USA TECHNOLOGIES INC, 10KSB, 1997-09-26

USA TECHNOLOGIES INC
10KSB, 1997-09-26
EQUIPMENT RENTAL & LEASING, NEC

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB

[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended June 30, 1997 Commission file number: 33-70882
OR
[ ] Transition report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934 [No Fee Required]

For the transition period from ______ to ______

USA TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)

Pennsylvania 23-2679963
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

200 Plant Avenue, Wayne, PA. 19087
(Address of principal executive offices) (Zip Code)
(610)-989-0340
(Registrant's telephone number, including area code)

NONE
(Securities registered pursuant to Section 12(g) of the Act

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405, of regulations S-B 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-KSB or any
amendments to this Form 10-KSB. [ ]

Transitional Small Business Disclosure Format Yes No X
--- ---

Registrant's total revenues for its most recent fiscal year............$607,772.

As of September 25, 1997, there were outstanding 31,618,019 shares of Common
Stock, no par value, and 644,295 shares of Series A Convertible Preferred
Stock, no par value.

The company's voting securities are traded on the Over the Counter (OTC)
Electronic Bulletin Board. The aggregate market value of the company's voting
securities held by non-affiliates of the Registrant was $13,615,938 on
September 25, 1997 based upon the average bid and asked price of the
Registrant's Common Stock and Preferred Stock on that date.
<PAGE>

TABLE OF CONTENTS

Part I Page
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Item 1. Business 1

2. Properties 5

3. Legal Proceedings 5

4. Submission of Matters to a Vote of Security Holders 5

Part II

5. Market for the Registrant's Common Equity and
Related Stockholder Matters 7

6. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8

7. Financial Statements 12

8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 13

Part III

9. Directors and Executive Officers of the Registrant 13

10. Executive Compensation 16

11. Security Ownership of Certain Beneficial Owners
and Management 20

12. Certain Relationships and Related Transactions 26

Part IV

13. Exhibits, Financial Statement Schedules and Reports on
Form 8-K 27
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USA TECHNOLOGIES, INC.

PART I

Item 1. Business

USA Technologies, Inc., a Pennsylvania corporation (the "Company")
was founded in January 1992. The Company is in the development stage and
intends to become a leading provider and licensor of unattended, credit card
activated control systems for the copying, debit card and personal computer
industries. The Company's devices make available credit card payment
technology in connection with the sale of a variety of products and services.
The Company anticipates generating its revenues from retaining a portion of
the monies generated from all credit card transactions conducted through its
control systems, as well as the direct sale of its control systems and the
resale of configured office products.

The Company has developed an unattended, credit card activated
control system to be utilized with photocopying machines, facsimile machines,
computer printers, and debit card purchase/revalue stations. The control
systems allow consumers to use credit cards to pay for use of these products.

The Company has also developed the Public PCTM, which is an
unattended credit card activated control system to be used in connection with
a personal computer, including on-line services, such as the Internet. This
product enables locations to offer the use of personal computers to the public
on an "as needed" basis utilizing credit cards as a method of payment. In
addition the Company introduced to the university library market its Automated
Print Payment System(TM) (APPS). This system enables libraries to charge users
via credit/debit cards for the printed output from computer networks, thus
providing a new source of revenue to cover their increasing costs of
operations.

During the fiscal year ended June 30, 1997, the Company introduced
the Business Express(TM), which is being marketed to the hospitality industry
as an amenity to the business traveler. The Business Express(TM) combines the
Company's existing applications for computers, copiers, and facsimiles into a
kiosk type configuration. All services provided are credit card activated. The
Business Express(TM) continues the Company's move toward the sale of the
Company's proprietary equipment to operators rather than the revenue sharing
arrangements employed in past years. The Company still retains all rights to
software and proprietary technology which it licenses to location operators
for their exclusive use.

The Company anticipates generating its revenues from the sale of
equipment utilizing its control systems, from retaining a portion of the
revenues generated from all credit card transactions conducted through its
control systems, and from monthly management fees from each location utilizing
its control systems. The Company has entered into joint marketing agreements
with Minolta Corportation and Lexmark International, Inc., and has been
designated as authorized equipment reseller by Hewlett-Packard Company,
International Business Machines Corporation and Dell Computer Corporation. The
Company believes that the Company will benefit from the association of its
control systems with the well-known brands of business equipment manufactured
by these companies.

On September 24, 1997, the Company entered into a Joint Venture
Agreement with Mail Boxes Etc. ("MBE"), the leading franchisor of postal,
business, and communications retail service centers, with approximately 3,000
locations in North America. The joint venture shall exclusively sell and market
unattended, credit card activated business centers under the name MBE
Express(TM) to the hospitality industry, travel industry, convention centers,
colleges, universities, supermarkets, banks, military, convenience stores, and
mass merchandisers located in the United States. The gross profits from any
sales of the MBE Express(TM) are to be shared by the Company and MBE. In
addition, other revenues resulting from activities relating to the MBE
Express(TM), such as electronic commerce, licensing, marketing and
advertising, are to be split equally between MBE and the Company. MBE has
agreed not to sell, use, endorse, approve, or purchase any unattended, credit
card activated technology or terminals other than those offered by the Company
for use in connection with the equipment included in the MBE Express(TM). The
Company and MBE will agree from time to time on an advertising and marketing
budget which would cover anticipated expenses for trade shows, trade
advertising, direct mail, telemarketing, national account coverage,
merchandising, market research and lead generation. All such expenses would be
split equally between the Company and MBE. The Company is to act as the
merchant for all MBE Express(TM) business centers and will receive a monthly
service fee of $20.00 for each terminal. The initial term of the joint venture
is five years. If certain sales goals are not met by the joint venture, the
Company may terminate the exclusivity provisions of the agreement after the
second year.

In addition, MBE has ordered 195 TransAct(TM) control boxes from the
Company to be used by MBE franchisees for their in-store computer workstations
(computer and printer). The Company will act as the merchant in connection
with credit card sales and will receive a monthly service of $20.00 for each
terminal. The terminals are to be delivered to MBE by the Company in October
1997.

The Company has entered into corporate agreements which establish
itself as a preferred supplier of business center products to two of the top
hospitality companies in the world: Choice Hotels International (Clarion,
Quality, Comfort, Sleep Inns), and Promus Hotel Corporation (Embassy Suites,
Hampton, Doubletree). In addition, the Company's Business Express(TM) has been
approved and recommended as a solution by Marriott for its hotels.

For the years ended June 30, 1996 and 1997, the Company has spent
approximately $224,000 and $344,000, respectively for the development of its
proprietary technology. These amounts include the expense of outside
consultants and contractors as well as compensation paid to certain of the
Company's employees as reflected in Compensation in the accompanying financial
statements.

As of June 30, 1997, the Company had 130 Business Express(TM) control
systems, 44 Copy Express(TM) control systems, 34 Debit Express(TM) control
systems, 23 Fax/Printer Express(TM) control systems, and 54 Public PC(TM)
control systems located at various hotels and libraries throughout the United
States and Canada. Through June 30, 1997 the total gross revenues received by
the Company from these systems has been nominal.

The Company has been certified by PNC Merchant Services (a subsidiary
of First Data Corporation), a leading credit card processor in the United
States. PNC Merchant Services has extended to the Company a fixed rate
percentage

<PAGE>
processing charge in connection with the credit card transactions conducted
through the Company's control systems. This charge is payable by the Company
(not the locations) out of its share of the gross proceeds.

Industry Trends

With trends over the last twenty years indicating an ever increasing
customer reliance on the use of credit cards as a method of payment, the
Company believes the future of purchasing retail products and services is in
credit cards rather than cash. Consumers are constantly searching for ways to
purchase quality products and services in the most convenient manner. Examples
of this trend include the increasing use of unattended Automated Teller
Machines (ATM's) in banking transactions and the use of unattended,
self-service gasoline pumps with credit and debit card payment capabilities.
Consumers are becoming more accustomed to using credit cards in an ever
increasing number of retail and service settings. They increasingly use mail
order, telephone and the Internet to order goods and services and use credit
cards to pay for them. There are over a billion credit cards in the United
States. The Company's products reflect this overall trend and feature
automated credit card control systems. The Company has focused its efforts
towards the personal computer, copier, and debit card industries.

Credit Card Processing

Each of the Company's credit card activated control devices records
and transmits all transaction data to the Company, and the Company then
forwards such data to the credit card processor. After receiving transaction
information from the Company, the credit card processor electronically
transfers the funds (less the credit card processor's charge) to the Company.
The Company then forwards to the location its share of the funds.

The Company and each location have agreed on a percentage split of
the gross proceeds from the Company's device. The credit card processor's fees
and cost to forward the location's share of the gross proceeds are all paid
for out of the Company's portion of the gross revenue.

The Company currently retains a portion of the gross revenues from
each device. If the Company has sold the equipment to the location, the
portion retained is generally 8% of the gross revenues. In cases where the
Company continues to own the equipment, the portion retained can be as high as
90% of gross revenues. In addition the Company charges a fixed monthly
management fee which is generally $25 per control device.

Product Lines

The Business Express(TM)

The hotel/motel hospitality industry continues to expand, but has
become more competitive as chains increase their efforts to attract the most
dominant and profitable customer: the business traveler. Business travelers
and conference attendees account for the majority of hotel occupancy, stay
longer and spend more per visit than the leisure traveler. For these reasons,
hotels have become very sensitive and responsive to the needs and preferences
of the business traveler. The Business Express(TM) enables a hotel to address
these needs in a comprehensive and cost effective manner, while simultaneously
generating incremental revenue.

The Business Express(TM) utilizes the Company's existing applications
for computers, copiers, and facsimile equipment, and combines them into a
branded product. The Business Express(TM) bundles the Public PC(TM) unit, the
Copy Express(TM) unit, and the Fax Express(TM) unit, into a functional kiosk
type work station. All devices are credit card activated, therefore
eliminating the need for an attendant normally required to provide such
services.

The MBE Express(TM)

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The Copy Express(TM)

Traditionally, customers wishing to use a photocopying machine have
either used a prepaid, stored value card or cash. In most instances, this
places a burden on employees of the facility to provide a number of services
unrelated to their primary jobs, such as providing change and
collecting/counting/reloading coins. With the Copy Express(TM), the attendant
no longer needs to interact with the customers for these purposes.

The Copy Express(TM) provides a cashless method to pay for the use of
photocopying machines. The device is attached to the photocopying machine,
computer printer, or microfilm/fiche printer in a similar manner as attaching
a standard coin acceptor. The device can be attached to either existing or new
equipment. The control system enables customers to photocopy documents with
the use of a credit card.

The Debit Express(TM)

Many "closed" environments such as universities or hospitals utilize
a private card known as a debit or "stored value" card, to store cash value.
The system works by encouraging customers (by discounting the price of the
products or services) to transfer lump sum cash values onto a magnetic stripe
or imbedded chip card that can be used to activate equipment within the closed
environment. As the cardholder uses the card to purchase products or services
the cash value is deducted from the total value on the card. Typically, the
cards are purchased from attendants or from machines which accept coins or
dollar bills.

The Company's Debit Express(TM) enables customers to purchase or
revalue their debit cards with the swipe of a credit card and eliminates the
need for cash or for an attendant to handle cash or provide change. The Debit
Express(TM) eliminates any reliance on cash by allowing customers to use a
valid credit card to purchase or place additional value on a debit card.

The Public PC(TM)

The Company believes that the growing dependence on personal
computers has created an environment where there is a need for access to
personal computers by the general public on an " as needed" basis. To meet
this need, the Company has developed the Public PC(TM). Through June 30, 1997,
the Company has installed 54 units in libraries and retail locations. The
device enables the public to utilize personal computers and/or the services
they offer on an "as-needed" basis. The system is designed so that the
computer cannot be used until a valid credit card is swiped through the
control system. Once the user is authorized to proceed, the system has the
ability to charge for time in use, printed output, and any modem activity.

The Company believes that the personal computer is becoming an
integral part of how people access and utilize the information available to
them. The Company believes that the majority of libraries do not currently
offer general use personal computers to their patrons. The Company will pursue
print shops, cyber cafes, hotels, airports, convention and conference centers,
and various retail outlets as potential customers.

Marketing

The Company is currently marketing its products through its full-time
sales staff consisting of four persons to hotel and retail locations, either
directly or through facility management companies servicing these locations.

On September 24, 1997, the Company entered into a Joint Venture
Agreement with Mail Boxes Etc. ("MBE"), the leading franchisor of postal,
business, and communications retail service centers with approximately 3,000
stores in North America. The joint venture shall exclusively sell and market
unattended, credit card activated business centers under the name MBE
Express(TM) to the hospitality industry, travel industry, convention centers,
colleges, universities, supermarkets, banks, military, convenience stores, and
mass merchandisers located in the United States. MBE has agreed not to sell,
use, endorse, approve, or purchase any unattended, credit card activated
technology or terminals other than those offered by the Company for use in
connection with the equipment included in the MBE Express(TM). The Company and
MBE will agree from time to time on an advertising and marketing budget which
would cover anticipated expenses for trade shows, trade advertising, direct
mail, telemarketing, national account coverage, merchandising, market research
and lead generation, All such marketing and sales expenses would be split
equally between the Company and MBE. The initial term of the joint venture is
five years. If certain sales goals are not met by the joint venture, the
Company may terminate the exclusivity provisions of the agreement after the
second year.

The MBE Express(TM) bundles together the same components as the
Business Express(TM): Public PC(TM), Copy Express(TM), and Fax Express(TM),
but under the MBE brand name. In addition, the MBE Express(TM) would include a
dial-through service to a nearby MBE store making available the products and
services of the store.
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The Company has entered into corporate agreements which establish
itself as a preferred supplier of business center products to two of the top
hospitality companies in the world: Choice Hotels International (Clarion,
Quality, Comfort, Sleep Inns), and Promus Hotel Corporation (Embassy Suites,
Hampton, Doubletree). In addition, the Company's Business Express(TM) has been
approved and recommended as a solution by Marriott for its hotels.

In May 1997, the Company entered into an agreement with a newly
formed Canadian company pursuant to which it would sell to such purchaser 10
Business Express(TM) business centers. The purchaser has indicated to the
Company that it intends to install the units within existing and propsed
Wal-Mart stores in Canada. The total purchase price for the 10 units would be
$1,118,261 (payable in Canadian dollars). The agreement states that the
Business Express(TM) units shall be installed at the purchaser's discretion.
Through June 30, 1997, one unit has been installed. No full Business Express
(TM) units have been installed since, and none are currently scheduled.

In March 1997, the Company entered into a co-marketing agreement with
Minolta Corporation ("Minolta") pursuant to which the Company and Minolta

<PAGE>

would work together to market and sell the Business Express (TM) featuring the
Minolta copier to the hospitality industry. The agreement is on a nonexclusive
basis and can be terminated by either party on thirty days notice.

In March 1997, the Company entered into a co-marketing agreement with
Lexmark International, Inc. ("Lexmark") pursuant to which the Company and
Lexmark would work together to market and sell the the Business Express (TM)
featuring the Lexmark printer to the hospitality industry. The agreement is on
a nonexclusive basis and can be terminated by either party on thirty days
notice.

In December 1996, the Company entered into an agreement with
International Business Machines Corporation ("IBM") pursuant to which it was
appointed an IBM Business Partner-Personal Computer Reseller. This agreement
will allow the Company to purchase IBM personal computers at a wholesale price
for resale to its customers as a configured Public PC (TM) that is credit card
activated. The agreement can be terminated by either party on thirty days
notice.

In December 1996, the Company was designated as an authorized
"Hewlett-Packard Value-Added Reseller," pursuant to which the Company may
purchase Hewlett-Packard facsimile machines at a wholesale price for resale to
its customers. The agreement can be terminated by either party upon thirty
days notice.

During February 1996, the Company entered into an agreement with Dell
Marketing, L.P., a subsidiary of Dell Computer Corporation ("Dell"), pursuant
to which the Company was appointed as a Dell authorized
"Remarketer/Integrator". This agreement allows the Company to purchase Dell
personal computers at a wholesale price for resale to its customers. The
agreement can be terminated by either party upon thirty days notice.

The Company believes these agreements are an important component of
the Company's effort to market the Business Express(TM) or other products to
the hospitality industry because they provide instant brand name recognition.
In addition, each of these companies offers maintenance and service agreements
relating to the equipment directly to the location, thus removing the need for
the Company to provide maintenance services or warranties to any of the
equipment (other than the control systems). Numerous hospitality conferences
have been attended jointly with one or several of the above companies. Reduced
pricing has also been secured as a result of these agreements.

Procurement

The Company's control system devices consist of a card reader,
printer, amplifier, circuit board and micro chip in a specially designed
housing. The devices are currently manufactured to the Company's design
specification by an independent contractor, LMC - Autotech Technologies, LP.
The Company has recently contracted for the purchase of 500 control devices,
for a total purchase price of $242,325. The Company anticipates obtaining its
complete computer systems (other than the Public PC(TM) control system) from
IBM.

Competition

The Company believes that there are currently no other businesses
offering an unattended, credit card activated control systems for use in
connection with copiers, printers or general use personal computers. There are
other companies presently offering unattended, credit card activated control
devices in connection with facsimile machines, Internet and e-mail access, and
debitcard purchase/revalue stations. In addition, the businesses which have
developed unattended, credit card activated control systems currently in use
in connection with gasoline dispensing, public telephones, prepaid telephone
cards, ticket dispensing machines, vending machines, or facsimile machines,
are capable of developing products or utilizing their existing products in
direct competition with the Company. Many of these businesses are well
established, have substantially greater resources than the Company and have
established reputations for success in the development, sale and service of
high quality products. The Company is aware of one business which has
developed an unattended, credit card activated control system to be used in

<PAGE>

connection with vending machines. Any such increased competition may result in
reduced sales and/or lower percentages of gross revenues being retained by the
Company in connection with its licensing arrangements, or otherwise may reduce
potential profits or result in a loss of some or all of its customer base. The
Company is also aware of several businesses which make available use of the
Internet and use of personal computers to hotel guests in their hotel rooms on
an "as-needed" basis. Although these services are not credit card activated,
such services would compete with the Company"s Business ExpressTM ,and the
locations may not order the Business Express(TM), or if ordered, the hotel
guest may not use it. Recently, the Company became aware that one potential
competitor has developed a credit card activated personal computer kiosk.

Patents, Trademarks and Proprietary Information

The Company has applied for federal registration of its trademarks
Business Express(TM), Printer Express(TM), Copy Express(TM), Debit
Express(TM), C3X(TM), Public PC(TM) and TransAct(TM).

Much of the technology developed or to be developed by the Company is
subject to trade secret protection. To reduce the risk of loss of trade secret
protection through disclosure, the Company has entered into confidentiality
agreements with its key employees. There can be no assurance that the Company
will be successful in maintaining such trade secret protection or that others
will not capitalize on certain of the Company's technology.

