USA TECHNOLOGIES INC, SB-2, 1999-08-04

USA TECHNOLOGIES INC
SB-2, 1999-08-04
BUSINESS SERVICES, NEC

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<PAGE>

As filed with the Securities and Exchange Commission on August 4, 1999

Registration No. 333-
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- -------------------------------------------------------------------------------
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
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Approximate date of proposed sale to the public: From time to time
after this Registration Statement becomes effective.

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

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

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ]
<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 (1) Offering Price Fee
- ---------- ---------- --------------- -------------- ------------
Common Stock,
no par value 50,000 shares $2.00 $100,000 $27.80

Common Stock,
no par value 50,000 shares $3.00 $150,000 $41.70

Common Stock,
no par value 150,000 shares $2.50 $375,000 $104.25

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Total .............. 250,000........................................... $173.75
=======
</TABLE>
(1) 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 of the 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.

250,000 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 "USTT". The closing bid price for the Common Stock on July 30, 1999
was $2.06 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 August 4, 1999.

<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 ................................................ 8

Management Discussion And Analysis of
Financial Condition And Results of Operations ................. 8

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

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

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

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

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

Market for Common Stock ........................................ 47

Description of Securities ...................................... 48

Plan of Distribution ........................................... 57

Legal Matters .................................................. 58

Experts ........................................................ 58

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 March 31, 1999, our Company had installed at commercial locations a
total of 1,224 control systems. See "Business." As of March 31, 1999, 290
Business Express(TM) or MBE Business Express(TM) units containing 1,068 control
systems have been installed in hotels located throughout the United States and
Canada. The 1,224 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 250,000 shares of
Common Stock by the Selling
Shareholders.

On June 7, 1999, the Company
effectuated a 1-for-10 reverse
stock split of all of its issued
and outstanding Common Stock.
Pursuant thereto, on the
effective date of the reverse
split (i) each 10 shares of
outstanding Common Stock were
reduced to one share of Common
Stock; (ii) the number of shares
of Common Stock into which each
outstanding warrant, purchase
right or option is exercisable
was proportionately reduced on a
10-to-1 basis; (iii) the
exercise price of each
outstanding warrant, purchase
right, or option was
proportionately increased on a
1-to-10 basis; (iv) the number
of shares of Common Stock into
which each share of Series A
Preferred Stock is convertible
was reduced from 10 shares to 1
share; (v) the conversion rate
of the accrued and unpaid
dividends on the Series A
Preferred Stock was increased
from $1.00 to $10.00 per share
of Common Stock; and (vi) each
share of Series B Preferred
Stock was converted into 4
shares of Common Stock. All of
the share numbers, share prices,
exercise prices, and all other
similar items contained in this
Prospectus have been properly
adjusted, on a retroactive
basis, to reflect all of the
foregoing.

Common Stock Outstanding as of
June 30, 1999 ............. 6,172,697 shares. On a fully
converted basis, there would be
9,539,023 shares outstanding
consisting of 250,000 shares
issuable upon exercise of the
Warrants by the Selling
Shareholders ("Selling
Shareholder Warrants"), 933,600
shares issuable upon the
exercise of the Warrants to be
issued in June 1999 ("1999-A
Warrants"), 928,840 shares
issuable upon exercise of
917,100 options to purchase
Common Stock and 11,740 Common
Stock Purchase Rights issued to
certain employees, directors or
consultants (collectively
"Management Options"), 110,000
shares issuable upon exercise of
the Warrants issued to
affiliates and/or consultants to
GEM Advisors, Inc. in June 1997,
("GEM Warrants"), 5,000 shares
issuable upon the exercise of
the Warrants issued August and
September 1998 ("1998-B
Warrants"), 4,000 shares
issuable upon the exercise of
the Warrants issued in January,
February and March 1998 ("1998-A

<PAGE>

Warrants"), 1,500 shares
issuable upon exercise of the
Warrants issued in April, May
and June 1997 ("1997-Warrants"),
4,000 shares issuable upon
exercise of the Warrants issued
in January and February 1997
("1996-B Warrants"), 86,800
shares issuable upon exercise of
the Warrants issued in 1996
("1996-A Warrants"), 67,300
shares issuable upon the
exercise of the Warrants issued
by the Company in 1995
("1995-Warrants"), 640,577
shares issuable upon conversion
of the Series A Convertible
Preferred Stock ("Series A
Preferred Stock"), and 334,709
shares issuable upon conversion
of accrued and unpaid dividends
on the Series A Preferred Stock.
On August 1, 1999, approximately
$469,000 of additional
dividends will accrue on the
Series A Preferred Stock which
are convertible into 481,070
additional shares of Common
Stock.

Series A Preferred Stock Outstanding as
of June 30, 1999 .......... 640,577 shares. Each share of
Series A Preferred Stock, no
par value, of the Company is
convertible by the holder
thereof at any time into 1
share 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
$10.00 per share. See
"Description of Securities -
Series A Convertible Preferred
Stock."

3
<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 March 31,
1999, 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 March 31, 1999 were nominal. The Copy Express(TM) was first
installed in January 1995, and as of March 31, 1999, there were 45 units in
operation. The Credit Card Vending Express(TM) was first installed in March
1995, and as of March 31, 1999, there were no units in operation. The Fax
Express (TM) was first installed in February 1997 and as of March 31, 1999 there
were 9 units in operation and net revenues were nominal. The Company's Debit
Express(TM) was first installed in April 1995, and as of March 31, 1999, 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 March 31, 1999, there were 69 units in operation and net
revenues were nominal. The Business Express(TM) was first installed in September
1996, and as of March 31, 1999, there were 290 Business Express(TM) or MBE
Business Express(TM) units in operation (containing 1,068 control systems).

4
<PAGE>

For its fiscal years ended June 30, 1998 and 1997 and for the nine
month period ended March 31, 1999, our Company incurred operating losses of
$3,586,281, $3,120,712, and $2,138,780, respectively. From its inception on
January 16, 1992 through March 31, 1999, we have incurred operating losses of
$15,070,932.

As of March 31, 1999, our Company had a negative working capital of
approximately $764,993, of which $790,860 was invested in inventory. At March
31, 1999, we had cash of $362,512. In subsequent months, additional cash has
been generated by selling additional securities and through increased revenues
primarily through resale of its equipment utilizing control systems. As of June
23, 1999, and following the closing of the recent private placement offering, we
had approximately $2,000,000 in cash. As of March 31, 1999, we installed 1,224
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
historical 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 materially adverse effect upon our Company's
business. 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 limited basis, there can be no assurance that our products will
be successful or cover all fixed expenses of the Company. In other words, 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 cover all
expenses, 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. Two other patents have received notices of allowance as of March 31,
1999. See "Business - Patents, Trademarks and Proprietary Information." There
can be no assurance that any of the eleven 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."

5
<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. See "Business-Procurement".

7. Cash Dividends Not Likely. There can be no assurance that the
proposed operations of our Company will result in 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 one-third (1/3) of a
share 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, 1999, the unpaid
and cumulative dividends on the Series A Preferred Stock equal $3,347,090. On
August 1, 1999, approximately $469,000 of additional dividends will become
accrued and unpaid on our Series A Preferred Stock. 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 $10.00 per share. Through March 31, 1999, $1,725,192 of unpaid and cumulative
dividends on the Series A Preferred Stock were converted to 202,697 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 March 31,
1999, our Company installed 1,224 control devices at commercial locations and
revenues have been small. 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 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
Selling Shareholder Warrants was determined arbitrarily by our Company and was
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.

7
<PAGE>

12. Shares Eligible for Future Sale. Of the 4,617,198 shares of Common
Stock issued and outstanding as of March 31, 1999, 4,233,398 are freely
transferable without restriction or further registration under the Act (other
than shares held by "affiliates" of the Company), and the remaining 383,800 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 660,027 shares of Preferred Stock issued and
outstanding on March 31, 1999, 510,027 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 March 31, 1999, there are 67,300 shares of Common Stock
issuable by the Company to the holders of the outstanding unexercised 1995
Warrants, 10,100 shares of Common Stock issuable to the holders of the
outstanding 1998-B Warrants, 191,900 shares of Common Stock issuable to the
holders of the outstanding 1999-A Warrants, 86,800 shares of Common Stock
issuable by the Company to the holders of the outstanding unexercised 1996
Warrants, 4,000 shares of Common Stock issuable by the Company to the holders of
the outstanding 1996-B Warrants, 1,500 shares of Common Stock issuable to the
holders of the outstanding 1997 Warrants, 4,000 shares of Common Stock issuable
to the holders of the outstanding 1998-A Warrants, 10,100 shares of Common Stock
issuable to the holders of the outstanding 1998-B Warrants, 191,900 shares of
Common Stock issuable to the holders of the outstanding 1999-A Warrants, 384,130
shares of Common Stock issuable to the holders of the Management Options, and
110,000 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 March 31, 1999, the Company issued Management Options to acquire up
to 384,130 shares of Common Stock, has issued GEM Warrants which are convertible
into 110,000 shares of Common Stock, has issued 1998-A Warrants which are
convertible into 4,000 shares of Common Stock, has issued 1998-B Warrants which
are convertible into 10,100 shares of Common Stock, has issued 1999-A Warrants
which are convertible into 191,900 shares of Common Stock, has issued 1997
Warrants which are convertible into 1,500 shares of Common Stock, has issued
1996-B Warrants which are convertible into 4,000 shares of Common Stock, has
issued 1996 Warrants which are convertible into 86,800 shares of Common Stock,
has issued 1995 Warrants which are convertible into 67,300 shares of Common
Stock, has issued 660,027 shares of Preferred Stock which are convertible into
660,027 shares of Common Stock, has issued 383,800 shares of restricted Common
Stock converted from 95,950 shares of Series B Preferred Stock, and has
$3,382,553 cumulative preferred dividends which are convertible into 338,255
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
1,666,112 shares of Common Stock would be issued and outstanding as of March 31,
1999, for a total of 6,475,210 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 conducted 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.

<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 September 30, 1999. 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
do not process date sensitive data and therefore the Company believes they
should not adversely affect operations.

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.

15. Ability to Service Debt; Subordination. As a result of our
incurrence of indebtedness in connection with our recently completed private
placement offering, we will be obligated to make substantial principal and
interest payments to the holders of the Senior Notes. On December 31, 2001, we
are obligated to repay the $4,668,000 principal amount of the Senior Notes.
Until the Senior Notes have been paid by us, the amount of the Senior Notes will
be reflected as a liability on our financial statements. In addition, pending
such repayment, our Company is required to make interest payments each calendar
quarter in the amount of $140,040, or in the amount of $560,160 each year. The
ability of our Company to satisfy its debt obligations will be dependent on its
future performance and the success of its product lines. Such performance is
subject to financial, business and market factors and other factors affecting
our Company's business and operations.

We anticipate that the scheduled interest and principal payments
required under the Senior Notes can be met from cash from operations, if any, as
well as proceeds from other securities offerings. However, there can be no
assurance that such interest and principal payments can be met.

The Senior Notes are unsecured and thus, in effect, will rank junior to
any Senior Indebtedness, as defined therein. See "Description of Securities -
12% Senior Note." The payment of any amount owing in respect of the Senior Notes
will be subordinated to prior payment in full of all existing and future Senior
Indebtedness. In the event of the liquidation, dissolution, reorganization or
similar proceedings with respect to the Company, assets of the Company will be
available to pay obligations on the Senior Notes only after all of the Senior
Indebtedness, as applicable, has been paid in full, and there can be no
assurance that sufficient assets to pay amounts due on all or any of the Senior
Notes will remain.

<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 Selling Shareholder Warrants by the Selling Shareholders. There is no
assurance that any or all of the Selling Shareholder Warrants will be exercised
by the Selling Shareholders. The Selling Shareholders will receive all of the
net proceeds from the sale of the Common Stock pursuant to this Prospectus. See
"Description of Securities."

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

<PAGE>

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 25, 1999 combined with the revenues to be generated during
fiscal years 1999 and 2000, the capital 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
as 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
$(1.51) 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
3,532,048.

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%.

10
<PAGE>

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 $2.08 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 2,098,438.

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.

Three And Nine Months Ended March 31, 1999:

The fiscal quarter ended March 31, 1999 resulted in a net operating
loss of $758,643 compared to a net loss of $643,317 for the comparable fiscal
quarter ended March 31, 1998. Losses are projected to continue until sufficient
revenue is generated from equipment sales and licensing fees from the Company's
proprietary technology.

Revenues were $997,436 compared to $548,208 from the previous year's
fiscal quarter. This $449,228 or 82% improvement reflects the success of the
Company's sales efforts and the increasing marketplace acceptance of the
Company's products. Of the total revenues, equipment sales totaled $864,343, an
increase of $387,104 or 81% over the same period last year. License fees
increased to $133,093 from $70,969 for the same period during the prior year, an
increase of 87%. Despite these gains, revenue is still well below the level
required for the Company to be profitable.

Cost of equipment sales for the period included labor and equipment of
$684,836 which represented an increase of $304,363 over the same period during
the prior year, and is directly attributable to the increase in equipment sales
described above.

General and administrative expenses of $616,069 increased by $148,025
or 32% from the same quarter last year. The principal reason was a large
increase in legal costs of $226,077 to pay for activities related to the pending
litigation with MBE. See "Business - Legal Proceedings." Without this legal
cost, overall general and administrative costs would have decreased by $78,052.
Other components of general and administrative costs included increases in
professional fees of $45,805, and increases in trade show expenses of $14,480;
offset by reductions in advertising costs of $42,154, product development cost
reductions of $23,994, and reductions in travel and entertainment of $57,660.

Compensation expense of $336,674 increased by 5% due to increased
personnel requirements in all areas of the Company. Depreciation and
amortization expense increased from $25,497 to $31,710.

<PAGE>

Accounts payable has increased substantially from June 30, 1998 due to
the increased activity resulting from increased operations and increased
expenses. Inventory and accounts payable both increased due to preparation for
activity anticipated in the fourth quarter of fiscal year 1999.

As of March 31, 1999, the Company had an installed base of a total of
1,224 control systems, distributed as follows: 1,068 Business Express(TM) or MBE
Business Express(TM) control systems, 45 Copy Express(TM) control systems, 33
Debit Express(TM) control systems, 9 Fax/Printer Express(TM) control systems,
and 69 Public PC(TM) control systems located at various hotels and libraries
throughout the United States and Canada. The total Business Express(TM) or MBE
Business Express(TM) locations as of March 31, 1999 is 290, compared to 100
locations as of March 31, 1998. The total license fee revenues received by the
Company from these systems has been increasing but is still well below the level
required to achieve profitability.

The nine month period ended March 31, 1999 resulted in a net operating
loss of $2,138,780 compared to a net loss of $2,046,813 for the comparable
period ended March 31, 1998. Revenues were $3,340,282 compared to $1,280,012, a
$2,060,270 or 161% improvement. Of the total revenues, equipment sales totaled
$3,021,727, an increase of $1,924,766 or 175%. Cost of sales of $2,576,394
represented an increase of $1,646,784, and is directly attributable to the
increase in equipment sales. General and administrative expenses of $1,614,407
increased by $254,445 or 19%. The principal reason was a large increase in legal
fees of $358,586 to pay for activities related to the pending litigation with
MBE. Without this legal cost, overall general and administrative costs would
have decreased by $104,141. Other components of general and administrative costs
included increases in outside marketing and operational services of $72,001, and
increased charges for warranty cost coverage of $26,648; offset by reductions in
consultant and professional fees of $113,341 and reductions in travel and
entertainment of $102,884. Compensation expense of $1,025,154 increased by 6%
due to permanent and increased personnel requirements in all areas of the
Company.

