USA TECHNOLOGIES INC, POS AM, 1997-10-16

USA TECHNOLOGIES INC
POS AM, 1997-10-16
EQUIPMENT RENTAL & LEASING, NEC

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As filed with the Securities and Exchange Commission on October 16, 1997

Registration No. 333-09465
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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

POST-EFFECTIVE AMENDMENT NO. 3

FORM SB-2

Registration Statement
Under

The Securities Act of 1933

USA TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in its Charter)

Pennsylvania 7359 23-2679963

(State or other (Primary Standard Industrial (I.R.S. employer
jurisdiction of Classification Code Number) Identification No.)
incorporation or
organization)

200 Plant Avenue
Wayne, Pennsylvania 19087
(Address of principal executive offices and zip code)

George R. Jensen, Jr.
Chief Executive Officer
USA Technologies, Inc.
200 Plant Avenue
Wayne, Pennsylvania 19087
(610) 989-0340
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
Douglas M. Lurio, Esquire
Lurio & Associates
1760 Market Street, Suite 1300
Philadelphia, PA 19103-4132
(215) 665-9300
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Approximate date of proposed sale to the public: From time to time
after this Registration Statement becomes effective.

If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, check the
following box: [ ]

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: [X]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ]

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If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]

The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.

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PROSPECTUS

USA TECHNOLOGIES, INC.

COMMON STOCK

This Prospectus relates to up to 5,200,000 shares of Common Stock, no par
value (the "Common Stock"), of USA Technologies, Inc. (the "Company") which may
be sold from time to time by the shareholders of the Company (the "Selling
Shareholders") who purchased 1996 Common Stock Purchase Warrants (the "1996
Warrants") from the Company. The 1996 Warrants were issued pursuant to a warrant
agreement dated as of May 1, 1996, by and between the Company and American Stock
Transfer & Trust Company, the warrant agent (the "1996 Warrant Agreement").

The Common Stock which may be sold by the Selling Shareholders pursuant to
this Prospectus will be purchased from the Company by the Selling Shareholders
pursuant to the exercise of the 1996 Warrants. The Company issued 5,200,000 1996
Warrants to the Selling Shareholders in May 1996 pursuant to the 1996 Warrant
Agreement in a transaction exempt from the registration requirements of the
Securities Act of 1933, as amended (the "Act"), and applicable state securities
law. Each 1996 Warrant entitles the holder thereof to purchase one share of
Common Stock for $.25 through October 31, 1997, and for $.50 at any time
thereafter through May 31, 2001. The exercise price of the 1996 Warrants may be
reduced by the Company at any time, or from time to time. As more fully
described below, through September 30, 1997, 3,242,000 1996 Warrants have been
exercised at a reduced price. The 1996 Warrants are exercisable at any time
through May 31, 2001, or such later date as the Company may determine. The
Company agreed, at its cost and expense, to register under the Act the Common
Stock underlying the 1996 Warrants for resale by the Selling Shareholders, and
to use its best efforts to register or qualify such Common Stock for resale
under applicable state securities laws. See "Description of Securities - 1996
Common Stock Purchase Warrants." The Common Stock may be sold from time to time
by the Selling Shareholders named herein pursuant to this Prospectus. See
"Selling Shareholders".

As a condition to obtaining the Common Stock being offered hereby, the
Selling Shareholders must exercise the 1996 Warrants by tendering the per share
exercise price required under the 1996 Warrant Agreement. Through September 30,
1997, the 1996 Warrants were exercised for a total of 3,242,000 shares of Common
Stock which generated gross proceeds to the Company of $650,400. All of such
1996 Warrants were exercised at $.20 per share of Common Stock except 40,000
Warrants which were exercised at .25 per share. In the event all remaining
1,958,000 1996 Warrants are exercised at $.25, the Company would receive gross
proceeds of $489,500. If the 1996 Warrants are exercised at a price less than
$.25, the gross proceeds received by the Company would be reduced. There is no
assurance that any of the remaining 1996 Warrants will be exercised by the
Selling Shareholders, and if none of the remaining 1996 Warrants are exercised,
the Company would not receive any gross proceeds. The Company is responsible for
all of the costs and expenses incident to the offer and sale of the Common Stock
by the Selling Shareholders pursuant to this Prospectus other than any brokerage
fees or commissions incurred by the Selling Shareholders

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in connection therewith.

The Common Stock offered by the Selling Shareholders pursuant to this
Prospectus may be sold from time to time by the Selling Shareholders. The sale
of the Common Stock offered hereby by the Selling Shareholders may be effected
in one or more transactions that may take place on the over-the-counter market,
including ordinary brokers' transactions, privately negotiated transactions or
through sales to one or more dealers for resale of such securities as
principals. Usual and customary or specifically negotiated brokerage fees or
commissions may be paid by the Selling Shareholders.

The Company will not receive any of the proceeds from the sale of the
Common Stock by the Selling Shareholders. The Selling Shareholders will receive
all of the net proceeds from the sale of the Common Stock and will pay all
selling commissions, if any, applicable to the sale of the Common Stock.

The Common Stock is currently traded on the OTC Electronic Bulletin
Board under the symbol USTT and the closing bid price for the Common Stock on
October 14, 1997 was $.53 per share.

See "Risk Factors" on page 5 of this Prospectus for a discussion of
certain factors that should be considered by prospective investors in the Common
Stock offered hereby.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.

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The date of this Prospectus is October 16, 1997.

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AVAILABLE INFORMATION

The Company has filed a registration statement on Form SB-2 (together
with any amendments thereto, the "Registration Statement") with the Securities
and Exchange Commission (the "Commission") under the Act with respect to the
Common Stock. This Prospectus, which constitutes a part of the Registration
Statement, omits certain information contained in the Registration Statement and
reference is made to the Registration Statement and the exhibits and schedules
thereto for further information with respect to the Company and the Common
Stock. Statements contained in this Prospectus as to the contents of certain
documents filed with, or incorporated by reference in the Registration Statement
are not necessarily complete, and in each instance reference is made to such
document, each such statement being qualified in all respects by such reference.

The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports and other information with the Commission.
Such reports, and other information filed by the Company can be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's
Regional Offices located at 7 World Trade Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such material can also be obtained at
prescribed rates from the Public Reference Section of the Commission,
Washington, D.C. 20549. In addition, registration statements and certain other
filings made with the Commission through its Electronic Data Gathering, Analysis
and Retrieval System are publicly available through the Commission's site on the
Internet's World Wide Web, located at http://www.sec.gov.

The Company will provide a copy of any or all documents incorporated by
reference herein (exclusive of exhibits unless such exhibits are specifically
incorporated by reference therein), without charge, to each person to whom this
Prospectus is delivered, upon written or oral request to USA Technologies, Inc.,
200 Plant Avenue, Wayne, Pennsylvania 19087, Attn: George R. Jensen, Jr., Chief
Executive Officer (telephone (610) 989-0340).

The Company will furnish record holders of its securities with annual
reports containing financial statements audited and reported upon by its
independent auditors, quarterly reports containing unaudited interim financial
information, and such other periodic reports as the Company may determine to be
appropriate or as may be required by law.

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PROSPECTUS SUMMARY

The following information does not purport to be complete and is
qualified in its entirety by and should be read in conjunction with the more
detailed information and Financial Statements, including the notes thereto,
appearing elsewhere in this Prospectus. Prospective investors should consider
carefully the factors discussed below under "Risk Factors".

The Company

USA Technologies, Inc., a Pennsylvania corporation (the "Company"), was
founded in January 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. The
Company's customers are university libraries, public libraries, hotels and
retail locations. In September 1996, the Company commenced offering its control
systems to the hospitality industry under the name Business Express(TM). The
Company anticipates generating its revenues both from the sale of equipment
utilizing its control systems, from retaining a percentage of the revenues
generated from all credit card transactions conducted through its control
systems, and from monthly administrative fees paid by various locations
utilizing its control systems.

In order to activate the equipment attached to the Company's control
systems, the consumer must swipe a valid credit card through the control system.
The control system then transmits this request to the credit card processor. The
credit card processor verifies that the credit card is valid and authorizes the
transaction. The control system then activates the equipment for use by the
consumer. When the consumer has finished using the equipment, the control system
transmits a record of the transactions to the Company's computer center. On a
daily basis, the Company transmits the transaction information collected from
all of its installed control devices to the credit card processor. The credit
card processor electronically transfers the proceeds derived from these
transactions, less the credit card processor's charge, to the Company. The
Company then forwards a check to the location representing its share of the
proceeds.

As of June 30, 1997, the Company had installed at commercial locations
a total of 285 devices and revenues have been nominal. See "Business." As of
June 30, 1997, 39 Business Express(TM) units containing 130 control systems have
been installed in hotels located throughout the United States and Canada. Of the
39 units which have been installed, 32 have included the purchase of equipment
from the Company and the licensing of its control systems and 7 were installed
on a revenue-sharing basis and included only the licensing of its control
systems. See "Business -- Business Express(TM)."

The Company has entered into an agreement with International Business
Machines Corporation ("IBM") pursuant to which the Company has been approved as
an IBM Business Partner - Personal Computer Reseller. The Company has also
entered into similar agreements with Dell Computer Corporation and
Hewlett-Packard Company. See "Business -- Procurement."

In March 1997, the Company entered into a co-marketing agreement with
Minolta Corporation pursuant to which the Company and Minolta will work together
in order to market and sell the Business Express(TM) featuring the Minolta
copier to the hospitality industry. The Company has also entered into a
co-marketing agreement with Lexmark International, Inc., pursuant to which the
Company and Lexmark will work together to market and sell the Business
Express(TM) featuring the Lexmark printer to the hospitality industry. See
"Business -- Marketing."

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 proposed Wal-Mart stores in
Canada. The total purchase price for the 10 units would be $1,118,261 (payable
in Canadian dollars). Fifty percent of the purchase price for each unit would be
payable prior to installation and the balance would be payable upon
installation. The agreement also appoints USA as the purchaser's agent in
connection with the processing, collection, and disbursement of all revenue from
credit card sales in connection with the units. The agreement states that the
Business Express(TM) units shall be installed at the purchaser's discretion.
Through June 30, 1997, one unit had been installed and none have been installed
thereafter. The dates of installation of any of the remaining units have not
been scheduled.

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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.

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.

In addition, MBE has ordered 195 TransAct(TM) control boxes from the
Company to be used by MBE franchises 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 fee 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.

The Company's executive offices are located at 200 Plant Avenue, Wayne,
Pennsylvania 19087, and its telephone number is (610) 989-0340.

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Description Of The Securities

Issuer ............................ USA Technologies, Inc.

Securities Offered ................ Up to 5,200,000 shares of
Common Stock by the Selling
Shareholders. See "Selling
Shareholders."

Common Stock Outstanding
as of June 30, 1997 ..... 29,969,934 shares. On a fully
converted basis, there would be
55,236,870 shares outstanding
consisting of 4,128,300 shares
issuable upon exercise of
outstanding options and purchase
rights, 2,000,000 shares
issuable upon exercise of the
Warrants issued to affiliates
and/or consultants to GEM
Advisors, Inc. in June 1997,
1,600,000 shares issuable upon
exercise of the 1997 Warrants
issued in April, May and June
1997 ("1997 Warrants"), 374,000
shares issuable upon exercise of
the 1996-B Warrants issued in
January and February 1997
("1996-B Warrants"), 1,998,000
shares issuable upon exercise of
the 1996 Common Stock Purchase
Warrants issued in 1996 ("1996
Warrants"), 1,414,000 shares
issuable upon the exercise of
the 1995 Warrants issued by the
Company in 1995 ("1995
Warrants"), 10,334,460 shares
issuable upon conversion of the
Preferred Stock at the 12 to 1
conversion rate, and 3,418,176
shares issuable upon conversion
of accrued and unpaid dividends
on the Preferred Stock at the
$.83 per share conversion price
(if these conversions do not
occur prior to December 31,
1997, there would be 8,612,050
shares issuable upon conversion
of Preferred Stock at the 10 to
1 conversion rate and 2,837,086
shares issuable upon conversion
of accrued and unpaid dividends
on the Preferred Stock at the
$1.00 per share conversion
price).
Preferred Stock Outstanding
as of June 30, 1997 ..... 861,205 shares. Each share of
Series A Convertible Preferred
Stock, no par value, of the
Company ("Preferred Stock") is
convertible by the holder
thereof at any time into 10
shares of Common Stock, provided
that through December 31, 1997,
each share of Preferred Stock is
convertible into 12 shares of
Common Stock. The holders of
Preferred Stock are entitled to
an annual cumulative cash
dividend of $1.50 per share. The
outstanding shares of Preferred
Stock are convertible into
10,334,460 shares of Common
Stock through December 31, 1997
and 8,612,050 shares of Common
Stock at any time thereafter. At
the time of conversion, all
accrued and unpaid dividends are
converted into Common Stock at
the rate of $1.00 per share of
Common Stock, provided that
through December 31, 1997, all
accrued and unpaid dividends are
converted into Common Stock at
the rate of $.83 per share of
Common Stock. See "Description

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of Securities - Series A
Convertible Preferred Stock."

