USA TECHNOLOGIES INC, SB-2, 1998-11-06

USA TECHNOLOGIES INC
SB-2, 1998-11-06
EQUIPMENT RENTAL & LEASING, NEC

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<PAGE>

As filed with the Securities and Exchange Commission on November 6, 1998

Registration No. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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, P. C.
1760 Market Street, Suite 1300
Philadelphia, PA 19103-4132
(215) 665-9300
-----------------------------------
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. [ ]

<PAGE>

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. [ ]

<TABLE>
<CAPTION>
============================================================================================
CALCULATION OF REGISTRATION FEE
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<S> <C> <C> <C> <C>
Title of each
class of Proposed Proposed
Securities Amount Maximum Maximum Amount of
to be to be Offering Price Aggregate Registration
Registered Registered Per Unit(8) Offering Price Fee
- ---------- ---------- --------------- -------------- ------------
Common Stock,
no par value 1,390,000 shares(1) $.40 $ 556,000 $ 161.24
150,000 shares(2) $.45 $ 67,500 $ 19.57
5,100,000 shares(3) $.50 $2,550,000 $ 879.32
5,200,000 shares(4) $.50 $2,600,000 $ 896.55
1,974,000 shares(5) $.40 $ 789,600 $ 272.28
3,750,000 shares(6) $.39 $1,462,500 $ 482.62
4,208,300 shares(7) $.55 $2,335,840 $ 770.81
---------
Total ..............21,772,300......................................... $3,491.39(9)
=========
</TABLE>
(1) This has been calculated by using the exercise price of the 1998-B Common
Stock Purchase Warrants ($.40) which was higher than the average bid and
asked price of the Common Stock on November 2, 1998 of $.13.

(2) This has been calculated by using the exercise price of the options to
purchase shares of Common Stock ($.45) which was higher than the average bid
and asked price of the Common Stock on November 2, 1998 of $.13.

(3) This Registration Statement amends the Company's Registration Statement on
Amendment No. 8 to Form SB-2, Commission File No. 333-98808 and pursuant to
Rule 429 of the Securities Act of 1933, as amended, carries forward
5,100,000 shares of Common Stock. A filing fee of $879.32 was paid in
connection with the filing of the previous Registration Statement.

(4) This Registration Statement amends the Company's Registration Statement on
Amendment No. 4 to Form SB-2, Commission File No. 333-09465 and pursuant to
Rule 429 of the Securities Act of 1933, as amended, carries forward
5,200,000 shares of Common Stock. A filing fee of $896.55 was paid in
connection with the filing of the previous Registration Statement.

(5) This Registration Statement amends the Company's Registration Statement on
Form SB-2, Commission File No. 333-30853 and pursuant to Rule 429 of the
Securities Act of 1933, as amended, carries forward 1,974,000 shares of
Common Stock. A filing fee of $272.28 was paid in connection with the filing
of the previous Registration Statement.

(6) This Registration Statement amends the Company's Registration Statement on
Form SB-2, Commission File No. 333-48731 and pursuant to Rule 429 of the
Securities Act of 1933, as amended, carries forward 3,750,000 shares of
Common Stock. A filing fee of $482.62 was paid in connection with the filing
of the previous Registration Statement.

(7) This Registration Statement amends the Company's Registration Statement on
Form SB-2, Commission File No. 333-38593 and pursuant to Rule 429 of the
Securities Act of 1933, as amended, carries forward 4,208,300 shares of
Common Stock. A filing fee of $770.81 was paid in connection with the filing
of the previous Registration Statement.

(8) Pursuant to Rule 457(g), the registration fee has been calculated at the
higher of the exercise price of the warrants relating to the above Common
Stock or the average of the bid and asked price within 5 business days
prior to the date of the initial filing the registration statement.

(9) The filing fee of $3,301.58 was paid in connection with the filing of the
previous Registration Statements. The balance of $180.81 has been paid in
connection with the filing of this Registration Statement.

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.

<PAGE>

USA TECHNOLOGIES, INC.

21,772,300 shares of Common Stock

These shares of Common Stock are being sold by the Selling Shareholders
listed below. The Company will not receive any part of the proceeds from the
sale.

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

The Common Stock is listed on the OTC Electronic Bulletin Board under
the symbol "USST." The closing bid price for the Common Stock on November 2,
1998 was $.11 per share.

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

THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD
PURCHASE SHARES ONLY IF YOU CAN AFFORD A COMPLETE LOSS. SEE "RISK
FACTORS" ON PAGE 6.

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

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed on the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.

The date of this prospectus is November __, 1998.

<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 . . . . . . . . . . . . . . . . . . 5

Risk Factors . . . . . . . . . . . . . . . . . . . . . . 6

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

Management Discussion And Analysis of
Financial Condition And Results
of Operations. . . . . . . . . . . . . . . . . . 11

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

Management . . . . . . . . . . . . . . . . . . . . . . . 25

Principal Shareholders . . . . . . . . . . . . . . . . . 32

Certain Transactions . . . . . . . . . . . . . . . . . . 37

Selling Shareholders . . . . . . . . . . . . . . . . . . 39

Market for Common Stock. . . . . . . . . . . . . . . . . 57

Description of Securities. . . . . . . . . . . . . . . . 58

Plan of Distribution . . . . . . . . . . . . . . . . . . 67

Legal Matters . . . . . . . . . . . . . . . . . . . . . 68

Experts. . . . . . . . . . . . . . . . . . . . . . . . . 68

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

<PAGE>

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

Our Company, USA Technologies, Inc., a Pennsylvania corporation was founded
in January 1992. We are an owner and licensor of automated, credit card
activated control systems for use in connection with copying machines, debit
card purchase/revalue stations, facsimile machines, personal computers, and
computer printers. Our customers are hotels, university libraries, public
libraries and retail locations. We generate revenues primarily 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.

Each control system operates as follows:
- The consumer swipes a valid credit card through the control system.
- The control system transmits the request to the credit card
processor.
- The credit card processor verifies that the credit card is valid and
authorizes the transaction.
- The control system activates the equipment for use by the consumer.
- Once the consumer finishes using the equipment, the control system
transmits a record of the transactions to our computer center.
- The transaction information collected from all of the installed
control devices is transmitted by us 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 us.
- Finally, we forward a check to each location representing its share
of the proceeds.

As of June 30, 1998, our Company had installed at commercial locations a
total of 616 control systems. See "Business." As of June 30, 1998, 132 Business
Express(TM) units containing 465 control systems have been installed in hotels
located throughout the United States and Canada. The 616 control systems include
both the purchases of equipment from the Company and the licensing of its
control systems as well as the placement of equipment by the Company on a
revenue-sharing basis and included only the licensing of its control systems.

1
<PAGE>

Our executive offices are located at 200 Plant Avenue, Wayne,
Pennsylvania 19087. The telephone number is (610) 989-0340. Our website is
located at http://www.usatech.com.

Where to Get More Information

Our 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 the
Public Reference Room, 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 or by calling the Commission at
1-800-SEC-0330. 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.

We 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.

2
<PAGE>

Securities

Securities Offered ................ Up to 21,768,100 shares of
Common Stock by the Selling
Shareholders.

Common Stock Outstanding
as of August 31, 1998 .... 40,200,147 shares. On a fully
converted basis, there would be
58,328,372 shares outstanding
consisting of 4,353,800 shares
issuable upon exercise of
4,201,000 options to purchase
Common Stock and 152,800 Common
Stock Purchase Rights
(collectively "Management
Options"), 1,100,000 shares
issuable upon exercise of the
Warrants issued to affiliates
and/or consultants to GEM
Advisors, Inc. in June 1997,
1,390,000 shares issuable upon
the exercise of the Warrants
issued August and September 1998
("1998-B Warrants"), 40,000
shares issuable upon the
exercise of the Warrants issued
in January, February and March
1998 ("1998-A Warrants"), 15,000
shares issuable upon exercise of
the Warrants issued in April,
May and June 1997
("1997-Warrants"), 40,000 shares
issuable upon exercise of the
Warrants issued in January and
February 1997 ("1996-B
Warrants"), 868,000 shares
issuable upon exercise of the
Warrants issued in 1996 ("1996
Warrants"), 673,000 shares
issuable upon the exercise of
the Warrants issued by the
Company in 1995
("1995-Warrants"), 6,709,660
shares issuable upon conversion
of the Series A Convertible
Preferred Stock ("Series A
Preferred Stock"), and 2,938,765
shares issuable upon conversion
of accrued and unpaid dividends
on the Series A Preferred Stock.

Series A Preferred Stock Outstanding as
of August 31, 1998 .... 670,966 shares. Each share of
Series A Preferred Stock, no
par value, of the Company is
convertible by the holder
thereof at any time into 10
shares of Common Stock. The
holders of Series A Preferred
Stock are entitled to an annual
cumulative cash dividend of
$1.50 per share. At the time of
conversion, all accrued and
unpaid dividends are converted
into Common Stock at the rate of
$1.00 per share. See
"Description of Securities -
Series A Convertible Preferred
Stock."

<PAGE>
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 USA
Technologies, Inc. and the Common Stock before investing in the Common Stock.

1. Limited Operating History; Significant Cumulative Operating Losses;
Auditor Report Modification for Going Concern. From inception through June 30,
1998, our Company has generated funds primarily through the sales of its
securities. The auditor's report at June 30, 1998 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
"Consolidated Financial Statements."

Our 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
revenues through June 30, 1998 were nominal. The Copy Express(TM) was first
installed in January 1995, and as of June 30, 1998, there were 45 units in
operation. The Credit Card Vending Express(TM) was first installed in March
1995, and as of June 30, 1998, there were no units in operation. The Fax Express
(TM) was first installed in February 1997 and as of June 30, 1998 there were 11
units in operation and net revenues were nominal. The Company's Debit
Express(TM) was first installed in April 1995, and as of June 30, 1998, there
were 33 units in operation and net revenues were nominal. The Public PC(TM)
(formerly known as the Credit Card Computer Express(TM)) was first installed in
April 1996, and as of June 30, 1998, there were 62 units in operation and net
revenues were nominal. The Business Express(TM) was first installed in September
1996, and as of June 30, 1998, there were 132 units in operation (containing 465
control systems). Although the MBE Joint Venture was established in September
1997, as of June 30, 1998, only 52 MBE Business Express(TM) units were sold. See
"Business-Legal Proceeding."

<PAGE>

For its fiscal years ended June 30, 1998, 1997, our Company incurred
operating losses of $3,586,281 and $3,120,712, respectively. From its inception
on January 16, 1992 through June 30, 1998, we have incurred operating losses of
$12,931,952.

As of June 30, 1998, our Company had a negative working capital of
approximately $5,312, of which $436,971 was invested in inventory. At June 30,
1998, we had cash of approximately $324,824. In subsequent months, the cash
position has been reduced. We anticipate generating additional cash to finance
future operating expenses by selling additional securities and through increased
revenues primarily through resale of its equipment utilizing control systems. As
of June 30, 1998, we installed 616 control devices at commercial locations. We
have an limited operating history upon which an evaluation of future prospects
can be made. Such future prospects must be considered in light of the risks,
expenses and difficulties frequently encountered in the establishment of a new
business. There is currently no basis upon which to assume that our Company's
business will prove financially profitable or generate more than nominal
operating revenues. In addition, there can be no assurances that we 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.

2. Dependence Upon Key Personnel. Our 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 our Company's
business. See "Management -- Officer Terminations." The Company entered into an
employment agreement with Mr. Jensen that expires in June 2000. The Company also
entered into one-year employment agreements with other executive officers, each
of which contain non-compete agreements. We have also 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 our Vice President-Research and
Development, Haven Brock Kolls, Jr. We do not have and do not presently intend
to obtain key man life insurance coverage on any of our 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 our products has not been
established. Although commercial production and installation of our products has
commenced on a very limited basis, there can be no assurance that our products
will be successful or become profitable. In addition, there can be no assurance
that the demand for our products will be sufficient to enable us to become
profitable. Even if our current products would prove to be commercially viable,
there can be no assurance that they can evolve or be improved to meet the future
needs of the market place. In any such event, investors may lose all or
substantially all of their investment in our Company.

4. Dependence on Proprietary Technology; Patent Issues. Our 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, we have applications, and intend to file
applications for additional patents covering its future products although there
can be no assurance that we will do so. In addition, there can be no assurance
that we will maintain or prosecute these applications. The United States
Government granted us one patent during April 1997 and another patent 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 to us, that we will develop additional products that are patentable or
do not infringe the patents of others, or that any patents issued to us will
provide us with any competitive advantages or adequate protection for our
products. In addition, there can be no assurance that any patents issued to us
will not be challenged, invalidated or circumvented by others. There can be no
assurance that any of our products would not infringe the patents of others. If
any of the products are found to have infringed any patent, there can be no
assurance that we will be able to obtain licenses to continue to manufacture and
license such product or that we will not have to pay damages as a result of such
infringement. Even if a patent application is granted for any of our products,
there can be no assurance that the patented technology will be a commercial
success or result in any profits to us. See "Business-Legal Proceedings."

7
<PAGE>

5. Competition. There are companies presently offering automated,
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 our Company's products,
including the Business Express(TM) and Public PC(TM). See "Business-
Competition." 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 our Company. Many of these businesses are well
established, have substantially greater resources than our 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 our 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 that our competitors are able to offer more
attractive technology, our ability to compete could be materially and adversely
affected. We are 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. Our Company is dependent on
third-party suppliers for the various component parts of its products. Although
we believe 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 our
Company, including delaying the implementation of the Company's business plan to
achieve profitability. We do 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 our Company will result in significant revenues or any
level of profitability. Any earnings which may be generated by our Company would
be used, for the foreseeable future, to finance the growth of our business.
Accordingly, while payment of dividends rests within the discretion of the Board
of Directors, no cash dividends on the Common Stock or Series A Preferred Stock
have been declared or paid by us to date, and the Company does not presently
intend to pay cash dividends on the Common Stock or Series A Preferred Stock for
the foreseeable future. Although we 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. Our Articles of Incorporation prohibit the declaration of any
dividends on the Common Stock unless and until all unpaid and accumulated
dividends on the Series A Preferred Stock have been declared and paid. Through
June 30, 1998, the unpaid and cumulative dividends on the or Series A Preferred
Stock equal $2,442,650. The unpaid and accumulated dividends are either payable
in cash by our Company when and if declared by the Board of Directors or may be
converted into shares of Common Stock at the rate of $1.00 per share. Through
June 30, 1998, $1,662,642 of unpaid and cumulative dividends on the Series A
Preferred Stock were converted to 1,964,426 shares of Common Stock. See
"Description of Securities - Series A Convertible Preferred Stock."

<PAGE>

8. Need For Market Acceptance; Location Risk. There can be no assurance
that demand for our Company's products will be sufficient to enable us to become
profitable. Likewise, no assurance can be given that we 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,
1998, our Company installed only 616 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, our revenues
would be adversely affected. We may in the future lose locations utilizing its
products to competitors, or may not be able to install our products at
competitor's locations. Moreover, even if our current products would prove to be
commercially viable, there can be no assurance that they can evolve or be
improved to meet the future needs of the market place.

9. No Current Established Trading Market; 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. 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, each share of 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. Determination of Offering Price. The exercise price of the Warrants
and Management Options was determined arbitrarily by our Company and were not
based upon book value, earnings, assets or any other recognizable standard of
value. If profitable results are not achieved from operations, of which there
can be no assurance, the value of our securities sold pursuant to this offering
could well become considerably less than the offering price of such securities
and could become worthless.

9
<PAGE>

12. Shares Eligible for Future Sale. Of the 40,163,837 shares of Common
Stock issued and outstanding as of June 30, 1998, 40,093,837 are freely
transferable without restriction or further registration under the Act (other
than shares held by "affiliates" of the Company), and the remaining 70,000 are
"restricted securities", as that term is defined under Rule 144 promulgated
under the Act, and under certain circumstances may be sold without registration
pursuant to that Rule. Of the 618,236 shares of Preferred Stock issued and
outstanding on June 30, 1998, 468,236 are freely transferable without
restriction or further registration under the Act (other than shares held by
"affiliates" of the Company), and the remaining 150,000 are "restricted
securities." As of June 30, 1998, there are 637,000 shares of Common Stock
issuable by the Company to the holders of the outstanding unexercised 1995
Warrants, 868,000 shares of Common Stock issuable by the Company to the holders
of the outstanding unexercised 1996 Warrants, 40,000 shares of Common Stock
issuable by the Company to the holders of the outstanding 1996-B Warrants,
15,000 shares of Common Stock issuable to the holders of the outstanding 1997
Warrants, 40,000 shares of Common Stock issuable to the holders of the
outstanding 1998-A Warrants, 4,353,800 shares of Common Stock issuable to the
holders of the Management Options, and 1,100,000 shares of common Stock issuable
upon the exercise of the GEM Warrants. Such Common Stock, if issued, will be
freely tradeable under the Act. See "Description of Securities". We are
unable to predict the effect that sales made under Rule 144 or otherwise may
have on the market price of the Series A Preferred Stock, Warrants, or Common
Stock underlying the Warrants prevailing at the time of any such sales. See
"Description of Securities--Shares Eligible for Future Sale" and "Market for
Securities".

13. Dilution, Issuance of Additional Securities By USA Technologies,
Inc. As of June 30, 1998, the Company issued Management Options to acquire up to
4,353,800 shares of Common Stock, has issued GEM Warrants which are convertible
into 1,100,000 shares of Common Stock, has issued 1998-A Warrants which are
convertible into 40,000 shares of Common Stock, has issued 1997 Warrants which
are convertible into 15,000 shares of Common Stock, has issued 1996-B Warrants
which are convertible into 40,000 shares of Common Stock, has issued 1996
Warrants which are convertible into 868,000 shares of Common Stock, has issued
1995 Warrants which are convertible into 637,000 shares of Common Stock, has
issued 618,236 shares of Preferred Stock which are convertible into 6,182,360
shares of Common Stock and has $2,442,650 cumulative preferred dividends which
are convertible into 2,442,650 shares of Common Stock. See "Description of
Securities." 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 15,714,810 shares of Common Stock would be issued
and outstanding as of June 30, 1998, for a total of 55,878,647 shares of Common
Stock issued and outstanding. Our Company may in the future issue additional
options, warrants or other securities convertible or exchangeable into Common
Stock.

14. Year 2000 Compliance. Our Company has recently commenced a study of
its business in order to determine whether its computer systems are in
compliance with Year 2000 issues. We found that, many existing computer
programs use only two digits to identify a year in the date field. These
programs were designed and developed without considering the impact of the
upcoming change in the century. If not corrected, many computer applications
could fail or create erroneous results by or at the Year 2000.

<PAGE>

In connection with our study, we are concentrating on five
areas of our business:

(1) control system terminals;

(2) office computers;

(3) credit card processing systems and related accounting systems;

(4) back-up, off-site recovery system and

(5) non information technology systems.

The study should be completed on or before December 31, 1998. Based on
the study to date, we estimate that we would incur costs of up to $25,000 in
order to be Year 2000 compliant. In reference to item two (2) above, we have
already found all but two office computers to be compliant. These two computers
will be replaced in fiscal year 1999.

Our Company is in the process of obtaining written assurances of
compliance from all material third parties whose products may affect our
operations.

The worst case scenario for the Company would be if the control systems
in the field were all found to contain a Year 2000 problem causing inaccurate
data transmissions to our main processing software. Preliminary analysis
indicates the probability of this scenario actually happening is very low. The
technology in the control units does not have to deal with any digits
representing the year. If, however, it did happen, we anticipate utilizing the
services of IBM Global Services to replace all defective units. We anticipate
the cost of such services to be approximately $150,000.