<PAGE>

Plan of Operations

On May 14, 1999, the Company signed a new agreement with International
Business Machines (IBM). This agreement expanded the original agreement whereby
IBM will install USA products in 1,000 locations, to 5,000 locations. In
addition, the new agreement includes a wider array of Company products which are
eligible for such installations.

The Company introduced in June 1999 its next generation of terminal,
which has received the approval for the trademark "e-port." This new terminal
contains all the functionality of the current TransAct(TM) terminal for card
processing, control and data management, and in addition offers capability for
public access electronic commerce and advertising using the internet.

Three patents have been filed for e-port(TM), raising the total to
fifteen patents filed covering various Company products. Two patents have been
issued. Two other patents have received notices of allowance, one for a vending
application and one for the dataport. This vending patent, in conjunction with
e-port(TM), may allow the Company to explore the vending market. Other markets
may also be available with e-port(TM), such as retail point of sale. See "Risk
Factors - Dependence on Proprietary Technology's Patent Issues."

The Company has developed a product line extension to its flagship
Business Express(TM) product, called the Business Express(TM) Limited Service
Series (LSS). The LSS has copier and fax capabilities plus laptop printing,
dataport capabilities and credit card activated phone. The LSS is targeted to
the hospitality industry, which includes mid-market, limited service and economy
properties. On May 14, 1999, as part of the Company's marketing effort for LSS,
an Agreement was reached with Choice Hotels (franchisor of approximately 3,000
Comfort, Clarion and Sleep brand hotels) which reflects Choice's commitment to
promote the LSS internally to its hotels.

An additional market which the Company is beginning to explore with
current TransAct(TM) technology is apartments. Approximately 27,000 operators of
apartment buildings in the United States have been identified as potential users
of the Company's products. The first installation in an apartment complex has
already occurred at a site in Maryland.

The Company is currently marketing its products through its full-time
sales staff consisting of three national accounts salespeople, three telephone
salespeople and one director of marketing, either directly to customer locations
or to management companies servicing these locations.

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 5,000 1998-B Warrants. The 1998-B Warrants enable the holder
to purchase one share of Common Stock for $1.50 on or before January 1, 1999,
and for $4.00 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.

<PAGE>

For the nine month period ended March 31, 1999, there was a net
increase in cash of $37,688. This was attributable to using $1,245,213 for
operating activities, partially offset by net proceeds of $883,192 raised
pursuant to the private placement offering described in the following paragraph,
$193,775 raised through the exercise of Common Stock purchase warrants and
options, and net proceeds of $234,485 raised through the issuance of Series A
Preferred Stock. As of March 31, 1999, total cash on hand was $362,512, and the
working capital deficit was $764,993 of which $790,860 was invested in
inventory.

From September 1998 through June 23, 1999, the Company engaged in a
private placement offering of 500 units at a unit price of $10,000. Each unit of
the Offering consisted of a 12% Senior Note in the principal amount of $10,000,
2,000 1999-A Warrants, and 1,000 shares of Series B Preferred Stock. Each share
of Series B Preferred Stock was converted into 4 shares of Common Stock as a
result of the June 7, 1999 reverse stock split of the Common Stock. The Company
sold an aggregate of 466.8 units or an aggregate of $4,668,000 pursuant to the
offering.

In connection with the offering described above, in January 1999 the
Board of Directors approved a commitment by the President to purchase 10 units
for $100,000. The President will pay for the units by foregoing payroll from
April 1, 1999 through June 30, 2000. The President has also directly purchased
10 additional units for $100,000.

During the quarter ended March 31, 1999, 128,900 Common Stock purchase
warrants were exercised at $1.00 per share, resulting in proceeds to the Company
of $128,900 and 45,000 Common Stock options were exercised at $1.00 per share,
resulting in proceeds of $45,000.

As of June 30, 1999, the Company had cash on hand of approximately
$1,700,000. The Company believes that these funds, together with funds available
from the potential exercise of outstanding warrants and options, plus increased
revenues from its business would be sufficient to fund operations until at least
through the quarter ended December 31, 1999. There can be no assurance that any
such additional sales of securities could be made by the Company or that
increased revenues would result from its business activities. In such event, the
Company may cease to be a going concern or may have to reduce its operations.
Since the cash received in exchange for the Senior Notes does not add to
shareholder equity but is reflected as a liability, a shareholder deficit has
arisen. The Company anticipates that improved operating results and exercise of
warrants or options would turn the current deficit into positive shareholder
equity.

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. As of
June 17, 1999, there is an amount of approximately $420,000 remaining unpaid
thereon. The MBE Joint Venture currently owes IBM approximately $800,000 (which
includes the $420,000 referred to in the prior sentence) in connection with
control systems and equipment ordered by the MBE Joint Venture. The Company is
currently attempting to come to an agreement with MBE pursuant to which the
amount due to IBM would be paid. As of June 17, 1999, the MBE Joint Venture had
an inventory of approximately 700 control systems.

<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, (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.

17
<PAGE>

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 has purchased 94 additional MBE Business Express(TM) units
through March 31, 1999.

On May 14, 1999, the Company notified MBE that the Company was
terminating the Joint Venture Agreement. The Joint Venture Agreement provided
that it could be terminated at any time by either partner if the other partner
breached any material term or condition of the agreement; provided that the
terminating partner allowed the other partner at least a sixty day period to
cure any alleged breach.

As required under the Joint Venture Agreement, on February 4, 1999 and
February 19, 1999, the Company delivered to MBE notice that MBE was in default
of the Joint Venture Agreement in connection with five separate items, and
demanded that MBE cure the breaches within sixty days. Through the date of the
termination of the Joint Venture Agreement, MBE failed to cure any of the
breaches and had not otherwise taken any steps to remedy the breaches.

The Company's May 14, 1999 letter to MBE states five reasons for the
termination: MBE's refusal to authorize the installation of data port terminals
as required under the sales agreement between the joint venture and a customer;
MBE's refusal to allow the joint venture to market and sell the data port
terminals; MBE's ongoing failure to commit adequate and appropriate resources to
joint venture sales and marketing to effectuate a reasonable number of sales of
joint venture business center equipment; MBE's failure to acknowledge the
Company's ownership of the trademark "Business Express" and its actions
inconsistent with the Company's ownership of the mark; and MBE's refusal to
timely meet with the Company to discuss and conclude a joint venture sales and
marketing budget for the fiscal year commencing April 1, 1999.

As of the date hereof, there are approximately 200 MBE Express(TM)
units at commercial locations. The Company will continue to perform all of its
obligations under the Joint Venture Agreement in connection with the operation
of these units. See "Business-Procurement."

The Company and MBE are currently involved in litigation against each
other in the Federal District Court for the Southern District of California. See
"Business--Legal Proceedings."

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 March 31, 1999, the Company had 1,068 Business Express(TM)
control systems, 45 Copy Express(TM) control systems, 33 Debit Express(TM)
control systems, 9 Fax/Printer Express(TM) control systems, and 69 Public PC(TM)
control systems located at various hotels and libraries throughout the United
States and Canada. Through March 31, 1999, 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, and the nine month period
ended March 31, 1999, the Company has spent approximately $199,000, $344,000 and
$109,092, 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. According to the Nilson Report (1999), the value of
world-wide credit card transactions doubled from approximately $.8 trillion in
1992 to approximately $1.6 trillion in 1998. 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.

<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 (the "MBE Joint
Venture"). During the term of 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. Through
March 31, 1999, the MBE Joint Venture has sold and installed approximately 200
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."

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) includes a
dial-through service to a nearby MBE store making available the products and
services of the store.

The Company's May 14, 1999 letter to MBE states five reasons for the
termination: MBE's refusal to authorize the installation of data port terminals
as required under the sales agreement between the joint venture and a customer;
MBE's refusal to allow the joint venture to market and sell the data port
terminals; MBE's ongoing failure to commit adequate and appropriate resources to
joint venture sales and marketing to effectuate a reasonable number of sales of
joint venture business center equipment; MBE's failire to acknowledge the
Company's ownership of the trademark "Business Express" and its actions
inconsistent with the Company's ownership of the mark; and MBE's refusal to
timely meet with the Company to discuss and conclude a joint venture sales and
marketing budget for the fiscal year commencing April 1, 1999.

As of the date hereof, there are approximately 200 MBE Buiness
Express(TM) units at commercial locations. The Company will continue to perform
all of its obligations under the Joint Venture Agreement in connection with the
operation of these units. See "Business-Procurement."

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 March 31, 1999, there
were 45 Copy Express(TM) control systems and 9 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 March 31, 1999.

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.

21
<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 March 31, 1999, there were 69 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 March 31, 1999.

Marketing

As of March 31, 1999, the Company is marketing its products through its
full-time sales staff consisting of eight persons, either directly to locations
or through facility management companies servicing the locations. The Company
believes the agreements with Minolta, 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.

<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. The Company anticipates
obtaining its complete computer systems (other than the Public PC (TM) control
system) from IBM. As of June 17, 1999, there is an amount of approximately
$420,000 remaining unpaid on the May 1998 control system order. The MBE Joint
Venture currently owes IBM approximately $800,000 (which includes the $420,000
referred to in the prior sentence) in connection with control systems and
equipment ordered by the MBE Joint Venture. The Company is currently attempting
to come to an agreement with MBE pursuant to which the amount due to IBM would
be paid. See "Business - Legal Proceedings." As of June 17, 1999, the MBE Joint
Venture had an inventory of 691 control systems.

<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 March 31, 1999 the Company has applied for fifteen United States
patents related to its cashless 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,
notices of allowance have been granted for two other patents, and the remaining
eleven 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 March 31, 1999, the Company has twenty-three 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.

In June 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 had previously 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.

In September 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 from the Company in September
1997 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 from the Company in April 1998.
In October 1998, the Company had the case removed to the United States District
Court for the Southern District of California. 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.

In December 1998, the Company filed an answer and Counterclaim to the
Complaint of MBE. The answer denies the allegations of MBE's complaint and
denies that MBE is entitled to any of the relief requested in the complaint.

The Counterclaim of the Company alleges that MBE breached the Joint
Venture Agreement by among other things, utilizing a competitor of the Company
in connection with MBE's in-store computer workstation project ("ICW Project"),
for which project the Company believes MBE must purchase USA's terminals. The
counterclaim also alleges that by attempting to cancel its written purchase
order with the Company for 600 terminals, MBE has breached such purchase order.
The Counterclaim includes claims by the Company against MBE for breach of
contract, breach of fiduciary duty, and trade libel. The Counterclaim seeks
recovery from MBE of monetary damages caused by MBE's actions, including lost
profits, consequential damages and/or incidental damages, and punitive damages.
The total counterclaims are for an amount in excess of $10 million. The Company
has also requested a declaration that MBE is required to use the Company in
connection with its ICW Project and prohibiting MBE from continuing to breach
the Joint Venture Agreement. As of the date hereof, limited discovery has been
conducted by the parties and no trial date has been set. By court order,
discovery is to be completed by December 3, 1999.

In September 1998, the Company had commenced arbitration proceedings
against MBE in connection with MBE's breach of the Joint Venture Agreement. In
December 1998, the parties agreed that the arbitration proceedings would be
terminated, and the Company would proceed with all of its claims against MBE in
the pending Federal Court action described above.

<PAGE>

<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 Chief Executive
Officer, Chairman of the
Board of Directors
Stephen P. Herbert 37 President, Chief
Operating Officer, Director
Haven Brock Kolls, Jr. 33 Senior Vice President - Research
and Development
Leland P. Maxwell 52 Senior Vice President,
Chief Financial Officer,
Treasurer
Edwin R. Boynton 45 Director
Steven Katz 50 Director
Peter G. Kapourelos 79 Director
Douglas M. Lurio 42 Director
William W. Sellers 77 Director
Henry B. duPont Smith 37 Director
William L. Van Alen, Jr. 65 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 is a Director of The Noah Fund, a publicly traded mutual fund. Mr.
Jensen received his Bachelor of Science Degree from the University

26
<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.

Edwin R. Boynton joined the Board of Directors in July 1999. He is a
partner of Stradley Ronon Stevens & Young LLP, and is a member of and currently
the chair of the firm's estates department. Mr. Boynton received his bachelor of
arts degree from Harvard University in 1976 and his Juris Doctor degree from
Duke University in 1979.

27
<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.

Steven Katz is President of Steven Katz & Associates, Inc., a
management consulting firm specializing in strategic planning and corporate
development for technology and service-based companies in the health care,
environmental, telecommunications and Internet markets. Mr. Katz's prior
experience includes: five years with Price Waterhouse & Co. in audit, tax and
management advisory services; two years of corporate planning with Revelon,
Inc.; five years with National Patent Development Corporation (NPDC) in
strategic planning, merger and acquisition, technology in-licensing and
out-licensing, and corporate turnaround experience as President of three NPDC
subsidiaries; and two years as a Vice President and General Manager of a
non-banking division of Citicorp, N.A.

Douglas M. Lurio joined the Board of Directors of the Company in June
1999. Mr. Lurio is President of Lurio & Associates, P.C., attorneys-at-law,
which he founded in 1991. Prior thereto, he was a partner with Dilworth, Paxson
LLP. Mr. Lurio received a Bachelor of Arts Degree in Government from Franklin &
Marshall College, a Juris Doctor Degree from Villanova Law School, and a Masters
in Law (Taxation) from Temple Law School.

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.

28
<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 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 436,500
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 eight 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.

On January 21, 1999, Mr. Jensen purchased ten (10) units of the
recently completed private placement offering for $100,000. In full payment for
such Units, Mr. Jensen has agreed to forego any base salary otherwise payable to
him under his employment agreement during the period of time commencing on April
1, 1999 and ending on June 30, 2000, or such longer period of time as may be
required based upon his monthly net base salary after all applicable withholding
taxes and other deductions.

During June 1999, the Board of Directors approved an amendment to Mr.
Jensen's employment agreement to increase the number of shares of Common Stock
issuable to him upon the occurrence of a "USA Transaction from five percent to
eight percent.

The Company has entered into a one-year employment agreement with Mr.
Herbert which expires on April 30, 2000. 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

29
<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, 2000, 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, 2000, 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.

30
<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 - 10,000 options; William W. Sellers - 10,000 options; and
William L. Van Alen, Jr. - 10,000 options.

In April 1998, the Company reduced from $2.50 to $1.50 the exercise
price of the following options to purchase Common Stock issued to the following
Directors of the Company: Peter G. Kapourelos - 17,000 options; William W.
Sellers - 15,500 options; William L. Van Alen, Jr. - 12,500 options; and Henry
B. duPont Smith - 10,000 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.

During June and July 1999, the Company granted 10,000 options to each
of the seven Directors who were not executive officers of the Company. Each
option is exercisable at $2.00 per share at any time for five years following
the vesting thereof.

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.