Common Stock OTC Bulletin
Board Symbol . . . . . . . USTT

Use of Proceeds . . . . . . . . . . The Company will receive no cash
proceeds from the sale of the
Common Stock being offered by
the Selling Shareholders hereby.
The Company would, however,
receive $.25 per 1996 Warrant if
exercised prior to October 31,
1997, and $.50 per 1996 Warrant
if exercised by the Selling
Shareholders thereafter (or such
lower exercise price as the
Company may determine). Through
September 30, 1997, a total of
3,202,000 1996 Warrants have
been exercised by the Selling
Shareholders at $.20 each, and
40,000 1996 Warrants have been
exercised by the Selling
Shareholders at $.25 each,
generating gross proceeds of
$650,400. The Company has used
these proceeds to finance
working capital. There is no
assurance that any or all of the
remaining 1996 Warrants will be
exercised by the Selling
Shareholders, and if none of the
remaining 1996 Warrants are
exercised, the Company would not
receive any further gross
proceeds. The Selling
Shareholders will receive all of
the net proceeds from the sale
of the Common Stock. The Company
will incur expenses of
approximately $65,000 in
connection with the registration
of the Common Stock underlying
the 1996 Warrants. See
"Description of Securities -
1996 Common Stock Purchase
Warrants."

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RECENT DEVELOPMENTS

During the fiscal quarter ended September 30, 1997, the Company incurred
operating losses of approximately $625,000 (unaudited).

RISK FACTORS

The securities described herein are speculative and involve a high
degree of risk. Each prospective investor in the Common Stock should carefully
consider the following risk factors inherent in and affecting the business of
the Company and the Common Stock before investing in the Common Stock.

1. Development Stage Company; Limited Operating History; Significant
Cumulative Operating Losses; Auditor Report Modification for Going Concern.
Since its founding in January 1992, the Company has been in the development
stage and has been engaged almost exclusively 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
generated funds primarily through the sales of its securities. The auditor's
report includes a modification that indicates that the Company's existence may
be dependent on its ability to continue to raise capital and generate sufficient
revenue from operations. See "Financial Statements." The Company installed its
first product, the Golfer's Oasis(TM) in June 1994. This product line did not
achieve the anticipated market acceptance and was also very capital intensive.
There are currently no units in operation and net revenues through June 30, 1997
were nominal. The Credit Card Copy Express(TM) was first installed in January
1995, and as of June 30, 1997, there were only 67 units in operation and net
revenues therefrom were nominal. The Credit Card Vending Express(TM) was first
installed in March 1995, and to date hereof there were no units in operation.
The Company's Credit Card Debit Express(TM) was first installed in April 1995,
and as of June 30, 1997, there were only 34 units in operation and net revenues
were nominal. The Public PC(TM) (formerly known as) Credit Card Computer
Express(TM) was first installed in April 1996, and as of June 30, 1997, there
were only 54 units in operation and net revenues were nominal. The Business
Express(TM) was first installed in September 1996, and as of June 30, 1997,
there were only 130 control systems in operation at 39 locations and net
revenues were nominal.

For its fiscal years ended June 30, 1996, and June 30, 1997, the
Company incurred operating losses of $2,451,697 and $3,120,712, respectively.
From its inception on January 16, 1992 through June 30, 1997, the Company has
incurred operating losses of $9,363,671. Such operating losses are anticipated
to continue through at least June 30, 1998. See "Management's Discussion And
Analysis of Financial Condition And Results of Operations."

As of June 30, 1997, the Company's working capital was approximately
$671,914, of which $378,318 was invested in inventory. At June 30, 1997, the
Company had cash net of current liabilities of approximately $90,608. The
Company anticipates generating additional cash to finance future operating
expenses by selling additional securities and through increased revenues. As of
June 30, 1997, 285 of the Company's control devices have been installed and net
revenues have been nominal. Accordingly, the Company has an extremely limited
operating history upon which an evaluation of the Company's prospects can be
made. Such prospects must be considered in light of the risks, expenses and
difficulties frequently encountered in the establishment of a new business as
well as the risks, expenses and difficulties encountered by a development stage
company. There is currently no basis upon which to assume that the Company's
business will prove financially profitable or generate more than nominal
operating revenues. In addition, there can be no assurances that the Company
will be able to continue to sell additional securities. If the Company either
fails to generate increased revenues or fails to sell additional securities,
investors may lose all or a substantial portion of their investment.

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2. Dependence Upon Key Personnel. The Company is dependent on certain
key management personnel, particularly its President and Chief Executive
Officer, George R. Jensen, Jr. The loss of services of Mr. Jensen or other
executive officers would have a material adverse effect upon the Company's
business. See "Management -- Officer Terminations." The Company has entered into
an employment agreement with Mr. Jensen that expires in June 1998 and one-year
employment agreements with the other executive officers each of which contain
non-compete agreements. The Company has obtained a key man life insurance policy
in the amount of $2,000,000 on Mr. Jensen, and a key man life insurance policy
in the amount of $1,000,000 on its Vice President-Research and Development,
Haven Brock Kolls, Jr. The Company does not have and does not presently intend
to obtain key man life insurance coverage on any of its other executive
officers.

3. Uncertainty of New Product Development; Unproven Commercial
Viability. While a number of products or services such as gasoline and public
telephones are currently provided through unattended, credit card activated
terminals, the commercial viability of any of the Company's products has not
been established. Although commercial production and installation of the
Company's products has commenced on a very limited basis, there can be no
assurance that the Company's products will be successful or become profitable.
Likewise, there can be no assurance that the demand for the Company's products
will be sufficient to enable the Company to become profitable. In any such
event, investors may lose all or substantially all of their investment in the
Company.

4. Dependence on Proprietary Technology; Patent Issues. The Company's
success is dependent in part on its ability to obtain patent protection for its
products, maintain trade secret protection and operate without infringing the
proprietary rights of others. To date, the Company has filed ten patent
applications, and intends to file applications for additional patents covering
its future products although there can be no assurance that it would do so. In
addition, there can be no assurance that the Company will maintain or prosecute
these applications. The United States Government granted one of the Company's
patents during April 1997 and another of its patents during June 1997. See
"Business - Patents, Trademarks and Proprietary Information." There can be no
assurance that any of the remaining patent applications will be granted, that
the Company will develop additional products that are patentable or do not
infringe the patents of others, or that any patents issued to the Company will
provide the Company with any competitive advantages or adequate protection for
its products. In addition, there can be no assurance that any patents issued to
the Company will not be challenged, invalidated or circumvented by others. There
can be no assurance that any of the Company's products would not infringe the
patents of others. If any of the Company's products is found to have infringed
any patent, there can be no assurance that the Company will be able to obtain
licenses to continue to manufacture and license such product or that the Company
will not have to pay damages as a result of such infringement. Even if a patent
application is granted for any of the Company's products, there can be no
assurance that the patented technology will be a commercial success or result in
any profits to the Company.

<PAGE>

5. Competition. There are companies presently offering unattended, credit
card activated control systems in connection with facsimile machines, personal
computers, debit card purchase/revalue stations, and use of the Internet and
e-mail which are in direct competition with the Company's products. In addition,
the businesses which have developed unattended, credit card activated control
systems currently used in connection with gasoline dispensing, public
telephones, prepaid telephone cards, ticket dispensing machines, or vending
machines are capable of developing control systems 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 enables the use of any "off the shelf" facsimile
machine as a public facsimile machine by utilizing the telephone to record
credit card information and then directly placing the telephone onto the
facsimile machine. Such competition may result in lower percentages of gross
revenues being retained by the Company in connection with its devices, or
otherwise may reduce potential profits or result in a loss of some or all of its
customer base. To the extent the Company's competitors are able to offer more
attractive technology, the Company's ability to compete could be materially and
adversely affected. 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
Express(TM), and the location may not order the Business Express(TM), or if
ordered, the hotel guest may not use it.

6. Dependence on Third-Party Suppliers. The Company is dependent on
third-party suppliers for the various component parts of its products. Although
the Company believes there are alternative sources for these component parts,
the failure of such suppliers to supply such component parts or the absence of
readily available alternative sources could have a material adverse effect on
the Company, including delaying the implementation of the Company's business
plan to achieve profitability. Except for suppliers of personal computers and
computer printers, the Company does not have supply contracts with any of such
third-party suppliers and intends to purchase components pursuant to purchase
orders placed from time to time. See "Business-Procurement".

7. Cash Dividends Not Likely. There can be no assurance that the
proposed operations of the Company will result in significant revenues or any
level of profitability. Any earnings which may be generated by the Company would
be used, for the foreseeable future, to finance the growth of the Company's
business. Accordingly, while payment of dividends rests within the discretion of
the Board of Directors, no cash dividends on the Common Stock have been declared
or paid by the Company to date, and the Company does not presently intend to pay
cash dividends on the Common Stock for the foreseeable future. Although the
Company paid a special stock dividend in August 1995 consisting of 3 shares of
Common Stock for each share of outstanding Preferred Stock, there can be no
assurance that cash dividends will ever be paid on the Common Stock. See
"Description of Securities-Series A Convertible Preferred Stock." The Articles
of Incorporation of the Company prohibit the declaration of any dividends on the
Common Stock unless and until all unpaid and accumulated dividends on the
Preferred Stock have been declared and paid. Through June 30, 1997, the unpaid
and cumulative dividends on the Preferred Stock equal $2,837,086. The unpaid and
accumulated dividends are either payable in cash by the Company when and if
declared by the Board of Directors of the Company, or may be converted by the
holder thereof into shares of Common Stock at the rate of $1.00 per share at the
time of conversion of the underlying share of Preferred Stock, provided that the
rate of conversion of such dividends is $.83 per share through December 31,
1997. Through June 30, 1997, $158,775 of unpaid and cumulative dividends on the
Preferred Stock have been converted to 174,784 shares of Common Stock. See
"Description of Securities- Series A Convertible Preferred Stock."

7
<PAGE>

8. Need For Market Acceptance; Location Risk. There can be no assurance
that demand for the Company's products will be sufficient to enable the Company
to become profitable. Likewise, no assurance can be given that the Company will
be able to install the credit card activated control systems at enough locations
or sell equipment utilizing its control systems to enough locations to achieve
significant revenues or that its operations can be conducted profitably. As of
June 30, 1997, the Company's has installed only 285 of its control devices at
commercial locations and revenues have been nominal. Alternatively, the
locations which would utilize the control systems may not be successful
locations. In such event, the revenues of the Company would be adversely
affected. The Company may lose locations utilizing its products to competitors,
or may not be able to install its products at its competitor's locations.

9. No Assurance of Active Public Market. The Common Stock is currently
traded on the OTC Electronic Bulletin Board. Although there is limited trading
in the Common Stock, there is no established trading market therefore. Unless
and until there is an established trading market for the Common Stock, holders
of the Common Stock could find it difficult to dispose of, or to obtain accurate
quotations as to the price of, the Common Stock. See "Description of Securities
- - Shares Eligible For Future Sale" and "Market For Common Stock."

10. Risks of Low-Priced Stocks. The Common Stock is subject to the
so-called penny stock rules that impose additional sales practice requirements
on broker-dealers who sell such securities to persons other than established
customers and accredited investors (generally defined as an investor with a net
worth in excess of $1,000,000 or annual income exceeding $200,000, or $300,000
together with a spouse). For transactions covered by this rule, the
broker-dealer must make a special suitability determination for the purchaser
and must have received the purchaser's written consent to the transaction prior
to sale. These regulations may adversely affect the ability of broker-dealers to
sell the Common Stock.

The Commission has adopted regulations that define a penny stock to be
any equity security that has a market price (as defined) of less than $5.00 per
share or an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require the delivery, prior to the transaction, of a disclosure schedule
relating to the penny stock market. The broker-dealer also must disclose the
commissions payable to both the broker-dealer and the registered representative,
current quotations for the securities and, if the broker-dealer is the sole
market-maker, the broker-dealer must disclose this fact and the broker-dealer's
presumed control over the market.

As of the date hereof, the Common Stock qualifies as a penny stock and
is subject to the above regulations. The above regulations could adversely
affect the market liquidity for the Common Stock and could limit the ability of
broker-dealers to sell the Common Stock as well as the ability of holders of the
Common Stock to sell the Common Stock in the secondary market.

11. Charge to Income in the Event of Release of Escrow Shares. 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 agreed not to sell,
pledge, or transfer, directly or indirectly, any of the Common Stock held in
escrow.

8
<PAGE>

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 cancelled 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.

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.