10
<PAGE>
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 gross proceeds upon exercise
of the Warrants and Management Options by the Selling Shareholders. There is no
assurance that any or all of the Warrants or Management Options 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. See "Description of Securities."

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Introduction

Since January 1992, the Company has been engaged primarily in research
and development activities focused on designing, developing, and marketing its
credit card activated control systems. During the quarter ended June 30, 1998,
the Company determined that it is no longer designated as a development stage
enterprise as defined in Statement of Financial Accounting Standards No. 7
Development Stage Enterprises. The strategic alliances entered into during the
year ended June 30, 1998 between the Company and MBE and between the MBE Joint
Venture and IBM have provided the Company with the ability to complete its
transition from a development stage enterprise to an enterprise focusing on
marketing its products and its commerical operations. The Company has incurred
operating losses during the years ended June 30, 1998 and 1997 of $3,568,281 and
$3,120,712, respectively and anticipates incurring operating losses through at
least the first half of fiscal 1999.

The Company's independent auditors have included an explanatory
paragraph in the report on the Company's June 30, 1998 consolidated 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, 1998 combined with the revenues to be generated during
fiscal year 1999, the potential capital to be raised from private placement
activities and the exercise of Common Stock Purchase Warrants, and the ability
to reduce anticipated expenditures, if required, will provide for the Company to
continue a going concern.

Results of Operations

Fiscal year ended June 30, 1998:

For the fiscal year ended June 30, 1998, the Company had a net loss of
$3,568,281. The overall loss applicable to common shares of $5,322,847 or
$(.15) loss per common share (basic and diluted) was derived by adding the
$3,568,281 net loss and the $1,754,566 cumulative preferred dividends and other
adjustments and dividends by the weighted average shares outstanding of
35,320,477.

Revenues for the fiscal year ended June 30, 1998 of $1,825,229, an
increase of $1,217,457 or 200% over the prior year reflecting the continued
entrance of the Business Express(TM) and MBE Business Express(TM) into the
marketplace.

Operating expenses for the fiscal year ended June 30, 1998 were
$5,501,650, representing a $1,758,689 or increase over the prior year. The
primary contributors to this increase were cost of sales, general and
administrative and compensation expenses, as discussed below.

Cost of sales increased by $736,639 from the prior year, primarily
reflecting the increase in MBE Business Express(TM) business during fiscal year
1998. General and administrative expenses of $2,213,984 increased by $173,821 or
8.5% which reflects both a general increase in spending to support the expansion
of operations and other factors as described below. Specifically, the major
contributors to this increase were: reserves of $87,520 established in fiscal
year 1998 to cover estimated future field service warranty expenses for the
Company's C3X terminals; marketing promotions and trade show expenses increased
$64,901 or 59.0%; and advertising increased by $125,204 or 143%, reflecting the
need to increase product awareness in the marketplace. Certain other increases
were experienced in outside services, telephone, and office supplies. Certain
other expenses decreased as compared to the prior year, primarily professional
and consultant fees, which decreased by $109,916 or 20%.

Compensation expense was $1,909,682, an increase of $829,224 or 76.7%
over the previous year. The increase was primarily due to the non-cash expense
of $554,630 which reflects the compensation charge recorded for the repricing of
the common stock options below fair market value during April 1998. The
remainder of the increase is due to increased personnel requirements in the
operations and sales areas.

Depreciation expense of $116,255 increased by $19,005, which is
attributable to the increased depreciable asset base.

11
<PAGE>

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 the prior year, reflecting the
first year of equipment sales. The cost of equipment sales increased $473,529
and the cost of license fee revenues increased $51,561. 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.

<PAGE>
Plan of Operations

As of June 30, 1998, the Company had a total of 616 credit card
activated control systems installed in the field as follows: Business
Express(TM) 465, Copy Express(TM) 45, Debit Express(TM) 33, Public PC(TM) 62,
Fax/Printer Express(TM) 11. For the fiscal year ended June 30, 1998, the total
license fee income received by the Company was approximately $236,742.

During the past year the Company has continued its new direction in
product development and has focused on products capable of generating new
incremental revenue for equipment operators (ie, Business Express(TM)) as
opposed to in the past simply providing a better method of payment (ie. Copy
Express(TM)). 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 in prior years. 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 transaction processing 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 continued focus on the sales
and/or leasing of its Business Express(TM) and MBE Business Express(TM) business
centers, continued development of strategic partnering relationships, and
continued development of its technology into new areas to include electronic
commerce and advertising.

Liquidity and Capital Resources

During the fiscal year ended June 30, 1998, the Company completed a
number of equity transactions. Net proceeds of $761,510 were realized from
private placement offerings of Series A Preferred Stock and $1,530,639 were
realized from Common Stock transactions, principally the exercise of Common
Stock Purchase Warrants. As of June 30, 1998, the Company had negative working
capital of $5,312, which included cash and cash equivalents of $324,824 and
inventory of $436,971.

During the fiscal year ended June 30, 1998, net cash of $2,578,597 was
used by operating activities, primarily due to the net loss of $3,568,281. The
net cash provided by financing activities of $2,273,878 was principally due to
the net proceeds generated from the issuance of securities as described in the
prior paragraph.

The Company's independent auditors have included an explanatory
paragraph in their report on the Company's June 30, 1998 consolidated
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, 1998 combined with the revenues and earnings to be
generated during fiscal year 1999, the potential capital to be raised from
private placement activities and the exercise of the Common Stock Purchase
Warrants, and the ability to reduce anticipated expenditures, if required, will
provide for the Company to continue as a going concern through at least June
30, 1999. There can be no assurance, however, that adequate revenues and
earnings will be generated during the 1999 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.

During July and August 1998, the Company engaged in a private placement
offering pursuant to Regulation D promulgated under the Act. The offering
consisted of units at $10,000 each, with each unit consisting of 2,000 shares of
Preferred Stock and 50,000 1998-B Warrants. The 1998-B Warrants enable the
holder to purchase one share of Common Stock for $.15 on or before January 1,
1999, and for $.40 through September 1, 2003. The offering commenced on or about
July 31, 1998, and terminated on August 17, 1998. The Company sold 27.8 units,
generating gross proceeds of $278,000.

In September 1998, the Company approved a private placement offering
pursuant to Regulation D promulgated under the Act. The offering consists of 200
units at $10,000 each, with each unit consisting of a $10,000 principal amount
12% Senior Note, 15,000 1998-C Common Stock Purchase Warrants and 1,000 shares
of Series B Equity Participating Preferred Stock. The offering commenced on
September 28, 1998 and will terminate on December 31, 1998 unless extended by
the Company. Through October 31, 1998 the Company has sold 15 units, generating
gross proceeds of $150,000.

The Company anticipates that for the year ended June 30, 1999, there
will be a negative cash flow from operations in excess of $1.5 million. The
Company anticipates that the shortfall in cash flow will be supported by
additional infusions from private placement activity, the exercise of some of
the Warrants and Management Options, the inventory financing arrangement with
IBM, and, if needed, the ability to reduce planned expenditures.

<PAGE>

Commitment

The Company leases 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.

During May 1998, the Company, on behalf of the MBE Joint Venture,
entered into a commitment to acquire 1,500 control systems for $779,865. Of such
control systems, 600 were ordered in connection with the MBE ICW Project. These
amounts are expected to be paid from profits on the sale of the associated MBE
Business Express(TM) sales and from sales directly to MBE. See "Business-Legal
Proceedings." If these sales fail to materialize, the Company would use
available cash plus funds from private placement activities and/or the exercise
of the Warrants and Management Options, to pay for the control system equipment.

15
<PAGE>
BUSINESS

USA Technologies, Inc., a Pennsylvania corporation (the "Company"), was
founded in January 1992. The Company is an owner and licensor of automated,
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 generates its revenues from the sale of equipment utilizing
its control systems, as well as 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 also anticipates generating revenues
from electronic commerce and advertising through the expansion of its technology
to allow advertisers and merchants to conduct business transactions for goods
and services.

The Company has entered into 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).
The agreement with Choice Hotels International was entered into in April 1997
and has been renewed through April 1999 and the agreement with Promus Hotels,
Inc. was entered into in May 1997. The agreement with Choice is for one year and
is automatically renewed from year to year unless terminated upon at least 30
days notice prior to the end of any one year period. The agreement with Promus
is for a term of three years and may be terminated by either party for any
reason upon at least 90 days written notice. The agreements provide that Choice
or Promus, as the case may be, would promote the products of the Company to its
owned, franchised and licensed properties at the prices set forth in the
agreements. The agreements do not obligate Choice, Promus, or any other party to
purchase any of the Company's products. Through June 30, 1998, Business
Express(TM) have been installed in 18 Choice Hotels and in 19 Doubletree or
Embassy Suites. In addition, the Company's Business Express(TM) has been
approved and recommended as a solution by Marriott for its hotels to satisfy an
identified Business Service Center need. The recommendation was set forth in an
interoffice memo from Marriott corporate to its hotels and was distributed
during September 1997. Through June 30, 1998, Business Express(TM) Units have
been installed in 16 Marriott properties.

On September 24, 1997, the Company entered into a Joint Venture
Agreement with Mail Boxes Etc. USA, Inc. ("MBE"), the leading franchisor of
postal, business, and communications retail service centers, with approximately
3,000 locations in North America (the "MBE Joint Venture"). The MBE 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. The agreement provides that any gross profits
earned by the MBE Joint Venture from sales on a national level (where the buying
decision is made at the customer's headquarters rather than at the local or
store level) shall be split equally between the Company and MBE. Any gross
profits earned from sales of the MBE Express(TM) to MBE franchisees in
connection with placement handoffs provided by either USA or MBE would be split
equally. For any sales made at the local or store level, the gross profit would
be split so that the partner responsible for contractually obligating the
customer for that particular sale would receive 75% and the other partner 25%.
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. See "Business-Legal
Proceedings."

During the term of the MBE Joint Venture, 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 MBE Joint Venture is five years. If certain sales goals are
not met by the MBE Joint Venture, the Company may terminate the exclusivity
provisions of the agreement after the second year. In this regard, if 2,000
business centers are not sold by September 24, 1999, the exclusivity provisions
may be terminated. The MBE Joint Venture may also be terminated at any time by
either partner if the other partner has breached any material term or condition
of the agreement; provided, that the terminating partner has allowed the other
partner at least a sixty day period to cure any alleged breach.

16
<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 September 1997, MBE ordered 195 TransAct(TM) control boxes from the
Company to be used by MBE franchisees for their in-store computer workstations
(computer and printer) ("ICW Project"). In April 1998, MBE ordered an additional
600 terminals for use in connection with its ICW Project. On August 25, 1998,
the Company notified MBE that MBE had breached the MBE Joint Venture Agreement
dated September 24, 1997 between the Company and MBE ("MBE Joint Venture
Agreement") as well as other agreements between the Company and MBE. The Company
indicated that any arrangements between MBE and the other vendor in connection
with the ICW Project violated the MBE Joint Venture Agreement which obligates
MBE to solely use the Company's terminals. The Company also indicated that the
computer product and related terminals provided to MBE for use in connection
with its ICW Project are commercially viable. Finally, the Company indicated
that the 195 terminals should not be transferred to the MBE Joint Venture and
should be retained by MBE, and the 600 terminals ordered by MBE in April 1998
would be delivered to MBE and should be paid for by MBE as agreed. See
"Business-Legal Proceedings." During fiscal year 1998, all 195 control boxes
have been shipped and subsequent thereto to MBE paid for all these control
systems. See "Business-Legal Proceedings."

On February 17, 1998, Prime Hospitality Corp. ("Prime") entered into an
agreement with the MBE Joint Venture pursuant to which Prime would purchase 100
MBE Business Express(TM) units for installation at Prime's owned and managed
hotels. The agreement provided that Prime would purchase the first six units on
a trial basis. If the 90-day trial period was successful, then Prime would order
the remaining 94 units. The agreement provides for a purchase price of
approximatley $2.0 million for all 100 units.

On June 19, 1998, the Company received notification from Prime that the
trial period was successful, and Prime would adopt the MBE Business Express(TM)
as a brand standard at all of its AmeriSuites properties. Pursuant to the
agreement, Prime is obligated to purchase a minimum of 94 additional MBE
Business Express(TM) units over the next 12 months.

On March 31, 1998, the MBE Joint Venture signed agreements with
International Business Machines Corporation ("IBM") whereby IBM agreed to be the
executional partner for certain aspects of the MBE Joint Venture's business,
including project management services, asset procurement and inventory
financing, configuration and testing of equipment, site preparation,
installation, maintenance services, and asset management. IBM would also assist
the MBE Joint Venture with marketing and technology exchange. Most of the 94
units will be installed by the end of calendar year 1998.

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

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.

<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.

As of June 30, 1998, the Company had 465 Business Express(TM)
control systems, 45 Copy Express(TM) control systems, 33 Debit Express(TM)
control systems, 11 Fax/Printer Express(TM) control systems, and 62 Public
PC(TM) control systems located at various hotels and libraries throughout the
United States and Canada. Through June 30, 1998, the total gross revenues
received by the Company from these systems has not been sufficient to cover
operating expenses.

For the years ended June 30, 1998 and 1997, the Company has spent
approximately $199,000 and $344,000, 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 consolidated 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. For example, according to the New York Times on November
20, 1994, in 1970 the average balance on credit cards in the United States was
$649; by 1986 it was $1,472, and in 1994 it was $2,800. According to Time
Magazine, May 9, 1994, from 1986 to 1994, the number of credit card transactions
in the United States increased 200% compared to an increase of 17% for cash and
check transactions. 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.

<PAGE>

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 certain locations and has supplied control systems to 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 (approximately 5.0%) of
the proceeds generated from any transactions. Through June 30, 1998, 132
Business Express(TM) units have been installed resulting in over $1,280,000 in
equipment sales. In connection with sales of business equipment, the Company
receives revenues of $8,000-$20,000 per unit and receives a monthly
administrative fee of $20-$25 per month.

<PAGE>

The MBE Business Express(TM)

On September 24, 1997, the Company entered into the MBE Joint Venture
Agreement with Mail Boxes Etc. USA, Inc. ("MBE"), the leading franchisor of
postal, business, and communications retail service centers with approximately
3,000 locations in North America (the "MBE Joint Venture"). During the term of
the MBE Joint Venture, and subject to the right of the Company to sell a private
label product, the MBE 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. Through June 30, 1998, the MBE
Joint Venture has sold and installed 52 MBE Business Express(TM) business
centers. The Company and MBE are currently involved in a litigation involving,
among other matters, the MBE Joint Venture. See "Business-Legal Proceedings."

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). If a customer would not desire to purchase the MBE Express(TM),
the Company is permitted to sell to such customer a private label product under
any name other than MBE Express(TM). The initial term of the MBE Joint Venture
is five years. If certain sales goals are not met by the joint venture, the
Company may terminate the exclusivity provisions of the agreement after the
second year. In this regard, if 2,000 business centers are not sold by September
24, 1999, the exclusivity provision may be terminated. The MBE Joint Venture may
be terminated at any time by either partner if the other partner has breached
any material term or condition of the agreement; provided that the terminating
partner has allowed the other partner at least a sixty day period to cure any
alleged breach.

On February 17, 1998, Prime entered into an agreement with the MBE
Joint Venture pursuant to which Prime would purchase 100 MBE Business
Express(TM) units for installation at Prime's owned and managed hotels. The
agreement provided that Prime would purchase the first six units on a trial
basis. If the 90-day trial period is successful, then Prime would order the
remaining 94 units. The agreement provides for a purchase price of approximatley
$2.0 million for all 100 units.

On June 19, 1998, the MBE Joint Venture received notification from
Prime that the trial period was successful, and Prime would adopt the MBE
Business Express(TM) as a brand standard at all of its AmeriSuites properties.
Pursuant to the agreement, Prime is obligated to purchase a minimum of 94
additional MBE Business Express(TM) units over the next 12 months. Most of the
94 units will be installed by the end of calendar year 1998.

On March 31, 1998, the MBE Joint Venture signed agreements with
International Business Machines Corporation ("IBM") whereby IBM agreed to be the
executional partner for certain aspects of the MBE MBE Joint Venture's business,
including project management services, asset procurement and inventory
financing, configuration and testing of equipment, site preparation,
installation, maintenance services, and asset management. IBM would also assist
the MBE Joint Venture with 40 business centers.

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.

<PAGE>

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, 1998, there
were 45 Copy Express(TM) control systems and 11 Fax Express(TM) control systems
installed in various locations. Since almost all of these units were placements
rather than sales, nominal equipment sales were realized through June 30, 1998.

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.

20
<PAGE>
The Public PC(TM)

The Company's Public PC(TM) (formerly known as the Credit Card Computer
Express(TM)) is an automated, 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, 1998, there were 62 stand alone Public PC(TM) control
systems (not including PC's which are part of Business Express(TM)) installed at
various public libraries, hotels and retail locations. These units resulted in
over $200,000 in equipment sales through June 30, 1998.

Marketing

The Company is currently marketing its products through its full-time
sales staff consisting of three persons, either directly to locations or through
facility management companies servicing the locations. The Company believes the
agreements on the Minolta, MBE, Choice Hotels International and Promus Hotel
Corporation 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.

As of October 31, 1998, the MBE Joint Venture has a $1.3 million
backlog of signed orders for the MBE Business Express(TM). Approximately three
quarters of these orders are from Amerisuites locations arising from execution
of the $2.0 million contract between the MBE Joint Venture and Prime
Hospitality. See "Business -- Litigation."

<PAGE>

Procurement

The Company's control system devices consist of a card reader, printer,
amplifier, circuit board and micro chip in a specially designed housing. The
devices are currently manufactured to the Company's design specification by an
independent contractor, LMC - Autotech Technologies, LP. In May 1998, the
Company on behalf of the MBE Joint Venture contracted for the purchase of 1,500
control devices, for a total purchase price of $779,865. Of the 1500 units, 900
are for the Joint Venture and 600 for MBE's ICW Project, by mutual agreement of
USA and MBE. The Company and the MBE Joint Venture anticipate obtaining its
complete computer systems (other than the Public PC(TM) control system) from
IBM.

<PAGE>

Competition

There are companies presently offering automated, 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 including Business
Express(TM) and Public PC(TM). 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 location may not order the Business
Express(TM), or if ordered by the hotel, 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), TransAct(TM), Copy Express(TM), C3X(TM), and 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.

As of June 30, 1998 the Company has applied for eight United States
patents 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 six 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" and "Business - Legal Proceedings."

Year 2000 Compliance

The Company has recently commenced a study of its business in order to
determine whether its computer systems are in compliance with Year 2000 issues.
In this regard, many existing computer programs use only two digits to identify
a year in the date field. These programs were designed and developed without
considering the impact of the upcoming change in the century. If not corrected,
many computer applications could fail or create erroneous results by or at the
Year 2000.

In connection with our study, we are concentrating on five
areas of our business:

(1) control system terminals;

(2) office computers;

(3) credit card processing systems and related accounting systems;

(4) back-up, off-site recovery system and

(5) non information technology systems.

The Company is in the process of obtaining written assurances of
compliance from all material third parties whose products may affect the
Company's operations.

The worst case scenario for the Company would be if the control systems
in the field were all found to contain a Year 2000 problem causing inaccurate
data transmissions to the Company's main processing software. Preliminary
analysis indicates the probability of this scenario actually happening is very
low. The technology in the control units does not have to deal with any digits
representing the year. If, however, it did happen, the Company anticipates
utilizing the services of IBM Global Services to replace all defective units.
The Company anticipates the cost of such services to be approximately $150,000.

Employees

As of June 30, 1998, the Company has twenty-one full-time employees.

