U SHIP INC, 10KSB, 1996-09-26

U SHIP INC
10KSB, 1996-09-26
AIR COURIER SERVICES

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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-KSB
(Mark One)
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 (FEE REQUIRED)
For the fiscal year ended June 30, 1996

/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (NO FEE REQUIRED)
For the transition period from __________ to __________

Commission File No. 0-28452

U-SHIP, INC.
(Name of Small Business Issuer in Its Charter)

Utah 39-1713181
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)

5583 West 78th Street
Edina, Minnesota 55439
(Address of principal executive offices) (Zip Code)

Issuer's Telephone Number, Including Area Code: (612) 941-4080

Securities registered under Section 12(b) of the Exchange Act: None

Securities registered under Section 12(g) of the Exchange Act: Common Stock,
par value $.004

Check Whether the Issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ---

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. X

State issuer's revenues for its most recent fiscal year. $713,348

State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days $11,035,178 as of August 30, 1996.

As of August 30, 1996, there were 4,012,189 shares of common stock of the
registrant issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the document listed below have been incorporated by
reference into the indicated part of this Form 10-KSB.

Document Incorporated Part of Form 10-KSB
--------------------- -------------------
None

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FORM 10-KSB INDEX

Page

PART I
Item 1. DESCRIPTION OF BUSINESS . . . . . . . . . . . . . . . . . . 1
Item 2. DESCRIPTION OF PROPERTY . . . . . . . . . . . . . . . . . . 12
Item 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . 12
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS . . . . 12
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. . 13
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . 13
Item 7. FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . 21
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . . . 32

PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE
EXCHANGE ACT. . . . . . . . . . . . . . . . . . . . . . . . 32
Item 10. EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . . . 33
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT . . . . . . . . . . . . . . . . . . . 34
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . . . . 35
Item 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K . . . . . . . . . . 37

SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

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PART I

ITEM 1. DESCRIPTION OF BUSINESS

COMPANY OVERVIEW

U-Ship, Inc. (the "Company" or "U-Ship") manufactures, markets and operates
self-service, automated shipping systems. The Company targets retail locations
that offer shipping services for consumers and small business shippers who ship
packages and priority letters through major carriers in the air express and
package delivery market. This market handled approximately 5.0 billion packages
and priority letters which were shipped during 1994. U-Ship offers these retail
locations a means to outsource their shipping service and improve their
efficiency, service level and accuracy.

In November 1994, the Company began deployment of its electronic network of
customer-operated, self-service shipping centers. The Company's Automated
Shipping Center ("ASC"), which is placed in retail locations in the United
States and Canada, currently provides a feeder system to United Parcel Service
of America, Inc. ("UPS"). The Company's ASC is also capable of providing
similar services to other carriers in the package shipping market. As of June
30, 1996, the Company had placed in service 156 ASCs in 24 states. The number
of packages shipped using the Company's ASCs during the 12 month periods ended
June 30, 1995 and June 30, 1996 were approximately 16,800 and 52,500,
respectively. The Company derives revenue from package shipping transactions
and to a much lesser extent, from the sale of its ASCs. The Company has been
granted four patents related to hardware and software utilized in its ASCs and
is not aware of other self-service, automated shipping systems currently
marketed or available to consumers and small business package shippers. The
Company believes that its ASC technology is among the most advanced self-
service, automated, air express and package shipping system available for
consumers and small business.

The Company's strategy is to make shipping services available to consumers
through the installation of its ASC systems in retail areas that currently
provide shipping services (such as major grocery stores and mass merchandising
outlets) and to target small business and home office users through major office
supply outlets, printing and copying outlets, major business centers and office
parks. Substantially all of the ASCs currently in place have been leased by
retailers from third party leasing companies. However, in order to increase
revenues, accelerate the placement of ASCs and better meet the needs of the
retail market, the Company has modified its marketing and sales strategy to
install ASCs at its own expense in retail locations which the Company
believes are likely to generate high volumes of shipping transactions. In
addition to retail placements, the Company seeks to market its ASC technology
to private carriers such as UPS.

The Company's marketing and sales efforts are focused on retailers who
represent a potential market of approximately 180,000 retail service outlets in
the United States. The Company segments this market into two areas: consumer-
related and business shippers. The Company's ASCs served customers in
approximately 52,500 shipping and priority mail transactions during the 12 month
period ended June 30, 1996 through its various retail locations.

The Company enters into long term agreements with retailers to outsource
its shipping services and to provide service and maintenance support related to
the operation of its ASCs. The services provided by the Company under these
agreements include data processing of credit card transactions, reconciliation
and payment of weekly UPS bills, customer service support related to package
tracking and damage and loss claims. These agreements also provide for
maintenance of the hardware and license of the software related to the operation
of the ASC. The Company generates revenue from package shipping transactions
and compensates retailers based upon the number and types of shipping
transactions processed. Each ASC location is centrally controlled and
serviced through a networked connection to the Company's computer system
located at its headquarters.

The Company also issues U-Ship private labeled "Preferred Business Shipper"
credit cards to small businesses for which it bills and collects on a monthly
basis. The Company also derives revenue to a lesser extent from the sale of
shipping supplies such as boxes, packing material and tape.

<PAGE>

The Company believes that the air express and package delivery market is
one of the fastest growing segments of the shipping industry, with approximately
5.0 billion packages and priority letters shipped by consumers and small
businesses during 1994. That number has been projected to grow at approximately
10% per year according to industry analysts. The Company believes that it
offers the only fully-automated, self-service package shipping interface
currently available to the general public. The Company believes that its ASC
acts as an efficient and accurate means of collecting and processing packages
through the shipping process.

The Company's ASC processes the information required by carriers to use
the Company's proprietary, self-service automated shipping technology. The
Company believes its competitive advantage lies in its technology, which uses
automation to provide greater accessibility and convenience for consumers
and small businesses who require express and ground shipping services. In
contrast, other systems for package collection are essentially manual and
require various labor steps to process and document the small package shipping
transaction. Such procedures are commonly found at service counters in grocery
stores, or at "mailbox" or packaging stores which offer package shipping
services.

Each ASC is connected to a central computer system at the Company's
headquarters via a remote telephone network. The ASCs can automatically, and
without human intervention, transmit information to the Company's central
computer system 24 hours a day, thereby allowing the Company to collect complete
information regarding packages shipped, modify and enhance the software resident
in each ASC and detect and diagnose both critical and non-critical service
requirements in the ASC. As a result, the Company believes that it can manage
growth and service ASCs in remote locations without employing significant
additional personnel.

U-Ship's ASCs arrange for shipment and generate required shipping
documentation. The information gathered in the shipping process allows the
Company to track packages to their destination, thereby providing customers with
the ability to know precisely where their packages are in the shipping process.
The Company also makes available to consumers and small businesses a full range
of shipping services from express next day air to ground transportation. The
Company's ASCs are generally located in retail locations that are open to the
public 24 hours a day. Customers can contact the Company concerning questions
or problems which arise at an ASC site by calling the Company's 800 number
which appears on the ASC's computer screen and the Customer's receipt.
Finally, each time the Company installs an ASC, it provides a four hour,
on-site training program to the retailer's personnel. Each ASC also comes
equipped with a training video and a complete user guide for use and future
reference by site personnel.

The Company generates revenue from shipping transactions made utilizing the
ASC. The Company charges a fee, customary in the retail shipping business, to
customers who use the ASC for shipping packages. This fee is based upon the
type of service, the size and weight of the package, the distance the package is
to shipped, the declared value of the package, and whether the package is being
shipped to a residential or commercial destination. The fee includes the
carrier's charge for the shipping transaction. Consumers utilizing the ASC for
shipping pay by means of a credit card or cash. The Company collects all
package shipping revenue, pays the carrier for the shipping charges and
allocates the remainder of each transaction charge between the Company and the
retailer. The retailer's commission varies, depending on whether the retailer
leased, purchased the ASC, or merely provided retail space for operation of the
ASC. The retailer's commission is negotiable and variable. In general,
however, the retailer's commission generally ranges from $.75 - $2.10 per
shipping transaction. In some cases, however, such commissions fall above or
below this range. The Company may offset cash service payments received by the
retailer against commissions due from the Company. The Company can also program
the ASC to accept a particular payment method to meet a retailer's needs or
require payment by credit card in the event of a default by the retailer.

<PAGE>

The U-Ship ASC provides a user-friendly voice and graphic interface and is
available in varying language versions to accommodate speakers of French,
Spanish and English. The ASC automatically weighs packages, generates labels
and shipping manifests and provides a complete accounting of every shipping
transaction. The ASC electronically communicates to U-Ship's central computer
control system all transaction data related to shipping activities and credit
card transactions. The Company's central computer can also perform remote
diagnostic system checks. Changes to on-screen color graphics and promotional
programs can be downloaded through this network, thereby allowing the Company to
respond quickly to market changes and special retail programs.

As of June 30, 1996, the Company had placed in service 156 ASCs in 24
states. The Company currently has in place ASCs in each of the following
national retailers: Kmart, Kinko's, Krogers, SuperValu and Gateway/Fleming.
However, the Company believes that its new focus on the small business and home
office market will increase its presence in office supply, copy and duplication
retailers. There can be no assurance, however, that the Company will possess
sufficient resources or be successful in increasing the number of ASC placement
locations.

The Company believes that its new focus on small businesses and home
offices will provide it with the opportunity to increase its volume of
shipments from consumers and the small business and home office markets. The
Company also believes that such deployment will create possible opportunities
for special shipping arrangements with catalog, television-based retail
operations and equipment manufacturers whereby return shipments and warranty
shipments are handled by U-Ship ASCs. This targeted segment of the Company's
strategy is not yet fully developed, however, and there can be no assurance
that the Company will be successful in developing such business.

INDUSTRY BACKGROUND

The air express and package delivery market is one of the fastest growing
segments of the shipping industry, with approximately 5.0 billion packages and
priority letters shipped by consumers and small businesses during 1994. Based
upon information available to the Company, the Company believes that the
business associated with the shipment of small packages and overnight and
second-day packages is experiencing annual growth in excess of 10%. Persons who
send priority packages are frequently under a deadline and, therefore, the
Company believes that 24-hour a day access in most locations to the Company's
ASC is of value. The Company believes that the growth of companies such as
Federal Express, Inc. ("Federal Express") and UPS, and the launching of new
small parcel shipping services by the U.S. Postal Service evidence the high
growth of this segment of the shipping industry. The Company believes that
small package shipping volume will continue to increase for the foreseeable
future based upon the following market trends:

INABILITY OF CARRIERS TO SERVE THE CONSUMER AND SMALL BUSINESS MARKET.
While the number of packages shipped by consumers and small businesses is large
and growing, this is a difficult market for carriers to service because such
shipments typically occur on an infrequent basis. Thus, there can be
inefficiency and substantial expense if the carrier provides package pickup.
Moreover, carrier depots are generally located in difficult-to-find office,
warehouse, office parks or airport spaces, which are often inconvenient for
consumers and small businesses to access. Frequently, these depots have limited
hours and do not cater to the needs of the shipping public. The result of these
inconveniences has been the growth of an air express and package collection
service industry, including "mailbox" stores in retail convenience centers and
shipping counters in grocery stores.

HIGH GROWTH OF CATALOG AND TELEVISION SHOPPING. Busy two-income families
often lack the time to shop at conventional stores. Increasingly, the Company
believes, people are buying for themselves and purchasing gifts for others
through catalogs and television shopping channels. Such purchases generated
revenues of several billion dollars in 1994. There is also a new and growing
trend toward virtual shopping, with people buying goods and services through the
Internet and the World Wide Web. Statistics also show that a substantial
percentage of all items purchased through the mail and television are returned,
creating a significant and growing small package shipping-return market.

<PAGE>

GROWTH OF HOME-BASED BUSINESSES AND TELECOMMUNICATION. Recent census data
from the United States government indicates that several million small
businesses and sole proprietorships operate from private residences.
Availability of personal computers, facsimile and digital telephone lines have
increased the number of people who correspond and do business via
telecommunication. Additionally, at-home workers, who must gather and receive
information quickly and frequently, send and receive information via overnight
service. The Company believes that small business and home office growth
stimulates growth in priority shipments.

GIFT-GIVING. The Company's historical package volume identifies a seasonal
increase during the Christmas, Mother's Day and graduation seasons. Sending
gifts through the use of package delivery services represents a significant
portion of the Company's business and is expected by the Company to grow as the
Company increases the number of ASC installations.

WARRANTY AND RECYCLING SHIPMENT GROWTH. Customer relationships are
increasingly important to manufacturers. Many manufacturers promote direct
return of faulty equipment to their factories via carriers. In addition, many
environmentally conscious manufacturers promote direct-return shipment of used
products which represent an environmental hazard (such as copier and laser
printer cartridges). The Company believes that such return shipments add to the
growing volume of the small package shipping business.

U-SHIP STRATEGY

U-Ship's business strategy focuses on meeting the needs of consumers and
small businesses by offering automated package shipping systems that provide
accessibility, convenience, ease-of-use and flexibility. A key component of
this strategy is to create and utilize strategic partnerships with service
carriers and retailers to reach what the Company believes is an underserved
segment of the shipping market.

TO MEET THE PACKAGE SHIPPING NEEDS OF CONSUMERS AND SMALL BUSINESSES WITH:

- ACCESSIBILITY. Easy access is achieved by placing ASCs where they can
be accessed 24 hours a day, 7 days a week in high volume retail
locations such as copy centers, office supply stores, grocery stores
and mass merchandise outlets, all of which presently offer shipping
services and are easily accessible by consumers and the small business
and home office shippers. Consumers regularly visit these local
retail stores and U-Ship supports the retailers strategy of being a
"one-stop-shop." U-Ship currently has ASCs in some, but not all,
locations of the following retailers: Krogers, Kinko's, SuperValu,
Gateway/Fleming and Kmart stores. For the small business and home
office markets, the Company is also targeting retail outlets which
serve these markets with business services such as printing, copying
and office supplies.

For time sensitive shipments, such as priority letters and
packages, U-Ship is targeting placement of ASCs in financial sites and
business districts where accounting and legal firms are located. The
Company believes that these businesses use next-day priority shipments
with great frequency. Although the Company offers stand-alone outdoor
kiosks which both process and capture parcels and letters to be
shipped, it is currently designing a new, unattended indoor system for
this market. There are 48 metropolitan statistical areas in the
United States with populations of more than 500,000. The Company
believes that each such areas present a potential market for U-Ship
stand-alone ASC systems.