If the Company attains the aforementioned earning thresholds or the
Company's Common Stock attains the aforementioned prices required for the
release of certain shares of Common Stock currently held in escrow and which are
subject to cancellation, such release will require the Company to recognize
additional compensation expense. In the event such shares are released, they
will be considered outstanding for purposes of calculating per share information
concerning the Company. Accordingly, the Company will, in the event of the
release of such Common Stock, recognize during the period in which the earning
thresholds are met or such per share prices obtained, what could be a
substantial charge that would have the effect of substantially increasing the
Company's loss or reducing or eliminating earnings, if any, at such time. Such
charge will not be deductible for income tax purposes. Although the amount of
compensation expense recognized by the Company will not affect the Company's
total Stockholders' equity or cash flow, it may have a depressive effect on the
market price of the Company's securities. If the required earnings threshold was
achieved at June 30, 1997, the compensatory charge to the Company's operations
during the fiscal year ended June 30, 1997 would have been $1,746,000 (assuming
the fair market value approximated $.40 per share on June 30, 1997). This charge
would not have affected the Company's cash flow or total Shareholders' equity.
The net loss per share of Common Stock would have been ($.29). See "Principal
Shareholders - 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 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 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 believes 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).

12. Uncertainty of Company to Continue as a Going Concern. The
Company's independent auditors have included an explanatory paragraph in their
report on the Company's financial statements for the year ended June 30, 1997,
to the effect that the Company's ability to continue as a going concern is in
substantial doubt. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and "Financial Statements." If the Company
ceases to continue as a going concern, the investors in the Common Stock would
lose all or substantially all of their investment in their Common Stock.

9
<PAGE>

13. Dilution, Issuance of Additional Securities By The Company. As of
June 30, 1997, the Company has issued outstanding options and purchase rights to
acquire up to 4,128,300 shares of Common Stock, has issued Warrants to
affiliates and/or consultants to GEM Advisor's, Inc. which are convertible into
2,000,000 shares of common stock, has issued 1997 Warrants which are convertible
into 1,600,000 shares of Common Stock, has issued 1996-B Warrants which are
convertible into 374,000 shares of Common Stock, has issued 1996 Warrants which
are convertible into 1,998,000 shares of Common Stock, has issued 1995 Warrants
which are convertible into 1,414,000 shares of Common Stock, has issued
861,205 shares of Preferred Stock which are convertible into 10,334,460 shares
of Common Stock through December 31, 1997 and has $2,837,086 cumulative
preferred dividends which are convertible into 3,418,176 shares of Common Stock
through December 31, 1997. In the event any or all of such securities are
exercised or converted, the number of issued and outstanding shares of Common
Stock would be increased. In such event, the percentage of Common Stock held by
each holder of Common Stock prior to such exercise or conversion would be
reduced and such exercise or conversion may have a dilutive effect on the market
price of the Common Stock. If all of such securities would be exercised or
converted into Common Stock, an additional 25,266,936 shares of Common Stock
would be issued and outstanding as of June 30, 1997, for a total of 55,236,870
shares of Common Stock issued and outstanding. The Company may in the future
issue additional options, warrants or other securities convertible or
exchangeable into Common Stock. See "Recent Developments".

During the fiscal years ended June 30, 1995, June 30, 1996 and June 30,
1997, the Company issued an additional 1,623,112 shares of Common Stock, an
additional 587,753 shares of Preferred Stock, options to acquire up to 3,780,000
shares of Common Stock and warrants to acquire up to 14,274,000 shares of Common
Stock. Assuming the exercise or conversion of all such securities, the issued
and outstanding shares of Common Stock would be increased by 19,872,142 shares.
As of June 30, 1997, such additional shares would represent approximately 39.8%
of all the issued and outstanding Common Stock on a fully converted basis.

14. Excessive Share Issuances, Number of Authorized Shares. As of June
30, 1997, on a fully converted basis, the Company would have 55,236,870 shares
of Common Stock issued and outstanding. This amount exceeds the authorized
number of shares of Common Stock of 55,000,000 by 236,870 shares. As of
September 30, 1997, on a fully converted basis, the Company would have
55,563,584 shares of Common Stock issued and outstanding. The Company's Articles
of Incorporation, the issued and outstanding option certificates and the various
warrant agreements contain various covenants which require the Company to
reserve an adequate number of shares of Common Stock for various contingencies.
Although the Company currently has reserved an adequate number of shares of
Common Stock on a fully converted basis, there can be no assurance that the
Company will be able to continue to satisfy these covenants.

All of the outstanding warrant agreements contain a covenant which
states that there have been reserved, and the Company shall at all times keep
reserved out of the authorized and unissued shares of Common Stock, a number of
shares of Common Stock sufficient to provide for the exercise of the rights of
purchase represented by the warrants.

10
<PAGE>

All of the option certificates contain a covenant which states that
"the Company shall at all times keep reserved out of the authorized and unissued
shares of Common Stock a number of shares of Common Stock sufficient to provide
for the exercise of the right of purchase represented by the options." Of the
issued and outstanding options to purchase 3,971,000 shares of Common Stock, as
of June 30, 1997 a total of 775,000 of these options have not vested and thus
are not eligible for exercise. As of December 31, 1997, a total of 462,500 of
these options will remain unvested and not be eligible for exercise.

The Company's Articles of Incorporation state that the Company shall at
all times reserve and keep available out of its authorized but unissued shares
of Common Stock a sufficient number of shares to effect the conversion of the
shares of the Preferred Stock.

On and after January 1, 1998, each share of Preferred Stock would be
convertible into 10 shares of Common Stock instead of 12 shares of Common Stock,
as currently provided. On and after January 1, 1998, the accrued and unpaid
dividends on the Preferred Stock would be convertible into Common Stock at the
rate of $1.00 per share of Common Stock as opposed to the present conversion
rate of $.83 per share of Common Stock. Based on the 861,705 shares of Preferred
Stock outstanding on June 30, 1997 and the accrued dividends thereon, the change
in these conversion rates on January 1, 1998 would result in a reduction of
2,303,500 shares of the fully diluted Common Stock. However, to the extent that
the holders of Preferred Stock convert their shares before such date, this
anticipated reduction in the outstanding shares of Common Stock would be reduced
or eliminated. Furthermore, based on the 861,205 shares of Preferred Stock
outstanding on August 1, 1997, an additional $645,904 dividend accrued on August
1, 1997 entitling the holders of Preferred Stock to acquire 778,197 additional
shares of Common Stock through December 31, 1997, and 645,904 shares thereafter.
Although the Company has not made any covenants to the holders of the Preferred
Stock to reserve shares of Common Stock for issuance upon conversion of the
accrued dividends on the Preferred Stock, these additional dividends are
automatically convertible into Common Stock at the time of the conversion of the
related shares of Preferred Stock. Thus, on June 30, 1997, although the accrued
dividends on the Preferred Stock could be converted into 3,418,176 shares of
Common Stock, there were only 3,338,816 shares of Common Stock that were
authorized and unreserved. There can be no assurance that a sufficient number of
shareholders will not convert their Preferred Stock and the accrued dividends
thereon into shares of Common Stock, thus causing the Company to violate the
above covenants.

The Company could remedy any violation of the above covenants by
increasing the number of authorized shares of Common Stock. Any such increase
must be approved by the Board of Directors of the Company and then approved by a
majority vote of the shareholders of the Company. There can be no assurance that
a majority of the shareholders would approve such a proposal. At this time, the
Company has no intention of presenting such a proposal to the shareholders.

USE OF PROCEEDS

The Company will not receive any of the proceeds from the sales of the
Common Stock by the Selling Shareholders. See "Selling Shareholders" for a list
of those Shareholders entitled to receive net proceeds from the sales of the
Common Stock. The Company would, however, receive $.25 through October 31, 1997
and $.50 (or such lower exercise price as the Company may determine) upon the
exercise of each 1996 Warrant by a Selling Shareholder. From November 1, 1996
through February 28, 1997, the Company reduced the exercise price of the 1996
Warrants to $.20. See "Description of Securities - 1996 Common Stock Purchase
Warrants." Through February 28, 1997, a total of 3,202,000 1996 Warrants were
exercised at $.20 and gross proceeds to the Company were $640,400. Since
February 28, 1997, and through September 30, 1997, 40,000 1996 Warrants have
been exercised at $.25, yielding $10,000 in gross proceeds to the Company. These
proceeds were used to finance working capital. There is no assurance that any or
all of the remaining 1996 Warrants will be exercised by the Selling
Shareholders. The Selling Shareholders will receive all of the net proceeds
from the sale of the Common Stock pursuant to this Prospectus. The Company will
incur costs of approximately $65,000 in connection with the registration of the
Common Stock underlying the 1996 Warrants. See "Description of Securities - 1996
Common Stock Purchase Warrants."

<PAGE>

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.

15
<PAGE>

BUSINESS

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 administrative fees paid by various locations
utilizing its control systems. The Company has recently entered into joint
marketing agreements with Minolta Corporation ("Minolta"), and Lexmark
International, Inc. ("Lexmark"), and has been designated as authorized equipment
resellers by Hewlett-Packard Company ("Hewlett-Packard"), International Business
Machines Corporation ("IBM") and Dell Computer Corporation ("Dell"). The Company
believes that the Company would 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 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.

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.

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 fee for each terminal. The
terminals are to be delivered to MBE by the Company in October 1997.

As of June 30, 1997, there were 285 of the Company's control systems
installed at locations throughout the United States and Canada and revenues have
been nominal.

The Control Systems

The Company has developed unattended, credit card activated control
systems that are being utilized in connection with photocopying machines, debit
card purchase/revalue stations, personal computers, facsimile machines and
computer printers.

16
<PAGE>

In order to activate the equipment attached to the Company's control
systems, the consumer must swipe a valid credit card through the control system.
The control system then transmits this request to the credit card processor. The
credit card processor verifies that the credit card is valid and authorizes the
transaction. The control system then activates the equipment for use by the
consumer. Each control system acts as an off-line terminal that has the ability
to communicate with the Company. When the consumer has finished using the
equipment, the control system transmits a record of the transaction to the
Company's computer center and prints a record of the transaction for the
consumer. On a daily basis, the Company transmits the transaction information
collected from all of its installed control devices to the credit card
processor. The credit card processor electronically transfers the proceeds
derived from these transactions, less the credit card processor's charge, to the
Company. The Company then forwards a check to the location of the equipment
representing the location's share of the proceeds along with a report reflecting
the usage of each piece of equipment attached to the control systems.

The Company has been certified as a merchant by PNC Merchant Services
(formerly First Data Corp.), a leading credit card processor in the United
States. PNC Merchant Services has extended to the Company a fixed rate
percentage processing charge in connection with the credit card transactions
conducted through the Company's control systems. This charge is payable by the
Company (and not by the locations) out of its share of the gross proceeds.

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

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. In addition,
consumers are becoming more accustomed to using credit cards as a method of
payment in an ever increasing array of retail and service settings. Almost every
department store, restaurant and supermarket accepts credit card payments.
Consumers are increasingly using mail order, telephone and the Internet to order
goods and services and are using credit cards to pay for these goods and
services. In response to this increasing consumer demand for convenience and
this increasing consumer acceptance of credit cards as a method of payment, the
Company has focused its efforts towards developing and marketing its unattended,
credit card activated control systems.

The Business Express(TM)

The Company believes that the hotel/motel hospitality industry continues to
expand, but has become more competitive as the industry increases its efforts to
attract the business traveler. The Company also believes that 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,
the Company believes that the hospitality industry has become very responsive to
the needs of the business traveler. The Business Express(TM) enables a hotel or
conference center to offer an unattended business center to its guests. The
Business Express(TM) is credit card activated, therefore eliminating the need
for an attendant to provide change, process credit cards, or calculate the
charges for the use of the equipment.

The Business Express(TM) utilizes the Company's existing control
systems for use in connection with computers, photocopying machines, computer
printers, and facsimile equipment, and combines them into a branded product. A
typical Business Express(TM) unit could include a personal computer and laser
printer, a photocopying machine and a facsimile machine, the corresponding
control systems, as well as work station furniture. However, a location can
custom order its unit to include any combination of equipment and corresponding
control system. Furthermore, the location could add additional equipment in the
future.

The Company assists the location in the design of the unit, including
selecting a layout and furniture for the equipment. To date, the Company has
sold business equipment to the locations, has supplied Company owned equipment
to the certain locations and has supplied control systems to the location for
use with location owned equipment. In all such cases, the Company licenses the
control systems to the locations and receives a fixed percentage of the proceeds
generated from any transactions. In connection with sales of business equipment,
the Company also receives revenues and in some cases receives a monthly
administrative fee.

17
<PAGE>

The MBE Express(TM)

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.

The Copy Express(TM)

Traditionally, customers wishing to use a photocopying machine have
either used a prepaid, stored value card or cash. In most circumstances, this
places a burden on employees of the facility to provide a number of services
unrelated to their primary jobs, such as providing change, coin collecting, coin
counting and coin reloading. By utilizing the Copy Express(TM) control system,
the location's attendant no longer is required to interact with the customers
for these purposes.

The Copy Express(TM) control system 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.

