U S TECHNOLOGIES INC, 10-K, 1999-04-15

U S TECHNOLOGIES INC
10-K, 1999-04-15
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<PAGE> 1
Form 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

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

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

For the year ended December 31, 1998

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

For the transition period from to
----------- ------------

Commission file number 0-15960

U.S. TECHNOLOGIES INC.
(Exact name of Registrant as specified in its charter.)

<TABLE>
<S> <C>
State of Delaware 73-1284747
(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
</TABLE>

3901 Roswell Road, Suite 300
Marietta, Georgia 30062
(Address of principal executive offices.) (Zip Code)

Registrant's telephone number, including area code: (770) 565-4311

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

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

YES [] NO [X]

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of
regulation S-K is not contained herein, and will not be contained to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or in any attachment to
this Form 10-K. [ ]

The aggregate market value of voting stock held by non-affiliates of the
Registrant at April 5, 1999 was approximately $6,393,709.

The number of shares outstanding of the Registrant's Common Stock, par value
$0.02 per share, at April 5, 1999 was 28,795,278 shares.

<PAGE> 2

PART I

ITEM 1. BUSINESS.

GENERAL. U.S. Technologies Inc. (the "Company") is an "outsourcing company"
soliciting manufacturing, assembly, repair, kitting and customer call center
services from Fortune 1000 and other select businesses. The Company performs its
services utilizing prison labor under the Prison Industry Enhancement Program
("PIE"). Congress created the PIE program in 1979 to encourage states and local
units of government to establish employment opportunities for prisoners that
approximate private sector work opportunities. The program is designed to place
inmates in a realistic working environment, pay them the local prevailing wage
for similar work, and enable them to acquire marketable skills to increase their
potential for successful rehabilitation and meaningful employment upon release.
The PIE Program has two primary objectives:

To generate products and services that enable prisoners to make a
contribution to society, help offset the cost of their incarceration,
compensate crime victims, and provide inmate family support.

To provide a means of reducing prison idleness, increasing inmate job
skills, and improving the prospects for successful inmate transition to
the community upon release.

To serve its clients the Company has established U.S. Technologies Inc. as the
parent organization to provide management and financial resources to its
wholly-owned operating subsidiaries. The operating subsidiaries are
Labor-to-Industry Inc. ("LTI"), which operates the Company's manufacturing
outsourcing operations, and Service-to-Industry Inc. ("STI"), formed in March
1998, which will operate the Company's service outsourcing operations. Each
subsidiary negotiates an agreement with a prison under which facilities and
participants are available to the Company.

The Company employs a portion of the inmates at each prison facility through a
competitive process and designs the work environment to motivate and train each
participant in the specific job skills of the contracted work and the general
skills required to obtain and hold long-term employment as well as how to
advance in employment in a competitive work environment. This training is
crucial for many prisoners, who may have never held a job before their
conviction. The PIE program allows for up to 80% of the prisoners' wages to be
withheld for the purpose of paying restitution to victims, fines, reimbursing
the cost of incarceration, alimony, child support, taxes and a restricted
savings account. In this way, the PIE program aids in reducing costs to
taxpayers and is a savings vehicle to assist the former inmate's transition back
into society. Further, the program has been very successful in reducing the rate
of recidivism, within the participating inmate population, according to the
Federal Bureau of Justice and Assistance.

The Company announced in August 1997, that it had entered into an agreement with
Wackenhut Corrections Corporation ("WCC") whereby WCC will allow the Company to
operate as its "industry partner" in any correctional facility managed by WCC.
WCC also agreed to determine the products it purchases from third parties, and
to the extent possible, purchase such products from the Company. WCC operates 47
corrections facilities in the United States, Australia, England and Canada and
is the second largest manager of privatized correctional facilities in the
United States. The Company announced in February 1998, that it had reached an
agreement with the states of California and Florida to expand its operations
into corrections facilities managed by those states.

Currently, the Company operates; an electronics manufacturing plant at WCC's
Lockhart, Texas corrections facility, a furniture manufacturing plant in a
California Department of Corrections facility located in Blythe, California and
a customer call center operation located in a Utah Department of Corrections
facility located in Draper, Utah . The Company is actively pursuing
opportunities at additional WCC facilities in other states for manufacturing and
customer call center operations. The Company's principal executive offices are
located in the Atlanta suburb of Marietta, Georgia.

INDUSTRY OVERVIEW. The Company's operations have been primarily focused in one
industry, electronics manufacturing (EM). The EM industry has been characterized
by rapid growth and aggressive competition based on improving technology and
decreasing cost. The Company, also, has recently entered furniture manufacturing
and the customer call center industries.

ELECTRONICS MANUFACTURING. Today's electronics manufacturing provider ("EMP")
industry is still relatively young. The industry has changed significantly since
the 1980s when small "mom and pop"

2
<PAGE> 3

companies handled a small market for contract manufacturing services. By 1996,
this small market had become a large international business with approximately
1,000 companies of which the top 50 companies' sales ranged from $5.4 billion to
$100.7 million, according to the March 1997 issue of Manufacturing Market
Insider. From 1990 through 1996, the industry's sales grew from approximately
$4.4 billion to approximately $14.5 billion, according to The Institute for
Interconnecting and Packaging Electronic Circuits (IPC), representing a 22%
compounded annual growth rate. The Company provides several services including
contract manufacturing, cable and wire harness assembly and printed circuit
board fabrication. Given the emergence of new technologies and the proliferation
of electronics into virtually all segments of the world economy, management
believes the Company is poised for significant continued growth in the years
ahead.

Original equipment manufacturers ("OEM") such as Cisco, Hewlett-Packard, IBM,
Lucent, Texas Instruments and many others are increasingly relying on EMPs for
assembly and other value-added services. Many OEMs have begun to view
outsourcing as a strategic tool which allows them to focus their efforts on
resources and core competencies resulting in improved flexibility and
responsiveness in all segments of their business. The benefits of outsourcing by
the OEM include: improved time to market since new products can be turned on
quickly by an EMP without the cost and time required for the OEM to re-tool;
access to state of the art manufacturing facilities and technologies without the
need for the OEM to invest in facilities capital equipment; and lower production
and procurement costs since EMP's can efficiently purchase many generic
components. Finally, EMP's typically do not bear the same overhead and benefit
burdens typically incurred by OEMs.

CUSTOMER CALL CENTER. The Company has been approached by several state
correctional facilities interested in maintaining and/or establishing new call
centers. To meet this need the Company formed STI in March 1998. In August 1998,
the Company opened its first customer call center operation in a Utah Department
of Corrections facility located in Draper, Utah. In these operations, STI will
provide live operators dialing outbound and receiving inbound calls for
appointment setting, surveys and data collection, and lead generation using
inmate labor. Calls are to be monitored and/or taped by the Company to insure
the quality of the work being performed by the operators.

Clients requiring such services, but lacking the management expertise or the
desire to run an in-house call center, outsource these "campaigns" to the
Company, usually on an hourly basis. The Company is also creating in-house
campaigns in order to consistently provide work for the inmates, given the
seasonal or sporadic nature of some client contracts.

Recognizing that the collection of personal data may be involved in some job
requests, the Company will also create a call center in the free-world, to be
run by STI. This service would allow an inmate operator to qualify a customer
for the purchase of a service or product, then transfer the call to a free-world
operator who would handle the billing arrangements. The Company's operations
also provide an additional benefit for the inmates. Those inmates who have
served their sentences and who performed well in the inmate call center will be
provided with an advantage for an immediate job opportunity upon their release,
subject to state laws governing this industry.

BUSINESS STRATEGY. The Company's strategy is to establish itself as a national
leader in the employment of prison labor in the outsourcing business, soliciting
a variety of labor intensive, repetitive work from Fortune 1000 and other select
companies. To that end, the Company utilizes the PIE program to perform its
services by using a low-cost, but highly-motivated labor pool, in modern, clean
and efficient facilities. The Company intends to operate the business in a
simple and straight-forward manner by maintaining corporate overhead at its
present level during the Company's expansion. The Company's strategy also
includes the following:

Utilize existing expertise in electronics manufacturing to seek new
business opportunities and to fully utilize all of its electronic assembly
space in Lockhart, Texas;

Provide ancillary services such as the assembly of kits (kitting) and
installation of parts associated with the primary electronics manufacturing
process;

Expand its furniture manufacturing operations by increasing its modular
furniture production capabilities and introducing other furniture products.

Operate and expand call center locations utilizing state of the art phone
and computer systems, by providing live operators dialing outbound and
receiving inbound calls for a variety of purposes.

<PAGE> 4

Management believes that significant additional capacity can be added, beyond
the three existing facilities, without significant additional corporate
overhead.

GROWTH STRATEGY. The Company has established a sound working relationship with
WCC and seeks to expand that relationship by going into additional WCC
facilities with available industry workspace to establish successful PIE
programs. The Company is also working with state-run (non-privatized)
correctional facilities where industry work space is available to establish PIE
work programs. In addition to its successful electronics manufacturing facility
in Lockhart, Texas, the Company intends to expand into customer call centers and
other operations. The Company is also evaluating the strategic acquisition of
successfully run companies whose services and products would be suitable for
expansion into a prison industry work program.

In accordance with this strategy, the Company is currently negotiating the
purchase of Affordable Interior Systems, Inc., (AIS), a division of U.S. Office
Products, Inc. AIS is a manufacturer and wholesaler of modular office furniture.
The Company's Blythe, California facility currently manufactures sub-assemblies
for AIS. These sub-assemblies were previously supplied to AIS by a Canadian
company.

EMPLOYEES. The Company employs approximately 135 persons, 122 of whom are
inmates, eight of whom are production, clerical and bookkeeping staff who
support manufacturing operations and five of whom are members of executive
management. The number of employed inmates will increase as the customer call
center and furniture businesses become fully operational. None of the Company's
employees are represented by a union. The Company believes that its relationship
with its employees is good.

ACQUISITIONS AND DISPOSITIONS. In October 1998, the Company purchased 100% of
GWP, Inc. ("GWP"), an acquisition company formed by the then President and Chief
Executive Officer of the Company, Mr. Kenneth H. Smith. The sole asset of GWP
was a 51% ownership interest in the capital stock of Technology Manufacturing
and Design, Inc. ("TMD"), an EMP located in Austin, Texas. The purchase price
for TMD was $730,000, an amount that was loaned by the Company to GWP for the
express purpose of purchasing TMD. Between the date of acquisition and December
31, 1998, the Company made additional advances of approximately $767,000 to TMD
for working capital purposes. In February 1999, as part of a severance
agreement, the Company sold GWP back to Mr. Smith for the total amount invested
by the Company in GWP and TMD.

GOVERNMENTAL REGULATION. Congress created the PIE Program in 1979 to encourage
state and local governments to establish employment opportunities for prisoners
that approximate private sector work opportunities and conditions. The program
is designed to place inmates in a realistic working environment, pay them the
state or Federal minimum or prevailing wage for similar work (whichever is
greater), and enable them to acquire marketable skills and work habits to
increase their potential for successful rehabilitation and meaningful employment
upon release. The U. S. Department of Justice's Bureau of Justice Assistance
administers the PIE Program through its Corrections Branch. Each certified PIE
Program must be determined to meet certain statutory and guideline requirements
so as to safeguard free world labor and industry and to protect free enterprise.
Mandatory criteria for participation in the PIE Program are as follows: (a)
inmates must be paid the prevailing local wage or state or Federal minimum wage,
whichever is greater, to protect private business from unfair competition that
would otherwise stem from the flow of low-cost, prison made goods into the
marketplace; (b) workers compensation and unemployment compensation benefits
must be provided; (c) inmate participation in the program must be voluntary and
in writing; (d) organized labor and local private industry must be consulted
prior to the initiation of a new PIE industry; (e) the Company must have written
assurances from the appropriate state agency that the new PIE industry will not
result in the displacement of workers employed prior to the program's
implementation, does not occur in occupations in which there is a surplus of
labor in the locality, and does not impair existing contracts for services; (f)
deductions (not to exceed 80%) must be made from the inmates pay for taxes,
reasonable charges for room and board, family support, victims compensation
fund, and a mandatory savings account for the inmate, the proceeds of which are
available upon release. In addition to the above, each prison is also subject to
laws and regulations concerning the operation, management and supervision of
prisoner employees, which affects the operation of each of the Company's
facilities. The Company's operations are also subject to all governmental
workplace regulations commonly associated with a service or manufacturing
enterprise.

ITEM 2. PROPERTIES

LEASES AND FACILITIES

The Company's wholly-owned subsidiary, LTI, operates in a minimum security
prison under an agreement with WCC, the Texas Department of Criminal Justice
("TDCJ"), the Division of Pardons and Parole (the "Division") and the City of
Lockhart, Texas. The lease on the Lockhart facility provides approximately

<PAGE> 5

27,800 square feet of manufacturing and office space through January 21, 2001,
and provides an automatic three year extension unless notification is given by
either party at least 6 months prior to the expiration date of the current term
not to renew. The amount of square footage may be increased or decreased
depending upon the number of prisoners employed. The lease also provides for
annual rental rates of $1 per year for the primary term and the first renewal
term thereafter. Occupancy fees for successive renewal terms shall be negotiated
by written agreement of the parties. It is expected that similar operating
leases will be executed at other WCC facilities.

LTI also operates in a minimum security prisons at Chuckawalla Valley State
Prison located in Blythe, California and located in MacFarland, California.
The lease on the Blythe facility provides approximately 36,300 square feet of
manufacturing and office space through August 31, 2003 and monthly payments of
$726. The lease on the MacFarland facility provides approximately 600 square
feet through March 2001 with an annual rental of $1 per year.

The Company's wholly owned subsidiary, STI operates in a minimum security prison
located in Draper, Utah. The lease on the Draper facility provides approximately
5,000 square feet of office space through June 17, 2000, and provides renewal
options through June 17, 2004. The lease also provides for annual rental rates
of $1 per year.

The Company leases approximately 3,200 square feet for its executive offices, in
Marietta, Georgia, under a three year operating lease expiring September 30,
2000.

ITEM 3. LEGAL PROCEEDINGS.

Since taking over the Company, management has successfully resolved most of the
outstanding litigation and claims in existence as of January 1, 1997. Currently
there are six lawsuits against the Company.

