SEC Filing | Cantaloupe, Inc.

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As filed with the Securities and Exchange Commission on March 6, 1997

Registration No. 333-09465
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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

POST-EFFECTIVE AMENDMENT NO. 2

FORM SB-2

Registration Statement
Under

The Securities Act of 1933

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

Pennsylvania 7359 23-2679963

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

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

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

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

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

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

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

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

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

PROSPECTUS

USA TECHNOLOGIES, INC.

COMMON STOCK

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

The Common Stock which may be sold by the Selling Shareholders pursuant to
this Prospectus will be purchased from the Company by the Selling Shareholders
pursuant to the exercise of the 1996 Warrants. The Company issued 5,200,000 1996
Warrants to the Selling Shareholders in May 1996 pursuant to the 1996 Warrant
Agreement in a transaction exempt from the registration requirements of the
Securities Act of 1933, as amended (the "Act"), and applicable state securities
law. Each 1996 Warrant entitles the holder thereof to purchase one share of
Common Stock for $.20 through February 28, 1997, and for $.50 at any time
thereafter through May 31, 2001. The exercise price of the 1996 Warrants may be
reduced by the Company at any time, or from time to time. As of December 31,
1996, 2,345,000 1996 Warrants have been exercised at $.20 each for total gross
proceeds to the Company of $469,000. From January 1, 1997 through February 17,
1997, an additional 989,000 1996 Warrants have been exercised resulting in an
additional $197,800 of gross proceeds to the Company. The 1996 Warrants are
exercisable at any time through May 31, 2001, or such later date as the Company
may determine. The Company agreed, at its cost and expense, to register under
the Act the Common Stock underlying the 1996 Warrants for resale by the Selling
Shareholders, and to register or qualify such Common Stock for resale under
applicable state securities laws. See "Description of Securities - 1996 Common
Stock Purchase Warrants." The Common Stock may be sold from time to time by the
Selling Shareholders named herein pursuant to this Prospectus. See "Selling
Shareholders".

As a condition to obtaining the Common Stock being offered hereby, the
Selling Shareholders must exercise the 1996 Warrants by tendering the per share
exercise price required under the 1996 Warrant Agreement. In the event all
remaining 2,855,000 1996 Warrants are exercised at $.50, the Company would
receive gross proceeds of $1,427,500. In the event all remaining 2,855,000 1996
Warrants are exercised at $.20, the Company would receive gross proceeds of
$571,000. There is no assurance that any of the remaining 1996 Warrants will be
exercised by the Selling Shareholders, and if none of the remaining 1996
Warrants are exercised, the Company would not receive any gross proceeds. The
Company is responsible for all of the costs and expenses incident to the offer
and sale of the Common Stock by the Selling Shareholders pursuant to this
Prospectus other than any brokerage fees or commissions incurred by the Selling
Shareholders

in connection therewith.

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

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

The Common Stock is currently traded on the OTC Electronic Bulletin
Board under the symbol USTT and the bid price for the Common Stock on March 4,
1997 was $.37 per share.

See "Risk Factors" on page 3 of this Prospectus for a discussion of
certain factors that should be considered by prospective investors in the Common
Stock offered hereby.

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

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The date of this Prospectus is March 6, 1997.

AVAILABLE INFORMATION

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

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

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

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

PROSPECTUS SUMMARY

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

The Company

USA Technologies, Inc., a Pennsylvania corporation (the "Company"), was
founded in January 1992. The Company changed its name from USA Entertainment
Center, Inc. to USA Technologies, Inc. on June 7, 1995 to more accurately
reflect the nature of its business. The Company is in the development stage and
intends to become an owner and licensor of unattended, credit card activated
control systems for the copying, debit card, fax, vending, and personal computer
industries. The Company's devices make available credit card payment technology
in connection with the sale of a variety of products and services. The Company
anticipates generating its revenues both from retaining a portion of the
revenues generated from all credit card transactions conducted through its
devices and from the sale of equipment utilizing its control systems.

The Company has developed a credit card activated control system to be
utilized with photocopying machines and computer printers known as the Credit
Card Copy ExpressTM, and a credit card activated control system to be utilized
with debit card purchase/revalue stations known as the Credit Card Debit
ExpressTM. The devices allow consumers to use credit cards to pay for these
products and services.

The Company has also developed the Credit Card Computer ExpressTM which
is an unattended, credit card activated control system to 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. This
product enables locations such as public libraries to offer the use of personal
computers to the public on an "as needed" basis utilizing credit cards as a
method of payment. See "Business - Credit Card Computer ExpressTM."

In September 1996, the Company commenced marketing the Business
ExpressTM. This product utilizes the Company's existing applications for
computers, copiers, and facsimile equipment, and combines them into a kiosk type
work station. All devices contained in the Business ExpressTM are credit card
activated. The Company intends to license the Business ExpressTM as well as sell
the Business ExpressTM to commercial locations. As of the date hereof, 9 units
have been licensed to commercial locations and no units have been sold.
See "Business - Business ExpressTM."

The Company has entered into an agreement with International Business
Machines Corporation ("IBM") pursuant to which the Company has been approved as
a personal computer value-added reseller. The Company has also entered into
similar agreements with Dell Computer Corporation and Hewlett-Packard Company.
See "Business - Procurement."

As of June 30, 1996, the Company had installed at commercial locations
a total of 130 devices and revenues have been nominal. As of February 28, 1997,
the Company had installed at commercial locations a total of 150 devices and
revenues have been nominal. See "Business". Substantially all of these customers
are university libraries or public libraries.

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

Description Of The Securities

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

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

Common Stock Outstanding
as of December 31, 1996 . . 25,659,144 shares. On a fully
converted basis, there would
be 43,992,035 shares
outstanding consisting of
3,773,300 shares issuable upon
exercise of outstanding
options and purchase rights,
2,855,000 shares issuable upon
exercise of the 1996 Warrants,
1,414,000 shares issuable
upon the exercise of the
outstanding 1995 Common Stock
Purchase Warrants ("1995
Warrants"), 7,939,950 shares
issuable upon conversion of the
Preferred Stock, and
2,350,641 shares issuable upon
conversion of accrued and
unpaid dividends on the
Preferred Stock.

Preferred Stock Outstanding
as of December 31, 1996 . . 793,995 shares. Each share of
Series A Convertible Preferred
Stock, no par value, of the
Company ("Preferred Stock") is
convertible by the holder
thereof at any time into 10
shares of Common Stock. The
Holders of Preferred Stock
are entitled to an annual
cumulative cash dividend of
$1.50 per share. The outstanding
shares of Preferred Stock are
convertible into 7,939,950
shares of Common Stock. At the
time of conversion, all accrued
and unpaid dividends are
converted into Common Stock at
the rate of $1.00 per share of
Common Stock. See

"Description of Securities -
Series A Convertible Preferred
Stock."

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

Use of Proceeds. . . . . . . . . The Company will receive no cash
proceeds from the sale of the
Common Stock being offered by
the Selling Shareholders hereby.
The Company would, however,
receive $.20 per 1996 Warrant
exercised by the Selling
Shareholders on or before
February 28, 1997, and $.50 per
1996 Warrant exercised by the
Selling Shareholders thereafter
(or such lower exercise price as
the Company may determine).
Through December 31, 1996, a
total of 2,345,000 1996 Warrants
have been exercised by the
Selling Shareholders at $.20
each, generating gross proceeds
of $469,000. From January 1,
1997 through February 28, 1997,
an additional 989,000 1996
Warrants were exercised at $.20
each, resulting in an additional
$197,800 of gross proceeds to
the Company. The Company intends
to use such proceeds to finance
working capital. There is no
assurance that any of the
remaining 1996 Warrants will be
exercised by the Selling
Shareholders, and if none of the
remaining 1996 Warrants are
exercised, the Company would not
receive any gross proceeds. The
Selling Shareholders will
receive all of the net proceeds
from the sale of the Common
Stock. The Company expects to
incur expenses of approximately
$55,000 in connection with the
registration under the Act and
applicable state securities laws
of the Common Stock underlying
the 1996 Warrants. See
"Description of Securities -
1996 Common Stock Purchase
Warrants."

RECENT DEVELOPMENTS

For the three months ended December 31, 1996, the Company incurred an
operating loss of $1,012,811 (unaudited). For the six months ended December 31,
1996, the Company incurred an operating loss of $1,685,137 (unaudited). During
such six month period, the Company generated nominal operating revenues. In
addition, losses for the two months ended February 28, 1997 will approximate
$360,000 (unaudited) and such losses are expected to continue through at least
June 30, 1997. At December 31, 1996, the Company's working capital was
approximately $941,125, of which $469,085 was invested in inventory. Subsequent
to December 31, 1996 and through February 28, 1997, the Company raised
approximately $289,000 through sales of its securities and the exercise of 1996
Warrants. Based on its current resources, the Company anticipates that it could
fund operations through at least April 1997. The Company anticipates that
subsequent to the date hereof it would raise approximately $750,000 through the
sales of its securities during the balance of fiscal 1997, providing sufficient
capital through at least June 30, 1997. The Company believes that after such
date, it would be able to fund operations through additional sales of its
securities as well as from increased revenues from its business. See
"Management's Discussion And Analysis of Financial Condition And Results of
Operations" and "Financial Statements."

In August 1996, the Company authorized the issuance of 265,000 shares
of Common Stock to two consultants, Diversified Consulting Group, LLC and
Russell Training Group, Inc. In October 1996, the Company issued and registered
these shares under the Act and such shares are freely tradeable thereunder. The
15,000 shares were issued to Russell Training Group, Inc. at a per share price
of $.53 and the Company recorded consulting expense of $8,000 in connection with
the issuance of these shares. The 250,000 shares were issued to Diversified
Consulting Group, LLC as compensation for consulting services. In connection
with the issuance of such shares, the Company recorded consulting expense of
$117,500 (i.e. $.47 per share). In November 1996, the Company granted to an
employee, Phillip A. Harvey, options to purchase up to 50,000 shares of Common
Stock at $.65 per share, granted to a consultant, RAM Group, options to purchase
up to 50,000 shares of Common Stock at $.50 per share and granted to an
employee, Michael Feeney, options to purchase up to 10,000 shares of Common
Stock at $.50 per share. In November 1996, the Company authorized the issuance
to a consultant, Jerome M. Wenger, of 160,000 shares of Common Stock. The
Company has agreed to register these shares under the Act and such shares will
be freely tradeable thereunder. These shares are scheduled to be issued in four
segments of 40,000 shares each over a four month period. In connection with the
issuance of such shares, the Company will record consulting expense equal to the
number of shares issued times the bid price of the Common Stock on the date of
such issuance to Mr. Wenger. See "Description of Securities."

In November 1996, the Company reduced the exercise price of the 50,000
options issued to Mr. Kolls in March 1996, the 400,000 options issued to Mr.
Herbert in April 1996 and the 50,000 options issued to Mr. Sterling in May 1996
from $.65 to $.45. The new exercise price of these options was determined by
reference to the bid price of the Company's Common Stock on the date the Company
reduced the exercise price. See "Certain Transactions."

In February 1997, the Company issued to its Chief Financial Officer
Leland P. Maxwell an aggregate of 200,000 options to acquire Common Stock at
$.45 per share. See "Management -- Executive Officer Stock Options."

All stock options are granted at an exercise price determined by the
Board of Directors to be equal to or greater than the fair market value of the
Common Stock on the date of the grant. All of the above options are exercisable
at any time within five years from the date of vesting.

Edward J. Sullivan resigned as Chief Financial Officer, Senior Vice
President and Treasurer of the Company, effective December 1, 1996, for personal
reasons. Mr. Sullivan has agreed to act as a part-time consultant to the Company
through February 28, 1997. The Company has agreed that 21,000 of the 50,000
options granted to Mr. Sullivan during May 1996 have become vested as of
December 1, 1996 at an exercise price of $.65 per share and the balance thereof
have been canceled. The employment agreement of Mr. Sullivan was canceled
effective December 1, 1996. The Company appointed Keith L. Sterling as interim
Chief Financial Officer and Treasurer of the Company. Mr. Sterling also serves
as Executive Vice President - Operations, Secretary and as a Director of the
Company. See "Management - Officer Terminations." On February 24, 1997, the
Company hired Leland P. Maxwell as Chief Financial Officer, Treasurer and
Senior Vice President. See "Management."

From November 1, 1996 through December 31, 1996, an aggregate of
2,345,000 1996 Warrants were exercised at a price of $.20 per share resulting in
gross proceeds to the Company of $469,000. Subsequent to December 31, 1996 and
through February 28, 1997, an additional 989,000 1996 Warrants were exercised at
a price of $.20 per share resulting in additional gross proceeds to the Company
of $197,800. On December 27, 1996, the Company commenced a private placement
offering for 20 units at $10,000 each or an aggregate of $200,000. Each unit
consists of 1,000 shares of Preferred Stock and 30,000 1996-B Common Stock
Purchase Warrants. Each such warrant is exercisable into one share of Common
Stock through June 30, 1997 at $.20 and thereafter at $.30 for five years after
the termination of the offering. As of February 28, 1997, 10 units have been
sold generating $100,000 of gross proceeds to the Company. See "Managements'
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources."