31
<PAGE>

Executive Stock Options

In June 1997, the Company issued to Mr. Kolls options to acquire up to
10,000 shares of Common Stock at an exercise price of $4.50 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 2,500 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 10,000 shares of Common Stock
at an exercise price of $4.50 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 2,500 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 10,000 shares of Common Stock at an exercise price of $4.50 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 2,500 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 45,000 shares of Common
Stock to $1.00 per share from $2.50 per share and $4.50 per share, and
accelerated the vesting of 2,500 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 5,000 shares of Common Stock at $4.50 per
share. The options become vested over a one-year period at the rate of 1,250
per quarter. The options must be exercised within five years of vesting.

In April 1998, the Company permanently reduced the exercise price to
$1.50 of the following options to purchase Common Stock: Haven Brock Kolls, Jr.
- - 10,000 options from $2.50 to $1.50; Stephen P. Herbert - 10,000 options from
$4.50 to $1.50; and Leland P. Maxwell - 10,000 options from $4.50 to $1.50.

In June 1999, the Company granted an aggregate of 470,000 options to
the executive officers as follows: Mr. Jensen - 180,000 options; Mr. Herbert -
110,000 options; Mr. Kolls - 100,000 options; Mr. Maxwell - 40,000 options; Mr.
Lawlor - 20,000 options; Mr. Donahue - 20,000 options. All of Mr. Jensen's
options became vested immediately. All of the other executive officers' options
would vest as follows: one-third immediately; one-third on June 17, 2000, and
one-third on June 17, 2001. Each option is exerciseable at $2.00 per share at
any time for five years following vesting thereof.

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.

<PAGE>

PRINCIPAL SHAREHOLDERS

Common Stock

The following table sets forth, as of June 30, 1999, 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. 460,000 shares(3) 4.93%
16 Marlborough Rd.
Newtown Square, Pennsylvania 19073

Stephen P. Herbert 97,717 shares(4) 1.05%
536 West Beach Tree Lane
Strafford, Pennsylvania 19087

Haven Brock Kolls, Jr. 93,183 shares(5) 1.00%
52 Norwood House Road
Downingtown, Pennsylvania 19335

Leland P. Maxwell 38,383 shares(6) *
129 Windham Drive
Langhorne, Pennsylvania 19047

Edwin R. Boynton 55,500 shares(7) *
104 Leighton Drive
Bryn Mawr, Pennsylvania 19010

Peter G. Kapourelos 41,300 shares(8) *
1515 Richard Drive
West Chester, Pennsylvania 19380

Steven Katz 5,000 shares(9) *
20 Rebel Run Drive
East Brunswick, New Jersey 08816

Douglas M. Lurio 34,533 shares(10) *
1760 Market Street, Suite 1300
Philadelphia, Pennsylvania 19103

William W. Sellers 166,075 shares(11) 1.78%
394 East Church Road
King of Prussia, Pennsylvania 19406

Henry B. duPont Smith 50,000 shares(12) *
350 Mill Bank Road
Bryn Mawr, Pennsylvania 19010

William L. Van Alen, Jr. 32,500 shares(13) *
Cornerstone Entertainment, Inc.
P.O. Box 727
Edgemont, Pennsylvania 19028

All Directors and Executive Officers
As a Group (11 persons) 1,074,190 shares(14) 11.50%

- ---------
*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, 1999, are deemed to be beneficially owned for purposes hereof.

34
<PAGE>

(2) On June 30, 1999 there were 6,172,697 shares of Common Stock and 640,577
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 640,577
shares of Common Stock, that all of the purchase rights and options which have
been issued and vested as of June 30, 1999 (or within 60-days of June 30, 1999)
have been converted into 729,740 shares of Common Stock. It has also been
assumed that all of the Selling Shareholder Warrants have been exercised for
250,000 shares. Of the 928,840 options or purchase rights to acquire Common
Stock issued as of June 30, 1999, only 729,740 are vested (or become vested
within 60-days) and included in this table. For purposes of computing such
percentages, it has also been assumed that all of the remaining warrants have
been exercised for 278,600 shares of Common Stock, and all of the accrued and
unpaid dividends on the Series A Preferred Stock as of June 30, 1999 have been
converted into 334,709 shares of Common Stock. It is also assumed that all
933,600 of the 1999-A Warrants have been exercised and converted into 933,600
shares of Common Stock. Therefore, for purposes of computing the percentages
under this table, there are 9,339,923 shares of Common Stock issued and
outstanding.

(3) Includes 200,000 shares of Common Stock held by Mr. Jensen with his children
as joint tenants, 180,000 shares of Common Stock issuable upon the exercise of
options, and 40,000 shares of Common Stock issuable upon the exercise of the
1999-A Warrants. Does not include the right granted to Mr. Jensen under his
Employment Agreement to receive eight percent (8%) of the issued and outstanding
Common Stock upon the occurrence of a USA Transaction (as defined therein). See
"Executive Employment Agreements."

(4) Includes 91,666 shares of Common Stock issuable to Mr. Herbert upon the
exercise of options, 2,000 shares issuable to his spouse upon the exercise of
1999-A Warrants, and 4,000 shares of Common Stock owned by his spouse.

(5) Includes 73,333 shares of Common Stock issuable to Mr. Kolls upon exercise
of options, 6,000 shares issuable to his spouse upon the exercise of 1999-A
Warrants, and 12,000 shares of Common Stock owned by his spouse.

(6) Includes 38,333 shares of Common Stock issuable to Mr. Maxwell upon the
exercise of options.

35
<PAGE>

(7) Includes 5,500 shares of Common Stock issuable upon the conversion of 5,500
shares of Series A Preferred Stock. Includes 10,000 shares issuable upon
exercise of 1999-A Warrants and 5,000 vested shares 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 1,000 shares of Common Stock issuable upon the conversion of 1,000
shares of Preferred Stock beneficially owned by Mr. Kapourelos. Includes 3,000
shares of Common Stock held on the date hereof by Mr. Kapourelos with his spouse
as joint tenants with right of survivorship. Includes 27,000 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 5,000 shares of Common Stock issuable upon exercise of options.

(10) Includes 23,533 shares of Common Stock held jointly with Mr. Lurio's
spouse, 5,000 shares of Common Stock issuable upon exercise of options and 6,000
shares issuable upon exercise of 1999-A Warrants.

(11) Includes 17,245 shares of Common Stock owned by the Sellers Pension Plan of
which Mr. Sellers is a trustee, 4,651 shares of Common Stock owned by Sellers
Process Equipment Company of which he is a Director, and 9,922 shares of Common
Stock are owned by Mr. Sellers' wife. Includes 25,500 shares of Common Stock
issuable upon exercise of options and 14,000 shares issuable upon exercise of
1999-A Warrants.

(12) Includes 12,000 shares of Common Stock issuable upon conversion of the
12,000 shares of Preferred Stock beneficially owned by Mr. Smith. Includes
20,000 shares of Common Stock issuable upon exercise of options. Includes 8,000
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.

(13) Includes 22,500 shares of Common Stock issuable to Mr. Van Alen upon
exercise of options.

(14) Includes all shares of Common Stock described in footnotes (2) through (13)
above.

Series A Preferred Stock

The following table sets forth, as of June 30, 1999 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.

36
<PAGE>

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

Edwin R. Boynton
104 Leighton Avenue
Bryn Mawr, Pennsylvania 19010 5,500 *

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 (10 persons) (2) 18,500 2.9%
- --------------
*Less than one percent (1%)

(1) There are 640,577 shares of Preferred Stock issued and outstanding as of
June 30, 1999.

(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, and for the nine months ended March 31, 1999
approximately $26,000, $27,000, and $153,000 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, and for the nine
months ended March 31, 1999 the Company incurred approximately $340,000,
$308,000, and $121,000, respectively, for these services.

In June 1997, the Company issued to Mr. Kolls options to acquire up to
10,000 shares of Common Stock at $4.50 per share, to Mr. Sterling options to
acquire up to 10,000 shares of Common Stock at $4.50 per share, to Mr. Feeney
options to acquire up to 500 shares of Common Stock at $4.50 per share, and to
Mr. Herbert option to acquire up to 10,000 shares of Common Stock at $4.50 per
share. See "Management - Executive Stock Options."

In November 1997, Mr. Jensen cancelled 436,500 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 5,000
shares of Common Stock at $4.50 per share. The options vest of the rate of 1,250
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 - 5,000 options; Peter G.
Kapourelos - 10,000 options; William W. Sellers - 10,000 options; Keith L.
Sterling - 10,000 options; and William L. Van Alen, Jr. - 10,000 options.

In March 1998, the Company extended the expiration date of all the
purchase rights to acquire 15,730 shares of Common Stock at $10.00 per share
from June 30, 1998 to the close of business June 30, 2000.

In April 1998, the Company reduced from $2.50 to $1.50 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 - 17,000
options; William W. Sellers - 15,500 options; William L. Van Alen, Jr. - 12,500
options; Henry B. duPont Smith - 10,000 options; and Haven Brock Kolls, Jr. -
10,000 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.

38
<PAGE>

In April 1998, the Company authorized a permanent reduction in the
exercise price of 5,000 of the 10,000 options to purchase shares of Common
Stock of the Company owned by Michael Lawlor, an officer of the Company, from
$4.50 per share to $0.50 per share. The exercise price of the remaining 5,000
options was permanently reduced from $4.50 to $1.50 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 12,100 shares of Common
Stock of the Company owned by Edward J. Sullivan, a former officer and employee
of the Company, to $1.50 per share through October 31, 1998. Thereafter, the
exercise price shall revert back to the current exercise prices. The current
exercise price is $2.50 for 10,000 of the options and $4.50 for 2,100 of the
options. The reduced exercise price of the 10,000 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 10,000 options to purchase shares of Common Stock of the Company owned by
Joseph Donahue, an executive of the Company, from $4.50 per share to $1.50 per
share. The reduced exercise price of the 10,000 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 7,500 options to purchase shares of Common Stock of the Company owned by
Phillip Harvey, a former executive of the Company, from $4.50 per share to $2.00
per share. The reduced exercise price of the 7,500 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 $4.50 to $1.50 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
- - 10,000 options; and Stephen Herbert - 10,000 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 20,000 shares of Common Stock of the Company
owned by Adele Hepburn, an employee of the Company, from $2.50 to $1.50. The
reduced exercise price of the 20,000 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 June and July 1999, the Company issued options to purchase an
aggregate of 470,000 shares of Common Stock to its executive officers and an
aggregate of 70,000 shares of Common Stock to its directors who were not
executive officers. Each option is exercisable at $2.00 per share of Common
Stock. See "Management -- Director Compensation and Stock Options" and
"Executive Stock Options."

In July 1999, the Company extended the expiration dates until June 30,
2001 of the options to acquire Common Stock held by the following directors,
officers, and employees: Adele Hepburn - 77,000 options; H. Brock Kolls - 20,000
options; Henry duPont Smith - 10,000 options; William Sellers - 15,500 options;
Peter Kapourelos - 17,000 options; and William Van Alen - 12,500 options. All of
the foregoing options would have expired in the first two calendar quarters of
the year 2000 or the first calendar quarter of year 2001.

During the fiscal year ended June 30, 1998, the Company paid Lurio &
Associates, P.C., of which Mr. Lurio is President, professional fees of
approximately $150,000 for legal services rendered to the Company by such law
firm.

<PAGE>

SELLING SHAREHOLDERS

Each of the Selling Shareholders listed below is, as of the date
hereof, the holder of Selling Shareholder Warrants to acquire the number of
shares of Common Stock set forth opposite such Selling Stockholder's name or has
exercised the corresponding Selling Shareholder Warrants for the number of
shares of Common Stock set forth opposite such Selling Shareholder's name. The
Selling Shareholder 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 Selling Shareholder Warrants is pursuant to 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 $7,500 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.

40
<PAGE>

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

<S> <C> <C> <C>
I.W. Miller Group, Inc. 100,000 0 *
Harmonic Research, Inc. 150,000 0 *
-------
Total 250,000
</TABLE>

- -----------------
* 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 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) Harmonic Research, Inc. has been retained as a consultant to the Company.
In addition, Harmonic Research, Inc., a broker dealer, acted as a
selected dealer for the Company in connection with a recent private
placement offering. See "Description of Securities-General."

41
<PAGE>

MARKET FOR COMMON STOCK

The Common Stock is currently traded on the OTC Electronic Bulletin
Board under the symbol 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) $6.30 $3.80
Second Quarter (through December 31, 1996) $5.70 $2.90
Third Quarter (through March 31, 1997) $4.30 $2.80
Fourth Quarter (through June 30, 1997) $5.00 $1.90

1998

First Quarter (through September 30, 1997) $8.00 $2.70
Second Quarter (through December 31, 1997) $6.00 $2.20
Third Quarter (through March 31, 1998) $4.90 $2.50
Fourth Quarter (through June 30, 1998) $4.60 $2.50

1999

First Quarter (through September 30, 1998) $3.10 $1.20
Second Quarter (through December 31, 1998) $1.40 $1.00
Third Quarter (through March 31, 1999) $1.80 $1.50
Fourth Quarter (through June 30, 1999) $3.38 $1.68

Such quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commission and may not represent actual transactions. All of the above bid
prices have been adjusted to reflect the 1-for-10 reverse split of the Common
Stock occurring on June 7, 1999.

On March 31, 1999, there were 384,130 shares of Common Stock issuable
upon exercise of outstanding Management Options which when and is issued would
be freely tradeable under the Act. Of such Management Options the 15,000 are
exercisable at $5.00 per share, 99,850 are exercisable at $4.50 per share,
141,500 are exercisable at $2.50 per share, 2,500 are exercisable at $2.00 per
share, 105,000 are exercisable at $1.50 per share, and 5,000 are exercisable at
$0.50 per share. In addition, there are 15,280 purchase rights exerciseable at
$10.00 per share. See "Description of Securities -- Management Options."

42
<PAGE>

As of March 31, 1999, there were 67,300 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 March 31, 1999, there were 86,800 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 March 31, 1999, there were 4,000 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 March 31, 1999, there were 1,500 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 March 31, 1999, there were 4,000 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 March 31, 1999, there were 110,000 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 March 31, 1999, there were 938 record holders of the Common Stock and
695 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
Series A Preferred Stock have been paid. As of June 30, 1999, such accumulated
and unpaid dividends amounted to $3,347,090. On August 1, 1999, approximately
$469,000 of additional dividends will accrue on the Series A Preferred Stock.

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<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 1,800,000 shares of undesignated
Preferred Stock. As of the date hereof, 900,000 shares have been designated as
Series A Convertible Preferred Stock, no par value ("Series A Preferred Stock"),
and 350,000 shares have been designated as Series B Equity Participating
Preferred Stock ("Series B Preferred Stock"), no par value.

As of June 30, 1999, there were 6,172,097 shares of Common Stock issued
and outstanding and 640,577 shares of Series A Preferred Stock issued and
outstanding which are convertible into 640,577 shares of Common Stock. Through
March 31, 1999, a total of 451,123 shares of Preferred Stock have been converted
into 493,832 shares of Common Stock and $1,725,192 of accrued and unpaid
dividends thereon have been converted into 202,697 shares of Common Stock. As of
March 31, 1999, there were 938 record owners of the Common Stock and 695 record
owners of the Preferred Stock.