The Company has applied for ten United States patents and has applied
for foreign patents in connection therewith. To date, two of these patents
have been approved: Patent Number 5,619,024 entitled "Credit card and bank
issued debit card operated system and method for controlling and monitoring
access of computer and copy equipment," and Patent Number 5,637,845 entitled
"Credit and bank issued debit card operated system and method for controlling
a prepaid card encoding/dispensing machine." As of the date hereof, the
remaining eight applications are pending and have not been granted.

Employees

The Company has seventeen full time employees.

Item 2. Properties

The Company leases its principal executive offices, consisting of
approximately 7,000 square feet, at 200 Plant Avenue, Wayne, Pennsylvania for
a monthly rental of $5,000 plus utilities and operating expenses. The lease
expires on October 15, 1999. A former property located at 1265 Drummers Lane,
Wayne, PA, was vacated in October, 1996. The lease payment of approximately
$5,000 per month ceased as of August 31, 1997.

Item 3. Legal Proceedings.

The Company is not a party to any material legal proceedings.

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

(a) The Annual Meeting of Shareholders was held on March 20, 1997.
(b) Election of Directors

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Each of the following individuals was elected as a
director at the Annual Meeting:

George R. Jensen, Jr.
Keith L. Sterling
Stephen P. Herbert
Peter G. Kapourelos
William W. Sellers
Henry B. duPont Smith
William L. Van Alen, Jr.

(c) In addition to the election of directors, the following other
matters were also voted on and approved at the Annual Meeting:

(i) A proposal to ratify the appointment of Ernst &
Young LLP as independent public accountants for the
Company for its 1997 fiscal year.

(ii) A proposal to act upon an amendment to the
Company's Articles of Incorporation increasing the
number of authorized shares of Common Stock from
45,000,000 to 55,000,000.

(iii) A proposal to act upon an amendment to the
Company's Articles of Incorporation increasing the
number of designated shares of Series A Preferred
Stock from 1,000,000 to 1,200,000.

(iv) A proposal to act upon an amendment to the
Company's Articles of Incorporation which would,
during the period from March 24, 1997 through
December 31, 1997, increase from 10 to 12 the
number of shares of Common Stock into which each
share of Series A Preferred Stock may be converted.

(v) A proposal to act upon an amendment to the
Company's Articles of Incorporation which would,
during the period from March 24, 1997 through
December 31,1997, decrease from $1.00 to $.83 the
price at which accrued but unpaid dividends on
Series A Preferred Stock may be exchanged for
shares of Common Stock.

<PAGE>

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.

The Common Stock and Preferred Stock are currently traded on the OTC
Electronic Bulletin Board under the symbols USTT and USTTP, respectively. Such
trading began on March 8, 1995.

The high and low bid prices on the OTC Electronic Bulletin Board for
the Common Stock were as follows:

Fiscal High Low
- ------ -------------------
1995

Third Quarter (March 8, 1995 to March 31, 1995) $ .75 $.50
Fourth Quarter (through June 30, 1995) $1.25 $.25

1996

First Quarter (through September 30, 1995) $ .55 $.25
Second Quarter (through December 31, 1995) $1.00 $.40
Third Quarter (through March 31, 1996) $1.40 $.37
Fourth Quarter (through June 30, 1996) $1.68 $.50

1997

First Quarter (through September 30, 1996) $ .63 $.38
Second Quarter (through December 31, 1996) $ .57 $.29
Third Quarter (through March 31, 1997) $ .43 $.28
Fourth Quarter (through June 30, 1997) $ .50 $.19

Such quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.

At June 30, 1997, there are 3,971,000 shares of Common Stock issuable
upon exercise of outstanding options, and 157,300 shares of Common Stock
issuable upon exercise of outstanding purchase rights. All of these shares of
Common Stock, if issued on the date hereof, would be "restricted securities"
as defined under Rule 144 under the Act. Of the 3,971,000 options, 100,000 are
exercisable at $.50 per share, 1,236,000 are exercisable at $.45 per share,
2,565,000 are exercisable at $.25 per share, and 70,000 are exercisable at
$.05 per share. In connection with the options exercisable at $.25, $.45 and
$.50 per share, as well as outstanding Purchase Rights to acquire up to
157,300 shares of Common Stock at $1.00 per share, the Company has agreed, at
its cost and expense, to file a registration statement under the Act and
applicable state securities laws covering all of the Common Stock underlying
the options before December 31, 1997. All of the aforesaid options have been
issued by the Company to employees, Directors, officers and consultants.

As of June 30, 1997, there were 1,414,000 shares of Common Stock
issuable upon exercise of the outstanding 1995 Warrants, which when and if
issued would be freely tradeable under the Act. As of June 30, 1997, there are
1,998,000 shares of Common Stock issuable upon exercise of the outstanding
1996 warrants, which when and if issued would be freely tradeable under the
Act. As of June 30, 1997, there were 374,000 shares of Common Stock issuable
upon exercise of the outstanding 1996-B Warrants, which when and if issued
would be freely tradeable under the Act. As of the date hereof, there are
1,600,000 shares of Common Stock issuable upon exercise of the outstanding
1997 warrants, which when and if issued would be freely tradeable under the
Act. As of June 30, 1997, there were 2,000,000 shares of Common Stock issuable
upon the exercise of outstanding warrants issued to affiliates and/or
consultants to GEMA in connection with the sale of Convertible Securities and
an undetermined amount of Common Stock issuable upon conversion of such
Convertible Securities.

<PAGE>

On June 30, 1997 there were 1,012 record holders of the Common Stock
and 933 record holders of the Preferred Stock.

The holders of the Common Stock are entitled to receive such
dividends as the Board of Directors of the Company may from time to time
declare out of funds legally available for payment of dividends. Through the
date hereof, no cash dividends have been declared on the Company's securities.
No dividend may be paid on the Common Stock until all accumulated and unpaid
dividends on the Preferred Stock have been paid. As of June 30, 1997, such
accumulated unpaid dividends amount to $2,837,086 and an additional $645,904
of dividends accrued on August 1, 1997.

Subsequent to June 30, 1997, certain holders of the Company's
Preferred Stock converted 216,910 shares into 2,602,920 shares of Common
Stock. Certain of theses shareholders also converted cumulative preferred
dividends of $518,026 into 624,128 shares of Common Stock.

During the fiscal quarter ended June 30, 1997, the Company sold 40
units (at $10,000 each) pursuant to Rule 506 of Regulation D under the Act
which represented 80,000 shares of Preferred Stock and 1,600,000 1997
Warrants. In June 1997, the holder of options to acquire 150,000 shares of
Common Stock at $.05 per share exercised such options. The shares of Common
Stock were issued pursuant to Rule 506 of Regulation D under the Act.

Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations.

Introduction

Since January 1992, the Company, a development stage corporation, has
been engaged largely in research and development activities focused on
designing, developing, and marketing its credit card activated control
systems. From inception through June, 30, 1997, the Company has had nominal
operating revenues (exclusive of interest) of $671,430 and has generated funds
primarily through the sale of its securities. Through June 30, 1997 the
Company has received, net of expenses of such sales, the amount of $5,487,636
in connection with private placements, $1,681,908 from the exercise of Common
Stock purchase warrants, and $2,345,104 in connection with its initial public
offering. The Company has incurred operating losses since its inception
through June 30, 1997 of $9,363,671 and such losses are expected to continue
through June 30, 1998.

The Company's independent auditors have included an explanatory
paragraph in their report on the Company's June 30, 1997 financial statements
discussing issues which raise substantial doubt about the Company's ability to
continue as a going concern. The Company believes that the funds available at
June 30, 1997 combined with the revenues to be generated during fiscal year
1998, the potential capital to be raised from the exercise of Common Stock
purchase warrants, and the ability to defer anticipated expenditures, if
required, will provide for the Company to continue a a going concern. There
can be no assurance, however, that any significant revenues will be generated
during the 1998 fiscal year or that sufficient capital can be raised by the
Company. In such event, the Company may cease to be a going concern and
investors in the Common Stock may lose all of their investment.

Results of Operations

Fiscal year ended June 30, 1997:

For the fiscal year ended June 30, 1997, the Company had a net loss
of $3,120,712. Overall this loss reflects the continuing development stage
activities of the Company. The Company's preferred stock provides for an
annual cumulative dividend of $1.50 per share payable to the shareholders of
record on February 1 and August 1 each year as declared by the Company's Board
of Directors. The $4,364,007 loss applicable to common shares or $.21 loss per
common share was derived by adding the $3,120,712 net loss and the $1,243,295
of cumulative preferred dividends earned for the year ending June 30, 1997,
and dividing by the weighted average shares outstanding, of 20,984,381.

Revenues for the period were $607,772, which increased $554,793 from
last year, primarily reflecting the sales of the Business Express(TM) product
line.

<PAGE>

Operating expenses for the fiscal year ended June 30,1997 were
$3,742,961, representing a $1,212,166 or 47.9% increase over the prior year.
The primary contributors to this increase were Cost of Sales, General and
Administrative expense and Compensation, as detailed below.

Cost of sales increased by $525,090 from nothing in the prior year,
reflecting the first year of equipment sales. (The implied gross profit of
$82,682 represents a margin of 13.6%). General and administrative expense of
$2,040,163 increased sharply by $528,882 or 35.0% which reflects both a
general increase in spending to support the expansion of operations as well as
several non-operational factors. Specifically the major contributors to this
increase were: Travel and lodging increased by a total of $66,393, which
reflected significant marketing related travel as well as an increase in
travel for the increased numbers of installations. Marketing promotions,
mailings and trade show expenses increased $110,147. Advertising increased by
$26,000, reflecting the need to increase product awareness in the marketplace.
Professional and consultant fees increased by $86,770, reflecting increased
legal, public relations and patent activity. Product development expense
increased $119,852 primarily due to developmental costs for new customers. The
balance of the increase includes temporary services, telephone, office
expense, and postage.

Compensation expense was $1,080,458, an increase of $177,060 or 19.6%
over the previous year. This increase was primarily due to headcount increases
in the sales function and to a lesser extent, operations.The cost of employee
benefits also rose by $34,468.

Depreciation expense of $97,250 increased by $25,234, which is
attributable to the increased depreciable asset base.

Fiscal year ended June 30, 1996:

For the fiscal year ended June 30, 1996, the Company had a net loss
of $2,451,697. Overall this loss reflects the continuing development stage
activities of the Company. The Company's preferred stock provides for an
annual cumulative dividend of $1.50 per share payable to the shareholders of
record on February 1 and August 1 each year as declared by the Company's Board
of Directors. The $3,405,997 loss applicable to common shares or $.23 loss per
common share was derived by adding the $2,451,697 net loss and the $954,300 of
cumulative preferred dividends for the year ending June 30, 1996 and dividing
by the weighted average shares outstanding.

Revenues for the period remained at a nominal level reflecting the
disappointing performance of the Credit Card Copy Express(TM) product line.
Expenses for the fiscal year ended June 30,1996 were $2,536,544, representing
a $868,546 or 52% increase over the prior year. The primary contributors to
this increase were General and Administrative expense and Compensation.

At June 30, 1996, cash was $1,773,356 compared to $376,191 on June
30, 1995. Such increase reflects the net proceeds received by the Company in
connection with a private placement offering that closed in June 1996 which
raised net proceeds of $1,249,264. In addition, during fiscal year 1996,
3,686,000 1995 Warrants were exercised for aggregate proceeds to the Company
of $1,105,800. At June 30, 1996, inventory was $426,391 compared to zero on
June 30, 1995. Such inventory was purchased by the Company in connection with
the marketing of its Credit Card Computer Express (TM) product (now known as
the Public PC(TM). The increase of accounts payable and accrued expenses
reflects the increased operating expenses incurred by the Company.

General and administrative expense of $1,449,889 increased sharply by
$751,289 or 10.7% which reflects both a general increase in spending to
support the expansion of operations as well as several non-operational
factors. Specifically the major contributors to this increase were (a)
$187,122 increase in travel and lodging which was concentrated in the
operations area and reflects the installation of the Company's control
devices; (b) $103,355 increase in professional fees due to financial
consultant and legal fees, including increased patent activity; (c) $93,888
increase in product development expense primarily due to the programming and
configuration of the Company's newly completed C3X(TM); (d) $313,548 increase
in consulting expenses of which $247,205 is a non-cash transaction
attributable to the issuance of Common Stock in exchange for services
rendered; and the

<PAGE>

balance of the increase which includes public relations and technical
services. Telephone, office expense, and postage increased moderately.

Compensation expense was $903,398, an increase of $215,013 or 31%
over the previous year. This increase was concentrated in the marketing
function and corporate staffing, and also including $27,343 of expense to
initiate an employee medical benefits plan.

Depreciation expense of $72,016 increased by $56,548, which is
attributable to the increased depreciable asset base. Advertising remained
consistent with the previous year.

A provision for losses on equipment was charged to operations in the
amount of $44,100 which represents the final charge for the discontinuance of
the Golfers Oasis(TM) product line.

Interest expense returned to normal levels with the elimination of
the public offering interest cost reflected in the prior year.

Plan of Operations

As of June 30, 1997, the Company had a total of 285 credit card
activated control systems installed in the field as follows: Business
Express(TM) 130, Copy Express(TM) 44, Debit Express(TM) 34, Public PC(TM) 54,
Fax/Printer Express(TM) 23. Through June 30, 1997 the total license fee income
received by the Company from these systems was $117,158.

During the past year the Company has continued its new direction in
product development. It has focused on products capable of generating new
incremental revenue for equipment operators (ie, Business Express) as opposed
to in the past simply providing a better method of payment (ie. Copy Express).
The new direction is also reflected in the move toward the sale of the
Company's proprietary equipment to operators rather than the revenue sharing
arrangements employed to date. The Company still retains all rights to
software and proprietary technology which it licenses to location operators
for their exclusive use. However this shift in market approach reduces the
Company's dependency on equipment revenue by providing a built in gross profit
on the sale of the equipment, and simultaneously reduces the Company's capital
asset requirements.

Plans for the coming fiscal year include progressing from the
developmental stage to an operating mode. The Company also intends to continue
to focus on the sales and/or leasing of its Business Express(TM) business
centers.

Liquidity and Capital Resources

During the fiscal year ended June 30, 1997, the Company completed a
number of equity transactions. Net proceeds of $394,688 were realized from the
two Private Placement Offerings of Preferred Stock and $1,141,126 was realized
from Common Stock transactions, principally the exercise of Common Stock
purchase warrants. As of June 30, 1997 total working capital was $671,914,
including cash on hand of $630,266.

During the fiscal year ended June 30, 1997, net cash of $2,651,341
was used by operating activities, primarily compensation and general and
administrative expenses. Consulting expense reflected $277,198 of a non-cash
transaction attributable to the issuance of common stock in exchange for
services rendered. Net cash of $17,855 was used by investing activities
principally for the purchase of furniture. The net cash provided by financing
activities of $1,526,107 was principally due to the net proceeds generated
from the issuance of securities described in the prior paragraph.

<PAGE>

continue as a going concern. The Company believes that the funds available at
June 30, 1997 combined with the revenues and earnings to be generated during
fiscal year 1998, the potential capital to be raised from the exercise of the
Common Stock purchase warrants, and the ability to defer anticipated
expenditures, if required, will provide for the Company to continue as a going
concern through at least June 30, 1998. There can be no assurance, however,
that any significant revenues and earnings will be generated during the 1998
fiscal year or that sufficient capital can be raised by the Company. In such
event, the Company may cease to be a going concern or may have to reduce its
operations or operating procedures. In such event, investors in the Common
Stock may lose all of their investment.

The Company anticipates that for the year ended June 30, 1998 there
will be a negative cash flow from operations in excess of $1 million. The
Company anticipates that the shortfall in cash flow will be supported by
additional equity infusion from the exercise of the Common Stock purchase
warrants, and, if needed, the ability to defer planned expenditures.

Commitment

During October 1996, the Company entered into a lease for
approximately 7,000 square feet in Wayne, Pennsylvania for a monthly rental of
$5,000 plus utilities and operating expenses. The lease expires on October 15,
1999. A former property located at 1265 Drummers Lane, Wayne, PA, was vacated
in October, 1996. The lease payment of approximately $5,000 per month ceased
as of August 31, 1997.

During August 1997, the Company entered into a commitment to acquire
500 control system equipment for $242,325. These amounts are expected to be
paid from the existing cash resources plus funds generated by Common Stock
warrant exercises.

<PAGE>

Item 7. Financial Statements

Page
----
Report of Independent Auditors F-1

Balance Sheets F-2

Statements of Operations F-3

Statement of Shareholders' Equity F-4

Statements of Cash Flows F-9

Notes to Financial Statements F-11

<PAGE>

Report of Independent Auditors

To the Board of Directors and Shareholders
USA Technologies, Inc.

We have audited the accompanying balance sheets of USA Technologies, Inc. (A
Development Stage Corporation) as of June 30, 1997 and 1996, and the related
statements of operations, shareholders' equity, and cash flows for each of the
two years in the period ended June 30, 1997 and the period January 16, 1992
(inception) through June 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of USA Technologies, Inc. at
June 30, 1997 and 1996, and the results of its operations and its cash flows
for each of the two years in the period ended June 30, 1997 and for the period
January 16, 1992 (inception) through June 30, 1997, in conformity with
generally accepted accounting principles.

The accompanying financial statements have been prepared assuming USA
Technologies, Inc. will continue as a going concern. As discussed in Note 2 to
the financial statements, the Company's recurring losses from operations from
its inception and its accumulated deficit through June 30, 1997, raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2.
The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that might result from the
outcome of this uncertainty.

/s/ Ernst & Young LLP

Philadelphia, Pennsylvania
August 14, 1997

F-1

<PAGE>

USA Technologies, Inc.
(A Development Stage Corporation)

Balance Sheets

<TABLE>
<CAPTION>
June 30
1997 1996
------------ ---------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 630,266 $ 1,773,356
Accounts receivable less allowance for
uncollectible accounts of $19,345 127,318 --
Inventory 378,318 426,391
Stock subscriptions receivable 60,000 106,350
Prepaid expenses and deposits 15,670 3,614
------------ ------------
Total current assets 1,211,572 2,309,711

Property and equipment, net 178,457 235,214
Other assets 20,250 42,446
------------ ------------
Total assets $ 1,410,279 $ 2,587,371
============ ============

Liabilities and shareholders' equity Current liabilities:
Accounts payable $ 474,646 $ 301,849
Accrued expenses 46,742 41,559
Current obligations under capital leases 18,270 9,048
------------ ------------
Total current liabilities 539,658 352,456
Obligations under capital leases, less current portion 24,480 21,209
Accrued rent -- 13,516
------------ ------------
Total liabilities 564,138 387,181

Shareholders' equity:
Preferred Stock, no par value:
Authorized shares - 1,200,000
Series A Convertible issued and outstanding shares - 861,205 and 796,025
at June 30, 1997 and 1996, respectively (liquidation preference of $
11,449,136
at June 30, 1997) 7,024,811 6,776,132
Common Stock, no par value:
Authorized shares - 55,000,000
Issued and outstanding shares - 29,969,934 and
23,023,976 at June 30, 1997 and 1996, respectively 4,355,334 2,720,201
Deficit accumulated during the development stage (10,534,004) (7,296,143)
------------ ------------
Total shareholders' equity 846,141 2,200,190
------------ ------------
Total liabilities and shareholders' equity $ 1,410,279 $ 2,587,371
============ ============
</TABLE>

See accompanying notes.