To date, the Company has licensed the control systems to university and
public libraries to be attached to their photocopying machines. The Company
receives a fixed percentage of the proceeds generated from any transactions and
the location receives the balance of the proceeds. As of June 30, 1997, there
were 67 Copy Express(TM) control systems (includes 14 Fax Express(TM)) installed
at various locations.

The Debit Express(TM)

Many "closed" environments such as universities utilize a private card
system to store cash value known as a debit or "stored value" card. Pursuant
thereto, customers 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.

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

To date, the Company has licensed the control system to university
libraries to be attached to their debit card purchase/revaluate machines. The
Company receives a fixed percentage of the proceeds generated from any
transactions and the location receives the balance of the proceeds. As of June
30, 1997, there were 34 Debit Express(TM) control systems installed at
university libraries.

<PAGE>

The Public PC(TM)

The Company's Public PC(TM) (formerly known as the Credit Card Computer
Express(TM)) is an unattended, credit card activated control system which can be
used in connection with general use of a personal computer, as well as for the
use of on-line services, including the Internet, and for the use of a laser
printer. The Company believes that the growing dependence on personal computers
and related services that are accessed through personal computers, such as the
Internet and e-mail, has created an environment where there is a need for access
to personal computers by the general public on an "as needed" basis. The
Company's control system enables locations such as public libraries, hotels and
convention centers, airports and retail locations to offer the use of personal
computers to the public on an "as needed" basis utilizing credit cards as a
method of payment. The Public PC(TM) is designed so that an attendant is not
required to process credit card transactions, provide change, or calculate
charges for the use of the equipment.

The Company licenses its control system to locations to be attached to
their personal computers. Alternatively, the Company may supply the location
with a computer system owned by the Company and license the control system to
the location for use with the Company's equipment. The Company receives a fixed
percentage of the proceeds generated from any transactions and the location
receives the balance thereof.

During fiscal 1997, the Company commenced selling personal computers
and laser printers to the locations in addition to only licensing the control
system. See "Business - Marketing." In connection with any such sales, the
Company would realize revenues from the sale of the equipment and also receive a
percentage of the proceeds generated from any credit card transactions. In
addition, in some cases, the Company receives a negotiated monthly
administrative fee.

As of June 30, 1997, there were 54 Public PC(TM) control systems
installed at various public libraries, hotels and retail locations.

Marketing

The Company is currently marketing its products through its full-time sales
staff consisting of 4 persons, either directly to locations or through facility
management companies servicing the 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.

19
<PAGE>

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.

In March 1997, the Company entered into a co-marketing agreement with
Minolta Corporation ("Minolta") pursuant to which the Company and Minolta 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 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
activiated. The agreement can be terminated by either party on 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

<PAGE>

"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. To date,
the Company has ordered 54 computers from Dell, all of which have been paid for
and received by the Company.

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.

The Company believes these agreements are an important component of the
Company's effort to market the Business Express(TM) 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).

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
control systems are currently manufactured to the Company's design
specifications by an independent contractor, LMC Autotech Technologies, L.P.
("LMC"). The Company anticipates that LMC will be able to meet its future
control system supply needs.

The Company anticipates obtaining computer hardware and other business
equipment (other than the Company's control systems) from Dell, Hewlett-Packard,
Minolta, Lexmark or IBM pursuant to the agreements entered into with each of
these companies. See "Business -- Marketing."

Competition

There are other companies presently offering unattended, credit card
activated control devices in connection with facsimile machines, personal
computers, Internet and e-mail access, and debit card purchase/revalue stations
which are in direct competition with the Company's products. 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, or vending
machines, are capable of utilizing their control systems 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. Such competition may result in 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. To the extent the Company's competitors are able to offer more
attractive technology, the Company's ability to compete could be materially and
adversely affected. 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
Express(TM), and the locations may not order the Business Express(TM), or if
ordered, the hotel guest may not use it. See "Risk Factors -- Competition."

Patents, Trademarks and Proprietary Information

The Company has applied for federal registration of its trademarks
Business Express(TM), Computer Express(TM), Fax Express(TM), TransAct(TM), Copy
Express(TM), C3X(TM), Printer Express(TM), and Debit Express(TM). There can be
no assurance, however, that any of such applications will be granted or that the
Company will continue to maintain or prosecute all of such applications.

<PAGE>

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 letters patent related to
its cashless vending technology, and has applied for certain corresponding
foreign letters patent in connection therewith. In April 1997, the United States
Patent Office granted the Company's 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." In June 1997, the United
States Patent Office granted the Company's 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. There can be no
assurance that the Company will continue to maintain and prosecute the remaining
pending applications. See "Risk Factors - Dependence on Proprietary Technology;
Patent Issues."

Employees

As of June 30, 1997, the Company had seventeen full-time employees.

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.

Legal Proceedings

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

<PAGE>

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. 32 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
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 $33 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

23
<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.

24
<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.

25
<PAGE>

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, 1994, June 30, 1995 and June 30, 1996 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 commencing July 1, 1996.
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

26
<PAGE>

may award to him. The Agreement 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 the 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 by 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.

27
<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.

28
<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 by the Company on April 30, 1997. 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 "Management - 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 described in Section 423 thereunder.

29
<PAGE>

PRINCIPAL SHAREHOLDERS

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.

30
<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%
10 Fox Chase Road
Malvern, Pennsylvania 19355

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 (8 persons) 10,696,450 shares(12) 19.6%

- ---------
*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.

31
<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 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, 1996.

(5) Includes 266,500 shares of Common Stock issuable upon exercise of options.
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
450,000 shares of Common Stock issuable upon exercise of options. 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 within 60 days of June 30, 1997.

32
<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 back 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 147,250 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 shares). 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 120,000 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 shares). 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.

33
<PAGE>

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

George R. Jensen, Jr.
10 Fox Chase Road
Malvern, Pennsylvania 19355 16,000 1.9%

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) 43,725 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. Sellers 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, Kolls, 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

34
<PAGE>

provisions of the escrow agreement, Mr. Jensen has agreed not to sell, pledge,
or transfer, directly or indirectly, any of the Common Stock held in escrow.

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
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."

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.

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 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 $500,000 of Convertible Securities in
June 1997, the Company issued an aggregate of 2,500,000 shares of Common Stock
to Lurio and 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 holders of the Convertible
Securities upon conversion of the Convertible Securities. During August and
September 1997, the holders of $430,000 of the Convertible Securities converted
into 1,568,517 shares of Common Stock, leaving 350,000 shares of Common Stock
held in escrow. See "Description of Securities - Convertible Securities and
Related Warrants."

35
<PAGE>

CERTAIN TRANSACTIONS

In February 1996, Mr. Jensen cancelled 305,000 shares of Common Stock
owned by him and which had been held in escrow. See "Principal Shareholders -
Escrow And Cancellation Arrangements".

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

36
<PAGE>

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. See "Management-Executive Stock Options" and "Management - Officer
Terminations."

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.

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 30, 1996, $98,600 was paid for such services performed.

In September 1996, the Company issued to Joseph Donahue, an employee of
the Company, options to purchase up to 50,000 shares of Common Stock at $.45 per
share.

In November 1996, the Company issued to Michael Feeney, an employee of
the Company, options to purchase up to 10,000 shares of Common Stock at $.50 per
share.

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 options issued to Mr. Sterling in May 1996
from $.65 to $.45.

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. See "Management - Executive Stock Options."

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

37
<PAGE>

SELLING SHAREHOLDERS

Each of the Selling Shareholders listed below is, as of the date hereof,
the holder of 1996 Warrants to acquire the number of shares of Common Stock set
forth opposite such Selling Stockholder's name or has exercised the 1996
Warrants for the number of shares of Common Stock set forth opposite such
Selling Shareholder's name. The 1996 Warrants were issued by the Company to the
Selling Shareholders in May 1996 pursuant to a transaction exempt from the
registration requirements of the Act and various state securities laws. The 1996
Warrants are exercisable at any time through May 31, 2001, unless such period is
extended by the Company.

As of September 30, 1997, the Selling Shareholders have exercised
3,202,000 of the 1996 Warrants at $.20 for an aggregate gross proceeds of
$650,400, and 40,000 1996 Warrants at $.25 for an aggregate gross proceeds of
$10,000. The issuance by the Company of the Common Stock to the Selling
Shareholders upon exercise of the 1996 Warrants is pursuant to the 1996 Warrant
Agreement in a transaction exempt from the registration requirements of the Act
and various state securities laws. During September 1997, the Board of Directors
authorized a reduction in the exercise price of each 1996 Warrant to $.25 during
the period of time beginning on September 14, 1997 and ending at the close of
business on October 31, 1997, at which time the exercise price will be $.50. The
Company has agreed, at its expense, to register the Common Stock for resale by
the Selling Shareholders under the Act and various state securities laws. The
Company expects to incur expenses of approximately $65,000 in connection with
the registration. The Common Stock may be sold from time to time by the Selling
Shareholders pursuant to this Prospectus. See "Plan of Distribution".

The following table sets forth information with respect to each Selling
Shareholder and the respective amounts of Common Stock that may be offered
pursuant to this Prospectus. None of the Selling Shareholders has, or within the
past three years has had, any position, office or other material relationship
with the Company, except as noted below. Except as specifically set forth below,
following the offering, and assuming all of the Common Stock offered hereby has
been sold, none of the Selling Shareholders will beneficially own one percent
(1%) or more of the Common Stock.
<TABLE>
<CAPTION>
Common Stock Offered Beneficial Ownership
Selling Shareholder Hereby After Offering (1)
- ------------------- -------------------- --------------------
Number Percent
------- --------
<S> <C> <C> <C>
Gilbert Abramson 20,000
Vanda Adams 40,000
</TABLE>

38
<PAGE>

Common Stock Offered Beneficial Ownership
Selling Shareholder Hereby After Offering (1)
- ------------------- -------------------- --------------------
Number Percent
------- --------
<S> <C> <C> <C>

Ann M. Allegrini 12,000
Eleanor S. Allshouse 20,000
John and Celia Alvanos 4,000
Costa and Michelle Alvanos 4,000
John P. Ayers 40,000
J. Stone Bagby 40,000
Alan and Judith Ballard 80,000
Thomas Basile 20,000
Thomas B. Basile 40,000
William Bauder 40,000
Robert E. Beck 12,000
Stephen A. Bell 40,000
John Berukoff 20,000
Benjamin and Diana Bird 40,000
Alexandra O. Bjorkland 40,000
Donald F. Blackburn 40,000
Clyde and Charlotte Blount 8,000
Frederick L. Bowden 10,000
Edwin R. Boynton 20,000
Edward S. Brockie 40,000
Kathleen D. Buffum 4,000
William P. and Judith Burks 40,000
Paul and Gwen Canavarro 20,000
Peter and Lisa Canavarro 20,000
Herminio and Maria Canavarro 20,000
Candace S. Carey 20,000
Jerrold Carl 40,000
Jeffrey C. Carlson 4,000
D. Zeke Carlson 4,000
L.E. Carlson 4,000
Henry and Jean Carlson 28,000
Charles Abbott Carter III 40,000
Marc A. Cohen 160,000
Craig and Deanne Cook 32,000
William R. Crothers 40,000
Gary L. Cunha 40,000
Marie Bradlyn Currin 12,000
Clifton B. Currin, Trustee 40,000
Nancy B. Davis 20,000
Jack and Helen Davis 50,000
Benjamin Deacon 20,000
Sheri Lynn DeMaris 80,000
Jill Smith cust. for Ron Jensen 136,000
Sheri Demaris cust. for Burt Jensen 100,000
Sheri Demaris cust.
for Andrew David Jensen 100,000
Desert Investment Grp.-D Crockett 40,000
William P. Dunham 4,000
</TABLE>

39
<PAGE>

Common Stock Offered Beneficial Ownership
Selling Shareholder Hereby After Offering (1)
- ------------------- -------------------- --------------------
Number Percent
------- --------
<S> <C> <C> <C>
Jean W. Eason 60,000
Dr. Mallory Eisenman 4,000
John Faust 20,000
Richard and Isabel Fradkin 40,000
Harriet and Cary Glickstein 80,000
E.J. and M.K. Golightly 40,000
Harold N. Gray 40,000
Wendel C. and Roma Roy Lynch Green 10,000
Loring S. Grove 10,000
Ruth Hall 4,000
Thomas F. Hall 80,000
S. Hansen and K. Heiuschel 40,000
Armason Harrison 8,000
William F. Harrity, Jr. 80,000
Robert Hauptfuhrer Family Partnership 100,000
Austin B. Hepburn 80,000 1,259,500(2) 2.3%
Adele H. Hepburn 80,000 1,259,400(2) 2.3%
A.D. Hodges 40,000
R. Holland, D. Holland and K. Duffy 40,000
David W. Hubbert 20,000
Wilbur E. Hudson 20,000
Robert M. Ihrig 20,000
Bernard Millis 40,000
Fred Karagosian 40,000
Harold and Lois Kauffman 40,000
George H. Kilmarx 40,000
Rocco and Sandra La Penta 160,000
Fred Languth 40,000
Robert E. Leiser 20,000
Peggy Longstreth Bayer 12,000
Nicholas S. Ludington 40,000
Douglas M. Lurio 40,000
Robert M. Madonna 40,000
Alberta and J. Grant McCabe 4,000
Philip S. Meckley 40,000
James F. Merriman 40,000
Richard D. Mierley 40,000
Richard Moffitt 20,000
Robert H. and Rosemary Montgomery 40,000
Thomas Motl 40,000
Eunice Carter Nute 20,000
Harry Ohannesian 80,000
Janet and Sudhir Patel 40,000
George M. Pflaumer 80,000
Bernard Pincus 10,000
Genevieve Pondo 12,000
J. Steve and Carol Powell 20,000
Ashok and Swaran Rajpal 10,000
</TABLE>