<PAGE>
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

In June 1994, a former employee and Director of the Company filed a
complaint against the Company in the Court of Common Pleas of Montgomery
County, Pennsylvania. The complaint alleges that the Company engaged in age
discrimination in violation of the Pennsylvania Human Relations Act in
connection with his termination of employment. The trial of this matter was
held in July 1998, and on August 28, 1998 the Court entered an Order in favor of
the Company and against the former employee. The Court's decision states that
the former employee failed to prove any age discrimination. On September 14,
1998, the former employee appealed the Court's decision as well as other prior
orders rendered in the matter to the Superior Court of Pennsylvania.

On June 11, 1998, the Company filed a complaint in the District Court
of the Eastern District of Pennsylvania against Alphanet Hospitality Systems,
Inc. ("Alphanet Hospitality") and Alphanet Telecom, Inc. ("Alphanet Telecom")
(collectively "Alphanet"). The complaint alleges that the Defendants engaged in
patent infringement, breach of contract, misappropriation of trade secrets,
unfair competition and tortious interference with prospective business
relations. The Company and Alphanet Hospitality considered entering into a
business relationship. In order to protect the Company's confidential
information and trade secrets, Alphanet Hospitality signed a Non-Disclosure and
Non-Use Agreement as part of the negotiation process. Alphanet terminated the
negotiations and the relationship with the Company. Shortly thereafter, Alphanet
began marketing an unattended business center similar to the Company's Business
Express(TM). The Company believes that Alphanet wrongfully used the confidential
information and trade secrets it became privy to during the negotiations, to
develop its product. The Company is seeking damages and injunctive relief. On
September 14, 1998, Alphanet filed an answer to the Complaint denying any
liability to the Company. Alphanet also filed a counterclaim against the Company
seeking a declaratory judgement that the Company's patents are invalid or, in
the alternative, there is no patent infringement. The counterclaim also seeks
damages against the Company for unfair competition and product disparagement.

On September 3, 1998, MBE commenced a legal action against the Company
in the Superior Court of the State of California, San Diego County. The
complaint alleges that the 195 terminals purchased by MBE were defective, and
seeks a refund of the purchase price in the amount of $141,260 as well as lost
profits claimed to be several hundred thousand dollars. In addition, the
complaint seeks a declaratory judgment that MBE is not obligated to purchase the
600 terminals ordered in April 1998. The complaint states that it does not
relate to the MBE Joint Venture but solely to MBE's ICW Project, and MBE is
ready, willing and able to proceed in accordance with the MBE Joint Venture
Agreement. In October 1998, the Company had the case removed to the United
States District Court for the Southern District of California. The Company also
filed a motion to have the case stayed and/or dismissed pending the arbitration
proceedings described below. The Company's motion is currently pending before
the court. The Company believes the claim to be without merit and that it will
prevail in this action. Accordingly, there has been no provision recorded for
this action in the accompanying consolidated financial statements.

On September 28, 1998, the Company commenced arbitration proceedings
against MBE as provided for in the MBE Joint Venture Agreement. The Company
alleges that MBE breached the MBE Joint Venture Agreement, by among other
things, negotiating with and utilizing a competitor of the Company in connection
with MBE's ICW Project. The Company believes that such action violated the
exclusivity provisions of the MBE Joint Venture Agreement which required MBE to
use USA for the ICW Project. The Company also alleges that MBE wrongfully used
and disclosed to the competitor certain proprietary information of the Company.
The Company seeks a declaration that MBE is required to use the Company in
connection with MBE's ICW Project, that MBE accept delivery and pay the purchase
price of $428,000 for the 600 terminals ordered by MBE in April 1998, and that
MBE pay to the Company monetary damages believed by the Company to be in excess
of $5,000,000 for MBE's breach. The complaint states that the Company has always
fully performed and intends to continue to fully perform its duties and
obligations under the MBE Joint Venture Agreement. MBE has filed an answer to
the Company's complaint denying the allegations in the complaint. As of the date
hereof, no date has been set for the arbitration proceedings.

On August 25, 1998, the Company notified MBE that MBE was in breach of
the Joint Venture Agreement, and on October 2, 1998, MBE notified the Company
that the Company was in breach of the Joint Venture Agreement. The Joint Venture
Agreement provides that it may be terminated by the non-breaching party if any
breach is not cured within sixty days. The Company has not terminated the Joint
Venture Agreement as of the date hereof as permitted thereunder.

<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. 50 President, Chief Executive
Officer, Chairman of the
Board of Directors
Stephen P. Herbert 35 Executive Vice President - Chief
Operating Officer, Director
Haven Brock Kolls, Jr. 33 Senior Vice President - Research
and Development
Leland P. Maxwell 51 Senior Vice President,
Chief Financial Officer,
Treasurer
Peter G. Kapourelos 78 Director
William W. Sellers 76 Director
Henry B. duPont Smith 37 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

25
<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. In August 1997, Mr.
Kolls became a patent agent registered to practice before the United States
Patent and Trademark Office. 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.

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.

26
<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.

27
<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, 1996, June 30, 1997 and June 30, 1998 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, 1996, June 30, 1997 or June 30, 1998 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., 1998 $100,000 $0
Chief Executive Officer, 1997 $100,000 $0
President 1996 $ 90,000 $0

Executive Employment Agreements

During November 1997, the Company has entered into an employment
agreement with Mr. Jensen which expires June 30, 2000. The Agreement is
automatically renewed from year to year thereafter unless canceled by Mr. Jensen
or the Company. The agreement provides for an annual base salary of $100,000 per
year. Mr. Jensen is entitled to receive such bonus or bonuses as may be awarded
to him by the Board of Directors. In determining whether to pay such a bonus,
the Board would use its subjective discretion. The Agreement requires Mr. Jensen
to devote his full time and attention to the business and affairs of the
Company, and obligates him not to engage in any investments or activities which
would compete with the Company during the term of the Agreement and for a period
of one year thereafter.

As part of the agreement, Mr. Jensen canceled an aggregate of 4,365,000
shares of Common Stock of the Company which had been beneficially owned by him
and which had been held in escrow pursuant to the Escrow Agreement dated
December 29, 1993 by and between the Company, Mr. Jensen and certain other
parties ("Escrow Agreement"). In January 1994, and at the request of the
Pennsylvania Securities Commission, Mr. Jensen placed all of the shares of
Common Stock beneficially owned by him into escrow as a condition of the
Company's initial public offering being declared effective in Pennsylvania. The
shares of Common Stock canceled by Mr. Jensen had been subject to cancellation
if certain performance goals were not met by the Company on or before June 30,
1998.

The agreement also grants to Mr. Jensen in the event a "USA
Transaction" (as defined below) occurs after the date thereof that number of
shares of Common Stock as shall when issued to him equal five percent of all the
then issued and outstanding shares of Common Stock (the "Rights"). Mr. Jensen is
not required to pay any additional consideration for such shares. At the time of
any USA Transaction, all of the shares of Common Stock underlying the Rights are
automatically deemed to be issued and outstanding immediately prior to any USA
Transaction, and are entitled to be treated as any other issued and outstanding
shares of Common Stock in connection with such USA Transaction.

The term USA Transaction is defined as (i) the acquisition of fifty-one
percent or more of the then outstanding voting securities entitled to vote
generally in the election of Directors of the Company by any person, entity or
group, or (ii) the approval by the shareholders of the Company of a
reorganization, merger, consolidation, liquidation, or dissolution of the
Company, or the sale, transfer, lease or other disposition of all or
substantially all of the assets of the Company.

<PAGE>

The Rights are irrevocable and fully vested and will not be affected by
the termination of Mr. Jensens's employment with the Company for any reason
whatsoever. If a USA Transaction shall occur at a time when there are not a
sufficient number of authorized but unissued shares of Common Stock, then the
Company shall as a condition of such USA Transaction promptly take any and all
appropriate action to make available a sufficient number of shares of Common
Stock. In the alternative, the Company may structure the USA Transaction so that
Mr. Jensen would receive the same amount and type of consideration in connection
with the USA Transaction as any other holder of Common Stock.

The Company has entered into a one-year employment agreement with Mr.
Herbert which expires on April 30, 1999. 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

28
<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. Kolls has entered into a one-year employment agreement with the
Company which expires on April 30, 1999, 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, 1999, 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 $90,000 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.

29
<PAGE>

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. Mr. Sellers' consulting services consisted of advising
and assisting the Company with a variety of business matters including but not
limited to, general operations of the business, expansion of its product line,
and identification of new business directions.

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. Mr. Kapourelos' services consisted of assisting the
Company in connection with investor and public relations.

In March 1998, the Company extended the expiration date of the
following options to purchase shares of Common Stock from June 30, 1998 to the
close of business on June 30, 2000, to the following Directors of the Company:
Peter G. Kapourelos - 100,000 options; William W. Sellers - 100,000 options; and
William L. Van Alen, Jr. - 100,000 options.

In April 1998, the Company reduced from $.25 to $.15 the exercise price
of the following options to purchase Common Stock issued to the following
Directors of the Company: Peter G. Kapourelos - 170,000 options; William W.
Sellers - 155,000 options; William L. Van Alen, Jr. - 125,000 options; and Henry
B. duPont Smith - 100,000 options.

In April 1998, all of the Common Stock underlying the above options was
registered by the Company under the Act, for resale by the holder thereof. Such
registration was at the Company's cost and expense.

The Board of Directors is responsible for awarding stock options. Such
awards are made in the subjective discretion of the Board. Other than the
repricing of the options by the Company in April 1998, 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. In connection with the April 1998 stock option
repriced, the exercise price of all these options were below the fair market
value on the date of the repricing, therefore, the Company recorded a charge to
compensation expense during fiscal year 1998.

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.

30
<PAGE>

Executive Stock Options

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. In November
1996, the exercise price of the options was reduced to $.45. The options must be
exercised within five years of vesting.

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

In May 1996, the Company issued to Mr. Sterling, a former officer and
Director 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 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, at the time of 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 canceled.
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. The
options must be exercised within five years of vesting.

In June 1997, the Company issued to Mr. Sterling, a former officer and
Director of the Company, 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. The options must be exercised
within five years of vesting.

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 options must be exercised within five years of vesting.

Keith L. Sterling resigned as the Executive Vice President-Systems
Chief Information Officer, Secretary and Director of the Company effective April
3, 1998 for personal reasons. The Company agreed to permanently reduce the
exercise price of Mr. Sterling's options to purchase 450,000 shares of Common
Stock to $.10 per share from $.25 per share and $.45 per share, and accelerated
the vesting of 25,000 options to April 1998. Mr. Sterling agreed to act as a
consultant through June 30, 1998.

In April 1998, the Company issued to each of Messrs. Herbert, Kolls and
Maxwell options to purchase up to 50,000 shares of Common Stock at $.45 per
share. The options become vested over a one-year period at the rate of 12,500
per quarter. The options must be exercised within five years of vesting.

In April 1998, the Company permanently reduced the exercise price to
$.15 of the following options to purchase Common Stock: Haven Brock Kolls, Jr. -
100,000 options from $.25 to $.15; Stephen P. Herbert - 100,000 options from
$.45 to $.15; and Leland P. Maxwell - 100,000 options from $.45 to $.15.

The Board of Directors is responsible for awarding stock options. Such
awards are made in the subjective discretion of the Board. Other than the
repricing of the options by the Company in April 1998, 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. In connection with the April 1998 stock options
repriced, the exercise prices of all those options were below the fair market
value on the date of the repricing, therefore, the Company recorded a charge to
compensation expense during fiscal year 1998.

31
<PAGE>

PRINCIPAL SHAREHOLDERS

Common Stock

The following table sets forth, as of June 30, 1998, 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.

<PAGE>

Number of Shares
Name and Address of Common Stock Percent
of Beneficial Owner Beneficially Owned(1) of Class(2)
------------------- --------------------- -----------
George R. Jensen, Jr. 3,228,000 shares(3) 5.8%
3 Sugarknoll Rd.
Devon, Pennsylvania 19333

Stephen P. Herbert 438,000 shares(4) *
536 West Beach Tree Lane
Strafford, Pennsylvania 19087

Haven Brock Kolls, Jr. 381,000 shares(5) *
150 Westridge Gardens
Phoenixville, Pennsylvania 19460

Leland P. Maxwell 163,000 shares(6) *
129 Windham Drive
Langhorne, Pennsylvania 19047

Peter G. Kapourelos 313,000 shares(7) *
1515 Richard Drive
West Chester, Pennsylvania 19380

William W. Sellers 1,140,750 shares(8) 2.0%
394 East Church Road
King of Prussia, Pennsylvania 19406

Henry B. duPont Smith 400,000 shares(9) *
350 Mill Bank Road
Bryn Mawr, Pennsylvania 19010

William L. Van Alen, Jr. 225,000 shares(10) *
Cornerstone Entertainment, Inc.
P.O. Box 727
Edgemont, Pennsylvania 19028

All Directors and Executive Officers
As a Group (8 persons) 6,288,750 shares(11) 11.3%

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

(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and derives from either voting or investment
power with respect to securities. Shares of Common Stock issuable upon
conversion of the Preferred Stock, or shares of Common Stock issuable upon
exercise of options currently exercisable, or exercisable within 60 days of
June 30, 1998, are deemed to be beneficially owned for purposes hereof.

33
<PAGE>

(2) On June 30, 1998 there were 40,163,837 shares of Common Stock and 618,236
shares of Series A Preferred Stock issued and outstanding. For purposes of
computing the percentages under this table, it is assumed that all shares of
issued and outstanding Series A Preferred Stock have been converted into
6,182,360 shares of Common Stock, that all of the purchase rights and options
which have been issued and vested as of June 30, 1998 (or within 60-days of June
30, 1998) have been converted into 4,353,800 shares of Common Stock. Of the
4,353,800 options or purchase rights to acquire Common Stock issued as of June
30, 1998, only 237,500 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
warrants have been exercised for 2,736,000 shares of Common Stock, and all of
the accrued and unpaid dividends on the Series A Preferred Stock as of June 30,
1998 have been converted into 2,442,650 shares of Common Stock. Therefore, for
purposes of computing the percentages under this table, there are 55,641,147
shares of Common Stock issued and outstanding.

(3) Includes 3,000,000 shares of Common Stock held by Mr. Jensen with his
children as joint tenants. Does not include the right granted to Mr. Jensen
under his Employment Agreement to receive five percent (5%) of the issued and
outstanding Common Stock upon the occurrence of a USA Transaction (as defined
herein) See "Executive Employment Agreements."

(4) Includes 437,500 shares of Common Stock issuable to Mr. Herbert upon the
exercise of options. Does not include 112,500 shares of Common Stock issuable
pursuant to options not presently exercisable and not exercisable within 60
days of June 30, 1998.

(5) Includes 362,500 shares of Common Stock issuable upon exercise of options.
Does not include 37,500 shares of Common Stock issuable pursuant to options not
presently exercisable and not exercisable within 60-days of June 30, 1998.

(6) Includes 162,500 shares of Common Stock issuable to Mr. Maxwell upon the
exercise of options. Does not include 87,500 shares of Common Stock issuable
pursuant to options not presently exercisable and not exercisable within 60 days
of June 30, 1998.

34
<PAGE>

(7) Includes 10,000 shares of Common Stock issuable upon the conversion of 1,000
shares of Preferred Stock beneficially owned by Mr. Kapourelos. 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. Does not include any shares of Common
Stock issuable upon conversion of any accrued and unpaid dividends on the Series
A Preferred Stock.

(8) Includes 172,458 shares of Common Stock owned by the Sellers Pension Plan of
which Mr. Sellers is a trustee, 46,518 Shares of Common Stock owned by Sellers
Process Equipment Company of which he is a Director, and 999,229 shares of
Common Stock are owned by Mr. Sellers' wife. Includes 155,000 shares of Common
Stock issuable upon exercise of options. Does not include any shares of Common
Stock issuable upon conversion of any accrued and unpaid dividends on the Series
A Preferred Stock.

(9) Includes 120,000 shares of Common Stock issuable upon conversion of the
12,000 shares of Preferred Stock beneficially owned by Mr. Smith. 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. Does
not include any shares of Common Stock issuable upon conversion of any accrued
and upaid dividends on the Series A Preferred Stock.

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

(11) Includes all shares of Common Stock described in footnotes (2) through (10)
above.

Series A Preferred Stock

The following table sets forth, as of June 30, 1998 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.

35
<PAGE>

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

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

Henry B. duPont Smith
350 Mill Bank Road
Bryn Mawr, Pennsylvania 19010 12,000(2) 1.9%

All Directors and
Executive Officers
As a Group (8 persons) (2) 13,000 2.1%
- --------------
*Less than one percent (1%)

(1) There are 618,236 shares of Preferred Stock issued and outstanding as of
June 30, 1998.

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

<PAGE>
CERTAIN TRANSACTIONS

At June 30, 1998 and 1997, approximately $26,000, and $27,000,
respectively, of the Company's accounts payable are due to several shareholders
for various legal and technical services performed. For the years ended June 30,
1998 and 1997, the Company incurred approximately $340,000 and $308,000,
respectively, for these services.

In September 1996, the Company issued to Joseph Donahue, a Vice
President 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, a Vice
President 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, to Mr. Feeney
options to acquire up to 5,000 shares of Common Stock at $.45 per share, and to
Mr. Herbert option to acquire up to 100,000 shares of Common Stock at $.45 per
share. See "Management - Executive Stock Options."

In November 1997, Mr. Jensen cancelled 4,365,000 shares of Common Stock
owned by him and which had been held in escrow. See "Principal Shareholders
Escrow and Cancellation Arrangements."

In December 1997, the Company issued to each of Joseph Donahue and
Phillip Harvey, Vice Presidents of the Company, options to acquire up to 50,000
shares of Common Stock at $.45 per share. The options vest of the rate of 12,500
per quarter.

In December 1997, Adele Hepburn, a Director of Public Relations of the
Company, loaned the Company the sum of $50,000 for working capital. The loan is
to be repaid on March 31, 1998 and bears interest at the rate of six percent
(6%) per annum.

In March 1998, the Company extended the expiration date of the
following options to purchase shares of Common Stock from June 30, 1998 to the
close of business on June 30, 2000: Adele Hepburn - 50,000 options; Peter G.
Kapourelos - 100,000 options; William W. Sellers - 100,000 options; Keith L.
Sterling - 100,000 options; and William L. Van Alen, Jr. - 100,000 options.

In March 1998, the Company extended the expiration date of all the
purchase rights to acquire 157,300 shares of Common Stock at $1.00 per share
from June 30, 1998 to the close of business June 30, 2000.

In April 1998, the Company reduced from $.25 to $.15 the exercise price
of the following options to purchase Common Stock issued to the following
Directors and/or executive officers of the Company: Peter G. Kapourelos -
170,000 options; William W. Sellers - 155,000 options; William L. Van Alen, Jr.
- - 125,000 options; Henry B. duPont Smith - 100,000 options; and Haven Brock
Kolls, Jr. - 100,000 options. The reduced exercise price is less than the fair
market value of the Common Stock on the effective date of the repricing, and
therefore, a charge to compensation expense was recorded during fiscal year
1998.

37
<PAGE>

In April 1998, the Company authorized a permanent reduction in the
exercise price of 50,000 of the 100,000 options to purchase shares of Common
Stock of the Company owned by Michael Lawlor, an officer of the Company, from
$.45 per share to $.05 per share. The exercise price of the remaining 50,000
options was permanently reduced from $.45 to $.15 per share. The reduced
exercise price is less than the fair market value of the Common Stock on the
effective date of the repricing, and therefore, a charge to compensation expense
was recorded during fiscal year 1998.