In November 1998, the Company issued 5,000 shares of Common Stock to
Ronald Trahan, a consultant to the Company, for services rendered. All of such
shares were registered under the Act.

In March 1999, the Company issued 180,000 shares of Common Stock to
Mason Sexton, a consultant to the Company, for services rendered. All of such
shares were registered under the Act.

From September 1998 through June 1999, the Company sold 466.8 units at
$10,000 each, for an aggregate of $4,668,000 pursuant to a private placement
offering. Each unit consisted of a $10,000 principal amount 12% Senior Note,
2,000 1999-A Warrants, and 1,000 shares of Series B Preferred Stock. The
offering was sold to 223 accredited investors, and did not involve any general
advertising or solicitation, and was therefore exempt from registration under
Rule 506 of Regulation D promulgated under the Act. The Company paid
compensation to Harmonic Research, Inc., a broker-dealer, in connection with the
47 units sold by such broker-dealer. In this regard, the Company paid to such
broker-dealer cash compensation of $47,000 as well as 43,800 shares of Common
Stock and 9,400 1999-A Warrants. The shares of Common Stock issued to such
broker-dealer are restricted securities as such term is defined under Rule 144
promulgated under the Act. Pursuant to the private placement offering, the
Company had issued 466,800 shares of Series B Preferred Stock. The Series B
Preferred Stock was convertible into 4 shares of Common Stock in the event of a
reverse stock split of the Common Stock. As a result of the 1-for-10 reverse
stock split which became effective on June 7, 1999, all of the shares of Series
B Preferred Stock were exchanged for 1,867,200 shares of Common Stock, and as of
the date hereof, there are no issued and outstanding shares of Series B
Preferred Stock. The 1,867,200 shares of Common Stock issued to the holders of
the Series B Preferred Stock are restricted securities as defined under Rule 144
promulgated under the Act, and can not be sold or transferred without
registration under the Act or pursuant to an applicable exemption therefrom.

On June 7, 1999 the Company effectuated a 1-for-10 reverse stock split
of all of its issued and outstanding Common Stock. Pursuant thereto, on the
effective date of the reverse stock split (i) each 10 shares of outstanding
Common Stock were reduced to one share of Common Stock; (ii) the number of
shares of Common Stock into which each outstanding warrant, purchase right or
option is exercisable was proportionately reduced on a 10-to-1 basis; (iii) the
exercise price of each outstanding warrant, purchase right, or option was
proportionately increased on a 1-to-10 basis; (iv) the number of share of Common
Stock into which each share of Series A Preferred Stock is convertible was
reduced from 10 shares to 1 share; (v) the conversion of the accrued and unpaid
dividends on the Series A Preferred Stock was increased from $1.00 to $10.00 per
share of Common Stock; and (vi) each share of Series B Preferred Stock was
converted into 4 shares of Common Stock. All of the share numbers, share prices,
exercise prices, and all other similar items contained in this Prospectus have
been properly adjusted, on a retroactive basis, to reflect the foregoing.

In June and July 1999, the Company issued options to purchase an
aggregate of 470,000 shares of Common Stock to its executive officers and an
aggregate of 70,000 shares of Common Stock to its directors who were not
executive officers. See "Management -- Director Compensation and Stock Options"
and "Executive Stock Options."

44
<PAGE>
In June 1999, the Company issued 4,000 shares of Common Stock to Robert
Flaherty in connection with public relations services rendered to the Company.
The shares constitute restricted securities as such term is defined under Rule
144 promulgated under the Act.

In June 1999, the Company issued 10,000 shares of Common Stock to Rick
Joshi, for consulting services rendered to the Company. The shares constitute
restricted securities as such term is defined under Rule 144 promulgated under
the Act.

In June 1999, the Company issued options to purchase an aggregate of
12,000 shares of Common Stock to six employees. The options are fully vested and
may be exercised at any time for five years following vesting at $2.00 per share
of Common Stock.

In July 1999, the Company extended the expiration dates until June 30,
2001, of various options held by certain directors, officers, and employees of
the Company. See "Certain Transactions."

Selling Shareholder Warrants

Pursuant to a Financial Public Relations Agreement between the Company
and I.W. Miller Group, Inc. ("Miller"), the Company retained Miller as its
public relations consultant effective August 1, 1999. As part of the agreement,
the Company issued to Miller fully vested warrants to acquire up to 100,000
shares, 50,000 of which are exercisable at $2.00 per share and 50,000 of which
are exercisable at $3.00 per share. The warrants are exercisable at any time for
two years following issuance. The warrants were issued to Miller pursuant to
Rule 506 under the Act, and the shares of Common Stock underlying the warrants
will be issued to Miller pursuant to such exemption.

The Company entered into a consulting agreement with Harmonic Research,
Inc. ("Harmonic") pursuant to which the Company issued to Harmonic fully vested
warrants to acquire up to 150,000 shares of Common Stock at $2.50 per share. The
warrants are exercisable at any time for two years following issuance. The
warrants were issued to Harmonic pursuant to Rule 506 under the Act, and the
shares of Common Stock underlying the warrants will be issued to Harmonic
pursuant to such exemption. Pursuant to the consulting agreement, the Company
retained Harmonic as a consultant for a three month period ending December 1,
1999, and agreed to pay Harmonic a fee of $5,000 per month.

The Company has agreed 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 Selling Shareholder Warrants. The
Company will also seek to have the resale of the Common Stock exempted from
registration in those states in which the Selling Shareholders are located.

Options and Purchase Rights

As of March 31, 1999, the Company had issued to its directors,
executive officers, consultants, and employees Options to acquire up to 15,000
shares of Common Stock at $5.00 per share, options to acquire up to 99,850
shares of Common Stock at $4.50 per share, options to acquire up to 141,500
shares of Common Stock at $2.50 per share, options to acquire up to 2,500 shares
of Common Stock at $2.00 per share, options to acquire up to 105,000 shares of
Common Stock at $1.50 per share, and options to acquire up to 5,000 shares of
Common Stock at $.50 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 15,280 shares of Common Stock at $10.00
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.

45
<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.

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 1
vote). 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, 1999 the accumulated and unpaid dividends on the Series A Preferred
Stock were $3,347,090. On August 1, 1999, approximately $481,070 of additional
dividends will accrue on the Series A Preferred Stock.

Each share of Series A Preferred Stock is convertible at any time into
1 share 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 $10.00 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 March 31, 1999, a total of 451,123
shares of Series A Preferred Stock have been converted into Common Stock and
accrued and unpaid dividends thereon have been converted into 202,697 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 one-third of a
share 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
190,860 shares of Common Stock.

46
<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 Preferred Stock. See "Risk Factors -- Ability to Service
Debt; Subordination."

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.

47
<PAGE>

Series B Equity Participating Preferred Stock

Pursuant to the private placement offering conducted by the Company
from September 1998 through June 1999, the Company had issued 466,800 shares of
Series B Preferred Stock. The Series B Preferred Stock was convertible into 4
shares of Common Stock in the event of a reverse stock split of the Common
Stock. As a result of the 1-for-10 reverse stock split which became effective on
June 7, 1999, all of the shares of Series B Preferred Stock were exchanged for
1,867,200 shares of Common Stock, and as of the date hereof, there are no issued
and outstanding shares of Series B Preferred Stock. The 1,867,200 shares of
Common Stock issued to the holders of the Series B Preferred Stock are
restricted securities as defined under Rule 144 promulgated under the Act, and
can not be sold or transferred without registration under the Act or pursuant to
an applicable exemption therefrom.

Convertible Securities and GEM Warrants

Affiliates and/or consultants to GEMA received non-redeemable warrants
to purchase up to 200,000 shares of the Company's Common Stock at a price of
$2.00 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 March
31, 1999, 90,000 GEM Warrants have been exercised, leaving a balance of 110,000
GEM Warrants.

48
<PAGE>

1999-A Common Stock Purchase Warrants

Each 1999-A Warrant entitles its holder to immediately purchase one
share of Common Stock. The exercise price is $1.00, except that through December
31, 1999, the exercise price has been reduced to $.50 per share. The 1999-A
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
933,600 1999-A Warrants remain outstanding.

The Company has, at its expense, registered for resale the Common Stock
underlying the 1999-A 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 holders of the 1999-A Warrants are located.

The 1999-A Warrants have been issued pursuant to a warrant agreement
(the "1999-A Warrant Agreement") dated as of September 28, 1998 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 1999-A Warrants and the number of shares of
Common Stock issuable upon exercise of the 1999-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 1999-A Warrants do not confer upon the holder any voting or any
other rights of a shareholder of the Company. Upon notice to the 1999-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 1999-A Warrants.

49
<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 $1.50 per share through January 1,
1999 and $4.00 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 139,000 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 March 31, 1999, 10,100 1998-B
Warrants remain outstanding.

The Company has, at its expense, registered for resale the Common Stock
underlying the 1998-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 1998-B Warrants are located.

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 $1.50 per share through June 1,
1998 and $4.00 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 375,000 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 March 31,
1999, 4,000 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.

50
<PAGE>
1997 Common Stock Purchase Warrants

Each 1997 Warrant entitles its holder to immediately purchase one share
of Common Stock. The exercise price was $2.00 per share through October 31, 1997
and $4.00 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 160,000 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 March 31,
1999, 158,500 1997 Warrants have been exercised and 1,500 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 $2.00 per share through October
31, 1997 and $3.00 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 37,400 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 March 31, 1999, 33,400 1996-B Warrants were exercised and 4,000
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 $2.50 through October 31, 1997, and
$5.00 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 $2.00 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 520,000 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 March 31, 1999, 433,200 1996 Warrants were
exercised and 86,800 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 $2.50 through October 31, 1997, and
$5.00 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 $2.00 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 510,000 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 March 31, 1999, 442,700 1995 Warrants were
exercised and 67,300 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.

52
<PAGE>

Shares Eligible for Future Sale

Of the 4,617,198 shares of Common Stock issued and outstanding on March
31, 1999, 4,233,398 are freely transferable without restriction or further
registration under the Act (other than shares held by "affiliates" of the
Company), and the remaining 383,800 are "restricted securities". As of March 31,
1999, there were 660,027 shares of Preferred Stock issued and outstanding,
510,027 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 660,027
shares of Preferred Stock issued and outstanding as of March 31, 1999 are
convertible into 660,027 shares of Common Stock. Of such shares of Common Stock,
510,027 would be fully transferrable without registration or regulation under
the Act or eligible for sale under the Rule and 150,000 would not be eligible
for sale.

As set forth in the prior paragraph, there were 383,800 shares of
Common Stock and 150,000 shares of Preferred Stock which are "restricted
securities" and cannot be resold without registration. The preferred shares
would become eligible for sale under Rule 144 during calender year 1999, and the
Common Stock in calendar year 2000.

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

53
<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, 1999-A 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

<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.

55
<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
except Note 15, as to which the date is
June 7, 1999

F-1
<PAGE>

USA Technologies, Inc.

Consolidated Balance Sheets

<TABLE>
<CAPTION>
June 30 March 31,
1998 1997 1999
(unaudited)
---------------------------------------------------
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 324,824 $ 630,266 $ 362,512
Accounts receivable less allowance
for uncollectible accounts of $23,764 and
$19,345 at June 30, 1998 and 1997, and
$23,783 at March 31, 1999 (unaudited) 222,743 127,318 749,064
Inventory 436,971 378,318 790,860
Stock subscriptions receivable 19,875 60,000 --
Prepaid expenses and deposits 20,515 15,670 32,461
---------------------------------------------------
Total current assets 1,024,928 1,211,572 1,934,897

Property and equipment, net 151,906 178,457 127,505
Other assets 10,250 20,250 10,250
---------------------------------------------------
Total assets $ 1,187,084 $ 1,410,279 $ 2,072,652
===================================================

Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 576,787 $ 474,646 $ 2,277,926
Accrued expenses 430,643 46,742 409,934
Current obligations under capital leases 22,810 18,270 12,030
---------------------------------------------------
Total current liabilities 1,030,240 539,658 2,699,890

Senior Notes -- -- 888,758
Obligations under capital leases, less current portion 1,669 24,480 22,124
---------------------------------------------------
Total liabilities 1,031,909 564,138 3,610,772

Shareholders' equity (deficit):
Preferred Stock, no par value:
Authorized shares - 1,800,000
Series A Convertible Preferred: Authorized shares 900,000
issued and outstanding shares - 618,236, 861,205 at June 30,
1998 and 1997, respectively and 660,027 at March 31, 1999
(unaudited) (liquidation preference of $8,625,010 at
June 30, 1998 and $9,982,823 at March 31, 1999) 4,538,114 7,024,811 4,673,592
Series B Equity Participating Preferred:
Authorized shares - 250,000; issued and outstanding shares - none
at June 30, 1998 and 1997, and 95,950 at March 31,
1999 (unaudited) -- -- --
Common Stock, no par value:
Authorized shares - 62,000,000 and 55,000,000 at
June 30, 1998 and 1997, and 62,000,000 at March 31, 1999 (unaudited)
Issued and outstanding shares - 4,016,384 and
2,996,993 at June 30, 1998 and 1997, respectively
and 4,233,398 at March 31, 1999 (unaudited) 11,223,213 4,355,334 11,595,769
Accumulated deficit (15,606,152) (10,534,004) (17,807,481)
---------------------------------------------------

Total shareholders' equity (deficit) 155,175 846,141 (1,538,120)
---------------------------------------------------
Total liabilities and shareholders' equity $ 1,187,084 $ 1,410,279 $ 2,072,652
===================================================
</TABLE>

See accompanying notes.

F-2
<PAGE>
USA Technologies, Inc.

Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended June 30 Three months ended March 31, Nine months ended March 31,
1998 1997 1999 1998 1999 1998
-------------------------- ---------------------------- ----------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Equipment sales $ 1,588,487 $ 490,614 $ 864,343 $ 477,239 $ 3,021,727 $1,096,961
License and transaction fees 236,742 117,158 133,093 70,969 318,555 173,709
Other -- 9,342
-------------------------- ------------------------- ---------------------------
Total revenues 1,825,229 607,772 997,436 548,208 3,340,282 1,280,012

Operating expenses:
General and administrative 2,213,984 2,040,163 616,069 468,044 1,614,407 1,359,962
Compensation 1,909,682 1,080,458 336,674 320,723 1,025,154 968,798
Cost of equipment sales 1,261,729 525,090 684,836 380,473 2,576,394 929,610
Depreciation and amortization 116,255 97,250 31,710 25,497 82,012 76,491
-------------------------- ------------------------- ---------------------------
Total operating expenses 5,501,650 3,742,961 1,669,289 1,194,737 5,297,967 3,334,861
-------------------------- ------------------------- ---------------------------
(3,676,421) (3,135,189) (671,853) (646,529) (1,957,685) (2,054,849)
Other income (expense):
Interest income 18,225 26,676 1,534 5,696 5,229 15,169
Interest expense (8,443) (12,199) (20,353) (2,484) (28,260) (7,133)
Joint Venture activities 98,358 -- (67,971) -- (158,064) --
-------------------------- ------------------------- ---------------------------
Total other income (expense) 108,140 14,477 (86,790) 3,212 (181,095) 8,036
-------------------------- ------------------------- ---------------------------
Net loss (3,568,281) (3,120,712) (758,643) (643,317) (2,138,780) (2,046,813)

Cumulative preferred dividends and
other adjustments (1,754,566) (1,243,295) (499,033) (522,992) (1,002,453) (1,754,566)
-------------------------- ------------------------- ---------------------------
Loss applicable to common shares $ (5,322,847) $ (4,364,007) $(1,257,676) $(1,166,309) $(3,141,233) $(3,801,379)
========================== ========================= ===========================
Loss per common share (basic and diluted) $ (1.51) $ (2.08) $ (0.30) $ (0.32) $ (0.77) $ (1.11)
========================== ========================= ===========================
Weighted average number of common shares
outstanding (basic and diluted) 3,532,048 2,098,438 4,132,107 3,609,474 4,059,540 3,416,076
========================== ========================= ===========================
</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 68,700 shares of Common Stock
in exchange for consulting services - 277,198 - 277,198
Conversion of 24,170 shares of Convertible
Preferred Stock to 27,380 shares of
Common Stock (206,009) 206,009 - -
Conversion of $39,001 of cumulative
preferred dividends into 3,900 shares of
Common Stock at $10.00 per share - 39,001 (39,001) -
Conversion of $78,148 of cumulative
preferred dividends into 9,416 shares of
Common Stock at $8.30 per share - 78,148 (78,148) -
Common Stock warrants exercised - 320,200
at $2.00 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 15,000 Common Stock options at
$ .50 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)

<TABLE>
<CAPTION>
Series A
Convertible
Preferred Common Accumulated
Stock Stock Deficit Total
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Issuance of 20,500 shares of Common Stock $ - $ 68,096 $ - $ 68,096
in exchange for consulting services
Issuance of 950 shares of Common Stock to
employees as compensation - 2,565 - 2,565
Conversion of 392,969 shares of Convertible
Preferred Stock to 466,452 shares of
Common Stock (3,188,207) 3,188,207 - -
Conversion of $1,388,772 of cumulative
preferred dividends into 167,455 shares
of Common Stock at $8.30 per share - 1,388,772 (1,388,772) -
Conversion of $115,095 of cumulative
preferred dividends into 11,509 shares
of Common Stock at $10.00 per share - 115,095 (115,095) -
Common Stock warrants exercised - 371,000
at $1.50 per warrant - 556,500 - 556,500
Common Stock warrants exercised - 281,900
at $2.00 per warrant, net of offering
costs - 521,639 - 521,639
Common Stock warrants exercised - 187,100
at $2.50 per warrant - 467,750 - 467,750
Exercise of 7,000 Common Stock options -
at $ .50 per share - 3,500 - 3,500
Exercise of 450 Common Stock purchase
rights - at $2.50 per sare - 1,125 - 1,125
Cancellation of 436,500 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 189,600 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

Issuance of 50 shares of Common Stock to
an employee as compensation (unaudited) - 100 - 100
Conversion of 13,809 shares of Convertible
Preferred Stock to 13,809 shares of
Common Stock (unaudited) (99,007) 99,007 - -
Conversion of $62,549 of cumulative
preferred dividends into 6,255 shares of
Common Stock at $10.00 per share (unaudited) - 62,549 (62,549) -
Issuance of 55,600 shares (27.8 units) of
Convertible Preferred Stock at $5.00 per
share for 1998-B Private Placement, net
of offering costs of $43,155 (unaudited) 234,485 - - 234,485
Issuance of 23,000 shares of Common
Stock in exchange for consulting
services (unaudited) - 37,000 - 37,000
Exercise of 128,900 Common Stock
warrants at $1.00 per share (unaudited) - 128,900 - 128,900
Exercise of 45,000 Common Stock options
at $1.00 per share (unaudited) - 45,000 - 45,000
Issuance of 95,950 shares (95.95 units) of
Series B Equity Participating Preferred
Stock (unaudited) - - - -
Net loss (unaudited) - - (2,138,780) (2,138,780)
-----------------------------------------------------------------
Balance, March 31, 1999 $ 4,673,592 $ 11,595,769 $ (17,807,481) $(1,538,120)
=================================================================
</TABLE>
See accompanying notes.

F-5
<PAGE>

USA Technologies, Inc.

Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
Year ended June 30 Nine months ended March 31
1998 1997 1999 1998
(Unaudited)
--------------------------- --------------------------
<S> <C> <C>

Operating activities
Net loss $(3,568,281) $ (3,120,712) $(2,138,780) $(2,046,813)
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 37,100 70,661
Depreciation and amortization 116,255 97,250 82,012 76,491
Provision for allowance for uncollectible accounts 10,441 19,345 19 3,264
Changes in operating assets and liabilities:
Accounts receivable (105,866) (146,663) (526,340) (280,934)
Inventory (147,634) 48,073 (367,708) (218,012)
Prepaid expenses, deposits, and other assets 5,155 9,702 (11,946) (8,449)
Accounts payable 102,141 172,797 1,701,139 271,273
Accrued expenses 383,901 (8,332) (20,709) 167,627
--------------------------- -------------------------
Net cash used in operating activities (2,578,597) (2,651,342) (1,245,213) (1,964,892)

Investing activities
Purchase of property and equipment (723) (17,855) (8,984) (723)
--------------------------- -------------------------
Net cash used in investing activities (723) (17,855) (8,984) (723)

Financing activities
Net proceeds from issuance of Senior Notes - - 883,192 -
Net proceeds from issuance of Common Stock and
exercise of Common Stock warrants 1,530,639 1,141,126 193,775 1,055,439
Net proceeds from issuance of Convertible
Preferred Stock 761,510 394,688 234,485 715,125
Repayment of principal on capital lease obligations (18,271) (9,707) (19,567) (13,316)
--------------------------- -------------------------
Net cash provided by financing activities 2,273,878 1,526,107 1,291,885 1,757,248
--------------------------- -------------------------

Net increase (decrease) in cash and cash equivalents (305,442) (1,143,090) 37,688 (208,367)
Cash and cash equivalents at beginning of period 630,266 1,773,356 324,824 630,266
--------------------------- -------------------------
Cash and cash equivalents at end of period $ 324,824 $ 630,266 $ 362,512 421,899
=========================== =========================

Supplemental disclosures of cash flow information:

Conversion of Convertible Preferred Stock to
Common Stock $ 3,188,207 $ 206,009 $ 99,007 $ 3,016,253
=========================== =========================
Conversion of Cumulative Preferred Dividends to
Common Stock $ 1,503,867 $ 117,149 $ 62,549 $ 1,398,979
=========================== =========================
Transfer of inventory to property and equipment $ 88,981 $ - $ 13,819 $ -
=========================== =========================
Stock subscription receivable $ 19,875 $ 60,000 $ - $ -
=========================== =========================
Capital lease obligations incurred $ - $ 22,200 $ 29,242 $ -
=========================== =========================
Cash paid during the period for interest $ 18,777 $ 10,549 $ 28,260 $ 7,133
=========================== =========================

</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.

Interim Financial Information

The consolidated financial statements and disclosures included herein for the
three and nine months ended March 31, 1999 and 1998 are unaudited. These
financial statements and disclosures have been prepared by the Company in
accordance with generally accepted accounting principles and reflect all
adjustments consisting of adjustments of a normal and recurring nature which, in
the opinion of management, are necessary for a fair presentation of the
Company's consolidated financial position and the results of its operations
and cash flows.

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 March 31
1998 1997 1999
(Unaudited)
---------------------------------------
Control systems $ 357,021 $ 269,590 $370,840
Furniture and equipment 75,710 73,437 113,936
Vehicles 10,259 10,259 10,259
---------------------------------------
442,990 353,286 495,035
Less accumulated depreciation 291,084 174,829 367,530
---------------------------------------
$ 151,906 $ 178,457 $127,505
=======================================

F-12
<PAGE>
USA Technologies, Inc.

Notes to Consolidated Financial Statements

5. Accrued Expenses

Accrued expenses consist of the following:
<TABLE>
<CAPTION>

June 30 March 31
1998 1997 1999
(unaudited)
--------------------------------------------------
<S> <C> <C> <C>

Accrued product warranty costs $ 102,520 $ - $115,000
Accrued software license and
support costs 84,297 - 18,948
Accrued compensation and related
sales commissions 79,147 3,698 92,577
Accrued professional fees 76,000 - 72,000
Accrued sales tax 44,630 25,559 46,830
Accrued other 30,524 7,144 47,491
Advanced customer billings 13,525 - 17,088
Accrued rent - 10,341 -
==================================================
$ 430,643 $ 46,742 $409,934
==================================================
</TABLE>

6. Related Party Transactions

At June 30, 1998 and 1997, and March 31, 1999 approximately $26,000, $27,000 and
$153,000 (unaudited) 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 and for the nine months ended March 31,
1999, the Company incurred approximately $340,000, $308,000, and $121,000
(unaudited) 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 436,500 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,
$94,000 and $49,000 during the years ended June 30, 1998 and 1997 and for the
nine months ended March 31, 1999 (unaudited), 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.

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 and March 31,
1999 (unaudited) amounted to $2,442,650, $2,837,086 and $3,382,553,
respectively. Cumulative unpaid dividends are convertible into common shares at
$10.00 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 $8.30 per common share. During the years ended
June 30, 1998 and 1997 and for the nine months ended March 31, 1999 (unaudited)
certain holders of the Preferred Stock converted 392,969, 24,170 and 13,809
shares, respectively, into 466,452, 27,380 and 13,809 shares of Common Stock,
respectively. Certain of these shareholders also converted cumulative preferred
dividends of $1,503,867, $117,149 and $62,549, respectively, into 178,964,
13,316 and 6,255 shares of Common Stock at June 30, 1998 and 1997 and March 31,
1999 (unaudited), 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 or March
31, 1999 (unaudited). 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 5,000 1998-A Common
Stock purchase warrants at an exercise price of $1.50 through June 30, 1998 and
$4.00 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, 371,000 1998-A warrants were exercised at $1.50 per
warrant generating gross proceeds of $556,500. At June 30, 1998 and March 31,
1999, there were 4,000 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 250,000 shares of Common Stock in escrow to ensure such shares
would be available upon conversion of the Placement by the Purchasers. As the
250,000 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 191,574 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 200,000
shares of the Company's Common Stock at $2.00 per warrant at any time through
June 22, 2002. As of June 30, 1998, 90,000 of these warrants were exercised
generating gross proceeds of $180,000. During the nine months ended March 31,
1999, no additional warrants were exercised.

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 4,000 1997 Common Stock
purchase warrants at an exercise price of $2.00 through October 31, 1997
(extended from the original date of August 31, 1997) and $4.00 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,
158,500 warrants were exercised at $2.00 per warrant generating gross proceeds
of $317,000. At June 30, 1998 and 1997, 1,500 and 160,000, respectively, of 1997
Common Stock purchase warrants were outstanding. No additional warrants have
been exercised subsequent to June 30, 1998.

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 4,000 1996-B
Common Stock purchase warrants at an exercise price of $2.00 per share through
October 31, 1997 (extended from original date of August 31, 1997) and $3.00 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, 33,400 warrants were exercised at $2.00 per
warrant generating gross proceeds of $66,800. At June 30, 1998 and 1997, 4,000
and 37,400, respectively, of 1996-B Common Stock purchase warrants were
outstanding. No additional warrants have been exercised subsequent to June 30,
1998.

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 $4.00 through December 31, 1996 and for
$5.00 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 $4.00 to $2.00 during the period November 1,
1996 through February 28, 1997, after which the exercise price returned to
$5.00. During September 1997, the Company's Board of Directors reduced the
exercise price of the 1996 Common Stock purchase warrants from $5.00 to $2.50
through October 31, 1997. Thereafter the exercise price returned to $5.00.
During the years ended June 30, 1998 and 1997, 113,000 and 320,200
warrants were exercised generating gross proceeds of $282,500 and $640,400,
respectively. At June 30, 1998 and 1997, respectively, there were 86,800 and
199,800 1996 Common Stock purchase warrants outstanding. No additional warrants
have been exercised subsequent to June 30, 1998.

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 $5.00. 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 $5.00 to $2.50 through October 31, 1997. During the year ended
June 30, 1998, 74,100 warrants were exercised at $2.50 generating gross
proceeds of $185,250. At June 30, 1998 and 1997, respectively, the Company had
67,300 and 141,400, 1995 Common Stock purchase warrants outstanding. No
additional warrants have been exercised subsequent to June 30, 1998.

At June 30, 1998 and 1997, the Company had outstanding 15,280
and 15,730 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 $10.00 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 $2.50 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 65,000 options from $6.50 to $4.50 per share. These
options were previously issued during the periods March 1996 through November
1996 and represented all options previously granted at $6.50. 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
189,600 options from $2.50-$4.50 per share to $.50-$2.00 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 333,500 $ .50-$5.00
Granted 81,500 $ 2.50-$5.00
Exercised (15,000) $ .50
Canceled (2,900) $ 4.50
-----------------------------
Balance at June 30, 1997 397,100 $ .50-$5.00
Granted 30,000 $ 4.50-$5.00
Exercised (7,000) $ .50
-----------------------------
Balance at June 30, 1998 420,100 $ .50-$5.00
Exercised (unaudited) ( 45,000) $ 1.00
-----------------------------
Balance at March 31, 1999 (unaudited) 375,100 $ .50-$5.00
=============================

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

The price range of the outstanding and exercisable common stock options at
March 31, 1999 (unaudited) 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
- -----------------------------------------------------------------------------------------------------------------

<S> <C> <C> <C> <C> <C>
$ .50 5,000 2.27 $ .50 5,000 $ .50
$1.50 105,000 1.21 $1.50 105,000 $1.50
$2.00 2,500 3.70 $2.00 2,500 $2.00
$2.50 141,500 0.64 $2.50 141,500 $2.50
$4.50 106,100 3.00 $4.50 99,850 $4.50
$5.00 15,000 2.80 $5.00 15,000 $5.00
------- ------ -------
375,100 $2.54 368,850
======= ====== =======
</TABLE>
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 March 31
1998 1997 1999
(unaudited)
---------------------------------------------------------
<S> <C> <C> <C>
Net loss applicable to common shares as
reported under APB 25: $(5,322,847) $(4,364,007) $(3,141,233)
Stock option expense per SFAS 123 (391,704) (137,013) (150,047)
--------------------------------------------------
Pro forma net loss $(5,714,551) $(4,501,020) $(3,291,280)
Pro forma net loss per common share $ (1.62) $ (2.14) $ (0.81)
Loss per common share as reported $ (1.51) $ (2.08) $ (0.77)

</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 839,500
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 436,500 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 436,500 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 and during the nine months ended March 31, 1999 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 5,000 1998-B Common Stock
purchase warrants at an exercise price of $1.50 through January 1, 1999 and
$4.00 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 $5.00 to $2.50 through September 30, 1998. Thereafter, the
exercise price will return to $5.00.

15. Reverse Stock Split

On May 27, 1999, the Company's shareholders approved a Plan of Recapitalization
and amendment to the Company's Articles of Incorporation to effect a 1-for-10
reverse split of Common Stock. All Common Stock per share amounts, and related
Common Stock equivalents have been restated to reflect the reverse stock split
in the accompanying consolidated financial statements.

16. 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. In October
1998, the Company had the case removed to the United States District Court for
the Southern District of California. 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.