40
<PAGE>

Common Stock Offered Beneficial Ownership
Selling Shareholder Hereby After Offering (1)
- ------------------- -------------------- --------------------
Number Percent
------- --------
<S> <C> <C> <C>

Keith J. Raphael 40,000
John B. Rettew III 40,000
Melissa C. Rike 12,000
Eric J. Robbins 40,000
Noma Ann Roberts 40,000
Dorothy S. Rodgers 40,000
Edmund H. Rogers, Jr. Trust UA 06-21-88 120,000
Gardiner Rogers 8,000
Rodney Rohrer 12,000
Joel M. Rubins 40,000
Scott W. Ryan 40,000
Joseph P. Sawka 40,000
Virginia Schaun and Martha Eischen 20,000
Richard S. Schonwald 20,000
William W. Sellers(3) 160,000 702,500 1.6%
Nancy F. Sellers(3) 40,000
Sellers Pension Plan(3) 80,000
Helen E. Seltzer 4,000
Robert Silverman 20,000
Horace and Elizabeth B. Spackman 40,000
Clarence E. Sterling 40,000
Dorothy A. Stone 40,000
Ben Wallace and J.A. Hatcherson 80,000
Howard Waxman 40,000
Peter S. Whitney 40,000
Peter S. Whitney SEP/IRA 40,000
Wilmington Trust Company, Trustee for
Allison Eleuthera Smith 40,000
Wilmington Trust Company, Trustee
for Isabelle duPont Smith 40,000
Wilmer H. Wood 4,000
Dr. David W. Wood 40,000
Joni Carley Yamaguchi 80,000
Keiji Yamaguchi 40,000
Thomas J. Zaucha 40,000
V. Scott Zelov 40,000
Peter Zelov 40,000
Un Jin Zimmerman 8,000
Patricia and Robert Zimmerman 20,000
-------
Total.................... 5,200,000

</TABLE>

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

(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and derives from

41
<PAGE>

either voting or investment power with respect to the securities, and includes
any shares of Common Stock which a person has the right to acquire within
60-days of the date hereof.

(2) Adele and Austin Hepburn are husband and wife, and together would
beneficially own an aggregate of 1,133,900 shares of Common Stock following the
sale of all their Common Stock underlying their 1996 Warrants. Adele Hepburn is
a Director of Public Relations of the Company.

(3) William W. Sellers is a Director of the Company. Mr. Sellers
is a trustee of the Sellers Pension Plan and a Director of Sellers
Process Equipment Company. Nancy F. Sellers is the spouse of
William W. Sellers.

MARKET FOR COMMON STOCK

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. As of the date hereof, there is no established
trading market for the Common Stock or Preferred Stock. See "Risk Factors - No
Assurance of Active Public Market" and "Risk Factors - Risks of Low-Priced
Stocks".

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

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

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.

On June 30, 1997, there were 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. See "Description of Securities-Shares
Eligible for Future Sale." 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
September 1997, the Company issued options to acquire up to 50,000 shares of
Common Stock to a consultant for $.50 per share. In connection with the options
exercisable at $.05 per share, the Company has

42
<PAGE>

agreed, at its cost and expense, to file a registration statement under the Act
covering the resale of the Common Stock underlying the options during calendar
year April 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. See "Description of Securities -
1995 Common Stock Purchase Warrants."

As of June 30, 1997, there were 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. See "Description of Securities -
1996 Common Stock Purchase Warrants."

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. See "Description of Securities -
1996-B Common Stock Purchase Warrants."

As of July 3, 1997, there were 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. See "Description of Securities -
1997 Common Stock Purchase Warrants."

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. See "Principal Shareholders - Convertible Securities Escrow
Agreement" and "Description of Securities - Convertible Securities and Related
Warrants."

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 amounted to $2,837,086. See "Risk Factors - Cash Dividends Not
Likely."

DESCRIPTION OF SECURITIES

General

The Company is authorized to issue up to 55,000,000 shares of Common
Stock, no par value ("Common Stock"), and 1,200,000 shares of undesignated
Preferred Stock all of which have been designated as Series A Convertible
Preferred Stock, no par value ("Preferred Stock").

During March 1997, the Company's Shareholders approved an increase in
the authorized number of shares of Common Stock to 55,000,000 shares; an
increase in the authorized number of shares of Series A Preferred Stock to
1,200,000 shares; an increase from 10 to 12 the number of shares of Common Stock
into which each share of Series A Preferred Stock may be converted during the
period from March 24, 1997 to December 31, 1997 and a decrease in the conversion
price at which the Series A Preferred Stock cumulative but unpaid dividends may
be converted into shares of Common Stock from $1.00 to $.83 per share of Common
Stock during the period from March 24, 1997 to December 31, 1997.

As of June 30, 1997, there were 29,969,934 shares of Common Stock
issued and outstanding and 861,205 shares of Preferred Stock issued and
outstanding which are convertible into 10,334,460 shares of Common Stock through
December 31, 1997 and into 8,612,050 shares of Common Stock thereafter. Through
June 30, 1997, a total of 45,345 shares of Preferred Stock have been converted
into 485,550 shares of Common Stock and accrued and unpaid dividends thereon
have been converted into 174,784 shares of Common Stock. As of June 30, 1997,
there were 1,012 record owners of the Common Stock and 933 record owners of the
Preferred Stock. As of June 30, 1997, there were 1,414,000 1995 Warrants,
1,998,000 1996 Warrants, 374,000 1996-B Warrants, 1,600,000 1997 Warrants issued
and outstanding. In addition, as of June 30, 1997, there were 2,000,000
outstanding warrants that had been issued to affiliates and/or consultants of
GEM Advisors, Inc.

As of June 30, 1997, the Company has issued to its directors,
executive officers, consultants, and employees options to acquire up to 100,000
shares of Common Stock at $.50 per share, options to acquire up to 1,236,000
shares of Common Stock at $.45 per share, options to acquire up to 2,565,000
shares of Common Stock at $.25 per share, and options to acquire up to 70,000
shares of Common Stock at $.05 per share. See "Management--Executive Stock
Options", "Management - Director Compensation and Stock Options" and "Management
- - Officer Terminations." The Company has also issued purchase rights to acquire
up to 157,300 shares of Common Stock at $1.00 per share. All options to purchase
Common Stock were granted at prices at or above the market value on the date of
the grant.

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<PAGE>

In April 1997, the Company commenced a private placement offering of
110 units at a unit price of $10,000 pursuant to Rule 506 under Regulation D of
the Act. Each unit consisted of 2,000 shares of Preferred Stock and 40,000 1997
Warrants. On May 15, 1997, the Company reduced this offering to a maximum of 40
units at a unit price of $10,000. The offering was concluded on July 3, 1997.
The Company sold 40 units of this offering, generating gross proceeds of
$400,000.

In April 1997, Kelly Capital Corporation exercised options to purchase
150,000 shares of Common Stock at $.05 per share. This transaction generated
proceeds to the Company of $7,500. All of such shares were issued by the Company
in reliance on Section 4(2) of the Act.

During June 1997, the Company issued an aggregate of $500,000 of
Convertible Securities pursuant to an agreement with Gem
Advisors Inc. (GEMA) which provided GEMA with the exclusive right to place the
Convertible Securities with qualified purchasers.

The Convertible Securities have a five year term and earn a cumulative
dividend at the rate of 6% per year, payable in Common Stock or cash at the
option of the Company at the time of conversion. The Convertible Securities were
issued by the Company pursuant to Regulation S promulgated under the Act. Since
the Convertible Securities can only be converted into shares of Common Stock,
the value and number of shares of Common Stock of the Company has been adjusted
to reflect the Convertible Securities as shares of Common Stock in the Company's
June 30, 1997 financial statements. Upon completion of the sale of the
Convertible Securities, GEMA received 8% of the gross proceeds (i.e. $40,000) as
a management/documentation fee. In addition, affiliates and/or consultants to
GEMA received non-redeemable warrants to purchase up to 2,000,000 shares of the
Company's Common Stock at a price of $.20 per share at any time prior to June
22, 2002. These warrants have been issued by the Company pursuant to Regulation
S.

The Company has entered into an escrow agreement pursuant to which the
Company issued 2,500,000 shares of restricted Common Stock registered in the
name of Lurio & Associates, as Escrow Agent. Such shares were issued in order to
ensure that they would be available if and when the holders of the Convertible
Securities convert their Convertible Securities. During August and September
1997, the holders of $430,000 of the Convertible Securities converted their
securities into 1,568,517 shares of Common Stock, and 350,000 shares of Common
Stock remain in escrow.

In June 1997, the Company extended the consulting agreement with Jerome
M. Wenger which had expired on March 31, 1997 for an additional four months, and
authorized the issuance of 160,000 shares of Common Stock as compensation for
the services to be rendered to the Company pursuant to this agreement. The
Company has registered these shares under the Act and such shares are freely
tradeable thereunder. In connection with the issuance of such shares, the
Company recorded consulting expense of $41,439 which was recorded during the
quarter ending June 30, 1997.

In June 1997, the Company authorized the issuance of 17,000 shares of
Common Stock to a consultant, Robert Flaherty, as compensation for services.
Such services included the preparation of public relations reports for the
Company. The Company has registered these shares under the Act and such shares
are freely tradeable thereunder. In connection with the issuance of such shares,
the Company recorded consulting expense of approximately $6,352 in June 1997.

In June 1997, the Company authorized the issuance of 125,000 shares of
Common Stock to a consultant, Rick Joshi, as compensation for services. Such
services included the preparation of research report for the Company in
exchange for 35,000 shares of such Common Stock. The Company has agreed to
register these shares under the Act and such shares will be freely tradeable
thereunder. In connection with the issuance of such shares, the Company recorded
consulting expense of approximately $46,709 in June 1997.

In September 1997, the Company issued 40,000 shares of Common Stock to
Michael Cardascia, a consultant to the Company, as compensation for services to
be rendered to the Company. The Company has agreed to register these shares
under the Act and such shares will be freely tradeable thereunder.

In September 1997, the Company granted to the RAM Group, a consultant
to the Company, fully vested options to acquire up to 50,000 shares of Common
Stock for $.50 at anytime during a five year period. In connection with such
grant, the Board of Directors concluded that the exercise price of such options
is equal to or greater than the fair market value of the Common Stock on the
date of the grant of the options.

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<PAGE>

Pursuant to the request of the Pennsylvania Securities Commission, Mr.
Jensen has agreed that unless certain conditions are satisfied, either 4,365,000
or, alternatively, 1,030,000 shares of the Common Stock beneficially owned by
him would be cancelled by the Company. In the event that any of Mr. Jensen's
shares of Common Stock are cancelled, such cancelled shares would no longer be
issued and outstanding shares of Common Stock. Unless and until any such shares
would be cancelled, 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. See "Risk Factors - Charge to Income in the
Event of Release of Escrow Shares" and "Principal Shareholders-Escrow and
Cancellation Arrangements."

Authorized Shares Exceeded

As of June 30, 1997, on a fully converted basis, the Company would have
55,236,870 shares of Common Stock issued and outstanding. This amount exceeds
the authorized number of shares of Common Stock of 55,000,000 by 236,870 shares.
As of September 30, 1997, on a fully converted basis, the Company would have
55,563,584 shares of Common Stock issued and outstanding. The Company's Articles
of Incorporation, the issued and outstanding option certificates and the various
warrant agreements, contain various covenants which require the Company to
reserve an adequate number of shares of Common Stock for various contingencies.
Although the Company currently has reserved an adequate number of shares of
Common Stock on a fully converted basis, there can be no assurance that the
Company will be able to continue to satisfy these covenants.

All of the option certificates contain a covenant which states that
"the Company shall at all times keep reserved out of the authorized and unissued
shares of Common Stock a number of shares of Common Stock sufficient to provide
for the exercise of the right of purchase represented by the options." Of the
issued and outstanding options to purchase 3,971,000 shares of Common Stock, as
of June 30, 1997, 775,000 of these options have not vested and thus are not
eligible for exercise. As of December 31, 1997, 462,500 of these options will
remain unvested and not be eligible for exercise.