RISK FACTORS

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

1. Development Stage Company; Limited Operating History; Significant
Cumulative Operating Losses; Auditor Report Modification for Going Concern.
Since its founding in January 1992, the Company has been in the development
stage and has been engaged almost exclusively in research and development
activities focused on designing, developing, and marketing its credit card
activated control systems. From inception through December 31, 1996 the Company
has generated funds primarily through the sales of its securities. The auditor's
report includes a modification that indicates that the Company's existence may
be dependent on its ability to continue to raise capital and generate sufficient
revenue from operations. See "Financial Statements." The Company installed its
first product, the Golfer's OasisTM in June 1994. This product line did not
achieve the anticipated market acceptance and was also very capital intensive.
There are currently no units in operation and net revenues through December 31,
1996 were nominal. The Credit Card Copy ExpressTM was first installed in January
1995, and as of December 31, 1996, there were only 60 units in operation and
net revenues therefrom were nominal. The Credit Card Vending ExpressTM was first
installed in March 1995, and as of September 30, 1996 there were only 2 units in
operation and net revenues were nominal. As of the date hereof, there are no
units in operation. The Company's Credit Card Debit ExpressTM was first
installed in April 1995, and as of December 31, 1996, there were only 35 units
in operation and net revenues were nominal. The Credit Card Computer ExpressTM
was first installed in April 1996, and as of December 31, 1996, there were only
43 units in operation and net revenues were nominal. The Business ExpressTM was
first installed in September 1996, and as of December 31, 1996, there were 8
units in operation and net revenues were nominal.

For its fiscal years ended June 30, 1995, and June 30, 1996, the
Company incurred operating losses of $1,645,750 and $2,451,697, respectively.
For the six months ended December 31, 1996, the Company incurred an operating
loss of $1,685,137 (unaudited). From its inception on January 16, 1992 through
December 31, 1996, the Company has incurred operating losses of $7,928,096
(unaudited). The Company anticipates that for the two months ended February 28,
1997, it will incur an operating loss of approximately $360,000 (unaudited).
Such operating losses are anticipated to continue through at least June 30,
1997. See "Management's Discussion And Analysis of Financial Condition And
Results of Operations."

As of December 31, 1996, the Company's working capital was
approximately $941,125, of which $469,085 was invested in inventory. At December
31, 1996, the Company had cash net of current liabilities of approximately
$432,231. The Company anticipates generating additional cash to finance future
operating expenses by selling additional securities and through increased
revenues. As of February 28, 1997, the Company's products have been installed at
only 150 locations and net revenues have been nominal. Accordingly, the Company
has an extremely limited operating history upon which an evaluation of the
Company's prospects can be made. Such prospects must be considered in light of
the risks, expenses and difficulties frequently encountered in the establishment
of a new business as well as the risks, expenses and difficulties encountered by
a development stage company. There is currently no basis upon which to assume
that the Company's business will prove financially profitable or generate more
than nominal operating revenues. In addition, there can be no assurances that
the Company will be able to continue to sell additional securities. If the
Company either fails to generate increased revenues or fails to sell additional
securities, investors may lose all or a substantial portion of their investment.

2. Dependence Upon Key Personnel. The Company is dependent on certain
key management personnel, particularly its President and Chief Executive
Officer, George R. Jensen, Jr. The loss of services of Mr. Jensen or other
executive officers would have a material adverse effect upon the Company's
business. See "Management -- Officer Terminations." The Company has entered into
an employment agreement with Mr. Jensen that expires in June 1997 and one-year
employment agreements with the other executive officers each of which contain
non-compete agreements. The Company has obtained a key man life insurance policy
in the amount of $2,000,000 on Mr. Jensen, and a key man life insurance policy
in the amount of $1,000,000 on its Vice President-Research and Development,
Haven Brock Kolls, Jr. The Company does not have and does not presently intend
to obtain key man life insurance coverage on any of its other executive
officers.

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

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

5. Competition. The Company is not aware of any other business
competing in the areas of unattended, credit card activated control systems for
use in connection with copiers or personal computers. However, the businesses
which have developed unattended, credit card activated control systems currently
used in connection with gasoline dispensing, public telephones, ticket
dispensing machines, prepaid telephone cards, vending machines, or facsimile
machines are capable of developing products or utilizing their existing products
in direct competition with the Company. Many of these businesses are well
established, have substantially greater resources than the Company and have
established reputations for success in the development, sale and service of high
quality products. The Company is aware of one business which has developed an
unattended, credit card activated device for vending machines. 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. Any such increased competition may result in lower percentages of gross
revenues being retained by the Company in connection with its devices, or
otherwise may reduce potential profits or result in a loss of some or all of its
customer base.

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

7. Cash Dividends Not Likely. There can be no assurance that the
proposed operations of the Company will result in significant revenues or any
level of profitability. Any earnings which may be generated by the Company would
be used, for the foreseeable future, to finance the growth of the Company's
business. Accordingly, while payment of dividends rests within the discretion of
the Board of Directors, no cash dividends on the Common Stock have been declared
or paid by the Company to date, and the Company does not presently intend to pay
cash dividends on the Common Stock for the foreseeable future. Although the
Company paid a special stock dividend in August 1995 consisting of 3 shares of
Common Stock for each share of outstanding Preferred Stock, there can be no
assurance that cash dividends will ever be paid on the Common Stock. See
"Description of Securities -- Series A Convertible Preferred Stock." The
Articles of Incorporation of the Company prohibit the declaration of any
dividends on the Common Stock unless and until all unpaid and accumulated
dividends on the Preferred Stock have been declared and paid. Through December
31, 1996, the unpaid and cumulative dividends on the Preferred Stock equal
$2,350,641. On February 1, 1997, an additional $602,321 of dividends accrued and
became payable to the holders of the Preferred Stock, bringing the total
accumulated and unpaid dividends on the Preferred Stock to $2,952,962. Through
December 31, 1996, $46,494 of unpaid and cumulative dividends on the Preferred
Stock have been converted to 46,494 shares of Common Stock. The unpaid and
accumulated dividends are either payable in cash by the Company when and if
declared by the Board of Directors of the Company, or may be converted by the
holders thereof into shares of Common Stock at the rate of $1.00 per share at
the time of conversion of the underlying share of Preferred Stock. See
"Description of Securities- Series A Convertible Preferred Stock."

8. Need For Market Acceptance; Location Risk. There can be no assurance
that demand for the Company's products will be sufficient to enable the Company
to become profitable. Likewise, no assurance can be given that the Company will
be able to install the credit card activated control systems at enough locations
or sell equipment utilizing its control systems to enough locations to achieve
significant revenues or that its operations can be conducted profitably. As of
February 28, 1997, the Company's products have been installed at only 150
locations and revenues have been nominal. Alternatively, the locations which
would utilize the control systems may not be successful locations. In such
event, the revenues of the Company would be adversely affected. The Company may
in the future lose locations utilizing its products to competitors, or may not
be able to install its products at its competitor's locations.

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

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

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

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

11. Charge to Income in the Event of Release of Escrow Shares. In
January 1994, at the time of the Company's initial public offering, and as a
condition of effectiveness of the offering in Pennsylvania, the Pennsylvania
Securities Commission requested that Mr. Jensen place in escrow with Corestates
Bank (formerly Meridian Bank), as escrow agent, all of the 7,593,000 shares of
Common Stock beneficially owned by him until June 30, 1998. Any additional
shares of Common Stock acquired by him will also be held in escrow. Subject to
the provisions of the escrow agreement, Mr. Jensen has agreed not to sell,
pledge, or transfer, directly or indirectly, any of the Common Stock held in
escrow.

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

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

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

If the Company attains the aforementioned earning thresholds or the
Company's Common Stock attains the aforementioned prices required for the
release of certain shares of Common Stock currently held in escrow and which are
subject to cancellation, such release will require the Company to recognize
additional compensation expense. In the event such shares are released, they
will be considered outstanding for purposes of calculating per share information
concerning the Company. Accordingly, the Company will, in the event of the
release of such Common Stock, recognize during the period in which the earning
thresholds are met or such per share prices obtained, what could be a
substantial charge that would have the effect of substantially increasing the
Company's loss or reducing or eliminating earnings, if any, at such time. Such
charge will not be deductible for income tax purposes. Although the amount of
compensation expense recognized by the Company will not affect the Company's
total Shareholders' equity or cash flow, it may have a depressive effect on the
market price of the Company's securities. If the required earnings threshold was
achieved at December 31, 1996, the compensatory charge to the Company's
operations during the six months ended December 31, 1996 would have been
$1,746,000 (assuming the fair market value approximated $.40 per share on
December 31, 1996). This charge would not have affected the Company's cash flow
or total Shareholders' equity. The net loss per share of Common Stock would have
been ($.21). See "Principal Shareholders - Escrow and Cancellation
Arrangements."

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

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

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

13. Dilution, Issuance of Additional Securities By The Company. As of
December 31, 1996, the Company has issued outstanding options to acquire up to
3,616,000 shares of Common Stock, has issued 1996 Warrants which are convertible
into 2,855,000 shares of Common Stock, has issued 1995 Warrants which are
convertible into 1,414,000 shares of Common Stock, and has issued 793,995 shares
of Preferred Stock which are convertible into 7,939,950 shares of Common Stock.
In the event any or all of such securities are exercised or converted, the
number of issued and outstanding shares of Common Stock would be increased. In
such event, the percentage of Common Stock held by each holder of Common Stock
prior to such exercise or conversion would be reduced and such exercise or
conversion may have a dilutive effect on the market price of the Common Stock.
If all of such securities would be exercised or converted into Common Stock, an
additional 15,824,950 shares of Common Stock would be issued and outstanding as
of December 31, 1996, for a total of 41,484,094 shares of Common Stock issued
and outstanding. The Company may in the future issue additional options,
warrants or other securities convertible or exchangeable into Common Stock. See
"Recent Developments".

During the fiscal years ended June 30, 1995 and June 30, 1996, the
Company issued an additional 1,623,112 shares of Common Stock, an additional
498,403 shares of Preferred Stock, options to acquire up to 2,965,000 shares of
Common Stock and warrants to acquire up to 10,300,000 shares of Common Stock.
Assuming the exercise or conversion of all such securities, the issued and
outstanding shares of Common Stock would be increased by 19,872,142 shares. As
of December 31, 1996, such additional shares would represent approximately 45%
of all the issued and outstanding Common Stock on a fully converted basis.

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 proceeds from the sales of the Common
Stock. The Company would, however, receive $.20 through February 28, 1997 and
$.50 thereafter (or such lower exercise price as the Company may determine) upon
the exercise of each 1996 Warrant by a Selling Shareholder. Through September
30, 1996, no 1996 Warrants had been exercised. Subsequent to November 1, 1996,
and through December 31, 1996, an aggregate of 2,345,000 1996 Warrants have been
exercised at $.20, and gross proceeds to the Company were $469,000. From January
1, 1997 through February 28, 1997, an additional 989,000 1996 Warrants were
exercised at a price of $.20 per share resulting in additional gross proceeds to
the Company of $197,800. These proceeds are anticipated to be used to finance
working capital. There is no assurance that any of the remaining 1996 Warrants
will be exercised by the Selling Shareholders. The Selling Shareholders will
receive all of the net proceeds from the sale of the Common Stock pursuant to
this Prospectus. The Company expects to incur costs of approximately $55,000 in
connection with the registration of the Common Stock underlying the 1996
Warrants under the Act and applicable state securities laws. See "Description of
Securities - 1996 Common Stock Purchase Warrants."

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

Introduction

Since January 1992, the Company, a development stage corporation, has
been engaged almost exclusively in research and development activities focused
on designing, developing, and marketing its unattended, credit card activated
control systems. From inception through December 31, 1996, the Company has had
nominal operating revenues and has generated funds primarily through the sale of
its securities. As of December 31, 1996, the Company has received, net of
expenses of such sales, the amount of $4,367,085 in connection with private
placements, $1,574,800 from the exercise of the 1995 Warrants and 1996 Warrants,
and $2,345,104 in connection with its initial public offering. The Company has
incurred operating losses since its inception, resulting in an accumulated
deficit of $8,986,148 at December 31, 1996 and such losses are expected to
continue at least through June 30, 1997.

The Company's independent auditors have included an explanatory
paragraph in their report on the Company's June 30, 1996 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, 1996 combined with the revenues to be generated during fiscal year
1997, the potential capital to be raised from the exercise of the 1995 and 1996
Warrants, and the ability to defer anticipated expenditures, if required, will
provide for the Company to continue as a going concern. There can be no
assurance, however, that any significant revenues will be generated during the
1997 fiscal year or that sufficient capital can be raised by the Company. In
such event, the Company may cease to be a going concern and investors in the
Common Stock may lose all of their investment. See "Risk Factors - Development
Stage Company; Limited Operating History; Significant Cumulative Operating
Losses."

Results of Operations

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

Revenues for the fiscal year ended June 30, 1996 remained at a nominal
level reflecting the disappointing performance of the Credit Card Copy ExpressTM
product line. Expenses for the fiscal year ended June 30, 1996 were $2,536,544,
representing a $868,546 or 52% increase over the prior year. The primary
contributors to this increase were general and administrative expense and
compensation.