- CONVENIENCE, SIMPLICITY AND CHOICE. By providing automatic weighing,
delivery services, label printing, shipping-manifest creation and
payment by credit card, U-Ship makes the process of shipping more
convenient and simple. The Company's system can respond to a
customer's frequent shipped-to list and automatically complete the
name and address of the recipient. The Company's technology permits
choice by providing visual and verbal shipping options to the customer
including price and designated delivery date. The ASC provides the
information at the customer's fingertips to make time/value shipping
decisions on the spot.

<PAGE>

The Company also markets its own Preferred Business Shipper
credit cards to frequent small business shippers, and it markets
special volume shipping programs to this cardholder base. These
credit cards enable an ASC to store certain information about the
recipient of each package shipped, making it possible for the ASC to
automatically supply the appropriate address and other information
about the recipient the next time the card user ships a package.
Payment for charges made on these cards is due on receipt and the
cards do not extend credit beyond the terms of the relevant invoice.
From July 1, 1995 through June 30, 1996, charges made on the cards
represented, in the aggregate, 7.5% of total package shipping revenue
and 7.1% of total shipping transactions made via the Company's ASCs.
Through June 30, 1996, the maximum outstanding balance owed to the
Company as a result of charges made on a Preferred Business Shipper
Credit Card in a one month period has been $6,115.

OPENING OPPORTUNITIES FOR SERVICES IN AREAS SUCH AS:

- RETURNS PROGRAMS AND WARRANTY PROGRAMS. The Company believes that
there is an opportunity to act as the preferred shipper for the return
of merchandise previously purchased by consumers through mail order
catalogs. To qualify, however, U-Ship must have broad accessibility
in most geographic markets.

TO USE STRATEGIC RELATIONSHIPS TO SERVICE DOMESTIC CARRIERS:

- DISCUSSIONS WITH CARRIERS. The Company entered into a pilot test
agreement with UPS in 1993 to test a free-standing, 24-hour self-
service package shipping kiosk. This installation remains in service
adjacent to a UPS service counter facility in Eau Claire, Wisconsin.
U-Ship is also in discussions with both national and regional carriers
concerning custom systems for use within their respective networks,
although there can be no assurance that any agreements will result
from such discussions. In March 1996, the Company entered into a
Master Agreement for Automated Shipping Center Software License and
Related Software-Based Services with UPS Canada (the "Canada
Agreement"), pursuant to which the Company licenses its proprietary
software to UPS Canada for use with the Company's ASCs which will be
placed in up to 10 retail counter applications in three cities in
Canada. Under the Canada Agreement, the Company will be paid a fee by
UPS Canada upon placement of the respective ASC at each Canadian
location, together with a per-package fee on each package shipped
using the Company's ASC. The term of the Canada Agreement is three
years. The ASCs subject to this agreement will be maintained under
a separate maintenance agreement. While the multi-lingual
capabilities of the ASC offers advantages in the international
marketplace, the Company's initial focus will remain on the United
States and Canadian markets and, for the foreseeable future, it will
pursue other markets only on an opportunistic basis, primarily
through economic partnership relationships.

PRINCIPAL RETAILER RELATIONSHIPS

The Company currently has ASCs in operation with various wholesalers and
retail chain operators, including: Krogers (9), Kinko's (13), Gateway/Fleming
(22), Kmart (15) and SuperValu (29).

The Company currently has ASCs placed in thirteen Kinko's stores, which
provide various services to business. Kinko's, or its partners, operate
approximately 850 stores nationwide and in Canada, Europe and Japan. In April
1996, the Company entered into a non-binding letter of intent with Kinko's
pursuant to which Kinko's will use its best efforts to provide the Company with
the opportunity to install ASCs in up to 100 existing Kinko's stores by December
31, 1996 and up to a total of 200 ASCs by December 31, 1997. Finally, under the
letter of intent package shipping revenue will be shared between the Company and
Kinko's pursuant to the agreement to be negotiated. The proposed transaction is
subject to the Company reaching a definitive

<PAGE>

agreement with Kinko's, of which there can be no assurance. Neither the
Company nor Kinko's is bound to the other until and unless an agreement is
executed.

RELATIONSHIP WITH CARRIER

The Company is dependent upon UPS to pick up and transport packages
processed via the Company's ASCs. Any interruption in, or increase in price of,
such service, or the failure of the Company to continue to maintain such
arrangements with UPS and the failure to develop alternate relationships with
other carriers, would cause an interruption to the Company's package shipping
business and would likely have a material adverse effect upon the Company's
operations and prospects. The Company has no control over the nature, cost
or availability of services provided by any carrier and has no long term
contracts with any carrier. For each ASC location, the Company enters into a
Commercial Counter Agreement with UPS which provides the basic terms of
service, advertising restrictions and certain related matters. The Company
has also entered into an Automated Shipping System Letter Agreement with UPS
regarding the Company's arrangements for use of UPS's Parcel Register,
Computer Manifest and other systems for identifying and recording packages
turned over to UPS for delivery. These agreements are generally terminable
at will, although the Company has enjoyed a shipper-carrier relationship with
UPS since 1992. Further, UPS is a regulated carrier which, under applicable
laws and regulations, is obligated, upon reasonable request, to provide safe
and adequate service, equipment and facilities for the surface transportation
of property in interstate commerce. This duty to furnish continuous and
adequate service obligates UPS to furnish ground transportation services
without discrimination at its established rates and to the limit of its
capacity. However, UPS is not regulated with respect to shipments tendered
which involve prior or subsequent movement by air.

The Company has also entered into a 3 year agreement with UPS Canada to
provide for an initial placement of ASCs at each of five UPS retail store sites
in Canada. The Company began installing these ASCs in July 1996 and is
expected to complete the installation of the ASCs in October. The Company's
agreement with UPS Canada provides for the licensing of (i) custom software, and
(ii) the Company's credit card processing services and system support. Under
this agreement, the Company will be paid a one-time charge per machine upon
placement of the machine at the respective UPS Canada location. U-Ship's
responsibilities for the initial deliveries under this agreement include
integration of the ASC software with UPS Canada's point of shipment processing
system and its package level detail database. The Company will retain all
rights in software developed for UPS Canada. Under an additional
maintenance and lease agreement, the Company will receive maintenance
fees for each ASC used by UPS Canada under the Canada Agreement.

MARKETING

The Company markets ASCs directly through Company personnel and to a much
lesser extent, through independent sales representatives. As of June 30, 1996,
the Company employed 6 of its personnel, including its President and Chief
Executive Officer, in sales and marketing activities and 1 independent sales
representative under a contract. The contract between the Company and its
independent sales representative generally provides that the representative must
use his best efforts to promote the sale of U-Ship's ASCs. The representative
receives between $300 and $500 per unit sold, depending on the terms and
conditions of such placement. The Company's agreement with the representative
also provides for limited expense reimbursement and runs through December 31,
1999. Subject to various state laws governing termination of sales
representatives, such agreement permits the Company to terminate such
representative upon 30 days notice.

The Company markets ASCs to retail organizations by direct contacts,
telemarketing, direct mail and print advertising and by displays and appearances
at industry trade shows. In fiscal year 1996, the Company presented its ASCs at
industry trade shows sponsored by Kinko's, the National Grocers Association, the
Food Marketing Institute and various other regional industry trade shows.

<PAGE>

THE COMPANY'S ASC

The Company manufactures, markets and operates self-service, automated,
self-contained shipping equipment for use by consumers and small business
shippers to ship packages and priority letters through major carriers. The
Company's ASC contains proprietary software, a computer monitor and a keyboard
to facilitate a user-friendly interface to consumers. The ASC also contains
algorithms and electronic communication capabilities which permit it to
communicate with a central computer system located at the Company's
headquarters. The Company has used market research and tests to refine and
simplify its interface, which uses graphics and voice prompts to simplify the
shipping process. The Company has also developed communications software that
provides a seamless link to access shipping information. This tool provides the
Company with accurate data used to manage site performance.

The U-Ship ASC uses a 486 or 586 microcomputer with user-friendly
interfaces incorporating multimedia color graphics and voice instructions to
enable consumers to make informed cost/delivery priority shipping decisions.
The ASC helps the consumer to complete all necessary shipping documents and
generates a high-quality bar-coded label that can be scanned by carriers. The
ASC allows the consumer to pay for the transaction using any major credit card
and U-Ship's Preferred Business Shipper credit card. The legible, scannable
labels and accurate invoices produced by the ASC help reduce the cost for
carriers receiving aggregated packages from U-Ship collection sites.

The Company's ASCs use state-of-the-art technology to provide the
following:

- A graphic user interface supported by voice instructions which guide
the shipper through the shipping process step-by-step

- An interactive touch screen that allows the user to make choices by
lightly touching large, colorful graphic "buttons" on the screen

- A keyboard for quick entry of "ship to" and contents data

- A credit card "swipe" that accepts all major credit cards and the U-
Ship Preferred Business Shipper card. The system captures sender name
and other key information encoded on the magnetic stripe of these
cards

- An integrated electronic scale that feeds accurate package weight to
the system

- Some systems also include integrated package measuring systems which
automatically record package dimensions using ultrasonic sensors. The
Company's ASC provides a visible measuring grid that allows the
shipper to quickly judge the package dimensions and enter them into
the system

- A thermal label printer that prints a bar-coded label to carrier
specifications including proprietary tracking numbers and sort codes

- A second printer, accessible only to the carrier pick-up driver, which
provides a completely accurate, computer-generated manifest

- On selected models, an interlocked parcel storage system that uses a
conveyor system to move and stack packages into a locked receptacle
for carrier pickup

- Americans with Disabilities Act accessible design

- Proprietary software that provides a unique, easy-to-use voice
prompted interface capable of translating complex rate and zone
calculations necessary for shipping packages via UPS into layperson's
language

<PAGE>

- State-of-the-art communications network which allows U-Ship to
control, communicate with and reconfigure ASCs in remote sites in a
matter of minutes

The Company provides a complete solution that reduces expenses related to:
bank credit card processing; training employees about carrier services, rates
and new service changes; package processing time for label completion, shipping
charge calculation, service explanations and customer interaction; daily
shipping documentation preparation; accounting and record keeping, reconciling
and paying weekly carrier bills and generating management reports; damage, loss
and claims processing for customers with shipping related problems; and customer
service, assisting customers with tracking packages and explaining services.

The ASC offers several benefits to retailers and mass merchandisers beyond
the revenue shared through package shipping. The ASC enhances the "one-stop
shopping" experience for the existing customers, it maintains and builds
customer traffic critical to their health and vitality and it contributes to
their image as a leading provider of cutting edge, value-added services. The
ASC accomplishes all of this while reducing additional overhead related to
labor and maintenance costs. Because the ASC is a turnkey system, the Company
believes that retailers recognize the value of not only offering shipping
services, but also offering those services through the fully automated, self-
service ASC technology.

LEASE FINANCING FOR ASC SALES

Historically, the Company relied almost exclusively upon third parties to
provide lease financing for its ASCs to retailers. In such a transaction, the
Company was paid in full for the purchase price of the ASC directly by the third
party equipment lessor which entered into an equipment lease with the retailer.
Under these agreements, the Company generally had the right to purchase the ASC
at the end of the lease for nominal consideration. Substantially all of the
Company's ASC sales to date are financed by third party equipment lessors who
have recourse to the Company in the event of retailer default or return of the
ASC. The Company has, however, shifted its business focus. In the future, the
Company anticipates placing ASCs in sites which provide high shipping volumes.
Provided a potential site meets this criteria, the Company anticipates placing
Company-owned ASCs in service at such sites at the Company's expense.

Historically, the Company has utilized several different leasing programs.
The determination by the Company of which program to use is made on a site-by-
site basis. In making such determinations, the Company considered the site's
projected volume. Under the Company's five-year lease program, the Company
received $6,500 upon verification by the third party lessor of delivery and
installation of the ASC. Under this program, the retailer paid the third party
lessor $150 per month for 60 months. At the end of this program, the Company
could purchase the ASC for $50. Under the Company's three-year lease program,
the Company received $4,400 upon verification by the third party lessor of
delivery and installation of the ASC. Under this program, the retailer paid the
third party lessor $150 per month for 36 months. At the end of this program,
the Company could purchase the ASC for $50. The Company's three-year program
and its five-year program provided for automatic renewal of the agreement
between the third party lessor or the Company, as applicable, and the retailer
unless otherwise cancelled by either party upon 30 days prior written notice.

The Company's agreements with such third party lessors generally provide
that upon default by the lessee-retailer, the Company must take back the ASC and
use its best efforts to remarket the ASC or reimburse the third party lessor for
the cost of the equipment on terms that are acceptable to the respective lessor.

As of June 30, 1996, the Company paid approximately $129,400 to equipment
lessors on account of ASCs sold to equipment lessors with recourse to the
Company in the event of a lessee default or other nonpayment. The payments to
lessors were the result of the exercise by 10 lessees of options to return ASCs
due to low package volumes at their retail locations. The Company does not
believe such payments to lessors has had a material impact upon its operations
or financial condition. Of the ASCs returned as of June 30, 1996, approximately
$91,500 was recovered and placed in the Company's inventory and approximately
$37,900 was written off due to upgrade returned machines with current ASC
technology. The Company has deferred a portion of its revenue related to
such recourse arrangements.

<PAGE>

In fiscal year 1996 the Company initiated a test market program pursuant
to which the Company or the retailer could cancel the lease at the end of its
initial twelve months. During the first twelve months of operation, the Company
and the retailer agree to measure certain criteria related to the number of
package shipping transactions, marketing and promotional activities, and
customer satisfaction related to the operation of the ASC. If certain criteria
are not met as agreed, the Company and/or the retailer can cancel the agreement
at the end of the period. If a cancellation occurs, the Company agrees to
remove the system from service. In addition to the release of the retailer from
its contractual agreement, the Company also has certain remarketing agreements
with lease financing sources to provide remarketing services for the relocation
of the ASC. If the Company's remarketing efforts are unsuccessful, the Company
will be obligated to repurchase the equipment from the lease financing source
and place it in inventory for future sale. The Company has deferred
recognition of revenue on sales of ASCs under this program.