In April 1998, the Company authorized a temporary reduction in the
exercise price of all of the options to purchase up to 121,000 shares of Common
Stock of the Company owned by Edward J. Sullivan, a former officer and employee
of the Company, to $.15 per share through October 31, 1998. Thereafter, the
exercise price shall revert back to the current exercise prices. The current
exercise price is $.25 for 100,000 of the options and $.45 for 21,000 of the
options. The reduced exercise price of the 100,000 options is less than the fair
market value of the Common Stock on the effective date of the repricing, and
therefore, a charge to compensation expense was recorded during fiscal year
1998.

In April 1998, the Company authorized a reduction in the exercise price
of the 100,000 options to purchase shares of Common Stock of the Company owned
by Joseph Donahue, an executive of the Company, from $.45 per share to $.15 per
share. The reduced exercise price of the 100,000 options is less than the fair
market value of the Common Stock on the effective date of the repricing, and
therefore, a charge to compensation expense was recorded during fiscal
year 1998.

In April 1998, the Company authorized a reduction in the exercise price
of the 75,000 options to purchase shares of Common Stock of the Company owned by
Phillip Harvey, a former executive of the Company, from $.45 per share to $.20
per share. The reduced exercise price of the 75,000 options is less than the
fair market value of the Common Stock on the effective date of the repricing,
and therefore, a charge to compensation was recorded during fiscal year 1998.

In April 1998, the Company reduced from $.45 to $.15 the exercise price
of the following options to purchase shares of Common Stock issued to the
following Directors and/or executive officers of the Company: Leland P. Maxwell
- - 100,000 options; and Stephen Herbert - 100,000 options. The reduced exercise
price of these options is less than the fair market value of the Common Stock on
the effective date of the repricing, and therefore, a charge to compensation
expense was recorded during fiscal year 1998.

In April 1998, the Company authorized the reduction in the exercise
price of the options to purchase 200,000 shares of Common Stock of the Company
owned by Adele Hepburn, an employee of the Company, from $.25 to $.15. The
reduced exercise price of the 200,000 options is less than the fair market value
of the Common Stock on the effective date of the repricing, and therefore, a
charge to compensation expense was recorded during fiscal year 1998.

In April 1998, the Company authorized a reduction in the exercise price
of 157,300 purchase rights from $1.00 per share to $.25 per share through June
30, 1998. At that time the price reverted back to $1.00 per share. As a result
of the reduction in the exercise price, 4,500 purchase rights were exercised.

38
<PAGE>

SELLING SHAREHOLDERS

Each of the Selling Shareholders listed below is, as of the date
hereof, the holder of 1998-B Warrants, 1998-A Warrants, 1997 Warrants, 1996-B
Warrants, 1996 Warrants, 1995 Warrants or Management Options to acquire the
number of shares of Common Stock set forth opposite such Selling Stockholder's
name or has exercised the corresponding Warrants or Management Options for the
number of shares of Common Stock set forth opposite such Selling Shareholder's
name. The Warrants were issued by the Company to the Selling Shareholders
pursuant to a transaction exempt from the registration requirements of the Act
and various state securities laws.

The issuance by the Company of the Common Stock to the Selling
Shareholders upon exercise of the Warrants is pursuant to a Warrant Agreement in
a transaction exempt from the registration requirements of the Act and various
state securities laws. The Company has agreed, at its expense, to register the
Common Stock for resale by the Selling Shareholders under the Act. The Company
expects to incur expenses of approximately $40,000 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 tables set 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.

39
<PAGE>

<TABLE>
<CAPTION>
1998-B COMMON STOCK PURCHASE WARRANTS

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

Barclay, Charles and Nancy 50,000

Bird, Benjamin Lee 12,500

Bjorkland, Trustee, Alexandra O. 50,000

Bolitsky, Joseph J. 200,000

Bourassa, Kim 100,000

Burks, William P. 25,000

Currin, Clifton B. 12,500

Delta Western Company 50,000

Geddis, Margaret R. 12,500

Hepburn, Adele H. 25,000 1,348,900(2) 3.3%

Jones, Robert 25,000

Klann, Hariette D. 25,000

Krook, Nancy 150,000

Moffit, Richard W. 50,000

Roberts, Noma Ann 25,000

Rubin, Peter 25,000

Selders, Thomas A. 25,000

Seltzer, Helen E. 2,500

Sullivan, Robert D. 25,000

Young, Frances 500,000

---------
Total 1,390,000
---------
- ---------------
</TABLE>

(2) Adele Hepburn would beneficially own an aggregate of 1,348,900 shares of
Common Stock together with her husband Austin Hepburn, following the sale of
the Common Stock underlying the 1998-B Warrents. Adele Hepburn is the Director
of Public Relations of the Company.

<PAGE>

1998-A COMMON STOCK PURCHASE WARRANTS

<TABLE>
<CAPTION>
Common Stock Offered Beneficial Ownership
Selling Shareholder Hereby After Offering (1)
- ------------------- -------------------- --------------------
Number Percent
------- -------
<S> <C> <C> <C>
Adams, Vanda G. 50,000
Allen, R. Kendall 250,000
Andrejak, Frank R. 25,000
Atkins, Darryl 50,000
Boynton, Edwin R. 50,000
Calvarese, Vincent J. 25,000
Civitella, Peter 16,650
Civitella, Matthew 16,650
Civitella, Michael J. 16,700
Cohen, Neils & Betsy D. 25,000
Cohen, Marc A. 150,000
Currin, Trust, Clifton B. 25,000
De Maris, Sheri-Lynn 50,000
Di Renzo, Louis & Rose 50,000
Donahue, Jean 25,000(2)
Ernst & Company 250,000
First Downing Capital Corp. 250,000
Fox, Louise L. 35,000
Generation Capital Association 150,000
Glickstein, Harriet 50,000
Gray, Harold N. 50,000
Harrity Jr., William F. 100,000
Hauptfuhrer, Barbara 75,000
Heald Family Trust 25,000
Harvey, Andrea B. 25,000
Hepburn, Adele H. 50,000 1,323,900(3) 2.3%
Hepburn, Austin B. 25,000 1,323,900(3) 2.3%
Kent, Maude Wood 50,000
Kilmark, George 50,000
Leroux, Shelley 50,000
Ludington, Nicholas S. 50,000
Merriman, James F. 25,000
Moffitt, Richard W. 50,000
Pollack, Robert L. 50,000
Potts, Robert H. 50,000
Powell, J. Steve 10,000
Proctor III, Charles W. 5,000
Ransome III, Ernest L. 50,000
Rettew III, John B. 50,000
Roberts, Noma Ann 25,000
Rosenthal, G.B. 800,000
Rubins, Joel 25,000
Rugart, Karl F. 25,000
Sedlacek, Thomas V. 25,000
Selders, Thomas & Kristii 25,000
Sellers, William W.(4) 50,000 1,160,750(4) 2.1%
Schonwald, Richard S. 50,000
Smith, Jill 25,000
Stull, Clark D 25,000
S. W. Ryan & Co. 100,000
Van Alen, Judith F. 100,000(5)
Wagner, Robert E. 25,000
Wyman Jr., Samuel D. 50,000
---------
Total 3,750,000
---------
- ---------------

</TABLE>

(2) Jean Donahue is the wife of Joseph Donahue, a Vice President of the Company.

(3) Adele and Austin Hepburn are husband and wife and together would
beneficially own an aggregate of 1,323,900 shares of Common Stock following the
sale of their Common Stock underlying their 1998-A Warrants. Adele Hepburn is
the Director of Public Relations of the Company.

(4) William W. Sellers is a Director of the Company.

(5) Judith F. Van Alen is the wife of William L. Van Alen, a Director of the
Company. Following the sale of the Common Stock underlying the 1998-A Warrants,
she would beneficially own an aggregate of 265,000 shares of Common Stock.

41
<PAGE>

1997 COMMON STOCK PURCHASE WARRANTS
-----------------------------------
<TABLE>
<CAPTION>
Common Stock Offered Beneficial Ownership
Selling Shareholder Hereby After Offering (1)
- ------------------- -------------------- ---------------------
Number Percent
------ -------
<S> <C> <C> <C>

Mr. Charles A. Mayer 8,000
Ms. Harriette Klann 40,000
Mr. and Mrs. Richard W. Moffitt 20,000
Mr. Edwin R. Boynton 40,000
Ernst & Company FBO Fred Karagosian 40,000
Mr. & Mrs. Daniel P. Mannix V 160,000
Daniel P. Mannix, as Custodian for Alexandra G. Mannix 40,000
Ms. Janet J. Hewes 40,000
Delaware Charter Gty. & Trust Co. for Paul M. Russell 40,000
Ernst & Company FBO Fred Karagosian 20,000
John DiSante 20,000
Vot Investments 20,000
Ernst & Company FBO Arthur Rogovin 20,000
Robert H. Potts 40,000
Noma Ann Roberts 40,000
Clifton B. Currin, Trustee 16,000
Louis E. Direnzo 40,000
Austin B. Hepburn 20,000 1,293,900(2) 2.6%
Elinor M. Steinhilber 20,000
Wilbur E. Hudson 10,000
Harvey J. Eliason 6,000
Susan E. Cohen 40,000
Gail D. Zimmerman 40,000
G. Keith Funk, Jr. 10,000
Susan E. Cohen 20,000
Henry C. Carlson 8,000
William P. Dunham 40,000
S. W. Ryan & Co. Inc. 30,000
Vanda G. Adams 10,000
Warren Palitz 40,000
Helen E. Seltzer 4,000
Sonja Pettingill 4,000
Risky Investment Group 40,000
Ernst & Company FBO D. Henry and Diane Tintorer 40,000

</TABLE>

<PAGE>

<TABLE>
<CAPTION>
<S> <C> <C> <C>
W. F. Harrity 40,000
Mr. John Berukoff 10,000
Joan B. Stuart 12,000
Evalyn Kadish 20,000
Stephen S. Turesky 20,000
Gurumantra S. Khalsa 8,000
Richard Fradkin 20,000
Roy T. Pirhala 10,000
Peggy Longstreth Bayer 8,000
Clark D. & Carolyn S. Stull, Jr. 20,000
Rosalind Robbins 40,000
Eric Robbins 40,000
William C. Martindale, Jr. 20,000
Andrew B. Hebenstreit 40,000
Father R. S. H. Green 800
Nancy Hansen 20,000
Adele H. Hepburn 30,000 1,293,900(2) 2.6%
Patricia Jill Smith custodian for Burton Jensen 11,200
Bullseye Marketing Inc. 200,000
Nancy Haun 4,000
---------
Total 1,600,000
</TABLE>

42
<PAGE>

- ---------------
(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 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 1,293,900 shares of Common Stock following the
sale of all their Common Stock underlying their 1997 Warrants. Adele Hepburn
is a Director of Public Relations of the Company.

On June 30, 1998, there were 4,353,800 shares of Common Stock issuable
upon exercise of outstanding Management Options. See "Description of
Securities-Shares Eligible for Future Sale." Of such Management Options the
150,000 are exercisable at $.50 per share, 840,000 are exercisable at $.45 per
share, 1,315,000 are exercisable at $.25 per share, 75,000 are exercisable at
$.20 per share, 1,321,000 are exercisable at $.15 per share, 450,000 are
exercisable at $.10 per share, and 50,000 are exercisable at $.05 per share. In
addition, there are 152,800 purchase rights exerciseable at $1.00 per share. In
connection with all of such options the Company has 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 1998. All of the
aforesaid options have been issued by the Company to employees, Directors,
officers, and consultants.

1996 - B COMMON STOCK PURCHASE WARRANTS
----------------------------------------

<TABLE>
<CAPTION>
Common Stock Offered Beneficial Ownership
Selling Shareholder Hereby After Offering (1)
- ------------------- -------------------- ---------------------
Number Percent
------ -------
<S> <C> <C> <C>
Ms. Vanda G. Adams 10,000
Mr. William S. Campbell 20,000
William R. Crothers 20,000
Mr. Benjamin H. Deacon 20,000
Sheri-Lynn Demaris 20,000
Mr. Robert R. Frey 4,000
Harold N. Gray 20,000
Ms. Jane C. Macelree 40,000
Lily L. McCartney Trust 20,000
Robert F. McCartney Trust 20,000
Mr. Eric Pagh 20,000
Ms. Noma Ann Roberts 20,000
Dr. Karl F. Rugart 20,000
Richard S. Schonwald 40,000
Mr. G. Morraw Smith 40,000
Mr. & Mrs. Clark D. Stull 40,000
-------
Total 374,000

</TABLE>

43
<PAGE>

1996 COMMON STOCK PURCHASE WARRANTS
-----------------------------------

<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
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>

44
<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 1,133,900(2) 2.3%
Adele H. Hepburn 80,000(2)
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>

45
<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 160,000 702,500(3) 1.6%
Nancy F. Sellers 40,000(3)
Sellers Pension Plan 80,000(3)
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

46
<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.

1995 COMMON STOCK PURCHASE WARRANTS
-----------------------------------
<TABLE>
<CAPTION>
Common Stock Offered Beneficial Ownership
Selling Shareholder Hereby After Offering (1)
- ------------------- -------------------- ---------------------
Number Percent
------ -------
<S> <C> <C> <C>
Vanda G. Adams 15,000
George M. Ahrens 30,000
Mr. and Mrs. James Allen, Jr. 30,000
Eleanor S. Allshouse 30,000
Mr. and Mrs. Gordon L. Angell 60,000
Charles W.& Katherine K. Apple Trust 24,000
Robert S. Appleby 60,000
Richard M. Appleby 60,000
John P. Ayers 24,000
Jody Marjorie Baker 15,000
Judy Ballard, IRA 15,000
Alan A. Ballard 30,000
Judith C. Ballard 37,500
Mr. and Mrs. Charles M. Barclay 60,000
Mr. and Mrs. Thomas B. Basile 30,000
Robert R. Batt, Jr. 6,000
William Bauder 31,500
Dr. C. Gottfried Baumann 30,000
</TABLE>

47
<PAGE>

<TABLE>
<CAPTION>
Common Stock Offered Beneficial Ownership
Selling Shareholder Hereby After Offering (1)
- ------------------- -------------------- ---------------------
Number Percent
------ -------
<S> <C> <C> <C>
Peggy Longstreth Bayer 9,000
Alexander R. Beard 6,000
Robert E. Beck 3,000
Wanda K. Benbow, IRA 9,000
William E. Benbow, IRA 21,000
Catherine M. Bigoney 30,000
Kathlyne K. Birdsall 30,000
Alexandra O. Bjorklund Trust 30,000
Donald F. Blackburn 30,000
Mr. & Mrs. Louis Bodo 60,000
Frederick L. Bowden 7,500
Edwin R. Boynton 15,000
Dr. James R. Boynton, M.D., P.C.,
Pension Trust 60,000
Paul J. Braun 30,000
Dr. Kent D.W. Bream 12,000
Carolyn C. Bream 12,000
Gwen A. Brewster 15,000
Mr. & Mrs. James H. Burdick 60,000
Mr. & Mrs. David O. Burdick 30,000
Mr. & Mrs. James H. Burdick, Jr. 30,000
Dr. James A. Burke 3,000
Steven Butler 30,000
Natasha A. Canavarro 15,000
Herman Canavarro 30,000
Christian B. Canavarro 12,000
Mr. & Mrs. Peter R. Canavarro 15,000
Cindy Cannupp 3,000
Mr. & Mrs. Henry C. Carlson 6,000
Charles Abbott Carter, III 150,000
Edward E. Chandlee, Jr. 10,500
Chesapeake Bank - Custodian for
G. Ebeling, IRA 30,000
Mr. & Mrs. Gordon S. Clausen 7,500
Mr. & Mrs. Craig R. Cook 15,000
Mr. & Mrs. Frederick Cooper 18,000
Mr. & Mrs. Andrew Cooper 30,000
Jason Cooper 15,000
Donald W. Cooper 15,000
Mr. & Mrs. Mark A. Costanzo 3,000
Marina Leigh Costanzo 6,000
Sally S. Costanzo 9,000
Susan B. Coughlin 45,000
Richard G. Crecraft 18,000
Rick Crecraft 66,000
David Crockett 3,000
Clifton B. Currin 39,000
John D'Avico 6,000
W. Corkran Darlington 15,000
</TABLE>

48
<PAGE>

<TABLE>
<CAPTION>
Common Stock Offered Beneficial Ownership
Selling Shareholder Hereby After Offering (1)
- ------------------- -------------------- ---------------------
Number Percent
------ -------
<S> <C> <C> <C>
F. Eugene Dixon, Jr. 30,000
James M. Dorsey 15,000
Mr. & Mrs. Gary G. Dougherty 6,000
William P. Dunham 3,000
Jean W. Eason 6,000
Edmund H. Rogers, Jr., Trustee 60,000
A. Mary Elder 15,000
Barbara B. Elkin 18,000
D. Diane Fiers 15,000
Mr. & Mrs. Harry S. Finerfrock 24,000
Ruth S. Flagg 15,000
Susan C. Forhane 15,000
Mr. Foss 6,000
Mr. & Mrs. Richard Fradkin 30,000
Robert Ross Frey 6,000
Ronald V. Futerman 30,000
Margaret R. Geddis 7,500
Mr. & Mrs. John C. Gelhard 6,000
Dr. George P. Glauner 15,000
Harriet Glickstein 45,000
Robert P. Gombar 4,500
Mr. & Mrs. Wenpel C. Green 3,000
Jacques C. Guequierre 15,000
Joni Southard Guffey 3,000
Ruth E. Hall 3,000
Dianna Hall 3,000
Thomas E. Hall 7,500
Nancy S. Hallett 15,000
Zelda S. Hansell 3,000
Susan J. Hansen 9,000
Gisela K. Harmelin 3,000
William F. Harrity, Jr. 60,000
Col. & Mrs. Russell D. Hartz 15,000
Robert P. Hauptfuhrer Family Partnership 60,000
Jack M. Heald 6,000
Mr. & Mrs. Clifford J. Heath 30,000
Emma K. Heed 225,750
Austin B. Hepburn 30,000 1,259,400(2) 2.3%
Adele H. Hepburn 34,500(2)
Patricia Austin Heppe 30,000
A.D. Hodges 30,000
Michael J. Hodges 30,000
Julia B. Holloway 30,000
David W. Hubbert 15,000
Wilbur E. Hudson 30,000
Christine F. Hughes 7,500
Robert M. Ihrig 15,000
Janney Montgomery Scott, Inc.
FBO Judith N. Hemley, IRA 15,000
</TABLE>

49
<PAGE>

<TABLE>
<CAPTION>
Common Stock Offered Beneficial Ownership
Selling Shareholder Hereby After Offering (1)
- ------------------- -------------------- ---------------------
Number Percent
------ -------
<S> <C> <C> <C>
Janney Montgomery Scott, Inc.
Custodian FBO R.E. Wagner, IRA 15,000
John C. Jubin 6,000
Hugo Kappler, Jr. 30,000
Mr. & Mrs. Harold F. Kauffman 15,000
William G. Kay, III 3,000
Caroline W. Kay 3,000
Sanford S. Kay 3,000
Mr. & Mrs. Ralph Kiper 30,000
Harriette D. Klann 30,000
Wayne H. Klapp 15,000
Edward M.K. Klapp 45,000
Carlyle Klise 9,000
Deborah A. Krull 15,000
Frederick K. Langguth 30,000
Mr. & Mrs. Gary E. Lasher 30,000
John N. Lee 30,000
Mr. & Mrs. Michael S. Lehnkering 15,000
Lucia E. Lugton 7,500
Mr. & Mrs. Albert Malischewski 30,000
Mr. & Mrs. William B. Malischewski 15,000
Alvan Markle 15,000
D. Edward McAllister 30,000
Elaine F. McGlone 1,500
Mr. & Mrs. Robert G. Meeker 60,000
James F. Merriman 30,000
Alfred J. Migliaccio, Custodian for
Ashlee C. Migliaccio, UGMA
of Pennsylvania 30,000
Harley E. Miller 7,500
Bernard Millis 30,000
Mr. & Mrs. James F. Mitchell, III 30,000
Mr. & Mrs. A. Harry Moffett 6,000
Wanda S. Moffitt 30,000
Donald Moll 15,000
Mr. & Mrs. Robert H. Montgomery 9,000
Gordon E. Montgomery 30,000
Mr. & Mrs. Milton K. Morgan, Jr. 30,000
Charles R. Morrow 24,000
Mr. & Mrs. Ronald L. Noll 6,000
Paul Nordin 30,000
David Gregory Nute 3,000
Kay B. Otterstrom 30,000
Sara Otterstrom 15,000
Lisa Otterstrom 15,000
Victor L. Pack 6,000
Robert G. Padrick 30,000
Eric Pagh 15,000
Janet P. Patel 30,000
</TABLE>