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

General and administrative expense of $1,449,889 increased sharply by
$751,289 or 108% which reflects both a general increase in spending to support
the expansion of operations as well as several non-operational factors.
Specifically, the major contributors to this increase were (a) $187,122 increase
in travel and lodging which was concentrated in the operations area and reflects
installation of the Company's control devices, (b) $103,355 increase in
professional fees due to financial consultant and legal fees, including
increased patent activity, (c) $93,888 increase in product development expense
primarily due to the programming and configuration of the Company's Credit Card
Computer ExpressTM, (d) $313,548 increase in consulting expense, $247,205 of
which is a non-cash compensation expense attributable to the issuance of Common
Stock to an outside consultant for services rendered, and (e) the balance of the
increase includes public relations and technical services. Telephone, office
expense, and postage increased moderately.

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

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

A provision for losses on equipment was charged to operations in the
amount of $44,100 which represents the final charge for the discontinuance of
the Golfer's OasisTM product line.

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

Fiscal Year Ended June 30, 1995. For the fiscal year ended June 30,
1995, the Company had a net loss of $1,645,750. Overall this loss reflects the
continuing development stage activities of the Company including the costs
associated with the de-emphasis of the Golfer's OasisTM product line. 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. In addition, in August 1995 the Company paid a special stock dividend of 3
shares of Common Stock for each share of Preferred Stock issued and outstanding
on August 1, 1995, consisting of an aggregate of 1,908,600 shares of Common
Stock. The $2,149,624 loss applicable to common shares or $.19 loss per common
share was derived by adding the $1,645,750 net loss and the $503,784 of
cumulative preferred dividends for the year ending June 30, 1995 and dividing by
the weighted average shares outstanding.

Revenues for the fiscal year ended June 30, 1995 remained at a nominal
level reflecting the disappointing performance of the Golfer's OasisTM and the
slower than anticipated introduction of the Credit Card Copy ExpressTM product
line. Expenses for the fiscal year ended June 30,1995 were $1,667,998,
representing a $413,914 or 33% increase over the prior year. The primary
contributors to this increase were general and administrative expense and a
provision for loss on obsolete equipment.

General and administrative expense of $698,600 increased sharply by
$314,689 which reflects both a general increase in spending to support the
expansion of operations as well as several non-operational factors.
Specifically, the major contributors to this increase were (a) $120,000 increase
in consulting fees which includes a non-recurring charge of $99,750 for the
non-cash compensation expense associated with the 150,000 shares of Common Stock
issued to an outside consultant, (b) $47,000 increase in rent, which includes a
non-recurring charge of $44,000 for the planned lease termination for the
Jacksonville facility, (c) 25,000 increase in equipment rental expense
associated with the Jacksonville location, (d) $69,000 increase in professional
fees due to legal, accounting, and public relations activities, (e) increase of
$12,000 in telephone expense, and (f) an increase of $12,000 in postage.

Compensation expense remained level with the prior year. At year end
the Company had thirteen full time employees representing a net addition of only
one. However the composition of the staff has shifted in support of the new
product development.

A provision for losses on obsolete equipment of $148,615 was recorded
to reflect the Company's decision to deemphasize the Golfer's OasisTM product
line. It is management's opinion that the new products already developed
represent a better utilization of the Company's resources and will yield returns
higher than the capital intensive Golfer's OasisTM. All of the software and
technology related to this control system has been incorporated into and will be
marketed under the Credit Card Vending ExpressTM line. This charge to expense
represents the cost of liquidating the machines, parts, and components in excess
of the Company's current requirements.

Advertising and interest expense were both level with the prior year.
The majority of the interest expense, however, is related to the Company's
initial public offering which closed in February 1995 and therefore will not
continue. Research and development expense decreased significantly in 1995 by
$73,125 primarily due to the transition of projects from outside contracts to
in-house personnel which is accounted for under Compensation. Depreciation
increased by $7,410 as a function of the increased asset base.

Six Months Ended December 31, 1996. The six months ended December 31,
1996 resulted in a net loss of $1,685,137 or $.12 loss per Common share as
compared to a net loss of $1,069,034 or $.11 loss per Common share for the
comparable six month period ended December 31, 1995. On an overall basis these
continuing and increasing losses reflect the development stage nature of the
Company and the significantly higher spending levels associated with the
introduction of the Company's latest proprietary product, the Business
ExpressTM. Losses are projected to continue until and unless sufficient revenue
is generated from the Company's products.

Revenue from operations was $153,642 compared to $42,937 for the
comparable six months ended December 31, 1995. This is also the first period to
reflect the Company's sale of equipment utilizing its control systems. Prior
thereto, the Company's operating revenues consisted solely of licensing and
transaction processing revenues. Equipment sales for the six month period
totaled $89,463. Licensing and processing revenue increased to $46,943 from
$22,883 for the same period in 1995. Despite this modest increase and change in
approach to the market, revenue is still well below the level required to be
profitable.

Expenses for the period were $1,838,779 which represents an increase
over the prior year of $726,808 or 65%. Generally this increased expense level
reflects continuing developmental activity for the Company's newest product, the
Business ExpressTM, as well as the associated costs of market introduction. The
major contributors to the increased expense level are discussed below. This
increase also includes a non-cash charge of $125,500 for the issuance of Common
Stock in exchange for consulting services, and a non-cash charge of $31,705 to
provide for losses on equipment.

General and administrative expenses of $1,107,970 increased by $504,075
or 83%. The increase in this expense category was concentrated in Product
Development and Travel Expense, both of which resulted directly from the
development and introduction of the Business ExpressTM. In addition,
Professional Fees increased and Rent increased primarily due to the accrual of
continuing rent expense on the Company's former leased facilities.

Compensation expense of $496,204 inreased by $42,134 or 9.3% due to an
increase in staffing levels in the marketing area and increased sales commission
payments related to increased equipment sales.

Depreciation increased from $10,212 to $46,522 reflecting the increased
depreciable capital asset base.

Advertising increased from $43,134 to $79,472 as a result of the
promotional expense related to the introduction of the Business ExpressTM.

Plan of Operations

As of February 28, 1997, the Company had a total of 150 credit card
activated control systems installed at commercial locations as follows:

Credit Card Copy ExpressTM 52, Credit Card Debit ExpressTM 35, Credit
Card Computer ExpressTM 42, Fax ExpressTM 12, and Business ExpressTM 9. In July
1996, the licensing arrangement with the apparel manufacturer operating the
Vending ExpressTM equipment was terminated by the manufacturer effective
September 30, 1996. Through September 30, 1996 the total gross revenues received
by the Company from these systems has been nominal.

During the 1996 fiscal year, the Company has shifted its emphasis to
products capable of generating new incremental revenue for equipment operators
(i.e. Credit Card Computer ExpressTM, Business ExpressTM) as opposed to in the
past simply providing a better method of payment (i.e. Credit Card Copy
ExpressTM).

The Company completed development of the Business ExpressTM in August
1996 and as of February 28, 1997 there were 9 sites in operation.

Another significant change in direction has been the move toward the
sale of equipment utilizing the Company's control systems rather than the
revenue sharing arrangements previously employed. This shift in approach reduces
the Company's dependancy on licensing revenue and simultaneously reduces the
Company's capital asset requirements.

Plans for the remainder of the 1997 fiscal year include progressing
from the development stage to an operating mode. In October 1996, the Company
relocated its principal offices to a 7,000 square foot facility which will
provide assembly and warehousing space for the anticipated increased production
of the Business ExpressTM.

Unless certain earnings are achieved by the Company or the price of the
Common Stock attains certain prices prior to June 30, 1998, a maximum of
4,365,000 shares of Mr. Jensen's shares of Common Stock will be cancelled. See
"Risk-Factors - Charge to Income in the Event of Release of Escrow Shares" and
"Management - Escrow And Cancellation Provisions." If such shares are not
cancelled and are released from escrow, the Company would recognize during the
period when such shares are released a substantial charge to operations. Such
charge could have the effect of substantially increasing the Company's loss or
reducing or eliminating any earnings. If such shares would have been released
during the six months ended December 31, 1996, there would have been a
compensatory charge of approximately $1,746,000 against operations, assuming the
fair market value of the Common Stock approximated $.40 per share on December
31, 1996. The net loss per share would have been ($.21) in contrast to the
reported loss per share of ($.12) for the six month period ended December 31,
1996.

Liquidity and Capital Resources

During the fiscal year ended June 30, 1996, the Company completed a
number of equity transactions. Net proceeds of $1,957,255 were realized from the
private placement offering of units consisting of Preferred Stock and 1995
Warrants, which closed August 31, 1995. In February 1996, the exercise price for
the 1995 Warrants was reduced from $.50 per share to $.30 per share and net
proceeds of $1,105,800 were generated from the 1995 Warrants exercised. In April
1996, a private placement offering of units consisting of Preferred Stock and
1996 Warrants generated an additional $1,249,264 of net proceeds. As of June 30,
1996 total working capital was $1,957,255, including cash on hand of $1,773,356.

During the fiscal year ended June 30, 1996, net cash of $2,392,538 was
used by operating activities, primarily compensation and general and
administrative expenses. Net cash of $108,904 was used by investing activities
principally for the purchase of property and equipment. The net cash provided by
financing activities of $3,898,607 was principally due to the net proceeds
generated from the issuance of Common Stock and Preferred Stock of $3,953,899.

For the six month period ended December 31, 1996, there was a net
decrease in cash of $1,120,498. This was attributable primarily to sustaining a
$1,685,137 operating loss and capital expenditures of $40,766, offset by
$575,350 raised through the issuance of Common Stock.

The Board of Directors approved a reduction in the exercise price of
the 5,200,000 1996 Warrants. Effective November 1, 1996 the exercise price was
reduced to $.20 per share through February 28, 1997. This resulted in the
exercise of 2,345,000 1996 Warrants for gross proceeds to the Company of
$469,000 as of December 31, 1996.

In addition, in December 1996, the Board of Directors authorized a
$200,000 private placement offering of 20 units at a unit price of $10,000. Each
unit consisted of 1,000 shares of Series A Convertible Preferred Stock and
30,000 1996-B Common Stock purchase warrants at an exercise price of $.20 per
share through June 30, 1997 and thereafter at $.30 per share for five years
after the termination of the offering.

As of December 31, 1996, working capital was approximately $941,125 of
which $469,085 was invested in inventory. Subsequently and through February 28,
1997, additional cash has been raised. A total of 10 units of the private
placement offering approved in December 1996 have been sold generating $100,000
of gross proceeds to the Company. In addition, 989,000 1996 Warrants have been
exercised at $.20 per share generating an additional $197,800 of gross proceeds.

At the current level of operations, the Company has sufficient
resources to continue operations through April 1997. The Company anticipates
that subsequent to the date hereof it would raise approximately $750,000 through
sales of its securities during the balance of fiscal 1997. The Company believes
that this would be sufficient to fund operations through at least June 30, 1997.

The Company anticipates funding operations subsequent to June 30, 1997
and through March 1, 1998, by sales of its securities as well as from increased
revenues from its business. There can be no assurance that additional sales of
securities could be made by the Company or that increased revenues would result
from its business. In such event, the Company may cease to be a going concern or
may have to reduce its operations or operating procedures. See "Risk Factors."

Commitment

During February 1996, the Company entered into a commitment to acquire
250 control systems for $142,000. As of June 30, 1996, 174 units were received
and accordingly $99,000 was included in accounts payable. As of the date hereof,
all remaining units under this commitment were received and all outstanding
balances related to this commitment were paid.

In October 1996, the Company entered into a lease for approximately
7,000 square feet in Wayne, Pennsylvania for a monthly rental of $5,000 plus
utilities and operating expenses. The lease expires on October 15, 1999. The
Company is obligated to continue to pay rent under its lease for its previous
Wayne, Pennsylvania office space through August 1997. Through December 31,
1996, all unpaid rent related to this lease has been accrued in the December
31, 1996 financial statements.

BUSINESS

The Company's devices make available credit card payment technology in
connection with the sale of a variety of products and services. The Company
anticipates generating its revenues from both retaining a portion of the
revenues generated from all credit card transactions conducted through its
control systems and from the sale of equipment utilizing its control systems.

The Company has developed an unattended, credit card activated control
system to be utilized with photocopying machines and computer printers known as
the Credit Card Copy ExpressTM, and an unattended, credit card activated control
system to be used in connection with debit card purchase/revalue stations known
as the Credit Card Debit ExpressTM. The devices allow consumers to use credit
cards to pay for those products and services.

In September 1996, the Company completed development of its Business
ExpressTM which will be marketed to the hospitality industry as an amenity to
the business traveler. The Business ExpressTM combines the Company's existing
applications for computers, copiers, and facsimiles into a kiosk type
configuration. All services provided are credit card activated. The Company
intends to license the Business ExpressTM as well as sell the Business ExpressTM
to commercial locations. As of February 28, 1997, 9 units have been licensed and
no units have been sold to commercial locations.

For the years ended June 30, 1995 and 1996, the Company has spent
approximately $130,000 and $224,000, respectively for the development of its
proprietary technology. These amounts include the expense of outside consultants
and contractors as well as compensation paid to the Company's employees and
included in Compensation in the accompanying financial statements.

The Company has been certified by First Data Corp., the leading credit
card processor in the United States. First Data has extended to the Company a
fixed rate percentage processing charge in connection with the credit card
transactions conducted through the Company's products. This charge is paid by
the Company out of its share of the gross proceeds. See "Business-Credit Card
Processing." Each credit card activated control device records and transmits all
transaction data to the Company, and the Company then forwards such data to the
credit card processor. After receiving transaction information from the Company,
the credit card processor electronically transfers the funds to the Company's
bank account. The Company then forwards to the location utilizing the Company's
control system its share of the funds.

