the first quarter of fiscal 2007 as a result of lower available cash
on hand due to the acquisition of Prism in July 2006.

69

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Total
tax expense for the year ended June 30, 2006 was $36.7 million (ZAR 235.1
million) compared with $29.7 million (ZAR 184.2 million) during the same period
in the prior year. The increase was due to our increased profitability in most
segments. Our effective tax rate for fiscal 2006 is 38.4%, compared to 40.3% for
fiscal 2005. The change in our effective tax rate is primarily due to the change
in the statutory rate of taxation for South African domiciled companies and
fewer non-deductible expenses during fiscal 2006 compared to fiscal 2005. The
effect of the change in tax rate is included in our fiscal 2006 tax expense and
is approximately $0.2 million (ZAR 1.0 million).

For
the years ended June 30, 2006 and 2005, earnings from Permit totaled
approximately $1.0 million and $0.5 million (ZAR 6.4 million and ZAR 3.3
million), respectively.

SmartSwitch
Namibia commenced operations in February 2006 and generated a profit during
these first months of trading due to the once off sale and financing of smart
cards to NamPost, its first customer. We are required to eliminate unrealized
income from license fees, software and hardware sales made to SmartSwitch
Namibia of $0.5 million (ZAR 3.2 million) for the year ended June 30, 2006.

Earnings
from equity-accounted investments includes a loss, after elimination of
unrealized income, of $0.6 million (ZAR 3.8 million) for the year ended June 30,
2006. We do not expect SmartSwitch Namibia to generate earnings during the first
quarter of fiscal 2007 as it has only recently commenced operations.

**Results
of operations by operating segment**

The
composition of revenue and the contributions of our business activities to
operating income are illustrated below.

|Table 7                                         |  | In
      United States Dollars (US GAAP) |  
|----------------------------------------------- |  | ---------------------------------------- | -
|                                                |  | Year
      ended June 30,                |  
|                                                |  | 2006                                     |  
|Operating Segment                               |  | $ 000                                   |  
|Consolidated revenue:                           |  |                                          |  
|Transaction-based activities                    |  | 117,186                                  |  
|Smart card accounts                             |  | 36,220                                   |  
|Financial services                              |  | 16,129                                   |  
|Hardware, software and related technology sales |  | 26,563                                   |  
|Total consolidated revenue                      |  | 196,098                                  |  
|Consolidated operating income (loss):           |  |                                          |  
|Transaction-based activities                    |  | 60,653                                   |  
|Smart card accounts                             |  | 16,464                                   |  
|Financial services                              |  | 6,929                                    |  
|Hardware, software and related technology sales |  | 16,721                                   |  
|Corporate/ Eliminations                         |  | (11,154                                  | )
|Total consolidated operating
      income       |  | 89,613                                   |  

|Table 8                                         |  | In
      South African Rand (US GAAP) |  
|----------------------------------------------- |  | ------------------------------------- | -
|                                                |  | Year
      ended June 30,             |  
|                                                |  | 2006                                  |  
|                                                |  | ZAR                                   |  
|Operating Segment                               |  | 000                                  |  
|Consolidated revenue:                           |  |                                       |  
|Transaction-based activities                    |  | 751,483                               |  
|Smart card accounts                             |  | 232,269                               |  
|Financial services                              |  | 103,431                               |  
|Hardware, software and related technology sales |  | 170,342                               |  
|Total consolidated revenue                      |  | 1,257,525                             |  
|Consolidated operating income (loss):           |  |                                       |  
|Transaction-based activities                    |  | 388,952                               |  
|Smart card accounts                             |  | 105,579                               |  
|Financial services                              |  | 44,434                                |  
|Hardware, software and related technology sales |  | 107,227                               |  
|Corporate/ Eliminations                         |  | (71,528                               | )
|Total consolidated operating
      income       |  | 574,664                               |  

70

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**Transaction-based
activities**

In
U.S. dollars, revenues increased by 13% for the year ended June 30, 2006, from
the year ended June 30, 2005. Operating income increased by 37% for the year
ended June 30, 2006, from the year ended June 30, 2005.

In
ZAR, revenues increased by 17% for the year ended June 30, 2006, from the year
ended June 30, 2005. Operating income increased by 42% for the year ended June
30, 2006, from the year ended June 30, 2005.

These
increases in revenues and operating income were due primarily to the continued
adoption of our merchant acquiring system in the provinces where we distribute
welfare grants, increased transacting ability at participating retailers POS
devices in these provinces, and higher volumes from our provincial contracts. We
discuss these factors in more detail below.

Revenues
for transaction-based activities include the transaction fees we earn through
our merchant acquiring effort and reflect the elimination of inter-company
transactions.

***Continued
adoption of our merchant acquiring system:***

Refer
to discussion under OverviewProgress of Our Merchant Acquiring Project.

***Higher
volumes from our provincial contracts*:**

During
the year ended June 30, 2006, we experienced growth in all of the provinces
where we administer payments of social welfare grants. This growth was mainly
due to an increase in the number of child support grants and disability grants
approved by the various provincial governments. In total, the volume of payments
processed during the year ended June 30, 2006 increased 7% to 42,243,781 from
the year ended June 30, 2005.

The
higher volumes under existing provincial contracts during the year ended June
30, 2006, as well as average revenue per grant paid, are detailed below:

|Table 9             |  |                   |  |  |                                      |  |   |      |  |   |      |  |  |        |  |  |        | 
|------------------- |  | ----------------- |  |  | ------------------------------------ |  | - | ---- |  | - | ---- |  |  | ------ |  |  | ------ | 
|Year ended June 30, | 
|                    |  | Number of         |  |  | Average
      Revenue per Grant Paid | 
|                    |  | Grants
      Paid |  |  | 2006                                 |  |   | 2005 |  |   | 2006 |  |  | 2005   | 
|Province            |  | 2006              |  |  | 2005                                 |  | $ | (1)  |  | $ | (2)  |  |  | ZAR(1) |  |  | ZAR(2) | 
|KwaZulu-Natal (A).  |  | 18,117,676        |  |  | 16,774,940                           |  |   | 3.13 |  |   | 2.88 |  |  | 20.14  |  |  | 17.85  | 
|Limpopo (B)         |  | 11,154,040        |  |  | 10,635,232                           |  |   | 2.43 |  |   | 2.47 |  |  | 15.59  |  |  | 15.34  | 
|North West (C)      |  | 3,181,242         |  |  | 3,153,868                            |  |   | 2.82 |  |   | 2.65 |  |  | 18.10  |  |  | 16.43  | 
|Northern Cape (D)   |  | 1,585,846         |  |  | 1,459,264                            |  |   | 3.00 |  |   | 3.13 |  |  | 19.30  |  |  | 19.41  | 
|Eastern Cape (E)    |  | 8,204,977         |  |  | 7,410,272                            |  |   | 1.87 |  |   | 1.99 |  |  | 12.04  |  |  | 12.35  | 
|Total               |  | 42,243,781        |  |  | 39,433,576                           |  |   |      |  |   |      |  |  |        |  |  |        | 

*(1)
Average Revenue per Grant Paid excludes $ 0.86 (ZAR 5.50) related to the
provision of smart card accounts.*

*(2)
Average Revenue per Grant Paid excludes $ 0.89 (ZAR 5.50) related to the
provision of smart card accounts.*

A
- in ZAR, the increase in the Average Revenue per Grant Paid in KwaZulu-Natal is
primarily due to the increase in the number of beneficiaries and the increase in
the per grant amount to beneficiaries announced in the 2005/2006 Budget Speech
by the South African Minister of Finance. These per grant increases became
effective on April 1, 2005. Our fee in this province is based on a percentage of
the amount paid to beneficiaries.

B
- in ZAR, the increase in the Average Revenue per Grant Paid in Limpopo is due
to the increase in the number of beneficiaries and the annual inflation price
adjustment effective from December 2005.

C
- in ZAR, the increase in the Average Revenue per Grant Paid in North West is
primarily due to inflation price increases agreed by the North West provincial
government during July 2005 and March 2006.

**D**
- in ZAR, the decrease in the Average Revenue per Grant Paid in Northern Cape is
primarily due to fewer registrations.

**E**
- in ZAR, the decrease in the Average Revenue per Grant Paid in Eastern Cape is
due to fewer registrations.

71

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Through
our merchant acquiring initiative, beneficiaries are able to load their grants
onto their cards as soon as the grant payment file is activated, which typically
happens during the week preceding the commencement of a calendar month. We
recognize the fee revenue related to the distribution of welfare grants when the
beneficiaries load the grants to their cards. The general exception to this rule
is the January payment cycle, when the payment file is normally activated during
the first week of January and not the last week of December. Our annual results
were not affected as twelve full payment cycles were included in the fiscal 2006
results.

Operating
income margin for the year ended June 30, 2006 increased to 52% from 43% for the
year ended June 30, 2005. These profit margin improvements were mainly due to:

- the increased volumes as detailed in the table above;
- the inflation adjustment to the price charged in the North West and Limpopo
  provinces; and
- the increase in the number of social grant beneficiaries paid through our
  POS device infrastructure at participating retailers, instead of payment using
  more costly automated cash dispensers.

**Smart
card accounts**

In
U.S. dollars, revenues and operating income each increased by 4% for the year
ended June 30, 2006, from the year ended June 30, 2005.

In
ZAR, revenues and operating income each increased by 7% for the year ended June
30, 2006, from the year ended June 30, 2005.

Operating
  income margin from providing smart card accounts was fairly constant at 45%
  for each of the years ended June 30, 2006 and 2005.

Revenue
from the provision of smart card-based accounts grew in proportion to the higher
number of beneficiaries serviced through our social welfare payment contracts. A
total number of 3,653,696 smart card-based accounts were active at June 30,
2006, compared to 3,353,603 active accounts as at June 30, 2005. The increase in
the number of active accounts resulted from an increase in the number of
beneficiaries in all provinces qualifying for government grants due to the
efforts of the South African government to provide social assistance to the very
old and very young.

**Financial
services**

In
U.S. dollars, revenues decreased 20% for the year ended June 30, 2006, from the
year ended June 30, 2005. Operating income decreased by 26% for the year ended
June 30, 2006, from the year ended June 30, 2005.

In
ZAR, revenues decreased by 18% for the year ended June 30, 2006, from the year
ended June 30, 2005. Operating income increased by 23% for the year ended June
30, 2006, from the year ended June 30,2004.

Revenues
from UEPS-based lending decreased during fiscal 2006 compared with fiscal 2005
due to the reduction in the rate of interest charged on UEPS-based loans during
the year. We offer the UEPS-based loans to our beneficiaries with the primary
purpose of assisting them to repay expensive loans with other loan providers and
to escape the debt spiral that they are trapped in. Once our UEPS-based loans
are repaid, we believe that the beneficiaries have an enhanced ability to remain
debt-free, or take loans in amounts smaller than the original refinancing
facility we offered to them. In addition, we continuously revise the interest
rates charged on our UEPS-based loans, as part of our ongoing commitment to the
South African government to provide affordable financial services to the
unbanked population of that country. We believe that once cardholders escape the
debt spiral they will have more disposable income to spend, including through
our merchant acquiring base.

Revenues
from our traditional microlending business decreased during the year due to
increased competition, our strategic decision not to grow this business, lower
interest rates charged on traditional microlending loans and the sale of loss
making branches. The loan portfolio of the traditional microlending businesses
remained static as a result of our strategic decision not to grow this
business.

Our
current UEPS-based lending portfolio comprises loans made to elderly pensioners
in some of the provinces where we distribute social welfare grants. We insure
the UEPS-based lending book against default and thus no allowance is required.
We consider UEPS-based lending less risky than traditional microfinance loans
because the grants are distributed to these lenders by us and these loans are
insured. We establish an allowance for doubtful traditional microlending loans
in respect of which we consider it likely that all or a portion of the principal
amount of the loan or interest thereon will not be repaid by the borrower. We
consider default likely after a specified period of non-payment, which is
generally not more than 150 days. We assess this allowance based on a review by
management of the aging of outstanding amounts, the payment history in relation
to those specific accounts and the overall default history.

72

---

Some
of the key indicators of these businesses are illustrated below:

|Table 10                              |  | As
      at June 30, |  
|------------------------------------- |  | -------------------- | -
|                                      |  | 2006                 |  
|                                      |  |                      |  
|                                      |  | $ 000               |  
|Traditional microlending:             |  |                      |  
|Finance loans receivable  gross      |  | 7,169                |  
|Allowance for doubtful finance loans  |  |                      |  
|receivable                            |  | (3,448               | )
|Finance
      loans receivable  net  |  | 3,721                |  
|                                      |  |                      |  
|UEPS-based lending:                   |  |                      |  
|Finance loans receivable net and     |  |                      |  
|gross
      (i.e., no allowance)      |  | 2,992                |  
|Total
      finance loans receivable, |  |                      |  
|net                                   |  | 6,713                |  

Operating income margin for the financial services segment
decreased to 43% for the year ended June 30, 2006 from 46% for the year ended
June 30, 2005, primarily due to lower interest rates offered on our UEPS-based
lending products and difficult operating conditions in our traditional
micro-lending operations.

**Hardware,
software and related technology sales**

In
U.S. dollars, revenues increased by $9.1 million for the year ended June 30,
2006, from the year ended June 30, 2005. Operating income increased by $11.0
million for the year ended June 30, 2006, from the year ended June 30, 2005.

In
ZAR, revenues increased by ZAR 61.7 million for the year ended June 30, 2006,
from the year ended June 30, 2005. Operating income increased by ZAR 71.9
million for the year ended June 30, 2006, from the year ended June 30, 2005.

The
increase in revenue for the year ended June 30, 2006, was due primarily to
revenues earned from the orders to supply Nedbank with smart cards, smart card
readers and terminals and the sale of hardware, software and licenses to
SmartSwitch Namibia. Total revenues from the Nedbank orders during the year
ended June 30, 2006, were approximately $13.3 million (approximately ZAR 85.3
million). Revenues from sales of hardware, software and licenses to SmartSwitch
Namibia during the year ended June 30, 2006, totaled approximately $3.9 million
(ZAR 24.9 million) of which approximately $0.5 million (ZAR 3.3 million), after
taxation, has been eliminated and will be recognized in future periods. The
elimination has been included in the Corporate/Eliminations segment.

During
fiscal 2005 we provided Nedbank with 18,500 POS devices, 5,600 pin-pads and
66,000 merchant smart cards. Total revenues from this contract were $10.4
million (approximately ZAR 63.6 million) for the year ended June 30, 2005. This
project was completed during the third quarter of fiscal 2005.

Hardware
sales to Nedbank are infrequent, and we do not anticipate revenue from similar
large-scale hardware supply contracts to occur in the foreseeable future. In
addition, we expect sales of hardware, software and licenses related to our
international expansion to occur on an ad hoc basis as and when new
international ventures, such as SmartSwitch Namibia and SmartSwitch Botswana,
are established. We expect to provide hardware, software and licenses to
SmartSwitch Botswana and software and licenses to SmartSwitch Nigeria during the
first quarter of fiscal 2007.

**Corporate/
Eliminations**

In
U.S. dollars, operating loss increased by $7.3 million for year ended June 30,
2006, from the year ended June 30, 2005.

In
ZAR, operating loss increased by ZAR 47.8 million for the year ended June 30,
2006, from the year ended June 30, 2005.

Operating
losses for the year ended June 30, 2006 includes expenses of $1.5 million (ZAR
9.8 million) related to our public offering and Nasdaq listing. During the year
ended June 30, 2005, we incurred expenses of $1.8 million (ZAR 11.3 million)
related to our public offering and Nasdaq listing

73

---

Operating
losses for the year ended June 30, 2006, includes increased expenditure related
to compliance with Sarbanes, non-executive directors fees resulting from the
election of independent directors to our board, increased legal and auditor
fees, increased bonuses, directors and officers insurance premiums,
establishment of a presence in North America, an increase in the number of head
office staff and salary increases. Ignoring the effects of exchange rates, we
expect inflationary increases to these and other expenses during fiscal
2007.

As
a result of the Prism acquisition we expect to incur increased expenses during
fiscal 2007 related to directors and officers insurance, compliance with
Sarbanes, and auditor fees. As of the date of this report, we are unable to
quantify the full extent of these costs.

***Year
Ended June 30, 2005 Compared to Year Ended June 30, 2004***

The
following factors had a significant impact on our results of operations for the
year ended June 30, 2005 as compared to the prior year:

- fluctuations in the exchange rate between the ZAR, our functional
  currency, and the U.S. dollar, our reporting currency, which had a positive
  impact on our reported revenues and net income in U.S. dollars;
- revenues earned from hardware and smart cards to Nedbank, which did not
  occur during fiscal 2004;
- higher volumes in transaction-based activities and financial services; and
- expenses related to our public offering and Nasdaq listing.

**Consolidated
overall results of operations**

This
discussion is based on the amounts which were prepared in accordance with US
GAAP.

The
following tables show the changes in the items comprising our statements of
operations, both in U.S. dollars and in ZAR:

|                                                          |  | In United States Dollars  | 
|--------------------------------------------------------- |  | ------------------------- | 
|Table 11                                                  |  | (US
      GAAP)           | 
|                                                          |  | Year ended
      June 30, | 
|                                                          |  | 2005                      | 
|                                                          |  | $000                     | 
|Revenue                                                   |  | 176,290                   | 
|Cost of goods sold, IT processing, servicing and support. |  | 50,682                    | 
|General and administration                                |  | 45,897                    | 
|Depreciation and amortization                             |  | 6,591                     | 
|Costs related to public offering and Nasdaq
      listing |  | 1,817                     | 
|Reorganization charges                                    |  | -                         | 
|Operating income                                          |  | 71,303                    | 
|Interest income, net                                      |  | 2,389                     | 
|Income before income taxes                                |  | 73,692                    | 
|Income tax expense                                        |  | 29,666                    | 
|Income before earnings from equity-accounted              |  |                           | 
|investment                                                |  | 44,026                    | 
|Earnings from equity-accounted investment                 |  | 536                       | 
|Net income                                                |  | 44,562                    | 

74

---

|                                                          |  | In South African Rand | 
|--------------------------------------------------------- |  | --------------------- | 
|Table 12                                                  |  | (US
      GAAP)       | 
|                                                          |  | Year ended June 30,   | 
|                                                          |  | 2005                  | 
|                                                          |  | ZAR                   | 
|                                                          |  | 000                  | 
|                                                          |  |                       | 
|                                                          |  |                       | 
|                                                          |  |                       | 
|Revenue                                                   |  | 1,094,688             | 
|Cost of goods sold, IT processing, servicing and support. |  | 314,714               | 
|General and administration                                |  | 285,001               | 
|Depreciation and amortization                             |  | 40,927                | 
|Costs related to public offering and Nasdaq
      listing |  | 11,283                | 
|Reorganization charges                                    |  | -                     | 
|Operating income                                          |  | 442,763               | 
|Interest income, net                                      |  | 14,835                | 
|Income before income taxes                                |  | 457,598               | 
|Income tax expense                                        |  | 184,214               | 
|Income before earnings from equity-accounted              |  |                       | 
|investment                                                |  | 273,384               | 
|Earnings from equity-accounted investment                 |  | 3,328                 | 
|Net income                                                |  | 276,712               | 

Analyzed
in ZAR, the increase in revenue and cost of goods sold, IT processing, servicing
and support for the year ended June 30, 2005, was primarily due to the delivery
of POS devices to Nedbank and the higher volumes in our transaction-based
activities and financial services operating segments. The increase in
depreciation and amortization for the year ended June 30, 2005 was due, in part,
to the inclusion of the Net 1 UEPS Technologies, Inc. intangibles for the full
year.

The
increase in operating income margin to 40% for the year ended June 30, 2005,
from 27% for the year ended June 2004, was primarily due to improved
efficiencies across all activities, performance of the Nedbank contract
mentioned above and a significantly improved contribution from our contract to
pay social welfare grants in the Eastern Cape province. We anticipate that as we
continue to enroll participating retailers in our system, we will experience
increased utilization of the installed base of our POS devices, which should
result in further improvements in our operating income margins.

In
addition, we incurred significant time and expense in 2005 in order to implement
and comply with the provisions of Sarbanes. These expenses are included in the
General and Administration expenses line-item and include the appointment of
permanent staff to implement and oversee our initial and continued compliance
with Sarbanes, consulting fees of $0.7 million (ZAR 4.6 million) paid to
external advisors and external audit costs related to the attestation of our
compliance. Our continued compliance with Sarbanes may require similar levels of
internal and external time and expense in the future. During the fourth quarter
of fiscal 2005, we began the process of the public offering and Nasdaq listing
described above. As of June 30, 2005, we had incurred expenses related to legal
fees, printing costs, registration and filing and accounting fees in connection
with this process totaling approximately $1.8 million. The offering and listing
were completed in early August 2005, and we will incur additional costs related
to this transaction in the first quarter of 2006.

Analyzed
in ZAR, interest on surplus cash for the year ended June 30, 2005 decreased to
$16.4 million (ZAR 101.7 million) from $15.4 million (ZAR 106.4 million) for the
year ended June 30, 2004, due to the decrease in the South African prime
overdraft rate from an average of approximately 12% per annum during the year
ended June 30, 2004 to approximately 11% per annum during the year ended June
30, 2005.

During
the year ended June 30, 2005, our increased pre-funding obligation resulted in
higher finance costs, which were partially offset by the decrease in the South
African prime overdraft rate. Thus, finance costs for the year ended June 30,
2005, increased from $11.8 million (ZAR 81.5 million) in 2004 to $14.0 million
(ZAR 86.8 million) in 2005.

Total
tax expense for the year ended June 30, 2005 was $29.7 million (ZAR 184.2
million) compared with $25.9 million (ZAR 179.4 million) during the same period
in the prior year. The increase was due to our increased profitability in all
segments. In addition, for the year ended June 30, 2004, we incurred significant
once off capital gains taxes and other non-deductible expenditure related to the
Aplitec transaction which result in a higher effective tax rate.

75

---

In
February 2005, the Finance Minister of South Africa announced in his annual
budget speech for the 2005/2006 tax year the decrease in statutory rate of
taxation for South African domiciled companies from 30% to 29% for all fiscal
years ending on or after April 1, 2005. As of June 30, 2005, the change in the
rate had not been promulgated by parliament in South Africa and thus is not the
enacted rate as described in Statement of Financial Accounting Standard 109,
Accounting for Income Taxes. The rate was promulgated on July 19, 2005, which
will result in a decrease in our distributed rate (i.e. the statutory rate plus
the effects related to a charge for Secondary Tax on Companies, which is
currently 12.5%) from 37.78% to 36.89% . The effect of this change was shown in
the first quarter of fiscal 2006 in our taxation charge.

For
the years ended June 30, 2005 and 2004, earnings from Permit totaled
approximately $0.5 million and $0.09 million (ZAR 3.3 million and ZAR 0.6
million), respectively.

**Results
of operations by operating segment**

The
composition of revenue and the contributions of our business activities to
operating income are illustrated below.

|Table 13                                              |  | In
      United States Dollars (US GAAP) |  
|----------------------------------------------------- |  | ---------------------------------------- | -
|                                                      |  | Year
      ended June 30,                |  
|                                                      |  | 2005                                     |  
|Operating Segment                                     |  | $ 000                                   |  
|Consolidated revenue:                                 |  |                                          |  
|Transaction-based activities                          |  | 103,653                                  |  
|Smart card accounts                                   |  | 34,931                                   |  
|Financial services                                    |  | 20,215                                   |  
|Hardware, software and related technology
      sales |  | 17,491                                   |  
|Total consolidated revenue                            |  | 176,290                                  |  
|Consolidated operating income (loss):                 |  |                                          |  
|Transaction-based activities                          |  | 44,233                                   |  
|Smart card accounts                                   |  | 15,878                                   |  
|Financial services                                    |  | 9,316                                    |  
|Hardware, software and related technology
      sales |  | 5,689                                    |  
|Corporate/ Eliminations                               |  | (3,813                                   | )
|Total consolidated
      operating income             |  | 71,303                                   |  

|Table 14                                              |  | In
      South African Rand (US GAAP) |  
|----------------------------------------------------- |  | ------------------------------------- | -
|                                                      |  | Year
      ended June 30,             |  
|                                                      |  | 2005                                  |  
|                                                      |  | ZAR                                   |  
|Operating Segment                                     |  | 000                                  |  
|Consolidated revenue:                                 |  |                                       |  
|Transaction-based activities                          |  | 643,642                               |  
|Smart card accounts                                   |  | 216,907                               |  
|Financial services                                    |  | 125,527                               |  
|Hardware, software and related technology
      sales |  | 108,612                               |  
|Total consolidated
      revenue                      |  | 1,094,688                             |  
|Consolidated operating income (loss):                 |  |                                       |  
|Transaction-based activities                          |  | 274,669                               |  
|Smart card accounts                                   |  | 98,596                                |  
|Financial services                                    |  | 57,849                                |  
|Hardware, software and related technology
      sales |  | 35,326                                |  
|Corporate/ Eliminations                               |  | (23,677                               | )
|Total consolidated
      operating income             |  | 442,763                               |  

76

---

**Transaction-based
activities**

In
U.S. dollars, revenues increased by 19% for the year ended June 30, 2005, from
the year ended June 30, 2004. Operating income increased by 87% for the year
ended June 30, 2005, from the year ended June 30, 2004.

In
ZAR, revenues increased by 9% for the year ended June 30, 2005, from the
comparable period in 2004. Operating income increased by 67% for the year ended
June 30, 2005, from the year ended June 30, 2004.

These
increases in revenues and operating income were due primarily to the rollout of
our merchant acquiring system which began in July 2004, implementation of
transacting ability at participating retailers POS devices, full operation of
the Eastern Cape provincial contract and higher volumes from our other
provincial contracts. We discuss these factors in more detail below.

***Rollout
of our merchant acquiring system:***

Refer
to discussion under OverviewProgress of Our Merchant Acquiring Project.

***Full
operation of Eastern Cape contract:***

During
the first two quarters of fiscal 2004, the implementation of our social welfare
grant payment system in the Eastern Cape Province was not fully operational. We
processed 7,410,272 transactions during the year ended June 30, 2005, compared
with 5,482,237 transactions during the year ended June 30, 2004.

***Higher volumes from
our other provincial contracts:***

We
have experienced growth in most of the other provinces where we administer
payments of social welfare grants. This growth has been mainly due to new
qualifying criteria announced in 2003 by the South African government that
increased the eligibility for child support grants, and a significant increase
in the number of disability grants approved by the various provincial
governments. In total, the volume of payments processed during the year ended
June 30, 2005 increased 17.93% to 39,433,576 from the year ended June 30,
2004.

The
higher volumes under existing provincial contracts during the year ended June
30, 2005, as well as average revenue per grant paid, are detailed below:

|Table 15                  |  |                   |  |  |                                      |  |  |      |  |  |      |  |  |        |  |  |        | 
|------------------------- |  | ----------------- |  |  | ------------------------------------ |  |  | ---- |  |  | ---- |  |  | ------ |  |  | ------ | 
|Year
      ended June 30, | 
|                          |  | Number of         |  |  | Average
      Revenue per Grant Paid | 
|                          |  | Grants
      Paid |  |  | 2005                                 |  |  | 2004 |  |  | 2005 |  |  | 2004   | 
|Province                  |  | 2005              |  |  | 2004                                 |  |  | (1)  |  |  | (2)  |  |  | ZAR(1) |  |  | ZAR(2) | 
|KwaZulu-Natal (A).        |  | 16,774,940        |  |  | 14,037,541                           |  |  | 2.88 |  |  | 2.68 |  |  | 17.85  |  |  | 18.52  | 
|Limpopo (B)               |  | 10,635,232        |  |  | 9,402,141                            |  |  | 2.47 |  |  | 2.29 |  |  | 15.34  |  |  | 15.84  | 
|North West (C)            |  | 3,153,868         |  |  | 3,127,808                            |  |  | 2.65 |  |  | 2.42 |  |  | 16.43  |  |  | 16.73  | 
|Northern Cape (D)         |  | 1,459,264         |  |  | 1,389,735                            |  |  | 3.13 |  |  | 2.81 |  |  | 19.41  |  |  | 19.41  | 
|Eastern Cape (E)          |  | 7,410,272         |  |  | 5,482,237                            |  |  | 1.99 |  |  | 1.88 |  |  | 12.35  |  |  | 13.00  | 
|Total                     |  | 39,433,576        |  |  | 33,439,462                           |  |  |      |  |  |      |  |  |        |  |  |        | 

*(1)
Average Revenue per Grant Paid excludes $ 0.89 (ZAR 5.50) related to the
provision of smart card accounts.*

*(2)
Average Revenue per Grant Paid excludes $ 0.79 (ZAR 5.50) related to the
provision of smart card accounts.*

(A)- The decrease in the Average Revenue per Grant Paid in KwaZulu-Natal is
primarily due to the introduction of more low value child support grants during
fiscal 2005. As we charge a percentage of the total amount distributed in
KwaZulu-Natal, the introduction of more lower value grants will result in a
decrease in the average revenue per grant paid.