F-2

<PAGE>

USA Technologies, Inc.
(A Development Stage Corporation)

Statements of Operations

January 16, 1992 (date
of inception) through
Year ended June 30 June 30,
1997 1996 1997
--------------------------------------------------------------------

<S> <C> <C> <C>
Revenues:
Equipment sales $ 490,614 $ -- $ 490,614
License fees 117,158 52,979 180,816
------------ ------------ ------------
Total revenues 607,772 52,979 671,430

Operating expenses:
General and administrative 2,040,163 1,511,281 5,258,688
Compensation 1,080,458 903,398 3,546,234
Cost of sales 525,090 -- 525,090
Depreciation and amortization 97,250 72,016 195,644
Provision for losses on equipment -- 44,100 400,715
Costs incurred in connection with
abandoned private placement -- -- 50,000
------------ ------------ ------------
Total operating expenses 3,742,961 2,530,795 9,976,371
------------ ------------ ------------
(3,135,189) (2,477,816) (9,304,941)

Other income (expense):
Interest income 26,676 31,868 80,080
Interest expense (12,199) (5,749) (138,810)
------------ ------------ ------------
Total other income (expense) 14,477 26,119 (58,730)
------------ ------------ ------------
Net loss (3,120,712) (2,451,697) $ (9,363,671)
============
Cumulative preferred dividends (1,243,295) (954,300)
------------ ------------
Loss applicable to common shares $ (4,364,007) $ (3,405,997)
============ ============

Loss per common share $ (.21) $ (.23)
============ ============

Weighted average number of common shares
outstanding 20,984,381 14,908,904
============ ============
</TABLE>

See accompanying notes

F-3

<PAGE>

USA Technologies, Inc.
(A Development Stage Corporation)

Statements of Shareholders' Equity
<TABLE>
<CAPTION>

Deficit
Series A Accumulated
Convertible During the
Preferred Common Development
Stock Stock Stage Total
----------------------------------------------------------------------

<S> <C> <C> <C> <C>
Balance, January 16, 1992, inception $ -- $ -- $ -- $ --
April 1992-10,500,000 shares of Common Stock at $.001
per share -- 10,500 -- 10,500
May 1992-10,000 shares of Convertible Preferred Stock
at $9.98 per share 99,800 -- -- 99,800
June 1992-100,000 shares of Common Stock at $.001
per share -- 100 -- 100
Net loss -- -- (1,848) (1,848)
----------- ----------- ----------- -----------
Balance, June 30, 1992 99,800 10,600 (1,848) 108,552
September 1992-15,000 shares of Convertible Preferred
Stock at $9.97 per share 149,550 -- -- 149,550
September 1992-450,000 shares of Common Stock at
at $.001 per share -- 450 -- 450
April 1993-400,000 shares of Common Stock at $.001
per share -- 400 -- 400
June 1993-695,000 shares of Common Stock at $.001
per share -- 695 -- 695
June 1993-142.2 units (142,200 shares, net of offering
costs, of Convertible Preferred Stock at $9.97 per
share and 4,266,000 shares of Common Stock at $.001
per share) 1,266,439 3,815 -- 1,270,254
Net loss -- -- (899,547) (899,547)
----------- ----------- ----------- -----------
Balance, June 30, 1993 1,515,789 15,960 (901,395) 630,354
September 1993-110,000 shares of Common Stock at
$.001 per share -- 110 -- 110
February 1994-79,522 units (79,522 shares, net of
offering costs, of Convertible Preferred Stock
at $9.99 per share and 556,654 shares of Common
Stock at $.001 per share) 624,824 438 -- 625,262
March 1994-34,960 units (34,960 shares, net of
offering costs, of Convertible Preferred Stock at $9.99
per share and 244,720 shares of Common Stock at $.001
per share) 288,591 202 -- 288,793
June 1994-15,940 units (15,940 shares, net of offering
costs, of Convertible Stock at $9.99 per share
and 111,580 shares of Common Stock at $.001 per share 75,196 52 -- 75,248
Net loss -- -- (1,244,117) (1,244,117)
----------- ----------- ----------- -----------
Balance, June 30, 1994 2,504,400 16,762 (2,145,512) 375,650
</TABLE>

- continued -

F-4

<PAGE>

USA Technologies, Inc.
(A Development Stage Corporation)

Statements of Shareholders' Equity (continued)
<TABLE>
<CAPTION>

Deficit
Series A Accumulated
Convertible During the
Preferred Common Development
Stock Stock Stage Total
---------------------------------------------------------------
<S> <C> <C> <C> <C>
July 1994-5,092 units (5,092 shares, net of offering
costs, of Convertible Preferred Stock at $9.99
per share and 35,644 of Common Stock at $.001 per share) $ 37,248 $ 26 $ -- $ 37,274
August 1994-9,132 units (9,132 shares, net of
offering costs, of Convertible Preferred Stock at $9.99
per share and 63,924 of Common Stock at $.001 per share) 66,801 47 -- 66,848
September 1994-4,935 units (4,935 shares, net of
offering costs, of Convertible Preferred Stock at $9.99
per share and 34,545 of Common Stock at $.001 per share) 36,098 25 -- 36,123
October 1994-12,205 units (12,205 shares, net of at
$9.99 per share offering costs, of Convertible
Preferred Stock and 85,435 of Common Stock at $.001 per
share) 88,895 62 -- 88,957
October 1994-cancellation of 900,000 shares of
Common Stock -- -- -- --
November 1994-11,478 units (11,478 shares net of
offering costs, of Convertible Preferred Stock
at $9.99 per share and 80,346 of Common Stock at
$.001 per share) 83,600 59 -- 83,659
December 1994-16,430 units (16,430 shares, net of
offering costs, of Convertible Preferred Stock
at $9.99 per share and 115,010 of Common Stock at $.001
per share) 119,668 84 -- 119,752
January 1995-12,225 units (12,225 shares, net of
offering costs, of Convertible Preferred Stock at $9.99
per share and 85,575 of Common Stock at $.001 per share) 102,244 71 -- 102,315
February 1995-98,081 units (98,081 shares, net of
offering costs, of Convertible Preferred Stock at $9.99
per share and 686,567 of Common Stock at $.001 per share) 820,298 575 -- 820,873
March 1995-cancellation of 1,100,000 shares of
Common Stock -- -- -- --
April 1995 - June 1995-issuance of 150,000 shares of
Common Stock in exchange for consulting services -- 99,750 -- 99,750
June 1995-24.9 units (24,900 shares, net of offering
costs, of Convertible Preferred Stock at $10 per share) 206,382 -- -- 206,382
June 1995-issuance of options to purchase 10,000
shares of Common Stock at $.25 per share in exchange for
services -- 2,600 -- 2,600
June 1995-conversion of 1,000 shares of Convertible
Preferred Stock to 10,000 shares of Common Stocks (8,262) 8,262 -- --
Net loss -- -- (1,645,750) (1,645,750)
Common stock dividend to be distributed - 3 shares of Common Stock for each
outstanding share of Convertible Preferred Stock on August 1, 1995
(1,473,300 shares as of June 30, 1995) -- 780,849 (780,849) --
--------- ------- ---------- -------
Balance, June 30, 1995 4,057,372 909,172 (4,572,111) 394,433
</TABLE>

- continued -

F-5

<PAGE>

USA Technologies, Inc.
(A Development Stage Corporation)

Statements of Shareholders' Equity (continued)
<TABLE>
<CAPTION>

Deficit
Series A Accumulated
Convertible During the
Preferred Common Development
Stock Stock Stage Total
-------------------------------------------------------------------

<S> <C> <C> <C> <C>
July 1995 - 145.1 units (145,100 shares, net of
offering costs, of Convertible Preferred Stock $ 1,441,185 $ -- $ -- $ 1,441,185
at $10 per share)
July1995 - September 1995 - issuance of 100,000 shares of Common Stock in
exchange for
consulting services -- 50,000 -- 50,000
July 1995 - Common Stock options exercised - 180,000
shares at $.05 per share -- 9,000 -- 9,000
August 1995 - Common stock dividend distributed -3
shares of Common Stock for each outstanding
share of Preferred Stock on August 1, 1995
(435,300 shares) -- 230,709 (230,709) --
October 1995 - Common Stock options exercised-100,000
shares at $.05 per share -- 5,000 -- 5,000
January 1996 - issuance of 30,000 shares of Common
Stock in exchange for consulting services -- 14,205 -- 14,205
February 1996 - issuance of 50,000 shares of
Convertible Preferred Stock at $4.00 per share 200,000 -- -- 200,000
February 1996 - Common Stock warrants exercised-
145,500 at $.40 per warrant -- 58,200 -- 58,200
March 1996 - Common Stock warrants exercised-
125,500 at $.40 per warrant -- 50,200 -- 50,200
March 1996 - issuance of 300,000 shares of Common
Stock in exchange for consulting services -- 183,000 -- 183,000
March 1996 - cancellation of 305,000 shares of
Common Stock -- -- -- --
April 1996 - Common Stock warrants exercised -
264,000 at $.30 per warrant -- 79,200 -- 79,200
May 1996 - Common Stock warrants exercised -
381,000 at $.30 per warrant -- 114,300 -- 114,300
Refund to warrant holders due to the reduction of
the 1995 Common Stock warrant exercise price
from $.40 per warrant to $.30 per warrant -- (27,100) -- (27,100)
May 1996 - conversion of 20,175 shares of
Convertible Preferred Stock to 201,750 shares of
Common Stock (171,689) 171,689 -- --
May 1996 - conversion of $41,626 of cumulative
preferred dividends into 41,626 shares of Common
Stock at $1.00 per share -- 41,626 (41,626) --
June 1996 - Common Stock warrants exercised -
2,770,000 at $.30 per warrant -- 831,000 -- 831,000
June 1996 - 130 units (130,000 shares, net of
offering costs, of Convertible Preferred Stock
at $10 per share) 1,249,264 -- -- 1,249,264
Net loss -- -- (2,451,697) (2,451,697)
----------- ----------- ----------- -----------
Balance, June 30, 1996 6,776,132 2,720,201 (7,296,143) 2,200,190

</TABLE>
- continued -

F-6

<PAGE>

USA Technologies, Inc.
(A Development Stage Corporation)

Statements of Shareholders' Equity (continued)

<TABLE>
<CAPTION>
Deficit
Series A Accumulated
Convertible During the
Preferred Common Development
Stock Stock Stage Total
----------------------------------------------------------------

<S> <C> <C> <C> <C>
October 1996 - issuance of 250,000 shares of Common
Stock in exchange for consulting services $ -- $117,500 $ -- $117,500
October 1996 - issuance of 15,000 shares of Common
Stock in exchange for consulting services -- 8,000 -- 8,000
November 1996 - conversion of 2,030 shares of
Convertible Preferred Stock to 20,300 shares of
Common Stock (17,275) 17,275 -- --
November 1996 - conversion of $4,868 of cumulative
preferred dividends into 4,868 shares of Common
Stock at $1.00 per share -- 4,868 (4,868) --
December 1996 - Common Stock warrants exercised -
2,345,000 at $.20 per warrant -- 469,000 -- 469,000
January 1997 - issuance of 7,750 shares of
Convertible Preferred Stock at $10.00 per share 77,500 -- -- 77,500
January 1997 - Common Stock warrants exercised -
724,000 at $.20 per warrant, net of offering
costs -- 90,795 -- 90,795
January 1997 - conversion of 2,450 shares of
Convertible Preferred Stock to 24,500 shares of
Common Stock (20,850) 20,850 -- --
January 1997 - conversion of $11,513 of cumulative
preferred dividends into 11,513 shares of Common
Stock at $1.00 per share -- 11,513 (11,513) --
February 1997 - issuance of 1,600 shares of
Convertible Preferred Stock at $10.00 per share,
net of offering costs 16,000 -- -- 16,000
February 1997 - Common Stock warrants exercised -
25,000 at $.20 per warrant, net of offering costs -- 3,071 -- 3,071
February 1997 - conversion of 250 shares of
Convertible Preferred Stock to 2,500 shares of
Common Stock (2,128) 2,128 -- --
February 1997 - conversion of $1,500 of cumulative
preferred dividends into 1,500 shares of Common
Stock at $1.00 per share -- 1,500 (1,500) --
March 1997 - issuance of 160,000 shares of Common
Stock in exchange for consulting services -- 57,200 -- 57,200
March 1997 - Common Stock warrants exercised -
108,000 at $.20 per warrant, net of offering -- 13,242 -- 13,242
costs
March 1997 - conversion of 3,390 shares of
Convertible Preferred Stock to 33,900 shares of
Common Stock (28,849) 28,849 -- --
March 1997 - conversion of $10,170 of cumulative
preferred dividends into 10,170 shares of Common
Stock at $1.00 per share -- 10,170 (10,170) --
April 1997 - 1.2 units (2,400 shares of Convertible
Preferred Stock at $10,000 per unit, net of
offering costs) 10,835 -- -- 10,835
April 1997 - conversion of 6,800 shares of
Convertible Preferred Stock to 81,600 shares of
Common Stock (58,004) 58,004 -- --
</TABLE>

- continued -

F-7

<PAGE>

USA Technologies, Inc.
(A Development Stage Corporation)

Statements of Shareholders' Equity (continued)
<TABLE>
<CAPTION>

Deficit
Series A Accumulated
Convertible During the
Preferred Common Development
Stock Stock Stage Total
-------------------------------------------------------------------

<S> <C> <C> <C> <C>
April 1997 - conversion of $37,875 of
cumulative preferred dividends into 45,633
shares of Common Stock at $.83 per share $ -- $ 37,874 $ (37,874) $ --
April 1997- issuance of 40,000 shares of Common
Stock in exchange for consulting services -- 12,349 -- 12,349
May 1997 - 24.7 units (49,400 shares of Convertible
Preferred Stock at $10,000 per unit, net of
offering costs) 223,034 -- -- 223,034
May 1997 - conversion of 350 shares of Convertible
Preferred Stock to 4,200 shares of Common Stock (2,986) 2,986 -- --
May 1997 - conversion of $11,625 of cumulative
preferred dividends into 11,763 shares of Common
Stock at $.83 and $1.00 per share -- 11,625 (11,625) --
May 1997 - issuance of 40,000 shares of Common Stock
in exchange for consulting services -- 14,143 -- 14,143
June 1997 - 14.1 units (28,200 shares of Convertible
Preferred Stock at $10,000 per unit, net of
offering costs) 127,319 -- -- 127,319
June 1997 - conversion of 8,900 shares of
Convertible Preferred Stock to 106,800 shares of (75,917) 75,917 -- --
Common Stock
June1997 - conversion of $39,599 of cumulative
preferred dividends into 47,711 shares of Common
Stock at $.83 per share -- 39,599 (39,599) --
June 1997 - issuance of 182,000 shares of Common
Stock in exchange for consulting services -- 68,006 -- 68,006
June 1997 - Common Stock options exercised - 150,000
at $.05 per share -- 7,500 -- 7,500
June 1997 - issuance of Common Stock, net of
offering costs -- 451,169 -- 451,169
Net loss -- -- (3,120,712) (3,120,712)
------------ ------------ ------------ ------------
Balance, June 30, 1997 $ 7,024,811 $ 4,355,334 $(10,534,004) $ 846,141
============ ============ ============ ============

</TABLE>
See accompanying notes.

F-8

<PAGE>

USA Technologies, Inc.
(A Development Stage Corporation)

Statements of Cash Flows

<TABLE>
<CAPTION>
January 16, 1992
(date of inception)
Year ended June 30 through June 30,
1997 1996 1997
------------ -------------- ------------------

<S> <C> <C> <C>
Operating activities
Net loss $(3,120,712) $(2,451,697) $(9,363,671)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 97,250 72,016 195,644
Provision for losses on equipment -- 44,100 383,756
Compensation charges incurred in
connection with the issuance of Common
Stock and Common Stock options 277,198 247,205 626,753
Changes in operating assets and liabilities:
Accounts receivable (127,318) -- (127,318)
Inventory 48,073 (426,391) (378,318)
Prepaid expenses, deposits, and other assets 9,702 (38,746) (43,693)
Accounts payable 172,797 150,252 574,918
Accrued expenses (8,332) 10,723 (2,529)
----------- ----------- -----------

Net cash used in operating activities (2,651,342) (2,392,538) (8,134,458)

Investing activities
Purchase of property and equipment (17,855) (112,443) (740,960)
Proceeds from sale of property and equipment -- 3,539 3,539
----------- ----------- -----------
Net cash used in investing activities (17,855) (108,904) (737,421)

Financing activities
Net proceeds from issuance of Common Stock 1,141,126 1,013,450 2,172,287
Net proceeds from issuance of Convertible -- -- 7,350,771
Preferred Stock 394,688 2,940,449 --
Change in accounts payable and accrued expenses
relating to the private placement offering -- (42,218) --
Repayment of principal on capital lease
obligations (9,707) (8,908) (18,615)
Repayment of note payable, net -- (4,166) (2,298)
----------- ----------- -----------
Net cash provided by financing activities 1,526,107 3,898,607 9,502,145
----------- ----------- -----------

Net (decrease) increase in cash and cash equivalents (1,143,090) 1,397,165 630,266
Cash and cash equivalents at beginning of period 1,773,356 376,191 --
----------- ----------- -----------
Cash and cash equivalents at end of period $ 630,266 $ 1,773,356 $ 630,266
=========== =========== ===========

</TABLE>

F-9

<PAGE>

USA Technologies, Inc.
(A Development Stage Corporation)

Statements of Cash Flows (continued)
<TABLE>
<CAPTION>

January 16, 1992
(date of inception)
Year ended June 30 through June 30,
1997 1996 1997
--------------- ---------------- -------------------

<S> <C> <C> <C>
Supplemental disclosure of cash flow information

Cash paid during the year for interest $ 10,549 $ -- $ 103,032
============== ============== ==========

Conversion of Convertible Preferred Stock to
Common Stock $ 206,009 $ 171,689 $ 385,960
============== ============== ==========

Conversion of Cumulative Preferred Dividends to
Common Stock $ 117,149 $ 41,626 $ 158,775
============== ============== ==========

Common stock dividend $ -- $ 230,709 $1,011,558
============== ============== ==========

Capital lease obligations incurred $ 22,200 $ 34,338
============== ==============

Stock subscription receivable $ 60,000 $ 106,350
============== ==============

</TABLE>

See accompanying notes.