As of February 28, 1997, the Company had 52 Credit Card Copy ExpressTM
control systems, 35 Credit Card Debit ExpressTM control systems, and 42 Credit
Card Computer ExpressTM control systems at some of the following commercial
locations: Adams State College, Anaheim Public Library, Boston College, Boston
College Law School, Bradley University Library, Bucks County Community College,
Central Arkansas Library System, Clarkson University, Cleveland State
University, Colgate University, Denver Public Library, Drexel University,
Georgetown University Law Library, Library of Congress, Loyola University
Medical School, Michigan State University, Nanuet Public Library, New England
Law Library, Nova Southeastern University, Ohio University, Penn State
University, Philadelphia College of Pharmacy & Science, Princeton University,
San Francisco Public Library, Temple University Law Library, University of
Arkansas Law Library, University of Chicago, University of the District of
Columbia, University of Georgia, University of Houston, University of Maine,
University of Maryland, University of Pittsburgh, University of Tennessee,
University of Texas, University of Wisconsin, Upper Merion Public Library,
Villanova University, and William Jeanes Memorial Library. Through December 31,
1996 the total gross revenues received by the Company from these systems has
been nominal.

As of February 28, 1997, the Company had installed at commercial
locations a total of 150 devices and revenues have been nominal.

The Company had licensed its Credit Card Vending ExpressTM technology
to an apparel manufacturer to be used in connection with the sale from vending
machines of T-shirts, windbreakers, and tote bags, and has also licensed this
technology to two golf courses. In July 1996, the licensing arrangement with the
apparel manufacturer was terminated by the apparel manufacturer effective
September 30, 1996. There are currently no Credit Card Vending ExpressTM control
systems in operation.

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 products and services is in credit cards
rather than cash. There are approximately eight hundred million credit cards
issued in the United States. The Company has focused its efforts towards
developing unattended, credit card activated control systems for use in the
copier, debit card and personal computer industries.

Credit Card Processing

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

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

The Credit Card Copy ExpressTM

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. With the Credit Card Copy ExpressTM, the attendant
no longer needs to interact with the customers for these purposes.

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

The Credit Card Debit ExpressTM

Many "closed" environments such as universities utilize a private card
system to store cash value known as a debit or "stored value" card. The system
works by encouraging customers to transfer lump sum cash values onto a magnetic
stripe or imbedded chip card that can be used to activate equipment within the
closed environment. As the cardholder uses the card to purchase products or
services the cash value is deducted from the total value on the card.

The Company's Credit Card Debit ExpressTM 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 Credit Card Debit ExpressTM eliminates any reliance on cash by
allowing customers to use a credit card to purchase or place additional value on
a debit card.

The Company's product is presently being used with debit card machines
in university libraries. Such debit cards are used for the copy machines located
in the library.

The Credit Card Computer ExpressTM

The Company believes that the growing dependence on personal computers
has created an environment where there is a need for access to personal
computers by the general public on an "as needed" basis. To meet this need, the
Company has developed the Credit Card Computer ExpressTM. Through December 31,
1996, the Company's system is in commercial use at 42 locations, substantially
all of which are public libraries. The device enables the public to utilize
personal computers and/or the services they offer on an "as-needed" basis. The
system is designed so that the computer could not be used until a valid credit
card is swiped through the control system. Once the user is authorized to
proceed, the system charges for time in use, printed output, and any modem
activity.

The Company could either sell the credit card activated control device
to locations which already have personal computers, or alternatively, either
license or sell to the location a Credit Card Computer ExpressTM complete
system.

In marketing the Credit Card Computer ExpressTM, the Company intends to
target public libraries and university libraries as its main customer base. The
Company believes that the personal computer is becoming an integral part of how
library patrons access and utilize the information available to them. The
Company also believes that the majority of these libraries do not currently
offer general use personal computers to their patrons. The Company will also
pursue print shops, cyber cafes, hotels, airports, convention and conference
centers, and various retail outlets as potential customers.

The Business ExpressTM

The hotel/motel hospitality industry continues to expand, but has
become more competitive as chains increase their efforts to attract the most
dominant and profitable customer - the business traveler. Business travelers and
conference attendees account for the majority of hotel occupancy, stay longer
and spend more per visit than the leisure traveler. For these reasons, the
Company believes that hotels have become very sensitive and responsive to the
needs and preferences of the business traveler. The Business ExpressTM enables a
hotel to address these needs, while simultaneously generating revenue to the
hotel.

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

During August 1996, the Company completed the Business ExpressTM
prototype and during September 1996 installed the first test site. As of
February 28, 1997, the Company had 9 commercial installations at Courtyard by
Marriott, located in Wayne, Pennsylvania; the Westin and Chimo Hotel located in
Ottawa, Ontario; Carriage Place, located in Denver, Colorado; Embassy Suites,
located in Hunt Valley, Maryland; and Sheraton Great Valley, located in Malvern,
Pennsylvania. The Company is continuing to market the product to the hospitality
industry.

Marketing

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

Procurement

The Company's control system devices consist of a card reader, printer,
amplifier, circuit board and micro chip in a specially designed housing. The
devices are currently manufactured to the Company's design specification by an
independent contractor, LMC - Autotech Technologies, LP. The Company has
recently contracted for the purchase of 250 control devices, for a total
purchase price of $142,000. As of the date hereof, all units ordered under this
contract have been received and all amounts due under this contract have been
paid by the Company.

The Company anticipates obtaining its complete computer systems (other
than the Company's control system) from Dell, Hewlett-Packard Company, or IBM
pursuant to the agreements entered into with them.

During February 1996, the Company entered into an agreement with Dell
Marketing, L.P., a subsidiary of Dell Computer Corporation ("Dell"), pursuant to
which the Company was appointed as a Dell authorized "Remarketer/Integrator."
The agreement has an initial term of one year and can be cancelled by either
party upon thirty days notice. Through December 31, 1996, the Company ordered 54
computer systems from Dell.

In December 1996, the Company entered into an agreement with IBM
pursuant to which it was appointed an "IBM Personal Computer Value Added
Reseller." The agreement is for a twelve month period commencing January 1, 1997
and can be terminated by either party after one month's prior notice.

The Company has also been designated as an authorized "Hewlett-Packard
Value-Added Reseller."

Competition

The Company believes that there are currently no other businesses
offering an unattended, credit card activated control systems for use in
connection with copiers or personal computers. However, the businesses which
have developed unattended, credit card activated control systems currently in
use in connection with gasoline dispensing, public telephones, prepaid telephone
cards, ticket dispensing machines, vending machines, or facsimile machines, are
capable of developing products or utilizing their existing products in direct
competition with the Company. Many of these businesses are well established,
have substantially greater resources than the Company and have established
reputations for success in the development, sale and service of high quality
products. The Company is aware of one business which has developed an
unattended, credit card activated control system to be used in connection with
vending machines. The Company is also aware of several businesses which make
available the Internet and use of personal computers to hotel guests in their
hotel rooms on as "as-needed" basis. These services are not, however, credit
card activated. Any such increased 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. See "Risk Factors - Competition".

Patents, Trademarks and Proprietary Information

The Company has applied for federal registration of its trademarks
Credit Card Printer ExpressTM, Credit Card Copy ExpressTM, Credit Card Debit
ExpressTM, Credit Card Computer ExpressTM, C3XTM, and Business ExpressTM.

Much of the technology developed or to be developed by the Company is
subject to trade secret protection. To reduce the risk of loss of trade secret
protection through disclosure, the Company has entered into confidentiality
agreements with its key employees. There can be no assurance that the Company

will be successful in maintaining such trade secret protection or that others
will not capitalize on certain of the Company's technology.

The Company has applied for seven United States letters patent related
to its cashless vending technology, and has applied for certain corresponding
foreign letters patent in connection therewith. As of the date hereof, all of
such applications are pending and have not been granted. See "Risk Factors
Dependence on Proprietary Technology; Patent Issues."

Employees

As of February 28, 1997, the Company had sixteen full-time employees.

Properties

The Company leases its principal executive offices, consisting of
approximately 7,000 square feet, at 200 Plant Avenue, Wayne, Pennsylvania for a
monthly rental of $5,000 plus utilities and operating expenses. The lease
expires on October 15, 1999. Effective October 1996, the Company cancelled its
lease in Jacksonville, Florida and has no further obligation thereunder. The
Company is obligated to continue to pay rent under the lease for its previous
Wayne, Pennsylvania executive offices through August 1997. Through December 31,
1996, all unpaid rent related to this lease has been accrued in the December
31, 1996 financial statements.

Legal Proceedings

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

MANAGEMENT

Directors and Executive Officers

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

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

George R. Jensen, Jr. 48 President, Chief Executive
Officer, Chairman of the
Board of Directors
Stephen P. Herbert 34 Executive Vice President - Sales
and Marketing, Director
Haven Brock Kolls, Jr. 31 Vice President - Research and
Development
Keith L. Sterling 44 Executive Vice President -
Operations, Secretary,
Director
Leland P. Maxwell 50 Senior Vice President,
Chief Financial Officer,
Treasurer
Peter G. Kapourelos 77 Director
William W. Sellers 75 Director
Henry B. duPont Smith 35 Director
William L. Van Alen, Jr. 63 Director

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

George R. Jensen, Jr., has been the President, Chief Executive Officer,
and Director of the Company since January 1992. Mr. Jensen is the founder, and
was Chairman, Director, and Chief Executive Officer of American Film
Technologies, Inc. ("AFT") from 1985 until 1992. AFT was in the business of
creating color imaged versions of black-and-white films. From 1979 to 1985, Mr.
Jensen was Chief Executive Officer and President of International Film
Productions, Inc. Mr. Jensen was the Executive Producer of the twelve hour
miniseries, "A.D.", a $33 million dollar production filmed in Tunisia. Procter
and Gamble, Inc., the primary source of funds, co-produced and sponsored the
epic, which aired in March 1985 for five consecutive nights on the NBC network.
Mr. Jensen was also the Executive Producer for the 1983 special for public
television, " A Tribute to Princess Grace". From 1971 to 1978, Mr. Jensen was a
securities broker, primarily for the firm of Smith Barney, Harris Upham. Mr.
Jensen was chosen 1989 Entrepreneur of the Year in the high technology category
for the Philadelphia, Pennsylvania area by Ernst & Young LLP and Inc. Magazine.
Mr. Jensen received his Bachelor of Science Degree from the University

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 full-time 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. From 1994 to April 1996, Mr. Herbert was a Manager of
Market Strategy. In such position he was responsible for directing development
of market strategy for the vending channel and subsequently the supermarket
channel for Pepsi-Cola in North America. Prior thereto, Mr. Herbert held various
sales and management positions with Pepsi-Cola. Mr. Herbert graduated with a
Bachelor of Science degree from Louisiana State University.

Haven Brock Kolls, Jr., joined the Company on a full-time basis in May
1994 and was elected an executive officer in August 1994. From January 1992 to
April 1994, Mr. Kolls was Director of Engineering for International Trade
Agency, Inc., an engineering firm specializing in the development of control
systems and management software packages for use in the vending machine
industry. Mr. Kolls was an electrical engineer for Plateau Inc. from 1988 to
December 1992. His responsibilities included mechanical and electrical
computer-aided engineering, digital electronic hardware design, circuit board
design and layout, fabrication of system prototypes and software development.
From 1984 to 1988, Mr. Kolls was employed as an electrical engineer. Mr. Kolls
is a graduate of the University of Tennessee with a Bachelor of Science Degree
in Engineering.

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

The former Chief Financial Officer of the Company resigned effective
December 1, 1996. See "Officer-Terminations."

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 division accounts 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.

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

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

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

William L. Van Alen, Jr., joined the Board of Directors of the Company
in May 1993. Mr. Van Alen is President of Cornerstone Entertainment, Inc., an
organization engaged in the production of feature films of which he was a
founder in 1985. Since 1996, Mr. Van Alen has been President and a Director of
The Noah Fund, a 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.

Executive Compensation

The following table sets forth certain information with respect to
compensation paid or accrued by the Company during the fiscal years ended June
30, 1994, June 30, 1995 and June 30, 1996 to the individual acting in the
capacity of Chief Executive Officer of the Company. No individual who was
serving as an executive officer of the Company at the end of the fiscal years
ended June 30, 1994, June 30, 1995 or June 30, 1996 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., 1996 $90,000 $0
Chief Executive Officer, 1995 $90,000 $0
President 1994 $90,000(1) $0

(1) During the 1994 fiscal year, Mr. Jensen actually received, in addition to
his salary for the 1994 fiscal year, the amount of $50,000 for accrued but
unpaid salary attributable to the 1993 fiscal year.

Executive Employment Agreements

The Company has entered into a one year employment agreement with Mr.
Jensen which expires June 30, 1997. The Agreement is automatically renewed from
year to year unless canceled by Mr. Jensen or the Company. The agreement
provides for an annual base salary of $100,000 per year commencing July 1, 1996.
Mr. Jensen is entitled to receive such bonus or bonuses as may be awarded to him
by the Board of Directors. In determining whether to pay such a bonus, the Board
would use its subjective discretion. The Agreement requires Mr. Jensen to devote
his full time and attention to the business and affairs of the Company, and
obligates him not to engage in any investments or activities which would compete
with the Company during the term of the Agreement and for a period of one year
thereafter.