In December 1998, the Company filed an answer and Counterclaim to the Complaint
of MBE. The answer denies the allegations of MBE's complaint and denies that MBE
is entitled to any of the relief requested in the complaint.

The Counterclaim of the Company alleges that MBE breached the Joint Venture
Agreement by among other things, utilizing a competitor of the Company in
connection with MBE's in-store computer workstation project ("ICW Project"), for
which project the Company believes MBE must purchase USA's terminals. The
counterclaim also alleges that by attempting to cancel its written purchase
order with the Company for 600 terminals, MBE has breached such purchase order.
The Counterclaim includes claims by the Company against MBE for breach of
contract, breach of fiduciary duty, and trade libel. The Counterclaim seeks
recovery from MBE of monetary damages caused by MBE's actions, including lost
profits, consequential damages and/or incidental damages, and punitive damages.
The Company has also requested a declaration that MBE is required to use the
Company in connection with its ICW Project and prohibiting MBE from continuing
to breach the Joint Venture Agreement. As of the date hereof, limited discovery
has been conducted by the parties and no trial date has been set.

In September 1998, the Company had commenced arbitration proceedings against MBE
in connection with MBE's breach of the Joint Venture Agreement. In December
1998, the parties agreed that the arbitration proceedings would be terminated,
and the Company would proceed with all of its claims against MBE in the pending
Federal Court action described above.

On May 14, 1999, the Company notified MBE that the Company was terminating the
Joint Venture Agreement. The Joint Venture Agreement provided that it could be
terminated at any time by either partner if the other partner breached any
material term or condition of the agreement; provided that the terminating
partner allowed the other partner at least a sixty day period to cure any
alleged breach.

<PAGE>

As required under the Joint Venture Agreement, on February 4, 1999 and February
19, 1999, the Company delivered to MBE notice that MBE was in default of the
Joint Venture Agreement in connection with five separate items, and demanded
that MBE cure the breaches within sixty days. Through the date of the
termination of the Joint Venture Agreement, MBE failed to cure any of the
breaches and had not otherwise taken any steps to remedy the breaches.

During September 1998, the Company's Board of Directors authorized a $2,000,000
private placement offering (the "Senior Note Offering") of 200 units at a unit
price of $10,000. Each unit consists of a 12% Senior Note in the principal
amount of $10,000, 1,500 1998-C Common Stock purchase warrants (later
redesignated as 1999-A Common Stock purchase warrants) and 1,000 shares of
Series B Equity Participating Preferred Stock. Each 1999-A Common Stock purchase
warrant entitles the holder to purchase 1 share of Common Stock for $1.00 at any
time through

F-23
<PAGE>
USA Technologies, Inc.

Notes to Consolidated Financial Statements

16. 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 4 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.

In January 1999, the Board of Directors approved the reduction of the exercise
price of the 1999-A Warrants from $1.00 to $.50, effective until December 31,
1999 at which time the price shall revert to $1.00, an increase in the number of
1999-A Warrants in each unit from 1,500 per unit to 2,000 per unit, an extension
of the reduced exercise price of $1.00 for the 139,000 1998-B warrants through
March 31, 1999 instead of only through February 1, 1999, and a reduction in the
exercise price of 15,280 purchase rights issued in July 1993 from $10.00 per
share to $1.00 per share through March 31, 1999, at which time the price will
revert to $10.00.

In connection with the Senior Note Offering, on January 21, 1999 the Board of
Directors approved a commitment by the President to purchase 10 units for
$100,000. The President will pay for the units by foregoing payroll from April
1, 1999 through June 30, 2000. The President also directly purchased 10 units,
resulting in proceeds to the Company of $100,000. The Board of Directors on
January 21, 1999 also expanded the rights of holders of the Series B Equity
Participating Preferred Stock to allow them to convert each share into 4 shares
of Common Stock in the event of a reverse stock split.

On March 4, 1999, the Board of Directors extended the Senior Note Offering to
April 30, 1999 and increased the number of shares of Series B Equity
Participating Preferred Stock from 200,000 to 250,000.

As of March 31, 1999, the Senior Note Offering sold 95.95 units. In connection
with this sale, 143,925 1999-A Warrants were issued with a fair value of
$145,364.

On May 6, 1999, the Board of Directors authorized an increase in the aggregate
Senior Note Offering from $2,000,000 to $3,500,000; increased the aggregate of
1999-A Warrants from 400,000 to 700,000 and the aggregate of Series B Equity
Participating Preferred Stock from 250,000 shares to 350,000 shares; and
extended the offering deadline from April 30, 1999 to May 31, 1999, with right
of extension for another 30 days, or until June 30, 1999.

On May 27, 1999, the shareholders approved an increase in the number of
authorized shares of undesignated Series Preferred Stock from 1,200,000 to
1,800,000, and an increase in the number of authorized shares of Series A
Preferred Stock from 787,591 to 900,000.

<PAGE>

On June 17, 1999, the Board of Directors authorized an increase in the aggregate
Senior Note Offering from $3,500,000 to $5,000,000 which would also allow
issuance of up to 1,000,000 1999-A Warrants and 500,000 shares of Series B
Equity Participating Preferred Stock; and extended the termination date of the
offering to June 30, 1999.

The Senior Note Offering closed on June 23, 1999. The Company sold to 223
accredited investors an aggregate of 466.8 units at $10,000 each, for an
aggregate of $4,668,000.

In June 1999, pursuant to the terms of the Series B Equity Participating
Preferred Stock, each share of Series B Equity Participating Preferred Stock was
exchanged for 4 shares of Common Stock, or an aggregate of 1,867,200 shares of
Common Stock. The 1,867,200 shares of Common Stock are restricted securities as
defined under Rule 144 of the Act.

In June 1999, the Company issued 25,000 shares of Common Stock to a
broker-dealer, as part of its compensation in connection with its assisting the
Company to raise monies in the Senior Note Offering.

In June 1999, the Company issued to an individual 4,000 shares of Common Stock
in connection with public relations services rendered to the Company.

In June 1999, the Company issued 10,000 shares of Common Stock to an individual
in consideration of consulting services performed on behalf of the Company.

In June 1999, the Company issued options to purchase an aggregate of 470,000
shares of Common Stock at $2.00 per share to its executive officers. The
Chairman's 180,000 options all vest immediately. All of the other executive
officers' options vest as follows: one-third immediately; one-third on the first
annual anniversary of the date of grant; and the final one-third on the second
annual anniversary of the date of grant. The options are exercisable at any time
within five years following the vesting thereof.

In June 1999, the Company issued options to purchase an aggregate of 60,000
shares of Common Stock at $2.00 per share to its outside directors. Certain of
these options vest immediately and others vest as follows: one-half immediately;
and one-half on the six month anniversary of the date of grant. The options are
exercisable at any time within five years following the vesting thereof.

In June 1999, the Company issued options to purchase an aggregate of 12,000
shares of Common Stock at $2.00 per share to six employees. These options vest
immediately and are exercisable at any time within five years of vesting.

During the period April 1999 to June 1999 the Company sold 371.3 units of the
Senior Note Offering generating gross proceeds of $3,713,000.

In July 1999 the Company's Board of Directors authorized the issuance of 100,000
fully vested warrants to purchase common stock to a financial and public
relations consultant in exchange for future consulting services. The warrants
are exercisable as follows: 50,000 at $2 per share and 50,000 at $3 share and
expire in July 2001.

In July 1999 the Company's Board of Directors authorized the issuance of 150,000
fully vested warrants to purchase common stock to a financial and public
relations consultant in exchange for future consulting services. The warrants
are exercisable at $2.50 per share and expire in July 2001.

In July 1999 the Company issued options to purchase an aggregate of 10,000
shares of common stock at $2.00 per share to a new director of the Company.
These options vest 5,000 immediately and 5,000 six months from the date of
grant.

In July 1999 the Company extended the expiration date for 5,000 options with an
exercise price of $2.50 from June 30, 1999 to August 31, 1999 and for 175,000
options with an exercise price of $2.50 with various expiration dates to June
30, 2001.

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 ......... $ 173.75
Blue Sky fees and expenses .................................... $ 526.25
Printing and Engraving Expenses ............................... $ 1,800.00
Accounting Fees and Expenses .................................. $ 2,500.00
Legal Fees and Expenses ....................................... $ 2,500.00
----------

Total ................................................ $ 7,500.00
----------

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 January and February 1997, the Company sold 9.35 units at
$10,000. Each unit consisted of 1,000 shares of Preferred Stock and 4,000 1996-B
Common Stock Purchase Warrants. An aggregate of 9,350 shares of Preferred Stock
and 37,400 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 4,000 1997
Common Stock Purchase Warrants. An aggregate of 80,000 shares of Preferred Stock
and 160,000 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 200,000 shares of the
Company's Common Stock at a price of $2.00 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 5,000
1998-A Common Stock Purchase Warrants. An aggregate of 150,000 shares of
Preferred Stock and 375,000 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 5,000 1998-B Common
Stock Purchase Warrants. An aggregate of 55,600 shares of Preferred Stock and
139,000 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.

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.

From September 1998 through June 23, 1999, the Company sold 466.8 units
at $10,000 each, for an aggregate of $4,668,000. Each unit consisted of a
$10,000 principal amount 12% Senior Note, 2,000 1999-A Common Stock Purchase
Warrants, and 1,000 shares of Series B Equity Participating Preferred Stock. The
offering was sold to 223 accredited investors, and did not involve any general
advertising or solicitation, and was therefore exempt from registration under
Rule 506 of Regulation D promulgated under the Act.

In June 1999, pursuant to the terms of the Series B Preferred Stock,
each share of Series B Preferred Stock was exchanged for 4 shares of Common
Stock, or an aggregate of 1,867,200 shares of Common Stock. Such exchange was
exempt from registration under the Act pursuant to Section 3(a)(9) of the Act.
The 1,867,200 shares of Common Stock are restricted securities as defined under
Rule 144 promulgated under the Act.

In June 1999, the Company issued 43,800 shares of Common Stock to
Harmonic Research, Inc., a broker-dealer, as part of its compensation in
connection with its assisting the Company to raise monies in a private placement
offering. The Company also issued to Harmonic Research, Inc. 9,400 1999-A Common
Stock Purchase Warrants. The shares and warrants are restricted securities as
such term is defined in Rule 144 promulgated under the Act and were issued
pursuant to Section 4(2) thereof.

In June 1999, the Company issued to Robert Flaherty 4,000 shares of
Common Stock in connection with public relations services rendered to the
Company. Such shares were exempt from registration under Rule 701 promulgated
under the Act.

In June 1999, the Company issued 10,000 shares of Common Stock to Rick
Joshi in consideration of consulting services performed on behalf of the
Company. The shares were exempt from registration pursuant to Rule 701
promulgated under the Act.

II-2
<PAGE>

In July 1999, the Company issued to I. W. Miller Group, Inc. fully
vested warrants to acquire up to 100,000 shares, 50,000 of which are exercisable
at $2.00 per share and 50,000 of which are exercisable at $3.00 per share. The
warrants are exercisable at any time for two years following issuance. The
warrants were issued to Miller pursuant to Rule 506 under the Act, and the
shares of Common Stock underlying the Warrants will be issued pursuant to such
exemption.

In July 1999, the Company issued to Harmonic Research, Inc. fully
vested warrants to acquire up to 150,000 shares of Common Stock at $2.50 per
share. The warrants are exercisable at any time for two years following
issuance. The warrants were issued pursuant to Rule 506 under the Act, and the
shares of Common Stock underlying the Warrants will be issued pursuant to such
exemption.

II. Stock Options

In August 1996, the Company issued to a RAM Group, consultant, options
to purchase up to 5,000 shares of Common Stock at $5.00 per share.

In September 1996, the Company issued to Joseph Donahue options to
purchase up to 5,000 shares of Common Stock at $4.50 per share.

In November 1996, the Company issued to a RAM Group, consultant,
options to purchase up to 5,000 shares of Common Stock at $5.00 per share.

In November 1996, the Company issued to Phillip A. Harvey options to
purchase up to 5,000 shares of Common Stock at $6.50 per share.

In November 1996, the Company issued to Michael Feeney options to
purchase up to 1,000 shares of Common Stock at $5.00 per share.

In February 1997, the Company issued to Leland P. Maxwell options to
purchase up to 20,000 shares of Common Stock at $4.50 per share.

In June 1997, the Company issued to Haven Brock Kolls options to
purchase up to 10,000 shares of Common Stock at $4.50 per share.

In June 1997, the Company issued to Keith Sterling options to purchase
up to 10,000 shares of Common Stock at $4.50 per share.

In June 1997, the Company issued to Stephen Herbert options to purchase
up to 10,000 shares of Common Stock at $4.50 per share.

In June 1997, the Company issued to Michael Feeney options to purchase
up to 500 shares of Common Stock at $4.50 per share.

II-3
<PAGE>

In September 1997, the Company issued to RAM Group, a consultant,
options to purchase up to 5,000 shares of Common Stock at $5.00 per share.

In December 1997, the Company issued to Joseph Donahue options to
purchase up to 5,000 shares of Common Stock at $4.50 per share.

In December 1997, the Company issued Phillip A. Harvey options to
purchase up to 5,000 shares of Common Stock at $4.50 per share.

In April 1998, the Company issued to Stephen Herbert options to
purchase up to 5,000 shares of Common Stock at $4.50 per share.

In April 1998, the Company issued to Haven Brock Kolls options to
purchase up to 5,000 shares of Common Stock at $4.50 per share.

In April 1998, the Company issued to Leland P. Maxwell options to
purchase up to 5,000 shares of Common Stock at $4.50 per share.

In June 1999, the Company issued options to purchase an aggregate of
470,000 shares of Common Stock at $2.00 per share to its executive officers, as
follows: George R. Jensen, Jr. - 180,000 options; Stephen P. Herbert - 110,000
options; Haven Brock Kolls - 100,000 options; Leland Maxwell - 40,000 options;
Michael Lawlor - 20,000 options; and Joseph Donahue - 20,000 options.

In June and July 1999, the Company issued options to purchase an
aggregate of 70,000 shares of Common Stock at $2.00 per share to its outside
directors, as follows: Steven Katz - 10,000 options; Edwin R. Boynton - 10,000
options; Peter Kapourelos - 10,000 options; William Sellers - 10,000 options;
Henry Smith - 10,000 options; William Van Alen, Jr. - 10,000 options; and
Douglas M. Lurio - 10,000 options.

In June 1999, the Company issued options to purchase an aggregate of
12,000 shares of Common Stock at $2.00 per share to six employees as follows:
Margaret Broadwell - 5,000 options; Cecil Ladesma - 2,000 options; Amy Thigpen -
2,000 options; Vivian Stroud - 1,000 options; Jim Tierney - 1,000 options; and
Dave DeMedio - 1,000 options.

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 10,000 shares of Common Stock at
$.50 per share were exercised by the holders thereof.

In June 1997, options to purchase 15,000 shares of Common Stock at
$.50 per share were exercised by the holders thereof.

In September 1997, options to purchase 7,000 shares of Common Stock at
$.50 per share were exercised by the holders thereof.

In March 1998, options to purchase 45,000 shares of Common Stock at
$1.00 per share were exercised by the holder 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
security holders of the Company, the securities issued contained restrictive
legends, and the issuance did not involve any general solicitation or
advertising.