RETAILER SUPPORT AND COMMISSIONS

The Company enters into a software and equipment maintenance agreement
("SEMA") with each new retailer who leases or places an ASC in service. The
SEMA is included in the product sales price and accordingly, related revenue is
recognized over the life of the contract. Under the terms of the SEMA, the
Company agrees to 1) install the ASC; 2) handle all user interactions and
financial transactions with UPS; 3) provide customer service, including package
tracking and loss recovery; 4) process all credit card transactions; 5) prepare
and submit usage reports to the retailer; 6) provide signage and promotional
material and assistance to the retailers; 7) provide on-line ASC maintenance and
support of the ASC's operation, including software support and maintenance and
emergency repairs; and 8) pay retailers a monthly commission equal to a portion
of the gross profit of the package shipping revenue. The Company has contracted
with independent service providers (AT&T and U.S. Net Corp.) to provide parts
and service for maintaining and servicing ASCs. The Company defers revenue
relating to SEMA obligations and recognizes net service income relating thereto
over the life of the obligation.

RESEARCH AND DEVELOPMENT

The Company is currently focusing its product development efforts on a
fully unattended version of the ASC, as well as on adding features to its
current ASC design which are specific to strategic customer relationships. The
Company expects to introduce into selected test markets its fully unattended ASC
in the fourth quarter of calendar year 1996. The Company also anticipates
enhancing its existing product line to offer international shipping capabilities
for Canada and the United States, and expects to release such enhancements
during the fourth quarter of fiscal year 1997. There can be no assurance,
however, that these products will be released on schedule and that they will be
accepted by the markets into which the Company anticipates releasing them. The
Company also has under development a variety of communication tools that will
help the shipper access information about its shipping options, costs and
current status of shipped packages more quickly using the communications
capabilities of the Internet. These products have not yet been scheduled for
release and remain subject to further development and market research.

MANUFACTURING

The Company buys substantially all of the components for its ASC from third
parties for assembly and testing by the Company at its facility. Some of these
components are designed by the Company and custom manufactured to the Company's
specifications, which permits the Company to produce the ASC without the
substantial commitment of resources that an integrated manufacturing facility
would require. The Company believes it maintains good relationships with its
suppliers and has no long-term manufacturing commitments with any such component
manufacturer or supplier. The Company does not believe that it is materially
dependent on any of its component suppliers because alternative sources for
product components are available. The Company believes that its current
facility has adequate manufacturing capacity to produce ASCs sufficient to meet
its current goals.

<PAGE>

COMPETITION

The express package and document collection and shipping industries, which
are dominated by major carriers, such as UPS, Federal Express, Airborne, DHL and
the U.S. Postal Service, are extremely competitive. The Company's competitors
and potential competitors have more experience, human and financial resources.
For example, UPS, the world's largest package distribution company, had revenues
of over $19.6 billion on a volume of 3.03 billion packages and documents in
1994. In addition, many potential customers, including Federal Express, UPS,
and the United States Postal Service are larger, possess more established
methods of operation and have developed loyalty to select manufacturing vendors
who provide them with new technology and automation. The Company is at a
disadvantage in competing with these larger and more established companies in
trying to establish itself as a manufacturer of automation equipment to be used
in the shipping industry. The Company believes that between 1992 and 1994 both
Federal Express and UPS developed or had third parties develop for them one or
more forms of automated shipping systems which could be competitive with the
Company's ASCs, but that these systems have not been deployed other than on a
limited test market basis. The Company has no current information indicating
that UPS or Federal Express intend to further deploy these systems. The
Company's primary method of competition with such carriers has been to patent
its technology which creates barriers to entry by such carriers into the
automated shipping market.

In addition to the competition from the commercial counter and pick-up
services provided by the major carriers, the Company also competes to a limited
extent with the drop boxes maintained by these competitors. According to an
industry source, as of 1994, UPS and Federal Express maintained at least 32,000
and 30,000 drop boxes, respectively, in the United States. In addition, most of
the Company's competitors offer reduced prices to persons who use their boxes.
The Company believes that the cost of these non-automated drop boxes is
substantially less than that of its ASC. The Company believes it can compete
with the non-automated drop boxes by offering more convenience and service to
shippers who desire a means of weighing a package, acceptance of a credit card
and the printing of shipping documentation, including coded shipping labels.
The Company's ASCs are user-friendly and interactive, providing the shipper with
options for the method of shipment (e.g., overnight air or 3-day shipment) and
for the purchase of insurance. In addition, the Company believes that drop
boxes are primarily receptacles for letters and air shipments. The Company's
ASCs permit the shipment of all sizes of packages and letters.

The related service industry (e.g., "mailbox" stores) providing package
collection services to consumers and small businesses is similarly very
competitive. The Company believes that these companies, many of which are
franchised, price their charges for shipping transactions based upon marking-up
line carrier charge and taking into account such factors as the type of service
provided, the size and weight of the package and the distance of the shipment.
The Company believes that there are at least nine national companies that have
established over 3,000 locations throughout the United States, primarily through
franchises. While the Company believes that such companies are a potential
customer base for the Company, they also represent intense competition for
Company owned and operated ASCs. The Company's primary method of competition
with packaging stores is to offer package shipping automation, self-service and
24-hour access to its ASCs in most retail locations, with minimal services
required by on-site personnel.

Additionally, the Company believes it has two major competitors in the
consumer retail market, Express Shipping Center, Inc. and Package Express, Inc.,
both of which provide services to retail and mass merchandisers related to
receiving and aggregating packages for commercial carrier pickup. These
competitors utilize store labor for manual processing and accepting of packages
at over 5,000 locations nationwide. The Company believes that its technology
provides substantial labor savings for retailers and mass merchandisers over the
methods provided by these competitors. The Company competes with these
competitors by offering a complete and automated solution that reduces time and
expenses related to: bank credit card processing; training employees related to
carrier services, rates and new service changes; package processing time for
label completion, shipping charge calculation, service explanations and customer
interaction; daily shipping documentation preparation; accounting and record
keeping, reconciliation and paying weekly carrier bills and generating
management reports.

<PAGE>

PATENTS

The Company currently owns four issued U.S. patents and has another U.S.
patent application pending relating to technology currently employed in its ASC
products. The Company has also filed for patent protection in several foreign
countries, including Australia, Canada, Japan, and the European Patent Community
and has filed a patent application pursuant to the Patent Cooperation Treaty
designating Australia, Canada, South Korea, Mexico and the European Patent
Community for potential patent protection. However, there can be no assurance
that the Company's patents will afford it significant protection.

In addition, the Company has a patent application pending, which relates to
significant aspects of its proprietary technology. At the time it made such
application, significant research was conducted for the Company by its patent
counsel, with respect to prior patented art similar to the Company's ASC. Such
research uncovered no art that is believed by the Company and such counsel to be
significantly detrimental to the patentability of the inventions claimed in the
application and, to the best of the Company's knowledge, its ASC does not
infringe upon patent or other proprietary rights of any third parties. There
can be no assurance, however, that such application will result in the issuance
of a patent.

There can be no assurance that the patent application filed by the Company
will result in a patent being issued or that any patents now issued or that may
be issued in the future will afford protection against competitors with similar
technology. In addition, no assurance can be given that patents issued to the
Company will not be infringed, designed-around by others or invalidated. Some
foreign countries provide significantly less patent protection than the United
States. There also can be no assurance that the Company's technology will not
infringe patents or proprietary rights of others. Furthermore, there can be no
assurance that challenges will not be instituted against the validity or
enforceability of any patent owned by the Company or, if instituted, that such
challenges will not be successful. The cost of litigation to uphold the
validity and prevent infringement of a patent can be substantial as can be the
costs of defending against such claims.

The Company also owns other proprietary technology and intellectual
property, including trade dress, trade secrets and software, that the Company
intends to protect vigorously with applicable state and federal intellectual
property laws. Although limited protection for software under the patent laws
of the United States is currently available, there can be no assurance that
software will continue to be the subject of such protection in the United
States. Also, foreign countries offer varying levels of patent protection for
software when compared with the United States.

TRADEMARKS

The Company presently owns United States trademark registrations for the
trademark U-SHIP & Design and for the trademark U-SHIP. In addition, the
Company owns a pending United States trademark registration application for the
trademark U-SHIP & Design. Each of these registrations and applications are for
the following goods: automated shipping machine for packages and overnight
letters which computes charges and prints labels, receipts and other similar
documents.

There can be no assurance that the registered trademarks or the pending
trademark application filed by the Company will afford protection against
competitors with similar marks that may have a prior use date. In addition, no
assurance can be given that trademarks owned by the Company will not be
infringed upon by others. There also can be no assurance that the Company's
trademarks will not infringe upon trademarks or proprietary rights of others.
Furthermore, there can be no assurance that challenges will not be instituted
against the validity or enforceability of any trademark registration owned by
the Company or, if instituted, that such challenges will not be successful. The
cost of litigation to uphold the validity and prevent infringement of a
trademark can be substantial as can be the costs of defending against such
claims.

EMPLOYEES

As of June 30, 1996, the Company employed 16 people on a full-time basis
and 1 on a part-time basis. The Company believes that its relations with its
employees are good.

<PAGE>

ITEM 2. DESCRIPTION OF PROPERTY

The Company leases approximately 16,200 square feet of space used for
offices, assembly, storage and packaging at 5583 West 78th Street, Edina,
Minnesota 55439 at a monthly rent of $10,386. The lease expires on March 31,
1999. The Company believes that these leased premises will meet is requirements
for facilities for the remainder of the lease term.

ITEM 3. LEGAL PROCEEDINGS

The Company received letters in August and November 1995 and April 1996
from the Minnesota Department of Commerce (the "Department") suggesting that the
Company may be offering and selling unregistered franchises in the State of
Minnesota in violation of Chapter 80C of Minnesota Statutes, including an
administrative order requiring the Company to produce information for the
Department concerning the Company and its alleged sale of franchises. Counsel
for the Company contacted the Department concerning its letters to the Company
and set forth the Company's position that it is not offering or selling
franchises in the State of Minnesota. The Company has been subsequently advised
by the Department that it does not intend to pursue any claims against the
Company. A finding that the Company has violated state franchise laws or
regulations could have a material, adverse effect upon the Company's business
and prospects. In addition, if the Company is found to have violated franchise
laws, certain persons entitled to the benefit of such laws may have the right to
rescind their purchases or leases of the Company's ASCs, in addition to
recovering damages, interest and attorneys' fees. The Company does not,
however, believe that it has operated in violation of any franchise laws.

The Company or a retailer with whom a package is deposited may have
exposure to a customer to the maximum extent of the declared value of the
package in the event of its damage or destruction while in the possession of the
Company or the retailer. The Company limits its liability to the customer to
the amount of the declared value pursuant to the shipping transaction
documentation. Claims against the Company, net reimbursement amounts received
by the Company from the carrier, from shippers totaled approximately $460 for
the fiscal year ended June 30, 1995 and $1,437 for the fiscal year ended June
30, 1996. The Company does not believe that it has significant exposure arising
out of shipper claims. The Company has no insurance which would protect it
against such losses.

The Company is not aware of any other pending or threatened material claims
or litigation.

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

There were no matters submitted to a vote of the Company's shareholders
during the three month period ended June 30, 1996.

<PAGE>

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's common stock began trading under the symbol "UBOT" on the
NASDAQ SmallCap Market in June 1996. Prior to such time, the common stock of
the Company was traded on a limited basis on the over-the-counter market under
the symbol "UBOT." The following table sets forth the quarterly high and low
bid prices for the Company's common stock, as reported by the National
Association of Securities Dealers' Bulletin Board, for each full quarterly
period within the two most recent fiscal years.

CLOSING BID PRICES
-----------------------
HIGH LOW
-------- --------
Period
- ------
Fiscal 1995
First Quarter 4.50 3.00
Second Quarter 4.50 2.50
Third Quarter 2.50 1.00
Fourth Quarter 2.50 1.50
Fiscal 1996
First Quarter 2.50 1.00
Second Quarter 3.50 1.00
Third Quarter 5.50 3.50
Fourth Quarter 4.25 3.50

These prices represent inter-dealer prices without adjustment for mark-up, mark-
down or commission and do not necessarily reflect actual transactions.

On August 30, 1996, the number of holders of record of common stock was
517. The transfer agent for the Company's common stock is Norwest Bank
Minnesota, National Association, 161 North Concord Exchange, South St. Paul,
Minnesota, 55075-0738, telephone: (612) 450-4064.

The Company has not paid any dividends on its common stock and expects that
for the foreseeable future it will follow a policy of retaining earnings in
order to finance the continued development of its business. Payment of
dividends is within the discretion of the Company's Board of Directors and will
depend upon the earnings, capital requirements and operating and financial
condition of the Company, among other factors.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

THE FOLLOWING DISCUSSION CONTAINS VARIOUS FORWARD-LOOKING STATEMENTS AS
DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, WHICH MAY BE
IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY," "WILL,"
"EXPECT," "ANTICIPATE," "ESTIMATE," "GOAL," "CONTINUE," OR OTHER COMPARABLE
TERMINOLOGY. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES
RELATING TO THE COMPANY'S FUTURE PERFORMANCE. ACTUAL EVENTS OR RESULTS MAY
MATERIALLY DIFFER FROM THOSE INDICATED IN SUCH FORWARD-LOOKING STATEMENTS. IN
EVALUATING SUCH STATEMENTS, SHAREHOLDERS AND PROSPECTIVE INVESTORS ARE CAUTIONED
NOT TO PLACE UNDUE RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS AND ARE
SPECIFICALLY DIRECTED TO REVIEW THE VARIOUS FACTORS IDENTIFIED UNDER THE CAPTION
"FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS" WHICH COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED IN SUCH FORWARD-LOOKING
STATEMENTS.