On and after January 1, 1998, each share of Preferred Stock would be
convertible into 10 shares of Common Stock instead of 12 shares of Common Stock,
as currently provided. On and after January 1, 1998, the accrued and unpaid
dividends on the Preferred Stock would be convertible into Common Stock at the
rate of $1.00 per share of Common Stock as opposed to the present conversion
rate of $.83 per share of Common Stock. Based on the 861,205 shares of Preferred
Stock outstanding on the date hereof and the accrued dividends thereon, the
change in these conversion rates on January 1, 1998 would result in a reduction
of 2,303,500 shares of the fully diluted Common Stock. However, to the extent
that the holders of Preferred Stock convert their shares before such date, this
anticipated reduction in the outstanding shares of Common Stock would be reduced
or eliminated. Furthermore, based on the 861,205 shares of Preferred Stock
outstanding on August 1, 1997, an additional $645,904 dividend accrued on
August 1, 1997 entitling the holders of Preferred Stock to acquire 778,197
additional shares of Common Stock through December 31, 1997, and 645,904 shares
thereafter. Although the Company has not made any covenants to the holders of
the Preferred Stock to reserve shares of Common Stock for issuance upon
conversion of the accrued dividends on the Preferred Stock, these additional
dividends are automatically convertible into Common Stock at the time of the
conversion of the related shares of Preferred Stock. Thus, on June 30, 1997,
although the accrued dividends on the Preferred Stock could be converted into
3,418,176 shares of Common Stock, there were only 3,338,816 shares of Common
Stock that were authorized and unreserved. There can be no assurance that a
sufficient number of shareholders will not convert their Preferred Stock and the
accrued dividends thereon into shares of Common Stock, thus causing the Company
to violate the above covenants.

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<PAGE>

Common Stock

The holder of each share of Common Stock is entitled to one vote on all
matters submitted to a vote of the shareholders of the Company, including the
election of directors. There is no cumulative voting for directors.

The holders of Common Stock are entitled to receive such dividends as
the Board of Directors may from time to time declare out of funds legally
available for payment of dividends. No dividend may be paid on the Common Stock
until all accumulated and unpaid dividends on the Preferred Stock have been
paid.

Upon any liquidation, dissolution or winding up of the Company, holders
of shares of Common Stock are entitled to receive pro rata all of the assets of
the Company available for distribution, subject to the liquidation preference of
the Preferred Stock of $10.00 per share and any unpaid and accumulated dividends
on the Preferred Stock. The holders of the Common Stock do not have any
preemptive rights to subscribe for or purchase shares, obligations, 1995
Warrants, 1996 Warrants, 1996-B Warrants, 1997 Warrants or other securities of
the Company.

Series A Convertible Preferred Stock

The holders of shares of Preferred Stock have the number of votes per
share equal to the number of shares of Common Stock into which each such share
is convertible (i.e., 1 share of Preferred Stock equals 10 votes, provided that
through December 31, 1997, each share of Preferred Stock equals 12 votes). The
shares of Preferred Stock are entitled to vote on all matters submitted to the
vote of the shareholders of the Company, including the election of directors.

The holders of Preferred Stock are entitled to an annual cumulative
cash dividend of $1.50 per annum, payable when, as and if declared by the Board
of Directors. The record dates for payment of dividends on the Preferred Stock
are February 1 and August 1 of each year. Any and all accumulated and unpaid
cash dividends on the Preferred Stock must be declared and paid prior to the
declaration and payment of any dividends on the Common Stock. Any unpaid and
accumulated dividends will not bear interest. As of June 30, 1997 the
accumulated and unpaid dividends on the Preferred Stock were $2,837,086.

Each share of Preferred Stock is convertible at any time into 10 shares
of fully issued and non-assessable Common Stock, provided that the conversion
rate for each share of Preferred Stock is 12 shares of Common Stock through
December 31, 1997. Accrued and unpaid dividends earned on shares of Preferred
Stock being converted into Common Stock are also convertible into Common Stock
at the rate $1.00 per share of Common Stock at the time of conversion and
whether or not such dividends have then been declared by the Company, provided
that the conversion rate is reduced to $.83 per share of Common Stock through
December 31, 1997. As of June 30, 1997, a total of 38,255 shares of Preferred
Stock have been converted into Common Stock and accrued and unpaid dividends
thereon have been converted into 174,784 shares of Common Stock. The conversion
rate of the Preferred Stock (and any accrued and unpaid dividends thereon) will
be equitably adjusted for stock splits, stock combinations, recapitalizations,
and in connection with certain other issuances of Common Stock by the Company.
Upon any liquidation, dissolution, or winding-up of the Company, the holders of
Preferred Stock are entitled to receive a distribution in preference to the
Common Stock in the amount of $10.00 per share plus any accumulated and unpaid
dividends.

The Company has the right, at any time on or after January 1, 1998, to
redeem all or any part of the issued and outstanding Preferred Stock for the sum
of $11.00 per share plus any and all unpaid and accumulated dividends thereon.
Upon notice by the Company of such call, the holders of the Preferred Stock so
called will have the opportunity to convert their shares of Preferred Stock and
any unpaid and accumulated dividends thereon (whether or not such dividends have
been declared by the Company as of such date) into shares of Common Stock.

The Company paid a special stock dividend consisting of 3 shares of
Common Stock for each share of Preferred Stock issued and outstanding on August
1, 1995. The stock dividend consisted of an aggregate of 1,908,600 shares of
Common Stock.

Convertible Securities and Related Warrants

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<PAGE>

The Convertible Securities mature five years from issuance and earn a
cumulative dividend at the rate of 6% per year, such dividend payable in Common
Stock or cash at the option of the Company at the time of conversion. At any
time after 45 days from issuance, the Convertible Securities are convertible
into shares of Common Stock at the lesser of $.398, the average closing bid
price of the Common Stock for the five trading days immediately preceding the
date of issuance, or sixty-five percent (65%) of the average closing bid price
of the Common Stock for the five trading days immediately preceding the day
prior to the date of conversion. At any time one year after issuance, the
Company has the right to require the redemption of the Convertible Securities at
the lesser of $.398, the average closing bid price of the Common Stock on the
date of issuance, or sixty-five percent (65%) of the average closing bid price
of the Common Stock for the five trading days immediately preceding the day
prior to the date of conversion. If the Convertible Securities have not been
redeemed or converted prior to their maturity date, the entire principal amount
of the Convertible Securities shall be automatically converted into shares of
Common Stock on and as of the such date. The number of shares into which the
Convertible Securities shall be converted shall be calculated in accordance with
the conversion formula described above. All dividends accrued on the Convertible
Securities through the maturity date shall be satisfied, at the Company's
option, either through the issuance of shares of Common Stock or the payment of
cash. The Convertible Securities were issued by the Company pursuant to
Regulation S promulgated under the Act.

Upon completion of the sale of the Convertible Securities, GEMA
received 8% of the gross proceeds (i.e. $40,000) as a management/documentation
fee. In addition, affiliates and/or consultants to GEMA received non-redeemable
warrants to purchase up to 2,000,000 shares of the Company's Common Stock at a
price of $.20 per share at any time prior to June 23, 2002. These warrants have
been issued by the Company pursuant to Regulation S.

In connection with the transaction, the Company entered into an escrow
agreement, pursuant to which the Company issued 2,500,000 shares of restricted
Common Stock registered in the name of Lurio & Associates, as Escrow Agent. Such
shares are being issued in order to ensure that they would be available when the
holders of the Convertible Securities convert their Convertible Securities. In
August and September 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 subject to the escrow agreement as of the date
hereof.

1997 Common Stock Purchase Warrants

Each 1997 Warrant entitles its holder to immediately purchase one share
of Common Stock. The exercise price is $.20 per share through September 30, 1997
and $.40 per share thereafter, subject to reduction at any time by the Company.
The 1997 Warrants are exercisable at any time prior to July 3, 2002, or such
later date as may be determined by the Company.

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<PAGE>

The 1997 Warrants have been issued pursuant to a warrant agreement (the
"1997 Warrant Agreement") by and between the Company and American Stock Transfer
& Trust Company, the warrant agent.

The Company has, at its expense, registered for resale the Common Stock
underlying the 1997 Warrants under the Act, and has exempted from registration
such Common Stock for resale by non-affiliates of the Company in those states in
which the holders of the 1997 Warrants are located.

The exercise price of the 1997 Warrants and the number of shares of Common
Stock issuable upon exercise of the 1997 Warrants are subject to adjustment in
certain circumstances, including a stock split of, stock dividend on, or a
subdivision, combination or recapitalization of the Common Stock. Upon the
merger, consolidation, sale of substantially all of the assets of the Company,
or other similar transaction, the Warrant holders shall, at the option of the
Company, be required to exercise the Warrants immediately prior to the closing
of the transaction, or such Warrants shall automatically expire. Upon such
exercise, the Warrant holders shall participate on the same basis as the holders
of Common Stock in connection with the transaction.

The 1997 Warrants do not confer upon the holder any voting or any other
rights of a shareholder of the Company. Upon notice to the 1997 Warrant holders,
the Company has the right, at any time and from time to time, to reduce the
exercise price or to extend the expiration date of the 1997 Warrants.

1996-B Common Stock Purchase Warrants

Each 1996-B Warrant entitles its holder to immediately purchase one share
of Common Stock. The exercise price is $.20 per share through September 30, 1997
and $.30 per share thereafter, subject to reduction at any time by the Company.
The 1996-B Warrants are exercisable at any time prior to February 28, 2002 or
such later date as may be determined by the Company. As of June 30, 1997, none
of the 1996-B Warrants have been exercised and 374,000 remain outstanding.

The 1996-B Warrants have been issued pursuant to a warrant agreement dated
as of February 28, 1997 (the "1996-B Warrant Agreement") by and between the
Company and American Stock Transfer & Trust Company, the warrant agent.

The Company has, at its expense, registered for resale the Common Stock
underlying the 1996-B Warrants under the Act, and has exempted from registration
such Common Stock for resale by non-affiliates of the Company in those states in
which the holders of the 1996-B Warrants are located.

The exercise price of the 1996-B Warrants and the number of shares of
Common Stock issuable upon exercise of the 1996-B Warrants are subject to
adjustment in certain circumstances, including a stock split of, stock dividend
on, or a subdivision, combination or recapitalization of the Common Stock. Upon
the merger, consolidation, sale of substantially all of the assets of the
Company, or other similar transaction, the Warrant holders shall, at the option
of the Company, be required to exercise the Warrants immediately prior to the
closing of the transaction, or such Warrants shall automatically expire. Upon
such exercise, the Warrant holders shall participate on the same basis as the
holders of Common Stock in connection with the transaction.

The 1996-B Warrants do not confer upon the holder any voting or any other
rights of a shareholder of the Company. Upon notice to the 1996-B Warrant
holders, the Company has the right, at any time and from time to time, to reduce
the exercise price or to extend the expiration date of the 1996-B Warrants.

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<PAGE>

1996 Common Stock Purchase Warrants

Each 1996 Warrant entitles its holder to purchase one share of Common Stock
at an exercise price of $.25 through October 31, 1997, and $.50 thereafter, or
such lower price as may be determined by the Company from time to time. The 1996
Warrants are exercisable at any time through May 31, 2001, or such later date as
may be determined by the Company ("1996 Warrant Termination Date"). On September
14, 1997, the Board of Directors of the Company reduced the exercise price of
the 1996 Warrants to $.25 per share through October 31, 1997. The exercise price
of the 1996 Warrants had been reduced by the Company to $.20 during the period
of time from November 1, 1996 through February 28, 1997. As of June 30, 1997, an
aggregate of 3,202,000 1996 Warrants have been exercised, all at $.20, and
1,998,000 remained unexercised. During September 1997, an aggregate of 40,000
1996 Warrants were exercised at $.25, leaving 1,958,000 1996 Warrants
unexercised.

The 1996 Warrants have been issued pursuant to a 1996 Warrant Agreement
dated as of May 1, 1996, by and between the Company and American Stock Transfer
& Trust Company, the warrant agent.

The Company has, at its expense, registered for resale the Common Stock
underlying the 1996 Warrants under the Act, and has exempted from registration
such Common Stock for resale by non-affiliates of the Company in those states in
which the holders of the 1996 Warrants are located.

The exercise price of the 1996 Warrants and the number of shares of Common
Stock issuable upon exercise of the 1996 Warrants are subject to adjustment in
certain circumstances, including a stock split of, stock dividend on, or a
subdivision, combination or recapitalization of the Common Stock. Upon the
merger, consolidation, sale of substantially all the assets of the Company, or
other similar transaction, the 1996 Warrant holders shall, at the option of the
Company, be required to exercise the 1996 Warrants immediately prior to the
closing of the transaction, or such 1996 Warrants shall automatically expire.
Upon such exercise, the 1996 Warrant holders shall participate on the same basis
as the holders of Common Stock in connection with the transaction.