F-10

<PAGE>

USA Technologies, Inc.
(A Development Stage Corporation)

Notes to Financial Statements

June 30, 1997

1. Business

USA Technologies, Inc. a Pennsylvania corporation (the "Company"), was
incorporated on January 16, 1992. The Company changed its name from USA
Entertainment Center, Inc. to USA Technologies, Inc. on June 7, 1995 to more
accurately reflect the nature of its business. The Company is in the
development stage and is an owner and licensor of unattended, credit card
activated control systems for use in connection with copying machines, debit
card purchase/revalue stations, facsimile machines, personal computers and
computer printers. During September 1996, the Company commenced offering its
control systems under the name Business Express(TM). Substantially all of the
Company's activities to date have been devoted to raising capital, developing
markets, and starting up operations. The Company's customers are located in
the United States and Canada and are comprised of hotels, retail locations,
university libraries, and public libraries. The Company generates its revenues
by the sale of equipment utilizing its control systems and retaining a
percentage of the gross licensing fees generated by the control systems, plus
a monthly administrative service fee.

2. Accounting Policies

Basis of Financial Statement Presentation

The financial statements of the Company have been prepared assuming the
Company will continue as a going concern, which contemplates the realization
of assets and the satisfaction of liabilities in the normal course of
business. Accordingly, the financial statements do not include any adjustments
that might be necessary should the Company be unable to continue in existence.
The Company has been in the development stage since its inception in 1992 and
has incurred substantial losses of $2.4 million in 1996, $3.1 million in 1997
and cumulative losses from its inception through June 30, 1997 amounting to
$9.4 million. Losses have continued through August 1997. The Company's ability
to meet its future obligations is dependent upon the success of its products
in the marketplace and its ability to raise capital until the Company's
products can generate sufficient operating revenues. These factors raise doubt
about the Company's ability to continue as a going concern. Management
believes that actions presently being taken will provide for the Company to
continue as a going concern. Such actions include the generation of revenues
from operations, raising capital from the exercise of Common Stock purchase
warrants, and/or the deferral of anticipated expenditures in order to
satisfactorily meet its obligations.

F-11

<PAGE>

USA Technologies, Inc.
(A Development Stage Corporation)

Notes to Financial Statements (continued)

2. Accounting Policies (continued)

Use of Estimates

The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

Cash Equivalents

Cash equivalents represents all highly liquid investments with original
maturities of three months or less. At June 30, 1997 cash equivalents were
comprised of a money market fund and certificate of deposit.

Inventory

Inventory is stated at the lower of cost (first-in, first-out method) or
market.

Property and Equipment

Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over three to seven years for financial statement
purposes and accelerated methods for income tax reporting purposes.

Revenue Recognition

Revenue from the sale of equipment is recognized upon installation and
customer acceptance of the related equipment. License fee revenue is
recognized upon the usage of the Company's credit card activated control
systems.

F-12

<PAGE>

USA Technologies, Inc.
(A Development Stage Corporation)

Notes to Financial Statements (continued)

2. Accounting Policies (continued)

Research and Development

Research and development costs are charged to operations as incurred. Such
research and development costs amounted to approximately $344,000 and $224,000
for the years ended June 30, 1997 and 1996, respectively, and approximately
$737,000 for the period January 16, 1992 (date of inception) to June 30, 1997.
These costs are reflected in general and administrative and compensation in
the accompanying financial statements.

Income Taxes

The Company provides for income taxes using the asset and liability approach
whereby deferred tax assets and liabilities are recorded based on the
difference between the tax bases of assets and liabilities and their carrying
amounts for financial reporting purposes. Such differences result from
differences in the timing of recognition by the Company of certain accrued
expenses, and the periods of amortization and depreciation of certain assets.

Accounting for Stock Options

Statement of Financial Accounting Standards No. 123 (FASB 123), "Accounting
for Stock-Based Compensation" is effective for fiscal years beginning after
December 15, 1995. FASB 123 provides companies with a choice to follow the
provisions of FASB 123 in determination of stock-based compensation expense or
to continue with the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25). The Company has elected
to follow the provisions of APB 25. Under APB 25, because the exercise price
of the Company's stock options equals or exceeds the market price of the
underlying Common Stock on the date of grant, no compensation expense is
recognized. The effect of applying FASB 123 to the Company's stock-based
awards results in net loss and net loss per common share that are not
materially different from amounts reported and, accordingly, the FASB 123 pro
forma disclosures have not been provided.

F-13

<PAGE>

USA Technologies, Inc.
(A Development Stage Corporation)

Notes to Financial Statements (continued)

2. Accounting Policies (continued)

Loss Per Common Share

Loss per common share is calculated based on the weighted average number of
common shares outstanding during the year, including the weighted average
impact of the 2,500,000 common shares held in escrow in connection with the
June 1997 Placement (Note 9). No exercise of stock options, purchase rights,
stock purchase warrants, or the conversion of preferred stock and cumulative
preferred dividends was assumed because the assumed exercise of these
securities would be antidilutive. The President's 4,365,000 common shares held
in escrow (Note 11) are not considered outstanding for purposes of calculating
the loss per common share for all periods presented.

In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share, which is required to be adopted on December 31,
1997. Under the new requirements for calculating primary earnings per share,
the dilutive effect of stock options will be excluded. The impact of Statement
No, 128 on the calculation of the Company's primary and fully diluted earnings
per share is not expected to be material.

3. Property and Equipment

Property and equipment consist of the following:

June 30
1997 1996
-------------- --------------

Control systems $ 269,590 $ 261,387
Furniture and equipment 73,437 55,582
Vehicles 10,259 10,259
-------------- --------------
353,286 327,228
Less accumulated depreciation 174,829 92,014
-------------- --------------
$ 178,457 $ 235,214
============== ==============

F-14

<PAGE>

USA Technologies, Inc.
(A Development Stage Corporation)

Notes to Financial Statements (continued)

4. Accrued Expenses

Accrued expenses consist of the following:

June 30
1997 1996
-------------- --------------

Accrued rent $ 10,341 $ 34,104
Accrued other 36,401 7,455
-------------- --------------
$ 46,742 $ 41,559
============== ==============

5. Related Party Transactions

At June 30, 1997 and 1996, approximately $27,000 and $14,000, respectively, of
the Company's accounts payable are due to several shareholders for various
legal and technical services performed.

During July 1996, the Company formalized certain agreements with two Directors
of the Company who performed consulting services during fiscal year 1996.
During the year ended June 30, 1996, $98,600 was paid for such services
performed.

6. Commitments

The Company conducts its operations from various facilities under operating
leases. Rental expense under such arrangements was approximately $94,000 and
$69,000, respectively, during the years ended June 30, 1997 and 1996 and
$327,000 for the period January 16, 1992 (date of inception) to June 30, 1997.

During the years ended June 30, 1997 and 1996, the Company entered into
agreements to lease $22,200 and $34,400, respectively, of computer equipment
which has been accounted for as capital leases. This computer equipment is
included in control systems at June 30, 1997 and 1996. Lease amortization of
$17,600 and $5,700 is included in depreciation expense for the year ended June
30, 1997 and 1996, respectively.

F-15

<PAGE>

USA Technologies, Inc.
(A Development Stage Corporation)

Notes to Financial Statements (continued)

6. Commitments (continued)

Future minimum lease payments subsequent to June 30, 1997 under capital and
noncancelable operating leases are as follows:

<TABLE>
<CAPTION>
Capital Operating
Leases Leases
-----------------------------------

<S> <C> <C>
1998 $ 26,055 $ 95,000
1999 26,055 75,000
2000 1,717 28,000
2001 - 3,000
------------- ------------
Total minimum lease payments 53,827 $ 201,000
============
Less amount representing interest (25% per annum) 11,077
------------
Present value of net minimum lease payments 42,750
Less current obligation under capital leases 18,270
------------
Obligation under capital leases, less current portion $ 24,480
============
</TABLE>

During August 1997, the Company entered into an agreement with a vendor
whereby the Company committed to acquire 500 control systems for $242,325. The
control systems are anticipated for delivery by the Company throughout fiscal
year 1998.

F-16

<PAGE>

USA Technologies, Inc.
(A Development Stage Corporation)

Notes to Financial Statements (continued)

7. Income Taxes

At June 30, 1997 and 1996, the Company had net tax operating loss
carryforwards of approximately $8,181,000 and $5,176,000, respectively, to
offset future taxable income expiring through 2012. At June 30, 1997 and 1996,
the Company recorded a deferred tax asset of $3,402,000 and $2,537,000,
respectively, which were reduced by a valuation allowance of the same amount
as the realization of these deferred tax assets are not certain. The deferred
tax assets arose primarily from the use of different accounting methods for
financial statement and income tax reporting purposes as follows:

<TABLE>
<CAPTION>
June 30
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax asset:
Net operating loss carryforwards $ 3,081,000 $ 2,174,000
Deferred research and development costs 226,000 159,000
Deferred pre-operating costs 84,000 158,000
Other temporary differences 20,000 64,000
----------- -----------
3,411,000 2,555,000
Deferred tax liabilities:
Depreciation (9,000) (18,000)
----------- -----------
Deferred tax asset, net 3,402,000 2,537,000
Valuation allowance (3,402,000) (2,537,000)
=========== ===========
$ -- $ --
=========== ===========
</TABLE>

As of June 30, 1993, the timing and manner in which the Company can utilize
operating loss carryforwards and future tax deductions for capitalized items
in any year was limited by provisions of the Internal Revenue Code regarding
changes in ownership of corporations. The Company believes that such
limitation will have an impact on the ultimate realization of its
carryforwards and future tax deductions (generated through June 30, 1993).
Cumulative losses generated for income tax purposes after June 30, 1993
through June 30, 1997, may be subject to similar limitation.

F-17

<PAGE>

USA Technologies, Inc.
(A Development Stage Corporation)

Notes to Financial Statements (continued)

8. Preferred Stock

The Preferred Stock authorized may be issued from time to time in one or more
series, each series with such rights, preferences or restrictions as
determined by the Board of Directors. Each share of Series A Preferred Stock
shall have the right to ten votes and is convertible at any time into ten
shares of Common Stock (each share of Common Stock entitles the holder to one
voting right). (For the period from March 24, 1997 to December 31, 1997, each
share of Series A Preferred Stock is convertible into twelve shares of Common
Stock). Series A Convertible Preferred Stock provides for an annual cumulative
dividend of $1.50 per share payable to the shareholders of record on February
1 and August 1 of each year. Cumulative unpaid dividends at June 30, 1997 and
1996 amounted to $2,837,086 and $1,758,490, respectively. Cumulative unpaid
dividends are convertible into common shares at $1.00 per common share at the
option of the shareholder. (For the period from March 24, 1997 to December 31,
1997, the cumulative unpaid dividends are convertible into common shares at
$.83 per common share). During the years ended June 30, 1997 and 1996, certain
holders of the Preferred Stock converted 24,170 and 20,175 shares,
respectively, into 273,800 and 201,750 shares of Common Stock, respectively.
Certain of these shareholders also converted cumulative preferred dividends of
$117,149 and $41,626, respectively, into 133,158 and 41,626 shares of Common
Stock at June 30, 1997 and 1996, respectively. The Series A Preferred Stock
may be called for redemption at the option of the Board of Directors at any
time on and after January 1, 1998 for a price of $11.00 per share plus payment
of all accrued and unpaid dividends. In the event of any liquidation, the
holders of shares of Series A Preferred Stock issued shall be entitled to
receive $10.00 for each outstanding share plus all cumulative unpaid
dividends. If funds are insufficient for this distribution, the assets
available will be distributed ratably among the preferred shareholders.

F-18

<PAGE>

USA Technologies, Inc.
(A Development Stage Corporation)

Notes to Financial Statements (continued)

9. Common Stock Transactions

The following is a summary of significant equity transactions:

o On June 23, 1997, the Company closed on a private placement offering of
Convertible Debentures (the Placement) resulting in net proceeds to the
Company of $451,169 ($500,000 less offering costs of $48,831). The
Placement was issued pursuant to Regulation S of the Securities Act of 1933
to five qualified purchasers, as defined, (Purchasers). The Placement is
convertible by the Purchasers into Common Stock at any time after 45 days
from issuance (August 7, 1997) and through the Placement's maturity of June
1, 2002 at the option of the Purchaser. The Company has the right to redeem
the unconverted portion of the Placement at any time after June 23, 1998
through June 1, 2002. The conversion or redemption rate (hereinafter
referred to as conversion rate) is equal to the lesser of 100% of the
average closing bid price of the Common Stock for the five trading days
immediately preceding June 23, 1997, or 65% of the average closing bid
price of the Common Stock for the five trading days immediately preceding
the date prior to the conversion or redemption date. Upon maturity (unless
converted or redeemed prior thereto), the Placement would be automatically
converted into shares of Common Stock at the conversion rate. As the terms
and intent of the Placement were to raise equity for the Company through
the issuance of Common Stock, and the terms of the Placement do not provide
for the repayment of principal in cash, the substance of the Placement is
that of an equity transaction and, accordingly, the net proceeds have been
reflected as Common Stock in the accompanying financial statements.

As a requirement to the closure of the Placement, the Company placed an
aggregate of 2,500,000 shares of Common Stock in escrow to ensure such
shares would be available upon conversion of the Placement by the
Purchasers. As the 2,500,000 shares held in escrow were legally issued
and outstanding at June 30, 1997, such shares are included in the common
shares issued and outstanding in the accompanying balance sheet. Upon
conversion by the Purchasers, the Placement and escrow shares will be
canceled and the appropriate number of shares of Common Stock will be
issued to the Purchasers. During August 1997, $375,000 of the Placement
was converted (at varying prices) into 1,377,949 of common shares, and
the escrowed shares were reduced to 625,000.

F-19

<PAGE>

USA Technologies, Inc.
(A Development Stage Corporation)

Notes to Financial Statements (continued)

9. Common Stock Transactions (continued)

Certain affiliates of the placement agent were issued non-detachable
Common Stock purchase warrants, exercisable immediately, to purchase up
to 2,000,000 shares of the Company's Common Stock at $.20 per warrant at
any time through June 22, 2002. No warrants were exercised at June 30,
1997.

o During March 1997, the Company's Board of Directors authorized a $1,100,000
private placement offering of 110 units at a unit price of $10,000. Each
unit included 2,000 shares of Convertible Preferred Stock and 40,000 1997
Common Stock warrants at an exercise price of $.20 through August 31, 1997
and $.40 thereafter for five years after the termination of the offering.
During June 1997, the Company's Board of Directors authorized the reduction
of this offering to a maximum of 40 units at an aggregate sales price of
$400,000. As of June 30, 1997, 40 units were sold, generating net proceeds
of $361,189 ($400,000 less offering costs of $38,811). The subscriptions
receivable of $60,000 as of June 30, 1997, recorded in connection with this
offering, were received in August, 1997. The Company terminated this
offering on July 3, 1997. At June 30, 1997, all 1,600,000 1997 Common Stock
purchase warrants are outstanding.

o During March 1997, the Company's Shareholders approved an increase in the
number of the Company's authorized common stock shares to 55,000,000; an
increase in the number of designated shares of Series A Convertible
Preferred Stock to 1,200,000; an increase in the number of shares of Common
Stock into which each share of Series A Preferred Stock may be exchanged,
from 10 to 12, for the period from March 24, 1997 to December 31, 1997; and
a decrease in the price at which accrued but unpaid dividends on Series A
Preferred Stock may be exchanged for shares of Common Stock, from $1.00 to
$.83, for the period from March 24, 1997 to December 31, 1997.

o During November 1996, the Company's Board of Directors authorized a
$200,000 private placement offering 20 units at a price of $10,000. Each
unit included 1,000 shares of Series A Convertible Preferred Stock and
40,000 1996-B Common Stock purchase warrants at an exercise price of $0.20
per share through August 31, 1997 and $0.30 per share through February 28,
2002. The offering closed during February 1997 resulting in the sale of
93.5 units generating proceeds of $93,500. At June 30, 1997, the 374,000
1996-B Common Stock purchase warrants are outstanding.

F-20

<PAGE>

USA Technologies, Inc.
(A Development Stage Corporation)

Notes to Financial Statements (continued)

9. Common Stock Transactions (continued)

o During April 1996, the Company's Board of Directors authorized a $1,300,000
private placement offering of 130 units at a unit price of $10,000 and each
unit included 40,000 1996 Common Stock purchase warrants and 1,000 shares
of Series A Convertible Preferred Stock. As of June 30, 1996, all 130 units
were sold, generating net proceeds of $1,249,264 ($1,300,000 less offering
costs of $50,736). The 5,200,000 1996 warrants issued are exercisable at
any time on or before May 31, 2001, unless such date is extended by the
Company. Each warrant entitles the holder to purchase one share of Common
Stock for $.40 through December 31, 1996 and for $.50 at any time
thereafter through May 31, 2001. During November 1996, the exercise price
of the 1996 warrants was reduced by the Company from $.40 to $.20 during
the period November 1, 1996 through February 28, 1997, after which the
exercise price will increase to $.50 (Note 12). During the year ended June
30, 1997, 3,202,000 warrants were exercised at $.20 per warrant generating
gross proceeds of $640,400. At June 30, 1997, there are 1,998,000 1996
Common Stock purchase warrants outstanding.

o During 1995, the Company issued Common Stock purchase warrants (the 1995
warrants) which are exercisable at any time on or before January 31,
2001, unless such date is extended by the Company. Each 1995 warrant
entitles the holder to purchase one share of Common Stock for $.50. The
exercise price of the 1995 warrants may be reduced by the Company at any
time, or from time to time (Note 12). At June 30, 1997, the Company had
1,414,000 of 1995 Common Stock purchase warrants outstanding.

o The Company has outstanding 157,300 Common Stock purchase rights at $1.00
per share which are exercisable through 1998.

F-21

<PAGE>

USA Technologies, Inc.
(A Development Stage Corporation)

Notes to Financial Statements (continued)

10. Stock Options

The Company's Board of Directors has granted options to employees and
consultants to purchase shares of Common Stock at or above fair market value.
All options granted have 5 year terms and vest and become fully exercisable on
the schedule established by the contract which granted the option. During
November 1996 and June 1997, the Company's Board of Directors authorized the
reduction in the exercise price of 650,000 options from $.65 to $.45 per
share. These shares were previously issued during the periods March 1996
through November 1996. The new exercise price of these options was equal to or
greater than the fair market value of the Common Stock on the date of such
reduction.