GENERAL

The Company began the research and development of its current product line
in June 1992, shipping its first product in November 1994. To become profitable,
the Company must significantly increase revenues

<PAGE>

from the placement of ASCs in the market place, which in turn, the Company
expects, will generate increased package shipments. The Company expects package
shipping revenue to become the most significant revenue stream for the Company.
The placement of ASCs by the Company will require additional investments in
equipment, personnel and the expenditure of funds to market the Company's ASC
product and services. To the extent the Company possesses insufficient resources
to fund such efforts, it will rely upon cash flow from operations and may seek
additional equity or debt financing. Historically, the Company has relied
almost exclusively upon third parties to provide lease financing for its ASCs
sales to retailers. The Company has, however, shifted its focus. In the
future, the Company anticipates placing ASCs in sites which provide high
shipping volumes. Provided a potential site meets this criteria, the Company
anticipates placing Company-owned ASCs in service at such sites at the
Company's expense. Because the market for self-service automated shipping is
undeveloped and the Company's product is relatively new, there can be no
assurance that demand for automated shipping will increase or that the
Company's ASCs will gain market acceptance or that additional equity or debt
financing will be available to the Company.

RESULTS OF OPERATIONS

FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995

The Company's revenues for the fiscal year ended June 30, 1996 were
$713,348 as compared to $725,729 for the fiscal year ended June 30, 1995. The
Company's revenue consisted of ASC sales and recurring package shipping revenue.
During the fiscal year ended June 30, 1996, the Company began implementation of
its strategy to focus on package shipping revenue as its primary source of
revenue. For the fiscal year ended June 30, 1996, approximately 76% of revenue
was derived from package shipping, compared to 21% for the fiscal year ended
June 30, 1995. The Company's package shipping revenue for the fiscal year ended
June 30, 1996 was $539,767 as compared to $150,639 for the fiscal year ended
June 30, 1995. The Company anticipates that package shipping revenue will
continue to grow as the number of installations of ASCs continues to increase.
During its 1996 fiscal year, the Company delivered and installed 100 ASCs
compared to 51 ASCs installed during fiscal year ended 1995 when the Company was
introducing its ASC. The Company first shipped the current version of its ASC
to market in November 1994. As of June 30, 1996, the Company had installed 156
systems in 24 states. Of the 156 ASCs in operation, three are owned by
retailers, twenty-one are owned by the Company and the remainder are leased by
retailers. Of the ASCs owned by the Company, two were placed in service in
calendar year 1995 in shopping malls pursuant to one-year agreements under which
the Company pays only fees to the mall based on shipping transactions. Of the
remaining 19, 6 are at gas and convenience stores pursuant to at-will
arrangements and 13 are located at various retailers on a test basis. The
6 ASCs located at gas and convenience stores are early kiosk versions of the
ASC which the Company will be removing from each location and either
scrapping or selling the equipment. The Company believes that such removal
will not have a material impact upon its financial condition or results of
operations. Although ASCs deployed increased during fiscal year 1996,
machine sales revenue in the amount of $313,496 was deferred by reason of
sales made with retailer return options. Further, the reduction in unit
selling price resulted in approximately $113,000 reduction in machine sales
revenue during fiscal year 1996 as compared to fiscal year 1995.

In order to increase the number of ASC installations to produce greater
package shipping revenue, the Company introduced a new marketing program in 1995
which offered retailers a limited return option. This program allows the
Company or the retailer to terminate the lease if certain criteria related to
package volume, retailer advertising and promotion and consumer acceptance are
not met within the first twelve months of the ASC's operation. A sale under
this program is recorded as deferred revenue which is recognized as revenue as
the return rights lapse. During fiscal year 1996, approximately 62% of ASC
sales were made with this option. As of June 30, 1996, the Company had deferred
recognition of $313,496 of revenue related to this program and $238,106 of
related cost. As of June 30, 1996, return privileges were exercised with
respect to 17 ASCs. Since June 30, 1996, six additional ASCs have been returned
to the Company, and are being relocated. The Company is also responsible for
ongoing maintenance of the ASCs. As of June 30, 1996, the Company had deferred
a total of $106,206 for such maintenance obligations. The Company recognizes
deferred maintenance revenue over the term of the maintenance agreement,
generally five years.

While the Company's package shipping revenues were higher for the fiscal
year ended June 30, 1996, its net sales for this period were actually less than
those for the fiscal year ended June 30, 1995, due to the deferral of $313,496
of revenue related to ASCs leased with return privileges. Cost of sales for the
fiscal year ended June 30, 1996 consisted of package shipping revenue costs of
$502,708 and machine production costs

<PAGE>

of $181,087. For the fiscal year ended June 30, 1995, cost of sales were
comprised of package shipping service costs of $149,750 and machine productions
costs of $454,548. Gross margins decreased from 17% to 4%, reflecting the
Company's strategic decision to lower the price of its ASCs in an effort to
increase market share through increased installations. The Company's decision
to lease its ASC at its manufactured cost reduced its gross margin by
approximately $3,000 per unit. In addition, increased training and installation
expenses reduced the gross margin on ASC placement by approximately $900 per
unit. The reduction in the gross margin was partially offset by the Company
reducing its cost to manufacture ASCs through production and purchasing
efficiencies that increased the gross margin by $2,400 per Unit. The Company
expects this strategy to produce greater package shipping volume and revenue
through increasing the number of installations.

General and administrative expenses increased by $655,763 or 69% from
$953,491 for the fiscal year ended June 30, 1995 to $1,609,254 for the fiscal
year ended June 30, 1996. Of the increase, $320,292 is attributed to additions
to staff within the sales and operations areas, and $172,990 is the result of
additional expenses related to depreciation, service and maintenance of
installed ASCs. The remaining $162,481 increase is associated with increased
expenses related to promotion, travel and general and administrative expenses.
Interest expense increased from $137,174 for the fiscal year ended June 30, 1995
to $378,837 for the fiscal year ended June 30, 1996 primarily related to the
bridge financing obtained by the Company in December 1995. The net loss for the
fiscal year ended June 30, 1996 was $2,184,287, or $1.13 per share, compared to
a net loss of $1,195,314, or $.73 per share, for the fiscal year ended June 30,
1995.

Research and development expenses for fiscal year 1996 were $247,053 which
exceeds those incurred in fiscal year 1995 due to development of stand-alone
versions of the ASC and development of software for the Company's UPS Canada
product.

FISCAL YEAR 1995 COMPARED TO FISCAL YEAR 1994

During fiscal year 1995, the Company's financial results were affected by
its move from a development stage company to an operating company. Revenues
increased with the introduction of the Company's ASC to the marketplace as did
related sales and marketing expenses. While the Company will continue to face
development costs in the future, expenses have significantly shifted to general
and administrative expenses.

In the first quarter of fiscal year 1995, the Company completed tooling and
manufacturing specifications in order to begin full production of its ASC. In
the second quarter of fiscal year 1995, the Company began selling ASCs directly
through its own sales personnel and through indirect sales channels utilizing
independent sales representatives. Further, the Company introduced various
methods of marketing, including direct contacts, advertising, telemarketing and
appearance at industry trade shows. At June 30, 1995 the Company had installed
ASCs in 78 locations in 16 states. Revenues for this period were generated from
the sale of ASCs to third party leasing companies which leased the ASCs to
retailers. In addition to equipment sales, revenues were generated from the
sale of package shipping services at each location. The Company also introduced
a new product line of packaging supplies to complement its shipping services.
Revenues for fiscal year 1995 totaled $725,729 consisting primarily of ASC
machine sales of $564,652. Cost of sales for this period were comprised of
machine production costs of $454,548 and package shipping service costs of
$149,750. Research and development expenses for fiscal year 1995 were $226,080
compared to $769,324 for fiscal year 1994. Gross margins between the periods
remained substantially the same at 17% in 1995 and 20% in 1994. The Company
used its limited resources in 1995 to increase marketing and sales efforts and
curtailed research and development of its new products.

Loss from operations related to package shipping for the fiscal year ended
June 30, 1995 totaled $44,397 compared to $34,459 for the fiscal year ended June
30, 1994. The increase is due primarily to increased costs associated with
advertising and promotion. Loss from operations related to machine and other
sales for the fiscal year ended June 30, 1995 totaled $1,013,743 compared to
$1,200,324 for the fiscal year ended June 30, 1994. The decrease is due
primarily to a decrease in research and development expenses.

During fiscal year 1994, the Company completed the basic design of its ASC.
During this period, the Company placed six additional ASCs in retail locations,
primarily to test grocery store markets. Net sales of

<PAGE>

$80,809 during this period were derived primarily from package shipping revenue
generated from the operation of 11 test market ASCs, including a pilot test unit
at the UPS service center in Eau Claire, Wisconsin.

LIQUIDITY AND CAPITAL RESOURCES

Net working capital (current assets less current liabilities) increased
from $1,478,951 deficit as of June 30, 1995 to a positive $2,972,701 as of June
30, 1996. On May 29, 1996, the Company completed the sale of 1,750,000 shares
of common stock, which resulted in net proceeds after expenses of $5,122,390.
On June 30, 1996, the Company used $1,917,700 of offering proceeds to retire
debt and bridge loan financing.

From June 1992 through November 1994, the Company's activities were
primarily focused on research and development and the acquisition of initial
start-up capital through the private sales of securities and loans from
principal shareholders. Between July 1, 1992 and June 30, 1996, the Company
sold 1,964,469 shares of common stock, resulting in gross proceeds from these
sales totaling $5,772,790. In addition, during this same period of time the
Company issued 46,622 shares of common stock in exchange for services valued at
$152,181. The above transactions were effected at prices ranging from $3.00 to
$4.00 per share.

Between July 1, 1992 and June 30, 1996, the Company issued 1,014,911 shares
of common stock in transactions involving the conversion of $3,089,340 of debt.
These included transactions in October 1995 in which the Company entered into
agreements with several secured and unsecured debt holders to convert their
outstanding notes into shares of the Company's common stock. This restructuring
decreased the current liabilities of the Company by $959,671, and reduced the
Company's long-term liabilities by $300,000. The conversion transactions
decreased the Company's shareholders' deficit by $1,259,671, and increased the
Company's outstanding shares of common stock by 419,890 shares. In addition to
the debt conversion, the Company purchased 200,000 shares of the Company's
common stock from certain insiders for a nominal amount. As part of the
restructuring plan, the Company also reduced the number of outstanding warrants
to purchase common stock by 70,000. The aforementioned share and warrant
repurchases, and the debt conversions, were entered into by the secured and
unsecured debt holders on the condition that the Company would receive at least
$1,350,000 of the financing by April 28, 1996. In December 1995, the Company
met this condition by completing a bridge financing transaction, pursuant to
which the Company sold 78 Bridge Units, each Bridge Unit consisting of a $25,000
principal amount Bridge Note and a Bridge Warrant to purchase 5,000 shares of
the Company's common stock. The bridge financing resulted in gross proceeds to
the Company of $1,950,000 and the issuance of Bridge Warrants to purchase an
aggregate of 390,000 shares of common stock exercisable at $2.80 per share.

As part of the foregoing restructuring, a $250,000 line of credit with a
bank was repaid by an investor who had guaranteed the line and was converted to
83,333 shares of common stock. Because the net proceeds from the bridge
financing were sufficient to meet the Company's working capital needs, it has
not replaced the line of credit.

During 1994 and 1995, the Company completed a series of debt financing
transactions. During the fiscal year ended June 30, 1994, the Company borrowed
$565,000 from a related party. These borrowings were evidenced by several
secured and unsecured notes bearing annual interest rates between 8 to 12%. In
connection with the borrowings, warrants were granted to the lenders to purchase
a total of 156,250 shares of the Company's common stock at prices ranging from
$2.96 to $4.00 per share.

During the fiscal year ended June 30, 1995, the Company borrowed $560,000
from related parties and $250,000 from a financial institution supported by the
guaranty of a related party. These borrowings were evidenced by several secured
and unsecured notes bearing annual interest rates between 7.75 to 13%. In
connection with the borrowings and guaranty, warrants were granted to the
parties to purchase a total of 182,000 shares of the Company's common stock at
prices ranging from $2.96 to $4.00 per share.

During the fiscal year ended June 30, 1996, the Company completed bridge
financing, borrowing $1,950,000 from investors in a private placement. In
addition, the Company borrowed $200,000 from a former employee of the Company.
These borrowings were evidenced by several unsecured notes bearing annual

<PAGE>

interest rates between 9.75 and 10%. In connection with the borrowing from the
former employee, warrants were granted to purchase a total of 50,000 shares of
the Company's common stock at $3.50 per share.

In April 1996, the Company entered into a non-binding letter of intent
with Kinko's relating to the installation of up to 100 ASCs in Kinko's stores
by December 31, 1996 and up to a total of 200 ASCs by December 31, 1997.
Kinko's would be obligated under the proposed agreement to use its best
efforts to provide the opportunity for such installations at stores operated
by Kinko's and its partners. Under the proposed agreement, Kinko's would
not, be obligated to provide any specified number of ASC installations. If
the Company enters into a definitive agreement with Kinko's, it will be
committed to manufacture and install up to 200 ASCs at a cost of
approximately $1 million. The Company anticipates using current funds
available, together with internally-generated cash flow to fund the Kinko's
ASC installation cost. The Company is in the process of negotiating its
contract with Kinko's. No assurance can be given that the Company will
conclude a satisfactory agreement with Kinko's. The Company may also seek
commercial financing from third parties for a portion or all of the
installations proposed for Kinko's. There can be no assurance that such
financing will be available to the Company on terms satisfactory to it.

Ownership changes, if any, resulting from the conversion of long-term debt
to common stock or the issuance of additional convertible debt or common stock
will limit future annual realization of the tax net operating loss
carry-forwards to a specified percentage of the value of the Company under
Section 382 of the Internal Revenue Code.

The financial statements of the Company were prepared on a going concern
basis which contemplates the realization of assets and satisfaction of
liabilities and commitments in the normal course of business. The Company
incurred a net loss of $1,264,466 and $1,195,314 for fiscal years 1994 and 1995,
respectively, and a loss of $2,184,287 for the fiscal year ended June 30, 1996,
and had an accumulated deficit of $5,343,295 at June 30, 1996.

CONCENTRATIONS OF CREDIT RISK

Concentrations of credit risk with respect to accounts receivable for
package revenues are limited due to the large number of customers comprising the
Company's customer base and their geographic dispersion. The Company generally
does not require collateral or other security for customer receivables. The
Company sells ASCs to third-party leasing companies and, at times, could
maintain individually significant receivable balances with leasing companies.
There were no accounts receivable from leasing companies at June 30, 1996.
Company credit card accounts receivable are monitored and controlled through
credit checks, verification of bank references and regular monitoring.