II-4

<PAGE>

Item 27. Exhibits

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

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

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

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

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

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

3.1.6 Sixth Amendment to Articles of Incorporation of the
Company filed on May 1, 1996 (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.

3.1.9 Ninth Amendment to Articles of Incorporation of the
Company filed on October 1, 1998.

3.1.10 Tenth Amendment to Articles of Incorporation of the
Company filed on April 12, 1999.

3.1.11 Eleventh Amendment to Articles of Incorporation of the
Company filed on June 7, 1999.

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).

4.6 Form of 12% Senior Note

**4.7 Warrant Certificate of I.W. Miller Group, Inc.

**4.8 Warrant Certificate of Harmonic Research, Inc.

**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).

10.35 Phillip A. Harvey Common Stock Option Certificate
dated as of April 22, 1999.

10.36 Consulting Agreement between Ronald Trahan and the
Company dated November 16, 1998 (incorporated by
reference to Exhibit 28 to Registration Statement No.
333-67503 on Form S-8 filed on November 18, 1998).

10.37 Consulting Agreement between Mason Sexton and the Company
dated March 10, 1999 (incorporated by reference to
Exhibit 28 to Registration Statement No. 333-74807 on
Form S-8 filed on March 22, 1999).

**10.38 Financial Public Relations Agreement between the Company
and I.W. Miller Group, Inc. dated August 1, 1999.

**10.39 Consulting Agreement between Harmonic Research, Inc. and
the Company dated August 3, 1999.

**23.1 Consent of Ernst & Young LLP.

**27.1 Power of Attorney

-------------------------------------------------------------------
** -- 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 August 4,
1999.

USA TECHNOLOGIES, INC.

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

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints George R. Jensen, Jr. and Leland P.
Maxwell, and each of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto such
attorneys-in-fact and agents, full power and authority to do and perform each
and every act and thing requisite or necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or either of them or their or his substitutes, may lawfully do or cause
to be done by virtue thereof.

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, August 4, 1999
- ---------------------------- and Chief Executive
George R. Jensen, Jr. Officer (Principal and
Chief Executive Officer)
Director

/s/ Leland P. Maxwell Vice President, Chief August 4, 1999
- ---------------------------- Financial Officer
Leland P. Maxwell Treasurer (Principal
Accounting Officer)

/s/ Stephen P. Herbert President, Chief August 4, 1999
- ---------------------------- Operating Officer,
Stephen P. Herbert Director

/s/ William W. Sellers Director August 4, 1999
- ----------------------------
William W. Sellers

/s/ Peter G. Kapourelos Director August 4, 1999
- ----------------------------
Peter G. Kapourelos

Director August , 1999
- ----------------------------
Henry B. duPont Smith

Director August , 1999
- ----------------------------
William L. Van Alen, Jr.

- --------------------------- Director August , 1999
Steven Katz

<PAGE>

/s/ Douglas M. Lurio
- --------------------------- Director August 4, 1999
Douglas M. Lurio

- --------------------------- Director August __, 1999
Edwin R. Boynton

</TABLE>

II-11
<PAGE>

EXHIBIT INDEX

Exhibit
Number Description
- ------- -----------
<S> <C>
4.7 Warrant Certificate of I.W. Miller Group, Inc.

4.8 Warrant Certificate of Harmonic Research, Inc.

5.1 Opinion of Lurio & Associates

10.38 Financial Public Relations Agreement between the Company and
I.W. Miller Group, Inc. dated August 1, 1999.

10.39 Consulting Agreement between Mason Sexton and the Company
dated August 3, 1999.

23.1 Consent of Independent Auditors

24.1 Power of Attorney (appears as part of signature page)

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

II-12

<PAGE>
THESE WARRANTS AND THE COMMON STOCK ISSUABLE UPON THE EXERCISE HEREOF HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE
SECURITIES LAW. THESE WARRANTS AND THE COMMON STOCK ISSUABLE UPON THE EXERCISE
HEREOF MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE
OF A REGISTRATION STATEMENT IN EFFECT UNDER SUCH ACT AND SUCH LAWS WITH RESPECT
TO THESE WARRANTS AND THE COMMON STOCK ISSUABLE UPON THE EXERCISE HEREOF, OR AN
OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT
REQUIRED.

WARRANT CERTIFICATE 100,000 COMMON STOCK WARRANTS
NO. 162

USA TECHNOLOGIES, INC.
----------------------

COMMON STOCK WARRANTS
---------------------

(These Warrants will be void if not exercised
by the Termination Date specified below.)

1. Warrants. Subject to the terms and conditions hereof, this
certifies that I.W. MILLER GROUP, INC. is the owner of 100,000 Warrants (the
"Warrants") of USA Technologies, Inc., a Pennsylvania corporation (the
"Company"). Each Warrant entitles the holder hereof to purchase from the Company
at any time prior to 5:00 p.m. on August 1, 2001 (the "Termination Date"), one
fully paid and non-assessable share of the Company's Common Stock, without par
value (the "Common Stock"), subject to adjustment as provided in Section 7
hereof.

2. Warrant Price. The Warrants shall be exercised by delivery
to the Company (prior to the Termination Date) of the Warrant price for each
share of Common Stock being purchased hereunder (the "Warrant Price"), this
Certificate, and the completed Election To Purchase Form which is attached
hereto. The Warrant Price shall be $2.00 per share of Common Stock for 50,000 of
the Warrants, and $3.00 per share for 50,000 of the Warrants. The Warrant Price
shall be subject to adjustment as provided in Section 7 hereof. The Warrant
Price is payable either in cash or by certified check or bank draft payable to
the order of the Company.

3. Exercise. Upon the surrender of this Certificate and
payment of the Warrant Price as aforesaid, the Company shall issue and cause to
be delivered with all reasonable dispatch to or upon

<PAGE>

the written order of the registered holder of this Warrant and in such name or
names as the registered holder may designate, a certificate or certificates for
the number of full shares of Common Stock so purchased upon the exercise of any
Warrant. Such certificate or certificates shall be deemed to have been issued
and any person so designated to be named therein shall be deemed to have become
a holder of record of such Common Stock on and as of the date of the delivery to
the Company of this Certificate and payment of the Warrant Price as aforesaid.
If, however, at the date of surrender of this Certificate and payment of such
Warrant Price, the transfer books for the Common Stock purchasable upon the
exercise of any Warrant shall be closed, the certificates for the Common Stock
in respect to which any such Warrant are then exercised shall be issued and the
owner of such Common Stock shall become a record owner of such Common Stock on
and as of the next date on which such books shall be opened, and until such date
the Company shall be under no duty to deliver any certificate for such Common
Stock.

4. Partial Exercise. The rights of purchase represented by the
Warrants shall be exercisable, at the election of the registered holder hereof,
either as an entirety, or from time to time for any part of the Common Stock
specified herein and, in the event that the Warrants are exercised with respect
to less than all of the Common Stock specified herein at any time prior to the
Termination Date, a new Certificate will be issued to such registered holder for
the remaining number of Warrants not so exercised.

5. Termination Date. All of the Warrants must be exercised in
accordance with the terms hereof prior to the Termination Date. At and after the
Termination Date any and all unexercised rights hereunder shall become null and
void and all such unexercised Warrants shall without any action on behalf of the
Company become null and void.

6. Lost, Mutilated Certificate. In case this Common Stock
Warrant Certificate shall become mutilated, lost, stolen or destroyed, the
Company shall issue in exchange and substitution for and upon cancellation of
the mutilated certificate, or in lieu of and in substitution for the Certificate
lost, stolen, or destroyed, a new Certificate of like tenor and representing an
equivalent right or interest, but only upon receipt of evidence satisfactory to
the Company of such loss, theft or destruction of such certificate and
indemnity, if requested, also satisfactory to the Company.

<PAGE>

7. Adjustments. Subject and pursuant to the provisions of this
Section 7, the Warrant Price and number of shares of Common Stock subject to the
Warrants shall be subject to adjustment from time to time only as set forth
hereinafter:

a. In case the Company shall declare a Common Stock
dividend on the Common Stock, then the Warrant Price shall be proportionately
decreased as of the close of business on the date of record of said Common Stock
dividend in proportion to such increase of outstanding shares of Common Stock.

b. If the Company shall at any time subdivide its
outstanding Common Stock by recapitalization, reclassification or split-up
thereof, the Warrant Price immediately prior to such subdivision shall be
proportionately decreased, and, if the Company shall at any time combine the
outstanding shares of Common Stock by recapitalization, reclassification, or
combination thereof, the Warrant Price immediately prior to such combination
shall be proportionately increased. Any such adjustment to the Warrant Price
shall become effective at the close of business on the record date for such
subdivision or combination. The Warrant Price shall be proportionately increased
or decreased, as the case may be, in proportion to such increase or decrease, as
the case may be, of outstanding shares of Common Stock.

c. Upon any adjustment of the Warrant Price as
hereinabove provided, the number of shares of Common Stock issuable upon
exercise of the Warrants remaining unexercised immediately prior to any such
adjustment, shall be changed to the number of shares determined by dividing (i)
the appropriate Warrant Price payable for the purchase of all shares of Common
Stock issuable upon exercise of all of the Warrants remaining unexercised
immediately prior to such adjustment by (ii) the Warrant Price per share of
Common Stock in effect immediately after such adjustment. Pursuant to this
formula, the total sum payable to the Company upon the exercise of the Warrants
remaining unexercised immediately prior to such adjustment shall remain
constant.

<PAGE>

in such a way that holders of Common Stock shall be entitled to receive stock,
securities, cash, property, or assets with respect to or in exchange for Common
Stock, and provided no election is made by the Company pursuant to subsection
(ii) hereof, then, as a condition of such reorganization, reclassification,
consolidation, merger or sale, the Company or such successor or purchasing
corporation, person, or entity, as the case may be, shall agree that the
registered holder of the Warrants shall have the right thereafter and until the
Termination Date to exercise such Warrants for the kind and amount of stock,
securities, cash, property, or assets receivable upon such reorganization,
reclassification, consolidation, merger, or sale by a holder of the number of
shares of Common Stock for the purchase of which such Warrants might have been
exercised immediately prior to such reorganization, reclassification,
consolidation, merger or sale, subject to such subsequent adjustments which
shall be equivalent or nearly equivalent as may be practicable to the
adjustments provided for in this Section 7.

(ii) Notwithstanding subsection (i) hereof
and in lieu thereof, the Company may elect by written notice to the registered
holder hereof, to require such registered holder to exercise all of the Warrants
remaining unexercised prior to any such reorganization, reclassification,
consolidation, merger or sale. If the holder of this Warrant shall not exercise
all or any part of the Warrants remaining unexercised prior to such event, such
unexercised Warrants shall automatically become null and void upon the
occurrence of any such event, and of no further force and effect. The Common
Stock issued pursuant to any such exercise shall be deemed to be issued and
outstanding immediately prior to any such event, and shall be entitled to be
treated as any other issued and outstanding share of Common Stock in connection
with such event. If an election is not made by the Company pursuant to this
subsection (ii) in connection with any such event, then the provisions of
subsection (i) hereof shall apply to such event.

e. Whenever the Warrant Price and number of shares of
Common Stock subject to this Warrant is adjusted as herein provided, the Company
shall promptly mail to the registered holder of this Warrant a statement signed
by an officer of the Company setting forth the adjusted Warrant Price and the
number of shares of Common Stock subject to this Warrant, determined as so
provided.

f. This form of Certificate need not be changed
because of any adjustment which is required pursuant to this

<PAGE>

Section 7. However, the Company may at any time in its sole discretion (which
shall be conclusive) make any change in the form of this Certificate that the
Company may deem appropriate and that does not affect the substance hereof; and
any Certificate thereafter issued, whether in exchange or substitution for this
Certificate or otherwise, may be in the form as so changed.

8. Reservation. There has been reserved, and the Company shall
at all times keep reserved out of the authorized and unissued shares of Common
Stock, a number of shares of Common Stock sufficient to provide for the exercise
of the right of purchase represented by the Warrants. The Company agrees that
all shares of Common Stock issued upon exercise of the Warrants shall be, at the
time of delivery of the Certificates for such Common Stock, validly issued and
outstanding, fully paid and non-assessable.

9. Fractional Shares. The Company shall not issue any
fractional shares of Common Stock pursuant to any exercise of any Warrant and
shall pay cash to the holder of any Warrant in lieu of any such fractional
shares.

10. No Right. The holder of any Warrants shall not be entitled
to any of the rights of a shareholder of the Company prior to the date of
issuance of the Common Stock by the Company pursuant to an exercise of any
Warrant.

11. Securities Laws. As a condition to the issuance of any
Common Stock pursuant to the Warrants, the holder of such Common Stock shall
execute and deliver such representations, warranties, and covenants, that may be
required by applicable federal and state securities law, or that the Company
determines is reasonably necessary in connection with the issuance of such
Common Stock. In addition, the certificates representing the Common Stock shall
contain such legends, or restrictive legends, or stop transfer instructions, as
shall be required by applicable Federal or state securities laws, or as shall be
reasonably required by the Company or its transfer agent.

<PAGE>

12. Applicable Law. The Warrants and this Certificate shall be
deemed to be a contract made under the laws of the Commonwealth of Pennsylvania
and for all purposes shall be construed in accordance with the laws thereof
regardless of its choice of law rules.

IN WITNESS WHEREOF, USA TECHNOLOGIES, INC., has executed and
delivered this Warrant Certificate as of the date written below.

USA TECHNOLOGIES, INC.

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

Attest: /s/ Leland P. Maxwell
----------------------------
Leland P. Maxwell, Secretary

Dated: August 1, 1999

<PAGE>

USA TECHNOLOGIES, INC.
200 Plant Avenue
Wayne, Pennsylvania 19087
Attn: George R. Jensen, Jr.,
Chief Executive Officer

ELECTION TO PURCHASE
--------------------

The undersigned hereby irrevocably elects to exercise the
right of purchase represented by the attached Warrant Certificate No. of the
Company. The undersigned desires to purchase ______ shares of Common Stock
provided for therein and tenders herewith full payment of the Warrant Price for
the shares of Common Stock being purchased, all in accordance with the
Certificate. The undersigned requests that a Certificate representing such
shares of Common Stock shall be issued to and registered in the name of, and
delivered to, the undersigned at the following address:________________________
_______________________________________________________________________________
______________ . If said number of shares of Common Stock shall not be all the
shares purchasable under the Certificate, then a new Common Stock Warrant
Certificate for the balance remaining of the shares of Common Stock purchasable
shall be issued to and registered in the name of, and delivered to, the
undersigned at the address set forth above.

Dated: _____________________, 19__ Signature:_______________________

<PAGE>

THESE WARRANTS AND THE COMMON STOCK ISSUABLE UPON THE EXERCISE HEREOF HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE
SECURITIES LAW. THESE WARRANTS AND THE COMMON STOCK ISSUABLE UPON THE EXERCISE
HEREOF MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE
OF A REGISTRATION STATEMENT IN EFFECT UNDER SUCH ACT AND SUCH LAWS WITH RESPECT
TO THESE WARRANTS AND THE COMMON STOCK ISSUABLE UPON THE EXERCISE HEREOF, OR AN
OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT
REQUIRED.