The following table summarizes all stock option activity:

Exercise
Common Shares Under Price
Options Granted Per Share
--------------- ---------

Balance at June 30, 1993 - $ -
Granted 875,000 $ .25
----------
Balance at June 30, 1994 875,000
Canceled (100,000) $ .25
Granted 2,290,000 $ .05-.25
----------
Balance at June 30, 1995 3,065,000
Granted 550,000 $ .65
Exercised (280,000) $ .05
----------
Balance at June 30, 1996 3,335,000 $ .05-.65
Granted 815,000 $ .25-.65
Exercised (150,000) $ .05
Canceled (29,000) $ .45
----------
Balance at June 30, 1997 3,971,000 $ .05-.50
==========

At June 30, 1997, 3,196,000 of these options were exercisable.

F-22

<PAGE>

USA Technologies, Inc.
(A Development Stage Corporation)

Notes to Financial Statements (continued)

11. Escrow and Cancellation Arrangements

At the request of the Pennsylvania Securities Commission, all of the executive
officers and directors of the Company serving at the commencement of the
initial public offering of the Company agreed to place in escrow 8,395,000
shares, as adjusted, beneficially owned by them until December 29, 1996. Under
certain circumstances as outlined by the Pennsylvania Securities Commission,
the President's shares may be held in escrow for an additional period of time,
but not later than June 30, 1998. Any additional shares acquired by the
executive officers and directors will also be held in escrow. The executive
officers and directors have agreed not to sell, pledge, or transfer, directly
or indirectly, any of the Common Stock held in escrow or any options to
acquire stock they may own. Additionally, the President of the Company has
agreed that his 4,365,000 escrowed common shares would be canceled by the
Company and would no longer be issued and outstanding unless certain
performance measures as specified by the Commission are achieved by June 30,
1998. If the performance measures are achieved, the common shares released
from escrow will result in a compensatory charge to the Company's operations.
The charge will be based on the fair value of the Company's common shares on
the date the shares are released from escrow. During the years ended June 30,
1997 and 1996, there was no such charge to operations. The 4,365,000 shares of
Common Stock held by the President are not considered outstanding for purposes
of calculating the loss per common share for all periods presented.

12. Events (Unaudited) Subsequent to the Date of the Report of Independent
Auditors

During the first quarter of 1998, 1,489,200 and 224,000 of 1997 and 1996-B
Common Stock warrants, respectively, were exercised at $.20 per warrant
generating total gross proceeds to the Company of $342,640.

During the first quarter of 1998, certain holders of the Company's Preferred
Stock converted 216,910 shares into 2,602,920 shares of Common Stock. Certain of
these shareholders also converted cumulative preferred dividends of $518,026
into 624,128 shares of Common Stock.

During September 1997, the Company's Board of Directors reduced the exercise
price of the 1995 Common Stock Purchase Warrants and the 1996 Common Stock
Purchase Warrants from $.50 to $.25 through October 31, 1997. Thereafter the
exercise price will be $.50. Further, the reduced $.20 exercise price of the
1996-B Common Stock Warrants and the 1997 Common Stock Warrants was extended
through September 30, 1997. Thereafter the exercise price will be $.50.

During September 1997, an additional $55,000 of the Placement (Note 9) was
converted into 190,575 shares of the Company's Common Stock.

F-23
<PAGE>

Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure.

None

PART III

Item 9. Directors and Executive Officers of the Registrant

MANAGEMENT

Directors and Executive Officers

The Directors and executive officers of the Company, together with
their ages and business backgrounds are as follows.

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

George R. Jensen, Jr. 48 President, Chief Executive
Officer, Chairman of the
Board of Directors
Stephen P. Herbert 34 Executive Vice President - Sales
and Marketing, Director
Haven Brock Kolls, Jr. 31 Vice President - Research and
Development
Keith L. Sterling 45 Executive Vice President -
Operations, Secretary, Director
Leland P. Maxwell 50 Senior Vice President, Chief
Financial Officer, Treasurer
Director
Peter G. Kapourelos 77 Director
William W. Sellers 76 Director
Henry B. duPont Smith 36 Director
William L. Van Alen, Jr. 64 Director

Each Director holds office until the next Annual Meeting of
Shareholders and until his successor has been elected and qualified.

George R. Jensen, Jr., has been the President, Chief Executive Officer,
and Director of the Company since January 1992. Mr. Jensen is the founder, and
was Chairman, Director, and Chief Executive Officer of American Film
Technologies, Inc. ("AFT") from 1985 until 1992. AFT was in the business of
creating color imaged versions of black-and-white films. From 1979 to 1985, Mr.
Jensen was Chief Executive Officer and President of International Film
Productions, Inc. Mr. Jensen was the Executive Producer of the twelve hour
miniseries, "A.D.", a $35 million dollar production filmed in Tunisia. Procter
and Gamble, Inc., the primary source of funds, co-produced and sponsored the
epic, which aired in March 1985 for five consecutive nights on the NBC network.
Mr. Jensen was also the Executive Producer for the 1983 special for public
television, " A Tribute to Princess Grace". From 1971 to 1978, Mr. Jensen was a
securities broker, primarily for the firm of Smith Barney, Harris Upham. Mr.
Jensen was chosen 1989 Entrepreneur of the Year in the high technology category
for the Philadelphia, Pennsylvania area by Ernst & Young LLP and Inc. Magazine.
Mr. Jensen received his Bachelor of Science Degree from the University

<PAGE>

of Tennessee and is a graduate of the Advanced Management Program at the
Wharton School of the University of Pennsylvania.

Stephen P. Herbert was elected a Director of the Company in April
1996, and joined the Company on a full-time basis on May 6, 1996. Prior to
joining the Company and since 1986, Mr. Herbert had been employed by
Pepsi-Cola, the beverage division of PepsiCo, Inc. From 1994 to April 1996,
Mr. Herbert was a Manager of Market Strategy. In such position he was
responsible for directing development of market strategy for the vending
channel and subsequently the supermarket channel for Pepsi-Cola in North
America. Prior thereto, Mr. Herbert held various sales and management
positions with Pepsi-Cola. Mr. Herbert graduated with a Bachelor of Science
degree from Louisiana State University.

Haven Brock Kolls, Jr., joined the Company on a full-time basis in
May 1994 and was elected an executive officer in August 1994. From January
1992 to April 1994, Mr. Kolls was Director of Engineering for International
Trade Agency, Inc., an engineering firm specializing in the development of
control systems and management software packages for use in the vending
machine industry. Mr. Kolls was an electrical engineer for Plateau Inc. from
1988 to December 1992. His responsibilities included mechanical and electrical
computer-aided engineering, digital electronic hardware design, circuit board
design and layout, fabrication of system prototypes and software development.
Mr. Kolls is a graduate of the University of Tennessee with a Bachelor of
Science Degree in Engineering.

Keith L. Sterling joined the Company on a full-time basis as
Executive Vice President-Operations and Secretary on July 1, 1993 and was
elected to the Board of Directors on May 12, 1995. On December 1, 1996, Mr.
Sterling was appointed Chief Financial Officer and Treasurer on an interim
basis through February 24, 1997. Mr. Sterling is part owner, and from October
1987 to July 1, 1993, was the Chief Executive Officer of Radnor Commonwealth
Equities, Inc., a Washington, D.C. asset-based investment/consulting firm. He
co-founded that firm in 1987. From 1980 to 1987, Mr Sterling held various
positions with MHB Companies, Inc., a national investment-development company
headquartered in Houston, Texas, including Executive Vice President. Mr.
Sterling graduated with a Bachelor of Science degree in Economics from
Susquehanna University.

Leland P. Maxwell joined the Company on a full-time basis on February
24, 1997 as Chief Financial Officer, Senior Vice President and Treasurer.
Prior to joining the Company, Mr. Maxwell was the corporate controller for
Klearfold, Inc., a privately-held manufacturer of specialty consumer
packaging. From 1992 to 1996, Mr. Maxwell was the regional controller for
Jefferson Smurfit/Container Corporation of America, a plastic packaging
manufacturer, and from 1986 to 1992 was the divisional accounting manager.
Prior thereto, he held financial positions with Safeguard Business Systems and
Smithkline-Beecham. Mr. Maxwell received a Bachelor of Arts degree in History
from Williams College and a Master of Business Administration-Finance from The
Wharton School of the University of Pennsylvania. Mr. Maxwell is a Certified
Public Accountant.

14
<PAGE>
Peter G. Kapourelos joined the Board of Directors of the Company in May
1993. Mr. Kapourelos has been a branch manager of Advantage Capital Corporation,
a subsidiary of Primerica Corporation, since 1972. He has been a member of the
Millionaire Production Club since 1972. Mr. Kapourelos is currently the Vice
President for American Capital High Yield Bond Fund and of the American Capital
Equity Income Fund, which are publicly traded mutual funds.

William W. Sellers joined the Board of Directors of the Company in May
1993. Mr. Sellers founded The Sellers Company in 1949 which has been nationally
recognized as the leader in the design and manufacture of state-of-the-art
equipment for the paving industry. Mr. Sellers has been awarded five United
States patents and several Canadian patents pertaining to this equipment. The
Sellers Company was sold to Mechtron International in 1985. Mr. Sellers is
Chairman of the Board of Sellers Process Equipment Company which sells
products and systems to the food and other industries. Mr. Sellers is actively
involved in his community. Mr. Sellers received his undergraduate degree from
the University of Pennsylvania.

Henry B. duPont Smith joined the Board of Directors of the Company in
May 1994. Since January 1992, Mr. Smith has been a Vice President of The
Rittenhouse Trust Company and since September 1991 has been a Vice President of
Rittenhouse Financial Services, Inc. From September 1991 to December 1992, he
was a registered representative of Rittenhouse Financial Securities, Inc. Mr.
Smith was an Assistant Vice President of Mellon Bank, N.A. from March 1988 to
July 1991, and an investment officer of Provident National Bank from March 1985
to March 1988. Mr. Smith received a Bachelor of Arts degree in Accounting in
1984 from Franklin & Marshall College.

William L. Van Alen, Jr., joined the Board of Directors of the Company
in May 1993. Mr. Van Alen is President of Cornerstone Entertainment, Inc., an
organization engaged in the production of feature films of which he was a
founder in 1985. Since 1996, Mr. Van Alen has been President and a Director of
The Noah Fund, a publicly traded mutual fund. Prior to 1985, Mr. Van Alen
practiced law in Pennsylvania for twenty-two years. Mr. Van Alen received his
undergraduate degree in Economics from the University of Pennsylvania and his
law degree from Villanova Law School.

<PAGE>

Item 10. Executive Compensation

The following table sets forth certain information with respect to
compensation paid or accrued by the Company during the fiscal years ended June
30, 1995, June 30, 1996 and June 30, 1997 to the individual acting in the
capacity of Chief Executive Officer of the Company. No individual who was
serving as an executive officer of the Company at the end of the fiscal years
ended June 30, 1995, June 30, 1996 or June 30, 1997 received salary and bonus
in excess of $100,000 in any such fiscal year.

Summary Compensation Table

Fiscal
Name and Principal Position Year Annual Compensation
- --------------------------- ------ -------------------------
Salary Bonus
------ -----
George R. Jensen, Jr., 1997 $100,000 $0
Chief Executive Officer, 1996 $90,000 $0
President 1995 $90,000 $0

Executive Employment Agreements

The Company has entered into an employment agreement with Mr. Jensen
which expires June 30, 1998. The Agreement is automatically renewed from year
to year unless canceled by Mr. Jensen or the Company. The agreement provides
for an annual base salary of $100,000 per year. Mr. Jensen is entitled to
receive such bonus or bonuses as may be awarded to him by the Board of
Directors. In determining whether to pay such a bonus, the Board would use its
subjective discretion. The Agreement requires Mr. Jensen to devote his full
time and attention to the business and affairs of the Company, and obligates
him not to engage in any investments or activities which would compete with
the Company during the term of the Agreement and for a period of one year
thereafter.

The Company has entered into a one-year employment agreement with Mr.
Herbert which expires on April 30, 1998. The agreement is automatically renewed
from year to year thereafter unless canceled by Mr. Herbert or the Company. The
Agreement provides for an annual base salary of $90,000 per year, provided, that
Mr. Herbert's base salary shall never be less than ninety percent of that of the
Chief Executive Officer of the Company. Mr. Herbert is entitled to receive such
bonus or bonuses as the Board of Directors may award to him. The Agreement

16
<PAGE>

requires Mr. Herbert to devote his full time and attention to the business and
affairs of the Company and obligates him not to engage in any investments or
activities which would compete with the Company during the term of the
agreement and for a period of one year thereafter.

Mr. Sterling has entered into a one-year employment agreement with
the Company which expires on June 30, 1998. The agreement is automatically
renewed from year to year thereafter unless cancelled by Mr. Sterling or the
Company. The Agreement provides for an annual base salary of $90,000 per year
and provides that Mr Sterling is entitled to receive such bonus or bonuses as
the Board of Directors may award to him. The agreement requires Mr. Sterling
to devote his full time and attention to the business and affairs of the
Company, and obligates him not to engage in any investments or activities
which would compete with the Company during the term of the agreement and for
a period of one year thereafter.

Mr. Kolls has entered into a one-year employment agreement with the
Company which expires on April 30, 1998, and is automatically renewed from
year to year thereafter unless canceled by Mr. Kolls or the Company. The
agreement provides for an annual base salary of $90,000 per year. Mr. Kolls is
also entitled to receive such bonus or bonuses as may be awarded to him by the
Board of Directors. The Agreement requires Mr. Kolls to devote his full time
and attention to the business and affairs of the Company, and obligates him
not to engage in any investments or activities which would compete with the
Company during the term of his agreement and for a period of one year
thereafter.

Mr. Maxwell has entered into a one-year employment agreement with the
Company which expires on February 28, 1998, and is automatically renewed from
year to year thereafter unless cancelled by Mr. Maxwell or the Company. The
agreement provides for an annual base salary of $85,000 per year, provided,
that Mr. Maxwell's base salary shall never be less than eighty-five percent of
that of the Chief Executive Officer of the Company. Mr. Maxwell is also
entitled to receive such bonus or bonuses as the Board of Directors may award
to him. The Agreement requires Mr. Maxwell to devote his full time and
attention to the business and affairs of the Company, and obligates him not to
engage in any investments or activities which would compete with the Company
during the term of the agreement and for a period of one year thereafter.

Director Compensation and Stock Options

Members of the Board of Directors do not currently receive any cash
compensation for serving on the Board of Directors.

In April 1993, Messrs. Kapourelos and Sellers each purchased 100,000
shares of Common Stock from the Company at a purchase price of $.001 per
share. In June 1993, Mr. Van Alen purchased 100,000 shares of Common Stock
from the Company at a purchase price of $.001 per share.

17
<PAGE>

In July 1993, the Company issued to each of Messrs. Kapourelos,
Sellers, and Van Alen fully vested options to purchase 100,000 shares of
Common Stock at an exercise price of $.25 per share. The options must be
exercised on or before June 30, 1998.

In March 1995, the Company issued to Mr. Smith fully vested options
to purchase 100,000 shares of Common Stock, to Mr. Sellers fully vested
options to purchase 55,000 shares of Common Stock, to Mr. Kapourelos fully
vested options to purchase 70,000 shares of Common Stock, and to Mr. Van Alen
fully vested options to purchase 25,000 shares of Common Stock. The exercise
price of these options is $.25 per share and they must be exercised on or
before February 29, 2000.

The Company paid to William W. Sellers the amount of $76,600 for
consulting services rendered by Mr. Sellers to the Company during the fiscal
year ended June 30, 1996.

The Company paid to Peter G. Kapourelos the amount of $22,000 for
consulting services rendered by Mr. Kapourelos to the Company during the
fiscal year ended June 30, 1996.

Executive Stock Options

In July 1993, the Company issued to Keith L. Sterling and Edward J.
Sullivan, a former officer of the Company, options to purchase shares of
Common Stock at an exercise price of $.25 per share. The options must be
exercised within five years of the vesting thereof. Mr. Sterling received
options to acquire 200,000 shares of Common Stock, 100,000 of which vested on
June 30, 1994, and 100,000 of which vested on June 30, 1995. Mr. Sullivan was
granted options to acquire 100,000 shares of Common Stock, 50,000 of which
vested on June 30, 1994, and 50,000 of which vested on June 30, 1995.

In August 1994, the Company issued to Mr. Kolls options to acquire
50,000 shares of Common Stock at an exercise price of $.25 per share, 25,000
of which vested on April 30, 1995, and 25,000 of which vested on April 30,
1996.

In August 1994, the Company issued to Mr. Barry Slawter, a former
officer of the Company, options to acquire 200,000 shares of Common Stock at
an exercise price of $.25 per share, 50,000 of which vested on February 1,
1995, 50,000 of which vested on May 1, 1995, 50,000 of which vested on August
1, 1995, and 50,000 of which vested on November 1, 1995. The options must be
exercised within five years after vesting.

18
<PAGE>

In March 1995, the Company issued to Mr. Sterling fully vested
options to acquire 100,000 shares of Common Stock at $.25 per share
exercisable on or before February 29, 2000.

In March 1995, the Company issued to Mr. Kolls options to acquire
150,000 shares of Common Stock, at an exercise price of $.25 per share, 75,000
of which vested on April 30, 1995, and 75,000 of which vested on April 30,
1996. These options must be exercised within five years after vesting.

In June 1995, the Company issued to Mr. Slawter fully vested options
to acquire 10,000 shares of Common Stock at an exercise price of $.25 per
share.
Such options must be exercised within five years.

In March 1996, the Company issued to Mr. Kolls options to acquire up
to 50,000 shares of Common Stock at an exercise price of $.65 per share, all
of which will vest if he is employed on April 30, 1997. In November 1996, the
exercise price of the options was reduced to $.45. The options must be
exercised within five years of vesting.

In April 1996, the Company issued to Mr. Herbert options to acquire
up to 400,000 shares of Common Stock at an exercise price of $.65 per share.
In November 1996, the exercise price of the options was reduced to $.45.
Subject to Mr. Herbert's continued employment with the Company, the options
will become vested over a three year period, 200,000 during the first year,
and 100,000 during each year thereafter, in quarterly intervals. The options
must be exercised within five years of vesting.

In May 1996, the Company issued to Mr. Sterling options to acquire up
to 50,000 shares of Common Stock at an exercise price of $.65 per share, all
of which vested on June 30, 1997. In November 1996, the exercise price of the
options was reduced to $.45. The options must be exercised within five years
of vesting.