(B)
- The decrease in the Average Revenue per Grant Paid in Limpopo is due to
the once-off registration fees charged during the bulk enrollment of
beneficiaries in fiscal 2004, when we commenced with the new contract in this
province. The fee charged for payment is significantly less than the fee charged
for registration.

(C)
- The decrease in the Average Revenue per Grant Paid in North West is primarily
due to the introduction of more low value child support grants during fiscal
2005. Our fee for the payment of child support grants in the North West province
is lower than the fee charged for all other grant types.

77

---

**(D)
-**No change to the Average Revenue per Grant Paid in the Northern Cape
during fiscal 2005.

(E)
- The decrease in the Average Revenue per Grant Paid in the Eastern Cape is due
to the once-off registration fees charged during the bulk enrollment of
beneficiaries during the first half of fiscal 2004, when we were in the process
of implementing our solution in this province. The fee charged for payment is
significantly less than the fee charged for registration.

Operating
income margin for the year ended June 30, 2005 increased to 43% from 28% for the
year ended June 30, 2004. These profit margin improvements were mainly due to:

• the increased volumes as detailed in the table above;

•
  the reduced losses on the Eastern Cape contract, where we incurred significant
  expenses during the first half of fiscal 2004 in connection with the process
  of optimizing the logistics of the Eastern Cape implementation, such as the
  number of vehicles, number of payment points and number of beneficiaries at
  each payment point;

•
  the conversion of our operations in the Limpopo province during November 2003
  to February 2004 to a full smart card-based payment system; and

•
  the increase in the number of social grant beneficiaries paid through our POS
  device infrastructure at participating retailers, instead of payment using more
  costly automated cash dispensers.

**Smart
card accounts**

In
U.S. dollars, revenues increased by 51% for the year ended June 30, 2005, from
the year ended June 30, 2004. Operating income increased by 52% for the year
ended June 30, 2005, from the year ended June 30, 2004.

In
ZAR, revenues and operating income each increased by 36% for the year ended June
30, 2005, from the year ended June 30, 2004.

Operating
  income margin from providing smart card accounts was fairly constant at 45%
  for each of the years ended June 30, 2005 and 2004.

Revenue
from the provision of smart card based accounts grew in proportion to the higher
number of beneficiaries serviced through our social welfare payment contracts. A
total number of 3,353,603 smart card-based accounts were active at June 30,
2005, compared to 3,066,581 active accounts as of June 30, 2004. The increase in
the number of active accounts resulted from an increase in the number of
beneficiaries in all provinces qualifying for government grants due to the
efforts of the South African government to provide social assistance to the very
old and very young.

**Financial
services**

In
U.S. dollars, revenues increased 22% for the year ended June 30, 2005, from the
year ended June 30, 2004. Operating income increased by 37% for the year ended
June 30, 2005, from the year ended June 30, 2004.

In
ZAR, revenues increased by 9% for the year ended June 30, 2005, from the year
ended June 30, 2004. Operating income increased by 24% for the year ended June
30, 2005, from the year ended June 30, 2004.

Revenues
from UEPS-based lending improved as a result of growth in our loan portfolio as
we expanded the areas where this service is offered. By contrast, the loan
portfolio of the traditional microlending businesses remained static as a result
of our strategic decision not to grow this business aggressively.

Our
current UEPS-based lending portfolio comprises loans made to elderly pensioners
in some of the provinces that distribute grants. We insure the UEPS-based
lending book against default and thus no provision is required. UEPS-based
lending is considered less risky as the grants are distributed to these lenders
by ourselves and these loans are insured. An allowance for doubtful traditional
microlending loans is established for all traditional microlending loans where
it is considered likely that all or a portion of the principal amount of the
loan or interest thereon will not be repaid by the borrower. Default is
considered likely after a specified period of repayment default, which is
generally not more than 150 days. The provision is assessed based on a review by
management of the ageing of outstanding amounts, the payment history in relation
to those specific accounts and the overall default history.

78

---

The
key indicators of these businesses are illustrated below:

|Table 16                      |  | As
      at June 30, |  
|----------------------------- |  | -------------------- | -
|                              |  | 2005                 |  
|                              |  |                      |  
|                              |  | $000                |  
|                              |  |                      |  
|Traditional microlending:     |  |                      |  
|Finance loans receivable      |  |                      |  
| gross                       |  | 7,212                |  
|Allowance for doubtful        |  |                      |  
|finance loans                 |  |                      |  
|receivable                    |  | (3,636               | )
|Finance loans                 |  |                      |  
|receivable  net              |  | 3,576                |  
|                              |  |                      |  
|UEPS-based lending:           |  |                      |  
|Finance loans receivable     |  |                      |  
|net
      and gross (i.e., no |  |                      |  
|allowance)                    |  | 4,184                |  
|                              |  |                      |  
|Total finance loans           |  |                      |  
|receivable, net               |  | 7,760                |  

During
the latter half of the third quarter and throughout the fourth quarter of 2005
the management of our traditional microlending businesses reviewed our long
outstanding finance loans. As a result of this review, management determined
that $5.5 million (ZAR 34.3 million) finance loans outstanding were not
recoverable. These loans had been provided for in full in the allowance for
doubtful finance loans receivable. Management began authorizing the write-off of
these finance loans in the latter half of the third quarter and in the fourth
quarter of 2005. This write-off has resulted in a decrease in the gross amount
outstanding as well as in the allowance for doubtful finance loans receivable
compared with the balances as at June 30, 2004. These write-offs had no effect
on the statement of operations as they had been fully provided for previously.
Our policy for providing for doubtful finance loans has not changed.

Operating
income margin for the financial services segment increased to 46% for the year
ended June 30, 2005 from 41% for the year ended June 30, 2004, primarily due to
the change in the composition of the lending portfolio from the lower margin and
higher risk traditional microlending to the higher margin and lower risk
UEPS-based lending. The provision of UEPS-based lending is volume driven and
profitability improves as volumes increase, as most costs are fixed. During
fiscal 2005, we have substantially reduced the staff cost associated with
UEPS-based lending, as the fixed-term contracts of staff members who assisted in
the establishment of this initiative expired.

**Hardware,
software and related technology sales**

In
U.S. dollars, revenues increased by $12.9 million for the year ended June 30,
2005, from the year ended June 30, 2004. Operating income increased by $4.5
million for the year ended June 30, 2005, from the year ended June 30, 2004.

In
ZAR, revenues increased by ZAR 76.6 million for the year ended June 30, 2005,
from the year ended June 30, 2004. Operating income increased by ZAR 26.8
million for the year ended June 30, 2005, from the year ended June 30, 2004.

These
increases were due primarily to revenues earned from commencement of our
contract to supply Nedbank with 18,500 POS devices, 5,600 pin-pads and 66,000
merchant smart cards. Total revenues from this contract were $10.4 million for
the year ended June 30, 2005 (approximately ZAR 63.6 million). As anticipated,
we completed this project during the third quarter of fiscal 2005. Hardware
sales of this nature are infrequent, and we do not anticipate revenue from
similar large-scale hardware supply contracts to occur in the foreseeable
future.

79

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**Corporate/
Eliminations**

In
U.S. dollars, operating loss decreased by 43% for year ended June 30, 2005, from
the year ended June 30, 2004.

In
ZAR, operating loss decreased 52% for the year ended June 30, 2005, from the
year ended June 30, 2004.

The
decrease in the operating loss for the Corporate/ Eliminations segment is mainly
due to the non-recurring reorganization charge of $11.1 million (ZAR 77.0
million) incurred in 2004. However, for the year ended June 30, 2005, we
incurred non-recurring charges of approximately $1.8 million (ZAR 11.3 million)
related to the public offering and Nasdaq listing in August 2005. In addition,
Net 1 UEPS Technologies, Inc.s operating losses are for the full year ended
June 30, 2005, compared with only 23 days from June 7, 2004, the date of the
Aplitec transaction, to year end June 30, 2004 in the comparative period.

Operating
income for the year ended June 30, 2005, includes consulting fees incurred of
approximately $0.7 million (ZAR 4.6 million) paid to external consultants and
our auditors related to our documentation, implementation and compliance with
Sarbanes.

In
the first quarter of 2006, we will incur additional expenses related to the
public offering and Nasdaq listing and compliance with Sarbanes. As at the date
of this report, we are unable to quantify the full extent of these costs.

Liquidity and Capital Resources

Our
business has historically generated and continues to generate high levels of
cash. At June 30, 2006, prior to closing the Prism acquisition, our cash
balances were $189.7 million, which were composed of ZAR-denominated balances of
ZAR 1,095.9 million ($150.7 million), U.S. dollar-denominated balances of $39.0
million and euro-denominated balances of €0.01 million ($0.01 million).

Surplus
cash held by our South African operations is invested in overnight call accounts
in the South African money market, and surplus cash held by our non-South
African companies is invested in the United States and European money markets.

Historically,
we have financed all operations, research and development, working capital,
capital expenditures and acquisitions through our internally generated cash. We
have no long-term indebtedness. We have aggregate credit facilities of $75.7
million (ZAR 550 million). From time to time, we have borrowed under these
facilities on a short-term basis when our pre-funding requirements exceed the
available cash on hand. We take the following factors into account when
considering whether to borrow under our financing facilities:

- cost of capital;
- cost of financing;
- opportunity cost of utilizing surplus cash; and
- availability of tax efficient structures to moderate financing costs.

We
have a unique cash flow cycle due to our obligations to pre-fund the payments of
social welfare grants in the KwaZulu-Natal and Eastern Cape provinces. We
provide the funds required for the grant payments on behalf of these provincial
governments from our own cash resources and are reimbursed within two weeks by
the KwaZulu-Natal and Eastern Cape governments, thus exposing ourselves to these
provinces credit risk. These obligations result in a peak funding requirement,
on a monthly basis, of approximately $46.8 million (ZAR 340 million) for each of
the KwaZulu-Natal and Eastern Cape contracts. The funding requirements are at
peak levels for the first three weeks of every month during the year. The
significant increase in the number of social welfare grant beneficiaries in the
KwaZulu-Natal and Eastern Cape provinces during fiscal 2006 has increased our
pre-funding requirements and may require us to obtain external financing in the
medium to long-term for the pre-funding of these grant payments.

In
addition, concurrently with the closing of the Prism acquisition on July 3,
2006, we paid approximately $95.2 million (ZAR 687.0 million) in cash for all
Prism shares and share options, which has significantly reduced the amount of
our available cash and has affected the frequency in which we use our credit
facilities. While we currently believe that these credit facilities are
sufficient to fund our combined operations for at least the next twelve months,
the reduction in our available cash may require us to seek additional sources of
capital through an increase in availability under our credit facilities or
issuance of debt securities. There can be no assurance that we will be able to
secure such additional financing on acceptable terms.

80

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***Cash
flows from operating activities***

Cash
flows from operating activities for the year ended June 30, 2006, increased to
$75.8 million (ZAR 486.6 million) from $38.1 million (ZAR 236.6 million) for the
year ended June 30, 2005. The increase is largely due to increased business
activities in our transaction-based activities and hardware, software and
related technology sales segments and better working capital management. The
payment of welfare grants through our merchant acquiring network increases our
operating cash flows as the total costs to distribute grants through our
merchant acquiring network are lower compared to paying grants at pay sites. In
addition, during the year ended June 30, 2005, we paid $8.5 million (ZAR 51.7
million) in non-recurring taxes related to the Aplitec transaction in June 2004.
During the year ended June 30, 2006, we paid provisional taxes of approximately
$3.2 million (ZAR 20.5 million) related to the tax year ended June 30, 2005 and
provisional taxes of approximately $24.2 million (ZAR 155.9 million) related to
the tax year ended June 30, 2006. In addition, we paid Secondary Taxation on
Companies, or STC, of approximately $0.5 million (ZAR 3.3 million) related to
the closure and deregistration of dormant subsidiaries. See the table below for
a summary of all taxes paid.

Taxes
paid during the year ended June 30, 2006 and 2005 were as follows:

|Table 19                                |  |        |   |  | Year ended June 30, |  |  |         |  
|--------------------------------------- |  | ------ | - |  | ------------------- |  |  | ------- | -
|                                        |  | 2006   |   |  | 2005                |  |  | 2006    |  
|                                        |  | $      |   |  | $                   |  |  | ZAR     |  
|                                        |  | 000   |   |  | 000                |  |  | 000    |  
|                                        |  |        |   |  |                     |  |  |         |  
|First provisional payments              |  | 11,963 |   |  | 10,770              |  |  | 74,905  |  
|Second provisional payments             |  | 12,223 |   |  | 7,773               |  |  | 80,953  |  
|Third provisional payments              |  | 2,861  |   |  | 10,871              |  |  | 18,361  |  
|Taxation paid related to prior years    |  | 837    |   |  | n/a                 |  |  | 5,331   |  
|Taxation refunds received               |  | (523   | ) |  | n/a                 |  |  | (3,209  | )
|Secondary taxation on companies         |  | 496    |   |  | n/a                 |  |  | 3,332   |  
|Taxes arising from
      reorganization |  | n/a    |   |  | 8,458               |  |  | n/a     |  
|Total tax paid                          |  | 27,857 |   |  | 37,872              |  |  | 179,673 |  

The
South African Revenue Service has increased our second provisional payments for
certain of our South African subsidiaries and has requested that we pay
approximately $8.7 million (based on the year end exchange rate of $1: ZAR 7.27)
(ZAR 63.0 million). These will have a negative impact on our cash flows from
operating activities for the first quarter of 2007.

Cash
flows from operating activities for the year ended June 30, 2005, decreased to
$38.1 million (ZAR 236.6 million) from $41.8 million (ZAR 290.4 million) for the
year ended June 30, 2004. The decrease is largely attributable to the taxes paid
during the year ended June 30, 2005, related to the Aplitec transaction, which
we accrued as of June 30, 2004. We were also required to pay higher provisional
taxes due to our increased profitability during the year ended June 30, 2005.
See the table above for a summary of all taxes paid. Cash flows from operating
activities, excluding the impact of these tax payments, increased due to higher
levels of revenue and operating profit during the year, partially offset by
changes in working capital. Payments received under the Eastern Cape provincial
government contract are due seven business days from invoice. Our last invoice
sent prior to year end was not due until after June 30, 2005 and we received
payment in the first week of the first quarter of 2006, which decreased our cash
on hand because we pre-fund beneficiary payments in this province.

***Cash
flows from investing activities***

Cash
used in investing activities for the year ended June 30, 2006 includes capital
expenditure of $1.8 million (ZAR 11.5 million), of which $0.6 million (ZAR 3.7
million) related to the purchase of POS and pin-pad devices for use at retailers
participating in our merchant acquiring project. During the year ended June 30,
2006, we invested $0.6 million (ZAR 4.0 million) in equity and lent $2.0 million
(ZAR 12.5 million) to SmartSwitch Namibia. During the fourth quarter of fiscal
2006 we invested $0.7 million (ZAR 4.5 million) in equity and lent $0.7 million
(ZAR 4.5 million) to SmartSwitch Botswana, a UEPS based switching system
established in Botswana.

Cash
used in investing activities for the year ended June 30, 2005, includes capital
expenditure of $3.4 million (ZAR 21.0 million), of which $0.4 million (ZAR 2.8
million) related to the purchase of an additional transaction processing
computer at head-office and $1.7 million (ZAR 10.4 million) related to the
purchase of POS and pin-pad devices for use at retailers participating in our
merchant acquiring project.

Investing
activities for the year ended June 30, 2004, consisted mainly of capital
expenditures of $2.8 million (ZAR 19.4 million), loans of approximately $0.8
million (ZAR 4.9 million) and approximately $0.9 million (ZAR 6.5 million) to
Permit and Imvume Resources (Pty) Ltd to enable Permit to acquire 95% of the
issued share capital of New Era Life Insurance Company Ltd., and the acquisition
of contract rights in the Limpopo province amounting to $1.3 million (ZAR 9.0
million).

81

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***Cash
flows from financing activities***

During
the year ended June 30, 2006, we received approximately $31.5 million (ZAR 202.0
million), net of share issue costs of approximately $2.4 million (ZAR 15.6
million), from the underwriters of our public offering exercising their option
to acquire 1,538,794 shares of our common stock. We also received approximately
$1.1 million (ZAR 7.1 million) from employees to repay loans associated with
stock options granted to them as well as the interest thereon. In addition, we
received approximately $1.0 million (ZAR 6.4 million) from the proceeds of stock
options exercises by directors and executive officers.

During
the fourth quarter of fiscal 2006, we paid $4.0 million (ZAR 25.7 million) to
repurchase 147,973 shares of our common stock which we expect to sell to certain
employees of Prism in accordance with the implementation agreement relating to
the Prism acquisition.

There
were no significant cash flows from financing activities during the year ended
June 30, 2005.

During
the year ended June 30, 2004, net cash received from the issue of common and
preferred stock of $53.7 million (ZAR 336.8 million), resulted from the issuance
of shares of common stock to the private equity funds that funded the Aplitec
transaction. The cash distribution and dividend paid to shareholders during the
year ended June 30, 2004 consisted of $72.7 million (ZAR 456.0 million) as a
result of the Aplitec transaction and $5.1 million (ZAR 35.5 million) paid to
Aplitec shareholders as a dividend pursuant to Aplitecs dividend policy at the
time.

Off-Balance Sheet Arrangements

We
have no off-balance sheet arrangements.

Capital Expenditures

Capital
expenditures for the years ended June 30, 2006, 2005 and 2004 were as follows:

|Table 20                       |  | Fiscal
      year ended June 30, | 
|------------------------------ |  | -------------------------------- | 
|                               |  |                                  | 
|                               |  | 2006                             | 
|Operating Segment              |  | $000                            | 
|                               |  |                                  | 
|Transaction-based activities   |  | 1,372                            | 
|Smart card accounts            |  | -                                | 
|Financial services             |  | 449                              | 
|Hardware, software and related |  |                                  | 
|technology sales               |  | -                                | 
|Corporate / Eliminations       |  | -                                | 
|Consolidated
      total       |  | 1,821                            | 

We
operate in an environment where our contracts for the payment of social welfare
grants require substantial capital investment to establish our operational
infrastructure when a contract commences. Further capital investment is required
when the number of beneficiaries increases to the point where the maximum
capacity of the original infrastructure is exceeded.

As
mentioned above, our capital expenditures for the year ended June 30, 2006
related mainly to the acquisition of POS and pin-pad devices that we lease to
participating retailers. Our capital expenditures for the year ended June 30,
2005, related mainly to the acquisition of a new transaction processing computer
at our head-office and the acquisition of POS and pin-pad devices that we lease
to participating retailers. Our capital expenditures for the year ended June 30,
2004 were mainly due to expansion in all provinces, as we experienced
significant growth in the number of customers we had to service. Capital
expenditures during the year ended June 30, 2004, were primarily due expansion
in all provinces, as we experienced significant growth in the number of
customers we had to service. Our other business activities require relatively
little capital investment.

All
of our capital expenditures for the past three fiscal years were funded through
internally generated funds. We had no outstanding capital commitments at June
30, 2006. We anticipate that capital spending for the first quarter of fiscal
2007 will relate primarily to on-going replacement of equipment used to
administer and distribute social welfare grants. We expect to fund these
expenditures through internally generated funds.

82

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Contingent Liabilities, Commitments and Contractual
Obligations

We
lease various premises under operating leases. Our minimum future commitments
for lease premises as well as other commitments are as follows:

|Table 21             |  | Payments
      due by Period, as at June 30, 2006(in $ 000s) | 
|-------------------- |  | ------------------------------------------------------------- | 
|                     |  | Due                                                           | 
|                     |  | within                                                        | 
|                     |  | 1
      year                                                  | 
|Operating lease      |  |                                                               | 
|obligations          |  | 1,181                                                         | 
|Purchase obligations |  | 894                                                           | 
|Total                |  | 2,075                                                         | 

Employee Benefits

We
do not provide retirement benefits to any of our employees. We provide our
employees with a choice of two health care service providers of which we pay the
monthly contribution. We do not provide any post-retirement health benefits.

Insurance

We
annually assess our risk exposure. At June 30, 2006, we believe that all risks
were adequately covered by third party insurers, except where we considered the
cost of insurance coverage to be excessive in relation to the probability and
extent of loss or we were unable to find any insurance underwriters willing to
accept the risks associated with certain aspects of our business. We have
confronted the latter with respect to insurance for losses or theft of cash from
our delivery vehicles.

The
main categories of our insurance are: directors and officers liability; loss or
damage to vehicles, electronic equipment and other assets; business
interruption; motor vehicle third party claims; group personal accident; and
employment practices liability.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK

We
seek to reduce our exposure to currencies other than the South African rand
through a policy of matching, to the extent possible, assets and liabilities
denominated in those currencies. In addition, we use financial instruments to
economically hedge our exposure to exchange rate and interest rate fluctuations
arising from our operations. We are also exposed to credit risks.

**Currency
  Exchange Risk**

We are
  subject to currency exchange risk because we purchase inventories that we are
  required to settle in other currencies, primarily the euro and U.S. dollar.
  We have used forward contracts to limit our exposure in these transactions to
  fluctuations in exchange rates between the South African rand, on the one hand,
  and the U.S. dollar and the euro, on the other hand. As of June 30, 2006, 2005
  and 2004, our outstanding foreign exchange contracts were as follows:

**As
  of June 30, 2006**

Notional**amount**
    Strike price
    MaturityEUR       
       627,372
    ZAR           
      8.0529
    November 30, 2006EUR         
       17,091
    ZAR           
      8.5339
    August 1, 2006EUR       (627,372)
    ZAR           
      8.2625
    November 30, 2006


**As
of June 30, 2005**

Notional amount
    Strike price
    MaturityUSD            98,000
    ZAR            
      6.0542
    September 30, 2005EUR            57,000
    ZAR            
      8.3404
    August 25, 2005EUR          285,000
    ZAR            
      8.4137
    October 25, 2005EUR          798,000
    ZAR            
      8.4494
    November 25, 2005EUR            39,000
    ZAR            
      8.4793
    November 30, 2005EUR         
      106,950
    ZAR            
      8.4078
    November 14, 2005EUR          267,110
    ZAR            
      8.4213
    July 29, 2005EUR         
      324,800
    ZAR            
      8.4536
    August 26, 2005EUR          101,250
    ZAR            
      8.3908
    July 15, 2005


83

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****As
  of June 30, 2004

Notional amount
      Strike price
      MaturityEUR            
        16,250
      ZAR            
        7.8475
      July 12, 2004EUR           202,000
      ZAR            
        8.1822
      August 2, 2004EUR            
        16,250
      ZAR            
        7.8878
      August 10, 2004EUR            
        16,250
      ZAR            
        7.9299
      September 10, 2004EUR             16,250
      ZAR            
        7.9749
      October 12, 2004EUR           263,200
      ZAR            
        8.2129
      October 29, 2004EUR         4,243,000
      ZAR            
        8.5225
      January 7, 2005USD           167,900
      ZAR            
        6.2950
      September 22, 2004


**Translation
Risk**

Translation risk relates to the
risk that our results of operations will vary significantly as the U.S. dollar
is our reporting currency, but we earn most of our revenues and incur most of
our expenses in ZAR. The U.S. dollar to ZAR exchange rate has fluctuated
significantly over the past two years. As exchange rates are outside our
control, there can be no assurance that future fluctuations will not adversely
affect our results of operations and financial condition.

**Interest
Rate Risk**

As
a result of our normal borrowing and leasing activities, our operating results
are exposed to fluctuations in interest rates, which we manage primarily through
our regular financing activities. We generally maintain limited investment in
cash equivalents and have occasionally invested in marketable securities.
Typically, for every 1% increase in SARBs repo rate, our interest expense on
pre-funding social welfare grants in the KwaZulu Natal and Eastern Cape
provinces increases by $21,230 per month, while interest earned per month on any
surplus cash increases by $12,786 per $13.8 million (ZAR 100 million).

**Credit
Risk**

Credit
risk relates to the risk of loss that we would incur as a result of
non-performance by counterparties. We maintain credit risk policies with regard
to our counterparties to minimize overall credit risk. These policies include an
evaluation of a potential counterpartys financial condition, credit rating, and
other credit criteria and risk mitigation tools as our management deems
appropriate.

With
respect to credit risk on financial instruments, we maintain a policy of
entering into such transactions only with South African and European financial
institutions that have a credit rating of BBB or better, as determined by
Standard & Poors.

**Micro-lending
Credit Risk**

We
are exposed to credit risk in our microlending activities, which provides
unsecured short-term loans to qualifying customers. We manage this risk by
assigning each prospective customer a creditworthiness score, which takes into
account a variety of factors such as employment status, salary earned, other
debts and total expenditures on normal household and lifestyle expenses.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our
consolidated financial statements, together with the report of our independent
registered public accounting firm, appear on pages F-1 through F-41 of this
Annual Report on Form 10-K

84

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

Not
applicable.

ITEM 9A. CONTROLS AND PROCEDURES

***Evaluation
of disclosure controls and procedures***

Under the supervision and with the participation of our management, including
  our chief executive officer and our chief financial officer, we conducted an
  evaluation of our disclosure controls and procedures, as such term is defined
  under Rule 13a-15(e) under the Securities Exchange Act of 1934. Based on this
  evaluation, the chief executive officer and the chief financial officer concluded
  that our disclosure controls and procedures were effective as of June 30, 2006

*Internal
Control over Financial Reporting*

Internal
control over financial reporting is a process designed by, or under the
supervision, of the companys chief executive officer (CEO) and chief financial
officer (CFO), or persons performing similar functions, and effected by the
companys board of directors, management, and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
accounting principles generally accepted in the United States of America
(GAAP).

Internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with GAAP, and that
receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the companys assets that could have a
material effect on the consolidated financial statements.

*Inherent
Limitations in Internal Control over Financial Reporting*

Internal
control over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives because of its inherent limitations. Internal
control over financial reporting is a process that involves human diligence and
compliance and is subject to lapses in judgment and breakdowns resulting from
human failures. Internal control over financial reporting also can be
circumvented by collusion or improper management override. Because of such
limitations, there is a risk that material misstatements may not be prevented or
detected on a timely basis by internal control over financial reporting.
However, these inherent limitations are known features of the financial
reporting process. Therefore, it is possible to design into the process
safeguards to reduce, though not eliminate, this risk.

*Managements
Report on Internal Control Over Financial Reporting*

Management,
including our chief executive officer and our chief financial officer, is
responsible for establishing and maintaining adequate internal control over our
financial reporting. Management conducted an evaluation of the effectiveness of
internal control over financial reporting based on the Internal Control 
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this evaluation, management concluded that our
internal control over financial reporting was effective as of June 30, 2006.

Deloitte
& Touche (South Africa), an independent registered public accounting firm,
has issued an attestation report on managements assessment of the companys
internal control over financial reporting.

*Changes
in Internal Control over Financial Reporting*

There
have not been any changes in our internal control over financial reporting
during the most recent fiscal quarter ended June 30, 2006, that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.

85

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To The Shareholders of Net 1 UEPS Technologies, Inc.