SEASONALITY AND INFLATION

The Company's package shipping revenues generally follow retail sales
trends, with the fall season (September through December) generating the highest
revenues for the year, due primarily to the back-to-school and holiday seasons,
and the first quarter generating the lowest revenues for the year. The Company
estimates that package shipping revenues recognized during the September through
December period represent approximately 39% of annual package shipping revenues.
The Company does not believe inflation has affected the results of its
operations, and does not anticipate that inflation will have an impact on its
future operations.

FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS

THE COMPANY WISHES TO CAUTION SHAREHOLDERS AND PROSPECTIVE INVESTORS THAT
THE FOLLOWING IMPORTANT FACTORS, AMONG OTHERS, COULD IN THE FUTURE AFFECT THE
COMPANY'S ACTUAL OPERATING RESULTS, AND THAT SUCH RESULTS COULD DIFFER
MATERIALLY FROM THOSE EXPRESSED IN ANY FORWARD-LOOKING STATEMENTS MADE BY THE
COMPANY. THE STATEMENTS UNDER THIS CAPTION ARE INTENDED TO SERVE AS CAUTIONARY
STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995. THE FOLLOWING INFORMATION IS NOT INTENDED TO LIMIT IN ANY WAY THE
CHARACTERIZATION OF OTHER STATEMENTS OR INFORMATION UNDER OTHER CAPTIONS AS
CAUTIONARY STATEMENTS FOR SUCH PURPOSE. THE ORDER IN WHICH SUCH FACTORS APPEAR
BELOW SHOULD NOT BE CONSTRUED TO INDICATE THEIR RELATIVE IMPORTANCE OR PRIORITY.

<PAGE>

LIMITED OPERATING HISTORY; LOSSES FROM OPERATIONS; GOING CONCERN UNCERTAINTY

The Company entered it current business in 1992 and has had a limited
operating history. The Company's proposed operations are subject to all the
risks inherent in the establishment of a new business. For the year ended
June 30, 1996, the Company's net sales were $713,348. The Company has never
generated net income, continues to sustain substantial operating losses and
expects to continue to operate at a loss thorough its current fiscal year.
For the year ended June 30, 1996, the Company incurred net losses of
$2,184,287. As of June 30, 1996, the Company had an accumulated deficit of
$5,343,295. As of June 30, 1996, the Company had working capital of
$2,972,701. There can be no assurance that the Company will achieve
profitable operations.

MARKET ACCEPTANCE OF PRODUCTS

A prerequisite to the Company's success will be the development of demand
for self-service, automated shipping services and wide placement of ASCs at
retail and other business locations. This is an undeveloped market and there
can be no assurance that such demand will develop. Furthermore, even if demand
does arise, there can be no assurance that the Company's product will gain broad
market acceptance. The Company has ASCs in 24 states. The commercial (non-U.S.
Postal Service) package shipping market is dominated by a relatively small
number of carriers, and carriers affiliated with direct air carriers, including
UPS, Federal Express, Roadway Package System, Inc. ("RPS"), DHL Worldwide
Services ("DHL") and Airborne Express ("Airborne"). These established carriers,
together with the U.S. Postal Service, process the vast majority of consumer and
small business package shipping transactions. There can be no assurance that
any of such dominant commercial package shippers or the public will adopt a
self-service shipping center concept or that they will select the Company's ASC
in preference to the shipping services offered by its competitors or potential
competitors.

DEPENDENCE UPON CARRIERS

SUBSTANTIAL INVESTMENT IN EQUIPMENT

As a part of its business strategy, the Company seeks to place ASCs, at
its own expense, in locations that have the potential to generate high
package volume and with businesses that have multiple strategic locations,
such as business centers, grocery stores and other service provider chains.
Although the Company has been able to sell ASCs with financing from third
party lessors, no assurance can be given that such financing will be
available in the future.

RELIANCE UPON THIRD PARTIES FOR LEASE FINANCING

To date, the Company has relied almost exclusively upon third parties to
provide lease financing for ASCs marketed to retailers. Although the Company
intends to finance an increased number of Company owned and customer leased
ASCs, the Company intends to continue to seek lease financing for ASCs. In the
event the Company should be unable to maintain relationships with third parties
to provide lease financing for ASCs, its business could be adversely affected.

ABILITY TO FORM STRATEGIC RELATIONSHIPS

The Company's strategy includes the formation of strategic relationships
with major carriers and retailers. The Company believes that relationships with
carriers will enable it to deploy its proprietary technology in the market by
leveraging a carrier's established service and distribution channels. The
Company has had limited success to date in forming a strategic relationship with
a carrier. The Company has also

<PAGE>

sought to establish relationships with multi-site retailers. To date, the
Company has had limited success in creating relationships with some retailers.

DEPENDENCE ON PROPRIETARY RIGHTS

The Company's success will depend upon its ability to protect its
proprietary technology, for which it relies on a combination of patent,
copyright, trademark and trade secret laws. Although the Company has received
patents for its ASC, there can be no assurance that current intellectual
property laws will afford the Company significant protection against competitors
or that other technology will not be developed to functionally compete with the
product. The Company believes that one or more major carriers, all of which
have greater financial, technical and marketing resources than the Company, have
attempted to develop or purchase products or technologies competitive with the
Company's ASCs.

FRANCHISE REGULATION

The Federal Trade Commission regulates the offer and sale of franchises
under its "Franchise Rule," a regulation which sets forth standards mandating
disclosure of information before the sale of a franchise or business
opportunity. Additionally, several states, including Minnesota, have laws and
rules which regulate various aspects of franchising and the sale of business
opportunities. The Company believes that its programs for the sale, lease or
placement of ASCs do not constitute franchises or business opportunities within
the meaning of the Franchise Rule or such state laws. If the Company should be
required to comply with such laws or rules it would incur substantial costs,
delays and other burdens associated with various franchise registration and
disclosure compliance obligations. In addition, there can be no assurance that
other governmental regulations will not hinder the Company's plans. A finding
that the Company has violated state franchise laws or regulations of the
Franchise Rule could result in administrative, civil or criminal actions against
the Company and could materially and adversely affect its business. In
addition, if the Company is found to have violated franchise laws, certain
persons entitled to the benefit of such laws may have the right to rescind their
purchases or leases of the Company's ASCs, in addition to recovering damages,
interest and attorneys' fees.

COMPETITION

The commercial (non-U.S. Postal Service) package shipping market is
dominated by a relatively small number of companies which have more experience
in the industry and have greater financial and technical resources than the
Company. Both Federal Express and UPS have test marketed automated self-service
shipping terminals, but have, to the best of the Company's knowledge,
discontinued such tests, and neither of them currently operates competing
machines in the market that are comparable to the form and function of the
Company's ASC. The Company competes with major air express carriers, such as
UPS, Federal Express, Airborne, DHL and the U.S. Postal Service, all of which
deploy large numbers of "drop boxes" which may compete with the Company's ASCs.
According to industry sources, these carriers are deploying additional drop
boxes on an ongoing basis. Many of such boxes have or will be installed in
business centers, office parks and shopping malls, which could be potential
sites for the Company's ASCs. The Company also faces intense competition from
the related service industry providing package collection services, such as mail
and packaging stores. In addition, the Company's competitors and the dominant
package shippers, all of which have greater resources than the Company, could
develop products competitive with the Company's ASCs.

TECHNOLOGICAL RISKS

The Company anticipates that any market which develops for automated
shipping services will be characterized by rapidly changing technology and user
preferences. Such market will likely be heavily influenced by the preferences
and acceptance of such technology by major package and parcel carriers. There
can be no assurance that future products or technology developed by others will
not render obsolete the Company's technology. Failure on the part of the
Company to develop new technology to meet competitive challenges may adversely
affect the Company's prospects.

<PAGE>

UNINSURED OBLIGATIONS TO SHIPPING CUSTOMERS

QUARTERLY REVENUE FLUCTUATION; SEASONALITY

The Company expects to experience continued and substantial fluctuations in
revenue due to seasonal changes which affect the volume of package shipping
transactions. Such fluctuations create significant imbalances in the Company's
cash flow. Potential investors and shareholders should not, therefore, rely on
individual quarterly results as being indicative of the Company's overall
performance.

<PAGE>

ITEM 7. FINANCIAL STATEMENTS

U-SHIP, INC. AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

AS OF JUNE 30, 1996 AND 1995

TOGETHER WITH REPORT OF

INDEPENDENT PUBLIC ACCOUNTANTS

<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To U-Ship, Inc.:

We have audited the accompanying consolidated balance sheets of U-Ship, Inc. and
Subsidiaries as of June 30, 1996 and 1995, and the related consolidated
statements of operations, shareholders' equity (deficit) and cash flows for the
years then ended. 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.

We conducted our audits in accordance with generally accepted auditing
standards. 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.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of U-Ship, Inc. and Subsidiaries
as of June 30, 1996 and 1995, and the results of their operations and their cash
flows for the years then ended, in conformity with generally accepted accounting
principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As reflected in the accompanying
financial statements, the Company incurred net losses of $2,184,287 and
$1,195,314 for the years ended June 30, 1996 and 1995, respectively. This
factor, among others, as discussed in Note 1, raises substantial doubt about the
ability of the Company to continue as a going concern. The financial statements
do not include any adjustments relating to the recoverability and classification
of recorded asset amounts or the amounts and classification of liabilities that
might be necessary should the Company be unable to continue as a going concern.

ARTHUR ANDERSEN LLP

Minneapolis, Minnesota,

August 15, 1996

<PAGE>

U-SHIP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
As of June 30

<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
ASSETS

CURRENT ASSETS:
Cash and cash equivalents $4,822,785 $ 41,853
Accounts receivable 59,135 55,604
Inventories 822,393 446,936
Prepaid expenses and other 12,208 10,741
---------- ----------
Total current assets 5,716,521 555,134
---------- ----------

PROPERTY AND EQUIPMENT:
Shipping centers 87,045 56,773
Furniture, fixtures and equipment 365,003 292,679
Less- Accumulated depreciation (230,704) (117,940)
---------- ----------
Total property and equipment, net 221,344 231,512

OTHER ASSETS, net 76,964 73,485
---------- ----------
$6,014,829 $ 860,131
---------- ----------
---------- ----------

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)

CURRENT LIABILITIES:
Current maturities of long-term debt and
notes payable $ 28,173 $ 947,437
Deferred revenue 419,702 68,063
Checks issued not yet presented for payment 1,851,365 -
Accounts payable 194,227 675,445
Accrued liabilities 250,353 343,140
---------- ----------
Total current liabilities 2,743,820 2,034,085

LONG-TERM DEBT, net of current maturities 30,263 346,926
---------- ----------

COMMITMENTS AND CONTINGENCIES (Notes 4, 5 and 7)

SHAREHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.004 par value; 25,000,000
shares authorized; none issued and outstanding - -
Common stock, $.004 par value; 75,000,000 shares
authorized; 3,916,573 and 1,754,867 issued and
outstanding, respectively 15,666 7,019

Additional paid-in capital 8,548,875 1,631,109
Warrants 19,500 -
Accumulated deficit (5,343,295) (3,159,008)
---------- ----------
Shareholders' equity (deficit) 3,240,746 (1,520,880)
---------- ----------
$6,014,829 $ 860,131
---------- ----------
---------- ----------
</TABLE>

The accompanying notes are an integral part of these consolidated balance sheets

<PAGE>

U-SHIP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Year Ended June 30

1996 1995
---------- ----------
<S> <C> <C>

REVENUES:
Package shipping $ 539,767 $ 150,639
Machine sales 159,021 564,652
Other 14,560 10,438
----------- -----------
Net sales 713,348 725,729

COST OF SALES 683,795 604,298
----------- -----------

GROSS PROFIT 29,553 121,431

GENERAL AND ADMINISTRATIVE EXPENSES 1,609,254 953,491

RESEARCH AND DEVELOPMENT EXPENSES 247,053 226,080
----------- -----------
LOSS FROM OPERATIONS (1,826,754) (1,058,140)

INTEREST EXPENSE 378,837 137,174

INTEREST INCOME 21,304 -
----------- -----------
NET LOSS $(2,184,287) $(1,195,314)
----------- -----------
----------- -----------

NET LOSS PER SHARE $ (1.13) $ (.73)
----------- -----------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 1,930,786 1,628,759
----------- -----------
----------- -----------
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

<PAGE>

U-SHIP, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity (Deficit)

Common Stock
------------------------- Paid-In Accumulated
Shares Amount Capital Warrants Deficit Total
---------- ---------- ----------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C>

BALANCE, June 30, 1994 1,563,283 $ 6,253 $1,030,842 $ - $(1,963,694) $(926,599)

Sale of common stock at $3.20 per share
in September 23,438 94 74,906 - - 75,000
Sale of common stock at $3.20 per share
in April 11,250 45 35,955 - - 36,000
Sale of warrants to purchase common stock
in May - - 100 - - 100
Sale of common stock at $3.00 per share
in June 21,667 87 64,911 - - 64,998
Issuance of common stock for the
retirement of debt at $3.20 per share
in December 127,242 509 406,664 - - 407,173
Issuance of common stock for services at
$3.80 per share in June 4,250 17 16,141 - - 16,158
Issuance of common stock in exchange for
interest-free loan 3,750 14 1,590 - - 1,604
Net loss - - - - (1,195,314) (1,195,314)
---------- ---------- ----------- ------------ ----------- ---------

BALANCE, June 30, 1995 1,754,880 7,019 1,631,109 - (3,159,008) (1,520,880)

Sale of common stock at $3.00 per share
from July to November 34,333 137 102,863 - - 103,000
Cancellation of shares in October (200,000) (800) 795 - - (5)
Issuance of common stock for the retirement
of debt at $3.00 per share in October 419,890 1,680 1,257,991 - - 1,259,671
Issuance of warrants - - - 19,500 - 19,500
Issuance of stock for lease financing
services at $3.50 per share 750 3 2,622 - 2,625
Repurchase of incremental shares (34) - (155) - - (155)
Public offering of common stock 1,750,000 7,000 5,115,390 - - 5,122,390
Conversion of bridge notes at $2.80 per
share 156,754 627 438,260 - - 438,887
Net loss - - - - (2,184,287) (2,184,287)
---------- ---------- ----------- ------------ ----------- ---------
BALANCE, June 30, 1996 3,916,573 $15,666 $8,548,875 $19,500 $(5,343,295) $3,240,746
---------- ---------- ----------- ------------ ----------- ---------
---------- ---------- ----------- ------------ ----------- ---------