In May 1996, the Company issued to Mr. Sullivan, a former officer of
the Company, options to acquire up to 50,000 shares of Common Stock at an
exercise price of $.65 per share, all of which were to vest if he was employed
by the Company on June 30, 1997. In December 1996, in conjunction with Mr.
Sullivan's separation of employment with the Company, the Company agreed that
21,000 of these options became vested at such time and the remainder would be
cancelled. See "Managment - Officer Terminations." The options must be
exercised within five years of vesting.

In February 1997, the Company issued to Mr. Maxwell options to
acquire up to 200,000 shares of Common Stock at an exercise price of $.45 per
share. Subject to Mr. Maxwell's continued employment with the Company, the
options will become vested over a two year period at the rate of 25,000
options per quarter. The options must be exercised within five years of
vesting.

In June 1997, the Company issued to Mr. Kolls options to acquire up
to 100,000 shares of Common Stock at an exercise price of $.45 per share.
Subject to Mr. Kolls' continued employment with the Company, the options will
become vested over a one year period at the rate of 25,000 options per
quarter.

In June 1997, the Company issued to Mr. Sterling options to acquire
up to 100,000 shares of Common Stock at an exercise price of $.45 per share.
Subject to Mr. Sterling's continued employment with the Company, the options
will become vested over a one year period at the rate of 25,000 options per
quarter.

In June 1997, the Company issued to Mr. Herbert options to acquire up
to 100,000 shares of Common Stock at an exercise price of $.45 per share.
Subject to Mr. Herbert's continued employment with the Company, the options
will become vested over a one year period at the rate of 25,000 options per
quarter.

The Board of Directors is responsible for awarding stock options.
Such awards are made in the subjective discretion of the Board. The exercise
price of all the above options represents on the date of issuance of such
options an amount equal to or in excess of the market value of the Common
Stock issuable upon the exercise of the options. All of the foregoing options
are non-qualified stock options and not part of a qualified stock option plan
and do not constitute incentive stock options as such term is defined under
Section 422 of the Internal Revenue Code, as amended, and are not part of an
employee stock purchase plan as defined in Section 423 thereunder.

19
<PAGE>

Item 11. Security Ownership of Certain Beneficial Owners and Management

Common Stock

The following table sets forth, as of June 30, 1997, the beneficial
ownership of the Common Stock of each of the Company's directors and executive
officers, as well as by the Company's directors and executive officers as a
group. Except as set forth below, the Company is not aware of any beneficial
owner of more than five percent of the Common Stock. Except as otherwise
indicated, the Company believes that the beneficial owners of the Common Stock
listed below, based on information furnished by such owners, have sole
investment and voting power with respect to such shares, subject to community
property laws where applicable.

20
<PAGE>

Number of Shares
Name and Address of Common Stock Percent
of Beneficial Owner Beneficially Owned(1) of Class(2)
------------------- --------------------- -----------
George R. Jensen, Jr. 7,753,000 shares(3) 14.2%
3 Sugar Knoll Road
Devon, Pennsylvania 19333

Stephen P. Herbert 225,000 shares (4) *
536 West Beach Tree Lane
Strafford, Pennsylvania 19087

Haven Brock Kolls, Jr. 266,500 shares(5) *
150 Westridge Gardens
Phoenixville, Pennsylvania 19460

Keith L. Sterling 450,000 shares(6) *
114 South Valley Road
Paoli, Pennsylvania 19033

Leland P. Maxwell 50,000 shares (7) *
129 Windham Drive
Langhorne, Pennsylvania 19047

Peter G. Kapourelos 315,000 shares(8) *
1515 Richard Drive
West Chester, Pennsylvania 19380

William W. Sellers 1,011,950 shares(9) 1.9%
394 East Church Road
King of Prussia, Pennsylvania 19406

Henry B. duPont Smith 400,000 shares(10) *
350 Mill Bank Road
Bryn Mawr, Pennsylvania 19010

William L. Van Alen, Jr. 225,000 shares(11) *
Cornerstone Entertainment, Inc.
P.O. Box 727
Edgemont, Pennsylvania 19028

All Directors and Executive Officers
As a Group (9 persons) 10,552,450 shares(12) 19.3%

- ---------
*Less than one percent (1%)

(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and derives from either voting or
investment power with respect to securities. Shares of Common Stock issuable
upon conversion of the Preferred Stock, or shares of Common Stock issuable
upon exercise of options currently exercisable, or exercisable within 60
days of June 30, 1997, are deemed to be beneficially owned for purposes
hereof.

21
<PAGE>

(2) For purposes of computing the percentages under this table, it is assumed
that all shares of issued and outstanding Preferred Stock have been converted
into 10,334,460 shares of Common Stock, that all of the options or purchase
rights to acquire Common Stock which have been issued and are fully vested as
of June 30, 1997 (or within 60-days of June 30, 1997) have been converted into
3,353,300 shares of Common Stock. Of the 4,128,300 options or purchase rights
to acquire Common Stock issued as of June 30, 1997, only 775,000 of such
options do not become vested within 60-days thereof, and such options are
excluded from this table. For purposes of computing such percentages it has
also been assumed that all of the remaining 1995 Warrants have been exercised
for 1,414,000 shares of Common Stock, all of the remaining 1996 Warrants have
been exercised for 1,998,000 shares of Common Stock, that all of the 1996-B
Warrants have been exercised for 374,000 shares of Common Stock, that all of
the 1997 Warrants have been exercised for 1,600,000 shares of Common Stock,
that all of the warrants issued to affiliates and/or consultants to GEM
Advisors, Inc. have been exercised for 2,000,000 shares of Common Stock, and
all of the accrued and unpaid dividends on the Preferred Stock as of June 30,
1997 have been converted, into 3,418,176 shares of Common Stock. Therefore,
for purposes of computing the percentages under this table, there are
54,461,870 shares of Common Stock issued and outstanding.

(3) Includes 6,000,000 shares of Common Stock held by Mr. Jensen with his
minor children as joint tenants with right of survivorship. Includes 160,000
shares of Common Stock issuable upon conversion of the 16,000 shares of
Preferred Stock owned by him. An aggregate of 4,365,000 shares of Common Stock
(or under certain circumstances 1,030,000 shares of Common Stock) beneficially
owned by Mr. Jensen are subject to cancellation and are included in this
table. See "Escrow and Cancellation Arrangements."

(4) Includes 225,000 shares of Common Stock issuable to Mr. Herbert upon the
exercise of options. Does not include 275,000 shares of Common Stock issuable
pursuant to options not presently exercisable and not exercisable within 60
days of June 30, 1997.

(5) Includes 250,000 shares of Common Stock issuable upon exercise of options.
Includes 16,500 shares acquired through the escrow agreement. Does not include
100,000 shares of Common Stock issuable pursuant to options not presently
exercisable and not exercisable within 60-days of June 30, 1997.

(6) All shares of Common Stock held by Mr. Sterling on the date hereof are
held with his spouse as joint tenants with right of survivorship. Includes
350,000 shares of Common Stock issuable upon exercise of options. Includes
100,000 shares acquired as founders stock. Does not include 100,000 shares of
Common Stock issuable pursuant to options not presently exercisable and not
exercisable within 60-days of June 30, 1997.

(7) Includes 50,000 shares of Common Stock issuable to Mr. Maxwell upon the
exercise of options. Does not include 150,000 shares of Common Stock issuable
pursuant to options not presently exercisable and not exercisable within 60
days of June 30, 1997.

22
<PAGE>

(8) Includes 12,000 shares of Common Stock issuable upon the conversion of
1,000 shares of Preferred Stock beneficially owned by Mr. Kapourelos (based
upon the 12 to 1 conversion rate that is in effect through December 31, 1997,
subsequent to which this amount will revert to 10,000 shares). Includes 30,000
shares of Common Stock held on the date hereof by Mr. Kapourelos with his
spouse as joint tenants with right of survivorship. Includes 170,000 shares of
Common Stock issuable upon exercise of options.

(9) Includes 176,700 shares of Common Stock issuable upon the conversion of
14,725 shares of Preferred Stock beneficially owned by Mr. Sellers (based upon
the 12 to 1 conversion rate that is in effect through December 31, 1997,
subsequent to which this amount will revert to 147,250). Includes an aggregate
of 141,750 shares of Common Stock issuable upon exercise of the 1995 Warrants
beneficially owned by him. Of such 1995 Warrants, 60,000 are owned by the
Sellers Pension Plan of which Mr. Sellers is a trustee, 30,000 are owned by
Sellers Process Equipment Company of which he is a Director, and 15,000 are
owned by his wife. Includes an aggregate of 120,000 1996 Warrants beneficially
owned by him, of which 80,000 are owned by the Sellers Pension Plan and 40,000
are owned by his wife. Includes 6,000 shares of Common Stock owned by Sellers
Pension Plan, 4,500 shares of Common Stock owned by Sellers Process Equipment
Company, and 28,000 shares of Common Stock owned by Mr. Seller's wife.
Includes 155,000 shares of Common Stock issuable upon exercise of options.

(10) Includes 144,000 shares of Common Stock issuable upon conversion of the
12,000 shares of Preferred Stock beneficially owned by Mr. Smith (based upon
the 12 to 1 conversion rate that is in effect through December 31, 1997,
subsequent to which this amount will revert to 147,250). Includes 100,000
shares of Common Stock issuable upon exercise of options. Includes 80,000
shares of Common Stock issuable upon conversion of the 1996 Warrants held by
trusts for the benefit of Mr. Smith's children of which he is a trustee.

(11) Includes 125,000 shares of Common Stock issuable to Mr. Van Alen upon
exercise of options.

(12) Includes all shares of Common Stock described in footnotes (2) through
(11) above.

Preferred Stock

The following table sets forth, as of June 30, 1997 the beneficial
ownership of the Preferred Stock by the Company's directors and executive
officers, as well as by the Company's directors and executive officers as a
group. Except as set forth below, the Company is not aware of any beneficial
owner of more than five percent of the Preferred Stock. Except as otherwise
indicated, the Company believes that the beneficial owners of the Preferred
Stock listed below, based on information furnished by such owners, have sole
investment and voting power with respect to such shares, subject to community
property laws where applicable.

<PAGE>

Number of Shares
Name and Address of of Preferred Stock Percent
Beneficial Owner Beneficially Owned of Class(l)
- ------------------- ------------------ -----------

George R. Jensen, Jr.
3 Sugar Knoll Road
Devon, Pennsylvania 19333 16,000 1.9%

Haven Brock Kolls, Jr.
150 West Ridge Gardens
Phoenixville, Pennsylvania 19460 500 *

Peter G. Kapourelos
1515 Richard Drive
West Chester, Pennsylvania 19380 1,000 *

William W. Sellers
394 East Church Road
King Of Prussia, Pennsylvania 19406 14,725(2) 1.7%

Henry B. duPont Smith
350 Mill Bank Road
Bryn Mawr, Pennsylvania 19010 12,000(3) 1.4%

All Directors and
Executive Officers
As a Group (9 persons) (4) 44,225 5.1%
- --------------
*Less than one percent (1%)

(1) There were 861,205 shares of Preferred Stock issued and outstanding as of
June 30, 1997.

(2) Includes 4,000 shares of Preferred Stock owned by Sellers Pension Plan of
which Mr. Seller is a trustee, 1,000 shares of Preferred Stock owned by
Sellers Process Equipment Company of which Mr. Sellers is a Director, and
2,000 shares of Preferred Stock owned by his wife.

(3) Includes 2,000 shares of Preferred Stock held by trusts for the benefit of
Mr. Smith's children of which he is a trustee.

(4) As of June 30, 1997, Messrs. Van Alen, Herbert, Maxwell and Sterling did
not beneficially own any shares of Preferred Stock.

Escrow And Cancellation Arrangements

In January 1994, at the time of the Company's initial public
offering, and as a condition of effectiveness of the offering in Pennsylvania,
the Pennsylvania Securities Commission requested that Mr. Jensen place in
escrow with CoreStates Bank (formerly Meridian Bank), as escrow agent, all of
the 7,593,000 shares of Common Stock beneficially owned by him until June 30,
1998. Any additional shares of Common Stock acquired by him will also be held
in escrow. Subject to the provisions of the escrow agreement, Mr. Jensen has

24
<PAGE>

agreed not to sell, pledge, or transfer, directly or indirectly, any of the
Common Stock held in escrow.

The escrow agreement provides that it shall be terminated prior to
June 30, 1998, and all of Mr. Jensen's shares of Common Stock currently held
in escrow shall be released and returned to him in the event of any
dissolution, merger, consolidation, sale of assets, stock sale, liquidation,
tender offer, exchange offer, or otherwise of or to the Company or its
shareholders. In connection with any such event, Mr. Jensen would not receive
any consideration for his shares of Common Stock unless and until each
shareholder (other than Mr. Jensen) has received an amount equal to $1.00 per
share of Common Stock.

Mr. Jensen has agreed that 4,365,000 shares of his escrowed Common
Stock would be canceled by the Company and would no longer be issued and
outstanding unless one of the following occurs: (i) the bid price of the
Common Stock equals or exceeds $1.75 for 30 consecutive trading days at any
time during the period of July 1, 1996 through June 30, 1998; or (ii) the
Company's cumulative operating income (before taxes, dividends, or
extraordinary items) per share of Common Stock (on a fully diluted basis) at
any time after July 1, 1994, through June 30, 1998, equals or exceeds $.18.
Mr. Jensen has agreed that an amount equal to 1,030,000 shares of his escrowed
Common Stock (rather than 4,365,000 shares) would be canceled if at any time
after July 1, 1994 and prior to June 30, 1998, the Company's cumulative
operating income per share of Common Stock is at least $.12 but less than
$.18. See "Risk Factors - Charge to Income in the Event of Release of Escrow
Shares."

Subject to the terms of the escrow agreement, Mr. Jensen's Common
Stock will be held in escrow until the earlier of the satisfaction of any of
the above conditions (in which event no shares, or only 1,030,000 shares,
would be canceled), or June 30, 1998. Unless and until any such shares would
be canceled, and subject to the restrictions on sale or transfer pursuant to
the escrow arrangement, Mr. Jensen has retained all rights pertaining to such
shares, including voting rights.

Prior to the date hereof, Mr. Jensen cancelled an aggregate of
2,305,000 shares of Common Stock which had been owned by him and which had
been held in escrow and were subject to cancellation pursuant to the above
arrangements. See "Certain Transactions." Prior to such cancellation, a
maximum of 6,670,000 shares (rather than 4,365,000 shares as currently
provided) were subject to cancellation.

In January 1994, at the time of the Company's initial public
offering, and as a condition of effectiveness of the offering in Pennsylvania,
the Pennsylvania Securities Commission also requested that all of the
Directors and executive officers of the Company (in addition to Mr. Jensen)
place in escrow all of the shares of Common Stock owned or to be owned by them
until January 5, 1997. As set forth above, Mr. Jensen's shares of Common Stock
are to remain in escrow until June 30, 1998. The escrow agreement provided
that such escrowed shares could not be sold, pledged or transferred. On
January 5, 1997 all of such shares of Common Stock (except for Mr. Jensen)
were released from escrow, returned to their respective owner, and are no
longer subject to the terms of the escrow agreement. An aggregate of 1,009,500
shares of Common Stock were released from escrow and only Mr. Jensen's shares
remain in escrow.

Pennsylvania is a so-called "merit review" state pursuant to which
state regulators had broad discretion to impose conditions upon the Company in
connection with its initial public offering in Pennsylvania. The staff of the
Pennsylvania Securities Commission believed that the amount of Common Stock
and options to acquire Common Stock that had been issued to the Directors and
executive officers by the Company at the time of the initial public offering
exceeded the amount permitted by its informal guidelines, and therefore
requested the cancellation arrangements relating to Mr. Jensen's shares
described above. In addition, the staff believed that all such Common Stock
constituted "promotional securities" and requested that all such Common Stock
be placed in escrow for three years (and that Mr. Jensen's shares be subject
to the escrow arrangement for a longer period).

Convertible Securities Escrow Agreement

At the time of the issuance of an aggregate of $500,000 of
Convertible Securities in June 1997, the Company issued an aggregate of
2,500,000 shares of Common Stock to Lurio & Associates, as Escrow Agent, to be
held pursuant to the terms of an escrow agreement. The shares of Common Stock
are being issued and held in escrow in order to ensure that they are available
to the holders of the Convertible Securities upon conversion of the
Convertible Securities. Through September 25, 1997, the holders of $430,000 of
the Convertible Securities converted their securities into 1,568,517 shares of
Common Stock, leaving 350,000 shares of Common Stock held in escrow.

25
<PAGE>

Item 12. Certain Relationships and Related Transactions.

During October 1994, Mr. Jensen canceled an aggregate of 900,000 shares
of Common Stock owned by him and which had been held in escrow.

During October 1994, Mr. Jensen resigned as custodian under the Uniform
Gifts to Minors Act for his three minor children, over 15,000 shares of
Preferred Stock and is no longer the beneficial owner of those shares.

In March 1995, Mr. Jensen canceled an aggregate of 1,100,000 shares of
Common Stock owned by him and which had been held in escrow.

During March 1995, the Company issued to Keith L. Sterling options to
purchase up to 100,000 shares of Common Stock, to Henry B. duPont Smith
options to purchase up to 100,000 shares of Common Stock, to William W.
Sellers options to purchase up to 55,000 shares of Common Stock, to Peter G.
Kapourelos options to purchase up to 70,000 shares of Common Stock, and to Mr.
Van Alen options to purchase up to 25,000 shares of Common Stock.

During March 1995, the Company issued to Haven Brock Kolls, Jr., options
to purchase up to 150,000 shares of Common Stock. This option agreement is
exercisable at $.25 per common share.

In June 1995, the Company issued to Barry Slawter, a former officer of
the Company, options to purchase up to 10,000 share of Common Stock. This
option agreement is exercisable at $.25 per common share.

<PAGE>

In August 1995, pursuant to the special stock dividend paid by the
Company to holders of Preferred Stock, the Company issued 48,000 shares of
Common Stock to Mr. Jensen, 1, 500 shares of Common Stock to Mr. Kolls, 3,000
shares of Common Stock to Mr. Kapourelos, 11,175 shares of Common Stock to Mr.
Sellers, and 30,000 shares of Common Stock to Mr. Smith.

In February 1996, Mr. Jensen cancelled 305,000 shares of Common Stock
owned by him and which had been held in escrow.

In March 1996, the Company issued to Mr. Kolls options to acquire up to
50,000 shares of Common Stock at $.65 per share.

In April 1996, the Company issued to Mr. Herbert options to acquire up to
400,000 shares of Common Stock at $.65 per share. In May 1996, the company
issued to Mr. Sterling options to acquire up to 50,000 shares of Common Stock
at $.65 per share and issued to Edward J. Sullivan, a former officer of the
Company, options to acquire up to 50,000 shares of Common Stock at $.65 per
share.