On July 16, 1995 the Company was served with a citation in Texas Industrial
Services vs. U.S. Technologies Inc., County Court at Law No. 2 of Travis County,
Texas. The suit alleges that the Company is liable for certain debts of a former
subsidiary, American Microelectronics, Inc., ("AMI") on the theory that the
Company is/was doing business as AMI. The petition seeks damages totaling
approximately $54,000. The Company has asserted a defense and no activity has
taken place on the suit since September 1995.

On October 31, 1996 a consent order was signed by Mr. William Meehan, the
Company's former president, in the case of Environmental Protection Agency v.
Senson Corp, LTD., Docket No. TSCA-09-96-0002, agreeing among other things to
pay a civil penalty. The penalty was never paid and is estimated to be
approximately $7,000.

On May 6, 1997 Mr. Meehan filed a lawsuit in the 98th Judicial District Court
for Travis County, Texas seeking payment of certain wages and other benefits
totaling approximately $330,000. The Company believes the claim is without merit
and intends to defend its position vigorously.

On July 14, 1997, Ryan Corley sued the Company, in the case styled Ryan Corley
vs. U.S. Technologies, case No. 97-08065, in the 250th Judicial District of
Travis County, Texas, alleging that he is entitled to four months severance pay
in the approximate amount of $30,000. This case is being vigorously defended by
the Company.

On January 13, 1999, in the case styled St. John vs. Labor-To-Industry, Inc., et
al, (U.S. District Court, Austin, Texas Division), Dale St. John sued LTI, WCC
and others. Mr. St. John alleges that he was denied continued employment because
he missed work as a result of being subpoenaed to court. He is suing for back
wages in an unspecified amount. The Company believes the claim is without merit
and intends to defend its position vigorously.

On February 16, 1999, in the case styled Fidelity Funding vs. Ken Smith, et al,
in the 14th Judicial District of Dallas County, Texas, Fidelity Funding, Inc.
(Fidelity) sued Mr. Smith and the Company in the amount of $839,449, the amount
allegedly owed by Technology Manufacturing and Design, Inc., ("TMD") to Fidelity
under a secured credit facility extended by Fidelity to TMD in November of 1998.
The suit resulted after the Company sold its 51% interest in TMD to Mr. Smith
and after TMD filed bankruptcy. The suit seeks to enforce a payment guaranty of
the Company with respect to the balance of principal and accrued interest owed
by TMD to Fidelity under this secured credit facility. The bankruptcy court for
the Western District of Texas has permitted Fidelity to collect the remaining
principal and interest due under this credit facility from the accounts
receivable securing this credit facility. The outcome of this suit can not be
fully determined at this time.

<PAGE> 6

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

No matter was submitted during the fourth quarter ended December 31, 1998 to a
vote of security holders of the Company.

6
<PAGE> 7

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

MARKET INFORMATION

The Company's common stock is traded on the OTC Bulletin Board under the symbol
"USXX".

The following table sets forth the high and low bid prices of the Company's
common stock in the over-the-counter market for the years ended December 31,
1998, 1997 and 1996. Prices for the year ended December 31, 1998 and 1997 and
for the quarter ended December 31, 1996 are as quoted on the OTC Bulletin Board
System. Prior to the fourth quarter of 1996, the Company's common stock was
quoted on the NASDAQ Small Cap Market. Quotations reflect inter-dealer prices
without retail mark-up, mark-down or commissions and may not necessarily
represent actual transactions.

<TABLE>
<CAPTION>
Bid
High Low
------------------------
<S> <C> <C>
1998
4th Quarter $.6300 $.3800
3rd Quarter $.7100 $.4200
2nd Quarter $.9000 $.6400
1st Quarter $.9200 $.4400
1997
4th Quarter $.5200 $.2400
3rd Quarter $.4200 $.1900
2nd Quarter $.4000 $.3000
1st Quarter $.5700 $.0850
1996
4th Quarter $.2200 $.0750
3rd Quarter $.2812 $.1250
2nd Quarter $.4400 $.2200
1st Quarter $.5300 $.2800
</TABLE>

On April 5, 1999, the closing bid price of the Company's common stock, as
quoted on the OTC Bulletin Board system, was $0.39.

HOLDERS OF COMMON STOCK

As of April 5, 1999, there were 549 holders of record of the Company's common
stock. This number is exclusive of beneficial owners whose securities are held
in street name.

DIVIDENDS

The Company has not declared or paid any cash dividend on its common stock. The
policy of the Board of Directors of the Company is to retain earnings for the
expansion and development of the Company's business. Future dividend policy and
the payment of dividends, if any, will be determined by the Board of Directors
in light of circumstances then existing, including the Company's earnings,
financial condition and other factors deemed relevant by the Board of Directors.

RECENT SALES OF UNREGISTERED SECURITIES

Commencing on July 9, 1998, and continuing through December 31, 1998, the
Company received $3,700,000 of a total commitment of $5,000,000 under an
agreement with USV Partners, LLC ("USV") whereby the Company is to issue its 9%
convertible preferred stock pursuant to a claim of exemption under Regulation
"S" promulgated by the Securities and Exchange Commission under the Securities
Act of 1933. The Company will issue the preferred stock upon fulfillment of the
$5,000,000 commitment. The net proceeds to the Company of approximately
$3,650,000, after legal and other costs, were used to provide working capital to
support the Company's 1998 operations and fund the purchase of TMD. Upon
Issuance, these convertible preferred shares can be converted, at USV's option,
into the Company's common shares at the exchange rate of $.41 per share. As of
April 12, 1999, USV has funded $4,700,000 of the $5,000,000 commitment.

<PAGE> 8

On January 12, 1998, the Company issued 4% convertible subordinated debentures
and 275,000 common stock purchase warrants exercisable at $1.00 per share,
through a private placement to certain foreign investors pursuant to a claim of
exemption under Regulation "S" promulgated by the Securities and Exchange
Commission under the Securities Act of 1933. The net proceeds to the Company,
after legal and other costs, were $247,500 which was used to liquidate certain
1996 liabilities at a substantial discount and provide working capital to
support the Company's operations. On February 25, 1998 and March 5, 1998 the
holders of the debentures converted the amounts outstanding into 563,215 shares
of the Company's common stock. All of the warrants remain outstanding.

<PAGE> 9

ITEM 6. SELECTED FINANCIAL DATA

The selected financial data set forth for the years ended December 31, 1998,
1997, 1996, 1995,and 1994 is derived from the Company's audited financial
statements. This information should be read in conjunction with the financial
statements for 1998, 1997 and 1996 and notes thereto included elsewhere herein
and "Management's Discussion and Analyses of Financial Condition and Results of
Operations" included in ITEM 7., which are incorporated herein by reference.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales $ 6,107,244 $ 4,166,626 $ 1,410,498 $ 1,951,487 $ 1,668,865
Operating costs and expenses:
Cost of sales 5,349,459 3,424,313 2,513,672 1,764,121 2,032,521
Selling expenses 313,283 70,869 245,232 270,906 368,018
General and administrative expenses 2,788,104 1,118,310 961,195 1,777,934 1,499,036
Impairment of long-lived assets - 1,408,839 - - -
Restructuring charge 90,000 196,903 - - -
Other - litigation - 252,256 - - -
------------ ------------ ------------ ------------ -----------

Total operating costs and expenses 8,540,846 6,471,490 3,720,099 3,812,961 3,899,575
------------ ------------ ------------ ------------ -----------

Loss from operations (2,433,602) (2,304,864) (2,309,601) (1,861,474) (2,230,710)

Other income (expense)

Interest (112,325) (25,191) (20,277) (112,387) (20,016)
Gain on disposal of subsidiary - - - - 1,376,959
Other (18,782) 87,310 (253,134) 112,773 26,751
------------ ------------ ------------ ------------ -----------

Total other (131,107) 62,119 (273,411) 386 1,383,694
------------ ------------ ------------ ------------ -----------

Net loss $ (2,564,709) $ (2,242,745) $ (2,583,012) $ (1,861,088) $ (847,016)
============ ============ ============ ============ ===========

Basic and diluted loss per common
share $ (0.09) $ (0.08) $ (0.14) $ (0.12) $ (0.16)

Weighted average shares outstanding 28,996,607 26,793,999 18,555,439 14,997,532 5,302,147

BALANCE SHEET DATA:
Working capital $ (312,828) $ (849,592) $ (707,467) $ 574,146 $ 779,566
Total assets 2,367,533 869,742 2,652,682 3,326,537 2,120,340
Total debt (1) 47,912 54,821 144,000 840,435 50,000
Stockholders' equity (capital deficit) 724,042 (419,911) 1,088,520 1,859,785 1,633,082
</TABLE>

(1) Includes long-term debt, current maturity of long-term debt, capital
lease obligations and notes payable.

9
<PAGE> 10

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

The following discussion should be read in conjunction with the consolidated
financial statements of the Company (including the notes thereto) included under
ITEM 8.

ACQUISITION OF TMD

The Company entered into a stock purchase agreement as of October 5, 1998
pursuant to which the Company's acquisition subsidiary, GWP, Inc., acquired a
51% interest of the capital stock, on a fully diluted basis, of Technology
Manufacturing & Design, a Texas corporation ("TMD"). TMD is in the business of
manufacturing certain specialized computer components and circuit boards.
Pursuant to the terms of the agreement, GWP paid TMD $536,486 in cash and was
issued 19,000,000 shares of TMD's capital stock. Subsequently, the Company made
additional investments in and incurred certain expenses with respect to TMD and
GWP.

RESIGNATION OF KENNETH H. SMITH; SALE OF TMD

On February 11, 1999, Mr. Kenneth H. Smith resigned as President and Chief
Executive Officer and as a director of the Company. Subsequent to Mr. Smith's
resignation, the Board of Directors of the Company appointed Gregory Earls, a
director of the Company since April 1998, as the President and Chief Executive
Officer of the Company. On February 15, 1999, James C. Melton resigned as
Executive Vice President and as a director of the Company.

Pursuant to the severance agreement entered into between the Company and Mr.
Smith, the Company sold its wholly-owned subsidiary, GWP, Inc. ("GWP"), along
with GWP's 51 % interest in TMD (which interest was acquired by GWP in October
1998) to Mr. Smith. The severance agreement provides that the total purchase
price shall be equal to the total investment by the Company in GWP and TMD. In
payment of the Company's initial estimate of approximately $2.1 million as the
purchase price amount, Mr. Smith tendered to the Company $875,000 and executed a
personal promissory note in the amount of approximately $1.2 million. The
severance agreement provides that the amount of the promissory note is subject
to adjustments, for activity through February 11, 1999, resulting from the audit
of the Company's financial statements. Pursuant to the severance agreement, any
adjustments resulting from the audit of the financial statements shall be
conclusive as to the amount of the Company's investment and expenses and the
amount of the adjustment, if any, to the promissory note. The promissory note
was secured by a pledge by Mr. Smith of 3,000,000 shares of the Company's common
stock and by the pledge by GWP of all of its capital shares of TMD, which
pledges also secure a personal guaranty by Mr. Smith of certain of the Company's
obligations with respect to TMD.

On April 1, 1999, the Company exercised its rights under the pledge agreement
with Mr. Smith and sold the 3,000,000 shares pledged by Mr. Smith at the closing
sale price on that date, as quoted on the OTC Bulletin Board market, a
recognized public market for publicly-traded, small-cap companies, on which the
Company's shares are traded. The closing sale price on April 1, 1999, was $.35
per share, for a total sales price of $1,040,000. This amount, less the expenses
associated with the sale, has been applied in reduction of Mr. Smith's
indebtedness to the Company. The 3,000,000 shares were sold to USV Partners, LLC
("USV"). In payment of the $1,050,000 sales price, USV executed a 30-day
promissory note in favor of the Company. This promissory note is secured by the
3,000,000 shares of the Company's common stock. Gregory Earls, the President and
Chief Executive Officer of the Company, is the sole member of USV Management,
LLC, the manager of USV.

<PAGE> 11

RESULTS OF OPERATIONS

The following table sets forth the Company's results of operations expressed as
a percentage of total revenues for the periods indicated:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>

STATEMENT OF OPERATIONS DATA:
Net sales 100% 100% 100%
Operating costs and expenses:
Cost of sales 88% 82% 178%
Selling expenses 5% 2% 17%
General and administrative expenses 46% 27% 68%
Impairment of long-lived assets 0% 34% 0%
Restructuring charge 1% 5% 0%
Other - litigation 0% 6% 0%
---- ---- ----

Total operating costs and expenses 140% 155% 264%
---- ---- ----

Loss from operations (40%) (55%) (164%)

Other income (expense)
Interest (0%) (1%) (1%)

Other (2%) 2% (18%)
---- ---- ----

Total other (2%) 1% (19%)
---- ---- ----

Net loss (42%) (54%) (183%)
==== ==== ====
</TABLE>

Year Ended December 31, 1998 Compared to Year Ended December 31, 1997.

During the year ended December 31, 1998 the Company had a net loss of $2,564,709
or $0.09 per weighted-average share, on net sales of $6,107,244 as compared to a
net loss of $2,242,745 or $0.08 per weighted-average share on net sales of
$4,166,626 for the year ended December 31, 1997. The net sales increase of 47%
was primarily the result of additional sales associated with TMD.

Cost of goods sold, in the amount of $5,349,459, increased as a percentage of
net sales to 88% for the year ended December 31, 1998 from $3,424,313 which
represented 82% of net sales for the year ended December 31, 1997. These
amounts include charges to write-off obsolete inventory in the amount of $0 in
1998, and $306,888 in 1997. Excluding the write-off of obsolete inventory, cost
of goods sold would have represented approximately 88% and 75% of net sales for
the years ended December 31, 1998 and 1997 respectively. The increase in the
cost of goods sold percentage is primarily due to TMD's cost of sales exceeding
its sales as a result of uneconomical material purchases and inefficient use of
labor. Excluding the operating results of TMD, cost of goods sold is
approximately 78% of net sales for the year ended December 31, 1998.

Selling expenses in the amount of $313,283 represented 5% of net sales during
the year ended December 31, 1998 compared to $70,869 representing 2% of net
sales for the year ended December 31, 1997. The increase in the selling expenses
percentage is primarily due to the cost of TMD's sales staff. Excluding the
operating results of TMD, selling expenses are approximately 3% of net sales.