We
have audited management's assessment, included in the accompanying 10K, Item 9A
Controls and procedures that Net 1 UEPS Technologies, Inc. and subsidiaries
(the Company) maintained effective internal control over financial reporting
as of June 30, 2006, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). The Company's management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the Company's internal control over financial
reporting based on our audit.

We
conducted our audit 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 effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinions.

A
company's internal control over financial reporting is a process designed by, or
under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.

Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.

In
our opinion, management's assessment that the Company maintained effective
internal control over financial reporting as of June 30, 2006, is fairly stated,
in all material respects, based on the criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). Also in our opinion, the Company maintained,
in all material respects, effective internal control over financial reporting as
of June 30, 2006, based on the criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO).

We
  have also audited, in accordance with the standards of the Public Company Accounting
  Oversight Board (United States), the consolidated financial statements as of
  and for the year ended June 30, 2006 of the Company and our report dated August
  29, 2006 expressed an unqualified opinion on those financial statements with
  an explanatory paragraph regarding the Company’s adoption of Statement
  of Financial Accounting Standards No. 123R, *Share-Based Payment*, with
  effect from July 1, 2005 using the modified prospective method.

/s/ Deloitte & Touche (South Africa) Chartered
Accountants (SA) Johannesburg, Republic of South Africa August
29, 2006

86

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ITEM 9B. OTHER INFORMATION

Not applicable.

87

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT

The
information required by this Item is incorporated by reference to the sections
of our definitive proxy statement for our annual meeting of shareholders to be
held in 2006, entitled Election of Directors and Executive Officers, to be
filed with the SEC within 120 days after the end of the fiscal year covered by
this Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION

The
information required by this Item is incorporated by reference to the sections
of our definitive proxy statement for our annual meeting of shareholders to be
held in 2006, entitled Executive Compensation and Other Matters, to be filed
with the SEC within 120 days after the end of the fiscal year covered by this
Form 10-K.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED SHAREHOLDERS MATTERS

The
information required by this Item is incorporated by reference to the sections
of our definitive proxy statement for our annual meeting of shareholders to be
held in 2006, entitled Security Ownership of Certain Beneficial Owners and
Management, to be filed with the SEC within 120 days after the end of the
fiscal year covered by this Form 10-K.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The
information required by this Item is incorporated by reference to the sections
of our definitive proxy statement for our annual meeting of shareholders to be
held in 2006, entitled Certain Relationships and Related Transactions, to be
filed with the SEC within 120 days after the end of the fiscal year covered by
this Form 10-K.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The
information required by this Item is incorporated by reference to the sections
of our definitive proxy statement for our annual meeting of shareholders to be
held in 2006, entitled Audit and Non-Audit Fees, to be filed with the SEC
within 120 days after the end of the fiscal year covered by this Form 10-K.

88

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PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

a)      The following documents
are filed as part of this report

1.
Financial Statements

The
following financial statements are included on pages F-1 through F-37

| | Report
      of the Independent Registered Public Accounting Firm  Deloitte &
      Touche (South Africa)                  | F-2
| | --------------------------------------------------------------------------------------------------------------------------- | ---
| |                                                                                                                             |    
| | Consolidated
      Balance Sheets  as of June 30, 2006 and 2005                                                            | F-3
| |                                                                                                                             |    
| | Consolidated
      Statements of Operations  for the years ended June 30, 2006, 2005 and
      2004                        | F-4
| |                                                                                                                             |    
| | Consolidated
      Statements of Movements in Shareholders Equity  for the years ended June
      30, 2006, 2005 and 2004 | F-5
| |                                                                                                                             |    
| | Consolidated
      Statements of Cash Flows  for the years ended June 30, 2006, 2005 and
      2004                        | F-6
| |                                                                                                                             |    
| | Notes
      to the Consolidated Financial Statements                                                                        | F-7

2.
Financial Statement Schedules

Financial
statement schedules have been omitted since they are either not required, not
applicable, or the information is otherwise included.

(b) Exhibits

|Exhibit |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|2.1     | Sale Agreement, dated October 31, 2003 between Net 1
      Applied Technology Holdings Limited, Net 1 Investment Holdings
      (Proprietary) Limited, Net 1 Support Services (Proprietary) Limited and
      Newshelf 713 (Proprietary) Limited. (Incorporated by reference to Exhibit
      2.1 to our Registration Statement on Form S-4 filed February 3, 2004
      (Commission File No. 333-112463))                                                                                                                    
|2.2     | Subscription Agreement, dated as of October 31, 2003,
      between Net 1 UEPS Technologies, Inc. and Newshelf 713 (Proprietary)
      Limited (Incorporated by reference to Exhibit 2.2 to our Registration
      Statement on Form S-4 filed February 3, 2004 (Commission File No.
      333-112463))                                                                                                                                                                                                                       
|2.3     | Asset Purchase Agreement, dated as of January 30, 2004,
      between Net 1 Holdings S.a.r.l. and Net 1 UEPS Technologies, Inc.
      (Incorporated by reference to Exhibit 2.3 to our Registration Statement on
      Form S-4 filed February 3, 2004 (Commission File No. 333-112463))                                                                                                                                                                                                                                      
|2.4     | Common Stock Purchase Agreement , dated as of January 30,
      2004, between Net 1 UEPS Technologies, Inc and SAPEF III International
      G.P. Limited (or its nominees). (Incorporated by reference to Exhibit2.4
      to our Registration Statement on Form S-4 filed February 3, 2004
      (Commission File No. 333-112463))                                                                                                                                                                                          
|2.5     | Subscription Agreement, dated November 10, 2003, between
      the Trustees for the time being of the New Aplitec Participation Trust and
      Newshelf 713 (Proprietary) Limited. (Incorporated by reference to Exhibit
      2.5 to our Registration Statement on Form S-4 filed February 3, 2004
      (Commission File No. 333-112463))                                                                                                                                                                                  
|2.6     | Trust Deed for the Aplitec Holding Participation Trust,
      dated October 31, 2003, entered into between Newshelf 713 (Proprietary)
      Limited and Brait Capital Parters Trustees (Proprietary) Limited.
      (Incorporated by reference to Exhibit 2.6 to our Registration Statement on
      Form S-4 filed February 3, 2004 (Commission File No. 333- 112463))                                                                                                                                                       
|2.7     | Trust Deed for the Aplitec Holdings Participation Trust,
      dated January 30, 2004, between Walker SPV, SAPEF III International G.P.
      Limited (in its capacity as original enforcer), Brait Capital Partners
      Trustees (Proprietary) Limited (in its capacity as trustee of the New
      Aplitec Participation Trust) and Net 1 UEPS Technologies, Inc.
      (Incorporated by reference to Exhibit 2.7 to our Registration Statement on
      Form S-4 filed February 3, 2004 (Commission File No. 333-112463))
|2.8     | Umbrella Agreement, dated November 10, 2003, South
      African Private Equity Trust III and South African Private Equity Fund III
      L.P. and Newshelf 713 (Proprietary) Limited. (Incorporated by reference to
      Exhibit 2.8 to our Registration Statement on Form S-4 filed February 3,
      2004 (Commission File No. 333-112463))                                                                                                                                                                               

89

---

|2.9   | Underwriting Agreement, dated November 10, 2003, between
      South African Private Equity Trust III and South African Private Equity
      Fund III, L.P. and Newshelf 713 (Proprietary) Limited (Incorporated by
      reference to Exhibit 2.9 to our Registration Statement on Form S-4 filed
      February 3, 2004 (Commission File No. 333- 112463))
|----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.10  | Agreement, dated as of March 3, 2006, between Net 1
      Applied Technologies South Africa Limited and Prism Holdings Limited, as
      amended (incorporated by reference to Exhibit 2.1 to our Form 8-K/A (SEC
      File No. 000-31203)), filed on April 7, 2006.                                                                                       
|3.1   | Articles of Incorporation of Net 1 UEPS Technologies,
      Inc., as amended (incorporated by reference to Exhibit 3.1 to our Form
      10-K for the year ended June 30, 2005 (SEC File No. 000-31203)) filed on
      September 13, 2005.                                                                                                                 
|3.2   | Amended and Restated By-Laws of Net 1 UEPS Technologies,
      Inc. (Incorporated by reference to Exhibit 3.5 to our Form 10-K for the
      year ended June 30, 2005 (SEC File No. 000-31203)) filed on September 13,
      2005.                                                                                                                          
|4.1   | Form of common stock certificate (Incorporated by
      reference to Exhibit 4.1 to our Registration Statement on Form S-1 filed
      June 17, 2005)                                                                                                                                                                                                       
|10.1  | Distribution Agreement, dated July 1, 2002, between Net 1
      UEPS Technologies, Inc. and Net 1 Investment Holdings (Pty) Limited
      (Incorporated by reference to Exhibit 10.1 to our Registration Statement
      on Form S-4 filed February 3, 2004 (Commission File No.
  333-112463))                                                             
|10.2  | Patent and Technology Agreement, dated June 19, 2000, by
      and between Net 1 Holdings S.a.r.l. and Net 1 UEPS Technologies, Inc.
      (Incorporated by reference to Exhibit 10.2 to our Registration Statement
      on Form S-4 filed February 3, 2004 (Commission File No.
  333-112463))                                                            
|10.3  | Service Level Agreement between the Department of Social
      Welfare and Population Development, KwaZulu Natal and Cash Paymaster
      Services KwaZulu Natal (Pty) Limited (Incorporated by reference to Exhibit
      10.4 to our Registration Statement on Form S-4 filed February 3, 2004
      (Commission File No. 333-112463))                    
|10.4  | 2004 Stock Incentive Plan (included as Annex B to the
      proxy statement/prospectus) (Incorporated by reference to Exhibit 10.5 to
      our Registration Statement on Form S-4 filed February 3, 2004 (Commission
      File No. 333- 112463))                                                                                                          
|10.5  | Product License Agreement between Net 1 Holdings S.a.r.l.
      and Banque De Gestion Et De Financement Burundi (Incorporated by reference
      to Exhibit 10.6 to Amendment No. 2 to our Registration Statement on Form
      S-4/A, filed on April 21, 2004 (Commission File No. 333-112463))                                                            
|10.6  | Product License Agreement between Net 1 Holdings S.a.r.l.
      and Banque De Commerce, De Development Et DIndustrie B.C.D.I. S.A. Rwanda
      (Incorporated by reference to Exhibit 10.7 to Amendment No. 2 to our
      Registration Statement on Form S-4/A, filed on April 21, 2004 (Commission
      File No. 333-112463))                           
|10.7  | Product License Agreement between Net 1 Holdings S.a.r.l.
      and Net 1 Operations S.a.r.l. (Incorporated by reference to Exhibit 10.8
      to Amendment No. 2 to our Registration Statement on Form S-4/A, filed on
      April 21, 2004 (Commission File No. 333-112463))                                                                              
|10.8  | Procurement and Commissioning Agreement between Net 1
      Investment Holdings (Proprietary) Limited and Reserve Bank of Malawi
      (Incorporated by reference to Exhibit 10.9 to Amendment No. 2 to our
      Registration Statement on Form S-4/A, filed on April 21, 2004 (Commission
      File No. 333-112463))                                     
|10.9  | Non Exclusive UEPS License Agreement between Net 1
      Investment Holdings (Proprietary) Limited and SIA Netcards (Incorporated
      by reference to Exhibit 10.10 to Amendment No. 2 to our Registration
      Statement on Form S-4/A, filed on April 21, 2004 (Commission File No.
      333-112463))                                                 
|10.10 | Technology License Agreement between Net 1 Investment
      Holdings (Proprietary) Limited and Visa International Service Association
      (Incorporated by reference to Exhibit 10.11 to our Registration Statement
      on Form S-1/A filed August 1, 2005 (Commission File No.
  333-125273))                                                          
|10.11 | Service Level Agreement between the Province of Eastern
      Cape Department of Social Development and CPS Eastern Cape (Proprietary)
      Limited (Incorporated by reference to Exhibit 10.12 to our Registration
      Statement on Form S-1/A filed August 1, 2005 (Commission File No.
      333-125273))                                             
|10.12 | Banking Facility between Nedbank Limited and Net 1
      Applied Technology Holdings Limited (Incorporated by reference to Exhibit
      10.13 to our Registration Statement on Form S-1/A filed August 1, 2005
      (Commission File No. 333-125273))                                                                                                     
|10.13 | Facility between Cash Paymaster Services Eastern Cape and
      Nedbank Limited (Incorporated by reference to Exhibit 10.14 to our
      Registration Statement on Form S-1/A filed August 1, 2005 (Commission File
      No. 333- 125273))                                                                                                                 
|10.14 | Addendum to Facility Letter  Approval of Increase
      Bridging Loan Facilities between Nedbank Limited and Net 1 Applied
      Technology Holdings Limited (Incorporated by reference to Exhibit 10.15 to
      our Registration Statement on Form S-1/A filed August 1, 2005 (Commission
      File No. 333-125273))                                    
|10.15 | Agreement between Nedcor Bank Limited and Net 1 Products
      (Proprietary) Limited (Incorporated by reference to Exhibit 10.16 to our
      Registration Statement on Form S-1/A filed August 1, 2005 (Commission File
      No. 333- 125273))                                                                                                            
|10.16 | Assignment of Copyright and License of Patents and Trade
      Marks between MetroLink (Proprietary) Limited and Net 1 Products
      (Proprietary) Limited (Incorporated by reference to Exhibit 10.17 to our
      Registration Statement on Form S-1/A filed August 1, 2005 (Commission File
      No. 333-125273))                                      

90

---

|10.17 | Patent and Technology Agreement by
        and between Net 1 Investment Holdings (Proprietary) Limited and Nedcor
        Bank Limited (Incorporated by reference to Exhibit 10.18 to our Registration
        Statement on Form S-1/A filed August 1, 2005 (Commission File No. 333-125273))                                                                                                                                                                                                                                                                                                                                                                                                                               
|----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.18 | Patent and Technology Agreement by and between Net
        1 Holdings S.a.r.l. and Net 1 Applied Technology Holdings Limited and
        Nedcor Bank Limited (Incorporated by reference to Exhibit 10.19 to our
        Registration Statement on Form S-1/A filed August 1, 2005 (Commission
        File No. 333-125273))                                                                                                                                                                                                                                                                                                                                                                                                 
|10.19 | Agreement between Nedbank Limited and
        Net 1 UEPS Technologies, Inc. and Net 1 Applied Technologies South Africa
        Limited (Incorporated by reference to Exhibit 10.20 to our Registration
        Statement on Form S-1/A filed August 1, 2005 (Commission File No. 333-125273))                                                                                                                                                                                                                                                                                                                                                                                                                              
|10.20 | Stock Purchase Agreement dated July 18, 2005, by and
        among CI Law Trustees Limited for the San Roque Trust, Dr. Serge C.P.
        Belamant, South African Private Equity Fund III, L.P., South African Private
        Equity Trust III, Brenthurst Private Equity II Limited, Brenthurst Private
        Equity South Africa I Limited, General Atlantic Partners 80, L.P., GapStar,
        LLC, GAP Coinvestments III, Brait International Limited, LLC, GAP Coinvestments
        IV, LLC, GAPCO GmbH & Co. KG and Net 1 UEPS Technologies, Inc. (Incorporated
        by reference to Exhibit 10.21 to our Registration Statement on Form S-1/A
        filed August 1, 2005 (Commission File No. 333-125273))
|10.21 | Placement Agent Agreement, dated July
        18, 2005, among Morgan Stanley & Co. Incorporated and J.P. Morgan
        Securities Inc., as Placement Agents, the sellers party thereto, and Net
        1 UEPS Technologies, Inc. (Incorporated by reference to Exhibit 10.22
        to our Registration Statement on Form S-1/A filed August 1, 2005 (Commission
        File No. 333-125273))                                                                                                                                                                                                                                                                                                                           
|10.22 | Amendment No. 1 to the Stock Purchase
        Agreement dated as of August 11, 2005                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|10.23 | Stock Option Agreement dated as of January 9, 2006,
        by and between Net 1 UEPS Technologies, Inc. and David A. Schwarzbach
        (Incorporated by reference to Exhibit 10.24 to our Quarterly Report on
        Form 10-Q filed February 7, 2006 (Commission File No. 000-31203))                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.24 | Employment Agreement dated as of January
        9, 2006, by and between Net 1 UEPS Technologies, Inc. and David A. Schwarzbach
        (Incorporated by reference to Exhibit 10.25 to our Quarterly Report on
        Form 10-Q filed February 7, 2006 (Commission File No. 000-31203))                                                                                                                                                                                                                                                                                                                                                                                                                                    
|10.25 | Service level agreement dated March 31, 2006, between
        the Limpopo Provincial Government in its Department of Health and Social
        Development and Cash Paymaster Services (Northern) (Pty) Ltd (Incorporated
        by reference to Exhibit 10.26 to our Quarterly Report on Form 10-Q filed
        May 9, 2006 (Commission File No. 000-31203))                                                                                                                                                                                                                                                                                                                                                             
|10.26 | Addendum to service level
        agreement dated as of April 14, 2006, entered into by and between the
        KwaZulu-Natal Provincial Government, in its Department of Welfare and
        Population Development and Cash Paymaster Services (KwaZulu-Natal) (Pty)
        (Ltd)                                                                                                                                                                                                                                                                                                                                                                                                                                        
|14    | Amended and Restated Code of Ethics (Incorporated by
        reference to Exhibit 14.1 to our Form 8-K filed June 7, 2005)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|21    | Subsidiaries
        of Registrant                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|23    | Consent of Independent Registered
        Public Accounting Firm                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|31.1  | Certification
        of Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a)
        under the Securities Exchange Act of 1934, as amended                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|31.2  | Certification of Principal
        Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the
        Securities Exchange Act of 1934, as amended                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|32    | Certification
        pursuant to 18 U.S.C. Section 1350                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

91

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.

NET 1 UEPS TECHNOLOGIES, INC.

By: /s/ Serge C.P. Belamant

Serge C.P. BelamantChief Executive
Officer, Chairman of the Board and Director

Date: August 29, 2006

Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.

|NAME                               | TITLE                                                       | DATE           
|---------------------------------- | ----------------------------------------------------------- | ---------------
|                                   |                                                             |                
|                                   | Chief Executive Officer and
      Chairman of the Board and | August 29, 2006
|/s/ Serge C.P. Belamant            | Director (Principal Executive
      Officer)                |                
|Serge C.P. Belamant                |                                                             |                
|                                   |                                                             |                
|                                   |                                                             |                
|                                   | Chief Financial Officer,
      Treasurer and Secretary and  | August 29, 2006
|/s/ Herman Gideon Kotze            | Director (Principal Financial and
      Accounting Officer) |                
|Herman Gideon Kotze                |                                                             |                
|                                   |                                                             |                
|/s/ Antony Charles Ball            | Director                                                    | August 29, 2006
|Antony Charles Ball                |                                                             |                
|                                   |                                                             |                
|/s/ Chad Leonard Smart             | Director                                                    | August 29, 2006
|Chad Leonard Smart                 |                                                             |                
|                                   |                                                             |                
|/s/ Christopher Stefan Seabrooke   | Director                                                    | August 29, 2006
|Christopher Stefan Seabrooke       |                                                             |                
|                                   |                                                             |                
|/s/ Alasdair Jonathan Kemsley Pein | Director                                                    | August 29, 2006
|Alasdair Jonathan Kemsley Pein     |                                                             |                
|                                   |                                                             |                
|/s/ Paul Edwards                   | Director                                                    | August 29, 2006
|Paul Edwards                       |                                                             |                
|                                   |                                                             |                
|/s/ Florian P. Wendelstadt         | Director                                                    | August 29, 2006
|Floridan P. Wendelstadt            |                                                             |                

92

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FORM 10-K  ITEM 8

NET 1 UEPS. TECHNOLOGIES, INC.

LIST OF CONSOLIDATED FINANCIAL STATEMENTS

|Report of the Independent
      Registered Public Accounting Firm  Deloitte & Touche (South Africa)                      | F-2
|------------------------------------------------------------------------------------------------------------------------- | ---
|                                                                                                                          |    
|Consolidated balance sheets
      as of June 30, 2006 and 2005                                                            | F-3
|                                                                                                                          |    
|Consolidated statements
      of operations for the years ended June 30, 2006, 2005 and 2004                              | F-4
|                                                                                                                          |    
|Consolidated statements
      of movements in shareholders equity for the years ended June 30, 2006,
      2005 and 2004 | F-5
|                                                                                                                          |    
|Consolidated statements
      of cash flows for the years ended June 30, 2006, 2005 and 2004                              | F-6
|                                                                                                                          |    
|Notes to the consolidated
      financial statements                                                                      | F-7

F-1

---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To The Shareholders of Net 1 UEPS Technologies, Inc.

We have audited the accompanying consolidated balance sheets
  of Net 1 UEPS Technologies, Inc. and subsidiaries (the Company)
  as of June 30, 2006 and 2005 and the related consolidated statements of income,
  shareholders equity and cash flows for each of the three years in the
  period ended June 30, 2006. These financial statements are the responsibility
  of the Companys management. Our responsibility is to express an opinion
  on these financial statements based on our audits.

Scope

We conducted our audits in accordance with 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
  examining, on a test basis, evidence supporting the amounts and disclosures
  in the financial statements. An audit also includes assessing the accounting
  principles used and significant estimates made by management, as well as evaluating
  the overall financial statement presentation. We believe that our audits provide
  a reasonable basis for our opinion.

Audit opinion

In our opinion, such consolidated financial statements, referred
  to above, present fairly, in all material respects, the financial position of
  the Company at June 30, 2006 and 2005 and the results of its operations and
  its cash flows for each of the three years in the period ended June 30, 2006
  in conformity with accounting principles generally accepted in the United States
  of America.

As discussed in Note 12 to the financial statements, in 2006
  the Company changed its method of accounting for stock based compensation to
  conform to Statement of Financial Accounting Standards No. 123R, *Share-Based
  Payment*, effective July 1, 2005. The Statement was adopted using the modified
  prospective method and accordingly prior periods’ information has not
  been restated .

We have also audited, in accordance with the standards of the
  Public Company Accounting Oversight Board (United States), the effectiveness
  of the Company's internal control over financial reporting as of June 30, 2006,
  based on the criteria established in Internal ControlIntegrated Framework
  issued by the Committee of Sponsoring Organizations of the Treadway Commission
  (COSO) and our report dated August 29, 2006, expressed an unqualified opinion
  on management's assessment of the effectiveness of the Company's internal control
  over financial reporting and an unqualified opinion on the effectiveness of
  the Company's internal control over financial reporting.

/s/ Deloitte & Touche (South Africa)



Chartered Accountants (SA) Johannesburg, Republic of South Africa 
  August 29, 2006



F-2

---

NET 1 UEPS TECHNOLOGIES, INC. 
  CONSOLIDATED BALANCE SHEETS 
  as of June 30, 2006 and 2005

|                                                                               |   | 2006                              |   |   | 2005    | 
|------------------------------------------------------------------------------ | - | --------------------------------- | - | - | ------- | 
|                                                                               |   | (In thousands, except share data) |  
|                                                                               |   |                                   |   |   |         | 
|ASSETS                                                                         |   |                                   |   |   |         | 
|CURRENT ASSETS                                                                 |   |                                   |   |   |         | 
|Cash and cash equivalents                                                      | $ | 189,735                           |   | $ | 107,749 | 
|Pre-funded
      social welfare grants receivable                              |   | 17,223                            |   |   | 11,567  | 
|Accounts receivable, net                                                       |   | 21,219                            |   |   | 15,293  | 
|Finance
      loans receivable, net                                            |   | 6,713                             |   |   | 7,760   | 
|Deferred expenditure on smart cards                                            |   | 656                               |   |   | 3,014   | 
|Inventory                                                                      |   | 1,935                             |   |   | 1,927   | 
|Deferred income taxes                                                          |   | 3,237                             |   |   | 3,354   | 
|Total
      current assets                                                     |   | 240,718                           |   |   | 150,664 | 
|                                                                               |   |                                   |   |   |         | 
|LONG-TERM RECEIVABLE                                                           |   | 946                               |   |   | 969     | 
|PROPERTY, PLANT AND EQUIPMENT, net                                             |   | 3,757                             |   |   | 6,216   | 
|EQUITY-ACCOUNTED INVESTMENTS                                                   |   | 4,986                             |   |   | 1,325   | 
|GOODWILL                                                                       |   | 13,923                            |   |   | 14,636  | 
|INTANGIBLE ASSETS, net                                                         |   | 5,649                             |   |   | 7,944   | 
|                                                                               |   |                                   |   |   |         | 
|TOTAL ASSETS                                                                   |   | 269,979                           |   |   | 181,754 | 
|                                                                               |   |                                   |   |   |         | 
|LIABILITIES                                                                    |   |                                   |   |   |         | 
|CURRENT LIABILITIES                                                            |   |                                   |   |   |         | 
|Bank
      overdraft                                                           |   | 20                                |   |   | -       | 
|Accounts
      payable                                                         |   | 2,073                             |   |   | 2,315   | 
|Other
      payables                                                           |   | 28,575                            |   |   | 18,000  | 
|Income
      taxes payable                                                     |   | 12,455                            |   |   | 14,038  | 
|Total
      current liabilities                                                |   | 43,123                            |   |   | 34,353  | 
|                                                                               |   |                                   |   |   |         | 
|DEFERRED INCOME TAXES                                                          |   | 17,846                            |   |   | 10,399  | 
|                                                                               |   |                                   |   |   |         | 
|TOTAL LIABILITIES                                                              |   | 60,969                            |   |   | 44,752  | 
|                                                                               |   |                                   |   |   |         | 
|SHAREHOLDERS EQUITY                                                           |   |                                   |   |   |         | 
|COMMON STOCK, net of treasury shares                                           |   |                                   |   |   |         | 
|Authorized
      shares: 83,333,333 with $0.001 par value;                     |   |                                   |   |   |         | 
|Issued
      and outstanding shares: 2006: 49,596,879; 2005: 28,548,269        |   | 50                                |   |   | 29      | 
|                                                                               |   |                                   |   |   |         | 
|SPECIAL CONVERTIBLE PREFERRED STOCK                                            |   |                                   |   |   |         | 
|Authorized
      shares: 50,000,000 with $0.001 par value;                     |   |                                   |   |   |         | 
|Issued
      and outstanding shares: 2006: 7,315,099; 2005: 26,733,521         |   | 7                                 |   |   | 27      | 
|                                                                               |   |                                   |   |   |         | 
|B CLASS PREFERENCE SHARES                                                      |   |                                   |   |   |         | 
|Authorized
      shares: 330,000,000 with $0.001 par value;                    |   |                                   |   |   |         | 
|Issued
      and outstanding shares (net of shares held by the Company): 2006: |   |                                   |   |   |         | 
|53,900,752;
      2005: 196,983,841                                            |   | 9                                 |   |   | 31      | 
|                                                                               |   |                                   |   |   |         | 
|ADDITIONAL PAID-IN CAPITAL                                                     |   | 105,792                           |   |   | 71,960  | 
|                                                                               |   |                                   |   |   |         | 
|TREASURY SHARES ISSUED: 2006: 147,973; 2005: 0                                 |   | (3,958                            | ) |   | -       | 
|                                                                               |   |                                   |   |   |         | 
|ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME                                  |   | (9,763                            | ) |   | 7,314   | 
|                                                                               |   |                                   |   |   |         | 
|RETAINED EARNINGS                                                              |   | 116,873                           |   |   | 57,641  | 
|                                                                               |   |                                   |   |   |         | 
|TOTAL SHAREHOLDERS EQUITY                                                     |   | 209,010                           |   |   | 137,002 | 
|                                                                               |   |                                   |   |   |         | 
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                     | $ | 269,979                           |   | $ | 181,754 | 

See accompanying notes to consolidated financial statements.