50
<PAGE>

<TABLE>
<CAPTION>
Common Stock Offered Beneficial Ownership
Selling Shareholder Hereby After Offering (1)
- ------------------- -------------------- ---------------------
Number Percent
------ -------
<S> <C> <C> <C>
Walter C. Patterson 3,000
Mary E. Petro 30,000
George M. Pflaumer 60,000
Robert L. Pollack 7,500
Genevieve Pondo 15,000
John W. Ponton, Jr. 30,000
J. Steve Powell 12,000
Charles E. Pusey, Jr. 6,000
Mr. & Mrs. Ashok K. Rajpal 15,000
Ernest L. Ransome, III 15,000
Myradean A. Ransome 15,000
McDonald & Co. FBO Rebecca
A. Osleger, IRA 60,000
Stephen D. Reim 30,000
John B. Rettew, III 15,000
Dr. & Mrs. John L. Reynolds 30,000
Rosalind Robbins 30,000
Mr. & Mrs. Eric J. Robbins 30,000
Dr. Donald Robbins 30,000
Ms. Noma Ann Roberts 15,000
Mr. & Mrs. Gregg F. Robinson 30,000
Dorothy S. Rodgers 30,000
Thelma T. Romig 15,000
Mr. & Mrs. John E. Roshelli 30,000
Eric S. Rugart 30,000
Robert T. Rugart 15,000
Jacquiline Rugart 15,000
Patricia E. Rugart 30,000
Dr. Karl F. Rugart 15,000
Cedric C. Scarlett 30,000
Eloise R. Schaper 15,000
Peter G. Schaper, Jr. 30,000
Christine M. Schuler 30,000
Candice Scialabbo 15,000
Carissa Scialabbo 15,000
Thomas V. Sedlacek 30,000
Mr. & Mrs. Thomas A. Selders 15,000
Mr. & Mrs. Frank R.S. Sellers 15,000
Nicholas Sellers 9,000
Nancy F. Sellers 30,000(3)
William W. Sellers 66,750(3) 945,200(3) 1.7%
Sellers Pension Plan 60,000(3)
Sellers Process Equipment Company 30,000(3)
Helen E. Seltzer 4,500
Richard A. Shea 30,000
Mr. & Mrs. Horace B. Spackman 30,000
Carolyn Stallworth 3,000
Clarence A. Sterling 30,000
</TABLE>

51
<PAGE>

<TABLE>
<CAPTION>
Common Stock Offered Beneficial Ownership
Selling Shareholder Hereby After Offering (1)
- ------------------- -------------------- ---------------------
Number Percent
------ -------
<S> <C> <C> <C>
Edward B. Stokes 30,000
Mr. & Mrs. Jack D. Stratton 30,000
Mrs. Ruth M. Strock 15,000
Sun Bank N.A. as Trustee for
Ally, Meuss, Rogers and Lindsay
PA, Profit Sharing 401(k) FBO
Doyle Rogers 30,000
Mr. & Mrs. John M. Taylor 6,000
Judith Ann Taylor 4,500
John M. Taylor 10,500
Ruth L. Troster 15,000
Roland G.E. Ullman, Jr. 3,000
Varo Technical Services, Inc.-
Pension Plan 30,000
Ms. Sabine M. Weghtman 6,000
Mr. & Mrs. Robert M. Whitbread 15,000
Darry Withers 6,000
Un-Jin Zimmerman 6,000
Patricia P. Zimmerman 6,000
----------

Total.......................................... 5,100,000
</TABLE>

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

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

52
<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 1,259,400 shares of Common Stock following the
sale of all their Common Stock underlying their 1995 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.

MANAGEMENT OPTIONS
------------------
<TABLE>
<CAPTION>

Beneficial Ownership
After Offering (1)
---------------------------
Selling Shareholder Common Stock Offered Hereby Number Percent
- ------------------- --------------------------- ------ ----------
Rights

<S> <C> <C> <C>
Mr. William W. Fiske 35,400
Ms. Emma K. Heed 16,500
Mr. George N. Nager 9,000
Mr. William Bauder 3,000
Ms. Judith Ballard 3,000
Mr. Wilmer Wood 1,500
Ms. Wendy Fox 3,750
Ms. Arcy Marshall 2,250
Mr. Frederick Cooper 45,000
Mr. Justin G. Duryea 1,500
Mr. Mark Cresap 1,500
Mr. James R. Jaeger, II 24,400
Mr. Eugene A. Jaeger, Jr. 6,000
Ms. Jeanne G. Romer 4,500
-------

Total 157,300

Options

Mr. Henry B. duPont Smith 100,000 300,000(2) *
Mr. Keith L. Sterling 450,000 100,500(3) *
Mr. Stephen P. Herbert 550,000 500(4) *
Mr. Haven Brock Kolls, Jr. 400,000 17,000(5) *
Mr. William W. Sellers 155,000 985,750(6) 1.8%
Mr. Peter G. Kapourelos 170,000 143,000(7) *
Mr. William L. Van Alen, Jr. 125,000 100,000(8) *
Ms. Adele Hepburn 770,000 473,900(9) 1.0%
Mr. Austin Hepburn 50,000 473,900(9) 1.0%
Mr. Robert Leiser 20,000
Mr. Doug Annette 25,000
Mr. and Mrs. Alan A. Ballard 15,000
Ms. Helen Estes Seltzer 12,000
Ms. Peg Longstreth Bayer 9,400
Mr. Clifton B. Currin 9,625
Mr. Rick Crecraft 22,350
Mr. Edward M.Taylor 9,500
Mr. Joseph Etris, Jr. 8,250
Ms. Emma K. Heed 8,150
Ms. Mary Farrow Evans 5,125
Mr. Jack D. Davis 3,425
</TABLE>

53
<PAGE>

Ms. Joy L. Punchur 2,725
Mr. Robert Cryan 2,500
Mr. Lawrence R. Malcolm 2,250
Ms. Elizabeth E. Logan 2,000
Mr. and Mrs. Ralph Cochran 1,750
Mr. Clark Stull 1,275
Ms. Anna Lincoln 600
Ms. Ruth E. Hall 550
Ms. Rosemary Marshall 400
Ms. Nancy Victor 200
Mr. Daniel A. Padden 175
Mr. Jeffrey M. McGarry 250
Ms. Susan H. Cortese 2,500
Mrs. Robert Leiser 20,000
Mr. Michael Lawlor 100,000 500 (10) *
RAM Group 150,000
Mr. Philip A. Harvey 100,000 500 (11) *
Mr. Joseph Donahue 100,000 500 (12) *
Mr. Michael Feeney 150,000 0 (13) *
Mr. Leland P. Maxwell 250,000 500 (14) *
Mr. Edward J. Sullivan 121,000 0 (15) *
Mr. Robert A. Bartlett 50,000 0 (16) *
Mr. Gregory C. Rollins 50,000 0 (17) *
Mr. Barry Slawter 210,000 0 (18) *
Ms. Megan N. Cherney 100,000 0 (19) *
-------

Total 4,201,000
</TABLE>

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

54
<PAGE>

(2) Henry B. duPont Smith would own 300,500 shares of Common Stock following
the sale of all of the Common Stock underlying his Options. Mr. Smith
currently serves as a Director of the Company.

(3) Keith L. Sterling would own 100,500 shares of Common Stock following the
sale of all of the Common Stock underlying his Options. Mr. Sterling
is a former officer and Director of the Company.

(4) Stephen P. Herbert would own 500 shares of Common Stock following
the sale of all of the Common Stock underlying his Options. Mr. Herbert
currently serves as Executive Vice President - Sales and Marketing, and as
a Director of the Company.

(5) Haven Brock Kolls, Jr. would own 17,000 shares of Common Stock following
the sale of all of the Common Stock underlying his Options. Mr. Kolls
currently serves as Vice President - Research and Development.

(6) William W. Sellers would own 985,750 shares of Common Stock following the
sale of all of the Common Stock underlying his Options. Mr. Sellers
currently serves as a Director of the Company.

(7) Peter G. Kapourelos would own 143,000 shares of Common Stock following the
sale of all of the Common Stock underlying his Options. Mr. Kapourelos
currently serves as a Director of the Company.

(8) William L. Van Alen, Jr. would own 100,000 shares of Common Stock following
the sale of all of the Common Stock underlying his Options. Mr. Van Alen
currently serves as a Director of the Company.

(9) Adele and Austin Hepburn are husband and wife, and together would
beneficially own an aggregate of 473,900 shares of Common Stock following
the sale of all of the Common Stock underlying their Options. Adele
Hepburn serves as Director of Public Relations of the Company and Austin
Hepburn is a former employee of the Company.

(10) Michael Lawlor would own 500 shares of Common Stock following the
sale of all of the Common Stock underlying his Options. Mr. Lawlor is a
current employee of the Company.

(11) Philip A. Harvey would own 500 shares of Common Stock following
the sale of all of the Common Stock underlying his Options. Mr. Harvey is a
current employee of the Company.

(12) Joseph Donahue would own 500 shares of Common Stock following the
sale of all of the Common Stock underlying his Options. Mr. Donahue is a
current employee of the Company.

55
<PAGE>

(13) Michael Feeney would no longer own any shares of Common Stock following the
sale of all of the Common Stock underlying his Options. Mr. Feeney is a
current employee of the Company.

(14) Leland P. Maxwell would no longer own any shares of Common Stock following
the sale of all of the Common Stock underlying his Options. Mr. Maxwell
currently serves as Senior Vice President, Chief Financial Officer and
Treasurer of the Company.

(15) Edward J. Sullivan would no longer own any shares of Common Stock following
the sale of all of the Common Stock underlying his Options. Mr. Sullivan is
a former officer of the Company.

(16) Robert A. Bartlett would no longer own any shares of Common Stock following
the sale of all of the Common Stock underlying his Options. Mr. Bartlett is
a former officer of the Company.

(17) Gregory C. Rollins would no longer own any shares of Common Stock following
the sale of all of the Common Stock underlying his Options. Mr. Rollins is
a former officer of the Company.

(18) Barry Slawter would no longer own any shares of Common Stock following the
sale of all of the Common Stock underlying his Options. Mr. Slawter is a
former officer of the Company.

(19) Megan N. Cherney would no longer own any shares of Common Stock following
the sale of all of the Common Stock underlying her Options. Ms. Cherney is
a former employee of the Company.

56
<PAGE>

MARKET FOR COMMON STOCK

The Common Stock is currently traded on the OTC Electronic Bulletin
Board under the symbols USTT. Such trading began on March 8, 1995. As of the
date hereof, there is no established trading market for the Common 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
- ------ ---- ---

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

1998

First Quarter (through September 30, 1997) $ .80 $.27
Second Quarter (through December 31, 1997) $ .60 $.22
Third Quarter (through March 23, 1998) $ .49 $.25
Fourth Quarter (through June 30, 1998) $ .46 $.25

1999

First Quarter (through September 30, 1998) $ .31 $.12
Second Quarter (through October 31, 1998) $ .17 $.08

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

57
<PAGE>

As of June 30, 1998, there were 673,000 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, 1998, there were 868,000 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, 1998, there were 40,000 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 June 30, 1998, there were 15,000 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, 1998, there were 40,000 shares of Common Stock issuable
upon exercise of the outstanding 1998-A Warrants, which when and if issued
would be freely tradeable under the Act. See "Description of Securities --
1998-A Common Stock Purchase Warrants."

As of June 30, 1998, there were 1,100,000 shares of Common Stock issuable
upon the exercise of outstanding GEM Warrants. See "Principal Shareholders --
Convertible Securities Escrow Agreement" and "Description of Securities --
Convertible Securities and Related Warrants."

As of June 30, 1998, there were 955 record holders of the Common Stock and
714 record holders of the Series A Preferred Stock.

The holders of the Common Stock are entitled to receive such dividends as
the Board of Directors of the Company may from time to time declare out of funds
legally available for payment of dividends. Through the date hereof, no cash
dividends have been declared on the Company's securities. No dividend may be
paid on the Common Stock until all accumulated and unpaid dividends on the
Preferred Stock have been paid. As of June 30, 1998, such accumulated unpaid
dividends amounted to $2,442,650.
<PAGE>

DESCRIPTION OF SECURITIES
General

The Company is authorized to issue up to 62,000,000 shares of Common
Stock, no par value ("Common Stock"), and 1,200,000 shares of undesignated
Preferred Stock. As of the date hereof, 787,591 shares have been designated as
Series A Convertible Preferred Stock, no par value ("Series A Preferred Stock")
and 200,000 shares have been designated as Series B Equity Participating
Preferred Stock ("Series B Preferred Stock"), no par value.

As of June 30, 1998, there were 40,163,837 shares of Common Stock issued
and outstanding and 618,236 shares of Series A Preferred Stock issued and
outstanding which are convertible into 6,182,360 shares of Common Stock. Through
June 30, 1998, a total of 437,314 shares of Preferred Stock have been converted
into 4,938,325 shares of Common Stock and $1,662,642 of accrued and unpaid
dividends thereon have been converted into 1,964,426 shares of Common Stock. As
of June 30, 1998, there were 955 record owners of the Common Stock and 714
record owners of the Preferred Stock. As of June 30, 1998, there were 673,000
1995 Warrants, 868,000 1996 Warrants 40,000 1996-B Warrants 15,000 1997
Warrants, and 40,000 1998-A Warrants issued and outstanding. If any of such
warrants are exercised, the resale of Common Stock would be freely tradeable
under the Act. In addition, as of June 30, 1998, there were 1,100,000
outstanding GEM Warrants and 4,353,800 Management Options.

Options and Purchase Rights

The Company issued 4,051,000 options to purchase shares of Common Stock
("Options") to the Selling Shareholders during various dates between July 1993
and December 1997. The Company issued an additional 150,000 Options between
during April 1998. Each Option entitles the holder to purchase one share of
Common Stock for the exercise price of the Option at the time of exercise. The
Options are exercisable for five years after the date upon which they become
fully vested.

The Company issued 157,300 Common Stock Purchase Rights ("Rights') to
the Selling Shareholders on June 30, 1993. Each Right entitles the holder
thereof to purchase one share of Common Stock for $1.00 at any time through June
30, 2000. The Options and rights are collectively referred to herein as
"Management Options."

As of June 30, 1998, the Company had issued to its directors, executive
officers, consultants, and employees Options to acquire up to 150,000 shares of
Common Stock at $.50 per share, options to acquire up to 840,000 shares of
Common Stock at $.45 per share, options to acquire up to 1,315,000 shares of
Common Stock at $.25 per share, options to acquire up to 75,000 shares of Common
Stock at $.20 per share, options to acquire up to 1,321,000 shares of Common
Stock at $.15 per share, and options to acquire up to 450,000 shares of Common
Stock at $.10 per share, options to acquire up to 50,000 shares of Common Stock
at $.05 per share. See "Management--Executive Stock Options", and "Management -
Director Compensation and Stock Options." The Company has also issued purchase
rights to acquire up to 157,300 shares of Common Stock at $1.00 per share. In
connection with the Management Options, the Company has, at its cost and
expense, filed a registration statement under the Act covering the resale of all
the Common Stock underlying the options.

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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, 1998-A Warrants, 1998-B
Warrants or other securities of the Company.

Series A Convertible Preferred Stock

The holders of shares of Series A 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 Series A Preferred Stock equals 10
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 Series A 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 Series
A Preferred Stock are February 1 and August 1 of each year. Any and all
accumulated and unpaid cash dividends on the Series A 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, 1998 the accumulated and unpaid dividends on the Series A Preferred
Stock were $2,442,650.

Each share of Series A Preferred Stock is convertible at any time into
10 shares of fully issued and non-assessable Common Stock. Accrued and unpaid
dividends earned on shares of Series A 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. As of June 30, 1998, a total of 437,314
shares of Series A Preferred Stock have been converted into Common Stock and
accrued and unpaid dividends thereon have been converted into 1,964,426 shares
of Common Stock. The conversion rate of the Series A 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 Series A 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, to redeem all or any part of
the issued and outstanding Series A 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 Series A Preferred Stock so called
will have the opportunity to convert their shares of Series A 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 $11.00 per share figure was the redemption price approved by the Directors
and Shareholders of the Company at the time the Series A Preferred Stock was
created and first issued. The Company currently has no plans to redeem the
Preferred Stock.

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

59
<PAGE>

12% Senior Notes

The principal amount of each 12% Senior Note shall be payable on
December 31, 2001, at which time any unpaid and accrued interest shall also
become due. Interest shall accrue at the rate of 12% per annum from and after
the date of issuance and shall be payable quarterly in arrears on December 31,
March 31, June 30, and September 30 of each year until December 31, 2001. The
Senior Notes are senior to all existing equity securities of the Company,
including the Series A and Series B Preferred Stock.

The indebtedness evidenced in the Senior Note is subordinated to the
prior payment when due of the principal of, premium, if any, and interest on
all "Senior Indebtedness", as defined herein, of the Company as follows: Upon
any distribution of its assets in a liquidation or dissolution of the Company,
or in bankruptcy, reorganization, insolvency, receivership or similar
proceedings relating to the Company, the Lender shall not be entitled to receive
payment until the holders of Senior Indebtedness are paid in full. Until a
payment default occurs with respect to any Senior Indebtedness, all payments of
principal and interest due to Lender under the Senior Note shall be made in
accordance with this Senior Note. Upon the occurrence of any payment default
with respect to any Senior Indebtedness then, upon written notice thereof to the
Company and Lender by any holder of such Senior Indebtedness or its
representative, no payments of principal or interest on the Senior Note shall be
made by the Company until such payment default has been cured to the
satisfaction of the holder of such Senior Indebtedness or waived by such holder,
provided, however, that if during the 180 day period following such default,
the holder of Senior Indebtedness has not accelerated its loan, commenced
foreclosure proceedings or otherwise undertaken to act on such default then
the Company shall be required to continue making payments under the Senior Note,
including any which had not been paid during such 180 day period. In the event
that any institutional lender to the Company at any time so requires, the Lender
shall execute, upon request of the Company, any intercreditor or subordination
agreement(s) with any such institutional lender on terms not materially more
adverse to the Lender then the subordination terms contained in this Senior
Note.

The term "Senior Indebtedness" shall mean (a) all direct or indirect,
contingent or certain indebtedness of any type, kind or nature (present or
future) created, incurred or assumed by the Company with respect to any future
bank or other financial institutional indebtedness of the Company, or (b) any
indebtedness created, incurred, or assumed, by the Company secured by a lien on
any assets of the Company.