<PAGE> 12

General and administrative expenses totaled $2,788,104 for the year ended
December 31, 1998 which represented 46% of net sales, compared to $1,118,310
which represented 27% of net sales for the year ended December 31, 1997. The
increase in general and administrative expenses is attributable to the increased
costs of management staffing, start-up expenses, travel and legal costs
associated with opening new locations and acquiring TMD.

During the year ended December 31, 1998 and 1997, the company recorded
restructuring charges of $90,000 and $196,903, respectively, to account for
primarily payroll cost associated with reorganizations of the Company's
management staff.

The 100% reserve against the Company's $4,408,000 net deferred tax asset
continues to be recognized at December 31, 1998. As a result of the series of
transactions through which the Company's new management gained control, in 1997,
the Company is limited in the utilization of prior accumulated net operating
losses and anticipates that approximately $574,000 per year of net operating
losses are available to offset future annual taxable income.

Year Ended December 31, 1997 Compared to Year Ended December 31, 1996.

During the year ended December 31, 1997 the Company had net loss of $2,242,745
or $0.08 per weighted-average share, on net sales of $4,166,626 as compared to a
net loss of $2,583,012 or $0.14 per weighted-average share on net sales of
$1,410,498 for the year ended December 31, 1996. The net sales increase of 195%
was a result of improvements instituted by the Company's new management which
included; converting all sales employees to commission-only sales agents,
improved bidding techniques, improved product quality and faster service.

On April 1, 1997, the Company recognized a $1,408,839 non-cash charge for the
impairment of long-lived assets to write-off all remaining assets described as
goodwill and investments in technologies. These included the remaining
unamortized cost of acquired technologies and goodwill of acquired companies.
The assets and technologies, which had been inactive during 1997 and 1996, were
thoroughly evaluated by the Company's new management and found to have no value.
During the first quarter of 1997, amortization of these assets totaled $111,078.

Also on April 1, 1997, the Company recognized a charge to restructure the
Company's operations. The charge, in the amount of $196,903, represents the
costs of severance to terminate thirteen management, sales and administrative
positions and lay-off 50 inmates at LTI. The company also recognized a charge,
in the amount of $252,256 to accrue losses and an accrual for the cost to defend
the Company from a variety of lawsuits with third parties and the Company's
former management.

Finally, on April 1, 1997, the Company recognized a non-cash charge to adjust
its inventory valuation allowance to write-off all remaining obsolete inventory
in the amount of $306,888.

Excluding the impairment charge of $1,408,839, the related first quarter
amortization of $111,078, the restructuring charge of $196,903, the charge to
accrue costs of litigation of $252,256, and the write-off of obsolete inventory
of $306,888, the Company's pretax profit for the year ended December 31, 1997,
would have been $33,219 compared with the net loss of $2,583,012 for the year
ended December 31, 1996. Excluding nonrecurring charges the pretax profit for
1997 improved by $2,616,231.

Cost of goods sold, in the amount of $3,424,313, decreased as a percentage of
net sales to 82% for the year ended December 31, 1997 from $2,513,672 which
represented 178% of net sales for the year ended December 31, 1996. These
amounts include charges to write-off obsolete inventory in the amount of
$306,888 in 1997, and $290,000 in 1996. Excluding the write-offs of obsolete
inventory, cost of goods sold would have represented approximately 75% and 158%
of net sales for the years ended December 31, 1997 and 1996 respectively. The
improvement in the Company's cost of goods sold is a direct result of changes
instituted by the Company's new management and the recognition of the charges
described above, improved production management, improved purchasing procedures,
improved bidding procedures and improved quality.

Selling expenses in the amount of $70,869 represented 2% of net sales during the
year ended December 31, 1997 compared to $245,232 representing 17% of net sales
for the year ended December 31, 1996. These expenses decreased primarily due to
the termination of the Company's full-time sales employees and replacing their
efforts with independent sales agents, compensated on a commission-only basis.
The improvement in performance on a percentage basis was also affected by
increased sales volume in 1997.

<PAGE> 13
General and administrative expenses totaled $1,118,310 for the year ended
December 31, 1997 which represented 27% of net sales, compared to $961,195 which
represented 68% of net sales for the year ended December 31, 1996. The
improvements in general and administrative expenses are attributable to the
charges described above, new management's efforts to control costs and increased
sales in 1997.

The 100% reserve against the Company's $2,934,000 net deferred tax asset
continues to be recognized at December 31, 1997. As a result of the series of
transactions through which the Company's management changed in 1997, the Company
is limited in the utilization of prior accumulated net operating losses and
anticipates that approximately $574,000 per year of net operating losses are
available to offset future annual taxable income.

Liquidity and Capital Resources.

During the three years ended December 31, 1998, 1997, and 1996 the Company
experienced negative operating cash flows of $2,103,161, $560,302 and $478,354,
respectively. Negative cash flows from operations resulted principally from
operating losses incurred during these years. The primary uses of cash during
1998 were to fund operating losses of $2,564,709, purchase TMD for $730,000 and
purchase equipment of $431,298. The losses in 1997 were largely offset by
non-cash reductions of (1) $179,194 for depreciation and amortization, (2)
$1,408,839 for impairment of long-lived assets and (3) $306,888 for inventory
valuation allowance. The primary uses of cash during 1997 were to fund the
reduction of accounts payable and the increase in accounts receivable due to
increased sales volume. During 1996, the Company increased its accounts payable
and accrued expenses by $892,589 to fund the negative cash flow from operations.

Cash used in investing activities of $1,425,554, $58,942 and $0 during 1998,
1997 and 1996, respectively, was primarily for the purchase of equipment and
also in 1998, $730,000 was used for the purchase of TMD.

Cash provided by financing activities of $3,638,366, $618,185 and $454,042
during 1998, 1997 and 1996, respectively, were primarily the net proceeds of
preferred stock, common stock and debt issuances.

<PAGE> 14
Commencing on July 9, 1998 and continuing through December 31, 1998, the
Company received $3,700,000 of a total commitment of $5,000,000 under the
agreement with USV whereby the Company is to issue its 9% convertible preferred
stock pursuant to a claim of exemption under Regulation "S" promulgated by the
Securities and Exchange Commission under the Securities Act of 1933. The Company
will issue the preferred shares upon fulfillment of the $5,000,000 commitment.
The net proceeds to the Company of approximately $3,650,000, after legal and
other costs, were used to provide working capital to support the Company's 1998
operations and fund the purchase of TMD. Upon issuance, these convertible
preferred shares can be converted, at USV's option, into the Company's common
shares at the exchange rate of $.41 per share. As of April 12, 1999, USV has
funded $4,700,000 of the $5,000,000 commitment.

On January 12, 1998, the Company issued 4% convertible subordinated debentures
and 275,000 common stock purchase warrants exercisable at $1.00 per share,
through a private placement to certain foreign investors pursuant to a claim of
exemption under Regulation "S" promulgated by the Securities and Exchange
Commission under the Securities Act of 1933. The net proceeds to the Company,
after legal and other costs, were $247,500, which were used to liquidate certain
1996 liabilities at a substantial discount and provide working capital to
support the Company's operations. On February 25, 1998 and March 5, 1998, the
holders of the debentures converted the amounts outstanding into 563,215 shares
of the Company's common stock. All of the warrants remain outstanding.

In 1997, as a result of the acquisition of the Company by the investor group led
by Mr. Smith and Mr. Warren, and the resulting issuance of 6,000,000 shares of
the Company's common stock, $536,613 was contributed to working capital. This
contribution significantly improved the Company's financial condition thus
improving the Company's relationships with vendors and allowing the Company to
finance significant increases in sales volume.

In 1996, the Company completed a private placement of debt, of approximately
$144,000, of which all but $25,000 was converted to equity by the Company in
1997.

During 1995 and 1996, the Company funded its operations through borrowings
totaling approximately $571,000, from companies controlled by prior management,
later repaid through the issuance of 1,845,000 shares of restricted stock.

Working capital increased by $536,764 from a negative $849,592 as of December
31, 1997, to a negative $312,828 as of December 31, 1998. Accounts receivable
increased by $231,648 to $572,975, representing approximately 52 days sales, at
December 31, 1998, from $341,327, representing approximately 30 days sales as of
December 31, 1997. Inventory increased by $510,922 to $585,855 at December 31,
1998 from $74,933 at December 31, 1997 primarily as a result of a change in the
customer mix at the LTI facility in Lockhart, Texas which resulted in the use of
more purchased inventory instead of customer supplied inventory. Accounts
payable increased by $467,342 to $844,173, representing approximately 89 days
cost of sales, from $376,831, representing approximately 66 days cost of sales.
This increase was the result of increased working capital needs to fund
inventory, accounts receivable and operating losses.

The Company's growth plans for 1999 include maximization of revenue potential at
the three existing facilities and the opening of two new facilities. Funding of
these new facilities would be achieved by selecting facilities that required
small capital investments and possible financing of the Company's inventory and
accounts receivable, which is currently unencumbered. Additionally, as
previously described, the Company is in negotiations to purchase AIS, a
free-world modular furniture manufacturer and wholesaler. Completion of this
purchase is subject to acquiring suitable financing and the infusion of
additional equity capital from USV. There is no guarantee that this funding will
take place.

Effect of Inflation.

Inflation has not had a material impact on the Company's operations.

14
<PAGE> 15

YEAR 2000

In 1998, the Company assessed its computer systems and those of its
subsidiaries and determined that much of the software used for order entry,
billing, inventory management, job costing and other accounting functions would
either need to be upgraded or replaced in order to be year 2000 compliant. To
date, the Company has incurred expenses of approximately $2,000 in connection
with software upgrades. Although the company is still in the process of
determining the most cost-effective means of upgrading or replacing its
remaining non-year 2000 compliant software, it anticipates that these
additional expenses will not exceed $10,000. The Company estimates that all of
its critical software will be year 2000 compliant before the end of the third
quarter of 1999. Should the Company not be able to successfully convert its
computer hardware and operating systems to be year 2000 compliant, the Company
would be able to operate manually for some period of time without experiencing
a significant negative impact on its operations.

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995. Certain statements in this annual report on form 10-K contain
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, which statements can generally be identified by
use of forward-looking terminology, such as "may," "will," "expect," "estimate,"
"anticipate," "believe," "target," "plan," "project," or "continue" or the
negatives thereof or other variations thereon or similar terminology, and are
made on the basis of management's plans and current analyses of the Company, its
business and the industry as a whole. These forward-looking statements are
subject to risks and uncertainties, including, but not limited to, economic
conditions, competition, interest rate sensitivity and exposure to regulatory
and legislative changes. The above factors, in some cases, have affected, and in
the future could affect, the Company's financial performance and could cause
actual results for 1999 and beyond to differ materially from those expressed or
implied in such forward-looking statements, even if experience or future changes
make it clear that any projected results expressed or implied therein will not
be realized.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The following consolidated financial statements of the Company and its
Accountants' opinion are set forth in Part IV, Item 14, of this Report:

(1) Report of Independent Certified Public Accountants
(2) Report of Independent Accountants
(3) Consolidated Balance Sheets, December 31, 1998 and 1997
(4) Consolidated Statements of Operations, Years Ended December 31, 1998,
1997 and 1996
(5) Consolidated Statements of Changes in Stockholders' Equity (Capital
Deficit), Years Ended December 31, 1998, 1997 and 1996
(6) Consolidated Statements of Cash Flows, Years Ended December 31, 1998,
1997 and 1996
(7) Notes to Consolidated Financial Statements

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

Not Applicable

<PAGE> 16

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The following table sets forth certain information regarding the executive
officers and directors of the Company:

<TABLE>
<CAPTION>
Name Age Position with the Company
- ---- --- -------------------------
<S> <C> <C>
Gregory Earls (1) 52 Chairman, President and Chief Executive Officer
John P. Brocard 45 Executive Vice President and General Counsel
</TABLE>

(1) The Board of Directors appointed Mr. Earls to the position of President and
Chief Executive Officer following the resignation of Kenneth H. Smith from those
positions on February 11, 1999.

DIRECTORS AND EXECUTIVE OFFICERS

The Company's By-Laws provide that the Board of Directors shall consist of not
less than one nor more than 15 members. Each member of the Board of Directors is
elected for a one-year term and until his or her successor is elected and
qualified.

Gregory Earls has served as Director of the Company since April, 1998. On
February 12, 1999, he was elected to the positions of Chairman of the Board,
President and Chief Executive Officer of the Company. Mr. Earls is also the
President and a Director of U.S. Viewing Corporation, an investment management
company he founded in 1986. Mr. Earls also serves as President and a Director of
Equitable Production Funding of Canada, Inc., a communications holding company.
From 1992 to 1996, he served as Chairman of the Board of Directors of Health and
Sciences Television Network, Inc., a distributor of educational programming. In
addition, Mr. Earls has also served as a member of the Board of Directors of
Jayhawk Acceptance Corporation, a medical finance company of which he was a
founder in 1994. Mr. Earls graduated from the University of Virginia in 1967.

John P. Brocard joined the Company in September 1997 as Senior Vice President
and General Counsel. Prior to joining the Company, Mr. Brocard practiced law for
17 years with the firm of Brocard & Brocard, P.A. in Marietta, Georgia,
Rockville, Maryland and Washington, D. C., a law firm specializing in civil and
criminal litigation. Mr. Brocard holds a BA degree from Furman University and a
JD degree from the Potomac School of Law.

KEY EMPLOYEES AND CONSULTANTS

Donald R. (Rusty) Whitlow joined the Company in December 1997 as Production
Manager of LTI. Prior to joining the Company, Mr. Whitlow served in a variety of
engineering and plant management positions in the apparel industry. From 1987
through 1997, Mr. Whitlow served at the Russell Corporation where he was Plant
Manager for more than eight years. Mr. Whitlow received his BS degree in
industrial management from the University of Alabama in 1982.

John T. Shapiro joined the Company on November 3, 1998, as Vice President,
National Accounts. Mr. Shapiro served as Director of Marketing Services of
Puritan/Churchill Chemical Company from August 1996, until joining the Company
in November 1998. Puritan is a specialty chemical manufacturing company whose
primary markets are health care, hospitality, food service, and manufacturing.
From 1990 until 1996, Mr. Shapiro was Director of Marketing Development at
Puritan. Mr. Shapiro holds a Bachelor of Science degree from Auburn University.
He has 20 years of sales, sales management, and marketing experience.