The 1996 Warrants do not confer upon the holder any voting or any other
rights of a shareholder of the Company. Upon notice to the 1996 Warrant holders,
the Company has the right, at any time and from time to time, to reduce the
exercise price or to extend the 1996 Warrant Termination Date.

1995 Common Stock Purchase Warrants

Each 1995 Warrant entitles its holder to purchase one share of Common Stock
at an exercise price of $.25 through October 31, 1997, and $.50 thereafter, or
such lower exercise price as may be determined by the Company from time to time.
On September 14, 1997, the Board of Directors of the Company reduced the
exercise price of the 1995 Warrants to $.25 per share through October 31, 1997.
The exercise price of the 1995 Warrants had been reduced by the Company to $.30
during the period of time from February 12, 1996 through June 30, 1996. As of
June 30, 1997, a total of 3,686,000 1995 Warrants have been exercised, all at
$.30, generating gross proceeds of $1,105,800. There are 1,414,000 unexercised
1995 Warrants as of June 30, 1997. The 1995 Warrants are exercisable at any time
through January 31, 2001, or such later date as may be determined by the Company
("1995 Warrant Termination Date").

The 1995 Warrants have been issued pursuant to a 1995 Warrant Agreement
dated as of June 21, 1995, by and between the Company and American Stock
Transfer & Trust Company, the warrant agent.

The Company has registered for resale the Common Stock underlying the 1995
Warrants under the Act, and has registered or exempted from registration such
Common Stock for resale by non-affiliates of the Company in those states in
which the holders of the 1995 Warrants are located.

The exercise price of the 1995 Warrants and the number of shares of Common
Stock issuable upon exercise of the 1995 Warrants are subject to adjustment in
certain circumstances, including a stock split of, stock dividend on, or a
subdivision, combination or recapitalization of the Common Stock. Upon the
merger, consolidation, sale of substantially all the assets of the Company, or
other similar transaction, the 1995 Warrant holders shall, at the option of the
Company, be required to exercise the 1995 Warrants immediately prior to the
closing of the transaction, or such Warrants shall automatically expire. Upon
such exercise, the 1995 Warrant holders shall participate on the same basis as
the holders of Common Stock in connection with the transaction.

The 1995 Warrants do not confer upon the holder any voting or any other
rights of a shareholder of the Company. Upon notice to the 1995 Warrant holders,
the Company has the right, at any time and from time to time, to reduce the
exercise price or to extend the 1995 Warrant Termination Date.

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<PAGE>

Shares Eligible for Future Sale

Of the 29,969,934 shares of Common Stock issued and outstanding on June
30, 1997, 14,500,334 are freely transferable without restriction or further
registration under the Act (other than shares held by "affiliates" of the
Company), and the remaining 15,469,600 are "restricted securities". As of June
30, 1997, there were 861,205 shares of Preferred Stock issued and outstanding,
268,905 of which are freely transferable without further registration or
restriction under the Act (other than shares held by "affiliates" of the
Company), and the remaining 592,300 are "restricted securities". The 861,205
shares of Preferred Stock issued and outstanding on June 30, 1997 are
convertible into 10,334,460 shares of Common Stock. Of such shares of Common
Stock, 3,226,860 would be fully transferable without registration or regulation
under the Act and 7,107,600 would be "restricted securities" within the meaning
of Rule 144.

As set forth in the prior paragraph, there are 15,469,600 shares of
Common Stock and 592,300 shares of Preferred Stock which are "restricted
securities" and cannot be resold without registration, except in reliance upon
Rule 144 or another applicable exemption from registration. All of such Common
Stock (other than 150,000 shares thereby) is eligible for sale under Rule 144.
Of such Preferred Stock, 502,950 are currently subject to sale pursuant to Rule
144, and 89,350 would become eligible for sale under Rule 144 during calendar
year 1998.

50
<PAGE>

As of June 30, 1997, there are outstanding options to acquire 3,971,000
shares of Common Stock, 70,000 of which are exercisable at $.05 per share,
2,565,000 of which are exercisable at $.25 per share, 1,236,000 of which are
exercisable at $.45 per share, and 100,000 of which are exercisable at $.50 per
share. There are also outstanding purchase rights to acquire 157,300 shares of
Common Stock at $1.00 per share. In September 1997, the Company issued to a
consultant options to acquire up to 50,000 shares of Common Stock at $.50 per
share. All of such Common Stock, if issued on the date hereof, would be
"restricted securities" as defined in Rule 144 promulgated under the Act. In
connection with all of such options other than options exercisable at $.05 per
share, the Company plans, 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 during calendar year 1997. As of June 30,
1997, there were also 1,414,000 shares of Common Stock issuable by the Company
to the holders of the outstanding unexercised 1995 Warrants, 1,998,000 shares of
Common Stock issuable by the Company to the holders of the outstanding
unexercised 1996 Warrants, 374,000 shares of Common Stock issuable by the
Company to the holders of the outstanding unexercised 1996-B Warrants, and
1,600,000 shares of Common Stock issuable by the Company to the holders of the
outstanding unexercised 1997 Warrants. Such Common Stock, if issued, will be
freely tradeable under the Act.

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are required to be aggregated), including any affiliate of the
Company, who beneficially owns "restricted securities" for a period of at least
one year is entitled to sell within any three-month period, shares equal in
number to the greater of (i) 1% of the then outstanding shares of the same class
of shares, or (ii) the average weekly trading volume of the same class of shares
during the four calendar weeks preceding the filing of the required notice of
sale with the Securities and Exchange Commission. The seller must also comply
with the notice and manner of sale requirements of Rule 144, and there must be
current public information available about the Company. In addition, any person
(or persons whose shares must be aggregated) who is not, at the time of sale,
nor during the preceding three months, an affiliate of the Company, and who has
beneficially owned restricted shares for at least two years, can sell such
shares under Rule 144 without regard to the notice, manner of sale, public
information or the volume limitations described above.

Limitation of Liability; Indemnification

As permitted by the Pennsylvania Business Corporation Law of 1988
("BCL"), the Company's By-laws provide that Directors of the Company will not be
personally liable, as such, for monetary damages for any action taken unless the
Director has breached or failed to perform the duties of a Director under the
BCL and the breach or failure to perform constitutes self-dealing, willful

51
<PAGE>

misconduct or recklessness. This limitation of personal liability does not apply
to any responsibility or liability pursuant to any criminal statute, or any
liability for the payment of taxes pursuant to Federal, State or local law. The
By-laws also include provisions for indemnification of the Company's Directors
and officers to the fullest extent permitted by the BCL. Insofar as
indemnification for liabilities arising under the Act may be permitted to
Directors, officers and controlling persons of the Company pursuant to the
foregoing provisions, or otherwise, the Company has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.

Transfer Agent and Registrar

The Transfer Agent and Registrar for the Common Stock, Preferred Stock,
1995 Warrants, 1996 Warrants, 1996-B Warrants and 1997 Warrants is American
Stock Transfer & Trust Company, 40 Wall Street, New York, New York 10005.

PLAN OF DISTRIBUTION

The Common Stock is being registered to permit public secondary trading
of the Common Stock by the Selling Shareholders from time to time after the date
of this Prospectus. The Company has agreed to bear all the expenses (other than
selling commissions) in connection with the registration and sale of the Common
Stock covered by this Prospectus.

In order to comply with the securities laws of certain states,
if applicable, the Common Stock will be sold in such jurisdictions
only through registered or licensed brokers or dealers. In

52
<PAGE>

addition, in certain states, the Common Stock may not be sold unless it has been
registered or qualified for resale by the Selling Shareholder in the applicable
state or an exemption from the registration or qualification requirement is
available and complied with.

LEGAL MATTERS

The validity of the Common Stock has been passed upon for the Company
by Lurio & Associates, Philadelphia, Pennsylvania. Lurio & Associates was as of
June 30, 1997 the beneficial owner of an aggregate of 2,500,000 shares of Common
Stock which were issued to the firm as Escrow Agent in connection with the
issuance of an aggregate of $500,000 of Convertible Securities in June 1997. In
August and September 1997, the holders of $430,000 of the Convertible Securities
converted their securities into Common Stock, leaving 350,000 shares subject to
the 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. See
"Description of Securities -- Convertible Securities and Related Warrants."

EXPERTS

The financial statements of USA Technologies, Inc. at June 30, 1997 and
1996, and 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, appearing in this
Prospectus and Registration Statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon (which contains an
explanatory paragraph describing conditions that raise substantial doubt about
the Company's ability to continue as a going concern as described in Note 2 to
the financial statements) appearing elsewhere herein, and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.

53
<PAGE>

INDEX TO FINANCIAL STATEMENTS

USA TECHNOLOGIES, INC.
(A Development Stage Corporation)

Report of Independent Auditors F-2

Balance Sheets F-3

Statements of Operations F-4

Statement of Shareholders' Equity F-5

Statements of Cash Flows F-10

Notes to Financial Statements F-12

F-1

<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-2

<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-3

<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-4

<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-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 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-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>
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)
July 1995 - 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-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>
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-8

<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-9

<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-10

<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-11

<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-12

<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-13

<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-14

<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-15

<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-16

<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-17

<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-18

<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-19

<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 1,377,942 of common shares, and
the escrowed shares were reduced to 625,000.

F-20

<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-21

<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-22

<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-23

<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 fiscal year 1998, 1,529,200 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 $350,640. In addition, during
the first quarter of 1998, 40,000 of 1996 Common Stock Warrants were exercised
at $.25 per warrant, generating total gross proceeds to the Company of $10,000.

During the first quarter of 1998, certain holders of the Company's Preferred
Stock converted 134,320 shares into 1,611,840 shares of Common Stock. Certain of
these shareholders also converted cumulative preferred dividends of $528,007
into 637,410 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-24

<PAGE>

No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and, if given or
made, such information or representation must not be relied upon as having been
authorized. This Prospectus does not constitute an offer to sell or the
solicitation of an offer to buy any securities other than the securities to
which the Prospectus relates or an offer to sell or the solicitation of an offer
to buy such securities in any circumstances in which such offer or solicitation
is unlawful. Neither the delivery of this Prospectus nor any sale made hereunder
shall, under any circumstances, create any implication that there has been no
change in the affairs of the Company since the date hereof or that the
information contained herein is current as of any time subsequent to its date.

TABLE OF CONTENTS

Available Information. . . . . . . . . . . . . . . . . . i

Prospectus Summary . . . . . . . . . . . . . . . . . . . 1

Recent Developments . . . . . . . . . . . . . . . . . .

Risk Factors . . . . . . . . . . . . . . . . . . . . . . 5

Use of Proceeds. . . . . . . . . . . . . . . . . . . . . 11

Management Discussion And Analysis of
Financial Condition And Results
of Operations. . . . . . . . . . . . . . . . . . 12

Business . . . . . . . . . . . . . . . . . . . . . . . . 16

Management . . . . . . . . . . . . . . . . . . . . . . . 23

Principal Shareholders . . . . . . . . . . . . . . . . . 30

Certain Transactions . . . . . . . . . . . . . . . . . . 36

Selling Shareholders . . . . . . . . . . . . . . . . . . 38

Market for Common Stock. . . . . . . . . . . . . . . . . 42

Description of Securities. . . . . . . . . . . . . . . . 43

Plan of Distribution . . . . . . . . . . . . . . . . . . 52

Legal Matters . . . . . . . . . . . . . . . . . . . . . 53

Experts. . . . . . . . . . . . . . . . . . . . . . . . . 53

Financial Statements . . . . . . . . . . . . . . . . . . F-1

<PAGE>

PART II

INFORMATION NOT REQUIRED IN THE PROSPECTUS

Item 24. Indemnification of Officers and Directors.

Section 1746 of the Pennsylvania Business Corporation Law of 1988, as
amended ("BCL"), authorizes a Pennsylvania corporation to indemnify its
officers, directors, employees and agents under certain circumstances against
expenses and liabilities incurred in legal proceedings involving such persons
because of their holding or having held such positions with the corporation and
to purchase and maintain insurance of such indemnification. The Company's Bylaws
substantively provide that the Company will indemnify its officers, directors,
employees and agents to the fullest extent provided by Section 1746 of the BCL.

Section 1713 of the BCL permits a Pennsylvania corporation, by so
providing in its By-laws, to eliminate the personal liability of a director for
monetary damages for any action taken unless the director has breached or failed
to perform the duties of his office and the breach or failure constitutes
self-dealing, willful misconduct or recklessness. In addition, no such
limitation of liability is available with respect to the responsibility or
liability of a director pursuant to any criminal statute or for the payment of
taxes pursuant to Federal, state or local law. The Company's By-laws eliminate
the personal liability of the directors to the fullest extent permitted by
Section 1713 of the BCL.

Item 25. Other Expenses of Issuance and Distribution.

The following is an itemized statement of the estimated amounts of all
expenses payable by the Registrant in connection with the registration of the
Common Stock, other than underwriting discounts and commissions.