</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

<PAGE>

U-SHIP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Year Ended June 30

1996 1995
---------- ----------
<S> <C> <C>

OPERATING ACTIVITIES:
Net loss $(2,184,287) $(1,195,314)
Adjustments to reconcile net loss to net
cash flows used for operating activities-
Depreciation and amortization 136,468 99,505
Common stock issued for services 2,625 17,762
Change in current operating items:
Checks held, not yet presented for payment 1,851,365 -
Accounts receivable (3,531) (51,850)
Advance to officer - 36,066
Inventories (375,457) (414,987)
Prepaid expenses and other (1,467) (42,100)
Accounts payable (316,548) 250,064
Accrued liabilities and deferred revenue 258,852 340,008
----------- -----------

Cash used for operating activities (631,980) (960,846)
----------- -----------

INVESTING ACTIVITIES:
Purchases of property and equipment (129,779) (189,433)
----------- -----------

FINANCING ACTIVITIES:
Proceeds from notes payable and long-term debt 2,248,509 1,211,001
Payments on notes payable and long-term debt (1,931,049) (198,751)
Sale of common stock 5,225,236 176,098
Cancellation of shares (5) -
----------- -----------
Cash provided by financing activities 5,542,691 1,188,348
----------- -----------

NET INCREASE IN CASH 4,780,932 38,069

CASH AND CASH EQUIVALENTS, beginning of year 41,853 3,784
----------- -----------

CASH AND CASH EQUIVALENTS, end of year $ 4,822,785 $ 41,853
----------- -----------
----------- -----------

NONCASH TRANSACTIONS:
Conversion of debt to common stock $ 1,095,001 $ 407,173
Conversion of payables to common stock 164,670 -
Common stock issued for services or property 2,625 17,762
Conversion of bridge notes to common stock 438,887 -

CASH PAID DURING THE PERIOD FOR:
Interest 189,684 22,209
Income taxes - -
----------- -----------
----------- -----------

</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

<PAGE>

U-SHIP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996

1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

U-Ship, Inc. (the Parent) has two subsidiaries, U-Ship International, Ltd.
(International) and U-Ship America, Inc. (America). International is in the
business of developing, manufacturing and operating equipment used as automated
self-service package shipping systems. America is an inactive subsidiary. U-
Ship, Inc. and its subsidiaries are collectively referred to herein as the
Company.

Since inception (September 30, 1991) through June 30, 1994, the Company was a
development stage enterprise, having devoted substantially all of its efforts to
proprietary product development and providing prototype products to certain
customers. Such efforts also included raising capital and acquiring and
constructing property and equipment. Although the Company began actively
selling its products during 1995 and no longer considers itself to be in the
development stage, it has not operated profitably to date and there are no
assurances that it will operate profitably in the future.

The aforementioned factors raise substantial doubt about the Company's ability
to continue as a going concern. The Company incurred net losses of $2,184,287
and $1,195,314 for the years ended June 30, 1996 and 1995, respectively. The
Company's ability to continue present operations, further develop potential
proprietary products and operate as a going concern is contingent upon approval,
acceptance and sales of the Company's products and the ability to obtain
financing that might not be available. The financial statements do not include
any adjustments relating to the recoverability and classification of recorded
asset amounts or amounts and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Parent,
International and America. All intercompany balances and transactions have
been eliminated in consolidation.

CASH AND CASH EQUIVALENTS

The Company considers all short-term, highly liquid investments, primarily in
commercial paper and money market accounts, that are readily convertible into
known amounts of cash and that have original maturities of three months or
less to be cash equivalents.

INVENTORIES

Inventories are stated at the lower of first-in, first-out (FIFO) cost or
market. Inventories consist of shipping systems in various stages of
completion, including component parts. The components of inventory are:

June 30, June 30,
1996 1995
--------- --------

Raw materials and work components $490,342 $446,936
Finished goods at customer sites 332,051 -
-------- --------
$822,393 $446,936
-------- --------
-------- --------

REVENUE RECOGNITION

The Company generates revenue from two primary sources: the sale of automated
shipping centers and the per package shipping revenue generated from ongoing
shipping volume. Revenues are also derived, to a lesser extent, from the sale
of shipping supplies and maintenance contracts.

The Company generally recognizes revenue from sales of shipping systems upon
delivery and installation. Certain sales agreements allow the customer to
return the shipping system under certain circumstances within the first 12
months. Such revenue and related costs are deferred until return rights lapse.

Package shipping revenue is recognized when the package is shipped. Revenue
from maintenance contracts is deferred and recognized over the period of the
related agreement.

The components of deferred revenue are as follows:

<PAGE>

June 30, June 30,
1996 1995
--------- --------
Machine sales $ 313,496 $ -
Maintenance contracts 106,206 68,063
--------- --------
$ 419,702 $ 68,063
--------- --------
--------- --------

Most of the automated shipping center sales are financed by third-party
equipment lessors. The lessor has certain recourse to the Company in the event
of customer default or return of the automated shipping center, primarily to
remarket the automated shipping center on a best-efforts basis. The Company has
reserved the estimated cost of fulfilling such recourse arrangements.

CONCENTRATIONS OF CREDIT RISK

Concentrations of credit risk with respect to accounts receivable for package
revenues are limited due to the large number of customers comprising the
Company's customer base and their geographical dispersion. The Company
generally does not require collateral or other security for customer
receivables. The Company sells automated shipping centers to third-party
leasing companies and, at times, could maintain individually significant
receivable balances with primary leasing companies. Receivables from leasing
companies comprised 49% of accounts receivable at June 30, 1995. Company
credit card receivables are monitored and controlled through credit checks,
verification of bank references and regular monitoring. Allowance for
doubtful accounts is evaluated periodically based on management's evaluation
of collectibility, historical experience and other economic factors.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Major renewals and betterments
are capitalized, and maintenance and repairs which do not improve or extend
the lives of the respective assets are charged to operations. Depreciation is
provided using the straight-line method for financial reporting purposes as
follows:

Shipping centers 5 years
Furniture, fixtures and equipment 3-5 years

OTHER ASSETS

Other assets primarily represent costs related to the automated shipping machine
patents. These costs are amortized over five years.

RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred.

NET LOSS PER SHARE

Net loss per share was computed by dividing net loss by the weighted average
number of shares of common stock and common stock equivalents outstanding during
each period. Common stock equivalents include the effects of options and
warrants which are assumed to be exercised or converted into common stock at the
beginning of the period. Pursuant to Securities and Exchange Commission rules,
shares of stock sold and stock options and warrants granted within one year of
the date of the initial public offering have been included in the calculation of
common share equivalents, using the treasury stock method, as if they were
outstanding for all periods presented. Shares canceled within one year of the
initial public offering have been reflected as if they had been canceled for all
periods presented.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles 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. The
ultimate outcomes could differ from those estimates.

NEW PRONOUNCEMENTS

In March 1995, the Financial Accounting Standards Board issued Statement of
Accounting Standards (SFAS) No. 121, "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." This statement establishes
accounting standards for the recognition and measurement of impairment of long-
lived assets, certain identifiable intangibles, and goodwill either to be held
or disposed of. The Company anticipates adopting

<PAGE>

SFAS No. 121 on July 1, 1996 and does not expect that adoption will have a
material impact on the financial position or results of operation of the
Company.

2. LONG-TERM DEBT AND NOTES PAYABLE:

Long-term debt consisted of the following:

<TABLE>
<CAPTION>
June 30
------------------------
1996 1995
---------- ----------
<S> <C> <C>
Promissory note to related party, interest
at a rate equal to the reference rate, as
defined, plus 4%, collateralized by all
assets of the Company, converted to common
stock at $3.00 per share in October 1995 $ - $ 350,000

Subordinated debenture, 10%, converted to
common stock at $3.00 per share in October 1995 - 350,000

Line of credit, 7.75%, converted to common
stock at $3.00 per share in October 1995 - 250,000

Promissory note to a related party, 10%,
converted to common stock at $3.00 per share
in October 1995 - 70,000

Demand notes payable to shareholders, 8%,
unsecured, $75,000 converted to common stock
at $3.00 per share in October 1995, remainder
repaid in 1996 - 111,945

Capital lease obligations 31,646 47,825

Other 26,790 114,593
---------- ----------
Total 58,436 1,294,363

Less- Current maturities (28,173) (947,437)
---------- ----------
Total long-term debt $ 30,263 $ 346,926
---------- ----------
---------- ----------
</TABLE>

Substantially all of the debt outstanding at June 30, 1995 was converted to
equity during October 1995 (see Note 4). Interest paid to related parties
totaled $44,150 and $50,158 for the years ended June 30, 1996 and 1995,
respectively.

Maturities of long-term debt as of June 30, 1996 are as follows: $28,173 in
1997, $27,555 in 1998 and $2,708 in 1999.

3. INCOME TAXES:

As of June 30, 1996, the Company had net operating loss carryforwards for income
tax purposes of approximately $4,727,000. These income tax net operating loss
carryforwards expire beginning in the year 2005. Because of the lack of
profitability, a valuation allowance equal to the deferred tax asset has been
recorded.

Ownership changes, if any, resulting from the conversion of long-term debt to
common stock or the issuance of additional convertible debt or equity ownership
will limit future annual realization of the tax net operating loss carryforwards
to a specified percentage of the value of the Company under Section 382 of the
Internal Revenue Code.

4. CAPITAL STOCK:

COMMON STOCK

During 1996, the Company sold an additional 1,784,333 shares of common stock
at $3.00 to $3.50 per share for $5,225,390. During 1995, the Company sold
56,355 shares of common stock at $3.00 to $3.20 per share for $175,784.

In addition to the above sales of common stock for cash, the Company has issued
shares of stock for services rendered. During the years ended June 30, 1996 and
1995, the Company issued 750 and 8,000 shares for services, property and
equipment, and interest forgone on loans to the Company. The Company recognized
expense for such shares issued totaling $2,625 and $17,762 for the years ended
June 30, 1996 and 1995, respectively.

The Company's board of directors declared a 1-for-4 reverse stock split during
January 1996, which was effected on February 29, 1996, the date of shareholder
approval. The stock split has been retroactively reflected in the accompanying
financial statements.

<PAGE>

RECAPITALIZATION AND FINANCING:

On September 18, 1995, the board of directors approved a recapitalization
program which was effected in October 1995. This program included the
conversion of $1,259,671 of debt and payables to common stock, a reduction in
the number of outstanding shares of common stock by 200,000 shares, and a
reduction in the number of outstanding warrants to purchase common stock by
70,000 shares.

Further, on December 15, 1995, the Company closed a $1,950,000 bridge financing
arrangement in which the Company received net proceeds of $1,808,673. The
financing was offered in the form of a unit which included $25,000 in principal
and a warrant to purchase common stock. Fifty percent of the principal amount
of the bridge notes were convertible at the option of the holder to common stock
for a period of 20 days following the initial public offering at $2.80 per
share. Bridge note holders elected to convert $438,887 into 156,754 shares of
common stock in June 1996.

Warrants to purchase 390,000 shares were issued as part of this financing. The
warrants are exercisable to purchase common stock beginning September 30, 1996
and terminating five years from the date of issuance. The exercise price of
these warrants is $2.80 per share.

PUBLIC OFFERING

On May 29, 1996, the Company completed a public offering of 1,750,000 shares of
common stock at an offering price to the public of $3.50 per share.
Additionally, the Company closed on the underwriter's overallotment of an
additional 100,000 shares of common stock on July 3, 1996. Net proceeds to the
Company (excluding the overallotment) totaled $5,122,390. In connection with
the public offering of common stock, the Company sold the underwriter a 5-year
warrant to purchase up to 175,000 shares of the Company's stock at $4.20 per
share. The proceeds were used by the Company to retire the bridge notes, repay
other debt and construct additional automated shipping centers.

WARRANTS

During fiscal year 1995, the Company issued 163,945 warrants to purchase common
stock at prices ranging from $3.50 to $5.20 per share to various shareholders
and investors as part of capital stock and financing transactions. These
warrants expire at various dates through fiscal year 2000. In addition to the
warrants issued to the underwriter and bridge note holders, the Company issued
134,421 warrants during fiscal year 1996 in exchange for capital stock and
financing transactions. These warrants are exercisable at $3.63 to $4.00 per
share through 2003.

Warrants outstanding at June 30, 1996 totaled 1,086,571, exercisable at prices
ranging from $2.80 to $5.20 per share through 2003.

5. STOCK OPTION PLAN:

During 1995, the Company established an employee stock option plan which
reserves 450,000 shares of the Company's common stock. Under the plan, the
board of directors may grant options to purchase shares of the Company's stock
to eligible employees and contractors at a price of not less than 100% of the
fair market value at the time of the grant for incentive stock options. As of
June 30, 1996, options to purchase 47,000 shares of common stock at $3.50 per
share were outstanding and exercisable.

Prior to June 30, 1994, the Company granted options to purchase up to 42,500
shares of restricted common stock to former officers and service providers of
the Company at $4.00 per share. These options expire in October 1997 and are
not part of the aforementioned stock option plan.

In January 1996, the Company adopted the 1996 Director Stock Option Plan
authorizing up to 100,000 options to be issued. These options expire within
five years of grant and are exercisable at 100% of the fair market value at the
date of grant. As of June 30, 1996, 30,000 shares were outstanding and
exercisable at $4.875.

6. RELATED-PARTY TRANSACTIONS:

In January 1995, the Company established a bank line of credit of $250,000 which
was supported by the personal guarantee of a private investor. In consideration
for his personal guarantee, the investor received warrants for the purchase of
62,500 shares of common stock. In October 1995, the investor assumed the bank's
right to receive payment under the line of credit and converted the $250,000
remaining on the line of credit to 83,333 shares of common stock.

In addition to the transactions described in Note 2, the Company had an
agreement with a consulting firm to develop a long-term business strategy for
the Company as well as work on other short-term organizational issues. The
consulting firm is owned by a director of the Parent. The agreement called for
monthly payments of $10,000 through October 1994 for a total of $60,000.