<PAGE> 17

Larry C. Cobb, a consultant who assists the Company in meeting its public filing
requirements, has been providing services to the Company since May 1998. Mr.
Cobb's experience includes over 25 years of financial and accounting management
with private and public companies, in the manufacturing, construction, retail
and service industries. Since 1994, Mr. Cobb has been an independent consultant
specializing in turn-arounds, reorganizations and start-ups. Mr. Cobb received
his BS degree in accounting from Mississippi State University in 1972 and a
Master of Professional Accountancy degree from Georgia State University in 1978.

COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT

Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors, certain officers and persons who own more than 10% of the outstanding
Common Stock of the Company, to file with the Securities and Exchange Commission
reports of changes in ownership of the Common Stock of the Company held by such
persons. Officers, directors and greater than 10% shareholders are also required
to furnish the Company with copies of all forms they file under this regulation.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and representations that no other reports were
required, during 1998, the Company has complied with all Section 16(a) filing
requirements applicable to its officers, directors and greater than 10%
shareholders, except as follows: the Initial Statements of Beneficial Ownership
of Securities (Form 3s) were inadvertently filed late for each of Messrs.
Kenneth H. Smith, James C. Melton, Sr., James V. Warren, John P. Brocard and C.
Ray Brumbeloe.

ITEM 11. EXECUTIVE COMPENSATION.

The table below sets forth all cash and cash equivalent remuneration
paid by the Company and its subsidiaries during the years ended December 31,
1998 and 1997, to each of the Company's executive officers whose compensation
for 1998 exceeded $100,000 (the "Named Executive Officers"):

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
Name and Principal Position Year Salary Bonus
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Kenneth H. Smith
Chairman of the Board
President and 1998 $197,500 $ 0
Chief Executive Officer 1997 180,000 35,074

James C. Melton, Sr.
Director and 1998 127,500 0
Executive Vice President 1997 100,000 12,421

John P. Brocard
Senior Vice President and 1998 110,000 0
General Counsel 1997 37,500 0
</TABLE>

COMPENSATION OF DIRECTORS

Directors of the Company are reimbursed for travel expenses incurred in serving
on the board of directors. Directors do not receive any compensation for
attendance at meetings of the board of directors.

<PAGE> 18

STOCK OPTION PLANS

The Company's Employee Incentive Stock Option Plan of 1990 and 1996 (the
"Plans") were adopted by the Board of Directors and approved by the Company's
stockholders on June 8, 1990 and July 25, 1996, respectively. The purpose of the
Plans is to attract and retain qualified personnel. The Plans provide that the
aggregate fair market value of the shares of common stock for which any
participant may be granted incentive stock options in any calendar year shall
not exceed $100,000 plus any "unused limited carryover" as determined under
Section 422A(c) of the Internal Revenue Code of 1954, as amended. No options may
be granted under the Plans after October 5, 1999 and April 29, 2006,
respectively.

The Plans are administered by the board of directors of the Company who
determine, subject to the provisions of the Plans, to whom options are granted
and the number of shares of the common stock subject to option. The exercise
price of such options granted under the Plans must equal at least 100% of the
fair market value of the common stock on the date the option is granted.

The Plans also provide that no option shall be executable more than three months
after termination of an option holder's employment with the Company, unless such
termination of employment occurs by reason of death or permanent and total
disability. In the event of the death or disability of an option holder while an
employee of the Company, the options which were otherwise executable by the
option holder or his legal representative or beneficiary of his estate, may at
any time within one year from the date of the option holder's death or
disability be exercised. In no event, however, shall an option be exercisable
after 10 years from the date it was granted.

During the years ended December 31, 1998, 1997 and 1996, no options were issued
under these qualified plans.

On May 4, 1993 and September 3, 1993, the Company adopted the 1993 and 1993A
Nonqualified Stock Option Plans, respectively. These plans reserved 500,000 and
800,000 shares respectively, of the Company's common stock to be granted to
non-employees, directors, and/or other persons associated with the Company whose
services have benefited the Company.

On April 14, 1994, the Company adopted the 1994 Nonqualified Stock Option Plan.
This plan reserved 800,000 shares of the Company's Common Stock to be granted
and issued to its officers, directors, employees and/or consultants whose
services have benefited the Company.

During November 1996, the Company adopted the 1996 Nonqualified Stock Option
Plan. The plan reserved 800,000 shares of the Company's Common Stock to be
granted and issued to its officers, directors, employees and/or consultants
whose services have benefited the Company.

During 1996, the Company's prior management granted options, outside the option
plans described above, to four other parties to purchase 200,000 shares of the
Company's Rule 144 stock at $0.50 per share exercisable at various times through
May 17, 2001. The Company's prior management also granted to a former board
member the option to purchase 150,000 shares at $0.125 per share through May 25,
1999. The validity of the options granted to the former board member, which
remain outstanding, has been questioned by the Company based on several factors.
The Company is evaluating the status of these options and will take appropriate
actions based on that determination.

During the year ended December 31, 1998, no options were issued or exercised
under the terms of the previously referenced option plans.

<PAGE> 19

BONUS PLAN

On July 14, 1989, the Company's Board of Directors adopted a bonus plan that
sets aside 1%, 2%, and 3% of sales as long as the Company maintains a pre-tax
income of 10%, 15%, and 20% of sales, respectively. The performance standards
will be based on quarterly operating periods. Bonuses are accrued quarterly and
allocated as of the end of each calendar year. No employees have vested rights
in the bonus plan. The Board of Directors of the Company acts as a committee to
determine who participates and the actual amount of the individual bonuses. No
bonuses were paid during 1998, 1997 or 1996 under this plan.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The following table sets forth certain information as of March 29, 1999 with
respect to the beneficial ownership of the Company's common stock, by (i) each
person known to the Company to beneficially own more than 5% of the outstanding
shares of common stock, (ii) each Named Executive Officer and (iii) each
director and executive officer of the Company, and (iv) the directors and
executive officers of the Company as a group.

<TABLE>
<CAPTION>
Shares of
Common Stock Percentage of
Beneficial Owner Beneficially Owned (1) Outstanding Shares
- ------------------ ---------------------- ------------------
<S> <C> <C>
C. Gregory Earls 19,061,273 (2) 45.9%
Chairman, President and
Chief Executive Officer
John P. Brocard 35,000 *
Executive Vice President
and General Counsel
James. V. Warren (3) 6,000,000 20.8%
James C. Melton, Sr. (4) 87,000 *

All Officers and Directors as a
Group (2 individuals) 19,096,273 46.0%
</TABLE>

* Less than 1%

(1) "Beneficial Ownership" includes shares for which an individual, directly or
indirectly, has or shares, or has the right to within 60 days to have or share,
voting or investment power or both. Beneficial ownership as reported in the
above table has been determined in accordance with Rule 13d-3 of the Exchange
Act. The percentages are based upon shares outstanding, except in the case of
Mr. Earls, for which the number of outstanding shares includes those shares
which Mr. Earls has the right to acquire, as described in note number 2 below.
(2) These shares are beneficially owned by USV Partners, LLC ("USV"). Of the
amount shown, 12,195,122 shares represent shares issuable to USV Partners, LLC
("USV") upon conversion of the 500,000 shares of convertible preferred stock
which USV has the right and obligation to purchase pursuant to that certain
Investment Agreement entered into between USV and the Company. Additionally, of
the amount shown, 500,000 shares represent shares issuable to USV upon exercise
of the 500,000 warrants which USV has the right and obligation to purchase
pursuant to that certain Investment Agreement entered into between USV and the
Company. Mr. Earls is the sole member of USV Management, LLC, the manager of
USV.
(3) Mr. Warren's address is c/o The Spear Group, 6525 The Corners Parkway,
Suite 300, Atlanta, Georgia, 30092. Effective March 30, 1998, Mr. Warren
resigned from the Company's Board of Directors.

<PAGE> 20
(4) Mr. Melton resigned as Executive Vice President and as a director of the
Company on February 15, 1999.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Ms. Carolyn Meehan, wife of Mr. William Meehan, president and CEO of the Company
until his resignation in January 1997, is president of Carlton Technologies
Limited ("Carlton") with whom the Company had various loans during 1995 and
1996. Many of these loans were retired by the issuance of the Company's common
stock in exchange for the debt. At December 31, 1996, the Company had a
receivable of $150,205 from the issuance of common stock in excess of debt to
Carlton. This amount was reclassified as a reduction in stockholders' equity as
of December 31, 1996.

During the period from January 1, 1998 through February 11, 1999, Mr. Smith, the
Chairman, President and Chief Executive Officer of the Company, had outstanding
a personal loan payable to the Company in the amount of approximately $385,000.
On December 17,1998, he repaid this personal loan. During this period Mr. Smith
also had outstanding certain personal loans from TMD. The greatest aggregate
amount of principal and interest due on these loans during such period was
$1,080,000. On February 11, 1999, Mr. Smith resigned as President and Chief
Executive Officer of and as a director of the Company and purchased all of the
Company's interest in GWP and TMD. The purchase price for GWP and TMD, as agreed
to between the Company and Mr. Smith, was equal to the aggregate investment by
the Company in GWP and TMD, plus certain expenses of the Company related
thereto, as finally determined in conjunction with the audit of the Company's
financial statements. As payment of this purchase price, Mr. Smith tendered to
the Company approximately $875,000 and executed a promissory note in favor of
the Company of approximately $1.2 million, secured by his shares of the capital
stock of the Company and of TMD. The promissory note is subject to adjustment
(increase or decrease) for actual investments (plus expenses) of the Company in
TMD upon completion of the audit of the Company's financial statements. This
transaction is described in more detail under the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Recent Developments."

20
<PAGE> 21

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K.

(a) List of financial statements, financial statement schedules and
exhibits.

Report of Independent Certified Public Accountants
Report of Independent Accountants
Consolidated Balance Sheets, December 31, 1998 and 1997
Consolidated Statements of Operations, Years Ended December 31, 1998,
1997 and 1996
Consolidated Statements of Changes in Stockholders' Equity (Capital
Deficit), Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows, Years Ended December 31, 1998,
1997 and 1996 Notes to Consolidated Financial Statements
Report of Independent Certified Public Accountants on Schedule II -
Valuation and Qualifying Accounts, Years Ended December 31, 1998,
1997, and 1996
Report of Independent Accountants on Schedule II - Valuation and
Qualifying Accounts, Years Ended December 31, 1998, 1997 and 1996
Schedule II - Valuation and Qualifying accounts, Years Ended
December 31, 1998, 1997 and 1996

(b) Reports on Form 8-K

On October 20, 1998, the Company filed a report on form 8-K describing
its purchase of a 51% interest in TMD.

On February 26, 1999, the Company filed a report on form 8-K describing
the sale of its 51% interest in TMD.

The exhibits required by Item 601 of Regulation SKB are filed herewith.
(See Index of Exhibits)

(d) Financial Statement Schedules:

The Financial Statement Schedules required by Regulation SX are filed
herewith.

21
<PAGE> 22

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, U.S. Technologies Inc. has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 14th day of
April, 1999.

U.S. TECHNOLOGIES INC.

By: /s/ C. Gregory Earls
---------------------------
C. Gregory Earls
President & CEO

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 date indicated:

<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ C. Gregory Earls President & CEO April 14, 1999
- -------------------- Chairman of the Board of Directors --------------
C. Gregory Earls Acting Principal Accounting Officer

/s/ John P. Brocard Executive Vice President April 14, 1999
- -------------------- General Counsel --------------
John P. Brocard
</TABLE>

22
<PAGE> 23

U.S. TECHNOLOGIES INC.

CONTENTS

<TABLE>

<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-2
REPORT OF INDEPENDENT ACCOUNTANTS F-3

CONSOLIDATED FINANCIAL STATEMENTS

Balance sheets F-4

Statements of operations F-5

Statements of changes in stockholders' equity (capital deficit) F-6

Statements of cash flows F-7

Notes to financial statements F-8

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-28
REPORT OF INDEPENDENT ACCOUNTANTS F-29

SCHEDULE II - Valuation and Qualifying Accounts F-30
</TABLE>
F-1
<PAGE> 24

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Stockholders and Board of Directors of
U.S. Technologies Inc.
Marietta, Georgia

We have audited the accompanying consolidated balance sheets of U.S.
Technologies Inc. as of December 31, 1998 and 1997, and the related
consolidated statements of operations, changes in stockholders' equity (capital
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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of U.S. Technologies
Inc. as of December 31, 1998 and 1997, and the results of their operations and
their cash flows for the years then ended in conformity with generally accepted
accounting principles.

BDO Seidman, LLP

Atlanta, Georgia
March 12, 1999

F-2
<PAGE> 25

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders
U.S. Technologies Inc. and Subsidiaries

We have audited the accompanying consolidated statements of operations, changes
in stockholders' equity and cash flows for the year ended December 31, 1996 of
U.S. Technologies Inc. and Subsidiaries "the Company". 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 audit 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 from 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 audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash flows for
the year ended December 31, 1996 of U.S. Technologies Inc.
and Subsidiaries, in conformity with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 2 to the financial
statements, the Company suffered significant losses from operations during the
year ended December 31, 1996, that raise substantial doubts about its ability to
continue as a going concern. Management's plans in regard to this are also
described in Note 2. The financial statements do not include any adjustments
that might result from this uncertainty.

BROWN GRAHAM AND COMPANY P.C.

Georgetown, Texas
April 8, 1997

F-3
<PAGE> 26

U.S. Technologies Inc.