F-3

---

NET 1 UEPS TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS for the years ended June 30, 2006, 2005 and 2004

|                                                               |   | 2006                                  |  |   | 2005    |  |   | 2004    | 
|-------------------------------------------------------------- | - | ------------------------------------- |  | - | ------- |  | - | ------- | 
|                                                               |   | (In thousands, except per share data) | 
|                                                               |   |                                       | 
|REVENUE                                                        | $ | 196,098                               |  | $ | 176,290 |  | $ | 131,098 | 
|                                                               |   |                                       |  |   |         |  |   |         | 
|EXPENSE                                                        |   |                                       |  |   |         |  |   |         | 
|                                                               |   |                                       |  |   |         |  |   |         | 
|Cost of goods sold, IT
      processing, servicing and support |   | 50,619                                |  |   | 50,682  |  |   | 39,134  | 
|                                                               |   |                                       |  |   |         |  |   |         | 
|General and administration                                     |   | 48,627                                |  |   | 45,897  |  |   | 39,677  | 
|                                                               |   |                                       |  |   |         |  |   |         | 
|Depreciation and amortization                                  |   | 5,710                                 |  |   | 6,591   |  |   | 5,676   | 
|                                                               |   |                                       |  |   |         |  |   |         | 
|Costs related to public
      offering and Nasdaq listing      |   | 1,529                                 |  |   | 1,817   |  |   | -       | 
|                                                               |   |                                       |  |   |         |  |   |         | 
|Reorganization charges                                         |   | -                                     |  |   | -       |  |   | 11,133  | 
|                                                               |   |                                       |  |   |         |  |   |         | 
|OPERATING INCOME                                               |   | 89,613                                |  |   | 71,303  |  |   | 35,478  | 
|                                                               |   |                                       |  |   |         |  |   |         | 
|INTEREST INCOME, net                                           |   | 5,889                                 |  |   | 2,389   |  |   | 3,640   | 
|                                                               |   |                                       |  |   |         |  |   |         | 
|INCOME BEFORE INCOME TAXES                                     |   | 95,502                                |  |   | 73,692  |  |   | 39,118  | 
|                                                               |   |                                       |  |   |         |  |   |         | 
|INCOME TAX EXPENSE                                             |   | 36,653                                |  |   | 29,666  |  |   | 25,927  | 
|                                                               |   |                                       |  |   |         |  |   |         | 
|INCOME FROM CONTINUING OPERATIONS BEFORE EARNINGS
      FROM   |   |                                       |  |   |         |  |   |         | 
|EQUITY-ACCOUNTED INVESTMENTS                                   |   | 58,849                                |  |   | 44,026  |  |   | 13,191  | 
|                                                               |   |                                       |  |   |         |  |   |         | 
|EARNINGS FROM EQUITY-ACCOUNTED INVESTMENTS                     |   | 383                                   |  |   | 536     |  |   | 87      | 
|                                                               |   |                                       |  |   |         |  |   |         | 
|NET INCOME                                                     |   | 59,232                                |  |   | 44,562  |  |   | 13,278  | 
|                                                               |   |                                       |  |   |         |  |   |         | 
|Net income per share                                           |   |                                       |  |   |         |  |   |         | 
|                                                               |   |                                       |  |   |         |  |   |         | 
|Basic earnings  common stock and
      linked units           |   | 1.05                                  |  |   | 0.81    |  |   | 0.40    | 
|Diluted earnings 
      common stock and linked units         |   | 1.03                                  |  |   | 0.80    |  |   | 0.38    | 

See accompanying notes to consolidated financial statements.

F-4

---

NET 1 UEPS Technologies, Inc.CONSOLIDATED STATEMENTS OF MOVEMENTS IN SHAREHOLDERS' EQUITY 
  for the years ended June 30, 2006, 2005 and 2004

Special Convertible
      
      
      B ClassCommon Stock
      
      
      Preferred
        Stock
      
      
      Preference
        Shares
      
      
      
      
      
      AccumulatedNumber
      
      
      
      
      
      
      
      
      Additional
      
      
      Number
      
      
      
      
      
      Number
      
      
      
      
      
      
      
      
      Otherof
      
      
      
      
      
      Treasury
      
      
      Paid-in
      
      
      of
      
      
      
      
      
      of
      
      
      
      
      
      Retained
      
      
      Comprehensive
      
      
      
      
      
      ComprehensiveShares
      
      
      Amount
      
      
      shares
      
      
      Capital
      
      
      Shares
      
      
      Amount
      
      
      Shares
      
      
      Amount
      
      
      Earnings
      
      
      Income (loss)
      
      
      Total
      
      
      Income (loss)'000
      
      
      '000
      
      
      '000
      
      
      
      
      
      '000
      
      
      
      
      
      '000
      
      
      '000
      
      
      '000
      
      
      '000
      
      
      '000Balance - July 1, 2003
      
      32,161,190
      
      $
      6
      
      
      
      
      $
      40,571
      
      
      -
      
      $
      0
      
      
      -
      
      $
      0
      
      $
      30,889
      
      $
      (962
      )
      $
      70,504Net Income
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      13,278
      
      
      
      
      
      13,278
      
      
      13,278Movement in Foreign CurrencyTranslation Reserve
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      16,001
      
      
      16,001
      
      
      16,001Items related to the AplitectransactionDividends paid
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      (35,665
      )
      
      
      
      
      (35,665
      )Cash distribution to Aplitecshareholders
      
      
      
      
      
      
      
      
      
      
      (37,002
      )
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      (37,002
      )Reorganization of share capital
      
      (31,910,238
      )
      
      (6
      )
      
      
      
      
      (64
      )
      
      31,910,238
      
      $
      32
      
      
      235,128,068
      
      $
      38
      
      
      
      
      
      
      
      
      -Issue of linked units to Brait inaccordance with underwritingagreement
      
      (250,952
      )
      
      -
      
      
      
      
      
      847
      
      
      250,952
      
      
      -
      
      
      1,849,119
      
      
      -
      
      
      
      
      
      
      
      
      847Reverse acquisition of Net 1 by Aplitec
      
      2,642,143
      
      
      3
      
      
      
      
      
      7,931
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      7,934Issue of common stock
      
      17,610,238
      
      
      18
      
      
      
      
      
      52,813
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      52,831Stock issued in accordance with 2004Stock Incentive Plan
      
      1,453,490
      
      
      1
      
      
      
      
      
      4,359
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      4,360Issue of stock for transaction fees
      
      833,333
      
      
      1
      
      
      
      
      
      2,499
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      2,500Balance - June 30, 2004
      
      22,539,204
      
      
      23
      
      
      -
      
      
      71,954
      
      
      32,161,190
      
      
      32
      
      
      236,977,187
      
      
      38
      
      
      8,502
      
      
      15,039
      
      
      95,588
      
      
      29,279Net Income
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      44,562
      
      
      
      
      
      44,562
      
      
      44,562Recognition of deferred tax asset,net of valuation allowance
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      4,577
      
      
      
      
      
      4,577Exercise of options by holders
      
      581,396
      
      
      1
      
      
      
      
      
      1,743
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      1,744Loan note consideration forstock issued in accordance with2004 Stock Incentive Plan
      
      
      
      
      
      
      
      
      
      
      (1,744
      )
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      (1,744
      )Conversion from specialconvertible preferred stock tocommon stock and cession of Bclass preference shares and Bclass loans to Net 1 as a result oftrigger events
      
      5,427,669
      
      
      5
      
      
      
      
      
      7
      
      
      (5,427,669
      )
      
      (5
      )
      
      (39,993,346
      )
      
      (7
      )
      
      
      
      
      
      
      
      -Movement in Foreign CurrencyTranslation Reserve
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      (7,725
      )
      
      (7,725
      )
      
      (7,725
      )Balance - June 30, 2005
      
      28,548,269
      
      
      29
      
      
      -
      
      
      71,960
      
      
      26,733,521
      
      
      27
      
      
      196,983,841
      
      
      31
      
      
      57,641
      
      
      7,314
      
      
      137,002
      
      
      36,837Net Income
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      59,232
      
      
      
      
      
      59,232
      
      
      59,232Issue of shares in public offering
      
      1,538,794
      
      
      1
      
      
      
      
      
      33,852
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      33,853Share issue costs
      
      
      
      
      
      
      
      
      
      
      (2,370
      )
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      (2,370
      )Exercise of options by holders
      
      239,367
      
      
      
      
      
      
      
      
      1,605
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      1,605Settlement of loan noteconsideration for stock issuedin accordance with 2004 StockIncentive Plan
      
      
      
      
      
      
      
      
      
      
      1,130
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      1,130Loan note consideration forstock issued in accordance with2004 Stock Incentive Plan
      
      
      
      
      
      
      
      
      
      
      (557
      )
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      (557
      )Stock compensation charge
      
      
      
      
      
      
      
      
      
      
      150
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      150Conversion from specialconvertible preferred stock tocommon stock and cession of Bclass preference shares and Bclass loans to Net 1 as a result oftrigger events
      
      19,418,422
      
      
      20
      
      
      
      
      
      22
      
      
      (19,418,422
      )
      
      (20
      )
      
      (143,083,089
      )
      
      (22
      )
      
      
      
      
      
      
      
      -Acquisition of treasury sharesat market value
      
      (147,973
      )
      
      -
      
      
      (3,958
      )
      
      -
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      (3,958
      )Movement in Foreign CurrencyTranslation Reserve
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      
      (17,077
      )
      
      (17,077
      )
      
      (17,077
      )Balance - June 30, 2006
      
      49,596,879
      
      $
      50
      
      $
      (3,958
      )
      $
      105,792
      
      
      7,315,099
      
      $
      7
      
      
      53,900,752
      
      $
      9
      
      $
      116,873
      
      $
      (9,763
      )
      $
      209,010
      
      $
      42,155


See accompanying notes to consolidated financial statements.

F-5

---

NET 1 UEPS TECHNOLOGIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS for the years ended June 30, 2006, 2005 and 2004

|                                                                          |   | 2006    |   |   | 2005         |   |   | 2004    |  
|------------------------------------------------------------------------- | - | ------- | - | - | ------------ | - | - | ------- | -
|                                                                          |   |         |   |   | In thousands |   |   |         |  
|                                                                          |   |         |   |   |              |   |   |         |  
|Cash flows from operating activities                                      |   |         |   |   |              |   |   |         |  
|Cash received from customers                                              | $ | 181,313 |   | $ | 174,704      |   | $ | 123,177 |  
|Cash paid to suppliers and employees                                      |   | (83,434 | ) |   | (101,024     | ) |   | (72,825 | )
|Cash generated by operations                                              |   | 97,879  |   |   | 73,680       |   |   | 50,352  |  
|Interest received                                                         |   | 14,496  |   |   | 16,308       |   |   | 15,362  |  
|Finance costs paid                                                        |   | (8,741  | ) |   | (13,974      | ) |   | (11,698 | )
|Income taxes paid                                                         |   | (27,857 | ) |   | (37,872      | ) |   | (12,121 | )
|Net cash provided by operating activities                                 |   | 75,777  |   |   | 38,142       |   |   | 41,895  |  
|                                                                          |   |         |   |   |              |   |   |         |  
|Cash flows from investing activities                                      |   |         |   |   |              |   |   |         |  
|Capital expenditures                                                      |   | (1,821  | ) |   | (3,436       | ) |   | (2,802  | )
|Proceeds from disposal of property, plant and equipment                   |   | 336     |   |   | 39           |   |   | 62      |  
|Proceeds from disposal of business                                        |   | 10      |   |   | -            |   |   | -       |  
|Long-term receivable granted                                              |   | -       |   |   | -            |   |   | (937    | )
|Acquisition of and advance of loans to equity-accounted
      investments |   | (4,030  | ) |   | -            |   |   | (707    | )
|Acquisition of intangibles                                                |   | -       |   |   | -            |   |   | (1,345  | )
|Cash received on acquisition of Net 1 UEPS
      Technologies, Inc.       |   | -       |   |   | -            |   |   | 8       |  
|Net cash used in investing activities                                     |   | (5,505  | ) |   | (3,397       | ) |   | (5,721  | )
|                                                                          |   |         |   |   |              |   |   |         |  
|Cash flows from financing activities                                      |   |         |   |   |              |   |   |         |  
|Proceeds from issue of common stock                                       |   | 33,661  |   |   | -            |   |   | 52,831  |  
|Proceeds from issue of special convertible preferred stock                |   | -       |   |   | -            |   |   | 847     |  
|Acquisition of treasury stock                                             |   | (3,958  | ) |   | -            |   |   | -       |  
|Proceeds from bank overdraft                                              |   | 20      |   |   | -            |   |   | 17      |  
|Repayment of bank overdraft                                               |   | -       |   |   | (19          | ) |   | -       |  
|Cash distributions to shareholders                                        |   | -       |   |   | -            |   |   | (37,002 | )
|Dividends paid                                                            |   | -       |   |   | -            |   |   | (40,753 | )
|Net cash provided by (used in) financing
      activities                 |   | 29,723  |   |   | (19          | ) |   | (24,060 | )
|                                                                          |   |         |   |   |              |   |   |         |  
|Effect of exchange rate changes on cash                                   |   | (18,009 | ) |   | (7,259       | ) |   | 13,855  |  
|                                                                          |   |         |   |   |              |   |   |         |  
|Net increase in cash and cash equivalents                                 |   | 81,986  |   |   | 27,467       |   |   | 25,969  |  
|                                                                          |   |         |   |   |              |   |   |         |  
|Cash and cash equivalents  beginning of period                           |   | 107,749 |   |   | 80,282       |   |   | 54,313  |  
|                                                                          |   |         |   |   |              |   |   |         |  
|Cash and cash equivalents at end of period                                | $ | 189,735 |   | $ | 107,749      |   | $ | 80,282  |  

See accompanying notes to consolidated financial statements.

F-6

---

|NET 1 UEPS TECHNOLOGIES, INC.                                                            
|-----------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                           
|for the years ended June 30, 2006, 2005 and 2004                                         
|(All amounts stated
      in thousands of United States Dollars, unless otherwise stated)

**1.**     **DESCRIPTION
  OF BUSINESS AND BASIS OF PRESENTATION**

***Description
  of Business***

Net
  1 UEPS Technologies, Inc. (Net1) was incorporated in the State of
  Florida on May 8, 1997, and was, prior to the transaction described below, engaged
  in the business of commercializing the smart card technology based on the Universal
  Electronic Payment System (UEPS) and Funds Transfer System (FTS)
  through the development of strategic alliances with national and international
  bank and card service organizations.

Net
  1 Applied Technology Holdings Limited (Aplitec) was a holding company
  established and existing under the laws of Republic of South Africa. Aplitecs
  subsidiaries employed specialized smart card technologies to add efficiency
  to commercial activities requiring money transfers, payment systems, and other
  electronic data applications. Through its subsidiaries, Aplitec was involved
  in the administration, management and payment of social welfare grants and handles
  the payment of pensions on behalf of the government in five of the nine provinces
  of South Africa. Aplitec also operated micro-lending businesses with more than
  100 branches throughout South Africa and developed, marketed and licensed administrative
  and payment solutions for the micro-lending industry. In addition, Aplitec provided
  financial services to its customers through its proprietary smart card platform
  and provided technical, operational, business solutions and outsourcing services
  to companies.

As
  a result of the transaction described below, the former shareholders of Aplitec
  obtained a majority voting interest in Net1 on June 7, 2004. Generally accepted
  accounting principles require that the company whose shareholders retain a majority
  interest in a combined business be treated as the acquirer for accounting purposes.
  Consequently, this transaction has been accounted for as a reverse acquisition.
  Accordingly, all the financial information included in this Form 10-K unless
  indicated otherwise for the periods up to June 7, 2004 represent the results
  of Aplitec prior to the date it acquired Net1. For the period from June 7, 2004
  the financial information presented herein represents the consolidated results
  of Aplitec and Net1 with Net1 as the acquired entity. We refer to the continuing
  combined entity of Net1 and Aplitec and their consolidated subsidiaries as the
  Company. We refer to the historic Aplitec business before the transaction
  as Aplitec, and the subsidiary that legally acquired the business
  of Aplitec as New Aplitec. Net1 refers solely to the
  Florida corporation and the business of Net1 prior to the Aplitec transaction.

Although
  Aplitec is deemed to be the acquiring company for financial and reporting purposes,
  the legal status of Net1 as the surviving corporation has not changed.

The
  Aplitec transaction had the following elements:

- On June 7, 2004, Net 1 Applied Technologies South Africa Limited (New
      Aplitec), a holding company established and existing under the laws
      of South Africa, completed a transaction whereby it acquired substantially
      all of the assets and liabilities of Aplitec for $127.53 million (or ZAR825,641,638)
      (the net purchase price). The net purchase price together with
      the cash retained in Aplitec was distributed as an advance distribution
      to Aplitec shareholders.
- The New Aplitec Participation Trust (the South African Trust)
      is a South African bewind trust established and existing under the laws
      of South Africa.
- The Aplitec Holdings Participation Trust (the Cayman Trust)
      is a purpose trust created under Part VIII of the Trust Law (2001 Revision)
      of the Cayman Islands.
- The Aplitec shareholders had the option of either electing to receive 190
      South African cents per share and an investment in New Aplitec in the form
      of a nil paid renounceable letter of allocation representing an interest
      in a New Aplitec B class preference share (B class preference shares)
      and B class loans held by the South African Trust (collectively the reinvestment
      option) or cash of 500 South African cents per share. Shareholders
      who elected to receive the reinvestment option are described as reinvesting
      shareholders. In addition to the liquidation dividend, reinvesting
      shareholders were granted, units in the South African Trust with the right
      to receive, for no additional consideration, special convertible preferred
      stock of Net1, which are held by the Cayman Trust. These shares may be converted,
      upon the occurrence of a trigger event, to Net1 common stock on a one-for-one
      basis. A trigger event can occur when a unit holder gives notice to the
      South African Trust in writing of its intention to convert some or all of
      its B class preference shares and B class loans. A trigger event also includes
      the abolition or relaxation of Exchange Controls by the South African Reserve
      Bank to permit reinvesting shareholders to hold Net1 common stock directly
      or the winding up or placing under judicial management of New Aplitec or
      Net1.

F-7

---

|NET 1 UEPS TECHNOLOGIES, INC.                                                            
|-----------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                           
|for the years ended June 30, 2006, 2005 and 2004                                         
|(All amounts stated
      in thousands of United States Dollars, unless otherwise stated)

1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION (continued)

Description of Business (continued)

- Upon receipt of notice of a trigger event, the trustee of the South African
      Trust will request delivery from the Cayman Trust of the number of shares
      of Net1s special convertible preferred stock attributable to the units
      being converted. Upon delivery by the Cayman Trust, the South African Trust
      will transfer these shares of special convertible preferred stock, along
      with a proportionate number of B class preference shares and loan accounts
      to Net1 in exchange for shares of Net1s common stock.
- On June 25, 2004, shareholders holding 1,849,119 of Aplitecs issued
      shares elected the cash option. The remaining shareholders holding 235,128,068
      shares elected the reinvestment option. Aplitec entered into an underwriting
      agreement with South African Private Equity Trust III (SAPET)
      and South African Private Equity Fund III L.P. (SAPEF and, together
      with SAPET, the Underwriters). In terms of this arrangement
      the Underwriters agreed to take up all of the rights in the South African
      Trust of the reinvestment option not taken up by Aplitecs shareholders,
      up to the maximum of $70 million (or ZAR437 million), which was equivalent
      to 64.7% of the reinvestment option, at a price of $0.45 (or ZAR2.85) per
      Aplitec share not involved in the reinvestment. The Underwriters paid $0.84
      million (or ZAR5,269,989) for 1,849,119 units in the South African Trust
      in terms of the underwriting agreement.
- On May 27, 2004, Net1 issued the equivalent of 32,161,190 of its special
      convertible preferred stock to the Cayman Trust, to be held for the benefit
      of Aplitecs shareholders that elected the reinvestment option and
      the Underwriters.
- The combination of instruments issued to the reinvesting shareholders (B
      class preference shares and B Class loans in New Aplitec as well as rights
      to receive special convertible preferred stock in Net1) are referred to
      as linked units and the reinvesting shareholders that hold these
      instruments are referred to as linked unit holders. Both the
      Net1 common stock and the linked units have been reflected as shareholders
      equity. Refer to Note 10  Capital Structure and Creditor Rights Attached
      to the B Class Loans for a detailed explanation of this treatment.

On
  June 13, 2005, Net1 effected a one-for-six reverse stock split. Under Florida
  corporate law the reverse stock split was not required to be approved by the
  Net1s shareholders. The following were previously retroactively restated
  as a result of the reverse stock split:

- number of shares of common and special convertible stock authorized, issued
      and outstanding, and the conversion ratio applicable to the securities included
      in the linked units issued in the transaction;
- stock issued under any of Net1s stock compensation plans, including
      stock issued pursuant to the Net1s 2004 Stock Incentive Plan;
- all per share measures, including, but not limited to basic and diluted
      earnings per share;
- certain price per share information related to the June 2004 Aplitec transaction;
      and
- reallocation of amounts from common stock to additional paid in capital
      as the par value of $0.001 per share did not change.

**2.**     **SIGNIFICANT
  ACCOUNTING POLICIES**

***Basis
  of presentation***

The
  accompanying consolidated financial statements include all majority owned subsidiaries
  over which Net1 exercises control and have been prepared in accordance with
  accounting principles generally accepted in the United States of America (GAAP).

***Principles
  of consolidation***

The
  financial statements of entities which are controlled by Net1, referred to as
  subsidiaries, are consolidated. Inter-company accounts and transactions are
  eliminated upon consolidation.

F-8

---

|NET 1 UEPS TECHNOLOGIES, INC.                                                            
|-----------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                           
|for the years ended June 30, 2006, 2005 and 2004                                         
|(All amounts stated
      in thousands of United States Dollars, unless otherwise stated)

**2.**     **SIGNIFICANT
  ACCOUNTING POLICIES (continued)**

***Use
  of estimates***

The
  preparation of financial statements in conformity with GAAP requires management
  to make estimates and assumptions that affect the reported amounts of assets
  and liabilities and disclosure of contingent assets and liabilities at the date
  of the financial statements and the reported amounts of revenues and expenses
  during the reporting period. Actual results could differ from those estimates.

***Changes
  to comparative information***

Certain
  minor adjustments and reclassifications have been made to the comparative information
  in order to make it comparable with the current year disclosures.

***Property,
  plant and equipment***

Property,
  plant and equipment are shown at cost less accumulated depreciation. Property,
  plant and equipment are depreciated on the straight-line basis at rates which
  are estimated to amortize the assets to their anticipated residual values over
  their useful lives. Within the following asset classifications, the expected
  economic lives are approximately:

| | Computer equipment     | 3 years      
| | ---------------------- | -------------
| | Office equipment       | 3 years      
| | Vehicles               | 4 to 5 years 
| | Furniture and fittings | 5 to 10 years

The
  gain or loss arising on the disposal or retirement of an asset is determined
  as the difference between the sales proceeds and the carrying amount of the
  asset and is recognized in income.

***Leasehold
  improvement costs***

Costs
  incurred in the adaptation of leased properties to serve the requirements of
  the Company are capitalized and amortized over the shorter of the term of the
  lease and the contract for which the lease has been entered into.

***Income
  taxes***

The
  Company provides for income taxes using the asset and liability method. This
  approach recognizes the amount of taxes payable or refundable for the current
  year, as well as deferred tax assets and liabilities for the future tax consequence
  of events recognized in the financial statements and tax returns. Deferred income
  taxes are adjusted to reflect the effects of changes in tax laws or enacted
  tax rates. The tax rate in South Africa varies depending on whether income is
  distributed. The income tax rate is currently 29%, but upon distribution an
  additional tax (Secondary Tax on Companies, or STC) of 12.5% is
  due based on the amount of dividends declared net of dividends received during
  a dividend cycle. The Company therefore measures its income taxes and deferred
  income taxes using a combined rate of 36.89% . The income tax rate during the
  years ended June 30, 2005 and 2004 was 30%, and the combined rate was 37.78%
  . The decrease in the statutory rate of taxation for South African domiciled
  companies from 30% to 29% for all fiscal years ending on or after April 1, 2005
  was promulgated on July 19, 2005, which has resulted in a decrease in the Companys
  distributed rate from 37.78% to 36.89% for the fiscal year ended June 30, 2006.

In
  establishing the appropriate income tax valuation allowances, the Company assesses
  the realizability of its net deferred tax assets, and based on all available
  evidence, both positive and negative, determines whether it is more likely than
  not that the net deferred tax assets or a portion thereof will be realized.

F-9

---

|NET 1 UEPS TECHNOLOGIES, INC.                                                            
|-----------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                           
|for the years ended June 30, 2006, 2005 and 2004                                         
|(All amounts stated
      in thousands of United States Dollars, unless otherwise stated)

**2.**     **SIGNIFICANT
  ACCOUNTING POLICIES (continued)**

***Goodwill***

Goodwill
  represents the excess of the purchase price of an acquired enterprise over the
  fair values of the identifiable assets acquired and liabilities assumed. The
  Company tests for impairment of goodwill on an annual basis and at any other
  time if events or circumstances change that would more likely than not reduce
  the fair value of the reporting unit goodwill below its carrying amount.

Circumstances
  that could trigger an impairment test include but are not limited to: a significant
  adverse change in the business climate or legal factors; an adverse action or
  assessment by a regulator; unanticipated competition; loss of key personnel;
  the likelihood that a reporting unit or significant portion of a reporting unit
  will be sold or otherwise disposed; and, results of testing for recoverability
  of a significant asset group within a reporting unit.

If
  the carrying amount of the reporting unit goodwill exceeds the implied fair
  value of that goodwill, an impairment loss is recorded in net income. Measurement
  of the fair value of a reporting unit is based on one or more of the following
  fair value measures including: amounts at which the unit as a whole could be
  bought or sold in a current transaction between willing parties; using present
  value techniques of estimated future cash flows; or using valuation techniques
  based on multiples of earnings or revenue, or a similar performance measure.

***Intangible
  assets***

Intangible
  assets are shown at cost less accumulated amortization and are amortized over
  their useful lives, which vary between five and ten years. Intangible assets
  are periodically evaluated for recoverability, and those evaluations take into
  account events or circumstances that warrant revised estimates of useful lives
  or that indicate that impairment exists.

***Equity-accounted
  investments***

The
  Company uses the equity method to account for investments in companies when
  it has a significant influence but not control over the operations of the equity-accounted
  company. Under the equity method, the Company initially records the investment
  at cost and then adjusts the carrying value of the investment to recognize the
  proportional share of the equity-accounted companys net income (loss).
  In addition, dividends received from the equity-accounted company reduce the
  carrying value of our investment.

***Inventory***

Inventory
  is valued at the lower of cost and market value. Cost is determined on a first-in,
  first-out basis and includes transport and handling costs.

***Translation
  of foreign currencies***

The
  functional currency of the Company is the South African rand and its reporting
  currency is the U.S. dollar. The current rate method is used to translate the
  financial statements of the Company to U.S. dollars. Under the current rate
  method, assets and liabilities are translated at the exchange rates in effect
  at the balance sheet date. Revenues and expenses are translated at average rates
  for the period. Translation gains and losses are reported in accumulated other
  comprehensive income in shareholders equity.

Foreign
  exchange transactions are translated at the spot rate ruling at the date of
  the transaction. Monetary items are translated at the closing spot rate at the
  balance sheet date. Transactional gains and losses are recognized in income
  for the period

F-10

---

|NET 1 UEPS TECHNOLOGIES, INC.                                                            
|-----------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                           
|for the years ended June 30, 2006, 2005 and 2004                                         
|(All amounts stated
      in thousands of United States Dollars, unless otherwise stated)

**2.**     **SIGNIFICANT
  ACCOUNTING POLICIES (continued)**

***Revenue
  recognition***

The
  Company recognizes revenue when:

- there is persuasive evidence of an agreement or arrangement;
- delivery of products has occurred or services have been rendered;
- the sellers price to the buyer is fixed or determinable; and
- collectibility is reasonably assured.

The
  Companys principal revenue streams and their respective accounting treatments
  are discussed below:

Fees
  and commissions

The
  Company provides a State pension and welfare benefit distribution service to
  provincial governments in South Africa. Fees are computed based on the number
  of beneficiaries included in the government payfile. Fee income received for
  these services is recognized in the statement of operations when distributions
  have been made to the beneficiaries.