7. COMMITMENTS AND CONTINGENCIES:

LEASE COMMITMENTS

In February 1995, the Company entered into a lease for office/warehouse space.
The lease calls for monthly rent payments of $10,386 including certain operating
expenses and real estate taxes through March 31, 1999. The

<PAGE>

Company also granted stock warrants totaling 5,775 shares, exercisable at $4.00
per share and expiring February 28, 2000, to the landlord (see Note 4).

Minimum rental payments under the leases are as follows:

Year Ending June 30
----------------------

1997 $81,664
1998 93,124
1999 78,723

LITIGATION

The Company is involved in legal proceedings incidental to the normal course of
business. Although the ultimate outcome of these matters cannot be determined,
management believes that the final disposition of these proceedings will not
have a material adverse effect on the consolidated financial position or results
of operations of the Company.

SHIPPING CLAIMS

The Company may have exposure to a customer to the maximum extent of the
declared value of a shipped package in the event of its damage or destruction
while in the possession of the Company or the retailer. The Company limits its
liability to the customer to the amount of the declared value pursuant to the
shipping transactions documentation; however, the Company has no insurance which
would protect it against losses from shipping claims. Through June 30, 1996,
claims against the Company have not been significant. The Company maintains
reserves for shipping claims based on past experience.

EMPLOYMENT CONTRACTS

The Company has entered into an employment agreement with a key employee that
expires in December 1996. Such agreement provides for an annual salary of
approximately $110,000.

8. SEGMENT REPORTING:

The operations of the Company are divided into two business segments for
financial reporting purposes. The package shipping segment derives revenues
from packages shipped at the automated shipping centers. The machine sales
segment derives revenues from the sale of automated shipping centers to third-
party leasing companies and retailers. Operating expenses that are not directly
traceable to an industry segment have been allocated based on management's
assessment of costs incurred by affected industry segments.

Financial information by business segment is as follows as of or for the year
ended June 30:

Machine Sales
and Other
Package ----------
Shipping Corporate Total
--------- --------- ----------
<S> <C> <C> <C> <C>

1996:
Sales $ 547,432 $ 165,916 $ - $ 713,348
Loss from operations (130,253) (2,054,034) - (2,184,287)
Identifiable assets 91,390 910,145 5,013,294 6,014,829
Capital additions - 122,804 6,975 129,799
Depreciation and amortization - 116,675 19,793 136,468

1995:
Sales 160,444 565,285 - 725,729
Loss from operations (44,397) (1,013,743) - (1,058,140)
Identifiable assets 42,150 576,967 241,014 860,131
Capital additions - 185,128 4,305 189,433
Depreciation and amortization - 81,640 17,865 99,505

</TABLE>

<PAGE>

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE

None.

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

The directors and executive offices of the Company are as follows:

Name Age Position(s)
---- --- -------------------------------------------------

Bruce H. Senske 41 Chief Executive Officer, Chief Financial Officer,
Treasurer and Director
Bryan M. Virgin 39 Vice President, Marketing and Sales
Kenneth W. Liles 41 Vice President, Technologies
B. Richard Vogen 53 Secretary and Director
Willis K. Drake 73 Director
Donald L. Kotula 50 Director
R. Michael Fox 50 Director
Gary W. Ramsden 39 Director
Ronald D. Schmidt 60 Director

BRUCE H. SENSKE has served as the Company's Chief Executive Officer, Chief
Financial Officer, Treasurer and a director since January 1993. From 1988 to
1992, Mr. Senske was Vice President of Strategic Marketing and Product Planning
at Vocam Systems, a division of the Pitney Bowes Company, a manufacturer of
transportation management software systems. Mr. Senske also currently serves as
Chief Executive Officer of both of the Company's subsidiaries.

KENNETH W. LILES has served as the Company's Vice President of Technologies
since March 1994. In September 1992, Mr. Liles founded Instrument Systems,
Inc., a hardware/software integration consulting company, and served as its
Chief Executive Officer through March 1994. Prior to 1992, Mr. Liles held
various engineering positions with EG&G Automotive Research, Honeywell Inc.,
LTV -- Vought Aerospace Group, Control Data Corporation, Rosemount, Inc. and
Pratt & Whitney Aircraft.

BRYAN M. VIRGIN has served as the Company's Vice President, Marketing and
Sales since June 1996. From August 1992 to May 1996, Mr. Virgin was Vice
President of Marketing for Growing Healthy Inc., a frozen baby food company.
From 1989 to 1992, Mr. Virgin was Vice President of Waters Molitor, Inc., a
marketing and promotional consulting firm. Prior to that, Mr. Virgin held
various positions at General Mills.

WILLIS K. DRAKE, who joined the Company's Board in January 1995, is
co-founder of Control Data Corporation. He is also founder, and former
President and Chairman of DataCard Corporation, a major manufacturer of plastic
transaction and identification cards, card personalization systems, and
transaction automation terminals. Mr. Drake has been retired since 1983.
However, as a director for Digi International, Analysts International, Inc. and
Telident, Inc., Mr. Drake remains active in providing entrepreneurial,
management, marketing and technical consultation to businesses in a variety of
industries.

R. MICHAEL FOX has been a director of the Company since June 1993. Mr. Fox
has also been Chief Executive Officer of Matrix Associates, Inc. since 1989.
Matrix Associates, Inc. is a marketing and consulting

<PAGE>

firm concentrating on mergers, acquisitions and turnarounds. Mr. Fox assists
companies in defining their markets, and provides strategic direction in
re-engineering and capital restructuring to improve profitability.

DONALD L. KOTULA, who joined the Company's Board in January 1995, is
founder of Northern Hydraulics, a major retailer of construction and light
industrial equipment, tools and supplies. Mr. Kotula has served as President
and Chief Executive Officer of Northern Hydraulics since 1981.

GARY W. RAMSDEN served as the President of U-Ship International, Ltd., a
subsidiary of the Company, from its inception in September 1991 to January 1993,
and has served as director of U-Ship, Inc. since its merger with U-Ship
International, Ltd. in June 1992 and is currently a realtor with Burnet Reality
in Eau Claire, Wisconsin. From October 1989 to March 1991, Mr. Ramsden was
employed in sales/management capacities for Crandell Moving and Storage,
Incorporated in Altoona, Wisconsin. From July 1988 to September 1989, Mr.
Ramsden was President of Five Star Moving Systems, Incorporated in Shoreview,
Minnesota.

RONALD D. SCHMIDT, who joined the Company's Board in June 1995, has been
Chairman and Chief Executive Officer of Zytec Corporation, a designer and
manufacturer of custom electronic power supplies used in the computer industry
since 1984. Under Mr. Schmidt's leadership, Zytec received the Malcolm
Baldridge National Quality Award in 1991 for quality manufacturing excellence.
Mr. Schmidt held a variety of management positions with Control Data Corporation
before acquiring Zytec from Control Data in a leverage buyout in 1984.

B. RICHARD VOGEN, who joined the Company's Board in June 1993, founded
Vocam Systems, Inc. in 1985, and served as its President and Chairman until its
acquisition by the Pitney Bowes Company in 1990. After its acquisition by
Pitney Bowes, Mr. Vogen continued to serve as President of the Vocam Systems
division until June 30, 1994. Since that date, Mr. Vogen has served as an
independent management consultant.

The Company has engaged an executive search firm to assist it in the
selection and hiring of a Chief Financial Officer and a Vice President of
Marketing.

To the Company's knowledge, based solely on a review of copies of reports
filed with the Securities and Exchange Commission during fiscal year 1996, all
applicable Section 16(a) filing requirements were complied with.

ITEM 10. EXECUTIVE COMPENSATION

Annual
Fiscal Compensation
Name and Principal Position Year Salary
--------------------------------------------- ------------- ---------------

Bruce H. Senske
Chief Executive Officer. . . . . . . . . . . 1996 $114,800
1995 $ 79,000
1994 $ 75,000

No options have been granted by the Company to Mr. Senske. The Company has
no retirement, pension, profit-sharing or insurance plans for officers and
employees, other than an employee health insurance plan.

EMPLOYMENT AGREEMENTS

Bruce H. Senske, Chief Executive Officer, Chief Financial Officer,
Treasurer and a director, is employed by the Company under an employment
agreement dated January 1, 1993. Mr. Senske's employment agreement has been
extended through calendar year 1996. Mr. Senske's employment agreement
originally provided for a base salary of $75,000 per year, but was increased in
July 1996 to $110,000 per year. In

<PAGE>

addition, Mr. Senske's employment agreement provides that he may not, either
during or subsequent to his employment with the Company, disclose any
information which is deemed confidential by the Company, or for a period of two
years following his employment by the Company, solicit or assist others in doing
so, any of the Company's then current employees to terminate their employment
with the Company for the purpose of becoming employed by Mr. Senske. Also,
Mr. Senske's employment provides that he must disclose to the Company any
inventions which are conceived by him during the course of his employment by the
Company and that he must assign to the Company all rights to such inventions.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table contains certain information as of June 30, 1996 as to
the number of shares of common stock beneficially owned by (i) each person known
by the Company to own beneficially more than five percent (5%) of the Company's
common stock, (ii) each person who is a director of the Company, and (iii) all
persons who are directors and officers of the Company as a group, and as to the
percentage of the outstanding shares held by them on such date. Unless
otherwise noted, each person identified below possesses sole voting and
investment power with respect to such shares.

AMOUNT AND NATURE OF PERCENTAGE OF
NAME OF BENEFICIAL OWNER OR GROUP BENEFICIAL OWNERSHIP(1) OUTSTANDING STOCK(10)
- ------------------------------------------------ ----------------------- -----------------------
<S> <C> <C>
Brewster Diversified Services, Inc.
20 North Lake #316
Forest Lake, MN 55025 293,688(2) 7.37%
Donald L. Kotula
2800 South Cross Drive West
Burnsville, MN 55337 256,656(3) 6.40%
Bruce H. Senske
5583 West 78th Street
Edina, MN 55439 246,442(4) 6.18%
Gary W. Ramsden
5896 Crocus Drive
Eau Claire, WI 54701 92,668(5) 2.36%
B. Richard Vogen
17883 179th Trail West
Lakeville, MN 55044 52,951(6) 1.35%
Willis K. Drake
4530 West 77th Street, #198
Minneapolis, MN 55044 12,042(7) .31%
Ronald D. Schmidt
10407 Fawns Way
Eden Prairie, MN 55347 12,000(8) .31%
R. Michael Fox
7221 Ohms Lane
Edina, MN 55439 5,750(9) .15%
All Directors and Officers as a Group (7 persons) 678,509 16.44%

</TABLE>

____________________
(1) The securities "beneficially owned" by a person are determined in
accordance with the definition of "beneficial ownership" set
forth in the regulations of the Commission and accordingly, may
include securities owned by or for, among others, the spouse,
children or certain other relatives of such person as well as
other securities as to which the person has or shares voting or
investment power or has the right to acquire within 60 days. The
same shares may be beneficially owned by more than one person.

<PAGE>

(2) Includes 70,000 shares purchasable pursuant to the exercise of
warrants.
(3) Includes 31,770 shares held by Mr. Kotula, 132,010 shares held by
Norquip Leasing, Inc. ("Norquip"), a company owned by Mr. Kotula,
5,375 shares purchasable pursuant to options and warrants held by
Mr. Kotula and 87,500 shares purchasable pursuant to warrants
held by Norquip.
(4) Includes 69,235 shares purchasable pursuant to the exercise of
warrants.
(5) Includes 15,000 shares purchasable pursuant to the exercise of
options.
(6) Includes 18,250 shares purchasable upon the exercise of options
and warrants.
(7) Includes 5,375 shares purchasable pursuant to the exercise of
options and warrants.
(8) Includes 5,000 shares purchasable pursuant to the exercise of
options
(9) Represents 5,750 shares purchasable pursuant to the exercise of
options and warrants.
(10) Assumes no exercise of: (a) 957,737 shares of common stock
issuable upon exercise of outstanding employee stock options,
outstanding director stock options and warrants, including
warrants issued in conjunction with bridge financing completed by
the Company in December 1995, or up to 175,000 shares of common
stock issuable upon exercise of warrants granted to the
Underwriter in connection with the public offering completed by
the Company in June 1996.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

BREWSTER TRANSACTIONS

During the fiscal years ended June 30, 1994 and 1995, Brewster
Diversified Services, Inc. ("Brewster") loaned the Company an aggregate of
$705,000 evidenced by promissory notes. The loans, as amended, bore
interest at 10% per annum and called for a $50,000 principal payment on
January 1, 1996. In addition, the Company was required to make principal
payments of $100,000 on January 1, 1997 and 1998, and on January 1, 1999,
the Company was required today any remaining unpaid principal and any
accrued interest. As additional consideration for the loans, the Company
issued Brewster warrants for the purchase of 140,000 shares of its common
stock exercisable at $2.96 per share. In addition, pursuant to a Stock
Exchange Agreement dated December 2, 1993, Brewster entered into an
agreement with certain of the Company's shareholders to exchange 100,000
shares of Brewster's common stock for an additional 250,000 shares of the
Company's common stock in the following amounts: 60,000 shares from each of
Gary Ramsden, Keith Ramsden, Marvin Ramsden and Elwood Taylor; 10,000
shares from Bruce Senske.

In December 1994, Brewster agreed to convert $355,000 of the Company's
indebtedness to it, plus accrued interest of $52,173, into common stock of
the Company at a rate of $3.20 per share. The $350,000 remaining balance
due Brewster under promissory notes was converted into a subordinated
convertible debenture, bearing an interest rate of 10% per annum, with
conversion rights to convert the balance to common stock at the time of a
public offering at the offering price. The Company completed a public
offering of its stock in May 1996. In October 1995, Brewster converted the
balance of the debenture, plus accrued interest of $32,123, into common
stock of the Company at a rate of $3.00 per share. Also in October 1995,
Brewster exchanged a warrant to purchase 125,000 shares of the Company's
common stock for a warrant to purchase 55,000 shares of the Company's
common stock bearing the same exercise price and maturity date. Between
the third quarter of fiscal year 1994 and the second quarter of fiscal year
1995, the high and low bid prices for the Company's common stock were $8.00
and $2.00, respectively. The Company determined that the prices at which
the above conversions were effected, $3.20 and $3.00 per share,
respectively, were at the fair market value for the common stock, taking
into account that the shares issued were restricted securities under
applicable federal and state securities laws.