WARRANT CERTIFICATE 150,000 COMMON STOCK WARRANTS
NO. 163

USA TECHNOLOGIES, INC.

COMMON STOCK WARRANTS

(These Warrants will be void if not exercised
by the Termination Date specified below.)

1. Warrants. Subject to the terms and conditions hereof, this
certifies that HARMONIC RESEARCH, INC. is the owner of 150,000 Warrants (the
"Warrants") of USA Technologies, Inc., a Pennsylvania corporation (the
"Company"). Each Warrant entitles the holder hereof to purchase from the Company
at any time prior to 5:00 p.m. on August 3, 2001 (the "Termination Date"), one
fully paid and non-assessable share of the Company's Common Stock, without par
value (the "Common Stock"), subject to adjustment as provided in Section 7
hereof.

2. Warrant Price. The Warrants shall be exercised by delivery
to the Company (prior to the Termination Date) of the Warrant price for each
share of Common Stock being purchased hereunder (the "Warrant Price"), this
Certificate, and the completed Election To Purchase Form which is attached
hereto. The Warrant Price shall be $2.50 per share of Common Stock. The Warrant
Price shall be subject to adjustment as provided in Section 7 hereof. The
Warrant Price is payable either in cash or by certified check or bank draft
payable to the order of the Company.

3. Exercise. Upon the surrender of this Certificate and
payment of the Warrant Price as aforesaid, the Company shall issue and cause to
be delivered with all reasonable dispatch to or upon the written order of the
registered holder of this Warrant and in such name or names as the registered
holder may designate, a

<PAGE>

certificate or certificates for the number of full shares of Common Stock so
purchased upon the exercise of any Warrant. Such certificate or certificates
shall be deemed to have been issued and any person so designated to be named
therein shall be deemed to have become a holder of record of such Common Stock
on and as of the date of the delivery to the Company of this Certificate and
payment of the Warrant Price as aforesaid. If, however, at the date of surrender
of this Certificate and payment of such Warrant Price, the transfer books for
the Common Stock purchasable upon the exercise of any Warrant shall be closed,
the certificates for the Common Stock in respect to which any such Warrant are
then exercised shall be issued and the owner of such Common Stock shall become a
record owner of such Common Stock on and as of the next date on which such books
shall be opened, and until such date the Company shall be under no duty to
deliver any certificate for such Common Stock.

<PAGE>

d. (i) If any capital reorganization or
reclassification of the capital stock of the Company, or consolidation or merger
of the Company with another corporation, person, or entity, or the sale of all
or substantially all of its assets to another corporation, person, or entity,
shall be effected in such a way that holders of Common Stock shall be entitled
to receive stock, securities, cash, property, or assets with respect

<PAGE>

to or in exchange for Common Stock, and provided no election is made by the
Company pursuant to subsection (ii) hereof, then, as a condition of such
reorganization, reclassification, consolidation, merger or sale, the Company or
such successor or purchasing corporation, person, or entity, as the case may be,
shall agree that the registered holder of the Warrants shall have the right
thereafter and until the Termination Date to exercise such Warrants for the kind
and amount of stock, securities, cash, property, or assets receivable upon such
reorganization, reclassification, consolidation, merger, or sale by a holder of
the number of shares of Common Stock for the purchase of which such Warrants
might have been exercised immediately prior to such reorganization,
reclassification, consolidation, merger or sale, subject to such subsequent
adjustments which shall be equivalent or nearly equivalent as may be practicable
to the adjustments provided for in this Section 7.

(ii) Notwithstanding subsection (i) hereof and in
lieu thereof, the Company may elect by written notice to the registered holder
hereof, to require such registered holder to exercise all of the Warrants
remaining unexercised prior to any such reorganization, reclassification,
consolidation, merger or sale. If the holder of this Warrant shall not exercise
all or any part of the Warrants remaining unexercised prior to such event, such
unexercised Warrants shall automatically become null and void upon the
occurrence of any such event, and of no further force and effect. The Common
Stock issued pursuant to any such exercise shall be deemed to be issued and
outstanding immediately prior to any such event, and shall be entitled to be
treated as any other issued and outstanding share of Common Stock in connection
with such event. If an election is not made by the Company pursuant to this
subsection (ii) in connection with any such event, then the provisions of
subsection (i) hereof shall apply to such event.

f. This form of Certificate need not be changed
because of any adjustment which is required pursuant to this Section 7. However,
the Company may at any time in its sole discretion (which shall be conclusive)
make any change in the form

<PAGE>

of this Certificate that the Company may deem appropriate and that does not
affect the substance hereof; and any Certificate thereafter issued, whether in
exchange or substitution for this Certificate or otherwise, may be in the form
as so changed.

<PAGE>

IN WITNESS WHEREOF, USA TECHNOLOGIES, INC., has executed and
delivered this Warrant Certificate as of the date written below.

USA TECHNOLOGIES, INC.

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

Attest: /s/ Leland P. Maxwell
-----------------------------------
Leland P. Maxwell, Secretary

Dated: August 3, 1999

<PAGE>

USA TECHNOLOGIES, INC.
200 Plant Avenue
Wayne, Pennsylvania 19087
Attn: George R. Jensen, Jr.,
Chief Executive Officer

ELECTION TO PURCHASE

The undersigned hereby irrevocably elects to exercise the
right of purchase represented by the attached Warrant Certificate No. ____ of
the Company. The undersigned desires to purchase ______ shares of Common Stock
provided for therein and tenders herewith full payment of the Warrant Price for
the shares of Common Stock being purchased, all in accordance with the
Certificate. The undersigned requests that a Certificate representing such
shares of Common Stock shall be issued to and registered in the name of, and
delivered to, the undersigned at the following address:_________________________
______________________________________________________________________________
______________ . If said number of shares of Common Stock shall not be all the
shares purchasable under the Certificate, then a new Common Stock Warrant
Certificate for the balance remaining of the shares of Common Stock purchasable
shall be issued to and registered in the name of, and delivered to, the
undersigned at the address set forth above.

Dated:______________, 19__ Signature:_________________________

<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

August 4, 1999

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 250,000 shares of
Common Stock ("Common Stock") issuable upon exercise of Warrants to purchase
shares of Common Stock 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>
FINANCIAL PUBLIC RELATIONS AGREEMENT

This Financial Public Relations Agreement (this "Agreement") is made
and entered into effective the 1st of August, 1999 between USA TECHNOLOGIES, a
Pennsylvania corporation, (the "Company"), having offices at 200 Plant Avenue,
Wayne, Pennsylvania and I.W. Miller Group, Inc., a California Corporation (the
"Consultant"), having offices at 2361 Campus Drive, Suite 101, Irvine, CA 92612,
based on the following:

Premise

A. The Company is a publicly held corporation whose securities are
listed on the OTC Bulletin Board market. The Company is seeking to
expand its investor base and the number of market professionals who
are aware of the Company's activities.

B. Consultant is established in the securities industry and has
experience in providing advice and support for publicly held
companies.

C. The Company desires to retain the services of Consultant, and
Consultant desires to offer such services on the terms and
conditions set forth in this Agreement.

NOW, THEREFORE, based on the foregoing premises, and in consideration
of the mutual covenants of the parties and the benefits to be derived
therefrom, it is hereby agreed as follows:

Agreement

1. Engagement of Consultant. The Company hereby engages Consultant to
provide services to the Company under the terms of this Agreement,
including, but not limited to, the analysis of business and proposed
business of the Company by the Consultant as it pertains to the
desirability and suitability of an investment in the Company by equity
participants; the presentation of the Company to market professionals,
including broker-dealers, mutual funds, and other institutional
investors; providing the Company advice concerning shareholder
relations and the preparation of information for the Company's
shareholders; assisting in long-term financial planning, including
borrowings, equity financing and other opportunities; providing advice
concerning the existing and future capital structure of the Company.
Notwithstanding the foregoing. Consultant shall not act as an agent of
the Company and shall not contact the holders of the securities of the
Company in connection with the exercise or conversion of currently
issued and outstanding warrants, options, or convertible securities.

2. Marketing. Company shall furnish to Consultant disclosure and filing
materials, financial statements, business plans, promotional materials,
annual reports and press releases. In addition, Company agrees to
distribute due diligence packages in ample quantities to potential
investors as well as to the brokerage community. Consultant may rely
on, and assume the accuracy of the due diligence package and/or
research reports. Consultant may disseminate through the use of the
media and advertisement the contents of the due diligence package and
any research reports in order to attract potential investors as well as
the brokerage community. Company acknowledges that Consultant is
engaged in other business activities during the term of this Agreement.

3. Advertising. Advertising is defined as the cost associated with lead
generation programs arranged by the Consultant for the Company. These
programs are designed to create investor awareness for the Company. All
advertising/lead generation programs are to be presented by the
Consultant to the Company and approved by the Company in advance.

4. Compensation to Consultant. Consultant is to receive an initial
$10,000.00 retainer, payable upon execution of this Agreement. Each
subsequent payment of $10,000.00 is to be paid on the 1st of each
month.

<PAGE>
a. Consultant is to receive a Warrant to purchase 50,000 common
shares of USTT, @ $2.00 per share. Said Warrant shall be issued
within 6 months of this contract and shall have a 2-year term
from the date of issuance and shall be fully vested upon
issuance.

b. Consultant is to receive a Warrant to purchase 50,000 common
shares of USTT, @ $3.00 per share. Said Warrant shall be issued
within 6 months of this contract and shall have a 2-year term
from the date of issuance and shall be fully vested upon
issuance.

c. Consultant represents and warrants to the Company that it is an
Accredited Investor as such term is defined in Rule 501
promulgated under the Securities Act of 1933, as amended
("Act") . As a result thereof, the Warrants and the Common
Stock underlying the Warrants will be issued to the Consultant
pursuant to Rule 506 promulgated under the Act.

d. The Warrants and the Common Stock underlying the Warrants
issuable to the Consultant shall not be registered under the
Act or any state securities laws, and shall constitute
restricted securities as defined under Rule 144 promulgated
under the Act. Following the issuance of the Warrants, the
Company shall, at its expense, file and use its best efforts to
have declared effective, a registration statement under the Act
covering the resale by the Consultant of the Common Stock
underlying the Warrants. The Company shall use its best efforts
to have the resale of the Common Stock exempted from the
registration requirements under applicable state securities
laws.

5. Reimbursement of Costs. Consultant shall be responsible for all
advertising costs for its lead generation campaigns. All travel costs
are to be presented to the company in advance and are to be split on a
50/50 basis between the consultant and the company.

6. Term. This Agreement shall commence on the date hereof and will
terminate on earliest of the following:

a. The term of this Agreement is one-year from date of execution.

b. Company can terminate consultant for cause upon 30 days written
notice. Cause shall be determined solely as the following:
violation of any rule or regulation of any regulatory agency;
any other neglect, act or omission detrimental to the conduct
of Company business; material breach of the Agreement or any
unauthorized disclosure of any of the secrets or confidential
information of the Company; dishonesty related to independent
contractor status; a change in personnel, management control of
the Consultant which materially effects the Consultant's work
on behalf of the Company.

c. Notwithstanding anything else set forth herein, Company can
terminate consultant for any reason given 30 days written
notice to consultants legal address of 2361 Campus Dr. Irvine,
CA 92612

d. The Consultant is to furnish to the Company activity reports on
a monthly basis.

7. Confidentiality. Consultant acknowledges that it may receive
confidential and proprietary information of the Company in connection
with the services provided under the terms of the Agreement. The
Consultant agrees to keep all such information confidential and to take
prudent steps to assure that its officers, directors, and employees,
and to not use such confidential information, except for the direct
benefit of the Company. Consultant shall not disclose such confidential
information and shall take reasonable steps to prevent the disclosure
by its officers, directors, and employees, without the prior written
consent of the Company.

8. Independent Consultant. The Company and Consultant hereby acknowledge
that Consultant is an independent contractor. Consultant shall not hold
itself out as, nor shall it take any action from which others might
infer that it is a partner or agent of or a joint venture with the
Company. Consultant shall have no authority to act on behalf of or bind
the Company and shall take no action, which purports to bind the
Company. The Company shall have no authority to act on behalf of or
bind the Consultant and shall take no action, which purports to bind
the Consultant.

9. Entire Agreement. This Agreement is and shall be considered to be the
only Agreement or understanding between the parties hereto with respect
to the engagement of Consultant by the Company. All negotiations,
commitments, and understandings acceptable to both parties have been
incorporated herein. No letter, telegram, or communication passing
between the parties hereto covering any matter during this contract
period, or any plans or periods thereafter, shall be deemed as part of
this Agreement and shall not have the effect of modifying or adding to
this Agreement unless it is distinctly stated in such letter, telegram,
or communication to this Agreement and is signed by the parties to this
Agreement.
<PAGE>

10. Governing Law. This Agreement shall be governed by and interpreted in
accordance with the laws of the state of Pennsylvania.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.

USA TECHNOLOGIES, INC.

/s/ George R. Jensen, Jr. /s/ Ira W. Miller
By:---------------------------------- ------------------------
George R. Jensen, Jr. Ira W. Miller
Chairman & CEO President
H.W. Miller Group, Inc.

Rev. 7/99

<PAGE>
[Harmonic Research Letterhead]

August 3, 1999

Mr. George R. Jensen, Jr.
Chairman & CEO
USA Technologies, Inc.
200 Plant Avenue
Wayne, PA 19087-3520

Dear George:

Harmonic Research extends our warmest congratulations to you and your staff on
the closing of the recent $4,600,000 financing. We believe that USA
Technologies, Inc. possesses the kind of "transformational" technology which we
have made the strategic focus of our investment banking effort. We are also
confident that you management team has the skills and drive necessary to fully
exploit its commercial potential.

It is in that light that we agree to extend the contractual relationship as
defined by the consulting agreement dated February 26, 1999 as amended March 10,
1999 between Harmonic Research, Inc. and USA Technologies, Inc. for an
additional three (3) months commencing September 1, 1999.

As compensation, USA Technologies, inc. agrees to pay Harmonic Research, Inc. an
aggregate of $15,000 payable at the rate of $5,000 per month for the consulting
period commencing September 1, 1999 to December 1, 1999 and to grant Harmonic
Research, Inc. 150,000 two-year fully vested warrants executable at $2.50 whose
underlying stock is to be registered by October 1, 1999. Harmonic Research
represents and warrants to USA Technologies, Inc. that it is an accredited
investor as such term is defined in Rule 501 of the Securities Act of 1933.

<PAGE>

We look forward to our continued and mutually rewarding relationship.

Very truly yours,

Harmonic Research, Inc.

By: /s/ Mason Sexton
----------------------------------
Mason Sexton
Chairman

AGREED TO AND ACCEPTED:
USA Technologies, Inc., hereby accepts the terms and provisions of, and agrees
to be bound by the terms and provisions of the foregoing letter, as of this
3rd day of August, 1999.

By: /s/ George R. Jensen
-----------------------------------
Mr. George R. Jensen, Jr.
Chairman & CEO

<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, except for Note 15, as to which
the date is June 7, 1999, in the Registration Statement (Form SB-2 No.
333-00000) and related Prospectus of USA Technologies, Inc. dated August 4,
1999.

/s/ Ernst & Young LLP

Philadelphia, Pennsylvania
August 4, 1999