Beneficiaries
  are able to load their pension and welfare grants at merchants enrolled in the
  Companys participating retailer program in certain provinces. There is
  no charge to the beneficiary to load the grant onto a smart card at the merchant
  location, however, a fee is charged to the merchant for purchases made at the
  merchant using the smart card. A fee is charged to the merchant when the beneficiary
  makes a cash withdrawal. Fee income received for these services is recognized
  in the statement of operations when the transaction occurs.

The
  Company provides an automated payment collection service to third parties, for
  which it charges monthly fees. These fees are recognized in the statement of
  operations as the underlying services are performed.

Hardware
  sales

Revenue
  from hardware sales is recognized when risk of loss has transferred to the customer
  and there are no unfulfilled company obligations that affect the customer’s
  final acceptance of the arrangement. Any cost of warranties and remaining obligations
  that are inconsequential or perfunctory are accrued when the corresponding revenue
  is recognized.

Interest
  income

Interest
  income earned from micro-lending activities is recognized in the income statement
  as it falls due, using the effective interest rate method by reference to the
  constant interest rate stated in each loan agreement.

Capital
  and interest that is in arrears and determined to be doubtful is provided for
  in full if the capital outstanding has not been insured. The Company insures
  against losses of capital related to certain loans. For these loans, provision
  is made for the amount of interest previously recognized in the statement of
  operations if it is determined that the interest outstanding will not be collected.

F-11

---

|NET 1 UEPS TECHNOLOGIES, INC.                                                            
|-----------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                           
|for the years ended June 30, 2006, 2005 and 2004                                         
|(All amounts stated
      in thousands of United States Dollars, unless otherwise stated)

**2.**     **SIGNIFICANT
  ACCOUNTING POLICIES (continued)**

***Revenue
  recognition (continued)***

Systems
  implementation projects

The
  Company undertakes smart card system implementation projects. The hardware and
  software installed in these projects are in the form of customized systems,
  which ordinarily involve modification to meet the customers specifications.
  Software delivered under such arrangements is available to the customer permanently,
  subject to the payment of annual license fees. Revenue for such arrangements
  is recognized under the completed contract method, no income and profit being
  recognized until the contract is completed, save for annual license fees, which
  are recognized in the period to which they relate. Up-front and interim payments
  received are recorded as client deposits until customer acceptance.

Terminal
  rental income

The
  Company leases terminals to merchants enrolled in its merchant retail application.
  Operating rental income is recognized monthly on a straight-line basis in accordance
  with the lease agreement.

Other
  income

Revenue
  from service and maintenance activities is charged to customers on a time-and-materials
  basis and is recognized in the statement of operations as services are delivered
  to customers.

***Research
  and development expenditure***

Research
  and development expenditures are charged to net income in the periods in which
  they are incurred.

***Computer
  software development***

Costs
  in respect of the development of software intended for sale to licensees is
  accounted for in accordance with Financial Accounting Standards Board (FASB)
  Statement No. 86, Accounting for Costs of Computer Software to be Sold, Leased,
  or Otherwise Marketed(FAS 86). FAS 86 requires product
  development costs to be charged to expenses as incurred until technological
  feasibility is attained. Technological feasibility is attained when the Companys
  software has completed system testing and has been determined viable for its
  intended use. The time between the attainment of technological feasibility and
  completion of software development is generally short with immaterial amounts
  of development costs incurred during this period.

Costs
  in respect of the development of software for the Companys internal use
  are accounted for in accordance with Statement of Position 98-1 Accounting
  for the Costs of Computer Software Developed or Obtained for Internal Use(SOP
  98-1), issued by the American Institute of Certified Public Accountants.
  SOP 98-1 requires these costs to be expensed as incurred, except to the extent
  that these costs are incurred during the application development stage. All
  other costs including those incurred in the project development and post-implementation
  stages are expensed as incurred.

F-12

---

|NET 1 UEPS TECHNOLOGIES, INC.                                                            
|-----------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                           
|for the years ended June 30, 2006, 2005 and 2004                                         
|(All amounts stated
      in thousands of United States Dollars, unless otherwise stated)

**2.**     **SIGNIFICANT
  ACCOUNTING POLICIES (continued)**

***Loan
  provisions and allowance for doubtful debts***

Traditional
  microlending

A
  specific provision is established for all loans where it is considered likely
  that all or a portion of the principal amount of the loan or interest thereon
  will not be repaid by the borrower. Default is considered likely after a specified
  period of repayment default, which is generally not more than 150 days. The
  provision is assessed based on a review by management of the ageing of outstanding
  amounts, the payment history in relation to those specific accounts and the
  overall default history.

UEPS-based
  lending

No
  provision is required for UEPS-based lending. The principal amount of the loan
  is insured and the amount due to be recovered from the insurer is recorded as
  a receivable once the amount is deemed unrecoverable. Default is considered
  when the beneficiary dies or can not be found. Once the loan is deemed unrecoverable,
  deferred interest related to the unrecoverable insured loan is not recognized.

Allowance
  for doubtful debts

A
  specific provision is established where it is considered likely that all or
  a portion of the amount due from customers renting point of sale (POS)
  equipment from the Company will not be recovered. Non-recoverability is assessed
  based on a review by management of the ageing of outstanding amounts, the location
  of the customer and the payment history in relation to those specific amounts.

***Stock-based
  compensation***

Stock-based
  compensation represents the cost related to stock-based awards granted to employees.
  The Company measures stock-based compensation cost at the grant date, based
  on the estimated fair value of the award, and recognizes the cost as an expense
  on a straight-line basis (net of estimated forfeitures) over the employee requisite
  service period. In respect of awards with only service conditions that have
  a graded vesting schedule, the Company recognizes compensation cost on a straight
  line basis over the requisite service period for the entire award. The forfeiture
  rate is estimated using historical trends of the number of awards forfeited
  prior to vesting. The expense is recorded in the statement of operations based
  on the employees respective functions.

The
  Company records deferred tax assets for awards that result in deductions on
  the Companys income tax returns, based on the amount of compensation cost
  recognized and the Companys statutory tax rate in the jurisdiction in
  which it will receive a deduction. Differences between the deferred tax assets
  recognized for financial reporting purposes and the actual tax deduction reported
  on the Companys income tax return are recorded in additional paid-in capital
  (if the tax deduction exceeds the deferred tax asset) or in the statement of
  operations (if the deferred tax asset exceeds the tax deduction and no additional
  paid-in capital exists from previous awards).

For
  the years ended June 30, 2005 and 2004, the Company accounted for its stock
  options using the intrinsic-value method prescribed in APB 25. Accordingly,
  compensation costs of stock options was measured as the excess, if any, of the
  quoted market price of the Companys stock at the measurement date over
  the option exercise price and was charged to operations over the vesting period.
  For plans where the measurement date occurred after the grant date, referred
  to as variable plans, compensation cost was re-measured on the basis of the
  current market value of the Companys stock at the end of each reporting
  period.

The
  Company recognized compensation expense for variable plans with performance
  conditions if achievement of those conditions becomes probable. As required
  by FAS 123, the Company has included in these financial statements the required
  pro forma disclosures as if the fair-value method of accounting had been applied.

F-13

---

|NET 1 UEPS TECHNOLOGIES, INC.                                                            
|-----------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                           
|for the years ended June 30, 2006, 2005 and 2004                                         
|(All amounts stated
      in thousands of United States Dollars, unless otherwise stated)

**2.**     **SIGNIFICANT
  ACCOUNTING POLICIES (continued)**

***Recent
  accounting pronouncements adopted***

FASB
  Statement No. 123 (revised 2004), Share-Based Payment, (FAS 123R)was issued in December 2004 and replaces FASB Statement No. 123, Accounting
  for Stock-Based Compensation (FAS 123) and supersedes Accounting
  Principles Board Opinion (APB) No. 25, Accounting for Stock Issued
  to Employees (APB 25). FAS 123R requires that the cost resulting
  from all share-based payment transactions be recognized in the financial statements
  at fair value and that excess tax benefits be reported as a financing cash inflow
  rather than as a reduction of taxes paid. FAS 123R is effective for the Company
  from July 1, 2005. FAS 123R requires public companies to account for share-based
  payments using either the modified-prospective method or by using the modified-retrospective
  method. Under the modified-prospective method, from the effective date, compensation
  cost is recognized based on the requirements of FAS 123R for all new share-based
  awards and based on the requirements of FAS 123 for all awards granted prior
  to the effective date of FAS 123R that remain unvested on the effective date.
  The modified-retrospective method permits companies to restate, based on the
  amounts previously recognized under FAS 123 for pro forma disclosure purposes,
  either all prior periods presented or prior interim periods in the year of adoption.
  The adoption of the modified-prospective method on July 1, 2005 by the Company
  did not have an impact on its overall results of operations or financial position.

FASB
  Statement 154, Accounting Changes and Error Corrections, a replacement
  of APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3,
  Reporting Accounting Changes in Interim Financial Statementsan amendment
  of APB Opinion No. 28, was issued on May 30, 2005. The new statement changes
  the requirements for the accounting and reporting of a change in accounting
  principle and applies to all voluntary changes in accounting principle as well
  as to changes required by an accounting pronouncement that does not include
  specific transition provisions. The statement is effective for accounting changes
  and corrections of errors made in fiscal years beginning after December 15,
  2005, and early adoption is permitted. The statement does not change the transition
  provisions of any existing accounting pronouncements, including those that are
  in a transition phase as of the effective date of the statement. The early-adoption
  of this statement has not had an impact on historical results. Rather, the impact
  depends on future changes in accounting principles.

In
  October 2005, the FASB issued FASB Staff Position (FSP) FAS No.
  123(R)-2, Practical Accommodation to the Application of Grant Data as Defined
  in FASB Statement No. 123(R) (FSP FAS 123(R)-2). This FSP clarifies
  that a mutual understanding is presumed to exist at the date the award is approved
  by the board of directors, or management with relevant authority, if the following
  conditions are met:

- The recipient does not have the ability to negotiate the key terms and conditions
    of the award with the employer;
- The key terms and conditions of the award are expected to be communicated
    to all recipients within a relatively short time period from the date of approval;
    and
- All other criteria for determining the grant date have been met.

The
  FSP should be applied upon the initial adoption of FAS 123R. Those entities
  that have previously adopted FAS 123R must apply the FSPs provisions to
  the first reporting period after October 18, 2005, for which financial statements
  or interim reports have not been issued. The adoption of the statement by the
  Company did not have an impact on its overall results of operations or financial
  position.

In
  November 2005, the FASB issued FSP FAS No. 123(R)-3, Transition Election
  Related to Accounting for the Tax Effects of Share-Based Payment Awards
  (FSP FAS 123(R)-3). This FSP provides a practical exception when
  a company transitions to the accounting requirements in FAS 123R. FAS
  123R requires a company to calculate the pool of excess tax benefits available
  to absorb tax deficiencies recognized subsequent to adopting FAS 123R (termed
  the APIC Pool), assuming the company had been following the recognition provisions
  prescribed by FAS 123. The FASB learned that several companies do not
  have the necessary historical information to calculate the APIC pool as envisioned
  by FAS 123R and accordingly, the FASB decided to allow a practical exception
  as documented in the FSP. FSP FAS 123(R)-3 is effective immediately. The adoption
  of the statement by the Company did not have an impact on its overall results
  of operations or financial position.

F-14

---

|NET 1 UEPS TECHNOLOGIES, INC.                                                            
|-----------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                           
|for the years ended June 30, 2006, 2005 and 2004                                         
|(All amounts stated
      in thousands of United States Dollars, unless otherwise stated)

**2.**     **SIGNIFICANT
  ACCOUNTING POLICIES (continued)**

***Recent
  accounting pronouncements adopted (continued)***

In
  November 2005, the FASB issued FSP FAS No. 115-1 and 124-1, The Meaning of
  Other-Than-Temporary Impairment and Its Application to Certain Investments.
  This FSP addresses the determination of when an investment is considered impaired,
  whether that impairment is other than temporary, and the measurement of an impairment
  loss. The FSP also includes accounting considerations subsequent to the recognition
  of an other-than-temporary impairment and requires certain disclosures about
  unrealized losses that have not been recognized as other-than-temporary impairments.
  FSP FAS No. 115-1 and FAS 124-1 was effective for the Company in the third quarter
  of fiscal year 2006. The adoption of the statement by the Company did not have
  an impact on its overall results of operations or financial position.

In
  December 2005, the FASB issued FSP SOP 94-6-1, Terms of Loan Products That
  May Give Rise to a Concentration of a Credit Risk. This FSP addresses (1)
  the circumstances under which the terms of the loan products give rise to a
  concentration of credit risk and (2) the disclosures or other accounting considerations
  that apply for entities that originate, hold, guarantee, service, or invest
  in loan products with terms that may give rise to a concentration of credit
  risk. The FASB believes judgment is required to determine whether loan products
  have terms that give rise to a concentration of credit risk. Companies are required
  to apply the guidance in the FSP to reporting periods ending after December
  19, 2005. The adoption of the statement by the Company did not have an impact
  on its overall results of operations or financial position.

In
  February 2006, the FASB issued FSP FAS No. 123(R)-4, Classification of Options
  and Similar Instruments Issued as Employee Compensation That Allow for Cash
  Settlement upon Occurrence of a Contingent Event (FAS FSP FAS 123R-4).
  This FSP amends FAS 123R to incorporate that a cash settlement feature that
  can be exercised only upon the occurrence of a contingent event that is outside
  the employees control does not meet certain conditions in FAS 123R until
  it becomes probable that the event will occur. The guidance in this position
  shall be applied upon initial adoption of FAS 123R. The adoption of FSP FAS
  No. 123R-4 did not have a material impact on the Companys consolidated
  financial position, results of operations or cash flows.

In
  June 2005, the Emerging Issues Task Force (EITF) ratified the modification
  of Paragraph 19 of FASB Statement No. 131, Disclosures About Segments of
  an Enterprise and Related Information(FAS 131),which
  indicates that operating segments that do not meet the quantitative thresholds
  included in paragraph 18 of FAS 131 may be combined with information about other
  operating segments that also do not meet these quantitative thresholds to produce
  a reportable segment if they share a majority of the aggregation criteria listed
  in paragraph 17 of FAS 131. The disclosure requirements are effective for fiscal
  years ending after September 15, 2005. The adoption of the statement by the
  Company did not have an impact on its segmental disclosures.

***Recent
  accounting pronouncements not yet adopted as of June 30, 2006***

In
  February 2006, the FASB issued FASB Statement No. 155, Accounting for Certain
  Hybrid Financial Instruments  an amendment of FASB Statements No. 133
  and 140, (FAS 155). FAS 155 provides entities with relief from
  having to separately determine the fair value of an embedded derivative that
  would otherwise be required to be bifurcated from its host contract in accordance
  with FASB Statement No. 133, Accounting for Derivative Instruments and Hedging
  Activities (FAS 133). Statement 155 allows an entity to make
  an irrevocable election to measure such a hybrid financial instrument at fair
  value in its entirety, with changes in fair value recognized in earnings. The
  election may be made on an instrument-by-instrument basis and can be made only
  when a hybrid financial instrument is initially recognized or when certain events
  occur that constitute a remeasurement (i.e. new basis) event for a previously
  recognized hybrid financial instrument. An entity must document its election
  to measure a hybrid financial instrument at fair value, either concurrently
  or via a pre-existing policy for automatic election. Once the fair value election
  has been made, the hybrid financial instrument may not be designated as a hedging
  instrument pursuant to FAS 133.

F-15

---

|NET 1 UEPS TECHNOLOGIES, INC.                                                            
|-----------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                           
|for the years ended June 30, 2006, 2005 and 2004                                         
|(All amounts stated
      in thousands of United States Dollars, unless otherwise stated)

**2.**     **SIGNIFICANT
  ACCOUNTING POLICIES (continued)**

***Recent
  accounting pronouncements not yet adopted as of June 30, 2006 (continued)***

FAS
  155 also:

- clarifies which interest-only strips and principal only-strips are not subject
    to FAS 133;
- requires that interest in securitized financial assets be evaluated to identify
    whether they are freestanding derivatives or hybrid financial instruments
    containing an embedded derivative that requires bifurcation;
- clarifies that concentrations of credit risk in the form of subordination
    are not embedded derivatives; and
- amends FASB Statement No. 140, Accounting for Transfers and Servicing
    of Financial Assets and Extinguishment of Liabilities (FAS
    140), to eliminate the prohibition on a qualifying special-purpose
    entity from holding a derivative financial instrument that pertains to a beneficial
    interest other than another derivative financial instrument.

FAS
  155 is effective for all financial instruments acquired, issued, or subject
  to a re-measurement (new basis) event occurring after the beginning of an entitys
  first fiscal year that begins after September 15, 2006. Upon adoption, an entity
  may elect fair value measurement for existing financial instruments with embedded
  derivatives that had previously been bifurcated pursuant to FAS 133. Early adoption
  is permitted as of the beginning of an entitys fiscal year, so long as
  the entity has not yet issued financial statements, including financial statements
  for any interim period, for that fiscal year. The adoption of the statement
  by the Company is not expected to have an impact on its overall results of operations,
  financial position or cash flows.

In
  March 2006, the FASB issued FASB Statement No. 156, Accounting for Servicing
  of Financial Assets(FAS 156). FAS 156 amends FAS 140 and will
  simplify the accounting for servicing assets and liabilities, such as those
  common with mortgage securitization activities. Specifically, FAS 156 addresses
  the recognition and measurement of separately recognized servicing assets and
  liabilities and provides an approach to simplify efforts to obtain hedge-like
  (offset) accounting.

FAS
  156 also:

- clarifies when an obligation to service financial assets should be separately
    recognized as a servicing asset or a servicing liability;
- requires that a separately recognized servicing asset or servicing liability
    be initially measured at fair value, if practicable; and
- permits an entity with a separately recognized servicing asset or servicing
    liability to choose either of the following methods for subsequent measurement:

| | a) | Amortization Method
| | -- | -------------------
| |    |                    
| | b) | Fair Value Method  

FAS
  156 permits a servicer that uses derivative financial instruments to offset
  risks on servicing to report both the derivative financial instrument and related
  servicing asset or liability by using a consistent measurement attribute 
  fair value. FAS 156 is effective for all separately recognized servicing assets
  and liabilities acquired or issued after the beginning of the Companys
  fiscal year that begins after September 15, 2006, with early adoption permitted.
  The adoption of the statement by the Company is not expected to have an impact
  on its overall results of operations, financial position or cash flows.

In
  April 2006, the FASB issued FSP FIN No. 46(R)-6, Determining the Variability
  to be Considered in Applying FASB Interpretation No. 46(R)(FSP FIN
  46(R)-6). This FSP introduces the by-design approach to determine
  the variability to consider when applying FASB Interpretation No. 46(R) Consolidation
  of Variable Interest Entities - an Interpretation of ARB No.51 (FIN
  46R). The FSP requires an analysis of the design of the entity in determining
  the variability to be considered in applying FIN 46(R), and provides the following
  two steps:

- Analyze the nature of the risks in the entity; and
- Determine the purpose(s) for which the entity was created and determine
    the variability (created by the risks identified in Step 1) the entity is
    designed to create and pass along to interest holders.

F-16

---

|NET 1 UEPS TECHNOLOGIES, INC.                                                            
|-----------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                           
|for the years ended June 30, 2006, 2005 and 2004                                         
|(All amounts stated
      in thousands of United States Dollars, unless otherwise stated)

**2.**     **SIGNIFICANT
  ACCOUNTING POLICIES (continued)**

***Recent
  accounting pronouncements not yet adopted as of June 30, 2006 (continued)***

The
  FSP should be applied prospectively to all entities (including newly created
  entities) with which an enterprise first becomes involved, and to all entities
  previously required to be analyzed under FIN 46(R) when a reconsideration event
  has occurred beginning the first day of the first reporting period beginning
  after June 15, 2006. The adoption of the statement by the Company is not expected
  to have an impact on its overall results of operations, financial position or
  cash flows.

In
  July 2006, the Financial Accounting Standards Board (FASB) issued
  FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxesan
  interpretation of FASB Statement No. 109 (FIN 48), which clarifies
  the accounting for uncertainty in tax positions. The evaluation of a tax position
  under FIN 48 is a two-step process. The first step is recognition: Tax positions
  taken or expected to be taken in a tax return should be recognized only if those
  positions are more likely than not of being sustained upon examination, based
  on the technical merits of the position. In evaluating whether a tax position
  has met the more likely than not recognition threshold, it should be presumed
  that the position will be examined by the relevant taxing authority that would
  have full knowledge of all relevant information. The second step is measurement:
  Tax positions that meet the recognition criteria are measured at the largest
  amount of benefit that is greater than 50 percent likely of being recognized
  upon ultimate settlement.

FIN
  48 also provides guidance on derecognition, classification, interest and penalties,
  accounting in interim periods, disclosure and transition. FIN 48 is effective
  for fiscal years beginning after December 15, 2006 and is effective for the
  Company in the first quarter of the year beginning July 1, 2007. The Company
  is currently assessing FIN 48 and has not yet determined the impact that the
  adoption of this interpretation will have on its financial position or results
  of operations.

In
  June 2006, the EITF reached a consensus that the scope of Issue No. 06-3, How
  Taxes Collected from Customers and Remitted to Governmental Authorities Should
  Be Presented in the Income Statement (That Is, Gross versus Net Presentation)
  includes any tax assessed by a governmental authority that is imposed concurrently
  on a specific revenue-producing transaction between a seller and a customer.
  In addition, the scope of the consensus excludes taxes that are assessed on
  gross receipts or that are an inventoriable cost. The EITF also affirmed as
  a consensus the tentative conclusion that the presentation of taxes on either
  a gross basis or a net basis within the scope of this Issue is an accounting
  policy decision that should be disclosed pursuant to APB Opinion No. 22, Disclosure
  of Accounting Policies. A company should disclose the amount of those taxes
  that is recognized on a gross basis in interim and annual financial statements
  for each period for which an income statement is presented if those amounts
  are significant. The Issue is effective for interim and annual periods beginning
  after December 15, 2006. The adoption of the Issue by the Company is not expected
  to have an impact on its overall results of operations, financial position or
  disclosure.

**3.**     **PRE-FUNDED
  SOCIAL WELFARE GRANTS RECEIVABLE**

The
  pre-funded social welfare grants receivable includes the amounts due from the
  provincial governments as a result of our merchant acquiring initiative, as
  the Company pre-funds social welfare grant payments on behalf of the government
  in these provinces.

The
  pre-funded social welfare grants receivable also includes the amounts due from
  the Eastern Cape and Kwa-Zulu Natal provincial governments, as the Company pre-funds
  social welfare grant payments on behalf of the government in these provinces.
  The pre-funded amounts are typically reimbursed to the Company within two weeks
  after the disbursement of the grants. The grant payment service normally commences
  a week before the start of a calendar month, with the exception of January.
  The January payment service typically commences during the first week of January.

The
  June 30, 2005 amount was previously included in accounts receivable. Management
  believes that the nature of the pre-funded social welfare grants receivable
  is substantially different from other accounts receivable and has therefore
  disclosed the balances separately.

F-17

---

|NET 1 UEPS TECHNOLOGIES, INC.                                                            
|-----------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                           
|for the years ended June 30, 2006, 2005 and 2004                                         
|(All amounts stated
      in thousands of United States Dollars, unless otherwise stated)

**4.**     **ACCOUNTS
  RECEIVABLE AND FINANCE LOANS RECEIVABLE**

|                                                                   |   | 2006   |  |  |   | 2005    | 
|------------------------------------------------------------------ | - | ------ |  |  | - | ------- | 
|                                                                   |   |        |  |  |   |         | 
|Accounts receivable, trade, net                                    | $ | 16,695 |  |  | $ | 3,955   | 
|Accounts receivable, trade, gross                                  |   | 16,854 |  |  |   | 3,955   | 
|Allowance for doubtful accounts
      receivable, end of year      |   | 159    |  |  |   | -       | 
|Allowance charged to statement
      of operations, re-measured at |   |        |  |  |   |         | 
|year end
      rates                                               |   | 163    |  |  |   | -       | 
|Amount utilized, re-measured
      at year end rates               |   | (4)    |  |  |   | -       | 
|Prepaid expenses related to Prism acquisition                      |   | 582    |  |  |   | -       | 
|Other receivables                                                  |   | 3,942  |  |  |   | 11,338  | 
|Total accounts receivable, net                                     |   | 21,219 |  |  |   | 15,293  | 
|                                                                   |   |        |  |  |   |         | 
|Finance loans receivable                                           |   |        |  |  |   |         | 
|UEPS-based lending                                                 |   | 2,992  |  |  |   | 4,184   | 
|Traditional microlending 
      net                               |   | 3,721  |  |  |   | 3,576   | 
|Traditional microlending
       gross                             |   | 7,169  |  |  |   | 7,212   | 
|Allowance
      for doubtful microlending loans , end of year      |   | 3,448  |  |  |   | 3,636   | 
|Allowance for
      doubtful microlending loans, beginning of year |   |        |  |  |   |         | 
|re-measured
      at year end rates                                |   | 3,344  |  |  |   | 7,841   | 
|Allowances
      charged to the statement of operations, re-       |   |        |  |  |   |         | 
|measured
      at year end rates                                   |   | 587    |  |  |   | 932     | 
|Amounts utilized,
      re-measured at year end rates              |   | (483)  |  |  |   | (5,137) | 
|                                                                   |   |        |  |  |   |         | 
|Total finance loans receivable                                     | $ | 6,713  |  |  | $ | 7,760   | 

Other
  receivables are included in Accounts receivable as of June 30, 2005, and are
  shown as a separate line item as of June 30, 2006.

Receivables
  from customers renting POS equipment from the Company are included in Accounts
  receivable, trade, and are stated net of an allowance for certain amounts that
  the Companys management has identified may be unrecoverable.

Prepaid
  expenses related to the acquisition of Prism Holdings Limited (Prism)
  includes legal and other professional fees. The acquisition closed on July 3,
  2006, and these amounts will be capitalized to the purchase price of the acquisition.

As
  previously disclosed, during the latter half of the third quarter and throughout
  the fourth quarter of 2005 the management of the Companys traditional
  microlending businesses management reviewed the Companys long outstanding
  finance loans. As a result of this review it was determined that $5.5 finance
  loans outstanding were not recoverable. The loans written off had been previously
  provided for in full and are shown in the above reconciliation in the line item
   Amounts utilized, re-measured at year end rates. These write-offs
  had no effect on the statement of operations as they had been fully provided
  for previously. The Companys policy for providing for doubtful finance
  loans has not changed

**5.**     **DEFERRED
  EXPENDITURE ON SMART CARDS**

The
  deferred expenditure on smart cards represents amounts paid for smart cards
  used in the administration and distribution of grants to beneficiaries. These
  expenditures are deferred and written off over the period of the contract with
  the provincial government.

F-18

---

|NET 1 UEPS TECHNOLOGIES, INC.                                                            
|-----------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                           
|for the years ended June 30, 2006, 2005 and 2004                                         
|(All amounts stated
      in thousands of United States Dollars, unless otherwise stated)

**6.**     **EQUITY-ACCOUNTED
  INVESTMENTS AND LONG TERM RECEIVABLE**

*Permit
  Group 2 (Proprietary) Limited (Permit)*

On
  April 1, 2004, Aplitec purchased 43% of the issued share capital of the Permit
  Group 2 (Proprietary) Limited (Permit) for $10. A loan of approximately
  $0.8 million, bearing interest at the then current South African prime rate,
  currently 11%, and with no fixed repayment terms, was made to Permit in April
  2004 and the proceeds of this loan was used to purchase 43% of a 95% interest
  in New Era Life Insurance Company Limited (New Era), a provider
  of various insurance products to the South African market.

Imvume
  Resources (Pty) Limited, ("Imvume"), holds a 57% equity interest in Permit,
  and controls Permit through its majority voting rights. On April 1, 2004, Aplitec
  granted a loan of approximately $1 million to Imvume, for the purpose of enabling
  Imvume to make a loan to Permit. This loan to Imvume, bears interest at the
  current South African prime rate, currently 11%. The loan of approximately $0.9
  million (at the year end exchange rate of $1: ZAR7.27) to Imvume is with recourse
  to the assets of Imvume, and as of the balance sheet date, management of the
  Company considers the loan to be recoverable.