Consolidated Balance Sheets

December 31, 1998 1997
- ---------------------------------------------------------------------- ------------ ------------
<S> <C> <C>
ASSETS

CURRENT
Cash $ 110,140 $ 489
Trade accounts receivable, net of reserves
of $140,000 and $18,000 572,975 341,327
Inventory, net 585,855 74,933
Prepaid expenses 29,831 4,244
------------ ------------

Total current assets 1,298,801 420,993
------------ ------------

PROPERTY AND EQUIPMENT, net of accumulated depreciation 499,749 137,024
------------ ------------

OTHER ASSETS
Net investment in and advances to subsidiary to be sold 524,558 --
Other assets 44,425 15,420
------------ ------------

Total other assets 568,983 15,420
------------ ------------

Total assets $ 2,367,533 $ 573,437
============ ============

CURRENT LIABILITIES
Accounts payable $ 844,173 $ 376,831
Accrued expenses 751,406 858,001
Current portion of long-term debt and capital lease obligation 16,050 35,753
------------ ------------

Total current liabilities 1,611,629 1,270,585
------------ ------------

LONG-TERM DEBT AND CAPITAL LEASE OBLIGATION,
less current portion 31,862 19,068
------------ ------------

Total liabilities 1,643,491 1,289,653
------------ ------------

STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)
Series A convertible preferred stock;
$0.02 par value; 10,000,000 shares
authorized; 5,000,000 subscribed, none
issued or outstanding 3,648,682 --
Common stock; $0.02 par value; 40,000,000 shares
authorized; 29,195,278 and 28,632,063 shares
issued; and 28,795,278 and 28,632,063 outstanding 583,906 572,642
Additional paid-in capital 12,605,029 12,392,016
Accumulated deficit (15,735,686) (13,170,977)
Stock receivable (150,205) (150,205)
Note receivable, stockholder -- (359,692)
Treasury stock, at cost (227,684) --
------------ ------------
Total stockholders' equity (capital deficit) 724,042 (716,216)
------------ ------------
Total liabilities and capital deficit $ 2,367,533 $ 573,437
============ ============
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE> 27

U.S. Technologies Inc.

Consolidated Statements of Operations

Years ended December 31, 1998 1997 1996
- ---------------------------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
NET SALES $ 6,107,244 $ 4,166,626 $ 1,410,498
------------ ------------ ------------
OPERATING COSTS AND EXPENSES
Cost of sales 5,349,459 3,424,313 2,513,672
Selling expense 313,283 70,869 245,232
General and administrative expense 2,788,104 1,118,310 961,195
Impairment of long-lived assets -- 1,408,839 --
Restructuring charge 90,000 196,903 --
Other - litigation -- 252,256 --
------------ ------------ ------------

Total operating costs and expenses 8,540,846 6,471,490 3,720,099
------------ ------------ ------------

Loss from operations (2,433,602) (2,304,864) (2,309,601)
------------ ------------ ------------

OTHER EXPENSE (INCOME)
Interest, net 18,782 25,191 20,277
Other, net 112,325 (87,310) 253,134
------------ ------------ ------------

Total other expense (income) 131,107 (62,119) 273,411
------------ ------------ ------------

Net loss $ (2,564,709) $ (2,242,745) $ (2,583,012)
============ ============ ============

Basic and diluted loss per common share $ (0.09) $ (0.08) $ (0.14)
============ ============ ============

Weighted average common shares outstanding 28,996,607 26,793,999 18,555,439
============ ============ ============
</TABLE>

See accompanying notes to consolidated financial statements

F-5
<PAGE> 28

U.S. Technologies Inc.

Consolidated Statements of Changes in Stockholders' Equity (Capital Deficit)

Shares
--------------------------------- Preferred Additional
Common Treasury Common Treasury Stock Paid-In
Stock Stock Stock Stock Issuable Capital
----- ----- ----- ----- -------- -------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1996 15,875,963 -- $ 317,520 $ -- $ -- $ 9,887,485

Stock issued for new product 3,536,000 -- 70,720 -- -- 481,780

Stock issued to retire debt 1,845,300 -- 36,906 -- -- 534,331

Stock options exercised 600,000 -- 12,000 -- -- 78,000

Debt contributed to capital -- -- -- -- -- 748,215

Net loss -- -- -- -- -- --
------------ --------- --------- --------- ----------- -----------

BALANCE, December 31, 1996 21,857,263 -- 437,146 -- -- 11,729,811

Stock issued, change in 5,507,130 -- 110,143 -- -- 516,431
control

Note receivable - stockholder -- -- -- -- -- --

Stock options exercised 50,000 -- 1,000 -- -- 11,500

Stock issued to retire debt 583,800 -- 11,676 -- -- 134,274

Stock receivable 633,870 -- 12,677 -- -- --

Accrued interest on note
receivable - stockholder -- -- -- -- -- --

Net loss -- -- -- -- -- --
------------ --------- --------- --------- ----------- -----------

BALANCE, December 31, 1997 28,632,063 -- 572,642 -- -- 12,392,016

Stock issued to retire debt 563,215 -- 11,264 -- -- 213,013

Purchase of treasury shares -- (400,000) -- (227,684) -- --

Preferred stock issuable -- -- -- -- 3,648,682 --

Advance to stockholder -- -- -- -- -- --

Accrued interest on note
receivable - stockholder -- -- -- -- -- --

Transfer to subsidiary to be -- -- -- -- -- --
sold

Net loss -- -- -- -- -- --
------------ --------- --------- --------- ----------- -----------

BALANCE, December 31, 1998 29,195,278 (400,000) $ 583,906 $(227,684) $ 3,648,682 $12,605,029
============ ========= ========= ========= =========== ===========

Note
Accumulated Receivable Stock
Deficit Stockholder Receivable Total
------- ----------- ---------- -----

BALANCE, January 1, 1996 $ (8,345,220) $ -- $ -- $ 1,859,785

Stock issued for new product -- -- -- 552,500

Stock issued to retire debt -- -- (150,205) 421,032

Stock options exercised -- -- -- 90,000

Debt contributed to capital -- -- -- 748,215

Net loss (2,583,012) -- -- (2,583,012)
------------ --------- --------- -----------

BALANCE, December 31, 1996 (10,928,232) -- (150,205) 1,088,520

Stock issued, change in -- -- -- 626,574
control

Note receivable - stockholder -- (270,000) -- (270,000)

Stock options exercised -- -- -- 12,500

Stock issued to retire debt -- -- -- 145,950

Stock receivable -- (63,387) -- (50,710)

Accrued interest on note
receivable - stockholder -- (26,305) -- (26,305)

Net loss (2,242,745) -- -- (2,242,745)
------------ --------- --------- -----------

BALANCE, December 31, 1997 (13,170,977) (359,692) (150,205) (716,216)

Stock issued to retire debt -- -- -- 224,277

Purchase of treasury shares -- -- -- (227,684)

Preferred stock issuable -- -- -- 3,648,682

Advance to stockholder -- (151,212) -- (151,212)

Accrued interest on note
receivable - stockholder -- (25,502) -- (25,502)

Transfer to subsidiary to be -- 536,406 -- 536,406
sold

Net loss (2,564,709) -- -- (2,564,709)
------------ --------- --------- -----------

BALANCE, December 31, 1998 $(15,735,686) $ -- $(150,205) $ 724,042
============ ========= ========= ===========

</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE> 29

U.S. Technologies Inc.

Consolidated Statements of Cash Flows

Years ended December 31, 1998 1997 1996
- ---------------------------------------------------------- ----------------- ------------------ -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (2,564,709) $ (2,242,745) $ (2,583,012)
Adjustments to reconcile net loss to
net cash used in operating activities:
Net loss from activities of subsidiary to be sold 972,892 -- --
Depreciation and amortization 68,573 179,194 473,927
Loss (Gain) on disposal of assets (118,000) -- 265,000
Impairment of long-lived assets -- 1,408,839 --
Restructuring costs 90,000 -- --
Inventory valuation allowance -- 306,888 290,000
Provision for bad debts 122,000 18,000 90,953
Changes in assets and liabilities,
net of effects of acquisition
Receivables (353,648) (120,680) (70,963)
Inventory (510,922) 90,406 157,743
Prepaid expenses (25,587) (3,971) 5,749
Other assets (29,005) (10,903) (340)
Accounts payable 467,342 (238,363) 551,546
Accrued expenses (222,097) 53,033 341,043
------------ ------------ ------------

Net cash used in operating activities (2,103,161) (560,302) (478,354)
------------ ------------ ------------

INVESTING ACTIVITIES
Net cash paid for acquisition (730,000) -- --
Net proceeds from disposal of assets 118,000 -- --
Purchase of equipment (431,298) (58,942) --
Proceeds from collection of notes and
other receivables 385,194 -- --
Advances, net of deficit in operating results of
subsidiary to be sold (767,450) -- --
------------ ------------ ------------

Net cash used in investing activities (1,425,554) (58,942) --
------------ ------------ ------------

FINANCING ACTIVITIES
Proceeds from convertible preferred
stock issuable 3,648,682 -- --
Issuance of common stock -- 588,364 90,000
Principal payments on notes payable (6,909) (6,179) (15,000)
Proceeds from issuance of convertible debentures 224,277 -- --
Proceeds from issuance of long-term debt -- 36,000 379,042
Purchase of treasury stock (227,684) -- --
------------ ------------ ------------

Net cash provided by financing activities 3,638,366 618,185 454,042
------------ ------------ ------------

Increase (decrease) in cash 109,651 (1,059) (24,312)

CASH, beginning of period 489 1,548 25,860
------------ ------------ ------------

CASH, end of period $ 110,140 $ 489 $ 1,548
============ ============ ============
</TABLE>

See accompanying notes to consolidated financial statements.

F-7
<PAGE> 30

U.S. Technologies Inc.

Notes to Consolidated Financial Statements

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Basis of Presentation

U.S. Technologies Inc. (the "Company") performs labor and service intensive
"outsourcing" work for Fortune 1000 and other select companies. Currently, the
work is performed by inmates in detention facilities located in Texas,
California and Utah under the guidelines of a 1979 Federal Government Program
known as the Prison Industry Enhancement program ("PIE"). The Company performs
electronic and furniture assembly, manufacturing, enhancement, rework,
packaging and sorting of products, as well as operates an inbound/outbound call
center.

The Company operates in privatized prisons under an exclusive agreement with
Wackenhut Corrections Corporation ("WCC"), a leading developer and manager of
privatized correctional and detention facilities in the United States, Canada,
the United Kingdom and Australia. The agreement with the WCC also permits the
Company to contract with state and federally operated facilities. WCC is the
second largest manager of privatized correctional facilities in the United
States. Currently WCC manages 35 detention facilities in the United States and
has begun construction on new industry buildings at certain of its sites for
use by the Company. WCC does not have an ownership interest in the Company.

The Company's wholly-owned subsidiaries include Labor-to-Industry Inc. ("LTI"),
Service-to-Industry Inc. ("STI"), GWP Inc. ("GWP") and Newdat Inc. ("Newdat").
LTI produces labor intensive tangible products and STI is a service provider
operating an inbound/outbound call center. GWP is a holding company for a 51%
interest in Technology Manufacturing and Design, Inc. ("TMD"). TMD is a
"free-world" (i.e., non-prison) contract manufacturer of electronic circuit
boards. Newdat is also a holding company for an 80% interest in SensonCorp
Limited ("Senson"). Both Newdat and Senson were inactive for all years
presented.

LTI operations included electronics-related assembly for all years presented,
furniture-related assembly commencing September 1998, and cut-and-sew
operations commencing May 1998. The cut-and-sew operations were discontinued in
February 1999. STI operated the call center from June 1998 and temporarily
suspended operations in January 1999. GWP and the 51% interest in TMD were
acquired effective October 5, 1998. On February 12, 1999, GWP and its interest
in TMD were sold to the former president of the Company as part of a severance
agreement with Mr. Kenneth H. Smith, the former president (Notes 2, 3 and 18).

The consolidated statements of operations, cash flows and changes in
stockholders' equity include the accounts of the Company and its subsidiaries,
including GWP and TMD, subsidiaries held for sale. Since GWP and TMD were sold
subsequent to year-end, the net assets are recorded in the accompanying balance
sheet as "Net investment in and advances to subsidiary to be sold." All
material intercompany accounts and transactions are eliminated.

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturity
dates of three months or less from the date of purchase to be cash equivalents.

F-8
<PAGE> 31

U.S. Technologies Inc.

Notes to Consolidated Financial Statements

Inventories

Inventories are stated at the lower of cost, determined by the average cost
method, or market.

Asset Impairment

Statement of Financial Accounting Standards ("SFAS") No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of, effective for years beginning after December 15, 1995, requires that
long-lived assets and certain intangibles to be held and used by the Company be
reviewed for impairment. The Company periodically assesses whether there has
been a permanent impairment of its long-lived assets, in accordance with SFAS
No. 121. A write-down of assets due to impairment was required for the
year-ended December 31, 1997, in the amount of approximately $1.4 million (Note
4).

Property and Depreciation

Property and equipment are stated at cost less accumulated depreciation.
Expenditures for additions, renewals and improvements of property and equipment
are capitalized. Expenditures for repairs, maintenance and gains or losses on
disposals are included in operations. Depreciation is computed using the
straight-line method over the following estimated lives:

ESTIMATED LIVES
---------------
<S> <C>
Equipment 5-7 years
Furniture and fixtures 7 years
Vehicles 3 years
Leasehold Improvements 6 years

</TABLE>

Other Assets

Other assets consist primarily of capitalized acquisition costs, which
include fees and other expenses incurred in connection with the Company's
acquisition program. As acquisitions are completed, such costs are included in
the Company's total investment to be allocated appropriately.

Revenue Recognition and Accounts Receivable

Revenue is recognized when the product is shipped. An allowance for doubtful
accounts is provided based on periodic review of the accounts.

Restructuring Costs

The Company records the costs of severance and lay-offs related to the
Company's employees in accordance with Emerging Issues Task Force ("EITF")
Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in Restructuring)."

F-9
<PAGE> 32

U.S. Technologies Inc.

Notes to Consolidated Financial Statements

Income Taxes

The Company accounts for income taxes under the asset and liability approach
that requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. In estimating future tax
consequences, the Company generally considers all expected future events other
than possible enactments of changes in the tax laws or rates. The Company
provides a valuation allowance against its deferred tax assets to the extent
that management estimates that it is not "more likely than not" that such
deferred tax assets will be realized.

Earnings per Share

The Company has adopted the provisions of SFAS No. 128, Earnings Per Share,
which is effective for fiscal years ending after December 15, 1997. Basic
earnings per common share are based on the weighted average number of common
shares outstanding during the period. Diluted earnings per share include the
dilutive effect of stock options and warrants. For all periods presented diluted
earnings per share have not been presented because the impact of the assumed
exercise of stock options and warrants would have been anti-dilutive. The
impact of the assumed exercise may have a dilutive effect in the future.