The Company has entered into a one-year employment agreement with Mr.
Herbert which expires on April 30, 1997. The agreement is automatically renewed
from year to year thereafter unless canceled by Mr. Herbert or the Company. The
Agreement provides for an annual base salary of $90,000 per year, provided, that
Mr. Herbert's base salary shall never be less than ninety percent of that of the
Chief Executive Officer of the Company. Mr. Herbert is entitled to receive such
bonus or bonuses as the Board of Directors

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

Mr. Sterling has entered into a one-year employment agreement with the
Company which expires on June 30, 1997. The agreement is automatically renewed
from year to year thereafter unless cancelled by Mr. Sterling or the Company.
The Agreement provides for an annual base salary of $90,000 per year and
provides that Mr Sterling is entitled to receive such bonus or bonuses as the
Board of Directors may award to him. The agreement requires Mr. Sterling to
devote his full time and attention to the business and affairs of the Company,
and obligates him not to engage in any investments or activities which would
compete with the Company during the term of the agreement and for a period of
one year thereafter.

Mr. Sullivan had entered into a one-year employment agreement with the
Company which was to expire on June 30, 1997. Effective December 1, 1996, Mr.
Sullivan resigned as an officer and Chief Financial Officer of the Company. Mr.
Sullivan has agreed to act as a part-time consultant to the Company through
February 28, 1997. Mr. Sullivan's employment agreement was cancelled by the
Company effective December 1, 1996. See "Management - Officer Terminations."

Mr. Kolls has entered into a one-year employment agreement with the
Company which expires on April 30, 1997, and is automatically renewed from year
to year thereafter unless canceled by Mr. Kolls or the Company. The agreement
provides for an annual base salary of $90,000 per year. Mr. Kolls is also
entitled to receive such bonus or bonuses as may be awarded to him by the Board
of Directors. The Agreement requires Mr. Kolls to devote his full time and
attention to the business and affairs of the Company, and obligates him not to
engage in any investments or activities which would compete with the Company
during the term of the agreement and for a period of one year thereafter.

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

Director Compensation and Stock Options

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

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

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

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

The Company paid to William W. Sellers the amount of $80,000 for
consulting services rendered by Mr. Sellers to the Company during the fiscal
year ended June 30, 1996.

The Company paid to Peter G. Kapourelos the amount of $24,000 for
consulting services rendered by Mr. Kapourelos to the Company during the fiscal
year ended June 30, 1996.

Executive Stock Options

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

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

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

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

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

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

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

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

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

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

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

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

Officer Terminations

The employment agreement of Barry Slawter, a former officer of the
Company, expired on June 30, 1996, and Mr. Slawter is no longer an employee or
officer of the Company.

Effective December 1, 1996, Edward J. Sullivan resigned as an officer
and Chief Finanical Officer of the Company. Mr. Sullivan has agreed to act as a
part-time consultant to the Company through February 28, 1997. The Company has
agreed that 21,000 of the 50,000 options granted to Mr. Sullivan during May 1996
have become vested as of December 1, 1996 and the balance thereof have been
cancelled. The employment agreement of Mr. Sullivan was cancelled effective
December 1, 1996.

PRINCIPAL SHAREHOLDERS

Common Stock

The following table sets forth, as of December 31, 1996, the
beneficial ownership of the Common Stock of each of the Company's directors and
executive officers, as well as by the Company's directors and executive officers
as a group. Except as set forth below, the Company is not aware of any
beneficial owner of more than five percent of the Common Stock. Except as
otherwise indicated, the Company believes that the beneficial owners of the
Common Stock listed below, based on information furnished by such owners, have
sole investment and voting power with respect to such shares, subject to
community property laws where applicable.

Number of Shares
Name and Address of Common Stock Percent
of Beneficial Owner Beneficially Owned(1) of Class(2)
------------------- --------------------- -----------
George R. Jensen, Jr. 7,753,000 shares(3) 17.8%
10 Fox Chase Road
Malvern, Pennsylvania 19355

Stephen P. Herbert 150,000 shares(4) *
536 West Beach Tree Lane
Strafford, Pennsylvania 19087

Haven Brock Kolls, Jr. 221,500 shares(5) *
150 Westridge Gardens
Phoenixville, Pennsylvania 19460

Keith L. Sterling 400,000 shares(6) *
114 South Valley Road
Paoli, Pennsylvania 19033

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

William W. Sellers 982,500 shares(8) 2.3%
394 East Church Road
King of Prussia, Pennsylvania 19406

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

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

All Directors and Executive Officers
As a Group (8 persons) 10,445,000 shares(11) 23.9%

- ---------
*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 December 31 1998, are deemed to be beneficially owned for purposes hereof.

(2) For purposes of computing the percentages under this table, it is assumed
that all shares of issued and outstanding Preferred Stock have been converted
into 7,939,950 shares of Common Stock, that all of the options or purchase
rights to acquire Common Stock which have been issued and are fully vested as
of December 31, 1996 (or within 60-days of December 31, 1996) have been
converted into 3,423,000 shares of Common Stock. Of the 3,773,300 options or
purchase rights to acquire Common Stock issued as of December 31, 1996, only
350,000 of such options do not become vested within 60-days thereof, and such
options are excluded from this table. For purposes of computing such
percentages it has also been assumed that all of the remaining 1995 Warrants
have been exercised for 1,414,000 shares of Common Stock, all of the 1996
Warrants have been exercised for 2,855,000 shares of Common Stock, and all of
the accrued and unpaid dividends on the Preferred Stock as of December 31,
1996 have been converted into 2,350,641 shares of Common Stock. Therefore, for
purposes of computing the percentages under this table, there are 43,642,035
shares of Common Stock issued and outstanding.

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

(4) Includes 150,000 shares of Common Stock issuable to Mr. Herbert upon the
exercise of options. Does not include 250,000 shares of Common Stock issuable
pursuant to options not presently exercisable and not exercisable within 60
days of December 31, 1996.

(5) Includes 5,000 shares of Common Stock issuable upon the conversion of 500
shares of Preferred Stock beneficially owned by Mr. Kolls. Includes 200,000
shares of Common Stock issuable upon exercise of options. Does not include
50,000 shares of Common Stock issuable pursuant to options not presently
exercisable and not exercisable within 60-days of December 31, 1996.

(6) All shares of Common Stock held by Mr. Sterling on the date hereof are
held with his spouse as joint tenants with right of survivorship. Includes
300,000 shares of Common Stock issuable upon exercise of options. Does not
include 50,000 shares of Common Stock issuable pursuant to options not
presently exercisable and not exercisable within 60-days of December 31,
1996.

(7) Includes 10,000 shares of Common Stock issuable upon the conversion of
1,000 shares of Preferred Stock beneficially owned by Mr. Kapourelos. Includes
30,000 shares of Common Stock held on the date hereof by Mr. Kapourelos with
his spouse as joint tenants with right of survivorship. Includes 170,000
shares of Common Stock issuable upon exercise of options.

(8) Includes 147,250 shares of Common Stock issuable upon the conversion of
14,725 shares of Preferred Stock beneficially owned by Mr. Sellers. Includes
an aggregate of 141,750 shares of Common Stock issuable upon exercise of the
1995 Warrants beneficially owned by him. Of such 1995 Warrants, 60,000 are
owned by the Sellers Pension Plan of which Mr. Sellers is a trustee, 30,000
are owned by Sellers Process Equipment Company of which he is a Director, and
15,000 are owned by his wife. Includes an aggregate of 120,000 1996 Warrants
beneficially owned by him, of which 80,000 are owned by the Sellers Pension
Plan and 40,000 are owned by his wife. Includes 6,000 shares of Common Stock
owned by Sellers Pension Plan, 4,500 shares of Common Stock owned by Sellers
Process Equipment Company, and 28,000 shares of Common Stock owned by Mr.
Seller's wife. Includes 155,000 shares of Common Stock issuable upon exercise
of options.

(9) Includes 120,000 shares of Common Stock issuable upon conversion of the
12,000 shares of Preferred Stock beneficially owned by Mr. Smith. Includes
100,000 shares of Common Stock issuable upon exercise of options. Includes
80,000 shares of Common Stock issuable upon conversion of the 1996 Warrants
held by trusts for the benefit of Mr. Smith's children of which he is a
trustee.

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

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

Preferred Stock

The following table sets forth, as of December 31, 1996 the beneficial
ownership of the Preferred Stock by the Company's directors and executive
officers, as well as by the Company's directors and executive officers as a
group. Except as set forth below, the Company is not aware of any beneficial
owner of more than five percent of the Preferred Stock. Except as otherwise
indicated, the Company believes that the beneficial owners of the Preferred
Stock listed below, based on information furnished by such owners, have sole
investment and voting power with respect to such shares, subject to community
property laws where applicable.

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

George R. Jensen, Jr.
10 Fox Chase Road
Malvern, Pennsylvania 19355 16,000 2.0%

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

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

William W. Sellers
394 East Church Road
King Of Prussia, Pennsylvania 19406 14,725(2) 1.8%

Henry B. duPont Smith
350 Mill Bank Road
Bryn Mawr, Pennsylvania 19010 12,000(3) 1.5%

All Directors and
Executive Officers
As a Group (8 persons) (4) 44,225 5.6%
- --------------
*Less than one percent (1%)

(1) There were 793,995 shares of Preferred Stock issued and outstanding as of
December 31, 1996.

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

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

(4) As of December 31, 1996, Messrs. Van Alen, Herbert, and Sterling did not
beneficially own any shares of Preferred Stock.

Escrow And Cancellation Arrangements

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

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

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

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

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

CERTAIN TRANSACTIONS

In March 1995, Mr. Jensen cancelled 1,100,000 shares of Common Stock owned
by him and which had been held in escrow. See "Principal Shareholders - Escrow
And Cancellation Arrangements."

In March 1995, the Company issued to Keith L. Sterling options to
purchase up to 100,000 shares of Common Stock, to Henry B. duPont Smith options
to purchase up to 100,000 shares of Common Stock, to William W. Sellers options
to purchase up to 55,000 shares of Common Stock, to Peter G. Kapourelos options
to purchase up to 70,000 shares of Common Stock, and to Mr. Van Alen options to
purchase up to 25,000 shares of Common Stock. All of these options are
exercisable at $.25 per share. See "Management- Executive Stock Options" and
"Management-Director Compensation and Stock Options."

In April 1995, the Company issued to Haven Brock Kolls, Jr., options to
purchase up to 150,000 shares of Common Stock at $.25 per share. See
"Management-Executive Stock Options."

In June 1995, the Company issued to Barry Slawter, a former officer of
the Company, options to purchase up to 10,000 shares of Common Stock at $.25 per
share. See "Management-Executive Stock Options."

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

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

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

In April 1996, the Company issued to Mr. Herbert options to

acquire up to 400,000 shares of Common Stock at $.65 per share. In May 1996, the
Company issued to Mr. Sterling options to acquire up to 50,000 shares of Common
Stock at $.65 per share and issued to Edward J. Sullivan, a former officer of
the Company, options to acquire up to 50,000 shares of Common Stock at $.65 per
share. See "Management-Executive Stock Options" and "Management - Officer
Terminations."

At June 30, 1996 and 1995 and September 30, 1996, approximately $14,000,
$19,000 and $8,000, respectively, of the Company's accounts payable are due to
several shareholders for various legal and technical services performed.

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

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

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

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

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

SELLING SHAREHOLDERS

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

As of December 31, 1996, the Selling Shareholders have exercised 2,345,000
of the 1996 Warrants at $.20 for an aggregate of $469,000. The issuance by the
Company of the Common Stock to the Selling Shareholders upon exercise of the
1996 Warrants is pursuant to the 1996 Warrant Agreement in a transaction exempt
from the registration requirements of the Act and various state securities laws.
During November 1996, the Board of Directors authorized a reduction in the
exercise price of each 1996 Warrant to $.20 during the period of time beginning
on November 1, 1996 and ending at the close of business on December 31, 1996, at
which time the exercise price will be $.50. The Company has agreed, at its
expense, to register the Common Stock for resale by the Selling Shareholders
under the Act and various state securities laws. The Company expects to incur
expenses of approximately $55,000 in connection with the registration. The
Common Stock may be sold from time to time by the Selling Shareholders pursuant
to this Prospectus. See "Plan of Distribution".

The following table sets forth information with respect to each Selling
Shareholder and the respective amounts of Common Stock that may be offered
pursuant to this Prospectus. None of the Selling Shareholders has, or within the
past three years has had, any position, office or other material relationship
with the Company, except as noted below. Except as specifically set forth below,
following the offering, and assuming all of the Common Stock offered hereby has
been sold, none of the Selling Shareholders will beneficially own one percent
(1%) or more of the Common Stock.