FIN
  46R, Consolidation of Variable Interest Entities, an Interpretation of ARB
  51, Revised December 2003 (FIN 46R), clarifies the application
  of Accounting Research Bulletin No. 51, Consolidated Financial Statements
  to certain entities in which equity investors do not have the characteristics
  of a controlling financial interest or do not have sufficient equity at risk
  for the entity to finance its activities without additional subordinated financial
  support. FIN 46R requires the consolidation of these entities, known as a Variable
  Interest Entity (VIE), by the primary beneficiary of the entity.
  The primary beneficiary is the entity, if any, that will absorb a majority of
  the entity's expected losses, receive a majority of the entity's expected residual
  returns, or both.

On
  adoption of FIN46R, the Company determined that Permit was a VIE, as the loan
  to Permit represents a variable interest. However, the Company is not the primary
  beneficiary of Permit. Therefore, the Company has not consolidated Permit, and
  has accounted for Permit as an equity-accounted investment. The interest earned
  on the loan to Permit has been eliminated. The company's total outstanding loan
  balances exposed to loss as a result of its involvement with Permit is approximately
  $0.7 million. The maximum exposure to loss refers to the maximum loss that the
  Company would be required to record in its income statement as a result of its
  involvement with a VIE. It does not consider the probability of such losses
  actually being incurred.

*SmartSwitch
  Namibia (Proprietary) Limited (SmartSwitch Namibia)*

In
  September 2005, the Company obtained a 50% interest in the issued and outstanding
  ordinary share capital and loans of SmartSwitch Namibia. The Company determined
  that SmartSwitch Namibia is a VIE, as the loan to SmartSwitch Namibia represents
  a variable interest but that the Company is not the primary beneficiary of SmartSwitch
  Namibia. Therefore, the Company has not consolidated SmartSwitch Namibia, and
  has accounted for this investment using the equity method. The interest earned
  on the loan to SmartSwitch Namibia has been eliminated. The Company has sold
  hardware, software and licenses to SmartSwitch Namibia and defers recognition
  of 50% of the net income after tax related to these sales until SmartSwitch
  Namibia has used the purchased asset or has sold it to a third party. The deferral
  of the net income after tax is shown in the Elimination column in the table
  below.

*SmartSwitch
  Botswana (Proprietary) Limited (SmartSwitch Botswana)*

In
  May 2006, the Company obtained a 50% interest in the issued and outstanding
  ordinary share capital and loans of SmartSwitch Botswana. The Company determined
  that SmartSwitch Botswana is a VIE, as the loan to SmartSwitch Botswana represents
  a variable interest but that the Company is not the primary beneficiary of SmartSwitch
  Botswana. Therefore, the Company has not consolidated SmartSwitch Botswana,
  and has accounted for this investment using the equity method. The interest
  earned on the loan to SmartSwitch Botswana has been eliminated. As of June 30,
  2006, SmartSwitch Botswana had not commenced operations.

The
  functional currency of the Companys equity-accounted investments is not
  the U.S. dollar and thus the investments are re-measured at the period end U.S.
  dollar/foreign currency exchange rate with an entry against accumulated other
  comprehensive income. The functional currency of Permit is the South African
  rand, the functional currency of SmartSwitch Namibia is the Namibian dollar
  and the functional currency of SmartSwitch Botswana is the Botswana pula.

F-19

---

|NET 1 UEPS TECHNOLOGIES, INC.                                                            
|-----------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                           
|for the years ended June 30, 2006, 2005 and 2004                                         
|(All amounts stated
      in thousands of United States Dollars, unless otherwise stated)

**6.**     **EQUITY-ACCOUNTED
  INVESTMENTS AND LONG TERM RECEIVABLE (continued)**

Summarized
  below is the Companys interest in equity-accounted investments as of June
  30, 2006 and 2005:

EarningsEquity
      
      
      Loans
      
      
      (Loss)
      
      
      Elimination
      
      
      TotalPermit:Balance as of July 1, 2004
      
      -
      
      $
      784
      
      $
      35
      
      $
      129
      
      $
      948Earnings from equity-accountedinvestment
      
      -
      
      
      -
      
      
      443
      
      
      93
      
      
      536Foreign currency adjustment(1)
      
      -
      
      
      (48
      )
      
      (34
      )
      
      (77
      )
      
      (159
      )Balance as of June 30,
        2005
      
      -
      
      
      736
      
      
      444
      
      
      145
      
      
      1,325Earnings from equity-accountedinvestment
      
      -
      
      
      -
      
      
      868
      
      
      101
      
      
      969Foreign currency adjustment(1)
      
      
      
      
      (59
      )
      
      (145
      )
      
      (23
      )
      
      (227
      )Balance as of June 30,
        2006
      
      -
      
      
      677
      
      
      1,167
      
      
      223
      
      
      2,067SmartSwitch Namibia:Share capital acquired/ loansextended
      $
      634
      
      
      1,978
      
      
      
      
      
      
      
      
      2,612Loss from equity-accountedinvestment
      
      
      
      
      
      
      
      (68
      )
      
      (518
      )
      
      (586
      )Foreign currency adjustment(2)
      
      (98
      )
      
      (259
      )
      
      9
      
      
      61
      
      
      (287
      )Balance as of June 30,
        2006
      
      536
      
      
      1,719
      
      
      (59
      )
      
      (457
      )
      
      1,739SmartSwitch Botswana:Share capital acquired/ loansextended
      
      710
      
      
      708
      
      
      
      
      
      
      
      
      1,418Earnings (Loss) from equity-accounted investment
      
      
      
      
      
      
      
      (9
      )
      
      9
      
      
      -Foreign currency adjustment(3)
      
      (121
      )
      
      (117
      )
      
      -
      
      
      -
      
      
      (238
      )Balance as of June 30,
        2006
      
      589
      
      
      591
      
      
      (9
      )
      
      9
      
      
      1,180Equity-accounted investments
      $
      1,125
      
      $
      2,987
      
      $
      1,099
      
      $
      (225
      )
      $
      4,986


(1)
   the foreign currency adjustment represents the effects of the fluctuations
  between the South African rand and the U.S. dollar. 
            (2)  the foreign
  currency adjustment represents the effects of the fluctuations between the Namibian
  dollar and the U.S. dollar, except for the foreign currency adjustment for loan
  balance which represents the effects of the fluctuations between the South African
  rand and the U.S. dollar. 
            (3)  the foreign
  currency adjustment represents the effects of the fluctuations between the Botswana
  pula and the U.S. dollar, except for the foreign currency adjustment for loan
  balance which represents the effects of the fluctuations between the South African
  rand and the U.S. dollar.

As
  the Company owns 50% of SmartSwitch Namibia, it is required to eliminate 50%
  of the net income generated from sales to SmartSwitch Namibia. The revenue generated
  and associated costs related to these sales are included in the line item captions
  above Net income from continuing operations before earnings from equity-accounted
  investments, net in the audited consolidated statement of operations for the
  years ended June 30 2006, 2005 and 2004. The elimination is included in the
  Earnings from equity-accounted investments, net line in the consolidated statement
  of operations for the years ended June 30, 2006, 2005 and 2004. The Company
  will recognize this net income from these hardware and software sales during
  the period in which the hardware and software it has sold to SmartSwitch Namibia
  is utilized in its operations, or has been sold to third party customers, as
  the case may be.

F-20

---

|NET 1 UEPS TECHNOLOGIES, INC.                                                            
|-----------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                           
|for the years ended June 30, 2006, 2005 and 2004                                         
|(All amounts stated
      in thousands of United States Dollars, unless otherwise stated)

**7.**     **PROPERTY,
  PLANT AND EQUIPMENT**

| |                                |   | 2006   |  |   | 2005   | 
| | ------------------------------ | - | ------ |  | - | ------ | 
| |                                |   |        |  |   |        | 
| | Cost:                          |   |        |  |   |        | 
| | Computer equipment             | $ | 9,596  |  | $ | 13,631 | 
| | Furniture and office equipment |   | 2,868  |  |   | 4,004  | 
| | Motor vehicles                 |   | 7,836  |  |   | 9,205  | 
| |                                |   | 20,300 |  |   | 26,840 | 
| | Accumulated depreciation:      |   |        |  |   |        | 
| | Computer equipment             |   | 7,722  |  |   | 11,236 | 
| | Furniture and office equipment |   | 1,927  |  |   | 2,607  | 
| | Motor vehicles                 |   | 6,894  |  |   | 6,781  | 
| |                                |   | 16,543 |  |   | 20,624 | 
| | Carrying amount:               |   |        |  |   |        | 
| | Computer equipment             |   | 1,874  |  |   | 2,395  | 
| | Furniture and office equipment |   | 941    |  |   | 1,397  | 
| | Motor vehicles                 |   | 942    |  |   | 2,424  | 
| |                                | $ | 3,757  |  | $ | 6,216  | 

**8.**     **GOODWILL
  AND INTANGIBLE ASSETS**

Summarized
  below is the movement in the gross carrying value and accumulated amortization
  of goodwill, which is no longer amortized.

|                                |   | Gross    |   |   |              |   |   | Net      |  
|------------------------------- | - | -------- | - | - | ------------ | - | - | -------- | -
|                                |   | carrying |   |   | Accumulated  |   |   | carrying |  
|                                |   | value    |   |   | amortization |   |   | value    |  
|                                |   |          |   |   |              |   |   |          |  
|Balance as of July 1, 2004      | $ | 19,302   |   | $ | (4,090       | ) | $ | 15,212   |  
|Foreign currency adjustment (1) |   | (826     | ) |   | 250          |   |   | (576     | )
|Balance as of June 30, 2005     |   | 18,476   |   |   | (3,840       | ) |   | 14,636   |  
|Foreign currency adjustment (1) |   | (1,022   | ) |   | 309          |   |   | (713     | )
|Balance as of June 30, 2006     | $ | 17,454   |   | $ | (3,531       | ) | $ | 13,923   |  

(1)
   the Foreign currency adjustment represents the effects of the fluctuations
  between the South African Rand and the United States dollar on the gross carrying
  value and accumulated amortization.

Summarized
  below is the carrying value and accumulated amortization of the intangible assets:

2006
      
      
      
      
      
      
      
      
      2005Gross
      
      
      
      
      
      Net
      
      
      Gross
      
      
      
      
      
      Netcarrying
      
      
      Accumulated
      
      
      carrying
      
      
      carrying
      
      
      Accumulated
      
      
      carryingvalue
      
      
      amortization
      
      
      value
      
      
      value
      
      
      amortization
      
      
      valueFinite-lived intangible assets:FTS patent
      $
      5,270
      
      $
      (3,163
      )
      $
      2,107
      
      $
      5,733
      
      $
      (2,867
      )
      $
      2,866Contract rights
      
      2,308
      
      
      (1,987
      )
      
      321
      
      
      2,510
      
      
      (1,325
      )
      
      1,185Customer contracts
      
      114
      
      
      (50
      )
      
      64
      
      
      114
      
      
      (26
      )
      
      88Exclusive licences
      
      4,506
      
      
      (1,349
      )
      
      3,157
      
      
      4,506
      
      
      (701
      )
      
      3,805Total finite-lived
        intangible assets
      $
      12,198
      
      $
      (6,549
      )
      $
      5,649
      
      $
      12,863
      
      $
      (4,919
      )
      $
      7,944


F-21

---

|NET 1 UEPS TECHNOLOGIES, INC.                                                            
|-----------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                           
|for the years ended June 30, 2006, 2005 and 2004                                         
|(All amounts stated
      in thousands of United States Dollars, unless otherwise stated)

**8.**     **GOODWILL
  AND INTANGIBLE ASSETS (continued)**

The
  Company obtained its FTS patent on its acquisition of Net 1 Investment Holdings
  (Proprietary) Limited (Net 1 Holdings) on July 12, 2000. 100% of
  Net 1 Holdings issued share capital was acquired for a historical cost
  of approximately $3.2 million (or $3.5 million at the year end exchange rate
  of $1: ZAR7.27), which was satisfied through the issuance of 9,750,000 shares
  of the Companys common stock. In addition, a deferred taxation adjustment
  was required to increase the historical carrying value to $4.8 million (or $1.7
  million at the year end exchange rate of $1:ZAR7.27) . Net 1 Holdings was a
  holding company that did not generate significant revenues or expenses and did
  not have significant assets or liabilities other than the FTS patent rights
  for South Africa and surrounding territories, on which the Companys smart
  card applications are based.

Aggregate
  amortization expense on the FTS patent for the year ended June 30, 2006 was
  approximately $0.6 million (2005: $0.6 million, 2004: $0.6 million).

In
  December 2003 the Company entered into an agreement with various black economic
  empowerment partners (the partners) whereby the partners would provide
  certain services, for example, debt collection and dispute resolution, related
  to the Cash Paymaster Services Northern contract. The contract rights will be
  amortized over the contract period of three years. Amortization for the year
  ended June 30, 2006 is approximately $0.9 million (2005: $0.9 million 2004:
  $0.5 million).

As
  a result of the accounting for the Aplitec transaction as a reverse acquisition,
  the assets and liabilities of the Company were valued in accordance with the
  requirements of FASB Statement No. 141, *Business Combinations*, (“FAS
  141”). The customer contracts and exclusive licenses were valued at approximately
  $0.1 million and $4.5 million, respectively, with estimated useful lives of
  five and seven years respectively. Amortization expense for the customer contracts
  and exclusive licenses for the year ended June 30, 2006, is $0.02 million and
  $0.6 million, respectively, (2005: $0.02 million and $0.6 million, respectively
  2004: $0.002 million and $0.05 million, respectively).

Future
  annual amortization expense is estimated at $1.8 million per annum. Actual annual
  amortization expense to be reported in future periods could differ from this
  estimate as a result of new intangible asset acquisitions, changes in useful
  lives and other relevant factors.

As
  required by FAS 141 goodwill has been allocated to the Companys reportable
  segments as follows:

| |                                                 |   |        |  |   | June 30, 2006 |   |   |          | 
| | ----------------------------------------------- | - | ------ |  | - | ------------- | - | - | -------- | 
| |                                                 |   |        |  |   |               |   |   | Net      | 
| |                                                 |   |        |  |   | Accumulated   |   |   | carrying | 
| |                                                 |   | Cost   |  |   | amortization  |   |   | value    | 
| |                                                 |   |        |  |   |               |   |   |          | 
| | Transaction-based activities                    | $ | 3,315  |  | $ | (977          | ) | $ | 2,338    | 
| | Smart card accounts                             |   | -      |  |   | -             |   |   | -        | 
| | UEPS-based financial services                   |   | 6,782  |  |   | (1,902        | ) |   | 4,880    | 
| | Hardware, software and related technology sales |   | 7,357  |  |   | (652          | ) |   | 6,705    | 
| | Total                                           | $ | 17,454 |  | $ | (3,531        | ) | $ | 13,923   | 
| |                                                 |   |        |  |   |               |   |   |          | 
| |                                                 |   |        |  |   | June 30, 2005 |   |   |          | 
| |                                                 |   |        |  |   |               |   |   | Net      | 
| |                                                 |   |        |  |   | Accumulated   |   |   | carrying | 
| |                                                 |   | Cost   |  |   | amortization  |   |   | value    | 
| |                                                 |   |        |  |   |               |   |   |          | 
| | Transaction-based activities                    | $ | 3,606  |  | $ | (1,063        | ) | $ | 2,543    | 
| | Smart card accounts                             |   | -      |  |   | -             |   |   | -        | 
| | UEPS-based financial services                   |   | 7,376  |  |   | (2,068        | ) |   | 5,308    | 
| | Hardware, software and related technology sales |   | 7,494  |  |   | (709          | ) |   | 6,785    | 
| | Total                                           | $ | 18,476 |  | $ | (3,840        | ) | $ | 14,636   | 

F-22

---

|NET 1 UEPS TECHNOLOGIES, INC.                                                            
|-----------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                           
|for the years ended June 30, 2006, 2005 and 2004                                         
|(All amounts stated
      in thousands of United States Dollars, unless otherwise stated)

**9.**     **OTHER
  PAYABLES**

|                                              |   | 2006   |  |   | 2005   | 
|--------------------------------------------- | - | ------ |  | - | ------ | 
|                                              |   |        |  |   |        | 
|Participating merchants settlement obligation | $ | 11,320 |  |   | -      | 
|Payroll related payables                      |   | 1,731  |  | $ | 300    | 
|Accruals                                      |   | 5,294  |  |   | 5,425  | 
|Value-added tax payable                       |   | 1,364  |  |   | 1,190  | 
|Other payables                                |   | 5,081  |  |   | 7,931  | 
|Provisions                                    |   | 3,785  |  |   | 3,154  | 
|                                              | $ | 28,575 |  | $ | 18,000 | 

**10.**     **CAPITAL
  STRUCTURE AND CREDITOR RIGHTS ATTACHED TO THE B CLASS LOANS**

The
  Companys balance sheet reflects two classes of equity - common stock and
  linked units.

The
  linked units comprise the following instruments which are linked and cannot
  be traded separately:

- a right to special convertible preferred stock,
- B Class preference shares in Net 1 Applied Technologies South Africa Limited
      (New Aplitec) and
- B Class loans issued by New Aplitec.

Although
  the linked units include certain instruments (the B Class preference shares
  and the B Class loans) that are legally equity of a subsidiary of Net1, they
  have been treated as equity of Net1 and recorded as part of shareholders
  equity in these, in recognition of their substance, which is economically equivalent
  to that of common stock.

The
  B Class loans referred to above are not considered to be a liability in accordance
  with FAS 150, Accounting for Certain Financial Instruments with Characteristics
  of Both Equity and Liability, as New Aplitec does not have an obligation
  to transfer assets to its shareholders in respect of the loans. In addition,
  any distributions relating to the loans are solely at the discretion of New
  Aplitec.

Voting
  rights  Holders of shares of special convertible preferred stock have
  the same voting rights as holders of common stock. Therefore, a linked unit-holder
  is able to vote on the same matters as a holder of common stock, including the
  selection of directors, corporate decisions submitted to shareholder vote, and
  decisions regarding distribution of earnings. In addition, the special convertible
  preferred stock does not provide any additional rights with respect to control
  of Net1 not shared by holders of common stock.

*Dividend
  rights*  Holders of common stock and linked units have similar rights
  to the distribution of Net1s earnings.

Liquidation
  rights  In the event of a liquidation of Net1 or New Aplitec, the
  linked units are automatically convertible into common stock of Net1, thereby
  allowing a linked unit holder to have identical liquidation rights to a holder
  of common stock in the event of liquidation.

Sale
  rights  A linked unit holder can only dispose of its interest in Net1
  by 1) converting the linked units into common stock and 2) selling the common
  stock on the open market. Therefore, a holder of the linked units receives the
  same risk and rewards in market price fluctuation as a common stockholder of
  Net1.

*Common
  stock*

Holders
  of shares of Net1s common stock are entitled to receive dividends and
  other distributions when declared by Net1s board of directors out of funds
  available. Payment of dividends and distributions is subject to certain restrictions
  under the Florida Business Corporation Act, including the requirement that after
  making any distribution Net1 must be able to meet its debts as they become due
  in the usual course of its business.

F-23

---

|NET 1 UEPS TECHNOLOGIES, INC.                                                            
|-----------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                           
|for the years ended June 30, 2006, 2005 and 2004                                         
|(All amounts stated
      in thousands of United States Dollars, unless otherwise stated)

**10.**     **CAPITAL
  STRUCTURE AND CREDITOR RIGHTS ATTACHED TO THE B CLASS LOANS (continued)**

*Common
  stock (continued)*

Upon
  voluntary or involuntary liquidation, dissolution or winding up of Net1, holders
  of common stock share ratably in the assets remaining after payments to creditors
  and provision for the preference of any preferred stock according to its terms.
  There are no pre-emptive or other subscription rights, conversion rights or
  redemption or scheduled installment payment provisions relating to shares of
  common stock. All of the outstanding shares of common stock are fully paid and
  non-assessable.

Each
  holder of common stock is entitled to one vote per share for the election of
  directors and for all other matters to be voted on by shareholders. Holders
  of common stock may not cumulate their votes in the election of directors, and
  are entitled to share equally and ratably in the dividends that may be declared
  by the board of directors, but only after payment of dividends required to be
  paid on outstanding shares of preferred stock according to its terms. The shares
  of Company common stock are not subject to redemption.

*Special
  convertible preferred stock*

The
  special convertible preferred stock ranks, on parity, without preference and
  priority, with Net1s common stock with respect to dividend rights (except
  as described below) or rights upon liquidation, dissolution or winding-up of
  Net1. The special convertible preferred stock is junior in preference and priority
  to each other class or series of preferred stock or other equity security of
  Net1 under terms which may be determined by the board of directors to expressly
  provide that such other security rank senior in preference or priority to the
  special convertible preferred stock with respect to dividend rights or rights
  upon liquidation, dissolution or winding-up of Net1.

So
  long as any shares of special convertible preferred stock are outstanding, Net1s
  board will determine immediately prior to the declaration of any dividend or
  distribution (i) the portion, if any, of Net1s assets available for such
  dividend of distribution that are attributable to funds or assets from New Aplitec,
  regardless of the manner received (the South African Amount) and
  (ii) the portion of such funds or assets that is not from New Aplitec (the Non-South
  African Amount). The South African Amount will not include amounts received
  from New Aplitec due to its liquidation, distribution or dividend after insolvency
  or winding up.

So
  long as any shares of special convertible preferred stock are outstanding, (i)
  any dividends or distributions by Net1s board of Non-South African Amounts
  must be paid pro rata to all holders of common stock and special convertible
  preferred stock and (ii) and dividends or distributions by Net1s board
  of South African Amounts can be paid only to holders of common stock. Net1s
  board has complete discretion to declare a dividend or distribution with respect
  to South African Amounts or Non-South African Amounts.

In
  the event of the voluntary or involuntary liquidation, dissolution, distribution
  of assets or winding-up of Net1, all outstanding shares of special convertible
  preferred stock will automatically convert and holders of such stock will be
  entitled to receive pari passu with holders of common stock, any assets
  of Net1 distributed for the benefit of its shareholders.

Holders
  of special convertible preferred stock have the right to receive notice of,
  attend, speak and vote at meetings of Net1s shareholders, and are entitled
  to vote on all matters on which holders of common stock are entitled to vote.
  Each holder of special convertible preferred stock present in person, or the
  person representing such holder, is entitled to a number of votes equal to the
  number of shares of common stock that would be issued upon conversion of the
  special convertible preferred stock held by such holder on the record date.

*B
  class preference shares*

Net1
  owns 100% of the A class common stock and A class loans in issue of New Aplitec.
  The B class preference shares rank pari passu with the New Aplitec A
  class stock in respect of participation in dividends and return of capital prior
  to winding-up of New Aplitec. The B class preference shares shall not, however,
  participate in dividends or a return of capital on a winding-up of New Aplitec
  for any reason. However, the unit holders will participate, as the B class preference
  stock will automatically convert into Company common stock on a winding-up of
  New Aplitec. The B class preference shares cannot be sold or transferred other
  than to Net1 pursuant to the occurrence of a trigger event. Therefore, the B
  class preference shares, the B class loans and the rights to receive Company
  special convertible preferred stock are linked together and cannot be traded
  separately.

F-24

---

|NET 1 UEPS TECHNOLOGIES, INC.                                                            
|-----------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                           
|for the years ended June 30, 2006, 2005 and 2004                                         
|(All amounts stated
      in thousands of United States Dollars, unless otherwise stated)

**10.**     **CAPITAL
  STRUCTURE AND CREDITOR RIGHTS ATTACHED TO THE B CLASS LOANS (continued)**

*B
  class preference shares (continued)*

The
  holders of B class preference shares will only be entitled to vote on matters
  which directly affect the rights attaching to the B class preference shares.
  At every general meeting of New Aplitec at which more than one class of shareholders
  are present and entitled to vote, unit holders of the South African Trust which
  in turn holds the B class preference shares, shall be entitled, upon a poll,
  to that proportion of the total votes in New Aplitec which the aggregate number
  of B class preference shares held bears to the aggregate number of all shares
  entitled to be voted at such meeting (provided that no resolution for the declaration
  of a dividend or for the disposal of any intellectual property of New Aplitec
  shall be passed unless unit holders representing 50.1% of the B class preference
  shares present at the meeting in person or represented by proxy vote in favor
  of such resolution).

*B
  class loans*

The
  B class loans are unsecured and repayable as and when directed by the board
  of directors of New Aplitec provided that no capital may be repaid until at
  least 30 days have lapsed from the date of drawdown of the loans, and subject
  to South African Exchange Control approval. The loans will bear interest at
  such rates as may be determined by the board of directors of New Aplitec at
  the beginning of each year, but shall not be more than the prime rate as quoted
  by Standard Bank of South Africa Limited from time to time. Interest, if so
  declared by the board of directors of New Aplitec, will be payable by New Aplitec
  semi-annually in arrears.

*Conversion
  of special convertible preferred stock to common stock*

Special
  convertible preferred stock is convertible into shares of common stock on a
  one-for-one basis upon the occurrence of a trigger event. With each converted
  share of special convertible preferred stock that is converted, Net1 will receive:

- 7.368421056 B class preference shares; and
- such holders interest in the New Aplitec B loan accounts.

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

During
  the year ended June 30, 2006, 19,418,422 shares of special convertible preferred
  stock were converted to common stock. The trigger events that gave rise to these
  conversions were requests by linked unit-holders to sell and/or convert 143,083,089
  linked units during year ended June 30, 2006. The net result of these conversions
  was that 143,083,089 B class preference shares and B class loans were ceded
  to Net1 during the year ended June 30, 2006, which converted 19,418,422 shares
  of special convertible preferred stock to 19,418,422 common stock in return
  for the ownership of the 143,083,089 B class preferred shares and B class loans.
  As a result of the conversion, the number of outstanding shares of common stock
  has increased by 19,418,422 and the number of outstanding shares of special
  convertible preferred stock has decreased by 19,418,422. In addition, as a consequence
  of the conversion, Net1 now owns 183,076,435 B class preferred shares and B
  class loans. The reduction in the B class preference shares from $0.031 million
  to $0.009 million is due to the cession to Net1 of the B class preference shares
  as a result of the trigger events.

During
  the year ended June 30, 2005, 5,427,669 shares of special convertible preferred
  stock were converted to common stock. The trigger events that gave rise to these
  conversions were requests by linked unit-holders to sell and/or convert 39,993,346
  linked units during year ended June 30, 2005. The net result of these conversions
  was that 39,993,346 B class preference shares and B class loans were ceded to
  Net1 during the year ended June 30, 2005, which converted 5,427,669 shares of
  special convertible preferred stock to 5,427,669 common stock in return for
  the ownership of the 39,993,346 B class preferred shares and B class loans.
  As a result of the conversion, the number of outstanding shares of common stock
  has increased by 5,427,669 and the number of outstanding shares of special convertible
  preferred stock has decreased by 5,427,669. In addition, as a consequence of
  the conversion, Net1 now owns 39,993,346 B class preferred shares and B class
  loans. The reduction in the B class preference shares from $0.038 million to
  $0.031 million is due to the cession to Net1 of the B class preference shares
  as a result of the trigger events.