Notwithstanding anything herein to the contrary, Senior Indebtedness
does not include (i) unsecured accounts payable to trade creditors of the
Company incurred in the ordinary course of business, (ii) any debt owed by the
Company, to any officer, director or stockholder of the Company, (iii) any
obligation of Borrower issued or contracted for as payment in consideration of
the purchase by the Company of the capital stock or substantially all of the
assets of another person or in consideration for the merger or consolidation
with respect to which the Company was a party, (iv) any operating lease
obligations of the Company, (v) any other indebtedness which by its terms is
subordinated to the Senior Note, or (vi) any "other indebtedness" which is
subordinated to all indebtedness to which the Senior Note is subordinated in
substantially like terms as the Senior Note; which such "other indebtedness"
shall be treated as equal with the indebtedness evidenced by the Senior Note.

60
<PAGE>

Series B Equity Participating Preferred Stock

The Series B Preferred Stock shall be automatically converted into
shares of Common Stock at a rate of forty (40) shares of Common Stock for each
share of Series B Preferred Stock in the event of a USA Transaction, as defined
herein. The Series B Preferred Stock has no voting rights and is not entitled to
receive any dividends. The Series B Preferred Stock is not entitled to any
liquidation or redemption rights.

The term "USA Transaction" shall mean (1) the acquisition by any
person, entity or group required to file (or which would be required to file if
the Company had been subject to such provisions) a Schedule 13D or Schedule
14D-1 promulgated under the Securities Exchange Act of 1934 ("Exchange Act") or
any acquisition by any person entitled to file (or which would be entitled to
file if the Company had been subject to such provisions) a Form 13G under the
Exchange Act with respect to such acquisition of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Exchange Act) of 51% or more
of the Company's then outstanding voting securities entitled to vote generally
in the election of Directors (the "Outstanding Shares"); or (2) approval by the
shareholders of the Company of a reorganization, merger, consolidation,
liquidation, or dissolution of the Corporation, or the sale, transfer, lease
or other disposition of all or substantially all of the assets of the
Corporation ("Business Combination").

Notwithstanding subsection (2) above, and other than in connection with
a liquidation or dissolution of the Company, a Business Combination described in
subsection (2) above shall not constitute a USA Transaction if following such
Business Combination, (A) all or substantially all of the individuals and
entities who were the beneficial owners of the Outstanding Shares immediately
prior to such Business Combination beneficially own, directly or indirectly,
more than 51% of the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of Directors of the entity
resulting from such business combination (including without limitation, an
entity which as a result of such transactions owns the Company or all or
substantially all of the Company's assets either directly or through one or more
subsidiaries), and (B) no person owns, directly or indirectly, 49% or more of
the combined voting power of the then outstanding voting securities of the
entity resuting from such business combination except to the extent that such
ownership existed prior to the Business Combination.

The Company has not reserved for issuance, and is not required to
reserve for issuance in the future, the 8,000,000 shares of Common Stock
issuable to the holders of the Series B Preferred Stock upon a USA Transaction.
If a USA Transaction shall occur at a time when there would not be a sufficient
number of authorized but unissued shares of Common Stock to satisfy the
Company's obligations, then the Company shall as a condition of such USA
Transaction promptly take any and all appropriate action to make available a
sufficient number of shares of Common Stock. In the alternative, the Company
shall structure the USA Transaction so that the holders of the Series B
Preferred Stock shall receive the same amount and type of consideration in
connection with the USA Transaction as any other holder of Common Stock, and as
if all the shares of Common Stock underlying the Series B Preferred Stock (i.e.,
40 shares of Common Stock for each share of Series B Preferred Stock) had
actually been issued to such holders by the Company at the time of the USA
Transaction.

Convertible Securities and GEM Warrants

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 ("GEM Warrants"). These
warrants have been issued by the Company pursuant to Regulation S. Through June
30, 1998, 900,000 GEM Warrants have been exercised, leaving a balance of
1,100,000 GEM Warrants.

61
<PAGE>

1998-C Common Stock Purchase Warrants

Each 1998-C Warrant entitles its holder to immediately purchase one
share of Common Stock. The exercise price is $.10 per share subject to reduction
at any time by the Company. The 1998-C Warrants are exercisable at any time on
or prior to December 31, 2001, or such later date as may be determined by the
Company. As of the date hereof all 3,000,000 1998-C Warrants remain outstanding.

The Company has agreed to use its best efforts to prepare and file at
its expense a registration statement with the Securities and Exchange Commission
covering the resale of the Common Stock underlying the 1998-C Warrants. Such
registration statement will be filed promptly following the Termination Date.
The Company will also seek to have the resale of the Common Stock by
non-affiliates of the Company exempted from registration in those states in
which the Units are offered and sold.

The 1998-C Warrants will be issued pursuant to a warrant agreement (the
"1998-C Warrant Agreement") by and between the Company and American Stock
Transfer & Trust Company, the warrant agent, and will be evidenced by warrant
certificates.

The exercise price of the 1998-C Warrants and the number of shares of
Common Stock issuable upon exercise of the 1998-C 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 1998-C Warrants do not confer upon the holder any voting or any
other rights of a shareholder of the Company. Upon notice to the 1998-C 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 1998-C Warrants.

The 1998-C Warrants may be exercised upon surrender of the warrant
certificate evidencing those 1998-C Warrants on or prior to the Termination Date
at the offices of American Stock Transfer & Trust Company, the warrant agent,
with the form of "Election to Purchase" on the reverse side of the Warrant
certificate completed and executed as indicated, accompanied by payment of the
full exercise price (by certified check payable to the order of the Company) for
the number of 1998-C Warrants being exercised.

No fractional shares will be issued upon exercise of the 1998-C
Warrants. However, if a Warrant holder exercises all of the 1998-C Warrants then
owned of record by him, the Company will pay to that 1998-C Warrant holder, in
lieu of the issuance of any fractional share which is otherwise issuable, an
amount in cash based on the market value of the Common Stock on the last trading
day prior to the exercise date.

62
<PAGE>

1998-B Common Stock Purchase Warrants

Each 1998-B Warrant entitles its holder to immediately purchase one
share of Common Stock. The exercise price is $.15 per share through January 1,
1999 and $.40 per share thereafter, subject to reduction at any time by the
Company. The 1998-B Warrants are exercisable at any time prior to August 17,
2003, or such later date as may be determined by the Company.

The 1998-B Warrants have been issued pursuant to a warrant agreement
(the "1998-B Warrant Agreement") dated as of July 1, 1998 by and between the
Company and American Stock Transfer & Trust Company, the transfer agent. The
Company issued 1,390,000 1998-B Warrants to the Selling Shareholders pursuant to
the 1998-B Warrant Agreement in a transaction exempt from the registration
requirements of the Securities Act of 1933, as amended (the "Act"), and
applicable state securities laws. As of June 30, 1998, all 1,390,000 1998-B
Warrants remain outstanding.

The Company has agreed, at its expense, to register for resale of the
Common Stock underlying the 1998-B Warrants under the Act, and to exempt from
registration such Common Stock for resale by non-affiliates of the Company, in
those States in which the holders of the 1998-B Warrants are located. See "Risk
Factors--Securities Registration of 1998-B Warrants".

The exercise price of the 1998-B Warrants and the number of shares of
Common Stock issuable upon exercise of the 1998-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 1998-B Warrants do not confer upon the holder any voting or any other
rights of a shareholder of the Company. Upon notice to the 1998-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 1998-B
Warrants.

1998-A Common Stock Purchase Warrants

Each 1998-A Warrant entitles its holder to immediately purchase one
share of Common Stock. The exercise price was $.15 per share through June 1,
1998 and $.40 per share thereafter, subject to reduction at any time by the
Company. The 1998-A Warrants are exercisable at any time prior to March 5, 2003
or such later date as may be determined by the Company.

The 1998-A Warrants have been issued pursuant to a warrant agreement
(the "1998-A Warrant Agreement") dated as of January 28, 1998 by and between the
Company and American Stock Transfer & Trust Company, the warrant agent. The
Company issued 3,750,000 1998-A Warrants to the Selling Shareholders pursuant
to the 1998-A Warrant Agreement in a transaction exempt from the registration
requirements of the Act and applicable state securities laws. As of June 30,
1998, 40,000 1998-A Warrants remain outstanding.

The Company has, at its expense, registered for resale the Common Stock
underlying the 1998-A Warrants under the Act, and to exempt from registration
such Common Stock for resale by non-affiliates of the Company in those states in
which the holders of the 1998-A Warrants are located.

The exercise price of the 1998-A Warrants and the number of shares of
Common Stock issuable upon exercise of the 1998-A 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 1998-A Warrants do not confer upon the holder any voting or any other
rights of a shareholder of the Company. Upon notice to the 1998-A 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 1998-A
Warrants.

63
<PAGE>
1997 Common Stock Purchase Warrants

Each 1997 Warrant entitles its holder to immediately purchase one share
of Common Stock. The exercise price was $.20 per share through October 31, 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.

The 1997 Warrants have been issued pursuant to a warrant agreement (the
"1997 Warrant Agreement") dated as of April 8, 1997 by and between the Company
and American Stock Transfer & Trust Company, the warrant agent. The Company
issued 1,600,000 1997 Warrants to the Selling Shareholders pursuant to the
1997 Warrant Agreement in a transaction exempt from the registration
requirements of the Act and applicable state securities laws. As of June 30,
1998, 1,585,000 1997 Warrants have been exercised and 15,000 remain outstanding.

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 was $.20 per share through October 31,
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.

The 1996-B Warrants have been issued pursuant to a warrant agreement
dated as of February 28, 1997 (the "1996-B Warrant Agreement") dated as of
December 27, 1996 by and between the Company and American Stock Transfer & Trust
Company, the warrant agent. The Company issued 374,000 1996-B Warrants to the
Selling Shareholders pursuant to the 1996-B Warrant Agreement in a transaction
exempt from the registration requirements of the Act and applicable securities
laws. As of June 30, 1998, 334,000 1996-B Warrants were exercised and 40,000
remain outstanding.

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 immediately purchase one share
of Common Stock. The exercise price was $.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. In July 1998, the Company
authorized a temporary reduction in the exercise price of each outstanding 1996
Warrant to $.20 through the close of business on September 30, 1998.

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 issued 5,200,000 1996 Warrants
to the Selling Shareholders pursuant to the 1996 Warrant Agreement in a
transaction exempt from the registration requirements of the Act and applicable
state securities laws. As of June 30, 1998, 4,332,000 1996 Warrants were
exercised and 868,000 remain outstanding.

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 immediately purchase one share
of Common Stock. The exercise price was $.25 through October 31, 1997, and $.50
thereafter, or such lower exercise price as may be determined by the Company
from time to time. The 1995 Warrants are exercisable at any time through January
31, 2001, or such later date as may be determined by the Company. In July 1998,
the Company authorized a temporary reduction in the exercise price of each
outstanding 1995 Warrant to $.20 through the close of business on September 30,
1998.

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 issued 5,100,000 1995
Warrants to the Selling Shareholders pursuant to the 1995 Warrant Agreement in a
transaction exempt from the registration requirements of the Act and applicable
state securities laws. As of June 30, 1998, 4,427,000 1995 Warrants were
exercised and 673,000 remain outstanding.

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.

65
<PAGE>

Shares Eligible for Future Sale

Of the 40,163,837 shares of Common Stock issued and outstanding on June
30, 1998, 40,093,837 are freely transferable without restriction or further
registration under the Act (other than shares held by "affiliates" of the
Company), and the remaining 70,000 are "restricted securities". As of June 30,
1998, there were 618,236 shares of Preferred Stock issued and outstanding,
468,236 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 150,000 are "restricted securities". The 618,236
shares of Preferred Stock issued and outstanding as of June 30, 1998 are
convertible into 6,182,360 shares of Common Stock. Of such shares of Common
Stock, 4,682,360 would be fully transferrable without registration or regulation
under the Act or eligible for sale under the Rule and 1,500,000 would not be
eligible for sale.

As set forth in the prior paragraph, there were 70,000 shares of
Common Stock and 150,000 shares of Preferred Stock which are "restricted
securities" and cannot be resold without registration. All of such shares would
become eligible for sale under Rule 144 during calender year 1999.

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

66
<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, Series A
Preferred Stock, Series B Preferred Stock, 1998-C Warrants, 1998-B Warrants,
1998-A Warrants, 1997 Warrants, 1996-B Warrants, 1996 Warrants and 1995
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.

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
Company is responsible for all other expenses incident to the offer and sale of
the Common Stock.

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

67
<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 P.C., Philadelphia, Pennsylvania 19103.

EXPERTS

The consolidated financial statements of USA Technologies, Inc. at June
30, 1998 and 1997, and for each of the two years in the period ended June 30,
1998, 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 consolidated 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.

68
<PAGE>

INDEX TO FINANCIAL STATEMENTS

USA TECHNOLOGIES, INC.

Report of Independent Auditors F-1

Consolidated Balance Sheets F-2

Consolidated Statements of Operations F-3

Consolidated Statements of Shareholders' Equity F-4

Consolidated Statements of Cash Flows F-6

Notes to Consolidated Financial Statements F-7

<PAGE>

Report of Independent Auditors

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

We have audited the accompanying consolidated balance sheets of USA
Technologies, Inc. as of June 30, 1998 and 1997, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
two years in the period ended June 30, 1998. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of USA Technologies, Inc. at June 30, 1998 and 1997, and the consolidated
results of its operations and its cash flows for each of the two years in the
period ended June 30, 1998, 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 consolidated financial statements, the Company's recurring losses from
operations from its inception and its accumulated deficit through June 30,
1998, 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 17, 1998

F-1
<PAGE>

USA Technologies, Inc.

Consolidated Balance Sheets

June 30
1998 1997
----------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 324,824 $ 630,266
Accounts receivable less allowance
for uncollectible accounts of $23,764 and
$19,345 in 1998 and 1997, respectively 222,743 127,318
Inventory 436,971 378,318
Stock subscriptions receivable 19,875 60,000
Prepaid expenses and deposits 20,515 15,670
---------------------------------
Total current assets 1,024,928 1,211,572

Property and equipment, net 151,906 178,457
Other assets 10,250 20,250
---------------------------------
Total assets $ 1,187,084 $ 1,410,279
=================================

Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 576,787 $ 474,646
Accrued expenses 430,643 46,742
Current obligations under capital leases 22,810 18,270
---------------------------------
Total current liabilities 1,030,240 539,658

Obligations under capital leases, less current portion 1,669 24,480
---------------------------------
Total liabilities 1,031,909 564,138

Shareholders' equity:
Preferred Stock, no par value:
Authorized shares - 1,200,000
Series A Convertible issued and outstanding shares - 618,236 and 861,205
at June 30, 1998 and 1997, respectively (liquidation
preference of $8,625,010 at June 30, 1998) 4,538,114 7,024,811
Common Stock, no par value:
Authorized shares - 62,000,000 and 55,000,000 at
June 30, 1998 and 1997, respectively
Issued and outstanding shares - 40,163,837 and
29,969,934 at June 30, 1998 and 1997, respectively 11,223,213 4,355,334
Accumulated deficit (15,606,152) (10,534,004)
---------------------------------
Total shareholders' equity 155,175 846,141
---------------------------------
Total liabilities and shareholders' equity $ 1,187,084 $ 1,410,279
=================================

</TABLE>

See accompanying notes.

F-2
<PAGE>

USA Technologies, Inc.

Consolidated Statements of Operations

Year ended June 30
1998 1997
---------------------------------

<S> <C> <C>
Revenues:
Equipment sales $ 1,588,487 $ 490,614
License and transaction fees 236,742 117,158
--------------------------------
Total revenues 1,825,229 607,772

Operating expenses:
General and administrative 2,213,984 2,040,163
Compensation 1,909,682 1,080,458
Cost of sales 1,261,729 525,090
Depreciation and amortization 116,255 97,250
--------------------------------
Total operating expenses 5,501,650 3,742,961
--------------------------------
(3,676,421) (3,135,189)
Other income (expense):
Interest income 18,225 26,676
Interest expense (8,443) (12,199)
Joint Venture activities 98,358 --
--------------------------------
Total other income (expense) 108,140 14,477
--------------------------------
Net loss (3,568,281) (3,120,712)

Cumulative preferred dividends and other adjustments (1,754,566) (1,243,295)
--------------------------------
Loss applicable to common shares $ (5,322,847) $ (4,364,007)
================================

Loss per common share (basic and diluted) $ (0.15) $ (0.21)
================================

Weighted average number of common shares
outstanding (basic and diluted) 35,320,477 20,984,381
================================

</TABLE>
See accompanying notes.

F-3
<PAGE>

USA Technologies, Inc.

Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>

Series A
Convertible
Preferred Common Accumulated
Stock Stock Deficit Total
------------------------------------------------------------------

<S> <C> <C> <C> <C>
Balance, June 30, 1996 $ 6,776,132 $ 2,720,201 $ (7,296,143) $ 2,200,190
Issuance of 687,000 shares of Common Stock
in exchange for consulting services - 277,198 - 277,198
Conversion of 24,170 shares of Convertible
Preferred Stock to 273,800 shares of
Common Stock (206,009) 206,009 - -
Conversion of $39,001 of cumulative
preferred dividends into 39,001 shares of
Common Stock at $1.00 per share - 39,001 (39,001) -
Conversion of $78,148 of cumulative
preferred dividends into 94,157 shares of
Common Stock at $ .83 per share - 78,148 (78,148) -
Common Stock warrants exercised - 3,202,000
at $ .20 per warrant, net of offering
costs - 576,108 - 576,108
Issuance of 9,350 shares (9.35 units) of
Convertible Preferred Stock at $10.00 per
share in connection with the 1996B
Private Placement 93,500 - - 93,500
Issuance of 80,000 shares (40 units) of
Convertible Preferred Stock at $5.00 per
share in connection with the 1997 Private
Placement, net of offering costs 361,188 - - 361,188
Exercise of 150,000 Common Stock options at
$ .05 per share - 7,500 - 7,500
Issuance of Common Stock in connection with
convertible security placement
(Note 9), 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>

F-4
<PAGE>

USA Technologies, Inc.

Consolidated Statements of Shareholders' Equity (continued)

Series A
Convertible
Preferred Common Accumulated
Stock Stock Deficit Total
------------------------------------------------------------------

<S> <C> <C> <C> <C>
Issuance of 205,000 shares of Common Stock $ - $ 68,096 $ - $ 68,096
in exchange for consulting services
Issuance of 9,500 shares of Common Stock to
employees as compensation - 2,565 - 2,565
Conversion of 392,969 shares of Convertible
Preferred Stock to 4,664,525 shares of
Common Stock (3,188,207) 3,188,207 - -
Conversion of $1,388,772 of cumulative
preferred dividends into 1,674,547 shares
of Common Stock at $ .83 per share - 1,388,772 (1,388,772) -
Conversion of $115,095 of cumulative
preferred dividends into 115,095 shares
of Common Stock at $1.00 per share - 115,095 (115,095) -
Common Stock warrants exercised - 3,710,000
at $ .15 per warrant - 556,500 - 556,500
Common Stock warrants exercised - 2,819,000
at $ .20 per warrant, net of offering
costs - 521,639 - 521,639
Common Stock warrants exercised - 1,871,000
at $ .25 per warrant - 467,750 - 467,750
Exercise of 70,000 Common Stock options -
at $ .05 per share - 3,500 - 3,500
Exercise of 4,500 Common Stock purchase
rights - at $.25 per share - 1,125 - 1,125
Cancellation of 4,365,000 shares of Common
Stock by the President of the Company - - - -
Issuance of 150,000 shares (75 units) of
Convertible Preferred Stock at $5.00 per
share, in connection with 1997B Private
Placement, net of offering costs 701,510 - - 701,510
Reduction in exercise price below the fair
market value for 1,896,000 Common
Stock options - 554,630 - 554,630
Net loss - - (3,568,281) (3,568,281)
=================================================================
Balance, June 30, 1998 $ 4,538,114 $ 11,223,213 $ (15,606,152) $ 155,175
=================================================================

</TABLE>
See accompanying notes.