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

Gilbert Abramson 20,000
Vanda Adams 40,000

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

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

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

Jean W. Eason 60,000
Dr. Mallory Eisenman 4,000
John Faust 20,000
Richard and Isabel Fradkin 40,000
Harriet and Cary Glickstein 80,000
E.J. and M.K. Golightly 40,000
Harold N. Gray 40,000
Wendel C. and Roma Roy Lynch Green 10,000
Loring S. Grove 10,000
Ruth Hall 4,000
Thomas F. Hall 80,000
S. Hansen and K. Heiuschel 40,000
Armason Harrison 8,000
William F. Harrity, Jr. 80,000
Robert Hauptfuhrer Family Partnership 100,000
Austin B. Hepburn 80,000 1,133,900(2) 2.6%
Adele H. Hepburn 80,000 1,133,900(2) 2.6%
A.D. Hodges 40,000
R. Holland, D. Holland and K. Duffy 40,000
David W. Hubbert 20,000
Wilbur E. Hudson 20,000
Robert M. Ihrig 20,000
Bernard Millis 40,000
Fred Karagosian 40,000
Harold and Lois Kauffman 40,000
George H. Kilmarx 40,000
Rocco and Sandra La Penta 160,000
Fred Languth 40,000
Robert E. Leiser 20,000
Peggy Longstreth Bayer 12,000
Nicholas S. Ludington 40,000
Douglas M. Lurio 40,000
Robert M. Madonna 40,000
Alberta and J. Grant McCabe 4,000
Philip S. Meckley 40,000
James F. Merriman 40,000
Richard D. Mierley 40,000
Richard Moffitt 20,000
Robert H. and Rosemary Montgomery 40,000
Thomas Motl 40,000
Eunice Carter Nute 20,000
Harry Ohannesian 80,000
Janet and Sudhir Patel 40,000
George M. Pflaumer 80,000
Bernard Pincus 10,000
Genevieve Pondo 12,000
J. Steve and Carol Powell 20,000
Ashok and Swaran Rajpal 10,000

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

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

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

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

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

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

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

MARKET FOR COMMON STOCK

The Common Stock and Preferred Stock are currently traded on the OTC
Electronic Bulletin Board under the symbols USTT and USTTP, respectively. Such
trading began on March 8, 1995. As of the date hereof, there is no established
trading market for the Common Stock or Preferred Stock. See "Risk Factors - No
Assurance of Active Public Market" and "Risk Factors - Risks of Low-Priced
Stocks".

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

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

1996

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

1997

First Quarter (through September 30, 1996) $ .63 $.38
Second Quarter (through December 31, 1996) $ .57 $.29
Third Quarter (through February 28, 1997) $ .43 $.30

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

On the date hereof, there are 3,616,000 shares of Common Stock issuable
upon exercise of outstanding options (none of which were issued subsequent to
December 31, 1996), and 157,300 shares of Common Stock issuable upon exercise
of outstanding purchase rights. All of these shares of Common Stock, if issued
on the date hereof, would be "restricted securities" as defined under Rule 144
under the Act. See "Description of Securities-Shares Eligible for Future Sale."
Of the 3,616,000 options, 221,000 are exercisable at $.65 per share, 110,000 are
exercisable at $.50 per share, 500,000 are exercisable at $.45 per share,
2,565,000 are exercisable at $.25 per share, and 220,000 are exercisable at $.05
per share. In connection with the options exercisable at $.25 and $.65 per
share, the Company has

agreed, at its cost and expense, to file a registration statement under the Act
and applicable state securities laws covering all of the Common Stock underlying
the options during April 1997. All of the aforesaid options have been issued by
the Company to employees, Directors, officers, and consultants.

As of December 31, 1996, there were 1,414,000 shares of Common Stock
issuable upon exercise of the outstanding 1995 Warrants, which when and if
issued would be freely tradeable under the Act. See "Description of Securities -
1995 Common Stock Purchase Warrants."

As of December 31, 1996, there were 2,855,000 shares of Common Stock
issuable upon exercise of the outstanding 1996 Warrants, which when and if
issued would be freely tradeable under the Act. See "Description of Securities -
1996 Common Stock Purchase Warrants."

The holders of the Common Stock are entitled to receive such dividends
as the Board of Directors of the Company may from time to time declare out of
funds legally available for payment of dividends. Through the date hereof, no
cash dividends have been declared on the Company's securities. No dividend may
be paid on the Common Stock until all accumulated and unpaid dividends on the
Preferred Stock have been paid. As of December 31, 1996, such accumulated
unpaid dividends amounted to $2,350,641. See "Risk Factors - Cash Dividends Not
Likely."

DESCRIPTION OF SECURITIES

General

The Company is authorized to issue up to 45,000,000 shares of Common
Stock, no par value ("Common Stock"), and 1,000,000 shares of undesignated
Preferred Stock all of which have been designated as Series A Convertible
Preferred Stock, no par value ("Preferred Stock").

As of December 31, 1996, there were 25,659,144 shares of Common Stock
issued and outstanding and 793,995 shares of Preferred Stock issued and
outstanding which are convertible into 7,939,950 shares of Common Stock. As of
December 31, 1996, a total of 22,205 shares of Preferred Stock have been
converted into 222,050 shares of Common Stock and accrued and unpaid dividends
thereon have been converted into 46,494 shares of Common Stock. As of December
31, 1996, there were 849 record owners of the Common Stock and 950 record owners
of the Preferred Stock. As of December 31, 1996, there were 1,414,000 1995
Warrants and 2,855,000 1996 Warrants issued and outstanding.

As of December 31, 1996, the Company has issued to its directors,
executive officers, consultants, and employees options to acquire up to 221,000
shares of Common Stock at $.65 per share, options to acquire up to 110,000
shares of Common Stock at $.50 per share, options to acquire up to 500,000
shares of Common Stock at $.45 per share, options to acquire up to 2,565,000
shares of Common Stock at $.25 per share, and options to acquire up to 220,000
shares of Common Stock at $.05 per share. See "Management--Executive Stock
Options", "Management - Director Compensation and Stock Options" and
"Management - Officer Terminations." The Company has also issued purchase rights
to acquire up to 157,300 shares of Common Stock at $1.00 per share. All options
to purchase Common Stock were granted at prices at or above the market value on
the date of the grant.

In August 1996, the Company authorized the issuance of 265,000 shares of
Common Stock to two consultants, Diversified Consulting Group, LLC, and Paul
Russell. The Company issued and registered these shares under the Act and issued
such shares in October 1996, and such shares are freely tradeable thereunder.

In November 1996, the Company granted to the RAM Group, a consultant,
options to purchase up to 50,000 shares of Common Stock at $.50 per share, to
Phillip A. Harvey, an employee, options to purchase up to 50,000 shares of
Common Stock at $.65 per share, and to Michael Feeney, an employee, options to
purchase up to 10,000 shares of Common Stock at $.50 per share.

In November 1996, the Company authorized the issuance of 160,000 shares
of Common Stock to Jerome Wenger, a consultant to the Company, as compensation
for services to be rendered to the Company. These shares are to be registered
under the Act and will be freely tradeable thereunder.

During the period from September 30, 1996 to December 31, 1996, 2,030
shares of Preferred Stock were converted into 20,300 shares of Common Stock.
Also during this period, $4,868 of accumulated and unpaid dividends on the
Preferred Stock were converted into 4,868 shares of Common Stock at the time of
conversion of the underlying Preferred Stock.

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

Common Stock

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

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

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

Series A Convertible Preferred Stock

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

The holders of Preferred Stock are entitled to an annual cumulative cash
dividend of $1.50 per annum, payable when, as and if declared by the Board of
Directors. Any and all accumulated and unpaid cash dividends on the Preferred
Stock must be declared and paid prior to the declaration and payment of any
dividends on the Common Stock. Any unpaid and accumulated dividends will not
bear interest. As of December 31, 1996 the accumulated and unpaid dividends on
the Preferred Stock were $2,350,641. On February 1, 1997, an additional $602,321
of dividends accrued on the Preferred Stock, making the total accumulated and
unpaid dividends equal to $2,952,962. During the period from September 30, 1996
to December 31, 1996, 4,868 shares representing accumulated and unpaid dividends
on the Preferred Stock were converted into 4,868 shares of Common Stock.

Each share of Preferred Stock is convertible at any time into 10 shares of
fully issued and non-assessable Common Stock. Accrued and unpaid dividends
earned on shares of Preferred Stock being converted into Common Stock are also
convertible into Common Stock at the rate $1.00 per share of Common Stock at the
time of conversion and whether or not such dividends have then been declared by
the Company. As of December 31, 1996, a total of 22,205 shares of Preferred
Stock have been converted into Common Stock and accrued and unpaid dividends
therein have been converted into 46,494 shares of Common Stock. The conversion
rate of the

Preferred Stock (and any accrued and unpaid dividends thereon) will be equitably
adjusted for stock splits, stock combinations, recapitalizations, and in
connection with certain other issuances of Common Stock by the Company. Upon any
liquidation, dissolution, or winding-up of the Company, the holders of Preferred
Stock are entitled to receive a distribution in preference to the Common Stock
in the amount of $10.00 per share plus any accumulated and unpaid dividends.

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

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

1996 Common Stock Purchase Warrants

Each 1996 Warrant entitles its holder to purchase one share of Common
Stock at an exercise price of $.20 per share through February 28, 1997, and at
exercise price of $.50 thereafter. The 1996 Warrants are exercisable at any time
through May 31, 2001, or such later date as may be determined by the Company
("1996 Warrant Termination Date"). As of December 31, 1996, an aggregate of
2,345,000 1996 Warrants have been exercised and 2,855,000 remain unexercised.

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

As a condition to obtaining their Common Stock, the Selling
Shareholders must exercise the 1996 Warrants by tendering the per share exercise
price required under the 1996 Warrant Agreement. In the event all 5,200,000 1996
Warrants are exercised at $.20, the Company would receive gross proceeds of
$1,040,000. There is no assurance that any of the remaining 1996 Warrants will
be exercised by the Selling Shareholders, and if none of the remaining 1996
Warrants are exercised, the Company would not receive any further gross
proceeds. Any such exercise must occur through the 1996 Warrant Termination
Date.

The Company has, at its expense, registered for resale by the Selling
Shareholders the Common Stock underlying the 1996 Warrants under the Act, and
has registered or exempted from registration such Common Stock for resale

in those states in which the Selling Shareholders 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 Warrant Termination Date of the Warrants.

1995 Common Stock Purchase Warrants

In June and July 1995, the Company issued an aggregate of 5,100,000
1995 Common Stock Purchase Warrants ("1995 Warrants") pursuant to a private
placement under the Act and various state securities laws. Each 1995 Warrant
entitles its holder to purchase one share of Common Stock from the Company at an
exercise price of $.50, or such lower exercise price as may be determined by the
Company from time to time. The exercise price of the 1995 Warrants had been
reduced by the Company to $.40 during the period of time from February 12, 1996
through April 30, 1996. Subsequent to April 30, 1996, the exercise price of the
1995 Warrants was further reduced to $.30 until June 30, 1996, and such
reduction was made retroactive to those holders who had already exercised the
1995 Warrants at $.40. As a result thereof, the Company returned the sum of
$27,200 to such holders. At December 31, 1996, a total of 3,686,000 1995
Warrants had been exercised generating gross proceeds of $1,105,800. There were
1,414,000 unexercised 1995 Warrants as of December 31, 1996, and no additional
1995 Warrants have been exercised through the date hereof. The 1995 Warrants are
exercisable at any time through January 31, 2001, or such later date as may be
determined by the Company ("1995 Warrant Termination Date").

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

As a condition to obtaining their Common Stock, the holders of the 1995
Warrants must exercise the 1995 Warrants by tendering the per share exercise
price required under the 1995 Warrant Agreement. In the event all remaining 1995
Warrants are exercised at $.30, the Company would receive gross proceeds of
$424,200. If all the remaining 1995 Warrants are exercised at a price of less
than $.30, the gross proceeds received by the Company would be reduced. There is
no assurance that any of the remaining 1995 Warrants will be exercised by the
holders of the 1995 Warrants, and if none of the remaining 1995 Warrants are
exercised, the Company would not receive any further gross proceeds. Any such
exercise must occur on or before the 1995 Warrant Termination Date.

The Company has, at its expense, 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 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 1995 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.

Shares Eligible for Future Sale

Of the 25,659,144 shares of Common Stock issued and outstanding on
December 31, 1996, 12,839,544 are freely transferable without restriction or
further registration under the Act (other than shares held by "affiliates" of
the Company), and the remaining 12,819,600 are "restricted securities". As of
December 31, 1996, there are 793,995 shares of Preferred Stock issued and
outstanding, 293,075 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 500,920 are "restricted
securities". The 793,995 shares of Preferred Stock issued and outstanding on
December 31, 1996 are convertible into 7,939,950 shares of Common Stock. Of
such shares of Common Stock, 2,930,750 would be fully transferable without
registration or regulation under the Act and 5,009,200 would be "restricted
securities" within the meaning of Rule 144.

As set forth in the prior paragraph, there are 12,819,600 shares of
Common Stock and 500,920 shares of Preferred Stock which are "restricted
securities" and cannot be resold without registration, except in reliance upon
Rule 144 or another applicable exemption from registration. Of such Common
Stock, an aggregate of 7,593,000 shares may not be sold or transferred until
June 30, 1998. See "Principal Shareholders-Escrow And Cancellation
Arrangements." Subject to such prohibition, during calendar year 1996,
12,839,544 shares of such Common Stock and 150,920 shares of such Preferred
Stock became eligible for sale pursuant to Rule 144. During calendar year 1997,
180,000 shares of Common Stock and 152,950 of Preferred Stock would become
eligible for sale pursuant to Rule 144. During calendar year 1998, the

remaining 100,000 shares of Common Stock and 180,000 shares of Preferred Stock
would become eligible for sale pursuant to Rule 144. The Company is unable to
predict the effect that sales made under Rule 144 or otherwise may have on the
market price of the Common Stock or Preferred Stock prevailing at the time of
any such sales.