<PAGE>

LOANS FROM OFFICERS, DIRECTORS AND RELATED PARTIES; CONVERSION OF
INDEBTEDNESS INTO STOCK AND WARRANTS

Between May 1992 and December 1993, the Company borrowed an aggregate
of the following amounts from the following persons for operating capital:
$27,750 from Bruce Senske, $123,294 from Elwood Taylor, $10,000 from Dennis
Postma and $1,000 from Keith Ramsden. In December 1993, the Company gave
promissory notes to these noteholders bearing interest at the rate of 8%
per annum. These noteholders converted such loans into common stock of the
Company at the rate of $3.40 per share and warrants to purchase an equal
number of shares of common stock. These warrants are exercisable at $4.00
per share. Such conversion was determined by the Board of Directors to be
fair in consideration of the noteholders' financial assistance to the
Company and the fact that such sales were effected directly by the Company
without the assistance of an underwriter.

Between January 1994 and September 1995, the Company borrowed an
aggregate of the following amounts from the persons and/or entities set
forth below for operating capital: $52,945 from Bruce Senske, $350,000 from
Norquip Leasing, Inc. (a company owned by Donald L. Kotula), $70,000 from
William Bartkowski, $200,000 from Donald L. Johnson, and $50,00 from
B. Richard Vogen. The Company gave each individual a promissory note
bearing interest at the rates from 8% to First Bank Reference Rate plus 4%
per annum. These noteholders received warrants for the purchase of one
share of common stock for every $4.00 loaned to the Company. The warrants
are exercisable at $3.50 to $4.00 per share. Such consideration was
determined to be fair by the Board of Directors in consideration of the
noteholders' financial assistance to the Company.

In October 1995, the noteholders converted the following loan amounts
into common stock of the Company at the rate of $3.00 per share: Bruce
Senske, $25,000; Norquip Leasing, Inc., $350,000 plus accrued interest of
$46,030; B. Richard Vogen, $50,000, plus accrued interest of $4,104; and
William Bartkowski, $70,000 plus accrued interest of $3,414. Such
conversion was determined to be fair by the Board of Directors in
consideration of the noteholders' financial assistance to the Company and
the fact that such sales were effected directly by the Company without the
assistance of an underwriter.

In January 1995, the Company established a bank line of credit of
$250,000 which was supported by the personal guaranty of Ronald Randall, a
private investor, in consideration for his personal guaranty. Mr. Randall
received warrants for the purchase of 62,500 shares of the Company's common
stock. In October 1995, Mr. Randall assumed the bank's right to receive
payment under the line of credit and converted the $250,000 remaining on
the line of credit to 83,333 shares of common stock.

During 1994, the Company became indebted to Kenneth Liles in the
amount of $79,000 for software development work performed by Mr. Liles for
the Company. In October 1995, Mr. Liles converted such indebtedness into
26,333 shares of the Company's common stock. Such conversion was
determined to be fair by the Board of Directors in consideration of
Mr. Liles' work on behalf of the Company.

REPURCHASE OF COMMON STOCK BY COMPANY

The Company purchased 200,000 shares of its common stock for nominal
consideration from the following related parties for the corresponding
amounts: Gary Ramsden, 25,000 shares; Keith Ramsden, 25,000 shares; Elwood
Taylor, 25,000 shares; Marvin Ramsden, 25,000 shares; and Brewster, 100,000
shares. The aforementioned transactions were entered into by such holders
on the condition that the Company would receive at least $1,350,000 of
bridge financing by April 28, 1996 on terms substantially equivalent to
those contained herein. The Company obtained bridge financing in excess of
such amount in December 1995.

RECENT PRIVATE PLACEMENT
During calendar year 1995, the Company sold an aggregate of 67,250
shares of its common stock for an aggregate amount of $204,000 (between
$3.00 and $3.20 per share) in various private placement transactions with
four of its directors, a related party and a former officer. More
specifically, the Company sold 8.333, 8.333, 3.333, 5,000, 11,250 and 1,000
shares of its common stock to B. Richard Vogen, Donald L. Kotula,

<PAGE>
Willis K. Drake, Ronald D. Schmidt, Ronald L. Randall and Donald Johnson,
respectively. Each of the aforementioned directors, officer and related
party paid $25,000, $25,000, $10,000, $15,000, $36,000 and $3,000,
respectively, for his shares. The remaining 30,000 shares were sold to
outside investors.

NON-ARM'S LENGTH TRANSACTIONS

The Company believes that the foregoing transactions were on terms no
less favorable to the Company than could have been obtained from
unaffiliated third parties. Such transactions have been ratified by a
majority of the independent outside members of the Company's Board of
Directors who do not have an interest in the transactions. All future
transactions with directors, officers or shareholders holding more than 5%
of the Company's outstanding shares, or affiliates of any such persons will
continue to be on terms no less favorable than could be obtained form an
unaffiliated third party and will be approved by a majority of the
independent outside directors who do not have an interest in the
transactions.

ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K

(a) EXHIBITS.

Exhibit
-------
3.1 The Company's Articles of Incorporation, as amended and
restated*

3.2 The Company's Bylaws, as amended*

4.1 Specimen form of the Company's common stock Certificate*

4.2 The Company's Articles of Incorporation, as amended and
restated (see Exhibit 3.1)

4.3 The Company's Bylaws (see Exhibit 3.2)

10.1 Nontransferable Stock Option Agreement dated October 30,
1992 between the Company and Dennis D. Postma (form of
Nontransferable Stock Option Agreement)*

10.2 Employment Agreement dated January 1, 1993 between the
Company and Bruce H. Senske, as amended January 29, 1996*

10.3 Stock Option Agreement dated April 1, 1993 between the
Company and Christine Bishop*

10.4 Warrant dated March 25, 1994 between the Company and
Brewster Diversified Services, Inc. to purchase 220,000
shares of the Company's Common Stock*

10.5 Merchant Application/Credit Card Processing Agreement dated
August 22, 1994 by and between the Company, NTB Merchant
Services and Card Establishment Services, Inc.*

10.6 Promissory Note dated August 31, 1994 between U-Ship
International, Ltd. and Bruce H. Senske in the amount of
$20,000*

10.7 Business Note dated October 10, 1994 between U-Ship
International, Ltd. and Royal Credit Union in the amount of
$24,819.97*

10.8 Promissory Note dated October 20, 1994 between U-Ship
International, Ltd. and Bruce H. Senske in the amount of
$18,000*

10.9 Lease Agreement dated February 27, 1995 between the Company
and Carpenter Land Company for property located at 5575-5599
West 78th Street, Edina, Minnesota*

10.10 Warrant dated March 1, 1995 between the Company and
Carpenter Land Company (form of warrant issued to several
investors as compensation for the investment of various
forms of capital)*

37
<PAGE>
10.11 Amendment No. 1 dated March 23, 1995 to Lease Agreement
dated February 27, 1995 between the Company and Carpenter
Land Company*

10.12 Promissory Note dated may 23, 1995 between U-Ship
International, Ltd. and Bruce H. Senske in the amount of
$7,000*

10.13 Incentive Stock Option Agreement dated June 5, 1995 between
the Company and Donald L. Johnson (form of Incentive Stock
Option Agreement issued pursuant to the 1995 Stock Option
Plan)*

10.14 Stock Purchase Agreement dated August 14, 1995 by and
between Donald L. Johnson and Brewster Diversified Services,
Inc. for the purchase by Donald L. Johnson of the Company's
Common Stock from Brewster Diversified Services, Inc.*

10.15 Combination Promissory Note and Loan Agreement dated August
30, 1995 between U-Ship International, Ltd., Bruce H.
Senske, individually, and First Bank National Association in
the amount of $15,000; Borrowers Pledge Agreement; Guaranty
of U-Ship, Inc.*

10.16 Promissory note dated September 6, 1995 between U-Ship
International, Ltd. and Donald L. Johnson in the amount of
$100,000*

10.17 Promissory note dated October 17, 1995 between U-Ship
International, Ltd. and Donald L. Johnson in the amount of
$100,000*

10.18 Vendor Remarket Agreement dated October 23, 1995 between the
Company and MLC Commercial Leasing*

10.19 Stock Purchase and Debt Conversion Agreement dated October
31, 1995 between the Company and Brewster Diversified
Services, Inc. for the conversion of debt into common stock
of the Company, the purchase by the Company of common stock
and the cancellation and exchange of a warrant*
10.20 Stock Purchase Agreement dated October 31, 1995 between the
Company and William Bartkowski for the conversion of debt
into common stock of the Company (form of Stock Purchase
Agreement used for various debtholders)*

10.21 Master Agreement dated November 21, 1995 between the Company
and Enterprise Financial Corporation*

10.22 Letter Agreement dated December 8, 1995 between the Company
and Minnesota Bankfirst*

10.23 Stock Purchase Agreement dated December 12, 1995 between the
Company and Ronald L. Randall for the conversion of debt
into Common Stock*

10.24 Form of warrant issued pursuant to bridge loan financing
completed by the Company in December 1995*

10.25 Independent Contractor Agreement dated March 1, 1996 between
the Company and Venture Brokerage Group, Inc.*

10.26 Broker Lease Agreement dated March 5, 1996 between the
Company and First Concord Funding Group, Inc.*

10.27 Amendment No. 2 dated March 27, 1996 to Lease Agreement
dated February 27, 1995 between the Company and Carpenter
Land Company*

10.28 Letter of Intent dated April 8, 1996 between the Company and
Kinko's Service Corporation*

10.29 Addendum to Note dated April 2, 1996 to Business Note dated
April 27, 1993 between the Company and Royal Credit Union*

10.30 Addendum to Note dated April 2, 1996 to Business Note dated
March 1, 1993 between the Company and Royal Credit Union*

38
<PAGE>

10.31 1995 Stock Option Plan*

10.32 Director Stock Option Plan*

10.33 Form of Software and Equipment Maintenance Agreement*

10.34 Form of Automated Shipping System Letter of Agreement*

10.35 Form of Letter of Agreement for Commercial Counters*

10.36 Form of Lease between the Company and remote site lessees
used in conjunction with the Company's Test Marketing
Program*

10.37 Form of Revised Lockup Agreement to be signed by the
officers, directors and certain shareholders of the Company*

10.38 Letter of Intent dated February 6, 1996 between the Company
and UPS Canada*

10.39 Software and Equipment Maintenance Agreement dated
December 14, 1995 between the Company and CDP*

10.40 Specialty License Agreement dated July 10, 995 between
Company and Homart Development Co.*

11 Computation of Per Share Earnings

21 Subsidiaries*

23 Consent of Arthur Andersen LLP

27 Financial Data Schedule

- -----------------
* Incorporated by reference to the Registrant's Registration Statement on
Form SB-2 (No. 333-01652C).

(b) REPORTS ON FORM 8-K.

The Company did not file any reports on Form 8-K with the United States
Securities and Exchange Commission during the three month period ended June
30, 1996.

39
<PAGE>

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.

U-SHIP, INC.
Dated: September 24, 1996

By /s/Bruce H. Senske
-------------------------------------
Bruce H. Senske,
President and Chief Executive Officer

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.

Date
----
<S> <C> <C>
s/Bruce H. Senske President, Chief Executive Officer September 24, 1996
- ------------------------------------- and Director (Principal Executive
Bruce H. Senske Officer and Principal Financial
Officer)

/s/Willis K. Drake Director September 24, 1996
- -------------------------------------
Willis K. Drake

/s/Donald L. Kotula Director September 24, 1996
- -------------------------------------
Donald L. Kotula

/s/R. Michael Fox Director September 24, 1996
- -------------------------------------
R. Michael Fox

/s/Gary W. Ramsden Director September 24, 1996
- -------------------------------------
Gary W. Ramsden

/s/Ronald D. Schmidt Director September 24, 1996
- -------------------------------------
Ronald D. Schmidt

/s/B. Richard Vogen Director September 24, 1996
- -------------------------------------
B. Richard Vogen

</TABLE>

<PAGE>

U-SHIP, INC.
COMPUTATION OF NET LOSS PER COMMON SHARE

<TABLE>
<CAPTION>
For The Year Ended June 30,
---------------------------
1995 1996
------------ ------------
<S> <C> <C>
Weighted average number of issued shares outstanding 1,671,268 1,973,295

Effect of cheap stock
Common shares canceled during 1996 (1) (200,000) (200,000)
Dilutive effect of cheap stock after application of
treasury stock method (1) 157,491 157,491
------------ ------------
Shares outstanding used to compute net loss per share 1,628,759 1,930,786
------------ ------------
------------ ------------

Net Loss ($1,195,314) ($2,184,287)
------------ ------------
------------ ------------
Net Loss Per Common Share ($0.73) ($1.13)
------------ ------------
------------ ------------
</TABLE>

(1) Cheap stock and common shares cancelled during the past year are included
in the computation for all periods presented in accordance with Staff
Accounting Bulletin Topic 4 (D).

<PAGE>

EXHIBIT 23

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-KSB, into the Company's previously filed
Registration Statement File No. 33-06269.

/s/ ARTHUR ANDERSEN LLP
-----------------------------
ARTHUR ANDERSEN LLP

Minneapolis, Minnesota
September 23, 1996

<PAGE>
<ARTICLE> 5
<CIK> 0001002902
<NAME> U-SHIP, INC.

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 4,834,993
<SECURITIES> 0
<RECEIVABLES> 59,135
<ALLOWANCES> 0
<INVENTORY> 822,393
<CURRENT-ASSETS> 5,716,521
<PP&E> 529,012
<DEPRECIATION> (230,704)
<TOTAL-ASSETS> 6,014,829
<CURRENT-LIABILITIES> 2,743,820
<BONDS> 30,263
0
0
<COMMON> 15,666
<OTHER-SE> 3,225,080
<TOTAL-LIABILITY-AND-EQUITY> 6,014,829
<SALES> 713,348
<TOTAL-REVENUES> 713,348
<CGS> 683,795
<TOTAL-COSTS> 683,795
<OTHER-EXPENSES> 1,856,307
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 357,533
<INCOME-PRETAX> (2,184,287)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,184,287)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,184,287)
<EPS-PRIMARY> (1.13)
<EPS-DILUTED> (.45)

</TABLE>