F-5
<PAGE>

USA Technologies, Inc.

Consolidated Statements of Cash Flows

Year ended June 30
1998 1997
----------------------------------
<S> <C> <C>

Operating activities
Net loss $ (3,568,281) $ (3,120,712)
Adjustments to reconcile net loss to net cash
used in operating activities:
Compensation charges incurred in
connection with the issuance of Common Stock
and repricing of Common Stock options 625,291 277,198
Depreciation and amortization 116,255 97,250
Provision for allowance for uncollectible accounts 10,441 19,345
Changes in operating assets and liabilities:
Accounts receivable (105,866) (146,663)
Inventory (147,634) 48,073
Prepaid expenses, deposits, and other assets 5,155 9,702
Accounts payable 102,141 172,797
Accrued expenses 383,901 (8,332)
----------------------------------
Net cash used in operating activities (2,578,597) (2,651,342)

Investing activities
Purchase of property and equipment (723) (17,855)
----------------------------------
Net cash used in investing activities (723) (17,855)

Financing activities
Net proceeds from issuance of Common Stock and
exercise of Common Stock warrants 1,530,639 1,141,126
Net proceeds from issuance of Convertible
Preferred Stock 761,510 394,688
Repayment of principal on capital lease obligations (18,271) (9,707)
----------------------------------
Net cash provided by financing activities 2,273,878 1,526,107
----------------------------------

Net decrease in cash and cash equivalents (305,442) (1,143,090)
Cash and cash equivalents at beginning of year 630,266 1,773,356
----------------------------------
Cash and cash equivalents at end of year $ 324,824 $ 630,266
==================================

Supplemental disclosures of cash flow information:

Conversion of Convertible Preferred Stock to
Common Stock $ 3,188,207 $ 206,009
==================================
Conversion of Cumulative Preferred Dividends to
Common Stock $ 1,503,867 $ 117,149
==================================
Transfer of inventory to property and equipment $ 88,981 $ -
==================================
Stock subscription receivable $ 19,875 $ 60,000
==================================
Capital lease obligations incurred $ - $ 22,200
==================================
Cash paid during the year for interest $ 18,777 $ 10,549
==================================

</TABLE>

See accompanying notes.

F-6
<PAGE>

USA Technologies, Inc.

Notes to Consolidated Financial Statements

June 30, 1998

1. Business

USA Technologies, Inc., a Pennsylvania corporation (the "Company"), was
incorporated on January 16, 1992. The Company is a provider and licensor of
unattended, credit card activated control systems for the copying, debit card
and personal computer industries. The Company's customers are principally
located in the United States and are comprised of hotels, retail locations,
university libraries, and public libraries. The Company generates its revenues
from the direct sale of equipment utilizing its control systems, from
retaining a percentage of the gross licensing fees generated by the control
systems, and from a monthly administrative service fee.

During September 1996, the Company commenced offering the Business Express(TM)
principally to the hospitality industry, which combined the Company's business
applications for computers, copiers and facsimile machines into a kiosk type
unit. During September 1997, the Company entered into a joint venture
agreement (Joint Venture) with Mail Boxes Etc. ("MBE") and commenced selling
the MBE Business Express(TM) ("MBEX") primarily to hotels located in the
United States (Note 3).

2. Accounting Policies

Basis of Financial Statement Presentation

The consolidated 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 consolidated financial statements do not include any
adjustments that might be necessary should the Company be unable to continue in
existence. The Company has incurred substantial losses of approximately $3.6
million and approximately $3.1 million during the fiscal years ending June 30,
1998 and 1997, respectively, and cumulative losses from its inception through
June 30, 1998 amounting to approximately $12.9 million. Losses have continued
through August 1998. 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 allow
for the Company to continue as a going concern. Such actions include the
generation of revenues from operations, raising capital from private placements
(Notes 14 and 15), the exercise of Common Stock purchase warrants and options,
and continued efforts to reduce costs.

F-7
<PAGE>

USA Technologies, Inc.

Notes to Consolidated Financial Statements

2. Accounting Policies (continued)

Development Stage Corporation

During the quarter ended June 30, 1998, the Company determined that it is no
longer designated as a development stage enterprise as defined in Statement of
Financial Accounting Standards No. 7 Development Stage Enterprises. During its
development stage, the Company devoted a substantial portion of its efforts
toward raising capital, research and development, establishing new business
and developing new products and markets. The strategic alliances entered into
during the year ended June 30, 1998 (Note 3) have provided the Company with
the ability to complete its transition from a development stage enterprise to
an enterprise focusing on marketing its products and its commercial
operations.

Consolidation

The consolidated financial statements include the accounts of the Joint
Venture (Note 3). All significant intercompany accounts and transactions have
been eliminated in consolidation.

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 represent all highly liquid investments with original
maturities of three months or less. At June 30, 1998, cash equivalents were
comprised of a money market fund and certificates of deposit.

Inventory

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

F-8
<PAGE>
USA Technologies, Inc.

Notes to Consolidated Financial Statements

2. Accounting Practices (continued)

Property and Equipment

Property and equipment are recorded at cost. Property and equipment consists
of control systems, which generate monthly transaction fees from usage and are
depreciated using the straight-line method over three years, and furniture and
vehicles, which are depreciated using the straight-line method over seven and
five years, respectively, 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 and transaction fee
revenue is recognized upon the usage of the Company's credit card activated
control systems.

Research and Development

Research and development costs are charged to operations as incurred. Such
research and development costs amounted to approximately $199,000 and $344,000
for the years ended June 30, 1998 and 1997, respectively. These costs are
reflected in general and administrative and compensation expenses in the
accompanying consolidated 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 expenses,
and the periods of amortization and depreciation of certain assets.

Accounting for Stock Options

During 1995, the Financial Accounting Standards Board issued Statement No. 123
("SFAS 123"), Accounting for Stock-Based Compensation. SFAS 123 provides
companies with a choice to follow the provisions of SFAS 123 in determination

F-9
<PAGE>
USA Technologies, Inc.

Notes to Consolidated Financial Statements

2. Accounting Practices (continued)

Accounting for Stock Options (continued)

of stock-based compensation expense or to continue with the provisions of
Accounting Principles Board Opinion No. 25 ("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 SFAS 123 to the Company's stock-based awards results in net
loss and net loss per common share that are disclosed on a proforma basis in
Note 11.

Loss Per Common Share

During February 1997, the Financial Accounting Standards Board issued
Statement No. 128 ("SFAS 128"), Earnings per Share, which was adopted by the
Company during the quarter ending December 31, 1997. SFAS 128 replaced the
calculation of primary and fully diluted earnings per share. Basic earnings
per share is calculated by dividing net income (loss) by the weighted average
common shares outstanding for the period. Diluted earnings per share is
calculated by dividing net income (loss) by the weighted average common shares
outstanding for the period plus the dilutive effect of stock options. SFAS 128
had no impact on the calculation of the Company's previously reported primary
and fully diluted loss per common share. 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.

Impact of Recent Accounting Pronouncements

During June 1997, the Financial Accounting Standards Board issued Statement
No. 130, Reporting Comprehensive Income ("SFAS 130") and Statement No. 131,
Disclosures about Segments of an Enterprise and Related Information ("SFAS
131"). SFAS 130 requires financial statement reporting of all non-owner
related changes in equity for the periods presented. SFAS 131 requires
disclosure about revenue, earnings and other financial information pertaining
to business segments by which a company is managed, as well as factors used by
management to determine segments. Both SFAS 130 and

F-10
<PAGE>

USA Technologies, Inc.

Notes to Consolidated Financial Statements

2. Accounting Practices (continued)

Impact of Recent Accounting Pronouncements (continued)

SFAS 131 are effective for fiscal years beginning after December 15, 1997. The
Company is in the process of evaluating the disclosure requirements of these
standards and believes the adoption of SFAS 130 and SFAS 131 will have no
material effect on the Company's results of operations or its financial
condition.

3. Joint Venture

During September 1997, the Company entered into a five year 50/50 (unless
otherwise specified) Joint Venture Agreement with Mail Boxes Etc. ("MBE"). The
Joint Venture operates under the name "MBE Express Joint Venture" (hereinafter
referred to as "Joint Venture") and will exclusively sell and market the
Company's Business Express(TM) product under the name MBE Business Express(TM).
Gross profits earned by the Joint Venture from sales on a National Account level
and sales referred to the Joint Venture by MBE franchisees are split equally by
the partners. Any sales generated by either of the partners responsible for
obligating the customer for the sale would receive 75% of the gross profit and
the other partner would receive 25% of the gross profit. The agreement also
allows the Company to have the option to directly sell its Business Express
products. Sharing of the transaction fees earned varies based on the initiator
of the sale of the MBE Business Express(TM). All other revenues and expenses of
the Joint Venture are shared equally by the partners. Reimbursements due from
the Joint Venture partner of $98,358 are recorded against other amounts payable
to MBE at June 30, 1998.

The Joint Venture Agreement specifies that if certain sales goals are not met
by the Joint Venture, the Company may terminate the exclusivity provisions of
the agreement after the second year. In this regard, if 2,000 business centers
are not sold by September 24, 1999, the exclusivity provisions may be
terminated. The Joint Venture may be terminated at any time by either partner
if the other partner has breached any material term or condition of the
agreement; provided that the terminating partner has allowed the other partner
at least a sixty-day period to cure any alleged breach (Note 15).

During the year ended June 30, 1998, the Company delivered to MBE 195 control
boxes to be used by its MBE franchisees. Through June 30, 1998, 7 control
systems were installed in MBE franchise operations. During April 1998, MBE
agreed to accept an additional 600 control boxes which are scheduled to be
shipped at the rate of 100 units per month commencing in September 1998 (See
Note 15).

F-11
<PAGE>
USA Technologies, Inc.

Notes to Consolidated Financial Statements

3. Joint Venture (continued)

At June 30, 1998, the Joint Venture recorded accounts payable to MBE of
approximately $248,000 which principally represents amounts payable for
inventory and other expenditures paid by MBE on behalf of the Joint Venture.

During February 1998, Prime Hospitality Corp. ("Prime") entered into an
agreement with the Joint Venture whereby Prime would purchase a minimum of 100
MBE Business Express(TM) units for installation at its owned and managed
hotels for a purchase price of approximately $2 million. The agreement
provided for a 90-day trial period on 6 units and if such trial was
successful, Prime would order the remaining 94 units. During June 1998, the
Joint Venture was notified by Prime that the trial period was successful and
accordingly, the remaining 94 units will be purchased by Prime prior to June
1999.

During March 1998, the Joint Venture entered into an agreement with
International Business Machines Corporation ("IBM") whereby IBM agreed to be
the executional partner for certain aspects of the Joint Venture's business,
including project management services, asset procurement and inventory
financing, configuration and testing of equipment, site preparation,
installation, maintenance services, and asset management. Under this
agreement, IBM will also assist the Joint Venture with marketing and
technology exchange. This agreement is expected to commence in the first
quarter of fiscal 1999.

4. Property and Equipment

Property and equipment consist of the following:

June 30
1998 1997
----------------------------------

Control systems $ 357,021 $ 269,590
Furniture and equipment 75,710 73,437
Vehicles 10,259 10,259
----------------------------------
442,990 353,286
Less accumulated depreciation 291,084 174,829
----------------------------------
$ 151,906 $ 178,457
==================================

F-12
<PAGE>
USA Technologies, Inc.

Notes to Consolidated Financial Statements

5. Accrued Expenses

Accrued expenses consist of the following:
June 30
1998 1997
------------------------------------

Accrued product warranty costs $ 102,520 $ -
Accrued software license and
support costs 84,297 -
Accrued compensation and related
sales commissions 79,147 3,698
Accrued professional fees 76,000 -
Accrued sales tax 44,630 25,559
Accrued other 30,524 7,144
Advanced customer billings 13,525 -
Accrued rent - 10,341
====================================
$ 430,643 $ 46,742
====================================

6. Related Party Transactions

At June 30, 1998 and 1997, approximately $26,000 and $27,000, respectively, of
the Company's accounts payable were due to several shareholders for various
legal and technical services performed. During the years ended June 30, 1998
and 1997, the Company incurred approximately $340,000 and $308,000,
respectively, for these services.

7. Commitments

During November 1997, the Company entered into a new Employment and
Non-Competition Agreement through June 30, 2000 (the Employment Agreement)
with the Company's President, providing for a base annual salary of $100,000.
The Employment Agreement is automatically renewed annually thereafter unless
canceled by either the President or the Company. In connection with the
Employment Agreement, the President canceled an aggregate of 4,365,000 shares
of Common Stock held in escrow in accordance with the terms as described in
Note 12. The Employment Agreement also granted the President in the event of a
"USA Transaction," as defined, irrevocable and fully vested rights equal to
that number of shares of Common Stock that when issued to him equals five
percent of all the then issued and outstanding shares of the Company's Common
Stock. The President is not required to pay any additional consideration for
such shares. The stock rights have no expiration and are not affected by the
President's termination of employment.

F-13
<PAGE>
USA Technologies, Inc.

Notes to Consolidated Financial Statements

7. Commitments (continued)

The Company conducts its operations from various facilities under operating
leases. Rental expense under such arrangements was approximately $70,000 and
$94,000 during the years ended June 30, 1998 and 1997, respectively.

During the year ended June 30, 1997, the Company entered into agreements to
lease $22,200 of computer equipment which was accounted for as a capital lease.
This computer equipment is included in control systems in the accompanying
consolidated financial statements. Lease amortization of $18,862 and $17,600 is
included in depreciation expense for the years ended June 30, 1998 and 1997,
respectively.

Future minimum lease payments subsequent to June 30, 1998 under capital and
noncancelable operating leases are as follows:
<TABLE>
<CAPTION>

Capital Operating
Leases Leases
---------------------------------

<S> <C> <C>
1999 $ 26,055 $ 79,900
2000 1,717 34,200
2001 - 9,000
------------------------------
Total minimum lease payments 27,772 $ 123,100
==============
Less amount representing interest (25% per annum) 3,293
----------------
Present value of net minimum lease payments 24,479
Less current obligation under capital leases 22,810
----------------
Obligation under capital leases, less current portion $ 1,669
================
</TABLE>

During May 1998, the Company entered into an agreement with a vendor (on
behalf of the Joint Venture) whereby the Company committed to acquire 1,500
control systems for approximately $780,000. The control systems are
anticipated for delivery by the Company through the quarter ending March 31,
1999. As more fully discussed in Note 15, certain of these control systems
have recently become the subject of litigation.

F-14
<PAGE>
USA Technologies, Inc.

Notes to Consolidated Financial Statements

8. Income Taxes

At June 30, 1998 and 1997, the Company had federal net operating loss
carryforwards of approximately $11,231,000 and $8,181,000, respectively, to
offset future federal taxable income expiring through 2013. Additionally, at
June 30, 1998 and 1997, the Company had state net operating loss carryforwards
of approximately $8,655,000 and $5,753,000, respectively, to offset future state
taxable income expiring through 2008. At June 30, 1998 and 1997, the Company
recorded a deferred tax asset of $4,905,000 and $3,402,000, 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
1998 1997
----------------------------------
<S> <C> <C>
Deferred tax asset:
Net operating loss carryforwards $ 4,384,000 $ 3,081,000
Compensation expense on stock option re-pricing 222,000 -
Deferred research and development costs 207,000 226,000
Deferred pre-operating costs 18,000 84,000
Other temporary differences 81,000 20,000
----------------------------------
4,912,000 3,411,000
Deferred tax liabilities:
Depreciation (7,000) (9,000)
----------------------------------
Deferred tax asset, net 4,905,000 3,402,000
Valuation allowance (4,905,000) (3,402,000
==================================
$ - $ -
==================================
</TABLE>

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 may have an
impact on the ultimate realization of its carryforwards and future tax
deductions.

F-15
<PAGE>
USA Technologies, Inc.

Notes to Consolidated Financial Statements

9. 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. During the period from March 24, 1997 to December 31, 1997, each
share of Series A Preferred Stock was 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, 1998 and
1997 amounted to $2,442,650 and $2,837,086, respectively. Cumulative unpaid
dividends are convertible into common shares at $1.00 per common share at the
option of the shareholder. During the period from March 24, 1997 to December
31, 1997, the cumulative unpaid dividends were convertible into common shares
at $.83 per common share. During the years ended June 30, 1998 and 1997,
certain holders of the Preferred Stock converted 392,969 and 24,170 shares,
respectively, into 4,664,525 and 273,800 shares of Common Stock, respectively.
Certain of these shareholders also converted cumulative preferred dividends of
$1,503,867 and $117,149, respectively, into 1,789,642 and 133,158 shares of
Common Stock at June 30, 1998 and 1997, 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. No such redemption has occurred
as of June 30, 1998. 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.

10. Common Stock Transactions

During June 1998, the Company's shareholders approved an increase in the
number of the Company's authorized common stock shares from 55,000,000 to
62,000,000.

During January 1998, the Company's Board of Directors authorized a $750,000
private placement offering of 75 units at a unit price of $10,000. Each unit
included 2,000 shares of Convertible Preferred Stock and 50,000 1998-A Common
Stock purchase warrants at an exercise price of $.15 through June 30, 1998 and
$.40 thereafter through March 5, 2003. The Company terminated this offering
during February 1998 selling all 75 units and

F-16
<PAGE>
USA Technologies, Inc.

Notes to Consolidated Financial Statements

10. Common Stock Transactions (continued)

generating net proceeds of $701,510 ($750,000 less offering costs of $48,490).
Through June 30, 1998, 3,710,000 1998-A warrants were exercised at $.15 per
warrant generating gross proceeds of $556,500. At June 30, 1998, there were
40,000 1998-A Common Stock purchase warrants outstanding.

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 was 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 had 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) was 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 consolidated 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 were included in the common shares issued and
outstanding in the June 30, 1997 balance sheet. During fiscal year 1998, the
entire Placement was converted (at varying prices) into 1,915,736 of common
shares. Accordingly, the Placement and escrow shares were canceled and the
appropriate number of shares of Common Stock were issued to the Purchasers.

F-17
<PAGE>

10. 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. As of June 30, 1998, 900,000 of these warrants were exercised
generating gross proceeds of $180,000.

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 purchase warrants at an exercise price of $.20 through October 31, 1997
(extended from the original date of August 31, 1997) and $.40 thereafter through
February 28, 2002. 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 stock
subscriptions receivable of $60,000 as of June 30, 1997, recorded in connection
with this offering were collected in August 1997. The Company terminated this
offering on July 3, 1997. During the year ended June 30, 1998, 1,585,000
warrants were exercised at $.20 per warrant generating gross proceeds of
$317,000. At June 30, 1998 and 1997, 15,000 and 1,600,000, respectively, of 1997
Common Stock purchase warrants were outstanding.

During November 1996, the Company's Board of Directors authorized a $200,000
private placement offering of 20 units at a unit 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 $.20 per share
through October 31, 1997 (extended from original date of August 31, 1997) and
$.30 per share through February 28, 2002. The offering closed during February
1997 resulting in the sale of 93.5 units generating gross proceeds of $93,500.
During the year ended June 30, 1998, 334,000 warrants were exercised at $.20
per warrant generating gross proceeds of $66,800. At June 30, 1998 and 1997,
40,000 and 374,000, respectively, of 1996-B Common Stock purchase warrants
were outstanding.

During 1996, the Company issued Common Stock purchase warrants (the 1996
warrants) which are exercisable at any time on or before May 31, 2001, unless
such date is extended by the Company. Each 1996 warrant entitles the holder to
purchase one share of Common Stock for $.40 through December 31, 1996 and for
$.50 at any time thereafter. The exercise price of the 1996 warrants may be
reduced by the Company at any time.

F-18
<PAGE>
USA Technologies, Inc.