As of December 31, 1996, there are outstanding options to acquire
3,616,000 shares of Common Stock, 220,000 of which are exercisable at $.05 per
share, 2,565,000 of which are exercisable at $.25 per share, 500,000 of which
are exercisable at $.45 per share, 110,000 of which are exercisable at $.50 per
share, and 221,000 of which are exercisable at $.65 per share. There are also
outstanding purchase rights to acquire 157,300 shares of Common Stock at $1.00
per share. All of such Common Stock, if issued on the date hereof, would be
"restricted securities" as defined in Rule 144 promulgated under the Act. In
connection with the options exercisable at $.25 and $.65 per share, the Company
had planned, at its cost and expense, to file a registration statement under the
Act and applicable state securities laws covering all of the Common Stock
underlying the options during 1997. In March 1997, the Board of Directors
decided to indefinitely postpone the preparation and filing of such registration
statement. As of December 31, 1996, there were also 1,414,000 shares of Common
Stock issuable by the Company to the holders of the outstanding unexercised 1995
Warrants and 2,855,000 shares of Common Stock issuable by the Company to the
holders of the outstanding unexercised 1996 Warrants. Such Common Stock, if
issued, will be freely tradeable under the Act.

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are required to be aggregated), including any affiliate of the
Company, who beneficially owns "restricted securities" for a period of at least
two years 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 three 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

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

Transfer Agent and Registrar

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

PLAN OF DISTRIBUTION

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

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

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

LEGAL MATTERS

The validity of the Common Stock has been passed upon for the Company by
Lurio & Associates, Philadelphia, Pennsylvania.

EXPERTS

The financial statements of USA Technologies, Inc. at June 30, 1996 and
1995, and for each of the two years in the period ended June 30, 1996, and for
the period January 16, 1992 (inception) through June 30, 1996, appearing in this
Prospectus and Registration Statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their reports thereon (which contain an
explanatory paragraph with respect to the Company's ability to continue as a
going concern as discussed in Note 2 to the financial statements) appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.

INDEX TO FINANCIAL STATEMENTS

USA TECHNOLOGIES, INC.
(A Development Stage Corporation)

Report of Independent Auditors F-2

Balance Sheets F-3

Statements of Operations F-4

Statement of Shareholders' Equity F-5

Statements of Cash Flows F-8

Notes to Financial Statements F-10

F-1

Report of Independent Auditors

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

We have audited the accompanying balance sheets of USA Technologies, Inc. (A
Development Stage Corporation) as of June 30, 1996 and 1995, and the related
statements of operations, shareholders' equity, and cash flows for each of the
two years in the period ended June 30, 1996 and the period January 16, 1992
(inception) through June 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of USA Technologies, Inc. at June
30, 1996 and 1995, and the results of its operations and its cash flows for each
of the two years in the period ended June 30, 1996 and for the period January
16, 1992 (inception) through June 30, 1996, in conformity with generally
accepted accounting principles.

The accompanying financial statements have been prepared assuming USA
Technologies, Inc. will continue as a going concern. As discussed in Note 2 to
the financial statements, the Company's recurring losses from operations from
its inception and its accumulated deficit through June 30, 1996, 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 9, 1996, except for Note 12, as
to which the date is September 10, 1996

F-2

USA Technologies, Inc.
(A Development Stage Corporation)

Balance Sheets

June 30, December 31,
1996 1995 1996
------------------------------------------------------
(Unaudited)

Assets
Current assets:
Cash $ 1,773,356 $ 376,191 $ 652,858
Trade receivables - - 39,808
Inventory 426,391 - 469,085
Stock subscriptions receivable 106,350 50,000 -
Prepaid expenses and deposits 3,614 3,137 -
------------------------------------------------------
Total current assets 2,309,711 429,328 1,161,752

Property and equipment, at cost, net 235,214 207,383 229,458
Other assets 42,446 4,832 14,129
------------------------------------------------------
Total assets $ 2,587,371 $ 641,543 $ 1,405,339
======================================================

Liabilities and shareholders' equity Current liabilities:
Accounts payable $ 301,849 $ 193,815 $ 186,893
Accrued expenses 41,559 19,352 17,384
Current obligation under capital lease 9,048 4,777 16,350
Note payable - 4,166 -
------------------------------------------------------
Total current liabilities 352,456 222,110 220,627

Obligation under capital lease, less current portion 21,209 - 34,122
Accrued rent 13,516 25,000 41,037
------------------------------------------------------
Total liabilities 387,181 247,110 295,786

Shareholders' equity:
Preferred Stock, no par value:
Authorized shares - 1,000,000
Series A Convertible issued and outstanding
shares - 796,025 and 491,100 at June 30, 1996 and 1995,
respectively and 793,995 at December 31, 1996 (unaudited)
(liquidation preference of $9,718,740 at June 30, 1996
and $10,290,590 at December 31, 1996 (unaudited) 6,776,132 4,057,372 6,758,857
Common Stock, no par value:
Authorized shares - 45,000,000 Issued and outstanding
shares - 23,023,976 and 18,254,300 at June 30, 1996
and 1995, respectively and 25,659,144 at
December 31, 1996 (unaudited) 2,720,201 909,172 3,336,844
Deficit accumulated during the development
stage (7,296,143) (4,572,111) (8,986,148)
------------------------------------------------------
Total shareholders' equity 2,200,190 394,433 1,109,553
------------------------------------------------------
Total liabilities and shareholders' equity $ 2,587,371 $ 641,543 $ 1,405,339
======================================================

See accompanying notes.

F-3

USA Technologies, Inc.
(A Development Stage Corporation)

Statements of Operations

Date of Inception Through
Six months ended -----------------------------
Year ended June 30 December 31, June 30, December 31,
1996 1995 1996 1995 1996 1996
--------------------------------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited)

Revenue:
Equipment Sales $ - $ - $ 89,463 $ - $ - $ 89,463
License fee 52,979 10,679 49,943 22,883 63,658 110,601
Interest 31,868 11,569 17,236 20,054 53,404 70,640
------------------------------------------------------------------------------------------
Total revenue 84,847 22,248 153,642 42,937 117,062 270,704

Costs and expenses:
Cost of Goods Sold - - 64,885 - - 64,885
General and administrative 1,449,889 698,600 1,107,970 603,895 2,865,523 3,973,493
Compensation 903,398 688,385 496,204 454,070 2,465,776 2,961,980
Depreciation and amortization 72,016 15,468 46,522 10,212 98,394 144,916
Advertising 61,392 67,740 79,472 43,134 353,002 432,474
Provision for losses on equipment 44,100 148,615 31,705 - 400,715 432,420
Interest 5,749 49,190 12,021 660 126,611 138,632
Costs incurred in connection with
abandoned private placement - - - - 50,000 50,000
------------------------------------------------------------------------------------------
Total costs and expenses 2,536,544 1,667,998 1,838,779 1,111,971 6,360,021 8,198,800
------------------------------------------------------------------------------------------

Net loss (2,451,697) (1,645,750) (1,685,137) (1,069,034) $ (6,242,959) $ (7,928,096)
==========================================================================================

Cumulative preferred dividends (954,300) (503,874) (597,019) (477,150)
-----------------------------------------------------------
Loss applicable to common shares $ (3,405,997) $ (2,149,624) $ (2,282,156) $(1,546,184)
===========================================================
Loss per common share $ (.23) $ (.19) $ (.12) $ (.11)
===========================================================
Weighted average number of common
shares outstanding 14,908,904 11,428,486 19,190,699 14,349,600
===========================================================

See accompanying notes.

F-4

USA Technologies, Inc.
(A Development Stage Corporation)

Statements of Shareholders' Equity

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

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

- continued -

USA Technologies, Inc.
(A Development Stage Corporation)

Statements of Shareholders' Equity (continued)

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

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

- continued -

USA Technologies, Inc.
(A Development Stage Corporation)

Statements of Shareholders' Equity (continued)

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

July 1995 - 145.1 units (145,100 shares, net of
offering costs, of Convertible Preferred Stock $ 1,441,185 $ - $ - $ 1,441,185
at $10 per share)
July 1995 - September 1995 - issuance of 100,000
shares of Common Stock in exchange for - 50,000 - 50,000
consulting services
July 1995 - Common Stock options exercised - 180,000
shares at $.05 per share - 9,000 - 9,000
August 1995 - Common stock dividend distributed -3
shares of Common Stock for each outstanding
share of Preferred Stock on August 1, 1995 - 230,709 (230,709) -
(435,300 shares)
October 1995 - Common Stock options exercised-100,000
shares at $.05 per share - 5,000 - 5,000
January 1996 - issuance of 30,000 shares of Common
Stock in exchange for consulting services - 14,205 - 14,205
February 1996 - issuance of 50,000 shares of
Convertible
Preferred Stock at $4.00 per share 200,000 - - 200,000
February 1996 - Common Stock warrants exercised-
145,500 at $.40 per warrant - 58,200 - 58,200
March 1996 - Common Stock warrants exercised-
125,500 at $.40 per warrant - 50,200 - 50,200
March 1996 - issuance of 300,000 shares of Common
Stock in exchange for consulting services - 183,000 - 183,000
March 1996 - cancellation of 305,000 shares of
Common Stock - - - -
April 1996 - Common Stock warrants exercised -
264,000 at $.30 per warrant - 79,200 - 79,200
May 1996 - Common Stock warrants exercised -
381,000 at $.30 per warrant - 114,300 - 114,300
Refund to warrant holders due to the reduction of
the 1995 Common Stock warrant exercise price
from $.40 per warrant to $.30 per warrant - (27,100) - (27,100)
May 1996 - conversion of 20,175 shares of
Convertible Preferred Stock to 201,750 shares of (171,689) 171,689 - -
Common Stock
May 1996 - conversion of $41,626 of cumulative preferred dividends into 41,626
shares of Common
Stock at $1.00 per share - 41,626 (41,626) -
June 1996 - Common Stock warrants exercised -
2,770,000 at $.30 per warrant - 831,000 - 831,000
June 1996 - 130 units (130,000 shares, net of
offering costs, of Convertible Preferred Stock
at $10 per share) 1,249,264 - - 1,249,264
Net loss - - (2,451,697) (2,451,697)
-------------------------------------------------------------------------
Balance, June 30, 1996 6,776,132 2,720,201 (7,296,143) 2,200,190
October 1996 - issuance of 250,000 shares
of Common Stock in exchange for
consulting services (unaudited) - 117,500 - 117,500
October 1996 - issuance of 15,000 shares
of Common Stock in exchange for
consulting services (unaudited) - 8,000 - 8,000
November 1996 - conversion of 2,030 shares of
Convertible Preferred Stock to 20,300 shares
of Common Stock (unaudited) (17,275) 17,275 - -
November 1996 - conversion of $4,868 of
cumulative preferred dividends into 4,868
shares of Common Stock at $1.00 per share
(unaudited) - 4,868 (4,868) -
December 1996 - Common Stock warrants
exercised- 2,345,000 at $.20 per warrant
(unaudited) - 469,000 - 469,000
Net loss (unaudited) - - (1,685,137) (1,685,137)
-------------------------------------------------------------------------
Balance, December 31, 1996 (unaudited) $ 6,758,857 $ 3,336,844 $ (8,986,148) $ 1,109,553
=========================================================================

See accompanying notes.

F-7

USA Technologies, Inc.
(A Development Stage Corporation)

Statements of Cash Flows

January 16, 1992
(date of inception)
Six months ended through
Year ended June 30 December 31, June 30, December 31,
1996 1995 1996 1995 1996 1996
---------------------------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited)

Operating activities
Net loss $(2,451,697) $(1,645,750) $(1,685,137) $(1,069,035) $(6,242,959) $(7,928,096)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 72,016 15,468 46,522 10,212 98,394 144,916
Provision for losses on equipment 44,100 148,615 - - 383,756 383,756
Compensation charges incurred in
connection with the issuance
of Common Stock and Common Stock
options 247,205 102,350 125,500 50,000 349,555 475,055
Changes in operating assets and
liabilities:
Trade receivables - - (39,809) - - (39,809)
Inventory (426,391) - (42,694) - (426,391) (469,085)
Prepaid expenses, deposits, and
other assets (38,746) 1,900 31,931 42,513 (53,395) (21,464)
Accounts payable 150,252 72,404 (114,956) 81,413 402,121 287,165
Accrued expenses 10,723 (48,728) 3,346 (1,302) 5,803 9,149
---------------------------------------------------------------------------------------
Net cash used by operating activities (2,392,538) (1,353,741) (1,675,297) (886,199) (5,483,116) (7,158,413)

Investing activities
Purchase of property and equipment (112,443) (213,370) (40,766) (443,119) (723,105) (763,871)
Proceeds from sale of property and equipment 3,539 - - 51,000 3,539 3,539
---------------------------------------------------------------------------------------
Net cash used by investing activities (108,904) (213,370) (40,766) (392,119) (719,566) (760,332)

Financing activities
Net proceeds from issuance of Common Stock 1,013,450 949 575,350 14,000 1,031,161 1,606,511
Net proceeds from issuance of Convertible
Preferred Stock 2,940,449 1,511,234 - 1,441,185 6,956,083 6,956,083
Repayment of note payable-other (4,166) (4,565) - (1,239) (2,298) (2,298)
Proceeds (payments) on capital lease
obligation (8,908) - 20,215 (4,777) (8,908) 11,307
Change in accounts payable and accrued
expenses relating to the private
placement offering (42,218) 42,218 - - - -
Change in accounts payable relating to the
initial public offering - (50,746) - - - -
---------------------------------------------------------------------------------------
Net cash provided by financing activities 3,898,607 1,499,090 595,565 1,449,169 7,976,038 8,571,603
---------------------------------------------------------------------------------------

Net increase (decrease) in cash 1,397,165 (68,021) (1,120,498) 170,851 1,773,356 652,858
Cash at beginning of period 376,191 444,212 1,773,356 376,191 - -
---------------------------------------------------------------------------------------
Cash at end of period $ 1,773,356 $ 376,191 $ 652,858 $ 547,042 $ 1,773,356 $ 652,858
=======================================================================================

F-8

USA Technologies, Inc.
(A Development Stage Corporation)

Statements of Cash Flows (continued)

Year ended June 30 Six Months ended December 31
1996 1995 1996 1995
-------------------------- -----------------------------
(unaudited) (unaudited)

Supplemental disclosure of cash flow information

Cash paid during the year for interest $ - $ 92,483
==========================

Common stock dividend $ 230,709 $ 780,849
==========================

Stock subscription receivable $ 106,350 $ 50,000
==========================

Conversion of Convertible Preferred Stock to Common Stock $ 171,689 $ 8,262
==========================

Conversion of Cumulative Preferred Dividends to Common
Stock $ 41,626 $ -
========================== ==============================

Capital lease obligation $ 34,338 $ - $ 27,972 $ -
========================== ==============================

See accompanying notes.