F-25

---

|NET 1 UEPS TECHNOLOGIES, INC.                                                            
|-----------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                           
|for the years ended June 30, 2006, 2005 and 2004                                         
|(All amounts stated
      in thousands of United States Dollars, unless otherwise stated)

**11.**     **REVENUE**

|                             |   | 2006    |  |   | 2005    |  |   | 2004    | 
|---------------------------- | - | ------- |  | - | ------- |  | - | ------- | 
|                             |   |         |  |   |         |  |   |         | 
|Sale of goods                | $ | 17,867  |  | $ | 11,885  |  | $ | 3,321   | 
|Loan based interest received |   | 15,017  |  |   | 19,069  |  |   | 15,678  | 
|Services rendered            |   | 163,214 |  |   | 145,336 |  |   | 112,099 | 
|                             | $ | 196,098 |  | $ | 176,290 |  | $ | 131,098 | 

**12.**     **STOCK-BASED
  COMPENSATION**

***2004
  Stock Incentive Plan***

The
  shareholders of Net1 approved the 2004 Stock Incentive Plan (the Plan)
  on May 27, 2004. The Plan permits Net1 to grant to its employees, directors
  and consultants incentive stock options, nonqualified stock options, stock appreciation
  rights, restricted stock, performance-based awards and other awards based on
  its common stock. The Remuneration Committee of Net1s board of directors
  (the Committee) administers the Plan.

Term

No
  awards may be granted under the Plan after the tenth anniversary of the effective
  date of the Plan, but awards granted before such tenth anniversary may extend
  beyond that date.

Shares
  Reserved for Awards and Limits on Awards

The
  total number of shares of common stock initially available under the Plan was
  2,906,980, of which 1,453,490 shares were used with respect to stock options,
  and 1,453,490 shares were used in respect of other stock-based awards. The maximum
  number of shares for which stock options and stock appreciation rights, or for
  which other stock-based awards may be granted during a calendar year to any
  participant is 436,047, which is approximately 30% of the total number of shares
  that may be used with respect to stock options or stock-based awards under the
  Plan.

Options
  Granted under 2004 Stock Incentive Plan

In
  2004, all stock options available for grant under the Plan were granted to the
  Companys directors, officers, other employees and other eligible participants
  as non-qualified stock options. 20% of these options became exercisable on the
  date of grant, and 20% of the remaining options become exercisable on first,
  second, third and fourth anniversaries of the date of grant. The options expire
  ten years from date of grant. Under the rules governing the stock options, those
  stock options held by persons other than directors and executive officers are
  automatically exercised on the date they first become exercisable, with payment
  upon exercise provided by a loan from Net1 to the option holder. Such loans
  are on a recourse basis and bear interest at market rates. Stock options held
  by directors and executive officers are not automatically exercised when they
  first become exercisable and no loan is extended for the payment for the exercise
  price upon exercise. All shares acquired upon exercise, whether held by directors,
  executive officers or others, may only be sold eleven months after they become
  exercisable, except as otherwise permitted by the Committee.

Stock
  Appreciation Rights

The
  Committee also may grant stock appreciation rights, either singly or in tandem
  with underlying stock options. Stock appreciation rights entitle the holder
  upon exercise to receive an amount in any combination of cash or shares of our
  common stock (as determined by the committee) equal in value to the excess of
  the fair market value of the shares covered by the right over the grant price.
  No stock appreciation rights have been granted.

F-26

---

|NET 1 UEPS TECHNOLOGIES, INC.                                                            
|-----------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                           
|for the years ended June 30, 2006, 2005 and 2004                                         
|(All amounts stated
      in thousands of United States Dollars, unless otherwise stated)

**12.**     **STOCK-BASED
  COMPENSATION (continued)**

***2004
  Stock Incentive Plan (continued)***

Other
  Stock-Based Awards granted under 2004 Stock Incentive Plan

In
  2004, as a condition precedent to the Aplitec transaction, other stock-based
  awards available for grant under the 2004 Stock Incentive Plan were granted
  to directors, officers and other persons. These grants were valued at $3.00
  per other stock-based award, vest immediately and can be exercised ratably,
  on an annual basis, over a period of five years, commencing with the grant date.
  Market value for the shares was determined to be the price that the private
  equity funds that funded the Aplitec transaction paid for their shares in Net1.
  The total cost related to these grants recognized in income for the year ended
  June 30, 2004 is approximately $4.3 million. The 2004 Stock Incentive Plan permits
  the Committee to grant awards that are valued by reference to, or otherwise
  based on the fair market value of, our common stock. These awards will be in
  such form and subject to such conditions, as the committee may determine, including
  the satisfaction of performance goals, the completion of periods of service
  or the occurrence of events.

**Other
  stock options**

In
  January 2006, Net1 issued a non-qualified option to purchase 200,000 shares
  of common stock at an exercise price of $30.71 per share to a new employee.
  These options become exercisable ratably over a period of five years commencing
  January 9, 2007. The Company believes that it is reasonably likely that the
  employee will exercise the options on each exercise date. Any unexercised options
  granted to the employee expire on January 9, 2016. The options were valued using
  the Cox Ross Rubinstein binomial model using the following assumptions: a risk-free
  rate of return of 4.5%, a dividend yield of 0% and estimated expected volatilities
  ranging from 24% to 40% over the expected life of the options. The weighted
  average estimated expected volatility is 32% and was calculated based on the
  volatilities of similar listed companies within the payment processing industry.
  Using the Cox Ross Rubinstein binomial model, the fair value of these options
  on the grant date was $1.6 million.

**Adoption
  of SFAS 123R and stock-based compensation charge**

The
  Company has elected to adopt the modified prospective application method as
  provided by FAS 123R and accordingly, from the effective date, compensation
  cost is recognized based on the requirements of FAS 123R for all new share-based
  awards and based on the requirements of FAS 123 for all awards granted prior
  to the effective date of FAS 123R that remain unvested on the effective date.
  Prior period amounts have not been restated. The adoption of FAS 123R did not
  have an impact on the options granted pursuant to the 2004 Stock Incentive Plan
  as the Company accounted for the stock-based compensation charge for these options
  in accordance with APB 25.

Under
  FAS 123R, the Company has recorded a stock compensation charge of $0.2 million
  for the year ended June 30, 2006 related to this 200,000 share option grant.
  The expense is recorded in general and administration in the audited consolidated
  statement of operations for the year ended June 30, 2006, based on the employees
  respective functions.

F-27

---

|NET 1 UEPS TECHNOLOGIES, INC.                                                            
|-----------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                           
|for the years ended June 30, 2006, 2005 and 2004                                         
|(All amounts stated
      in thousands of United States Dollars, unless otherwise stated)

**12.**     **STOCK-BASED
  COMPENSATION (continued)**

The
  stock compensation charge under APB 25 for the years ended June 30, 2005 and
  2004 was $0, and $4.36 million, respectively. Had compensation expense for share
  options granted under the stock option plan been determined based on fair value
  at the grant dates consistent with the method required in accordance with FAS
  123, the Companys net income and earnings per share for 2005 and 2004
  would have been as presented in the pro-forma disclosures below:

|                                                                                                                                               |   | 2005   |  |   | 2004   |  
|---------------------------------------------------------------------------------------------------------------------------------------------- | - | ------ |  | - | ------ | -
|                                                                                                                                               |   |        |  |   |        |  
|Net income                                                                                                                                     | $ | 44,562 |  | $ | 13,278 |  
|Add back: stock-based compensation expense included in reported
      net income, net of related tax effects                                   |   | -      |  |   | 4,360  |  
|Deduct: total stock-based compensation expense
      determined under fair value based method for all awards, net of related
      tax effects |   | -      |  |   | (6,257 | )
|                                                                                                                                               |   |        |  |   |        |  
|Pro-forma net income                                                                                                                           | $ | 44,562 |  | $ | 11,381 |  
|                                                                                                                                               |   |        |  |   |        |  
|Earnings per share, in US cents:                                                                                                               |   |        |  |   |        |  
|Basic, as reported                                                                                                                             |   | 81.4   |  |   | 39.6   |  
|Basic, pro forma                                                                                                                               |   | 81.4   |  |   | 32.4   |  
|                                                                                                                                               |   |        |  |   |        |  
|Weighted average assumptions(1):                                                                                                               |   |        |  |   |        |  
|Risk-free interest rate                                                                                                                        |   | 3.50%  |  |   | 3.50%  |  
|Dividend yield                                                                                                                                 |   | 0.00%  |  |   | 0.00%  |  
|Stock volatility                                                                                                                               |   | 72.00% |  |   | 72.00% |  
|Average expected life (years)                                                                                                                  |   | 7.00   |  |   | 7.00   |  

(1)
  the 2005 and 2004 assumptions are based on stock issued under the 2004 Stock
  Incentive Plan.

The
  Company has recognized a deferred tax asset of approximately $0.06 million related
  to its stock compensation charge under FAS 123R. However, the Companys
  management has provided a valuation allowance of approximately $0.06 million
  against this deferred tax asset because the Company can not be assured it is
  more likely than not it will, together with its accumulated losses, utilize
  the tax deduction related to the stock compensation charge in future periods.

As
  of June 30, 2006, the total unrecognized compensation cost related to stock
  options is approximately $1.4 million. The total unrecognized compensation cost
  is expected to be recognized over 4.50 years. As of June 30, 2006, the interest
  due from employees related to stock options exercised was approximately $0.01
  million.

Activity
  under the 2004 Stock Incentive Plan and the options granted to the new employee
  in January 2006 for the years ended June 30, 2006, 2005, and 2004 is summarized
  as follows:

|                                    |  |           |   |          |  |  | Weighted    |  |   |           | 
|----------------------------------- |  | --------- | - | -------- |  |  | ----------- |  | - | --------- | 
|                                    |  |           |   |          |  |  | Average     |  |   |           | 
|                                    |  |           |   | Weighted |  |  | Remaining   |  |   | Aggregate | 
|                                    |  |           |   | average  |  |  | Contractual |  |   | Intrinsic | 
|                                    |  | Number of |   | exercise |  |  | Term        |  |   | Value     | 
|                                    |  | shares    |   | price    |  |  | (in years)  |  |   | ($000)   | 
|Balance outstanding  July 1, 2003  |  | -         |   |          |  |  |             |  |   |           | 
|Granted                             |  | 1,453,490 |   | $3.00    |  |  | 10.00       |  |   |           | 
|Exercised                           |  | -         |   |          |  |  |             |  |   |           | 
|Balance outstanding  June 30, 2004 |  | 1,453,490 |   | 3.00     |  |  | 10.00       |  | $ | 13,395    | 
|Exercised                           |  | (581,396  | ) | 3.00     |  |  |             |  |   | 9,558     | 
|Balance outstanding  June 30, 2005 |  | 872,094   |   | 3.00     |  |  | 9.00        |  |   | 14,302    | 
|Granted to new
      employee       |  | 200,000   |   | 30.71    |  |  | 10.00       |  |   |           | 
|Exercised                           |  | (239,367  | ) | 3.00     |  |  |             |  |   | 6,331     | 
|Balance outstanding  June 30, 2006 |  | 832,727   |   | 9.66     |  |  | 8.36        |  |   | 22,775    | 
|                                    |  |           |   |          |  |  |             |  |   |           | 
|Exercisable                         |  | 41,731    |   | $3.00    |  |  | 8.00        |  | $ | 1,141     | 

F-28

---

|NET 1 UEPS TECHNOLOGIES, INC.                                                            
|-----------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                           
|for the years ended June 30, 2006, 2005 and 2004                                         
|(All amounts stated
      in thousands of United States Dollars, unless otherwise stated)

**12.**     **STOCK-BASED
  COMPENSATION (continued)**

During
  the years ended June 30, 2006, 2005 and 2004, the following activity occurred
  under the Companys 2004 Stock Incentive Plan:

|                                                 |   |       |  |   | Year ended June 30, |  |   |      | 
|------------------------------------------------ | - | ----- |  | - | ------------------- |  | - | ---- | 
|                                                 |   | 2006  |  |   | 2005                |  |   | 2004 | 
|Total intrinsic value of stock options exercised | $ | 6,331 |  | $ | 9,558               |  | $ | -    | 

During
  each of the years ended June 30, 2006, 2005 and 2004, approximately 300,000
  respectively, stock options became exercisable.

During
  the year ended June 30, 2006, the Company received approximately $1.6 million
  from employees exercising stock options and approximately $1.1 million from
  employees repaying loans granted. Other than the award made in January 2006,
  the Company does not anticipate receiving any taxation benefits from the exercise
  of options by employees.

Net1
  issues new shares to satisfy stock option exercises. Awards that expire or are
  cancelled without delivery of shares generally become available for issuance
  under the 2004 Stock Incentive Plan.

The
  Company acquired the issued and outstanding share capital of Prism Holdings
  Limited (Prism) for $0.16 (R1.16 using the U.S. dollar/ South African
  rand exchange rate as of June 30, 2006) per share. In terms of an amendment
  to the agreement between the Company and Prism, the Company is required to grant
  904,674 stock options to executives and other employees of Prism. The exercise
  price is $22.51 per share, which is the average of the high and low prices of
  the Company as quoted on The Nasdaq Global Market on August 24, 2006, the date
  that the Companys board approved the amendment to the agreement. These
  options will vest ratably over a five year period. It is impossible to determine
  the expected fair value of these options as the Companys management has
  not had sufficient time since August 24, 2006 to evaluate all variables involved
  in valuing these options. The fair value of these options will be valued using
  the same model used to value the options granted in January 2006, namely, the
  Cox Ross Rubenstein binomial model.

**13.**     **INCOME
  TAXES**

Presented
  below is the analysis of the income tax provision for each of the years ended
  June 30, and the reconciliation of income taxes, calculated at the statutory
  South African income tax rate, to the income tax provision included in the accompanying
  statements of operations for each of the years ended June 30:

|                                                  |   | 2006    |   |   | 2005    |   |   | 2004   | 
|------------------------------------------------- | - | ------- | - | - | ------- | - | - | ------ | 
|Income tax provision                              |   |         |   |   |         |   |   |        | 
|Current
      income tax provision                | $ | 35,027  |   | $ | 30,164  |   | $ | 21,298 | 
|Capital gains tax                                 |   | -       |   |   | -       |   |   | 4,012  | 
|Change in
      tax rate                          |   | (155    | ) |   | -       |   |   | -      | 
|Deferred taxation charge
      (benefit)          |   | 1,781   |   |   | (498    | ) |   | 617    | 
|Income tax provision                              | $ | 36,653  |   | $ | 29,666  |   | $ | 25,927 | 
|                                                  |   |         |   |   |         |   |   |        | 
|Income tax rate reconciliation                    |   |         |   |   |         |   |   |        | 
|Income taxes at statutory South African tax rates |   | 36.89%  |   |   | 37.78%  |   |   | 37.78% | 
|Permanent items                                   |   | 0.63%   |   |   | 1.47%   |   |   | 9.95%  | 
|Movement in valuation allowance                   |   | 1.02%   |   |   | 1.00%   |   |   | 8.29%  | 
|Capital gains tax                                 |   | -%      |   |   | -%      |   |   | 10.26% | 
|Change in tax rate                                |   | (0.16)% |   |   | -%      |   |   | -%     | 
|Income tax provision                              |   | 38.38%  |   |   | 40.25%  |   |   | 66.28% | 
|Current                                           |   | 36.68%  |   |   | 40.93%  |   |   | 54.44% | 
|Capital
      gains tax                           |   | -%      |   |   | -%      |   |   | 10.26% | 
|Change in tax rate                                |   | (0.16)% |   |   | -%      |   |   | -%     | 
|Deferred                                          |   | 1.86%   |   |   | (0.68)% |   |   | 1.58%  | 

In
  July 2005, the enacted tax rate in South Africa changed from 37.78% to 36.89%
  . There were no changes to the enacted tax rate in years ended June 30, 2005
  and 2004.

F-29

---

|NET 1 UEPS TECHNOLOGIES, INC.                                                            
|-----------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                           
|for the years ended June 30, 2006, 2005 and 2004                                         
|(All amounts stated
      in thousands of United States Dollars, unless otherwise stated)

**13.**     **INCOME
  TAXES (continued)**

During
  the year ended June 30, 2006, one of the Companys subsidiaries in South
  Africa utilized approximately $3.1 million of its net operating loss carry forward.

The
  following table shows the significant components included in deferred income
  taxes as at June 30:

|                                                            |   | 2006   |   |   | 2005   |  
|----------------------------------------------------------- | - | ------ | - | - | ------ | -
|                                                            |   |        |   |   |        |  
|Deferred tax assets                                         |   |        |   |   |        |  
|                                                            |   |        |   |   |        |  
|Assessed
      losses                                       | $ | 4,144  |   | $ | 5,452  |  
|Provisions and accruals                                     |   | 1,443  |   |   | 1,332  |  
|FTS patent                                                  |   | 2,549  |   |   | 2,996  |  
|Deferred income                                             |   | 416    |   |   | -      |  
|Intangible
      assets                                     |   | 66     |   |   | 1,920  |  
|Other                                                       |   | 447    |   |   | 410    |  
|Total deferred tax assets before valuation allowance        |   | 9,065  |   |   | 12,110 |  
|Valuation allowances                                        |   | (4,720 | ) |   | (4,996 | )
|Total deferred tax assets, net
      of valuation allowance |   | 4,345  |   |   | 7,114  |  
|                                                            |   |        |   |   |        |  
|Total deferred tax liabilities:                             |   |        |   |   |        |  
|                                                            |   |        |   |   |        |  
|Intangible
      assets                                     |   | 1,185  |   |   | 1,472  |  
|Prepaid expenses                                            |   | 284    |   |   | 1,082  |  
|STC liability,
      net of STC credits                     |   | 17,253 |   |   | 11,605 |  
|Other                                                       |   | 232    |   |   | -      |  
|Total deferred tax liabilities                              |   | 18,954 |   |   | 14,159 |  
|                                                            |   |        |   |   |        |  
|Reported as                                                 |   |        |   |   |        |  
|Current deferred tax assets                                 |   | 3,237  |   |   | 3,354  |  
|Long term
      deferred tax liabilities                    |   | 17,846 |   |   | 10,399 |  
|                                                            |   |        |   |   |        |  
|Net deferred income tax liabilities                         | $ | 14,609 |   | $ | 7,045  |  

The
  utilization of deferred tax assets is dependent on the Companys future
  operating profits. Management is not aware of any trends, events, or transactions
  that are expected to affect future levels of taxable income. Management is of
  the opinion that based on the weight of available positive and negative evidence
  it is more likely than not that the results of future operations will generate
  sufficient taxable income to realize the deferred tax assets above, except for
  certain tax losses discussed below.

A
  portion of the valuation allowance raised against the deferred tax assets relates
  to net operating losses incurred by Net1. Management has not recognized any
  of the potential benefit of these net operating losses because the Company can
  not be assured it is more likely than not it will utilize the net operating
  loss carried forward in future years. There was no significant movement in the
  valuation allowance during the year ended June 30, 2006. The valuation allowance
  as of June 30, 2006 is approximately $3.0 million.

F-30

---

|NET 1 UEPS TECHNOLOGIES, INC.                                                            
|-----------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                           
|for the years ended June 30, 2006, 2005 and 2004                                         
|(All amounts stated
      in thousands of United States Dollars, unless otherwise stated)

**13.**     **INCOME
  TAXES (continued)**

In
  addition, at the end of the 2005 fiscal year it was determined that certain
  intangible assets and the FTS patent had new tax bases as a result of certain
  reorganizations that occurred in connection with the Aplitec transaction. Consequently
  a gross deferred tax asset of $6.9 million was recognized in respect of these
  deductible temporary differences and the other side of the entry was recorded
  directly in equity in accordance with the requirements of EITF Issue No. 94-10,
  Accounting by a Company for the Income Tax Effects of Transactions Among
  or With Its Shareholders Under FASB Statement No. 109. The tax deduction
  for the intangible asset is claimable in two equal amounts beginning in the
  tax year ended June 30, 2005. The tax deduction for the FTS patent is claimable
  over a 20 year period beginning in the tax year ended June 30, 2005. Management
  has considered all available evidence, both positive and negative, including
  forecasts of taxable income over its five-year forecasting period, and determined
  based on the weight of that evidence, that as at 30 June 2006, a valuation allowance
  is neededfor approximately 72% of the deduction claimable related to
  the FTS patent as there may not be sufficient taxable income in the future to
  offset this deduction. The valuation allowance of $2.3 million recognized on
  initial recognition of the deferred tax asset has also been charged directly
  against equity resulting in a net credit to equity of $4.6 million. There was
  no significant movement in the valuation allowance during the year ended June
  30, 2006. The valuation allowance as of June 30, 2006 is approximately $1.7
  million.

In
  June 2005 three wholly owned dormant subsidiaries of New Aplitec were liquidated.
  A liquidation dividend was paid to New Aplitec which resulted in approximately
  $0.5 million of STC paid to the South African Revenue Services. New Aplitec
  is entitled to claim a credit for this STC paid if it declares and pays a dividend
  to its shareholders. This STC credit has been netted against the STC liability
  included in deferred tax liabilities.

Net1
  has incurred net operating losses as detailed in the following table:

|Year of loss |   | Amount |  |  | Year of    | 
|------------ | - | ------ |  |  | ---------- | 
|             |   |        |  |  | Expiration | 
|1997         | $ | 135    |  |  | 2012       | 
|1998         |   | 659    |  |  | 2013       | 
|1999         |   | 267    |  |  | 2014       | 
|2000         |   | 336    |  |  | 2015       | 
|2001         |   | 674    |  |  | 2016       | 
|2002         |   | 166    |  |  | 2017       | 
|2003         |   | 282    |  |  | 2018       | 
|2004         |   | 4,532  |  |  | 2019       | 
|2005         |   | 157    |  |  | 2020       | 
|2006         |   | 389    |  |  | 2021       | 
|             | $ | 7,597  |  |  |            | 

Net
  operating losses incurred in South Africa generally expire if a company does
  not trade during the year. In South Africa, the subsidiary company which incurred
  the losses is currently trading and will continue to trade for the foreseeable
  future. This company’s net operating losses is presented in the following
  table:

|Year of loss                                                                     |   | Amount |  |  |  | 
|-------------------------------------------------------------------------------- | - | ------ |  |  |  | 
|2004 and prior, net of utilization (at June
      30, 2006 rate of $1: ZAR 7.27) | $ | 1,342  |  |  |  | 
|2005                                                                             |   | -      |  |  |  | 
|2006                                                                             |   | -      |  |  |  | 
|                                                                                 | $ | 1,342  |  |  |  | 

F-31

---

|NET 1 UEPS TECHNOLOGIES, INC.                                                            
|-----------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                           
|for the years ended June 30, 2006, 2005 and 2004                                         
|(All amounts stated
      in thousands of United States Dollars, unless otherwise stated)

**14.**     **EARNINGS
  PER SHARE**

The
  entire consolidated net income of the Company is attributable to the shareholders
  of the Company comprising both the holders of Net1 common stock and the holders
  of linked units. As described in Note 10, the linked units have the same rights
  and entitlements as those attached to common stock.

As
  the linked units owned by holders are exchangeable for special convertible preferred
  stock at the ratio of 7.37:1, which is then converted to common stock at the
  ratio of 1:1, the basic earnings per share for the common stock and linked units
  are the same and is calculated by dividing the net income by the combined number
  (56.5 million) of weighted average common stock (49.2 million) and special convertible
  preferred stock (7.3 million) in issue. Diluted earnings per share has been
  calculated to give effect to the number of additional common stock/ linked units
  that would have been outstanding if the potential dilutive instruments had been
  issued in each period.

The
  weighted average number of outstanding shares presented below includes the common
  stock as well as the special convertible preferred stock, as the holders of
  special convertible preferred stock have the same rights and entitlements as
  those attached to the common stock.

The
  following tables detail the weighted average number of outstanding shares used
  for the calculation of earnings per share as of June 30, 2006, 2005 and 2004.

|                                                                                      |  | 2006   |  |  | 2005   |  |  | 2004   | 
|------------------------------------------------------------------------------------- |  | ------ |  |  | ------ |  |  | ------ | 
|                                                                                      |  | 000   |  |  | 000   |  |  | 000   | 
|Weighted average number of outstanding shares
      of common stock  basic           |  | 49,198 |  |  | 27,984 |  |  | 1,420  | 
|Weighted average effect of dilutive securities: employee stock
      options          |  | 712    |  |  | 636    |  |  | 46     | 
|Weighted average number of outstanding shares
      of common stock  diluted         |  | 49,910 |  |  | 28,620 |  |  | 1,466  | 
|                                                                                      |  |        |  |  |        |  |  |        | 
|                                                                                      |  | 2006   |  |  | 2005   |  |  | 2004   | 
|                                                                                      |  | 000   |  |  | 000   |  |  | 000   | 
|Weighted average number of outstanding linked
      units  basic                     |  | 7,315  |  |  | 26,734 |  |  | 32,161 | 
|Weighted average effect of dilutive securities: employee stock
      options          |  | 106    |  |  | 607    |  |  | 1,030  | 
|Weighted average number of outstanding linked
      units  diluted                   |  | 7,421  |  |  | 27,341 |  |  | 33,191 | 
|                                                                                      |  |        |  |  |        |  |  |        | 
|                                                                                      |  | 2006   |  |  | 2005   |  |  | 2004   | 
|                                                                                      |  | 000   |  |  | 000   |  |  | 000   | 
|Total weighted average number of outstanding
      shares used to calculated earnings |  |        |  |  |        |  |  |        | 
|per share  basic                                                                     |  | 56,513 |  |  | 54,718 |  |  | 33,581 | 
|                                                                                      |  |        |  |  |        |  |  |        | 
|Total weighted average number of outstanding shares used to
      calculated earnings |  |        |  |  |        |  |  |        | 
|per share  diluted                                                                   |  | 57,331 |  |  | 55,961 |  |  | 34,657 | 

**15.**     **COMPREHENSIVE
  INCOME (LOSS)**

The
  Companys comprehensive income consists of net income and foreign currency
  translation gains and losses which, under GAAP, are excluded from net income.
  Total comprehensive income for each of the three years ended June 30, 2006 was:

|                                         |   | 2006    |   |   | 2005   |   |   | 2004   | 
|---------------------------------------- | - | ------- | - | - | ------ | - | - | ------ | 
|Net income                               | $ | 59,232  |   | $ | 44,562 |   | $ | 13,278 | 
|Foreign currency translation adjustments |   | (17,077 | ) |   | (7,725 | ) |   | 16,001 | 
|                                         | $ | 42,155  |   | $ | 36,837 |   | $ | 29,279 | 

F-32

---

|NET 1 UEPS TECHNOLOGIES, INC.                                                            
|-----------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                           
|for the years ended June 30, 2006, 2005 and 2004                                         
|(All amounts stated
      in thousands of United States Dollars, unless otherwise stated)

**16.**     **RECONCILIATION
  OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES**

|                                                                            |   | 2006    |   |   | 2005    |   |   | 2004   |  
|--------------------------------------------------------------------------- | - | ------- | - | - | ------- | - | - | ------ | -
|                                                                            |   |         |   |   |         |   |   |        |  
|Net income                                                                  | $ | 59,232  |   | $ | 44,562  |   | $ | 13,278 |  
|Adjustments to reconcile net income to net cash provided by
      operating |   |         |   |   |         |   |   |        |  
|activities:                                                                 |   |         |   |   |         |   |   |        |  
|Depreciation and amortization                                               |   | 5,710   |   |   | 6,591   |   |   | 5,676  |  
|Corporate
      finance fee                                                 |   | -       |   |   | 95      |   |   | -      |  
|Earnings from equity-accounted
      investments                            |   | (383    | ) |   | (536    | ) |   | (87    | )
|(Profit)
      loss on disposal of property, plant and equipment            |   | (210    | ) |   | 14      |   |   | 14     |  
|Profit on disposal of business                                              |   | (10     | ) |   | -       |   |   | -      |  
|Fair value
      adjustment related to financial liabilities                |   | 6       |   |   | 49      |   |   | 33     |  
|Fair value of foreign currency
      exchange contracts                     |   | (90     | ) |   | (507    | ) |   | 483    |  
|Interest
      received from equity-accounted investments                   |   | -       |   |   | (129    | ) |   | (68    | )
|Stock compensation charge
      related to awards of stock/ options         |   | 150     |   |   | -       |   |   | 4,360  |  
|Stock issued
      related to transaction costs                             |   | -       |   |   | -       |   |   | 2,500  |  
|Write down of property,
      plant and equipment                           |   | 314     |   |   | -       |   |   | -      |  
|Changes
      in assets and liabilities:                                    |   |         |   |   |         |   |   |        |  
|(Increase)
      in accounts receivable and finance loans receivable        |   | (13,870 | ) |   | (5,462  | ) |   | (6,686 | )
|Decrease (Increase) in deferred expenditure on smart cards                  |   | 3,199   |   |   | 1,063   |   |   | (1,268 | )
|(Increase)
      in inventory                                               |   | (109    | ) |   | (979    | ) |   | (44    | )
|(Decrease) Increase in accounts payable and other payables                  |   | 13,183  |   |   | (1,850  | ) |   | 6,770  |  
|(Decrease)
      Increase in taxes payable                                  |   | (471    | ) |   | (10,723 | ) |   | 18,166 |  
|Increase (Decrease) in deferred taxes                                       |   | 9,126   |   |   | 5,954   |   |   | (1,232 | )
|Total adjustments                                                           |   | 16,546  |   |   | (6,420  | ) |   | 28,617 |  
|Net cash provided by operating
      activities                             | $ | 75,777  |   | $ | 38,142  |   | $ | 41,895 |  

**17.**     **OPERATING
  SEGMENTS**

The
  Company discloses segment information in accordance with FAS No. 131, Disclosure
  About Segments of an Enterprise and Related Information (FAS 131),
  which requires companies to determine and review their segments as reflected
  in the management information systems reports that their managers use in making
  decisions and to report certain entity-wide disclosures about products and services,
  major customers, and the material countries in which the entity holds assets
  and reports revenues.