Stock Option Plans

Effective in 1997, the Company adopted the disclosure option of SFAS No. 123,
"Accounting for Stock Based Compensation." SFAS No. 123 requires that companies
that do not choose to account for stock based compensation as prescribed by the
statement shall disclose the pro forma effects on earnings and earnings per
share as if SFAS No. 123 had been adopted. Additionally, certain other
disclosures are required with respect to stock compensation and the assumptions
used to determine the effects of SFAS No. 123.

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 revenue and expenses during the reporting period.
Actual results could differ from those estimates for many reasons including
risks and uncertainties. Potential risks and uncertainties include such factors
as the financial strength of the electronics manufacturing industry, sales in
the electronics manufacturing industry, competition and the success of the
Company's planned expansion into the call center and other manufacturing
industries. The Company also estimates that the value of assets pledged to the
Company to support the Company's guarantees of TMD are sufficient to minimize
any exposure to significant losses that the Company may incur because of TMD
(Note 17).

Fair Value of Financial Instruments

The fair value of financial instruments is the amount at which the instrument
could be exchanged in a current transaction between willing parties. The
carrying amounts of the Company's financial instruments included in the
accompanying consolidated balance sheets are not materially different from
their fair values.

F-10
<PAGE> 33

U.S. Technologies Inc.

Notes to Consolidated Financial Statements

New Accounting Pronouncements

SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, is
effective for all fiscal quarters of fiscal years beginning after June 15,
1999. SFAS No. 133 requires companies to recognize all derivatives contracts as
either assets or liabilities in the balance sheet and to measure them at fair
value. If certain conditions are met, a derivative may be specifically
designated as a hedge, the objective of which is to match the timing of gain or
loss recognition on the hedging derivative with the recognition of (i) the
changes in the fair value of the hedged asset or liability that are
attributable to the hedged risk or (ii) the earnings effect of the hedged
forecasted transaction. For a derivative not designated as a hedging
instrument, the gain or loss is recognized in income in the period of change.

Historically, the Company has not entered into derivatives contracts either to
hedge existing risks or for speculative purposes. Accordingly, the Company does
not expect adoption of the new standard on January 1, 2000, to affect its
financial statements.

Reclassifications

Certain prior year amounts have been reclassified to conform with current year
presentation.

F-11
<PAGE> 34

U.S. Technologies Inc.

Notes to Consolidated Financial Statements

2. FUTURE OPERATIONS

The Company's consolidated financial statements have been presented on the
basis that it is a going concern, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business. The
Company incurred significant losses during each of the three years in the
period ended December 31, 1998, and had working capital deficiencies at
December 31, 1998 and 1997.

In January 1997, as part of the transaction through which control of the
Company passed to the new management team, the Company received a significant
infusion of equity capital of approximately $536,000. This capital infusion was
used to finance the significant expansion of the Company's operations. The new
management team took immediate steps to cut costs and improve production
management, product quality and customer service. All the steps resulted in an
immediate increase in revenues with existing customers and opportunities to
serve new customers. These steps also resulted in the recognition of a
restructuring charge to recognize the cost of severance and lay-off of excess
personnel of approximately $197,000.

The new management team also made a thorough evaluation of the value of the
assets acquired by prior management and took appropriate steps to write-off the
value of assets which would not be realized, totaling approximately $1,409,000,
and obsolete inventory, in the amount of approximately $307,000. The new
management team acted to resolve most of the outstanding litigation, inherited
from prior management, recognizing a charge of approximately $252,000. The
Company's new management also converted approximately $119,000 of the Company's
long-term debt and $27,000 of accrued interest into equity.

In 1998, further steps were taken to turn around the negative financial results
of the Company. These steps included raising capital from an issuance of
convertible debentures, entering into a $5 million preferred stock investment
agreement with U.S. Viewing Corporation ("USVC") and cost reductions from
termination of certain executive, management and inmate personnel. The Company
also identified Affordable Interior Systems ("AIS") as a highly-profitable
acquisition candidate and aggressively pursued and obtained various potential
financing opportunities. The non-binding letter of intent to acquire AIS
includes a purchase price of approximately $14.7 million with a note payable to
the seller of up to $3.8 million. The acquisition will likely close in April
1999. Financing for the remainder of the purchase price is expected to be
provided through an asset-based lender and/or a private placement of debt or
equity securities.

Additional steps taken in 1999 included closing one unprofitable division
temporarily and another unprofitable division indefinitely, and resignations of
Mr. Kenneth H. Smith, chairman of the board of directors, president and chief
executive officer, and Mr. James C. Melton, Sr., member of the board of
directors and executive vice president.

The Company acquired TMD during 1998. TMD was initially expected to complement
the Company's existing business operations. However, TMD continued to generate
significant operating losses and was sold subsequent to year-end to Mr. Smith
in conjunction with his severance agreement.

The Company has temporarily filled the vacancies left by Mr. Smith's
resignation with Mr. C. Gregory Earls. Mr. Earls is a substantial investor in
the Company and a member of the board of directors. Mr. Earls is also president
and a director of USVC. Through USVC, Mr. Earls has successfully helped the
Company gain access to investment capital and has committed to generate

F-12
<PAGE> 35

U.S. Technologies Inc.

Notes to Consolidated Financial Statements

additional capital for the Company as necessary.

Finally, management believes that if it became necessary for a significant cash
infusion to fund its operations, the Company could factor its accounts
receivable which are primarily with Fortune 1000 companies. Also, all of the
Company's assets, including inventory and fixed assets, are unencumbered and
could be used as collateral, if needed. Management believes that these cash
infusion measures could raise up to $500,000, depending upon the underlying
value of the assets.

The Company's continued existence is dependent upon its ability to continue to
resolve its liquidity problems. While there is no assurance that such problems
can be resolved, the Company believes there is a reasonable expectation of
achieving that goal through cash generated from operations, the expansion of
operations and the sale of additional stock through private placements. Should
the Company be unable to achieve its financial goals, the Company may be
required to significantly curtail its operations.

3. BUSINESS COMBINATION

As described in Note 1, the Company acquired a 51% interest in TMD for $730,000
in October 1998 and subsequently sold GWP and the 51% interest in TMD back to
Mr. Smith in February 1999. The acquisition of TMD was accounted for as a
purchase with TMD issuing new common and preferred stock to GWP. The subsequent
sale also included the sale of GWP.

The following table summarize the fair values of the assets acquired and
liabilities assumed in connection with the acquisition:

<TABLE>
<CAPTION>
<S> <C>
Current assets $ 1,237,312
Property and equipment 2,096,196
Net assets held for sale 275,000
Other assets, including goodwill 2,482,466
Current liabilities (2,709,148)
Other liabilities (2,651,826)
-----------
$ 730,000
===========
</TABLE>

Net assets held for sale represent a circuit board design operation of TMD,
sold in December 1998. Net operating results of the circuit board design
operation were not significant.

In conjunction with the acquisition, the Company guaranteed the future purchase
of the 49% minority interest of TMD. The purchase price of the minority
interest is based on a multiple of earnings before interest, taxes,
depreciation and amortization ("EBITDA"), to be completed between October 2000
and October 2001. The Company also subsequently guaranteed a credit facility
for TMD of up to $2.5 million.

The accompanying statement of operations include net sales of approximately
$2,119,000, net loss of approximately $973,000 and net loss per share of $0.03
attributed to TMD. However, because of the sale of TMD subsequent to year-end,
unaudited pro forma results of operations for the years ended 1998 and 1997 are
not considered meaningful and have not been presented.

F-13
<PAGE> 36

U.S. Technologies Inc.

Notes to Consolidated Financial Statements

The net liabilities of GWP and its interest in TMD, and the Company's net
investment in and advances to GWP, TMD and Mr. Smith at December 31, 1998, are
summarized as follows:

Current assets $ 1,572,243
Property and equipment 1,848,503
Other assets, including goodwill 2,734,750
Current liabilities (4,357,782)
Notes payable (2,770,626)
-----------
Net liabilities (972,912)

Investments and advances 1,497,470
-----------
Net investments and advances $ 524,558
===========
</TABLE>

In February 1999, in conjunction with Mr. Smith's severance agreement, the
Company sold GWP and its interest in TMD to Mr. Smith. The severance agreement
provided that the sales price would be equal to the Company's total investment
in GWP and TMD. The parties' initial estimate of the purchase price of
approximately $2.1 million was paid by Mr. Smith though a cash payment of
approximately $875,000 and a personal promissory note in the amount of
approximately $1.2 million.

The Company continues to be subject to the guarantee of certain of TMD's
liabilities, aggregating approximately $1,229,000 at December 31, 1998, and the
future purchase of the 49% minority interest in TMD. However, in conjunction
with the sale, the Company obtained a pledge of 3 million shares of Common Stock
from Mr. Smith, a pledge from GWP of its 51% interest in TMD and Mr. Smith's
personal guarantee.

4. IMPAIRMENT AND RESTRUCTURING CHANGE

As a result of changes in the Company's management in 1997, a thorough
evaluation of the Company's operations was undertaken, including, among other
things, the carrying value of long-lived assets in light of the recurring
operating losses and uncertainty regarding the recoverability of such assets.
Effective April 1, 1997, management determined that based on the current market
conditions and an analysis of the projected undiscounted future cash flows
calculated in accordance with the provisions of SFAS No. 121, the carrying
amount of its goodwill and investments in technology may not be recoverable.
The resultant impairment of these long-lived assets necessitated a write-down
of $1,408,839, comprised of unamortized goodwill and investments in
technologies of Newdat and Senson, acquired in January 1995.

During 1997, management also evaluated personnel requirements in light of the
current level and mix of operating revenues. The evaluation resulted in
management, sales and administrative personnel being reduced from 16 to three,
and the number of inmate employees being reduced from approximately 125 to
approximately 75. Effective April 1, 1997, the Company recorded a restructuring
charge in the amount of $196,903 to record the costs of severance and lay-off
of excess personnel. The restructuring was completed as of June 30, 1997, with
none of the amounts accrued remaining outstanding as of December 31, 1997.

During 1998, the Company hired four management-level personnel to generate and
manage anticipated growth. Effective December 28, 1998, in light of actual
operations, three of these management-level personnel were terminated in
addition to one executive level officer. Total

F-14
<PAGE> 37

U.S. Technologies Inc.

Notes to Consolidated Financial Statements

severance to be paid to these individuals was approximately $49,000 plus an
additional $41,000 in expenses, which was recorded and accrued as restructuring
charges as of their termination date.

As described in Notes 2 and 18, Messrs. Smith and Melton resigned effective
February 12, 1999, and February 15, 1999, respectively. Total severance and
other costs related to their resignations of approximately $231,000 which
will be recognized by the Company in the first quarter of 1999.

5. INVENTORIES

At December 31, inventories consisted of the following:

1998 1997
------------ ------------
<S> <C> <C>
Raw material $ 511,766 $ 893,848
Work in progress 239,243 15,085
Finished goods 60,846 --
------------ ------------
811,855 908,933
Reserve for obsolescence 226,000 834,000
------------ ------------

$ 585,855 $ 74,933
============ ============
</TABLE>

The Company provided a reserve for obsolete raw materials which was charged to
operations of $0, $306,888 and $290,000, during the years ended December 31,
1998, 1997 and 1996, respectively.

6. PROPERTY AND EQUIPMENT

At December 31, property and equipment consisted of the following:

1998 1997
---------- ----------
<S> <C> <C>
Equipment $1,211,508 $ 983,099
Furniture and fixtures 335,337 170,823
Leasehold improvements 161,895 123,520
---------- ----------
1,708,740 1,277,442
Less accumulated depreciation 1,208,991 1,140,418
---------- ----------

$ 499,749 $ 137,024
========== ==========
</TABLE>

Depreciation expense for the years ended December 31, 1998, 1997 and 1996 was
$328,470, $67,116 and $90,072, respectively. Depreciation expense for the year
ended December 31, 1998 includes $154,000 for TMD.

F-15
<PAGE> 38

U.S. Technologies Inc.

Notes to Consolidated Financial Statements

7. ACCRUED EXPENSES

At December 31, accrued expenses consisted of the following:

1998 1997
---------- ----------
<S> <C> <C>
Compensation $ 292,905 $ 263,792
Legal and professional fees 279,854 518,598
Accrued restructuring cost 90,000 --
Travel 63,950 1,755
Property taxes 17,111 58,174
Other 7,586 15,682
---------- ----------

$ 751,406 $ 858,001
========== ==========
</TABLE>

8. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATION

Long-term debt and capital lease obligation consisted of the following at
December 31:

1998 1997
---------- ----------
<S> <C> <C>

Capital lease obligation, with monthly payments
of $778 through July, 2002 and
imputed interest of 9% $ 28,834 $ --

5% unsecured note payable; due July 27, 2000 19,078 29,821

12% unsecured note paid in 1998 -- 25,000
---------- ----------

Total $ 47,912 $ 54,821
========== ==========
</TABLE>

Current maturities of long-term debt and capital lease obligation are as
follows:

Capital
December 31, Notes Leases
---------- ----------
<S> <C> <C>
1999 $ 10,027 $ 9,336
2000 9,051 9,336
2001 -- 9,336
2002 -- 5,446
Subtotal ---------- ----------
Less amounts representing interest 19,078 33,454
-- 4,620
---------- ----------

$ 19,078 $ 28,834
========== ==========

</TABLE>

During 1998, the Company converted $224,277 in aggregate principal of 4%
convertible subordinated debentures into 563,000 shares of the Company's stock.

F-16
<PAGE> 39

U.S. Technologies Inc.

Notes to Consolidated Financial Statements

9. LEASES

Effective October 15, 1996, and during all of 1997, the Company operated under a
verbal lease and work program agreement with WCC, The Texas Department of
Criminal Justice, Division of Pardons and Paroles ("TDCJ") and the City of
Lockhart, Texas, for its LTI operations to lease approximately 27,800 square
feet of manufacturing and office space. In 1998, WCC and the Company executed a
written agreement effective through January 31, 2001, which will include an
automatic three-year extension. The agreement provides for annual rental rates
of $1 per year for the primary term and the three-year extension. The Company
executed a similar agreement with WCC and the California Department of
Corrections for its MacFarland, California facility and the State of Utah,
Department of Corrections, Division of Correctional Industries for its Draper,
Utah facility. The MacFarland agreement commenced on June 1, 1998 and provides
for 600 square feet with annual rentals of $1 per year through March 2001. The
Draper agreement commenced in June 1998 and provides for 5000 square feet with
annual rentals of $1 per year with renewal options through June 2004.