Securities and Exchange Commission - Registration Fee . $ 896.56
Blue Sky fees and expenses. . . . . . . . . . . . . . . $ 5,000.00
Printing and Engraving Expenses . . . . . . . . . . . . $13,000.00
Accounting Fees and Expenses. . . . . . . . . . . . . . $22,000.00
Legal Fees and Expenses . . . . . . . . . . . . . . . . $22,000.00
Miscellaneous . . . . . . . . . . . . . . . . . . . . . $ 2,103.44
----------

Total . . . . . . . . . . . . . . . . . . $65,000.00
----------

Item 26. Recent Sales of Unregistered Securities.

During the three years immediately preceding the date of the filing of
this Registration Statement, the following securities were issued by the Company
without registration under the Securities Act of 1933, as amended ("Act"):

II-1

<PAGE>

I. Private Placements.

During June and July 1995, the Company sold 170 Units at $10,000 each
pursuant to a private placement under Rule 506 of Regulation D promulgated under
the Act. Each Unit consisted of 1,000 shares of Preferred Stock and 30,000 1995
Common Stock Purchase Warrants. An aggregate of 170,000 shares of Preferred
Stock and 5,100,000 1995 Common Stock Purchase Warrants were sold to 226
accredited investors. In connection therewith, William W. Sellers, a Director of
the Company, purchased an aggregate of 2,225 shares of Preferred Stock and
66,750 1995 Common Stock Purchase Warrants.

During February 1996, the Company sold 50,000 shares of Preferred Stock
at $4.00 per share pursuant to Regulation S promulgated under the Act.

During May 1996, the Company sold 130 units at $10,000 each pursuant to
a private placement under Rule 506 of Regulation D promulgated under the Act.
Each unit consisted of 1,000 shares of Preferred Stock and 40,000 1996 Common
Stock Purchase Warrants. An aggregate of 130,000 shares of Preferred Stock and
5,200,000 1996 Common Stock Purchase Warrants were issued to 100 accredited
investors and 33 non-accredited investors. In connection therewith, William W.
Sellers, a Director of the Company, purchased 4,000 shares of Preferred Stock
and 160,000 1996 Common Stock Purchase Warrants.

During January and February 1997, the Company sold 9.35 units at
$10,000 each pursuant to a private placement under Rule 506 of Regulation D
promulgated under the Act. Each unit consisted of 1,000 shares of Preferred
Stock and 40,000 1996-B Common Stock Purchase Warrants. An aggregate of 9,350
shares of Preferred Stock and 374,000 1996-B Common Stock Purchase Warrants were
sold to 16 accredited investors.

During April, May, June and July 1997, the Company sold 40 units at
$10,000 each pursuant to a private placement under Rule 506 of Regulation D
promulgated under the Act. Each unit consisted of 2,000 shares of Preferred
Stock and 40,000 1997 Common Stock Purchase Warrants. An aggregate of 80,000
shares of Preferred Stock and 1,600,000 1997 Common Stock Purchase Warrants
were sold to 44 accredited investors and 10 non-accredited investors.

During June 1997, the Company issued an aggregate of $500,000 of
Convertible Securities pursuant to an agreement with Gem Advisors Inc. ("GEMA")
which provided GEMA with the exclusive right to place the Convertible Securities
with qualified purchasers. The Convertible Securities were issued by the Company
pursuant to Regulation S promulgated under the Act. Upon completion of the sale
of the Convertible Securities, GEMA received 8% of the gross proceeds (i.e.
$40,000) as a management/documentation fee. In addition, affiliates and/or
consultants to GEMA received non-redeemable warrants to purchase up to 2,000,000
shares of the Company's Common Stock at a price of $.20 per share at any time
prior to June 23, 2002. These warrants have been issued by the Company pursuant
to Regulation S.

II. Stock Options

II-2

<PAGE>

In March 1995, the Company issued to the following officers, directors,
consultants and employees, options to acquire an aggregate of 1,305,000 shares
of Common Stock at $.25 per share:

Number of shares of
Common Stock purchasable
Grantee Under the Options Granted
------- -------------------------
Henry B. duPont Smith 100,000
Keith L. Sterling 100,000
William W. Sellers 55,000
Peter G. Kapourelos 70,000
William L. Van Alen, Jr. 25,000
Adele Hepburn 500,000
Austin Hepburn 390,000
Robert Leiser 40,000
Doug Anette 25,000

In March 1995, the Company issued to two consultants, Howard Bronson
and Kelly Capital, options to acquire an aggregate of 500,000 shares of Common
Stock at $.05 per share.

In March 1995, the Company issued to H. Brock Kolls options to purchase
up to 150,000 shares of Common Stock at $.25 per share.

II-3

<PAGE>

In June 1995, the Company issued to Barry Slawter options to purchase
up to 10,000 shares of Common Stock at $.25 per share.

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

In April 1996, the Company issued to Stephen Herbert options to
purchase up to 400,000 shares of Common Stock at $.65 per share.

In May 1996, the Company issued to Keith Sterling options to purchase
up to 50,000 shares of Common Stock at $.65 per share.

In May 1996, the Company issued to Edward Sullivan options to purchase
up to 50,000 shares of Common Stock at $.65 per share.

In July 1996, the Company issued to Michael Lawlor options to purchase
up to 100,000 shares of Common Stock at $.65 per share.

In August 1996, the Company issued to a RAM Group, consultant, options
to purchase up to 50,000 shares of Common Stock at $.50 per share.

In September 1996, the Company issued to Joseph Donahue options to
purchase up to 50,000 shares of Common Stock at $.45 per share.

In November 1996, the Company issued to a RAM Group, consultant,
options to purchase up to 50,000 shares of Common Stock at $.50 per share.

In November 1996, the Company issued to Phillip A. Harvey options to
purchase up to 50,000 shares of Common Stock at $.65 per share.

In November 1996, the Company issued to Michael Feeney options to
purchase up to 10,000 shares of Common Stock at $.50 per share.

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

In June 1997, the Company issued to Haven Brock Kolls options to
purchase up to 100,000 shares of Common Stock at $.45 per share.

In June 1997, the Company issued to Keith Sterling options to purchase
up to 100,000 shares of Common Stock at $.45 per share.

In June 1997, the Company issued to Stephen Herbert options to purchase
up to 100,000 shares of Common Stock at $.45 per share.

In June 1997, the Company issued to Michael Feeney options to purchase
up to 5,000 shares of Common Stock at $.45 per share.

In September 1997, the Company issued to RAM Group, a consultant,
options to purchase up to 50,000 shares of Common Stock at $.50 per share.

The issuance of all of the foregoing options was made in reliance upon
the exemption provided by Section 4(2) of the Act.

III. Common Stock-For Cash.

In July 1995, options to purchase 180,000 shares of Common Stock at $.05
per share were exercised by the holders thereof. All of such shares were issued
by the Company in reliance on Section 4(2) of the Act.

In October 1995, options to purchase 100,000 shares of Common Stock at
$.05 per share were exercised by the holders thereof. All of such shares were
issued by the Company in reliance on Section 4(2) of the Act.

In June 1997, options to purchase 150,000 shares of Common Stock at
$.05 per share were exercised by the holders thereof. All such shares were
issued by the Company in reliance on Section 4(2) of the Act.

IV. Stock Dividend.

The Company issued a stock dividend consisting of 3 shares of Common
Stock for each share of Preferred Stock issued and outstanding on August 1,
1995. Based on the 636,200 shares of Preferred

II-4

<PAGE>

Stock issued and outstanding on such date, an aggregate of 1,908,600 shares of
Common Stock were distributed to the holders of the Preferred Stock. Pursuant
thereto, 48,000 shares were issued to Mr. Jensen, 1,500 shares were issued to
Mr. Kolls, 3,000 shares were issued to Mr. Kapourelos, 11,175 shares were issued
to Mr. Sellers, and 30,000 shares were issued to Mr. Smith. The issuance of this
Common Stock was made in reliance on the exemption provided by Section 4(2) of
the Act.

Item 27. Exhibits.

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

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

II-5

<PAGE>

Exhibit
Number Description
- ------- -----------

4.1 1996 Warrant Agreement dated as of May 1, 1996
between the Company and American Stock Transfer
and Trust Company

4.2 Form of 1996 Warrant Certificate

4.3 1995 Warrant Agreement dated as of June 21, 1995
between the Company and American Stock Transfer
and Trust Company (Incorporated by reference to
Exhibit 4.1 to Form SB-2 Registration Statement
No. 33-98808)

4.4 Form of 1995 Warrant Certificate (Incorporated by
reference to Exhibit 4.2 to Form SB-2 Registration
Statement No. 33-98808)

5.1 Opinion of Lurio & Associates

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)

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

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

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

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)

II-6

<PAGE>

Exhibit
Number Description
- ------- -----------
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

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

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 dated
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)

II-7

<PAGE>

Exhibit
Number Description
- ------- -----------

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

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 March 20, 1996

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)

II-8

<PAGE>

Exhibit
Number Description
- ------- -----------

10.18.1 H. Brock Kolls Common Stock Options dated
as of March 20, 1996

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 Form SB-2
Registration Statement No. 33-70992)

10.21 Employment Agreement dated June 30, 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 28, 1995 (Incorporated by
reference to Exhibit 10.25 to Form SB-2 Registration
Statement No. 33-98808)

10.26 Remarketer/Integrator Agreement between
the Company and Dell Computer Corporation
dated February 8, 1996

II-9

<PAGE>
Exhibit
Number Description
- ------- -----------
10.27 Letter Agreement between the Company and
Diversified Corporate Consulting Group, L.P.,
dated February 7, 1996 (Incorporated by
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

10.29 Michael Lawlor Common Stock Option
Certificate dated as of July 8, 1996

10.30 Employment And Non-Competition Agreement
between the Company and Stephen P. Herbert
dated April 4, 1996

10.31 Stephen P. Herbert Common Stock Option
Certificate dated April 4, 1996

10.32 Letter between the Company and William W.
Sellers dated July 17, 1996

10.33 Letter between the Company and Peter G.
Kapourelos dated July 17, 1996

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 Statement 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 Statement 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 Statement 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 Statement 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).

II-10
<PAGE>

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
Statement No. 33-98808).

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 Statement 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 10.2 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. (Incorporated by reference to
Exhibit 10.47 to Form 10-KSB filed on September 25, 1997).

**23.1 Consent of Ernst & Young LLP, Independent
Auditors

23.2 Consent of Lurio & Associates (included
in Exhibit 5.1)
- --------------
** Filed herewith
II-11

<PAGE>

Item 28. Undertakings.

The undersigned registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:

(i) To include any prospectus required by section
10(a)(3) of the Securities Act of 1933;

(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high and of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.

(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.

Provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if
the information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the registrant pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration statement.

(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.

(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.

Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in

II-12

<PAGE>

the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.

For purposes of determining any liability under the Securities Act of
1933, each filing of the registrant's annual report pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934 that is incorporated by reference
in this registration statement shall be deemed to be a new registration
statement relating to the securities offered herein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.

II-13

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing this Post Effective Amendment No. 2 to Form
SB-2 and has duly caused this Registration Statement on Form SB-2 to be signed
on its behalf by the undersigned, thereunto duly authorized, in Wayne,
Pennsylvania, on October 16, 1997.

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 Act of 1933, as amended,
this Registration Statement has been duly signed below by the following persons
in the capacities and dates indicated.

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

/s/ George R. Jensen, Jr. Chairman of the Board, October 16, 1997
- --------------------------- President and Chief
George R. Jensen, Jr. Executive Officer
(Principal and Chief
Executive Officer)

/s/ Leland P. Maxwell Vice President, Chief October 16, 1997
- --------------------------- Financial Officer
Leland P. Maxwell Treasurer (Principal
Accounting Officer)

/s/ Stephen P. Herbert Vice President, October 16, 1997
- --------------------------- Director
Stephen P. Herbert

/s/ Keith L. Sterling Vice President, October 16, 1997
- --------------------------- Director
Keith L. Sterling

Director October __, 1997
- ---------------------------
William W. Sellers

/s/ Peter G. Kapourelos Director October 16, 1997
- ---------------------------
Peter G. Kapourelos

Director October __, 1997
- ---------------------------
Henry B. duPont Smith

Director October __, 1997
- ---------------------------
William L. Van Alen, Jr.

</TABLE>

II-14

<PAGE>

EXHIBIT INDEX

Exhibit
Number Description
- ------- -----------
<S> <C>

23.1 Consent of Independent Auditors
</TABLE>

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

II-15

<PAGE>

Exhibit 23.1

CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our firm under the caption "Experts" and
to the use of our report dated August 14, 1997, in Post-Effective
Amendment No. 3 to the Registration Statement (Form SB-2 No. 333-09465) and
related Prospectus of USA Technologies, Inc. dated October 16, 1997.

/s/ Ernst & Young LLP

Philadelphia, Pennsylvania
October 16, 1997