Notes to Consolidated Financial Statements

10. Common Stock Transactions (continued)

During November 1996, the Company's Board of Directors reduced the exercise
price of the 1996 warrants from $.40 to $.20 during the period November 1,
1996 through February 28, 1997, after which the exercise price returned to
$.50. During September 1997, the Company's Board of Directors reduced the
exercise price of the 1996 Common Stock purchase warrants from $.50 to $.25
through October 31, 1997. Thereafter the exercise price returned to $.50.
During the years ended June 30, 1998 and 1997, 1,130,000 and 3,202,000
warrants were exercised generating gross proceeds of $282,500 and $640,400,
respectively. At June 30, 1998 and 1997, respectively, there were 868,000 and
1,998,000 1996 Common Stock purchase warrants outstanding.

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. During September
1997, the Company's Board of Directors reduced the 1995 Common Stock purchase
warrants from $.50 to $.25 through October 31, 1997. During the year ended
June 30, 1998, 741,000 warrants were exercised at $.25 generating gross
proceeds of $185,250. At June 30, 1998 and 1997, respectively, the Company had
673,000 and 1,414,000, 1995 Common Stock purchase warrants outstanding.

At June 30, 1998 and 1997, the Company had outstanding 152,800
and 157,300 Common Stock purchase rights, respectively. These Common Stock
purchase rights, issued in 1993, allow the holder to purchase shares of the
Company's Common Stock at $1.00 per share and are exercisable through June 30,
2000. During April 1998, the Company's Board of Directors authorized a
reduction in the exercise price of the purchase rights to $.25 per share
through June 30, 1998.

At June 30, 1998, stock subscriptions receivable of $19,875 were collected
during July 1998.

F-19
<PAGE>
USA Technologies, Inc.

Notes to Consolidated Financial Statements

11. 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
fiscal year 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
options were previously issued during the periods March 1996 through November
1996 and represented all options previously granted at $.65. 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. During April 1998, the
Company's Board of Directors authorized the reduction in the exercise price of
1,896,000 options from $.25-$.45 per share to $.05-$.20 per share. As the new
exercise prices were below the fair market value of the Company's Common Stock
on the date of repricing, the Company recorded a non-cash charge to
compensation expense of approximately $555,000 during fiscal year 1998.

The following table summarizes all stock option activity:

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

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
Granted 300,000 $ .45-$.50
Exercised (70,000) $ .05
-----------------------------
Balance at June 30, 1998 4,201,000 $ .05-$.50
=============================

F-20
<PAGE>
USA Technologies, Inc.

Notes to Consolidated Financial Statements

11. Stock Options (continued)

The price range of the outstanding and exercisable common stock options at
June 30, 1998 is as follows:
<TABLE>
<CAPTION>
Weighted
Average Weighted
Remaining Average
Option Exercise Options Contract Life Weighted Exercise Options Exercise
Prices Outstanding (Yrs.) Price Exercisable Price
- -----------------------------------------------------------------------------------------------------------------

Pro forma information regarding net loss and net loss per common share
determined as if the Company is accounting for stock options granted under the
fair value method of SFAS 123 is as follows:
<TABLE>
<CAPTION>

June 30
1998 1997
--------------------------------------
<S> <C> <C>
Net loss applicable to common shares as
reported under APB 25: $ (5,322,847) $ (4,364,007)
Stock option expense per SFAS 123 (391,704) (137,013)
--------------------------------------
Pro forma net loss $ (5,714,551) $ (4,501,020)
Pro forma net loss per common share $ (.16) $ (.21)
Loss per common share as reported $ (.15) $ (.21)

</TABLE>
The fair value for the Company's stock options was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for fiscal years 1998 and 1997; risk-free
interest rate of 5.5%; an expected life of 2 years; no expected cash dividend
payments on common stock and volatility factors of the expected market price
of the Company's common stock, based on historical volatility of 0.793 and
0.765, respectively.

F-21
<PAGE>

USA Technologies, Inc.

Notes to Consolidated Financial Statements

11. Stock Options (continued)

The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. As noted above, the Company's stock options are vested
over an extended period. In addition, option models require the input of
highly subjective assumptions including future stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective assumptions can
materially affect the fair value estimates, in management's opinion, the
Black-Scholes model does not necessarily provide a reliable measure of the
fair value of the Company's stock options. The Company's pro forma information
reflects the impact of the reduction in price of certain stock options.

12. 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 were to be held in escrow for an additional period of
time, but not later than June 30, 1998. Additionally, the President of the
Company 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 were achieved by June 30,
1998. During November 1997, in connection with a new Employment and
Non-competition Agreement entered into by the Company with the President, the
President canceled his 4,365,000 escrowed common shares.

13. Retirement Plan

During July 1997, the Company adopted a Savings and Retirement Plan (the Plan)
which allows employees who have attained the age of 21 and have completed one
year of service to make voluntary contributions up to a maximum of 15% of their
annual compensation, as defined in the Plan. The Plan does not provide for any
matching contribution by the Company, however, the Board of Directors may
authorize, at its sole discretion, Company contributions to the Plan. During
fiscal year 1998, there were no contributions made to the Plan by the Company.

F-22
<PAGE>
USA Technologies, Inc.

Notes to Consolidated Financial Statements

14. Subsequent Events

During July 1998, the Company's Board of Directors authorized a $700,000 private
placement offering of 70 units at a unit price of $10,000. Each unit includes
2,000 shares of Convertible Preferred Stock and 50,000 1998-B Common Stock
purchase warrants at an exercise price of $.15 through January 1, 1999 and $.40
thereafter for five years after the termination of the offering. The Company
terminated the offering on August 17, 1998. As of August 17, 1998, 27.8 units
were sold generating gross proceeds of $278,000.

During July 1998, 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 September 30, 1998. Thereafter, the
exercise price will return to $.50.

15. Events (Unaudited) Subsequent to the Date of the Auditors' Report

During August 1998, the Company notified MBE that MBE breached the Joint
Venture Agreement (Note 3). Specifically, the Company indicated that MBE
entered into an arrangement with another vendor which was a violation of the
Joint Venture Agreement which obligates MBE to solely use the Company's
control boxes. On September 3, 1998, MBE commenced a legal action against the
Company in the Superior Court of the State of California alleging that the 195
control boxes purchased by MBE were defective and seeks a refund of the
purchase price in the amount of $141,260, plus lost profits claimed to be
several hundred thousand dollars. Additionally, the complaint seeks a
declaratory judgment that MBE is not obligated to purchase the control boxes
ordered in April 1998 (none of which have been delivered as of September 24,
1998). The complaint filed does not relate to the Joint Venture Agreement but
solely to MBE's In-Center Workstation (ICW) program and states that MBE is
willing to proceed in accordance with the Joint Venture Agreement. In October
1998, the Company had the case removed to the United States District Court for
the Southern District of California. The Company also filed a motion to have the
case stayed and/or dismissed pending the arbitration proceedings described
below. The Company believes the claim to be without merit and that it will
prevail in this action. Accordingly, there has been no provision for this action
in the accompanying consolidated financial statements.

On August 25, 1998, the Company notified MBE that MBE was in breach of the Joint
Venture Agreement, and on October 2, 1998, MBE notified the Company that the
Company was in breach of the Joint Venture Agreement. The Joint Venture
Agreement provides that it may be terminated by the non-breaching party if any
breach is not cured within sixty days. The Company has not terminated the Joint
Venture Agreement as of the date hereof as permitted thereunder.

During September 1998, the Company's Board of Directors authorized a
$2,000,000 private placement offering (the "Offering") of 200 units at a unit
price of $10,000. Each unit of the Offering shall consist of a 12%
Senior Note in the principal amount of $10,000, 15,000 1998-C Common Stock
purchase warrants and 1,000 shares of Series B Equity Participating Preferred
Stock. Each 1998-C Common Stock purchase warrant entitles the holder to
purchase 1 share of common stock for $.10 at any time through

F-23
<PAGE>

USA Technologies, Inc.

Notes to Consolidated Financial Statements

15. Events (Unaudited) Subsequent to the Date of the Auditors' Report
(continued)

December 31, 2001. Each share of Series B Preferred Stock is automatically
convertible into 40 shares of Common Stock at the time of a "USA Transaction,"
as defined. In connection with this Offering, the Board of Directors also
authorized the creation of 200,000 shares of a new Series B Equity Participating
Preferred Stock. The offering commenced on September 28, 1998, and through
October 31, 1998 generated gross proceeds of $150,000.

F-24

<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 . $ 180.81
Blue Sky fees and expenses. . . . . . . . . . . . . . . $ 9,819.19
Printing and Engraving Expenses . . . . . . . . . . . . $ 5,000.00
Accounting Fees and Expenses. . . . . . . . . . . . . . $15,000.00
Legal Fees and Expenses . . . . . . . . . . . . . . . . $10,000.00
----------

Total . . . . . . . . . . . . . . . . . . $40,000.00
----------

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 February 1996, the Company sold 50,000 shares of Preferred Stock
at $4.00 per share. The securities were offered and sold in an offshore
transaction to a non-U.S. person and was therefore exempt from registration
under Regulation S promulgated under the Act.

During May 1996, the Company sold 130 units at $10,000 each. 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. The offering was sold to
accredited investors and less than 35 non-accredited investors, involved no
general solicitation or advertising, and was therefore exempt from registration
under Rule 506 of Regulation D promulgated under the Act.

During January and February 1997, the Company sold 9.35 units at
$10,000. 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. The offering was offered and sold only to accredited
investors, involved no general solicitation or advertising, and was therefore
exempt from registration under Rule 506 of Regulation D promulgated under the
Act.

During April, May, June and July 1997, the Company sold 40 units at
$10,000. 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. In connection therewith, Adele and
Austin Hepburn purchased a total of 1 1/4 units for $12,500. Ms. Hepburn is the
Director of Public Relations of the Company. The offering was sold to accredited
investors and less than 35 non-accredited investors, involved no general
solicitation or advertising, and was therefore exempt from registration under
Rule 506 of Regulation D promulgated under 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. 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. The securities were offered and sold in an offshore transaction to a
non-U.S. person and was therefore exempt from registration under Regulation S
promulgated under the Act.

During the quarter ended March 1997, the Company sold 75 units at
$10,000. Each unit consisted of 2,000 shares of Preferred Stock and 50,000
1998-A Common Stock Purchase Warrants. An aggregate of 150,000 shares of
Preferred Stock and 3,750,000 1998-A Common Stock Purchase Warrants were sold to
44 accredited investers and 15 non-accredited investors. The offering was sold
to accredited investors and less than 35 non-accredited investors, involved no
general solicitation or advertising, and was therefore exempt from registration
under Rule 506 of Regulation D promulgated under the Act.

During July and August 1998, the Company sold 27.8 units at $10,000.
Each unit consisted of 2,000 shares of Preferred Stock and 50,000 1998-B Common
Stock Purchase Warrants. An aggregate of 55,600 shares of Preferred Stock and
1,390,000 1998-B Common Stock Purchase Warrants were sold to 20 accredited
investors. The offering was sold only to accredited investors, involved no
general solicitation or advertising, and was therefor exempt from registration
under Rule 506 of Regulation D promulgated under the Act.

On September 28, the Company began selling units at $10,000. Through
October 31, 1998, the Company sold 15 units generating gross proceeds of
$150,000. Each unit consists of a $10,000 principal amount 12% Senior Note,
15,000 1998-C Common Stock Purchase Warrants and 1,000 shares of Series B Equity
Participating Preferred Stock. The offering will terminate on December 31, 1998.
The offering will be sold only to accredited investors, will involve no general
solicitation or advertising, and will therefore be exempt from registration
under Rule 506 of Regulation D promulgated under the Act.

Other than the securities issued pursuant to Regulation S, the above
securities were isued pursuant to the exemption set forth in Section 4(2) of the
Act.

II-2
<PAGE>

II. Stock Options

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.

II-3
<PAGE>

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.

In December 1997, the Company issued to Joseph Donahue options to
purchase up to 50,000 shares of Common Stock at $.45 per share.

In December 1997, the Company issued Phillip A. Harvey options to
purchase up to 50,000 shares of Common Stock at $.45 per share.

In April 1998, the Company issued to Stephen Herbert options to
purchase up to 50,000 shares of Common Stock at $.45 per share.

In April 1998, the Company issued to Haven Brock Kolls options to
purchase up to 50,000 shares of Common Stock at $.45 per share.

In April 1998, the Company issued to Leland P. Maxwell options to
purchase up to 50,000 shares of Common Stock at $.45 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 as all of the options were
issued to officers, directors, employees or consultants to the Company, each of
such issuances were separate transactions not part of any plan, and none of the
issuances involved any general solicitation or advertising.

III. Common Stock-For Cash.

In October 1995, options to purchase 100,000 shares of Common Stock at
$.05 per share were exercised by the holders thereof.

In June 1997, options to purchase 150,000 shares of Common Stock at
$.05 per share were exercised by the holders thereof.

In September 1997, options to purchase 70,000 shares of Common Stock at
$.05 per share were exercised by the holders thereof.

All of the foregoing issuances were made in reliance upon the exemption
provided by Section 4(2) of the Act as all of the issuances were to existing
securityholders of the Company, the securities issued contained restrictive
legends, and the issuance did not involve any general solicitation or
advertising.

II-4

<PAGE>

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

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

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

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

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

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

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

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

3.1.8 Eighth Amendment to Articles of Incorporation of the
Company filed on July 5, 1998.

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

4.1 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 N. 33-98808, filed October 31,
1995).

4.2 Form of Warrant Certificate (Incorporated by reference to
Exhibit 4.2 to Form SB-2 Registration Statement, No.
33-98808, filed October 31, 1995).

4.3 1996 Warrant Agreement dated as of May 1, 1996 between
the Company and American Stock Transfer and Trust
Company.

4.4 Form of 1996 Warrant Certificate.

4.5 Form of 1997 Warrant (Incorporated by reference to
Exhibit 4.1 to Form SB-2 Registration Statement No.
333-38593, filed February 4, 1998).

**5.1 Opinion of Lurio & Associates, P.C.

II-5
<PAGE>

10.1 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).

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

10.3 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).

10.4 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).

10.5 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).

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

10.7 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).

10.8 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).

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

10.9 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).

10.10 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).

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

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

10.12 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).

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

II-6
<PAGE>

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

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

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

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

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

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

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

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

10.21.1 First Amendment to Employment and Non-competition
Agreement between the Company and Leland P. Maxwell dated
February 24, 1998.

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

10.23 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).

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

10.25 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).

II-7
<PAGE>

10.26 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).

10.27 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).

10.28 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).

10.29 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 26, 1997).

10.30 Employment and Non-competition Agreement between the
Company and George R. Jensen, Jr. dated November 20, 1997
(Incorporated by reference to Exhibit 10.1 to Form 8-K
filed on November 26, 1997).

10.31 Agreement between the Compapny and Promus Hotels, Inc.
dated May 8, 1997 (incorporated by reference to Exhibit
10.49 to Form SB-2 Registration Statement No. 333-38593,
filed on February 4, 1998).

10.32 Agreement between the Company and Choice Hotels
International, Inc. dated April 24, 1997 (Incorporated by
reference to Exhibit 10.50 to Form SB-2 Registration
Statement No. 333-38593, filed on February 4, 1998).

10.33 Agreement between the Company and PNC Merchant Services
dated July 18, 1997 (Incorporated by reference to Exhibit
10.51 to Form SB-2 Registration Statement No. 333-38593,
filed on February 4, 1998).

10.34 Separation Agreement between the Company and Keith L.
Sterling dated April 8, 1998 (Incorporated by reference
to Exhibit to Exhibit 10.1 to Form 10-QSB filed May 12,
1998).

**23.1 Consent of Ernst & Young LLP.

-------------------------------------------------------------------
** -- Filed herewith.

II-8
<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-9
<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-10
<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 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 November 6,
1998.

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, November 6, 1998
- ---------------------------- President and Chief
George R. Jensen, Jr. Executive Officer
(Principal and Chief
Executive Officer)
Director

/s/ Leland P. Maxwell Vice President, Chief November 6, 1998
- ---------------------------- Financial Officer
Leland P. Maxwell Treasurer (Principal
Accounting Officer)

/s/ Stephen P. Herbert Executive Vice President - November 6, 1998
- ---------------------------- Chief Operating Officer,
Stephen P. Herbert Director

/s/ William W. Sellers Director November 6, 1998
- ----------------------------
William W. Sellers

/s/ Peter G. Kapourelos Director November 6, 1998
- ----------------------------
Peter G. Kapourelos

Director November __, 1998
- ----------------------------
Henry B. duPont Smith

Director November __, 1998
- ----------------------------
William L. Van Alen, Jr.

</TABLE>

II-11
<PAGE>

EXHIBIT INDEX

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

5.1 Opinion of Lurio & Associates

23.1 Consent of Independent Auditors

</TABLE>
- ----------------

II-12

<PAGE>
Exhibit 5.1
LURIO & ASSOCIATES, P.C.

ATTORNEYS AT LAW
SUITE 1300
1760 MARKET STREET
PHILADELPHIA, PA 19103-4132

----------------
DOUGLAS M. LURIO** NEW JERSEY OFFICE
MARGARET SHERRY LURIO*
ALLA PASTERNACK
KEVIN M. RULIS
411 COOPER STREET
215 / 665-9300 CAMDEN, NEW JERSEY 08102
FAX 215 / 665-8582 TEL. NO.: 609/225-9434

**MEMBER PENNSYLVANIA & FLORIDA BARS
*MEMBER PENNSYLVANIA & NEW JERSEY BARS

November 6, 1998

USA Technologies, Inc.
200 Plant Avenue
Wayne, PA 19087

Attn: Mr. George R. Jensen, Jr., President

Re: USA Technologies, Inc. -
Registration Statement on Form SB-2
-----------------------------------

Dear Mr. Jensen:

We have acted as counsel to USA Technologies, Inc., a Pennsylvania
corporation (the "Company"), in connection with a Registration Statement on Form
SB-2, filed with the Securities and Exchange Commission on the date hereof (the
"Registration Statement"). The Registration Statement covers 21,772,300 shares
of Common Stock ("Common Stock") issuable upon exercise of 1998-B, 1998-A, 1997,
1996-B, 1996 and 1995 Common Stock Purchase Warrants as well as options to
purchase shares of Common Stock and Common Stock Purchase Rights of the Company.

In rendering this opinion, we have examined (i) the Articles of
Incorporation, as amended, and By-Laws of the Company; (ii) the resolutions of
the Board of Directors evidencing the corporate proceedings taken by the Company
to authorize the issuance of the Common Stock pursuant to the Registration
Statement; (iii) the Registration Statement (including all exhibits thereto);
and (iv) such other documents as we have deemed appropriate or necessary as a
basis for the opinion hereinafter expressed.

In rendering the opinion expressed below, we assumed the authenticity
of all documents and records examined, the conformity with the original
documents of all documents submitted to us as copies and the genuineness of all
signatures.

Based upon and subject to the foregoing, and such legal considerations
as we deem relevant, we are of the opinion that, when resold as contemplated by
the Registration Statement, and subject to effectiveness of the Registration
Statement and compliance with applicable state securities laws, the Common Stock
when issued will be legally issued, fully paid and nonassessable.

We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to references made to this firm under the heading
"Legal Matters" in the Prospectus contained in the Registration Statement and
all amendments thereto.

Sincerely,

/s/ LURIO & ASSOCIATES, P.C.
---------------------------------
LURIO & ASSOCIATES, P.C.

<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 17, 1998, in the Registration Statement
(Form SB-2 No. 333-00000) and related Prospectus of USA Technologies, Inc. dated
November 6, 1998.

/s/ Ernst & Young LLP

Philadelphia, Pennsylvania
November 6, 1998