The
  Company currently has four reportable segments which each operate mainly within
  South Africa: Transaction-based activities, Smart card accounts, Financial services
  and Hardware, software and related technology sales. The Companys reportable
  segments offer different products and services and require different resources
  and marketing strategies and share the Companys assets.

The
  Transaction-based activities segment currently consists mainly of a state pension
  and welfare benefit distribution service provided to provincial governments
  in South Africa. Fee income is earned based on the number of beneficiaries included
  in the government pay-file. This segment also includes fee income from the merchant
  retail application launched during the year ended June 30, 2005. This segment
  has individually significant customers that each provides more than 10% of the
  total revenue of the Company. For the year ended June 30, 2006, there were three
  such customers, providing 38%, 19% and 12% of total revenue (2005: three such
  customers, providing 36%, 20% and 12% of total revenue; 2004: three such customers,
  providing 38%, 22% and 11% of total revenue).

The
  Smart card accounts segment derives revenue from the provision of smart card
  accounts, as a fixed monthly fee per card is charged for the maintenance of
  these accounts.

The
  Financial Services segment derives revenue from the provision of short-term
  personal lending activities and life insurance products. Interest income is
  recognized in the income statement as it falls due, using the interest method
  by reference to the constant interest rate stated in each loan agreement.

F-33

---

|NET 1 UEPS TECHNOLOGIES, INC.                                                            
|-----------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                           
|for the years ended June 30, 2006, 2005 and 2004                                         
|(All amounts stated
      in thousands of United States Dollars, unless otherwise stated)

**17.**     **OPERATING
  SEGMENTS (continued)**

The
  Hardware, software-related and technology sales segment markets, sells and implements
  the Universal Electronic Payment System (UEPS). The segment undertakes
  smart card system implementation projects, delivering hardware, software and
  business solutions in the form of customized systems. This segment also generates
  rental income from hardware provided to merchants enrolled in the Companys
  merchant retail application launched during the year ended June 30, 2005.

Corporate/Eliminations
  include the Companys head office cost centers in addition to the elimination
  of inter-segment transactions.

The
  Company evaluates segment performance based on operating income. The following
  tables summarize segment information which is prepared in accordance with GAAP:

|                                                      |   |         |   |   | June 30, |   |   |         |  
|----------------------------------------------------- | - | ------- | - | - | -------- | - | - | ------- | -
|                                                      |   | 2006    |   |   | 2005     |   |   | 2004    |  
|                                                      |   |         |   |   |          |   |   |         |  
|Revenues                                              |   |         |   |   |          |   |   |         |  
|Transaction-based activities                          | $ | 117,186 |   | $ | 103,653  |   | $ | 86,794  |  
|Smart card accounts                                   |   | 36,220  |   |   | 34,931   |   |   | 23,065  |  
|Financial services                                    |   | 16,129  |   |   | 20,215   |   |   | 16,633  |  
|Hardware, software and
      related technology sales |   | 26,563  |   |   | 17,491   |   |   | 4,606   |  
|Total                                                 |   | 196,098 |   |   | 176,290  |   |   | 131,098 |  
|                                                      |   |         |   |   |          |   |   |         |  
|Operating income                                      |   |         |   |   |          |   |   |         |  
|Transaction-based activities                          |   | 60,653  |   |   | 44,233   |   |   | 23,713  |  
|Smart card accounts                                   |   | 16,464  |   |   | 15,878   |   |   | 10,460  |  
|Financial services                                    |   | 6,929   |   |   | 9,316    |   |   | 6,778   |  
|Hardware, software and related technology
      sales |   | 16,721  |   |   | 5,689    |   |   | 1,232   |  
|Corporate/ Eliminations                               |   | (11,154 | ) |   | (3,813   | ) |   | (6,705  | )
|Total                                                 |   | 89,613  |   |   | 71,303   |   |   | 35,478  |  
|                                                      |   |         |   |   |          |   |   |         |  
|Interest earned                                       |   |         |   |   |          |   |   |         |  
|Transaction-based activities                          |   | -       |   |   | -        |   |   | -       |  
|Smart card accounts                                   |   | -       |   |   | -        |   |   | -       |  
|Financial services                                    |   | -       |   |   | -        |   |   | -       |  
|Hardware, software and related technology
      sales |   | -       |   |   | -        |   |   | -       |  
|Corporate/ Eliminations                               |   | 14,638  |   |   | 16,341   |   |   | 15,418  |  
|Total                                                 |   | 14,638  |   |   | 16,341   |   |   | 15,418  |  
|                                                      |   |         |   |   |          |   |   |         |  
|Interest expense                                      |   |         |   |   |          |   |   |         |  
|Transaction-based activities                          |   | 8,700   |   |   | 13,564   |   |   | 11,175  |  
|Smart card accounts                                   |   | -       |   |   | -        |   |   | -       |  
|Financial services                                    |   | 11      |   |   | 34       |   |   | 29      |  
|Hardware, software and related technology
      sales |   | 38      |   |   | 354      |   |   | 155     |  
|Corporate/ Eliminations                               |   | -       |   |   | -        |   |   | 419     |  
|Total                                                 |   | 8,749   |   |   | 13,952   |   |   | 11,778  |  
|                                                      |   |         |   |   |          |   |   |         |  
|Depreciation and amortization                         |   |         |   |   |          |   |   |         |  
|Transaction-based activities                          |   | 4,046   |   |   | 5,112    |   |   | 3,915   |  
|Smart card accounts                                   |   | -       |   |   | -        |   |   | -       |  
|Financial services                                    |   | 470     |   |   | 507      |   |   | 572     |  
|Hardware, software and related technology
      sales |   | -       |   |   | -        |   |   | 4       |  
|Corporate/ Eliminations                               |   | 1,194   |   |   | 972      |   |   | 1,185   |  
|Total                                                 | $ | 5,710   |   | $ | 6,591    |   | $ | 5,676   |  

F-34

---

|NET 1 UEPS TECHNOLOGIES, INC.                                                            
|-----------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                           
|for the years ended June 30, 2006, 2005 and 2004                                         
|(All amounts stated
      in thousands of United States Dollars, unless otherwise stated)

**17.**     **OPERATING
  SEGMENTS (continued)**

| |                                                       |   |         |   |   | June 30, |  |   |         |  
| | ----------------------------------------------------- | - | ------- | - | - | -------- |  | - | ------- | -
| |                                                       |   | 2006    |   |   | 2005     |  |   | 2004    |  
| |                                                       |   |         |   |   |          |  |   |         |  
| | Income taxation expense                               |   |         |   |   |          |  |   |         |  
| | Transaction-based activities                          | $ | 15,032  |   | $ | 9,182    |  | $ | 4,601   |  
| | Smart card accounts                                   |   | 4,774   |   |   | 4,751    |  |   | 3,138   |  
| | Financial services                                    |   | 2,005   |   |   | 2,749    |  |   | 2,023   |  
| | Hardware, software and related
      technology sales |   | 4,838   |   |   | 1,540    |  |   | 323     |  
| | Corporate/ Eliminations                               |   | 10,004  |   |   | 11,444   |  |   | 15,842  |  
| | Total                                                 |   | 36,653  |   |   | 29,666   |  |   | 25,927  |  
| |                                                       |   |         |   |   |          |  |   |         |  
| | Net income                                            |   |         |   |   |          |  |   |         |  
| | Transaction-based activities                          |   | 36,919  |   |   | 21,484   |  |   | 7,944   |  
| | Smart card accounts                                   |   | 11,690  |   |   | 11,125   |  |   | 7,322   |  
| | Financial services                                    |   | 4,913   |   |   | 6,536    |  |   | 4,721   |  
| | Hardware, software and related
      technology sales |   | 11,847  |   |   | 3,792    |  |   | 754     |  
| | Corporate/ Eliminations                               |   | (6,137  | ) |   | 1,625    |  |   | (7,463  | )
| | Total                                                 |   | 59,232  |   |   | 44,562   |  |   | 13,278  |  
| |                                                       |   |         |   |   |          |  |   |         |  
| | Segment assets                                        |   |         |   |   |          |  |   |         |  
| | Total                                                 |   | 269,979 |   |   | 181,754  |  |   | 152,632 |  
| |                                                       |   |         |   |   |          |  |   |         |  
| | Expenditures for long-lived assets                    |   |         |   |   |          |  |   |         |  
| | Transaction-based activities                          |   | 1,372   |   |   | 2,604    |  |   | 2,371   |  
| | Smart card accounts                                   |   | -       |   |   | -        |  |   | -       |  
| | Financial services                                    |   | 449     |   |   | 832      |  |   | 185     |  
| | Hardware, software and related technology sales       |   | -       |   |   | -        |  |   | 34      |  
| | Corporate/ Eliminations                               |   | -       |   |   | -        |  |   | 218     |  
| | Total                                                 | $ | 1,821   |   | $ | 3,436    |  | $ | 2,808   |  

The
  segment information as reviewed by the chief operating decision maker does not
  include a measure of segment assets per segment as all of the significant assets
  are used in the operations of all, rather than any one, of the segments. The
  Company does not have dedicated assets assigned to a particular operating segment.
  Accordingly, it is not meaningful to attempt an arbitrary allocation and segment
  asset allocation is therefore not presented.

**18.**     **FAIR
  VALUE OF FINANCIAL INSTRUMENTS**

*Initial
  recognition and measurement*

Financial
  instruments are recognized when the Company becomes a party to the transaction.
  Initial measurements are at cost, which includes transaction costs subsequent
  to initial recognition. These instruments are measured as set out below:

*Trade
  and other receivables*

Trade
  and other receivables originated by the Company are stated at cost less allowance
  for doubtful debts. The fair value of trade and other receivables approximate
  their carrying value due to their short-term nature.

*Trade
  and other payables*

The
  fair values of trade and other payables approximates their carrying amounts,
  due to their short-term nature.

F-35

---

|NET 1 UEPS TECHNOLOGIES, INC.                                                            
|-----------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                           
|for the years ended June 30, 2006, 2005 and 2004                                         
|(All amounts stated
      in thousands of United States Dollars, unless otherwise stated)

**18.**     **FAIR
  VALUE OF FINANCIAL INSTRUMENTS (continued)**

*Risk
  management*

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

**Currency
  Exchange Risk**

The
  Company is subject to currency exchange risk because it purchases inventories
  that it is required to settle in other currencies, primarily the euro and U.S.
  dollar. The Company has used forward contracts in order to limit its exposure
  in these transactions to fluctuations in exchange rates between the South African
  rand, on the one hand, and the U.S. dollar and the euro, on the other hand.

As
  of June 30, 2006, 2005 and 2004, the outstanding foreign exchange contracts
  are as follows:

**As
  of June 30, 2006**

Notional amount
      Strike price
      MaturityEUR 627,372
      ZAR 8.0529
      November 30, 2006EUR 17,091
      ZAR 8.5339
      August 1, 2006EUR (627,372)
      ZAR 8.2625
      November 30, 2006As of June 30, 2005Notional amount
      Strike price
      MaturityUSD 98,000
      ZAR 6.0542
      September 30, 2005EUR 57,000
      ZAR 8.3404
      August 25, 2005EUR 285,000
      ZAR 8.4137
      October 25, 2005EUR 798,000
      ZAR 8.4494
      November 25, 2005EUR 39,000
      ZAR 8.4793
      November 30, 2005EUR 106,950
      ZAR 8.4078
      November 14, 2005EUR 267,110
      ZAR 8.4213
      July 29, 2005EUR 324,800
      ZAR 8.4536
      August 26, 2005EUR 101,250
      ZAR 8.3908
      July 15, 2005As of June 30, 2004Notional amount
      Strike price
      MaturityEUR 16,250
      ZAR 7.8475
      July 12, 2004EUR 202,000
      ZAR 8.1822
      August 2, 2004EUR 16,250
      ZAR 7.8878
      August 10, 2004EUR 16,250
      ZAR 7.9299
      September 10, 2004EUR 16,250
      ZAR 7.9749
      October 12, 2004EUR 263,200
      ZAR 8.2129
      October 29, 2004EUR 4,243,000
      ZAR 8.5225
      January 7, 2005USD 167,900
      ZAR 6.295
      September 22, 2004


F-36

---

|NET 1 UEPS TECHNOLOGIES, INC.                                                            
|-----------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                           
|for the years ended June 30, 2006, 2005 and 2004                                         
|(All amounts stated
      in thousands of United States Dollars, unless otherwise stated)

**18.**     **FAIR
  VALUE OF FINANCIAL INSTRUMENTS (continued)**

**Translation
  Risk**

Translation
  risk relates to the risk that the Companys results of operations will
  vary significantly as the U.S. dollar is its reporting currency, but it earns
  most of its revenues and incurs most of its expenses in ZAR. The U.S. dollar
  to ZAR exchange rate has fluctuated significantly over the past two years. As
  exchange rates are outside the Companys control, there can be no assurance
  that future fluctuations will not adversely affect the Companys results
  of operations and financial condition.

**Interest
  Rate Risk**

As
  a result of our normal borrowing and leasing activities, the Companys
  operating results are exposed to fluctuations in interest rates, which it manages
  primarily through our regular financing activities. The Company generally maintains
  limited investment in cash equivalents and has occasionally invested in marketable
  securities.

**Credit
  Risk**

Credit
  risk relates to the risk of loss that the Company would incur as a result of
  non-performance by counterparties. The Company maintains credit risk policies
  with regard to its counterparties to minimize overall credit risk. These policies
  include an evaluation of a potential counterpartys financial condition,
  credit rating, and other credit criteria and risk mitigation tools as the Companys
  management deems appropriate.

With
  respect to credit risk on financial instruments, the Company maintains a policy
  of entering into such transactions only with South African and European financial
  institutions that have a credit rating of BBB or better, as determined by Standard
  & Poors.

**Microlending
  Credit Risk**

The
  Company is exposed to credit risk in its microlending activities, which provides
  unsecured short-term loans to qualifying customers. The Company manages this
  risk by assigning each prospective customer a creditworthiness score,
  which takes into account a variety of factors such as employment status, salary
  earned, other debts and total expenditures on normal household and lifestyle
  expenses.

**19.**     **COMMITMENTS
  AND CONTINGENCIES**

*Operating
  lease commitments*

The Company leases certain premises.
  At June 30, 2006, the future minimum payments under operating leases consist
  of:

Due within 1 year
      $1,181Due within 2 years
      901Due within 3 years
      307Due within 4 years
      $33Due within 5 years
      -


Operating
  lease payments related to the premises and equipment were $3.3 million, $3.4
  million and $3.0 million, respectively, for the years ended June 2006, 2005
  and 2004, respectively.

*Capital
  commitments*

The
  Company had no outstanding capital commitments as at June 30, 2006 which had
  been approved by the directors (2005 and 2004: nil).

*Purchase
  Obligations*

As of June 30, 2006 the Company
  has purchase obligations totaling $0.9 million.

F-37

---

|NET 1 UEPS TECHNOLOGIES, INC.                                                            
|-----------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                           
|for the years ended June 30, 2006, 2005 and 2004                                         
|(All amounts stated
      in thousands of United States Dollars, unless otherwise stated)

**19.**     **COMMITMENTS
  AND CONTINGENCIES (continued)**

*Guarantees*

In
  2001, Aplitec issued a guarantee of $3.2 million (R20 million) to Nedbank Limited
  (Nedbank), regarding the guarantee provided by Nedbank to the Eastern
  Cape provincial government. The guarantee was required by the provincial government
  that Cash Paymaster Services (Proprietary) Limited, a wholly owned subsidiary
  of Aplitec, would perform under the contract for the provision of welfare grants
  to beneficiaries in the province. The maximum potential amount that Aplitec
  could pay is $2.8 million (R20 million), re-measured at the year end exchange
  rate of $1:ZAR7.27.

As
  of June 30, 2006, the Company had unused aggregate credit facilities of approximately
  $75.7 million.

*Contingencies*

The
  Company is subject to a variety of insignificant claims and suits that arise
  from time to time in the ordinary course of our business.

Management
  of the Company currently believes that the resolution of these matters, individually
  or in the aggregate, will not have a material adverse impact on our financial
  position or our results of operations.

**20.**     **RELATED
  PARTY TRANSACTIONS**

The
  Company provides Nedbank with POS terminals and other pay processing hardware.
  In addition, the Company has a technology service and maintenance contract with
  Nedbank and provides other sundry services. During the year ended June 30, 2006,
  the Company earned $1.8 million under the technology service and maintenance
  contract and $13.3 million in hardware sales from Nedbank. During the year ended
  June 30, 2005, the Company earned $2.0 million under the technology service
  and maintenance contract and $11.1 million in hardware sales from Nedbank. Included
  in accounts receivable as of June 30, 2006, is $1.5 million due from Nedbank.
  Nedbank was a related party until the public offering and Nasdaq listing. Prior
  to the public offering and Nasdaq listing, Nedbank beneficially owned 23% of
  the Company’s common stock. As of June 30, 2006, Nedbank no longer owns
  any securities in the Company or any of its subsidiaries.

For
  services provided related to the Aplitec transaction, Brait South Africa Limited
  (Brait) received fees totaling approximately $3.7 million. Brait
  exercised its option to purchase an equivalent of 833,333 shares of the Companys
  common stock for an exercise price of $3.00 per share as partial payment for
  services rendered. The remaining amount was paid in cash in July 2004. Antony
  Ball is a director and an officer of Brait S.A. and certain affiliates, including
  without limitation, Brait International and those affiliates that manage SAPEF
  and SAPET. Chad Smart is an officer of Brait S.A. and certain of its affiliates,
  including without limitation, Brait International and those affiliates that
  manage SAPEF and SAPET. Each of Messrs. Ball and Smart is a member of the Companys
  board of directors.

The
  South African Trust was created as a result of the Aplitec transaction to hold
  the units of reinvesting shareholders. The Company does not have any interests
  in the trust nor does it have any involvement in the day-to-day operations of
  the trust. The Company pays the expenses of the trust which comprise mainly
  the administrative costs related to the conversion by unit holders to Net1 common
  stock. During the years ended June 30, 2006 and 2005, the Company incurred expenses
  of approximately $0.1 million and $0.2 million, respectively, related to these
  administrative costs. As of June 30, 2006, $0.01 million is included in accounts
  payable and should be paid by September 2006.

**21.**     **ACQUISITIONS**

2006 Acquisitions

The Company did not make any acquisition during the year ended
  June 30, 2006.

2005 Acquisitions

The Company did not make any acquisition during the year ended
  June 30, 2005.

F-38

---

|NET 1 UEPS TECHNOLOGIES, INC.                                                            
|-----------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                           
|for the years ended June 30, 2006, 2005 and 2004                                         
|(All amounts stated
      in thousands of United States Dollars, unless otherwise stated)

**21.**     **ACQUISITIONS
  (continued)**

2004 Acquisitions

*Reverse
  acquisition of Net1*

On
  June 7, 2004, as part of the Aplitec transaction described in Note 1, the Company
  (i.e. Aplitec) from an accounting perspective was deemed to have acquired 100
  percent of the outstanding common shares of Net1. The results of Net1s
  operations have been included in the consolidated financial statements since
  that date.

From
  an accounting perspective, the aggregate purchase price was deemed to be approximately
  $7.9 million. This amount was determined based on the best estimate of fair
  market value of Net1 shares at the measurement date of the acquisition, multiplied
  by the number of shares of Net1 that were outstanding immediately prior to the
  acquisition (approximately 15.9 million). The fair value of the Net1 common
  stock used in determining the purchase price was $0.50, which is the price per
  share paid by the private equity funds which funded the Aplitec transaction.

The
  following table summarizes the estimated fair values of the assets acquired
  and liabilities assumed at the acquisition date.

|Cash                       | $ | 8      |  |  |  | 
|-------------------------- | - | ------ |  |  |  | 
|Investments                |   | 217    |  |  |  | 
|Intangible assets          |   | 4,620  |  |  |  | 
|Goodwill                   |   | 5,794  |  |  |  | 
|Total assets acquired      |   | 10,639 |  |  |  | 
|                           |   |        |  |  |  | 
|Current liabilities        |   | 960    |  |  |  | 
|Deferred tax               |   | 1,745  |  |  |  | 
|Total liabilities acquired |   | 2,705  |  |  |  | 
|                           |   |        |  |  |  | 
|Net assets acquired        | $ | 7,934  |  |  |  | 

Of
  the $4.6 million of acquired intangible assets, approximately $0.1 million was
  assigned to customer contracts and approximately $4.5 million was assigned to
  the exclusive licenses. The customer contracts have an expected useful life
  of five years, and the exclusive license has an expected useful life of seven
  years. The tax bases of the intangible assets acquired is nil and consequently
  a deferred tax liability of $1.8 million has been recognized.

The
  goodwill of approximately $5.8 million is included in the Hardware, software
  and related technology sales segment. The goodwill is not deductible for tax
  purposes.

No
  pro-forma financial effect has been presented as the impact on earnings is immaterial.

*Acquisition
  of NUEP Holdings S.a.r.l.*

In
  June 2004, the Company acquired 100% of the issued share capital of NUEP Holdings
  S.a.r.l (Holdings) for $0.03 million. Holdings owns the U.S. patent
  for the FTS and the rights to the UEPS technology.

F-39

---

|NET 1 UEPS TECHNOLOGIES, INC.                                                            
|-----------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                           
|for the years ended June 30, 2006, 2005 and 2004                                         
|(All amounts stated
      in thousands of United States Dollars, unless otherwise stated)

**22.**     **COSTS
  RELATED TO PUBLIC OFFERING AND NASDAQ LISTING**

Net1
  completed a public offering and Nasdaq listing in August 2005. The Company incurred
  the following costs in connection with this transaction during the years ended
  June 30, 2006 and 2005:

|                                                                |   | Year ended |  |   | Year ended | 
|--------------------------------------------------------------- | - | ---------- |  | - | ---------- | 
|                                                                |   | June 30,   |  |   | June 30,   | 
|                                                                |   | 2006       |  |   | 2005       | 
|Legal fees                                                      | $ | 1,007      |  | $ | 1,567      | 
|Printing                                                        |   | 243        |  |   | -          | 
|Accounting fees                                                 |   | 25         |  |   | 179        | 
|Regulatory and filing fees                                      |   | 165        |  |   | 26         | 
|Other                                                           |   | 89         |  |   | 45         | 
|Total costs related to public
      offering and Nasdaq listing | $ | 1,529      |  | $ | 1,817      | 

The
  Other category includes costs to date related to venue hire, travel, bank charges
  and other miscellaneous expenses related to the public offering and Nasdaq listing.
  All costs related to the public offering are non-deductible for taxation purposes.

Share
  issue costs of $2.4 million were incurred relating to the underwriters exercising
  their over allotment option. The share issue costs have been charged directly
  to additional paid-in capital.

**23.**     **REORGANIZATION
  CHARGES**

As
  a result of the Aplitec transaction, the Company incurred the following charges
  during the period ended June 30, 2004:

Accounting fees
      $
      1,256Regulatory, filing and printing charges
      
      520Legal fees
      
      529Secretarial services
      
      16Other professional fees
      
      4,429Other
      
      4,383Total
        reorganization charge
      $
      11,133


The
  Other professional fees include the transaction costs paid to Brait. Included
  in the Other category is the charge for other stock-based awards of approximately
  $4.3 million issued to directors and other employees as a condition precedent
  to the transaction.

**24.**     **UNAUDITED
  QUARTERLY RESULTS**

The
  following tables contain selected unaudited consolidated statements of income
  for each quarter of fiscal 2006 and 2005:

Three months endedJun 30,
      
      
      Mar 31,
      
      
      Dec 31,
      
      
      Sep 30,
      
      
      Total2006
      
      
      2006
      
      
      2005
      
      
      2005
      
      
      YTD(In thousands except per share
        data)Revenue
      $
      48,198
      
      $
      54,584
      
      $
      47,429
      
      $
      45,887
      
      $
      196,098Costs related to public offering and Nasdaq listing
      
      -
      
      
      25
      
      
      27
      
      
      1477
      
      
      1,529Operating income
      
      23,001
      
      
      25,042
      
      
      21,173
      
      
      20,397
      
      
      89,613Net income
      
      15,545
      
      
      16,576
      
      
      13,932
      
      
      13,179
      
      
      59,232Earnings per share (common stock and linked
        units)Basic earnings per share
      
      0.27
      
      
      0.29
      
      
      0.25
      
      
      0.24
      
      
      1.05Diluted earnings per share
      $
      0.27
      
      $
      0.29
      
      $
      0.24
      
      $
      0.24
      
      $
      1.03


F-40

---

|NET 1 UEPS TECHNOLOGIES, INC.                                                            
|-----------------------------------------------------------------------------------------
|Notes to the Consolidated Financial Statements                                           
|for the years ended June 30, 2006, 2005 and 2004                                         
|(All amounts stated
      in thousands of United States Dollars, unless otherwise stated)

**24.**     **UNAUDITED
  QUARTERLY RESULTS (continued)**

Three months endedJun 30,
      
      
      Mar 31,
      
      
      Dec 31,
      
      
      Sep 30,
      
      
      Total2005
      
      
      2005
      
      
      2004
      
      
      2004
      
      
      YTD(In thousands except per share
        data)Revenue
      $
      41,405
      
      $
      45,667
      
      $
      45,995
      
      $
      43,223
      
      $
      176,290Operating income
      
      16,326
      
      
      20,135
      
      
      18,271
      
      
      16,571
      
      
      71,303Net income
      
      10,142
      
      
      11,957
      
      
      12,236
      
      
      10,227
      
      
      44,562Earnings per share (common stock and linked units)Basic earnings per share
      
      0.19
      
      
      0.22
      
      
      0.22
      
      
      0.19
      
      
      0.81Diluted earnings per share
      $
      0.18
      
      $
      0.21
      
      $
      0.22
      
      $
      0.18
      
      $
      0.80


**25.**     **SUBSEQUENT
  EVENTS**

**Prism
  acquisition**

On
  July 3, 2006, the Company acquired all of the issued and outstanding ordinary
  shares of Prism for approximately $95.2 million (ZAR 687.00 million), or ZAR1.16
  per share. The Company is required, under FAS 141, to allocate the purchase
  price among the assets acquired and liabilities assumed. As of the date of this
  report this allocation has not been completed. The Company intends to file audited
  financial statements of Prism and pro forma financial information on Form 8-K/A
  on or before September 19, 2006.

We
  have not provide certain disclosures required by FAS 141 as it is not practicable.
  Prisms operations will be included in the Companys consolidated
  financial statements from July 3, 2006.

**SmartSwitch
  Nigeria Limited (SmartSwitch Nigeria)**

The
  Company is required to fund SmartSwitch Nigeria with $3.1 million in equity
  funding and $6.1 million as a loan advance.

*********************

F-41

---