At June 30, 1997 and 1996 and December 31, 1996, approximately $27,000,
$14,000 and $30,000, respectively, of the Company's accounts payable are due
to several shareholders for various legal and technical services performed.

In June 1996, the Company refunded a total of $87,200 to the holders of
the 1995 Warrants who had exercised the 1995 Warrants at $.40 per share. Of
such refunded amount, $4,500 was refunded to William W. Sellers.

During July 1996, the Company formalized certain agreements with William
W. Sellers and Peter G. Kapourelos, two Directors of the Company, who
performed consulting services during fiscal year 1996. During the year ended
June 10, 1996, $98,600 was paid for such services performed.

In November 1996, the Company reduced the exercise price of the 50,000
options issued to Mr. Kolls in March 1996, the 400,000 options issued to Mr.
Herbert in April 1996 and the 50,000 issued to Mr. Sterling in May 1996 from
$.65 to $.45.

In December 1996, in conjunction with the cancellation of Mr. Sullivan's
employment agreement, the Company agreed that 21,000 of the 50,000 options
granted to Mr. Sullivan during May 1996 became vested as of December 1, 1996
and the balance thereof were cancelled.

In February 1997, the Company issued to Mr. Maxwell options to purchase
up to 200,000 shares of Common Stock at $.45 per share.

In June 1997, the Company issued to Mr. Kolls options to acquire up to
100,000 shares of Common Stock at $.45 per share, to Mr. Sterling options to
acquire up to 100,000 shares of Common Stock at $.45 per share, and to Mr.
Herbert options to acquire up to 100,000 shares of Common Stock at $.45 per
share.

Mr. Jensen may be deemed a "promoter" of the Company as such term is
defined under the Federal securities laws.

Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K.

a. Financial Statements filed herewith at Item 7 hereof includes
balance sheets at June 30, 1997 and 1996 and statements of
operations, shareholders' equity, and cash flows, for the years
ended June 30, 1997 and 1996 and from the period January 16, 1992
(inception) through

<PAGE>

June 30, 1997. All other schedules for which provision is made in
regulation S-B of the Commission are not required under the
related instruction or are not applicable and therefore have been
omitted.

b. A report on Form 8-K was filed by the Company on July 8, 1997.

c. The Exhibits filed as part of, or incorporated by reference into
this Form 10-KSB are listed below.

Exhibit
Number Description
-------------------------------------------------------
3.1 Articles of Incorporation of Company filed on January 16,
1992 (Incorporated by reference to Exhibit 3.1 to Form
SB-2 Registration Statement No. 33-70992)

3.1.1 First Amendment to Articles of Incorporation of the
Company filed on July 17, 1992 (Incorporated by
reference to Exhibit 3.1.1 to Form SB-2 Registration
Statement No.
33-70992)

3.1.2 Second Amendment to Articles of Incorporation of the
Company filed on July 27, 1992 (Incorporated by
reference to Exhibit 3.1.2 to Form SB-2 Registration
Statement No. 33-70992)

3.1.3 Third Amendment to Articles of Incorporation of the
Company filed on October 5, 1992 (Incorporated by
reference to Exhibit 3.1.3 to Form SB-2 Registration
Statement No. 33-70992)

3.1.4 Fourth Amendment to Articles of Incorporation of the
Company filed on October 18, 1993 (Incorporated by
reference to Exhibit 3.1.4 to Form SB-2 Registration
Statement No. 33-70992)

3.1.5 Fifth Amendment to Articles of Incorporation of the
Company filed on June 7, 1995(Incorporated by reference
to Exhibit 3.1 to Form SB-2 Registration Statement No.
33-98808)

3.1.6 Sixth Amendment to Articles of Incorporation of the
Company filed on May 1, 1996 (Incorporated by reference
to Exhibit 3.1.6 to Form SB-2 Registration Statement
No. 333-09465)

3.1.7 Seventh Amendment to Articles of Incorporation of the
Company filed on March 24, 1997 (Incorporated by
reference to Exhibit 3.1.7 to Form SB-2 Registration
Statement No. 333-30853)

3.2 By-Laws of the Company (Incorporated by reference to
Exhibit 3.2 to Form SB-2 Registration Statement No.
33-70992)

10.1 Amended and Restated Employment and Non-Competition
Agreement between the Company and George R. Jensen,
Jr., dated as of July 1, 1992 (Incorporated by
reference to Exhibit 10.3 to Form SB-2 Registration
Statement No. 33-70992)

<PAGE>

10.1.2 First Amendment to Amended and Restated Employment and
Non-Competition Agreement between the Company and
George R. Jensen, Jr., dated as of April 29, 1996
(Incorporated by reference to Exhibit 10.1.2 to Form
SB-2 Registration Statement No. 333-09465)

10.2 Employment and Non-Competition Agreement between the
Company and Keith L. Sterling dated as of July 1, 1993
(Incorporated by reference to Exhibit 10.4 to Form SB-2
Registration Statement No. 33-70992)

10.2.1 First Amendment to Employment and Non-Competition
Agreement between the Company and Keith L. Sterling
dated as of April 29, 1996 (Incorporated by reference
to Exhibit 10.2.1 to Form SB-2 Registration Statement
No. 333-09465)

10.3 Employment and Non-Competition Agreement between the
Company and Edward J. Sullivan dated as of July 1, 1993
(Incorporated by reference to Exhibit 10.5 to Form SB-2
Registration Statement No. 33-70992)

10.3.1 First Amendment to Employment and Non-Competition
Agreement between the Company and Edward J. Sullivan
dated as of April 29, 1996 (Incorporated by reference
to Exhibit 10.3.1 to Form SB-2 Registration Statement
No. 333-09465)

10.4 Employment and Non-Competition Agreement between the
Company and Adele Hepburn dated as of January 1, 1993
(Incorporated by reference to Exhibit 10.7 to Form SB-2
Registration Statement No. 33-70992)

10.5 Robert L. Bartlett Common Stock Options dated as of
July 1, 1993 (Incorporated by reference to Exhibit 10.9
to Form SB-2 Registration Statement No. 33-70992)

10.6 Edward J. Sullivan Common Stock Options dated as of
July 1, 1993 (Incorporated by reference to Exhibit
10.10 to Form SB-2 Registration Statement No. 33-70992)

10.6.1 Edward J. Sullivan Common Stock Options dated as of
April 29, 1996 (Incorporated by reference to Exhibit
10.6.1 to Form SB-2 Registration Statement
No.333-09465)

10.7 Keith L. Sterling Common Stock Options dated July 1,
1993 (Incorporated by reference to Exhibit 10.11 to
Form SB-2 Registration Statement No. 33-70992)

10.7.1 Keith L. Sterling Common Stock Options dated as of
April 29, 1996 (Incorporated by reference to Exhibit
10.7.1 to Form SB-2 Registration Statement No.
333-09465)

<PAGE>

10.8 Adele Hepburn Common Stock Options dated as of July 1,
1993 (Incorporated by reference to Exhibit 10.12 to
Form SB-2 Registration Statement No. 33-70992)

10.9 Gregory C. Rollins Common Stock Options dates as of
August 23, 1993 (Incorporated by reference to Exhibit
10.13 to Form SB-2 Registration Statement No. 33-70992)

10.10 Lease agreement for Principal Executive Office dated
October 1, 1992 (Incorporated by reference to Exhibit
10.14 to Form SB-2 Registration Statement No. 33-70992)

10.10.1 First Amendment to Lease for Principal Executive Office
dated July 13, 1993 (Incorporated by reference to
Exhibit 10.14.1 to Form SB-2 Registration Statement No.
33-70992)

10.11 Application Sales Agreement of the Company to Card
Establishment Services, Inc. and letter of acceptance
thereof (Incorporated by reference to Exhibit 10.15 to
Form SB-2 Registration Statement No. 33-70992)

10.12 Non-Disclosure Agreement between USA Entertainment
Center, Inc. and Card Establishment Services, Inc.
(Incorporated by reference to Exhibit 10.16 to Form
SB-2 Registration Statement No. 33-70992)

10.13 Certificate of Appointment of American Stock Transfer &
Trust Company as Transfer Agent and Registrar dated
October 8, 1993 (Incorporated by reference to Exhibit
10.23 to Form SB-2 Registration Statement No. 33-70992)

10.14 Form of Escrow Agreement between the Company, Meridian
Trust Company and various shareholders dated as of
December 28, 1993 (Incorporated by reference to Exhibit
10.31 to Form SB-2 Registration Statement No. 33-70992)

10.14.1 Modification to Escrow Agreement dated as of October 6,
1994 between the Company, Meridian Trust Company, and
George R. Jensen, Jr. (Incorporated by reference to
Exhibit 10.31.1 to Form SB-2 Registration Statement No.
33-70992)

10.14.2 Joinder to Escrow Agreement dated as of February 14,
1996 by each of Haven Brock Kolls, Barry Slawter, and
Henry B. DuPont Smith Incorporated by reference to
Exhibit 10.14.2 to Form SB-2 Registration Statement No.
333-09465)

10.15 Employment and Non-Competition Agreement between the
Company and H. Brock Kolls dated as of May 1, 1994
(Incorporated by reference to Exhibit 10.32 to Form
SB-2 Registration Statement No. 33-70992)

10.15.1 First Amendment to Employment and Non-Competition
Agreement between the Company and H. Brock Kolls dated
as of May 1, 1994 (Incorporated by reference to Exhibit
10.15.1 to Form SB-2 Registration Statement No.
333-09465)

<PAGE>

10.16 Agreement of Lease dated March 16,1994, by and between
the Company and G.F. Florida Operating Alpha, Inc.
(Incorporated by reference to Exhibit 10.33 to Form
SB-2 Registration Statement No. 33-70992)

10.17 Megan N. Cherney Common Stock Options dated as of April
1, 1994 (Incorporated by reference to Exhibit 10.41 to
Form SB-2 Registration Statement No. 33-70992)

10.18 H. Brock Kolls Common Stock Options dated as of May 1,
1994 (Incorporated by reference to Exhibit 10.42 to
Form SB-2 Registration Statement No. 33-70992)

10.18.1 H. Brock Kolls Common Stock Options dated as of March
20, 1996 (Incorporated by reference to Exhibit 10.19 to
Form SB-2 Registration Statement No. 33-70992)

10.19 Barry Slawter Common Stock Options dated as of August
25, 1994 (Incorporated by reference to Exhibit 10.43 to
Form SB-2 Registration Statement No. 33-70992)

10.20 Employment and Non-Competition Agreement between the
Company and Barry Slawter dated as of July 12, 1994
(Incorporated by reference to Exhibit 10.44 to FormSB-2
Registration Statement No. 33-70992)

10.21 Employment Agreement dated June 20, 1994 between the
Company and Megan N. Cherney (Incorporated by reference
to Exhibit 10.45 to Form SB-2 Registration Statement
No. 33-70992)

10.22 First Amendment to Employment and Non-Competition
Agreement dated September 2, 1994 between Barry Slawter
and the Company (Incorporated by reference to Exhibit
10.46 to Form SB-2 Registration Statement No. 33-70992)

10.23 Consulting Agreement between Jerome M. Wenger and the
Company dated March 24, 1995 (Incorporated by reference
to Exhibit 28 to the Form S-8 Registration Statement
No. 33-92038 filed on May 6, 1995)

10.24 Amendment to Consulting Agreement between Jerome M.
Wenger and the Company dated May 19, 1995 (Incorporated
by reference to Exhibit 28.2 to Form S-8 filed on
November 1, 1995)

10.25 First Amendment to Employment and Non-Competition
Agreement between the Company and Barry Slawter dated
September 8, 1995

10.26 Remarketer/Integrator Agreement between the Company and
Dell Computer Corporation dated February 8, 1996
(Incorporated by reference to Exhibit 10.26 to Form
SB-2 Registration Statement No. 333-09465)

10.27 Letter Agreement between the Company and Diversified
Corporate Consulting Group, L.P., dated February 7,
1996 (Incorporated by

<PAGE>

reference to Exhibit 28.2 to Form S-8 Registration
Statement No. 333-2614)

10.28 Employment and Non-Competition Agreement between the
Company and Michael Lawlor dated June 7, 1996
(Incorporated by reference to Exhibit 10.28 to Form
SB-2 Registration Statement No. 333-09465)

10.29 Michael Lawlor Common Stock Option Certificate dated as
of June 7, 1996 (Incorporated by reference to Exhibit
10.29 to Form SB-2 Registration Statement No.333-09465)

10.30 Employment and Non-Competition Agreement between the
Company and Stephen P. Herbert dated April 4, 1996
(Incorporated by reference to Exhibit 10.30 to Form
SB-2 Registration Statement No. 333-09465)

10.31 Stephen P. Herbert Common Stock Option Certificate
dated April 4, 1996 (Incorporated by reference to
Exhibit 10.31 to Form SB-2 Registration Statement No.
333-09465)

10.32 Letter between the Company and William W. Sellers dated
July 17, 1996 (Incorporated by reference to Exhibit
10.32 to Form SB-2 Registration Statement No.
333-09465)

10.33 Letter between the Company and Peter G. Kapourelos
dated July 17, 1996 (Incorporated by reference to
Exhibit 10.33 to Form SB-2 Registration Statement No.
333-09465)

10.34 RAM Group Common Stock Option Certificate dated as of
August 22, 1996 (Incorporated by reference to Exhibit
10.34 to Form SB-2 Registration No. 33-98808)

10.35 RAM Group Common Stock Option Certificate dated as of
November 1, 1996 (Incorporated by reference to Exhibit
10.35 to Form SB-2 Registration No. 33-98808)

10.36 Philip A. Harvey Common Stock Option Certificate dated
as of November 1, 1996 (Incorporated by reference to
Exhibit 10.36 to Form SB-2 Registration No. 33-98808)

10.37 Joseph Donahue Common Stock Option Certificate dated as
of September 2, 1996 (Incorporated by reference to
Exhibit 10.37 to Form SB-2 Registration No. 33-98808)

10.38 Separation and Consulting Agreement between the Company
and Edward J. Sullivan dated December 17, 1996
(Incorporated by reference to Exhibit 10.1 to Form 8-K
filed on December 19, 1996)

10.39 Employment and Non-Competition Agreement between the
Company and Leland P. Maxwell dated February 24, 1997
(Incorporated by reference to Exhibit 10.39 to Form
SB-2 Registration No. 33-98808)

<PAGE>

10.40 Leland P. Maxwell Common Stock Option Certificate dated
February 24, 1997 (Incorporated by reference to Exhibit
10.40 to Form SB-2 Registration No. 33-98808)

10.41 Letter between the Company and GEM Advisers, Inc.
signed May 15, 1997 (Incorporated by reference to
Exhibit 10.1 to Form 8-K filed on May 22, 1997)

10.42 Business Express Agreement between the Company and
1217909 Ontario Inc. dated May 20, 1997 (Incorporated
by reference to Exhibit 10.42 to Form 8-K filed on May
22, 1997)

10.43 H. Brock Kolls Common Stock Option Certificate dated as
of June 9, 1997 (Incorporated by reference to Exhibit
10.43 to Form SB-2 Registration Statement No.
333-30853)

10.44 Stephen Herbert Common Stock Option Certificate dated
as of June 9, 1997 (Incorporated by reference to
Exhibit 10.44 to Form SB-2 Registration Statement No.
333-30853)

10.45 Keith Sterling Common Stock Option Certificate dated as
of June 9, 1997 (Incorporated by reference to Exhibit
10.45 to Form SB-2 Registration Statement No.
333-30853)

10.46 Michael Feeney Common Stock Option Certificate dated as
of June 9, 1997 (Incorporated by reference to Exhibit
10.46 to Form SB-2 Registration Statement No.
333-30853)

**10.47 Joint Venture Agreement dated September 24, 1997 between
the Company and Mail Boxes Etc.

27.1 Financial Data Schedule (Electronic Filing Only)
--------------------------------------------------------------------
** -- Filed herewith.

d. Schedules filed herewith include: None

<PAGE>

SIGNATURES

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

USA TECHNOLOGIES, INC.

By: /s/ George R. Jensen, Jr.
--------------------------------------
George R. Jensen, Jr., President
and Chief Executive Officer

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

Signatures Title Date
- ---------- ----- ----
<S> <C> <C>

/s/ George R. Jensen, Jr. Chairman of the Board of Directors, September 26, 1997
- ---------------------------- President and Chief Executive Officer
George R. Jensen, Jr (Principal Executive Officer)

/s/ Leland P. Maxwell Vice President and Chief Financial September 26, 1997
- ---------------------------- Officer (Principal Accounting Officer)
Leland P. Maxwell

/s/ William W. Sellers Director September 26, 1997
- ----------------------------
William W. Sellers

/s/ Peter G. Kapourelos Director September 26, 1997
- ----------------------------
Peter G. Kapourelos

/s/ Henry B. duPont Smith Director September 26, 1997
- ----------------------------
Henry B. duPont Smith

/s/ William L. Van Alen, Jr. Director September 26, 1997
- ----------------------------
William L. Van Alen, Jr.

/s/ Keith L. Sterling Director September 26, 1997
- ----------------------------
Keith L. Sterling

/s/ Stephen P. Herbert Director September 26, 1997
- ----------------------------
Stephen P. Herbert

</TABLE>

<PAGE>
MBE Express(TM) Joint Venture Agreement

This Agreement is made this 24th day of September 1997, by and
between USA Technologies, Inc., a Pennsylvania corporation ("USA"), and Mail
Boxes Etc., a California corporation ("MBE").

Background

MBE is the world's largest franchisor of postal, business, and
communications retail service centers. USA has developed an unattended, credit
card activated business center known as the Business Express(TM). As more fully
set forth herein, the parties have created a joint venture in order to market
and sell the business centers under the name MBE Express(TM).

Agreement

NOW THEREFORE, intending to be legally bound hereby, the parties
hereto agree as follows:

1. Joint Venture. USA and MBE hereby form a joint venture of which
each of the them shall be a fifty percent (50%) partner unless otherwise
specified herein. The name of the joint venture shall be the "MBE Express(TM)
Joint Venture".

2. Advisory Committee. The joint venture shall be managed by an
advisory committee, the members of which shall consist one-half of
representatives of MBE and one-half of representatives of USA. The actual
number of members serving on the advisory committee shall be mutually agreed
upon by the partners from time to time. The advisory committee shall among
other things establish and maintain the business plan for the partnership as
well as approve the marketing budget for the partnership. The advisory
committee

<PAGE>

shall meet no less than every two months in order to review the progress of
the joint venture and to formulate business strategy.

3.Purpose.

