Overview

SCHIMATIC Cash Transactions Network.com, Inc. (the "Company") was originally incorporated in the State of Florida under the name of Apple Tree Capital Corp. on October 4, 1996. Apple Tree Capital Corp. never had any assets or commenced operations.

On November 12, 1998, Apple Tree simultaneously acquired Schimatic Technologies, Inc. and R & D Technology Inc., two privately held Nevada Corporations.

Schimatic Technologies, Inc. had been organized principally based on a business model for the future development of a freestanding Internet kiosk capable of economical domestic and international funds transfers. R & D Technology, Inc. had been organized based on a business model for the future development of technology for the three-dimensional, virtual reality presentation of products in freestanding Internet kiosks for online shopping.

In September 1999, SCHIMATIC Cash Transactions Network.com, Inc. acquired the business and assets of IC One, Inc., a developer of smart-card technologies. The acquisition of IC One was treated as a reverse acquisition under the purchase method of accounting in which the combination was reported as a recapitalization of IC One. IC One is treated as the continuing entity for accounting purposes, and the historical financial statements presented, including the statement of stockholders' equity, are those of IC One. IC One was deemed the acquirer and successor company. The key assets acquired with IC One were patents and pending patents in the United States and other countries.

With the acquisition of IC One, we commenced efforts to complete commercialization of smart-card-based loyalty programs and ancillary services and products as described in this document.

Products and Services Development

Our products and services are designed to operate in conjunction with a variety of business applications, the largest being the retail payments industry. This industry is comprised of retail merchants and the infrastructure of banks and other financial institutions, and card associations and technology suppliers that enable them to process payment transactions.

We anticipate that our software will be used to support these major business sectors:

o Technology suppliers provide the centralized systems and services to process the electronic payment transactions. Large issuing banks frequently process their own charge card and electronic payments transactions, while smaller banks and other financial institutions outsource processing. Large processors have established market dominance through consolidation and subsequent economies of scale. Merchants pay fees to the banks for the privilege of accepting credit cards.

o Retail merchants use discounts, points programs and other incentives to differentiate themselves from their competitors and to increase loyalty in the form of repeat spending. These programs are typically tied to the amount or frequency of customer spending, with the most prominent ones directly tied to a credit or debit card. Additionally, many other segments of the payments industry, such as the hospitality and travel industries, have programs designed to award points for each dollar spent that can be redeemed for free or upgraded goods or services.

We believe that the retail industry as well as various other segments are in the initial stages of adopting smart cards and wireless devices to replace the magnetic-stripped cards that have existed in the marketplace for nearly 30 years. As this transition occurs, we believe there is an opportunity to market our loyalty program software to the various organizations that comprise the industry. We anticipate the majority of our revenue will come from marketing our software to the organizations that provide the loyalty system infrastructure as an adjunct to the electronic payments process. This includes card manufacturers, point-of-sale, or POS, terminal providers, banks and other financial institutions, third-party payment processors, card associations and other software suppliers. In some cases, we expect that our customers may also include retail merchants or other businesses that wish to sponsor their own loyalty programs.

The electronic payment industry is very mature, and because our software is compatible with existing magnetic-stripped card technology as well as smart cards, we believe our software and intellectual property provide a potential solution for those wishing to migrate from magnetic-strip cards to smart cards or other smart devices in order to grant loyalty rewards and incentives.

The ability of smart cards to store data or value makes them particularly suited to loyalty programs that track and provide incentives to repeat customers. Stored value is more convenient and safer than cash. When combined with a software and hardware system for processing loyalty transactions, the smart cards and other devices provide an opportunity to develop loyalty programs that provide users with immediate, dynamically updated incentives.

In addition to the payments industry, we anticipate significant and increased demand for more powerful and effective smart-card-based loyalty programs in other industries such as gaming, transit, identification, access and health care. We are actively seeking to introduce our intellectual property in these other markets.

We believe that we are able to offer services that fill these needs for all of the aforementioned industry segments.

Strategic Alliances

We have developed and will continue to seek strategic relationships with industry participants that may provide an alternate channel to deliver our products and services by expanding our market reach and creating incentives through revenue or technology sharing with strategic partners. We have established the following strategic alliances.

Airos Group

We entered into an agreement with Airos Group to complete the current software development and integration services on the Ingenico terminal for Scotiabank. Airos Group's primary focus is system integration, software development, and quality assurance for the financial services industry with a focus on smart card and payment terminals. Airos Group has provided integration and development services to a variety of clients. In 2003, we replaced the above agreement with a new agreement to complete the development of all product components, including the card, terminal and host processing, plus integration and customization services.

Giesecke & Devrient GmbH

Giesecke & Devrient GmbH, Munich, Germany, is an international technology group with a range of international electronic payments products and services that supplies bank notes and security documents; bank note, security paper and currency automation systems; as well as cards, components and complete multifunctional, smart-card systems for electronic payments and telecommunications. In 2001, we agreed with Giesecke & Devrient to cooperatively market its smart chip cards and operating systems and our loyalty applications. Details of specific marketing efforts as well as product sharing arrangements are to be negotiated on a case-by-case basis.

Intellectual Property

Our intellectual property consists of software applications and a system built around our process and methodology patents and includes application software for loyalty programs that reside on cards or other portable electronic devices and the terminals for the processing of loyalty and payments. We also have a centralized processing system for loyalty program management and accounting that can be used for our own loyalty customers and licensed to other electronic payment processors that offer loyalty programs.

Patents

We have U.S. Patent No. 5806045, issued on September 8, 1998, with prior patent filings dating back to February 1994. Since that time, the patent has also been issued in Australia (Patent No. 703349, October 1999), Mexico (Patent No. 96/03161, November 2000), and Japan (Patent No. 3416141) and has recently been approved in Canada. We refer to these patents issued or pending collectively as the "patents."

The patents are entitled: "Method and System for Allocating and Redeeming Incentive Credits between a Portable Device and a Base Device," and cover processes or methodologies associated with storing and redeeming loyalty credits and incentives on a portable device and interacting with a base device to calculate the amount of loyalty units to be credited or redeemed.

Trademarks, Copyrights and Trade Secrets

We also rely on the protections afforded our intellectual property under copyright, trademark and trade secret laws. We market or may market products or services under the following trademarks:

o E-LLEGIANCE(TM) for our smart-card-based loyalty applications;

o LOYALTY CENTRAL(TM) for our loyalty program management, transaction processing and accounting centralized processing services;

o LOYALTYCENTRAL.COM(TM) for our loyalty program management user interface; and

o SMART BANK(R) for specialized products services for marketing to the financial services and banking industries.

Research and Development Program

We incurred expenses of approximately $1.8 million and $5.6 million on research and development during 2002 and 2001, respectively. The payment for such services were satisfied primarily through the issuance of either stock or stock options.

Competition

Many of our existing competitors, as well as a number of potential new competitors, have longer operating histories, greater name recognition, larger customer bases, and significantly greater financial, technical and marketing resources than we have. Such competitors may be able to undertake more extensive marketing campaigns, adopt more aggressive pricing policies, and make more attractive offers to potential employees and distribution partners. We believe that we can compete effectively, because we will offer our clients certain capabilities that are protected by our patents that our competition cannot offer without infringing our patents. However, patents can be difficult to defend and there can be no assurance that our competitors will not develop products and services that are equal or superior to ours, or that we can achieve greater market acceptance than our competitors.

Employees

We currently have four full-time employees including officers. Three are located in the Salt Lake City, Utah office and one in the Las Vegas, Nevada office.