The Company entered into a an agreement with the State of California, acting by
and through its Director of General Services, with the approval of the
Department of Corrections, to lease space in the Chuckawalla Valley State
Prison (CVSP) located in Blythe, California. The lease provides for
approximately 20,300 square feet of warehouse space, and approximately 16,000
square feet of space for a total of 36,300 square feet, located within the
boundaries of CVSP. The lease commenced on September 1, 1998 and terminates on
August 31, 2003, with monthly payments of $726.

The Company leases approximately 3,000 square feet for its executive offices in
Marietta, Georgia, under a three-year operating lease expiring September 30,
2000. Monthly rentals under this lease are $4,287. The Company is obligated
under several operating leases for vehicles and office equipment.

Future minimum rentals due under operating leases are as follows:

Year Amount
---- ------
<S> <C>
1999 $ 109,420
2000 82,279
2001 20,701
2002 20,701
2003 16,798
---------
$ 249,899

</TABLE>

Rental expense for the years ended December 31, 1998 and 1997 and 1996 were
$109,204, $62,308 and $27,648, respectively.

10. INCOME TAXES

Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.

F-17
<PAGE> 40

U.S. Technologies Inc.

Notes to Consolidated Financial Statements

Significant components of the Company's deferred tax assets at December 31,
1998 and 1997 are as follows:

1998 1997
------------ ------------
<S> <C> <C>
Deferred tax assets
Current assets and liabilities $ 190,000 $ 246,000
Net operating loss carryforwards 4,218,000 3,474,000
Valuation allowance (4,408,000) (3,720,000)
------------ ------------
-- --
============ ============
</TABLE>

At December 31, 1998, the Company has net operating loss carryforwards of
approximately $10,491,000 for federal income tax purposes that expire in years
2004 through 2012. The Company's utilization of losses prior to 1997 to offset
future taxable income is limited to approximately $574,000 per year as a result
of a change in control of the Company, in accordance with Internal Revenue Code
Section 382. Utilization of the losses and other deferred tax assets may be
further limited by alternative minimum tax provisions.

The reconciliation of income tax computed at the United States federal
statutory tax rate (34 percent) to income tax benefit is as follows:

1998 1997
------------ ------------
<S> <C> <C>
Benefit at United States statutory rate $ (872,000) $ (763,000)
State tax benefit 154,000 135,000
Non-deductible expenses 30,000 214,000
Change in deferred tax asset
valuation allowance 688,000 414,000
------------ ------------
-- --
============ ============
</TABLE>

11. STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)

Common Stock and Earnings Per Share

The Company had 40,000,000 authorized shares of $0.02 par value common stock
and 10,000,000 authorized shares of $0.02 par value preferred stock at December
31, 1998. Shares of common stock issued and outstanding were 29,195,278 and
28,632,063, respectively, at December 31, 1998. The following table reconciles
the number of shares shown as outstanding on the balance sheets with the
weighted-average shares used for computing earnings per share ("EPS") for the
years ended December 31:

1998 1997
------------ ------------
<S> <C> <C>

Common shares outstanding at December 31, 29,195,278 28,632,063
Effect of using weighted-average common shares outstanding
(198,671) (1,838,064)
------------ ------------
Shares used in computing earnings per share 28,996,607 26,793,999
============ ============

</TABLE>

F-18
<PAGE> 41

U.S. Technologies Inc.

Notes to Consolidated Financial Statements

Diluted EPS have not been presented due to stock options and warrants which
comprised common stock equivalents totalling 267,400, 267,400 and 0 for the
years ended December 31, 1998, 1997 and 1996, respectively, being
anti-dilutive.

During 1996, the Company issued 3,536,000 shares of its commons stock,
representing $552,500 for a new technology. As described in Note 3, the
unamortized balance of this technology has been written-off an impairment
charge in 1997.

During 1996, the Company issued 1,845,300 shares of common stock to retire
outstanding notes payable of $571,237 to Carlton Technologies Ltd. At the time
the stock was issued to Carlton Technologies Ltd., only $421,032 of notes
payable was due; therefore a receivable of $150,205 has been recorded as a
reduction of stockholders' equity.

Effective January 1, 1997, a group of individuals entered into an agreement
with the then majority owners of the Company to acquire control of the Company.
The individuals were principally Mr. Smith and Mr. James V. Warren. Mr. Smith
served as the Company's Chairman of the Board of Directors, Present and Chief
Executive Officer (CEO). As a part of the agreement, certain accounts
receivable, accrued expenses and notes payable arising from companies
controlled by former majority owners, Tintagel, Ltd., Laura Investments, Ltd.,
and Laura Technologies, Ltd., in the amount of $748,215 were contributed to
additional paid-in capital effective December 31, 1996. In 1997, in connection
with the foregoing acquisition, the Company issued 6,000,000 shares of the
Company's common stock in exchange for $536,613 and a note in the principal
amount of $63,387 from Mr. Smith. The note receivable from Mr. Smith has been
recorded as a reduction in stockholders' equity. In addition, the investor
group let by Mr. Smith and Mr. Warren acquired an additional 9,169,000 shares
of the Company's common stock from companies owned or controlled by Tintagel,
Ltd., and Komen Holdings Pty, Ltd., another affiliate of the former majority
owners.

During 1997, the Company converted $119,000 in aggregate principal of certain
notes payable plus accrued interest of $26,950 into 583,800 shares of the
Company's common stock. Also during 1997, the Company issued 87,000 shares of
the Company's common stock to Mr. Melton, and 54,000 shares of the Company's
common stock to Mr. C. Ray Brumbeloe, a former officer of the Company, at the
current market price.

During 1998, the Company converted $224,277 in aggregate principal of 4%
convertible subordinated debentures into 563,000 shares of the Company's stock.

Warrants

In conjunction with issuance of $275,000 convertible debentures in January
1998, the Company granted the placement agent warrants to acquire 275,000
shares of Common Stock for $1.00. The warrants are exercisable for five years.
All of the warrants remain outstanding.

Convertible Preferred Stock

In July 1998, the Company entered into an investment agreement to issue 500,000
shares of Series A Convertible Preferred Stock ("Preferred Stock") and a
warrant to purchase 500,000 shares of the Company's common stock. The aggregate
purchase of the Preferred Stock and warrant is $5 million. The investor group
contributed $3.7 million through December 31, 1998, and contributed
approximately $600,000 more in 1999, for an aggregate of approximately $4.3
million as of March 12, 1999. The remaining balance is expected to be
contributed during 1999, at which point, the Company will issue the Preferred
Stock and warrants. The aggregate net proceeds, estimated to be approximately
$4.9 million, will be used primarily for corporate purposes and working
capital. The determination of any accretive dividend to be recorded resulting
from an issuance of the preferred stock at a discount will be made on the date
the Preferred Stock is issued.

The Preferred Stock has a dividend rate of nine percent, payable annually on
April 1, beginning in 1999. The dividend, at the discretion of the Board of
Directors of the Company, may be in cash,

F-19
<PAGE> 42

U.S. Technologies Inc.

Notes to Consolidated Financial Statements

Preferred Stock having an aggregate stated value equal to the amount of the
dividend or Common Stock having a fair value, as defined, equal to the rate of
the dividend. The dividend rate will increase to 11% upon certain "triggering
events", as defined, which are generally events of default. Shares of the
Preferred Stock are convertible into shares of Common Stock from January 12,
1999 through January 12, 2004. The shares can be converted into that number of
Common Stock shares determined by dividing the stated value of $10.00 per share
plus accrued and unpaid dividends, by a Conversion Price of $0.41, and
multiplied by a Conversion Factor, as defined. The Conversion Factor is
initially 1.00, as adjusted from time to time, so as to not dilute the number
of share of Common Stock that would be received upon conversion of the
Preferred Stock. The Company is required to reserve 12.2 million shares of
Common Stock for conversion of the Preferred Stock.

The Company, at its option, may redeem the Preferred Stock after the daily
average closing price of the Common Stock is $2.50 or greater for 20
consecutive trading days. The redemption price equals the stated value of $10
per share plus accumulated and unpaid dividends.

As long as at least 45% of the Preferred Stock that was issued remains
unconverted, the holders of Preferred Stock have the right to elect at least
one member, and up to one-third of the members of the board of directors. The
holders of Preferred Stock are also entitled to vote together as a single class
with the holders of Common Stock on certain corporate matters submitted to a
vote of stockholders. The holders of Preferred Stock have one vote for each
share of Common Stock that could then be acquired on conversion of their
Preferred Stock.

Upon any dissolution, liquidation or winding-up of the Company, before any
payments are made to any holders of Common Stock or any other class or series
the Company's capital stock then outstanding, the holders of Preferred Stock
are entitled to receive an amount equal to the stated value of $10.00 per share
of Preferred Stock plus accrued and unpaid dividends. There is no sinking fund
in respect of the Preferred Stock.

Stock Compensation Plans

Prior to 1997, the Company created three qualified and four nonqualified stock
options plans that provide for the granting of incentive and nonqualified
options to purchase the Company's Common Stock to selected officers, other key
employees, directors and consultants. General terms provide for three-year
vesting beginning one year from date of grant, with an exercise price equal to
the market value of the Common Stock as of the grant date. The options expire
three months after or employee's termination, or ten years from the date of
grant. The qualified and nonqualified option plans have 531,600 and 290,000,
shares, respectively, available for grant.

In October 1995, the Financial Accounting Standards Board (FASB) issued SFAS
No. 123, Accounting for Stock Based Compensation, effective for the Company
beginning January 1, 1996. SFAS No. 123 defines a "fair value method" of
accounting for employee stock options. It also allows accounting for such
options under the "intrinsic value method" in accordance with Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees and related interpretations. If a company elects to use the intrinsic
value method, then pro forma disclosures of earnings and earnings per share are
required as if the fair value method of accounting was applied. The effects of
applying SFAS No. 123 in the pro forma disclosures are not necessarily
indicative of future amounts because the pro forma disclosures do not take into
account the amortization of the fair value of awards prior to 1995.
Additionally, the Company is expected to grant additional awards in future
years.

The Company has elected to account for its stock options under the intrinsic
value method

F-20
<PAGE> 43

U.S. Technologies Inc.

Notes to Consolidated Financial Statements

outlined in APB No. 25. The fair value method requires use of option valuation
models, such as The Black-Scholes option valuation model, to value employee
stock options, upon which a compensation expense is based. The Black-Scholes
option valuation model was not developed for use in valuing employee stock
options. Instead, this model was developed for use in estimating the fair value
of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock pride volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, it is management's
option that the existing models do not necessarily provide a reliable measure
of the fair value of its employee stock options. Under the intrinsic value
method, compensation expense is only recognized if the exercise price of the
employee stock option is less than the market price of the underlying stock on
the date of grant.

In accordance with SFAS No. 123, the fair value for the Company's employee
stock options was estimated at the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions for the year
ended 1996 (no options were granted during 1997 or 1998).

<S> <C>
Risk-free interest rate 6.32%
Dividend yield 0%
Volatility factor 67%
Weighted-average expected life (in years) 4.14

</TABLE>

For purposes of pro forma disclosures, the estimated fair value of options is
amortized to expense over the option's vesting period. The Company's pro forma
information follows:

1998 1997 1996
---------------- --------------------- ---------------------
<S> <C> <C> <C>
Net loss
As reported $(2,564,709) $(2,242,745) $(2,583,012)
Pro forma (2,564,709) (2,242,745) (2,657,418)
Earnings per share
As reported (0.09) (0.08) (0.14)
Pro forma (0.09) (0.08) (0.14)

</TABLE>

F-21
<PAGE> 44

U.S. Technologies Inc.

Notes to Consolidated Financial Statements

A summary of stock option activity, and related information for the years 1996
and 1997 follows. (There was no activity in 1998):

Qualified Plans Nonqualified Plans
--------------------------------- -----------------------------------
Weighted- Weighted-
average average
Options exercise price Options exercise price
-------------- ---------------- --------------- -----------------
<S> <C> <C> <C> <C>
Outstanding at January 1, 1996 137,580 $ 2.34 -- $ --
Granted -- -- 600,000 0.15
Exercised -- -- (600,000) 0.15
Forfeited or canceled (24,000) 1.57 --
-------- ------ --------- ------
Outstanding at December 31, 1996 113,580 2.50 -- --
Granted -- -- -- --
Exercised (50,000) 0.25 -- --
Forfeited or canceled (46,180) 4.27 -- --
-------- ------ --------- ------
Outstanding at December 31, 1997
and 1998 17,400 $ 0.59 -- --
======== ====== ========= ======
Options exercisable at:
December 31, 1996 113,580 $ 2.50 -- --
December 31, 1997 and 1998 17,400 0.59 -- --

</TABLE>

The weighed average fair value of options granted during 1996 was $0.15.

During 1996, the Company granted options, outside the option plans described
above, to four other parties to purchase 200,000 shares of the Company's Rule
144 stock at $0.50 per share exercisable at various times through May 17, 2001.
The Company also granted to a former board member the option to purchase
150,000 shares at $0.125 per share through May 25, 1999. As of December 31,
1997 and 1998, 100,000 of the $0.50 options and all of the $0.125 options
remain outstanding.

The range of exercise prices of all outstanding and exercisable options at
December 31, 1998, is $0.125 - $0.84375, with a weighted average exercise price
of $0.30. The options have remaining contractual lives of 0.4 - 2.4 years, with
a weighted average contractual life of 1.2 years.

12. BUSINESS AND CREDIT CONCENTRATION

The Company is dependent upon certain customers for a major portion of its
sales. The sales of services to IBM represented approximately 43%, 66% and 55%
for the years ended December 31, 1998, 1997 and 1996, respectively. Texas
Instruments accounted for approximately 7%, 19% and 8% of total sales during
the for the years ended December 31, 1998, 1997 and 1996, respectively. IBM and
Texas Instruments, along with other customers, High End Systems and Wyle EMG,
comprised approximately 16% of net accounts receivable at December 31, 1998.
The Company generally does not require collateral on its trade accounts
receivable.