A. During the term of the joint venture, the joint venture
shall have the exclusive right to market and sell the MBE Express(TM) to the
hospitality industry, travel industry, convention centers, colleges,
universities, supermarkets, banks, military, convenience stores, and mass
merchandisers located in the United States. The joint venture shall also have
the nonexclusive right to market and sell the MBE Express(TM) in those countries
in which MBE has Master Franchise Agreements.

B. Definition. For all purposes hereof, the term "MBE
Express(TM)" or "Business Express(TM)"shall mean an unattended, credit card
activated business center consisting of at least two separate technologies
(i.e., computer, copier, laptop workstation, or facsimile machine). For
purposes hereof, USA's Public PC(TM) product or MBE's in-center computer
workstation (a computer and a printer) shall not be considered as two separate
technologies but only one technology.

4. Private Label Product.

A. During the term of the joint venture, in the event a
customer would not desire to purchase the MBE Express(TM) in the industries
referred to above, USA would have the option to directly sell to that customer
a private label business center utilizing any name other than the MBE
Express(TM), including the name Business Express(TM) or any other name it deems
appropriate.

<PAGE>

B. Such private label product would not utilize the data
base technology to be developed by USA referred to in paragraph 10, and shall
not utilize the trademarks and trade dress used by the MBE Express(TM). In
connection with any direct private label sales made by USA an amount equal to
two percent (2%) of the gross revenues from each terminal would be paid to the
joint venture and applied towards the marketing and sales expenses of the
joint venture and any excess shall be split equally between the partners.

C. If any proposed sale of the MBE Express(TM) by the joint
venture creates a franchise encroachment issue within the MBE system, USA may
sell a non-MBE Express(TM) branded product (i.e., Business Express(TM)) in those
locations which are affected under the same terms and conditions as set forth
in Sections 4.A and 4.B above.

5. USA Terminals. During the term of the joint venture, USA shall be
permitted to sell its control system terminals to any person or entity
whatsoever. [two sentences intentionally omitted] USA shall be permitted to
continue to market and sell its Business Express(TM) business centers to
industries not specifically identified in Section 3 above.

6. MBE Exclusive. During the term of the joint venture, MBE

<PAGE>

shall not use, sell, endorse, approve, or purchase any unattended, credit card
activated technology or terminals other than those offered by USA for use in
connection with any of the equipment included in the MBE Express(TM). During the
term of the joint venture, MBE shall not purchase, endorse, approve, use,
sell, or market any unattended business center other than the MBE Express(TM).
USA acknowledges that the MBE franchises are independently owned and operated
and that any obligations of such franchisees shall be set forth in appropriate
processing, sales, or placement agreements to be entered into between USA and
such franchisees.

7. Business Center Components. The manufacturers of the third party
components (i.e., computers, furniture, facsimile machines, printers and copy
machines) included in the MBE Express(TM) shall be agreed upon by the partners.
Any such components shall be purchased directly by USA or MBE, and as shall be
mutually agreed upon by the partners, MBE shall assist USA with financing
arrangements required in connection therewith, including MBE being a guarantor
of such obligations. USA shall have the control system terminals manufactured
on behalf of the joint venture. All such components shall be supplied to the
joint venture at cost.

8. Sales Revenues. The actual selling price of the MBE Express(TM)
shall be established by the partners. Any gross profit (as defined below)
earned by the joint venture from sales on a corporate/national account level
(where the buying decision is made at a customer's headquarters rather than at
the local or store level) would be split equally between USA and MBE. Any
gross

<PAGE>

profit earned by the joint venture from sales to MBE franchisees in connection
with placement handoffs (i.e., sales leads - where host location has already
committed to placing a MBE Express(TM)) provided by either USA or MBE would be
split equally between USA and MBE. For any sales made to the host location at
the local or store level, the gross profit earned by the joint venture would
be split so that the partner responsible for contractually obligating the
customer for that particular sale would receive 75% of the gross profit and
the other partner 25% of the gross profit. For purposes of determining which
partner is responsible for contractually obligating the customer, the term
"partner" shall include such partner's affiliate or franchisee; provided,
however, that only a partner (i.e., USA or MBE) shall be entitled to receive
any payments of gross proceeds hereunder. For all purposes of this Section 8,
the term "gross profits" shall mean the sales price received for the MBE
Express(TM) less the total cost of goods sold (third party costs included) to
deliver, configure, warehouse, assemble, and install the business center
("Order Fulfillment"). All Order Fulfillment tasks may be performed by the
joint venture either directly or outsourced as shall be agreed upon by the
partners.

9. Other Revenues. Notwithstanding anything else set forth herein, it
is the partners intention that any and all revenues, rebates, or income
whatsoever received by the joint venture or either partner and which are
generated or result from the use of, or from any of the marketing or sale
activities in connection with,

<PAGE>

MBE Express(TM) shall be split equally between the partners. Such use or
activities shall include but not be limited to any cooperative marketing,
advertising, licensing, and electronic commerce conducted on the MBE
Express(TM).

10. Intellectual Property.

A. Each of the partners hereby grants to the joint venture
at no cost an appropriate license to use their respective trademarks, logos,
and intellectual property as described herein. During the term of the joint
venture, the trademark MBE Express(TM) is hereby exclusively licensed to the
joint venture by MBE.

B. USA shall, at its cost, develop a customer data
collection network (the "Network") to be hosted by MBE's ISP. The Network
shall be used by all MBE Express(TM) business centers. The Network is hereby
licensed to the joint venture by USA at no cost. Upon the termination of this
Agreement, any and all customer data gathered, or to be gathered after such
termination, pursuant to the Network shall be and remain the sole property of
MBE. Following any such termination, USA shall have the right to use the
Network technology in order to develop its own customer data collection
network to be used in any of its products.

C. During the term of the joint venture, USA would not
utilize the Network in any private label sales or placements of the business
centers or in any other product which is similar to the MBE Express(TM) or
Business Express(TM). USA would, however, be able to utilize the Network
technology solely in connection with its Public PC(TM) product (i.e., computer
and printer) and USA shall use its best

<PAGE>

efforts to utilize MBE's ISP to host the Network technology and to include an
e-MBE icon at no additional cost. MBE shall be able to use the Network for any
of its in-center computer workstations and any other computer station so long
as such computer station utilizes USA's TransAct(TM) card swipe technology. Upon
termination of the joint venture, USA shall be permitted to utilize the
Network technology to develop its own customer data collection network for use
in connection with any and all of its products.

11. Budget. The partners would agree from time to time (but not less
frequently than annually) upon a budget which would cover anticipated expenses
for sales and marketing of the MBE Express(TM). Any such expenses in the budget
shall only be for third party out-of-pocket expenses incurred by the partners
(unless otherwise agreed to) and would include items such as for trade shows,
trade advertising, direct mail, telemarketing, national account coverage,
merchandising, market research and lead generation. These expenses would be
split equally between the partners. Any items not covered in the approved
budget would have to be agreed upon in advance by the partners. Neither
partner shall be reimbursed for their own related (internal) expenses.

12. Administrative Matters. The books and records of the joint
venture would be maintained by USA. USA shall collect and make appropriate
disbursements of the revenues of the joint venture. Any pre-approved,
authorized or agreed upon expenses of the joint venture which are in an amount
of $5,000 or less may be paid by one partner and the other partner shall
reimburse that partner for its

<PAGE>

share of the expense. If any such expense is in excess of $5,000, then such
expense shall be paid by both partners directly at the same time; provided,
however, that upon mutual agreement of the partners, one partner may pay such
expense and be reimbursed by the other partner for its share of such expense.
All expenses would have to have been reflected in the approved budget or
separately approved by each partner in advance. If in the future, the joint
venture would require a dedicated staff, the partners agree that the costs
thereof (i.e., salaries and benefits) would be equally split between them. The
joint venture shall be audited on an annual basis as part of USA's regular
audit and the joint venture shall pay its fair share of such audit.

13. MBE Express(TM) Processing.

A. In connection with all sales of the MBE Express(TM), USA
shall act as the merchant for all credit card sales. USA and the owner of each
such business center shall enter into an appropriate licensing and processing
agreement which shall reflect the terms and conditions of subparagraph B
below. In this regard, USA shall use its best efforts to utilize the lowest
cost processor.
B. If the sale of a business center is made to a person
other than a MBE franchisee, USA shall retain 5% of the gross revenues, MBE
shall retain 5% thereof, and the owner of the business center shall retain 90%
thereof. If, however, the cost of USA's processor shall be in excess of 5%,
then the appropriate percentage retained by USA shall be appropriately
increased and the percentage retained by MBE shall be appropriately decreased
so that

<PAGE>

the owner of the business center shall at all times retain a minimum of 90% of
the gross revenues; provided, however, that if the cost of USA's processor
shall exceed 6%, any such excess shall be borne equally by USA and MBE. For
example, if the cost of processing is 6%, USA would retain 6% of the proceeds
and MBE would retain 4% thereof. If the processing costs are 7%, USA would
retain 6 1/2% and MBE would retain 3 1/2%. USA reserves the right to forward
to the business center owner its share of the gross proceeds on a monthly
basis (rather than on the first and fifteenth of each month).

C. In connection with any sales of the MBE Express(TM) made to
a MBE franchisee, USA shall retain 5% and the MBE franchisee shall retain 95%
of the gross revenues. If, however, the cost of USA's processor shall be in
excess of 5%, then the percentage retained by USA shall be appropriately
increased and the percentage retained by the MBE franchisee shall be
appropriately decreased; provided, however, that if the cost of USA's
processor shall exceed 6%, the excess shall be borne equally by USA and the
MBE franchisee. For example, if the cost of processing is 6%, USA would retain
6% of the proceeds and the MBE franchisee would retain 94% thereof. If the
processing costs are 7%, USA would retain retain 6 1/2% and the MBE franchisee
would retain 93 1/2%. USA shall forward to MBE the MBE franchisee's portion of
the gross proceeds on the first and fifteenth of each month.

D. USA and MBE reserve the right to restructure the above
arrangement in the event that the charges for credit card

<PAGE>

processing increases above anticipated levels in the future.

14. Monthly Service Fees.

A. For all sales of the MBE Express(TM), including sales to
MBE's franchisees, USA shall be entitled to receive a monthly service fee of
$25 per control system terminal from the owner of the business center and USA
will retain the monthly payment from the amount received. USA shall rebate to
MBE on a monthly basis the sum of $5.00 from each and every such monthly
payment.
B. In consideration of the monthly service fee, USA shall be
responsible for all control system terminal related issues, including handling
questions from the owner of the business center about the operation of the
terminals, sending usage information to the owner of the MBE Express(TM) by
e-mail (with a copy thereof to MBE), changing pricing for location customers
remotely, and changing advertising on the purchase receipts remotely.

15. Help Desk. Any questions or issues involving the equipment
contained in the MBE Express(TM) business centers or from users of the equipment
(other than those specifically referred to in Section 14.B above), shall be
handled by a help desk to be established by the joint venture either directly
or through outsourcing.

16. Development Projects. The partners shall mutually attempt to
agree from time to time upon development projects and how such projects would
be funded. Such development projects would include customer driven requests
for custom hardware, software, merchandising, etc.

<PAGE>

17. Term of Joint Venture.

A. The initial term of the joint venture shall be for five
years from the date hereof and shall automatically be continued from year to
year thereafter unless terminated by notice from either partner to the other
partner at least 90 days prior to the end of the initial five year term or any
one year extension thereof. Any such termination could be for any reason
whatsoever and whether or not any "cause" exists.

B. If the joint venture has not met the following cumulative
performance goals, then USA may by sixty days prior written notice to MBE be
released from the exclusive restrictions set forth in Sections 3 and 4 hereof
as they relate to the Business Express(TM):
Number of MBE Express(TM)
Contract Year Locations Open
----------------------- -----------------------
Beginning of Year Three 2,000 business centers
Beginning of Year Four 3,000 business centers
Beginning of Year Five 4,000 business centers

Upon the release of USA pursuant to any such notice, MBE shall also be
released from the exclusivity provisions set forth in Section 6 hereof.
Notwithstanding the above, any sales of the MBE Express(TM) shall remain subject
to all of the terms and conditions of this Agreement.

C. Notwithstanding subparagraph A or B, the joint venture
may be terminated by either partner at any time if the other partner has
breached any material term or condition hereof; provided, however, that the
partner terminating the joint venture

<PAGE>

shall have provided the other partner with written notice of such alleged
breach and at least sixty days in order to cure any such alleged breach prior
to terminating this Agreement, and this Agreement shall not be terminated if
such alleged violation has been cured within such sixty day period.

D. Upon any termination of this Agreement, the partners
shall be free to engage in any business whatsoever; provided that the partners
shall not utilize the intellectual property of the other. Upon any such
termination, USA shall continue to perform its responsibilities and make
payment to MBE as set forth in Sections 13 and 14 hereof for all MBE Express(TM)
operations sold or placed by the joint venture. Upon any termination, MBE
shall retain the right to use the trade name MBE Express(TM). Additionally, MBE
shall retain the perpetual right to utilize the Network (as hosted by MBE's
ISP) as well as any customer data collected prior to any such termination, or
to be collected after termination, pursuant to the Network, and USA reserves
the right to use the Network technology in order to develop its own
proprietary network for use in any and all of its products but shall have no
right to the customer data collected pursuant to the Network.

18. Nonassignability. Without the prior written consent of the other
partner, neither partner shall, directly or indirectly, sell, pledge,
hypothecate, encumber, assign, convey, transfer, grant an option in connection
with, or in any other manner dispose of all or any portion of its interest in
the joint venture, whether voluntary or involuntary, or by operation of law,
or attempt to do

<PAGE>

any of the foregoing. Any act in violation of this Section shall be null and
void as against the joint venture and the partners. No other person or entity
shall be admitted as a partner of the joint venture unless USA and MBE shall
have both agreed thereto.

19. Good Faith. The partners shall cooperate with each other in good
faith to attempt to resolve any business issues which may arise in the future
from time to time. In this regard, the partners shall take any appropriate
actions and execute and deliver any appropriate documents which may be
necessary or appropriate to carry out the transactions contemplated by this
Agreement.

20. Notices. Any notices or consents required or permitted by this
Agreement shall be in writing and shall be deemed delivered if delivered in
person or sent by certified mail, postage prepaid, return receipt requested,
as follows, unless such address is changed by written notice hereunder:

If to USA:
USA Technologies, Inc.
200 Plant Avenue
Wayne, Pennsylvania 19087
Attn. Mr. George R. Jensen, Jr.,
Chief Executive Officer

If to MBE:

Mail Boxes Etc.
6060 Cornerstone Ct. West
San Diego, California 92121-3975
Attn. Mr. Thomas Herskowitz,
Senior Vice President Development

21. Applicable Law. The substantive laws of the Commonwealth of
Pennsylvania (without regard to its conflicts of laws rules) shall govern the
construction of this Agreement and the rights and

<PAGE>

remedies of the partners hereto. The headings of the Sections of this
Agreement are for convenience only; they form no part of this Agreement and
shall not affect its interpretation. If any provision of this Agreement is
held to be invalid, the same shall not affect the remaining provisions of this
Agreement which shall continue in full force and effect.

22. Arbitration. All disputes, controversies, or misunderstandings
whatsoever arising out of or in connection with this Agreement, shall be
settled and resolved by binding arbitration pursuant to the Commercial
Arbitration Rules of the American Arbitration Association. The arbitration
shall be convened in the City of Philadelphia, Pennsylvania, if MBE is the
moving party, or in San Diego, California, if USA is the moving party. The
arbitration shall be conducted by a single arbitrator, or if the dispute
involves more than $50,000 by three arbitrators, to be selected by the
partners pursuant to such rules. The costs and expenses of the arbitration, as
well as the arbitrator's compensation shall be paid by the partners as shall
be determined by the arbitrator(s). The arbitrator(s) shall not have any power
to alter, modify or change any of the terms of this Agreement or to grant any
remedy which is either inconsistent with or prohibited by the terms of this
Agreement, or not available in a court of law. The arbitrator(s) shall not
have the authority to commit errors of law or errors of legal reasoning. In
addition, the arbitrator(s) shall have no power or authority to award
punitive, consequential or incidental damages. The arbitrator(s) shall, within
thirty days

<PAGE>

after the matter has finally been submitted to him or her, render a written
decision making specific findings of fact and setting forth the reasons for
the decision which shall be consistent with the terms of this Agreement. The
partners intend that this Section shall survive the termination of or
expiration of this Agreement. The decision and award of the arbitrator(s)
shall be final and binding upon the partners and judgment may be entered on
the award in any court of competent jurisdiction.

23. Binding Effect. This Agreement shall inure to the benefit of,
and shall be binding upon, the respective permitted successors and assigns of
the parties hereto; provided, however, that neither USA nor MBE shall assign
this Agreement in whole or in part without the prior written consent of the
other. This Agreement constitutes the entire agreement between the partners
hereto, and may only be amended or modified by a writing signed on behalf of
the partners hereto.

IN WITNESS WHEREOF, the partners hereto have executed and delivered
this Agreement on the day and year first above written.

USA TECHNOLOGIES, INC. MAIL BOXES ETC.

By: /s/ George R. Jensen, Jr. By: /s/ Thomas Herskowitz
------------------------- ---------------------
George R. Jensen, Jr., Thomas Herskowitz,
Chief Executive Senior Vice President
Officer Development

<PAGE>

Exhibit 11 - Statement of Earnings (Loss) Per Share Computation.

Year Ended June 30,

1996 1997

Weighted average number of
Common shares outstanding 14,908,904 20,984,381
=====================================

Net Loss $(2,451,697) $(3,120,712)

Cumulative Preferred Dividends $ (954,300) $(1,243,295)
--------------------------------------

Loss Applicable to Common Shares $(3,405,997) $(4,364,007)
======================================
Loss Per Common Share $ (.23) $ (.21)
======================================

Note: No exercise of stock options, purchase rights, stock purchase
warrants, or conversion of Preferred Stock and cumulative preferred
dividends was assumed because the exercise of such securities would be
anti-dilutive.

<ARTICLE> 5
<CIK> 0000896429
<NAME> USA TECHNOLOGIES, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1.000
<CASH> 630,266
<SECURITIES> 0
<RECEIVABLES> 146,663
<ALLOWANCES> (19,345)
<INVENTORY> 378,318
<CURRENT-ASSETS> 1,211,572
<PP&E> 353,286
<DEPRECIATION> 174,829
<TOTAL-ASSETS> 1,410,279
<CURRENT-LIABILITIES> 539,658
<BONDS> 0
0
7,024,811
<COMMON> 4,355,334
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,410,279
<SALES> 490,614
<TOTAL-REVENUES> 607,772
<CGS> 525,090
<TOTAL-COSTS> 3,742,961
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,199
<INCOME-PRETAX> (3,120,712)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,120,712)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,120,712)
<EPS-PRIMARY> (0.21)
<EPS-DILUTED> (0.21)

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