F-22
<PAGE> 45

U.S. Technologies Inc.

Notes to Consolidated Financial Statements

During all years presented, the Company's operations were primarily in
electronics manufacturing. Until such time as the Company successfully expands
into the call center, furniture manufacturing, and other industries, the
Company will be economically dependent on the health of the electronics
manufacturing industry and the niche in which it provides products and
services.

The Company is also dependent on WCC since the operations of its primary
operating facility is subject to the work program agreement described in Note
8, above.

13. RELATED PARTIES

Ms. Carolyn Meehan, wife of Mr. William Meehan, president and CEO of the
Company until his resignation in January 1997, is president of Carlton
Technologies Limited ("Carlton") with whom the Company had various loans during
1996. Many of these loans were retired by the issuance of the Company's common
stock in exchange for the debt. At December 31, 1996, the Company had a
receivable of $150,205 from the issuance of common stock in excess of debt to
Carlton. This amount was reclassified as a reduction in stockholders' equity as
of December 31, 1996.

As of December 31, 1997, the Company had notes and interest receivable from Mr.
Smith aggregating $359,692. The notes related to the acquisition of his
interest in the Company and his assumption of an amount due to the Company
associated with the sale of an asset in connection with the acquisition of his
interest in the Company. In effect, Mr. Smith acquired the Company's rights to
an asset underlying a portion of the notes receivable. The notes are recognized
as a reduction in stockholders' equity. The notes were effectively transferred
to TMD during 1998.

As of December 31, 1998, the Company had notes and interest receivable from Mr.
Smith aggregating approximately $536,000 in the accompanying balance sheet
under the caption "Net investments in and advances to subsidiary to be sold."
Subsequent to year-end, in connection with Mr. Smith's resignation and his
purchase of TMD from the Company, Mr. Smith paid $875,000 to the Company and
executed a three-year note for approximately $1.2 million in connection with
the purchase of TMD (Notes 3 and 18).

14. SUPPLEMENTAL CASH FLOW INFORMATION

Cash paid for interest was approximately $11,000, $17,000 and $12,000 for 1998,
1997 and 1996, respectively. During 1998, the Company converted $275,000 of
debentures and accrued interest into 563,215 shares of common stock.

F-23
<PAGE> 46

U.S. Technologies Inc.

Notes to Consolidated Financial Statements

15. FOURTH QUARTER ADJUSTMENTS

Significant adjustments increasing the fourth quarter loss in 1998 and 1996 are
indicated below. There were no significant adjustments increasing the fourth
quarter loss in 1997.

1998 1996
------------ ------------
<S> <C> <C>
Increase of allowance for doubtful accounts $ 140,000 $ 21,700
Write-down of inventory for obsolete raw materials -- 339,372
Amortization of goodwill -- 40,042
Accrued expenses 90,000 130,911
------------ ------------

Aggregate adjustment $ 230,000 $ 532,025
============ ============

Aggregate adjustment per common share $ 0.01 $ 0.03
============ ============

</TABLE>

16. SEGMENT INFORMATION

During 1998, the Company adopted SFAS 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS 131 establishes standards for the way
that public business enterprises report information about operating segments in
their financial statements. The standard defines operating segments as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision makers in
deciding how to allocate resources and in assessing the performance. The
Company's chief operating decision makers aggregate operating segments based on
the location of the segment and whether it is prison-based or free-world. Based
on the quantitative thresholds specified in SFAS 131, the Company has
determined that it has four reportable segments. The four reportable segments
are USXX (Marietta, Georgia), LTI (Lockhart, Texas), TMD (Georgetown, Texas)
and STI (Draper, Utah). USXX is the corporate office, LTI is a prison-based
manufacturer of computer circuit boards, TMD is a freeworld manufacturer of
computer circuit boards and STI is a prison-based inbound/outbound call center.
Other segments include manufacturing of modular office furniture components and
cut-and-sew operations.

The accounting policies of the operating segments are the same as those
described in Note 1, Summary of Significant Accounting Policies. Segment
amounts disclosed are prior to any elimination entries made in the
consolidation. The chief operating decision-makers evaluate performance of the
segments based on operating results and EBITDA. EBITDA represents earnings
before interest expense, provision (benefit) for income taxes, depreciation and
amortization, restructuring and special charges. EBITDA is not a measurement in
accordance with generally accepted accounting principles ("GAAP") and should
not be considered an alternative to, or more meaningful than, income from
operations, net income or cash flows as defined by GAAP or as a measure of
profitability or liquidity. All companies do not calculate EBITDA in the same
manner and, accordingly, EBITDA may not be comparable with other companies.

F-24
<PAGE> 47

U.S. Technologies Inc.

Notes to Consolidated Financial Statements

Summary information by segment follows (in thousands):

1998 USXX LTI TMD STI Other Total
- -------------------- ---------- ------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ -- $3,918 $ 2,119 $ 13 $ 57 $ 6,107

Operating profit
(loss) (1,552) 212 (660) (262) (172) (2,434)

EBITDA (1,503) 394 (698) (181) (91) (2,079)

Total assets $ 4,386 $1,031 $ 657 $ 337 $ 215 $ 6,626
======= ====== ======= ====== ====== =======
<CAPTION>

1997 USXX LTI TMD STI Other Total
- -------------------- ---------- ------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ -- $4,167 $ -- $ -- $ -- $ 4,167

Operating profit
(loss) (1,706) 152 -- -- (751) (2,305)

EBITDA (578) 397 -- -- -- (181)

Total assets $ 2,956 $ 532 $ -- $ -- $ -- 3,488
======= ====== ======= ====== ====== =======
<CAPTION>

1998 1997
------------ ------------
(in thousands)
<S> <C> <C>
Assets
Total segment assets $ 6,626 $ 3,488
Eliminations (4,258) (2,915)
------------ ------------

Reported total assets $ 2,368 $ 573
============ ============

</TABLE>

The Company operated the same segments in 1996 as 1997. However, segment
information for 1996 is not available.

17. CONTINGENCIES

The Company has guaranteed certain liabilities, of up to $2.5 million, and the
purchase of the minority interest in TMD, based on a multiple of earnings
before interest, taxes, depreciation and amortization (Note 3). Upon the
subsequent sale of TMD, the Company received, from Mr. Smith, a pledge of 3
million shares of Common Stock of the Company, the 51% interest in TMD and a
personal guarantee. Concurrent with the sale, TMD filed for bankruptcy
protection, thereby defaulting on the certain liabilities guaranteed by the
Company, aggregating approximately $840,000 at February 12, 1999, the date of
the bankruptcy filing. As a result of the bankruptcy filing, the creditor for
which the Company has provided the guaranty filed a claim on February 16, 1999
against the Company for the approximate $840,000 balance owed by TMD.
Management believes that TMD's assets held by the creditor as collateral exceed
the liability due the creditor and the security pledges held by the Company
would offset any remaining obligation to the Company.

F-25
<PAGE> 48

U.S. Technologies Inc.

Notes to Consolidated Financial Statements

The Company is involved in several lawsuits related to prior management and
claims against companies acquired or controlled by prior management. One of
these suits claim that the Company is liable as a successor-in-interest for
amounts owned by entities whose assets were acquired by the Company. The
aggregate amount claimed under this lawsuit, including interest and attorney
fees, is approximately $54,000. Management believes the claim is without merit,
and accordingly is vigorously defending the lawsuit.

The Company is involved in two lawsuits brought by a former management
employees who claim to be entitled to certain severance benefits and back pay.
The aggregate amount claimed under these lawsuits, including interest and
attorney fees, is approximately $360,000. Management is vigorously defending
these lawsuits.

Effective April 1 1997 the Company accrued a charge in the amount of $252,256
to recognize the costs which were deemed to be "probable" under SFAS No. 5,
Accounting for Contingencies, to resolve outstanding litigation. As of December
31, 1998, the remaining balance of this accrual to resolve outstanding
litigation was $28,000.

18. SUBSEQUENT EVENTS

As discussed in Notes 2 and 4, Messrs. Smith and Melton, resigned as officers
and directors of the Company as of February 12, 1999 and February 15, 1999,
respectively. In connection with their resignations, the Company agreed to pay
an aggregate of approximately $231,000 in severance and related expenses. The
severance agreements also included irrevocable proxies of all of the former
officers' shares of Common Stock to a designated member of the board of
directors and non-compete agreements. The non-compete agreements prohibit
either of the former officers from engaging in prison-based manufacturing or
services anywhere in the United States, other than prison-based manufacturing
of electronics outside the state of Texas. The severance agreement for Mr.
Melton also included an option to purchase up to 300,000 shares of Common
Stock, with an exercise price of $0.40 per share, exercisable for three years
from the date of resignation.

Mr. Smith's severance agreement also provided for the sale of GWP and the
Company's 51% interest in TMD to Mr. Smith for approximately $2.1 million,
representing net investments in, advances to and costs incurred on behalf of
GWP, TMD and Mr. Smith through February 12, 1999. In connection with his
severance Mr. Smith executed a three-year note payable to the Company for
approximately $1.2 million, representing the purchase price for GWP of
approximately $2.1 million less a cash payment of approximately $875,000.
Interest on the note accrues at prime plus 2%, payable quarterly, with principal
due in equal annual installments beginning in February 2000. The Company remains
subject to its guaranty of certain of TMD's liabilities and obligations. As a
result, the Company required a personal guaranty from the Mr. Smith and a pledge
of his 3 million shares of Common Stock, GWP and the 51% ownership of TMD,
subject to anti-dilution provisions.

Immediately upon the sale of GWP and TMD to Mr. Smith, TMD filed for
bankruptcy. The bankruptcy filing caused a default on certain of TMD's
liabilities guaranteed by the Company, aggregating approximately $840,000,
obligating the Company to pay the liabilities on behalf of TMD. The Company has
filed notice of default with Mr. Smith, enabling the Company to take possession
of Mr. Smith's pledged assets. Currently, the Company is working with attorneys
representing the guaranteed creditor and the former president to minimize any
exposure to the Company. Management believes that the assets held by the
creditor, along with the 3 million

F-26
<PAGE> 49

U.S. Technologies Inc.

Notes to Consolidated Financial Statements

shares of Common Stock pledged to the Company, will minimize any loss to the
Company. Furthermore, management believes that the Company's exposure to other
liabilities or contingencies resulting from TMD's bankruptcy filing are
minimal. However, no assurances can be provided at this time that the Company
will not incur other obligations or liabilities on behalf of TMD.

As part of the restructuring plan implemented in December 1998, discussed in
Note 4, the Company temporarily suspended its prison-based inbound/outbound call
center in Utah in January 1999 and closed indefinitely its prison-based
cut-and-sew operations in California in February 1999. Total costs associated
with the closing these operations were estimated to be $90,000, which is
included in accrued expense.

As discussed in Note 11, the Company entered into an investment agreement
during 1998 to issue 500,000 shares of preferred stock and a warrant to acquire
500,000 shares of Common Stock for a total of $5 million. As of March 12, 1999,
the Company has received approximately $4.3 million of the estimated $4.9
million net proceeds. The remaining $600,000 is expected to be contributed by
April 30, 1999, at which time the preferred stock and warrant will be issued.

F-27
<PAGE> 50

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Stockholders and Board of Directors of
U.S. Technologies Inc.
Marietta, Georgia

The audits referred to in our report dated March 12, 1999, relating to the
consolidated financial statements of U.S. Technologies Inc., which is contained
in Item 8 of this Form 10-K included the audit of the financial statement
schedules listed in the accompanying index. These financial statement schedules
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statement schedules based upon our
audits.

In our opinion such financial statement schedules present fairly, in all
material respects, the information set forth therein.

BDO Seidman, LLP

Atlanta, Georgia
March 12, 1999

F-28

<PAGE> 51

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders
U.S. Technologies Inc. and Subsidiaries

Our report on the consolidated financial statements of U.S. Technologies Inc.
and subsidiaries is included on page F-3 of this Form 10-K. In connection with
our audit of such financial statements, we have also audited the related
financial statement schedule listed on the index of this Form 10-K.

In our opinion the 1996 financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be in
them.

BROWN GRAHAM AND COMPANY P.C.

Georgetown, Texas
April 8, 1997

F-29
<PAGE> 52
U.S. TECHNOLOGIES, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

Column A Column B Column C Additions Column D Column D
- ----------------------------------- ------------- ------------------------- ----------- ------------
Balance at Charged to Charged to Balance at
Beginning Cost and Other End of
Classification of Period Expenses Accounts Deductions Period
- ----------------------------------- ------------- ------------------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
1998
Accounts receivable - bad debt
reserve $ 18,000 $126,000 $ 14,000 $140,000
Inventory obsolescence 34,000 -- 411,000 225,000

1997
Accounts receivable - bad debt
reserve 90,953 18,000 90,953 18,000
Inventory obsolescence 585,000 306,888 57,888 834,000

1996
Accounts receivable - bad debt
reserve 68,434 90,953 68,434 90,453
Inventory obsolescence 295,000 290,000 -- 585,000

</TABLE>

NOTE: These valuation and qualifying accounts were deducted from the assets
to which they apply.

F-30

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1998 AUDITED FINANCIAL STATEMENTS OF US TECHNOLOGIES, INC., AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS IN FORM 10-K FOR THE
YEAR ENDED DECEMBER 31, 1998.
</LEGEND>

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 110,140
<SECURITIES> 0
<RECEIVABLES> 712,975
<ALLOWANCES> 140,000
<INVENTORY> 585,855
<CURRENT-ASSETS> 1,298,801
<PP&E> 1,708,740
<DEPRECIATION> 1,208,991
<TOTAL-ASSETS> 2,367,533
<CURRENT-LIABILITIES> 1,611,629
<BONDS> 0
0
3,648,682
<COMMON> 583,906
<OTHER-SE> (3,490,546)
<TOTAL-LIABILITY-AND-EQUITY> 2,367,533
<SALES> 6,107,244
<TOTAL-REVENUES> 6,107,244
<CGS> 5,349,459
<TOTAL-COSTS> 8,540,846
<OTHER-EXPENSES> 112,325
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,783
<INCOME-PRETAX> (2,564,709)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,564,709)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,564,709)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.09)

</TABLE>