F-9

USA Technologies, Inc.
(A Development Stage Corporation)

Notes to Financial Statements

June 30, 1996

1. Business

USA Technologies, Inc. a Pennsylvania corporation (the "Company"), was
incorporated on January 16, 1992. In May 1995, the Company changed its name from
USA Entertainment Center, Inc. to USA Technologies, Inc. to more accurately
reflect its business. Substantially all of the Company's activities to date have
been devoted to raising capital, developing markets, and starting up operations.
The Company intends to become the leading provider and licenser of credit card
activated control systems for the vending, copying, debit card, and personal
computer industries. The Company's products make available credit card payment
technology in connection with the sale of various products and services.

Through June 30, 1996 and 1995 and December 31, 1996, respectively, the Company
installed 77, 42 and 60 Credit Card Copy ExpressTM control systems; 24, 9 and 35
Credit Card Debit ExpressTM control systems, and at June 30, 1996 and December
31, 1996, 21 and 43 Computer ExpressTM control systems at various colleges,
universities and public libraries. The Company generally retains twenty to
thirty percent of the gross revenues in connection with the machines. Through
June 30, 1996 and December 31, 1996, the total gross revenues received by the
Company from these systems has been nominal.

The Company has also licensed and installed refreshments centers which utilize
the Credit Card Vending ExpressTM control system. The Company licensed its
Credit Card Vending ExpressTM technology to an apparel manufacturer to be used
in connection with the sale from a vending machine of T-shirts, windbreakers,
and tote bags. The Company generally retains 20% of the gross revenues from such
systems. Through June 30, 1996 and September 30, 1996, the total gross revenues
to the Company from these machines were nominal. Subsequent to June 30, 1996,
the apparel manufacturer terminated its agreement with the Company effective
September 30, 1996.

F-10

USA Technologies, Inc.

(A Development Stage Corporation)

Notes to Financial Statements (continued)

2. Accounting Policies

Basis of Financial Statement Presentation

The financial statements of the Company have been prepared assuming the Company
will continue as a going concern, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business.
Accordingly, the financial statements do not include any adjustments that might
be necessary should the Company be unable to continue in existence. The Company
has been in the development stage since its inception in 1992 and has incurred
losses from operations since its inception through June 30, 1996 amounting to
$6.2 million. The Company's working capital has been substantially reduced due
to operating losses incurred subsequent to June 30, 1996. Such losses are
expected to continue in fiscal year 1997. Additionally, the Company has
implemented a plan to sell its proprietary control systems, and accordingly, the
Company will require additional capital to maintain the required inventory
levels. These factors combined with the significant working capital required in
the future raise substantial doubt about the Company's ability to continue as a
going concern. Management believes that actions presently being taken will
provide for the Company to continue as a going concern. Such actions include the
generation of revenues from operations, raising capital from the exercise of the
1995 and 1996 Common Stock purchase warrants, and/or the deferral of anticipated
expenditures in order to satisfactorily meet its obligations.

Interim Financial Information

The financial statements and disclosures included herein for the six months
ended December 31, 1996 and 1995, and for the date of inception through
December 31, 1996 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 financial position and the results of
its operations and cash flows.

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.

Inventory

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

Property and Equipment

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

F-11

USA Technologies, Inc.

(A Development Stage Corporation)

Notes to Financial Statements (continued)

2. Accounting Policies (continued)

Revenue Recognition

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

Research and Development

Research and development costs are charged to operations as incurred. Such
research and development costs amounted to approximately $224,000 and $130,000
for the years ended June 30, 1996 and 1995, respectively, and approximately
$393,000 for the period January 16, 1992 (date of inception) to June 30, 1996.
These costs are reflected in general and administrative and compensation in the
accompanying financial statements.

Income Taxes

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

Loss Per Common Share

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

F-12

USA Technologies, Inc.

(A Development Stage Corporation)

Notes to Financial Statements (continued)

3. Property and Equipment

Property and equipment consist of the following:

June 30
1996 1995 December 31, 1996
---------------------------------------------------------
(unaudited)

Control systems $ 261,387 $ 161,323 $ 266,547
Furniture and equipment 55,582 52,919 66,004
Vehicles 10,259 17,333 10,258
---------------------------------------------------------
327,228 231,575 342,809
Less accumulated depreciation 92,014 24,192 113,351
---------------------------------------------------------
$ 235,214 $ 207,383 $ 229,458
=========================================================

The Company discontinued the Golfers OasisTM vending machine control systems and
an agreement was entered into with the manufacturer of the machines to
repurchase certain of the machines at an amount significantly below the purchase
amount. Accordingly, the Company has recorded a charge for the permanent
impairment to the carrying value of the related assets of $44,160 and $149,000,
respectively, during the years ended June 30, 1996 and 1995.

4. Accrued Expenses

Accrued expenses consist of the following:

June 30
1996 1995 December 31, 1996
--------------------------------------------------------
(unaudited)

Accrued rent $ 34,104 $ 19,000 $ _
Accrued other 7,455 352 17,384
--------------------------------------------------------
$ 41,559 $ 19,352 $ 17,384
======================================= =================

F-13

USA Technologies, Inc.

(A Development Stage Corporation)

Notes to Financial Statements (continued)

5. Related Party Transactions

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

At June 30, 1996 and 1995 and December 31, 1996, approximately $14,000, $19,000
and $30,000, respectively, of the Company's accounts payable are due to several
shareholders for various legal and technical services performed.

6. Commitments

The Company conducts its operations from various facilities under operating
leases. Rental expense under such arrangements was approximately $69,000 and
$72,000, respectively during the years ended June 30, 1996 and 1995 and $233,000
for the period January 16, 1992 (date of inception) to June 30, 1996.

The Company closed its storage facility in Jacksonville, Florida during the year
ended June 30, 1995. Accordingly, a $44,000 charge to operations was recorded
during 1995 representing the future minimum lease payments due under the related
leases net of anticipated sub-lease payments.

During fiscal year 1996, the Company entered into an agreement to lease $34,400
of computer equipment which has been accounted for as a capital lease. This
computer equipment is included in control systems at June 30, 1996. Lease
amortization of $5,700 is included in depreciation expense for the year ended
June 30, 1996.

F-14

USA Technologies, Inc.

(A Development Stage Corporation)

Notes to Financial Statements (continued)

6. Commitments (continued)

Future minimum lease payments subsequent to June 30, 1996 under capital and
noncancellable operating leases are as follows:

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

1997 $15,753 $ 89,000
1998 15,753 20,000
1999 10,502 3,000
-----------------------------------
Total minimum lease payments 42,008 $112,000
=================
Less amount representing interest (25% per annum) 11,751
------------------
Present value of net minimum lease payments 30,257
Less current obligation under capital lease 9,048
------------------
Obligation under capital lease, less current portion $21,209
==================

During February 1996, the Company entered into an agreement with a vendor
whereby it committed to acquire 250 control system units. As of June 30, 1996,
174 units were received and approximately $99,000 was included in accounts
payable in connection with this obligation. An additional $43,000 will be
payable upon the delivery of the remaining 76 units during fiscal year 1997.

During February 1996, the Company entered into an agreement with a consulting
firm whereby the Company committed to pay this firm $50,000, and issued 300,000
shares of the Company's Common Stock which were registered with the Securities
and Exchange Commission. Subsequent to June 30, 1996, the Company extended its
agreement with this consulting firm providing for the issuance of an additional
250,000 shares of its Common Stock. Through June 30, 1996, $22,000 of the
commitment was paid in accordance with the agreement. An additional $28,000 is
payable at $4,000 per month from July 15, 1996 through January 15, 1997.

The Company has several employment agreements with its officers, none of which
extend beyond one year.

F-15

USA Technologies, Inc.

(A Development Stage Corporation)

Notes to Financial Statements (continued)

7. Income Taxes

At June 30, 1996 and 1995, the Company had a net tax operating loss carryforward
of approximately $5,176,000 and $2,565,000, respectively, to offset future
taxable income expiring through 2011. At June 30, 1996 and 1995, respectively,
the Company recorded a deferred tax asset of $2,537,000 and $1,564,000, which
were reduced by a valuation allowance of same amounts. The deferred tax assets
arose primarily from the use of different accounting methods for financial
statement and income tax reporting purposes principally related to the
accounting for preoperating costs and research and development costs and net
operating loss carryforwards.

As of June 30, 1993, the timing and manner in which the Company can utilize
operating loss carryforwards and future tax deductions for capitalized items in
any year was limited by provisions of the Internal Revenue Code regarding
changes in ownership of corporations. The Company believes that such limitation
will have an impact on the ultimate realization of its carryforwards and future
tax deductions (generated through June 30, 1993). Cumulative losses generated
for income tax purposes from June 30, 1994 through June 30, 1996, are not
expected to be subject to the limitation.

8. Preferred Stock

The Preferred Stock authorized may be issued from time to time in one or more
series, each series with such rights, preferences or restrictions as determined
by the Board of Directors. Each share of Series A Preferred Stock shall have the
right to ten votes and is convertible at any time into ten shares of Common
Stock. 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, 1996 and
1995, and December 31, 1996 amounted to $1,758,490, $845,816 and $2,350,641,
respectively. Cumulative unpaid dividends are convertible into common shares at
$1.00 per common share at the option of the shareholder. During the year ended
June 30, 1996 and the six months ended December 31, 1996, certain holders of the
Preferred Stock converted 20,175 and 2,030 shares, respectively, into 201,750
and 20,300 shares, respectively, of Common Stock. Certain of these shareholders
also converted cumulative preferred dividends of $41,626 into 41,626 shares of
Common Stock in fiscal year 1996 and $4,868 into 4,868 shares of Common Stock
during the six months ended December 31, 1996. The Series A Preferred Stock may
be called for redemption at the option of the Board of Directors at any time on
and after January 1, 1998 for a price of $11.00 per share plus payment of all
accrued and unpaid dividends. In the event of any liquidation, the holders of
shares of Series A Preferred Stock issued shall be entitled to receive $10.00
for each outstanding share plus all cumulative unpaid dividends. If funds are
insufficient for this distribution, the assets available will be distributed
ratably among the preferred shareholders.

F-16

USA Technologies, Inc.

(A Development Stage Corporation)

Notes to Financial Statements (continued)

9. Stock Transactions

During April 1996, the Company's shareholders approved the increase in the
number of the Company's authorized common stock to 45,000,000 and to increase
the number of designated shares of Series A Convertible Preferred Stock from
700,000 to 1,000,000.

During April 1996, the Company's Board of Directors authorized a $1,300,000
private placement offering of 130 units at a unit price of $10,000 and each unit
included 40,000 1996 Common Stock purchase warrants and 1,000 shares of Series A
Convertible Preferred Stock. As of June 30, 1996, all 130 units were sold,
generating net proceeds of $1,249,264 ($1,300,000 less offering costs of
$50,736). During August 1996, the Company filed a Registration Statement Form
SB-2 to register the Common Stock underlying the 1996 Common Stock purchase
warrants with the Securities and Exchange Commission. The 5,200,000 1996
warrants issued are exercisable at any time on or before May 31, 2001, unless
such date is extended by the Company. Each warrant entitles the holder to
purchase one share of Common Stock for $.40 through December 31, 1996 and for
$.50 at any time thereafter through May 31, 2001. The exercise price of the 1996
warrants may be reduced by the Company at any time, or from time to time. At
June 30, 1996 there are 5,200,000 1996 warrants outstanding.

During February 1996, the Company filed a Registration Statement with the
Securities and Exchange Commission in connection with an agreement with a
consulting company whereby the Company issued and registered for sale 300,000
shares of its Common Stock in exchange for consulting and advisory services to
be rendered to the Company. A charge of $183,000, reflecting the estimated fair
value of the shares issued, is recorded in general and administrative expenses
in connection with this agreement.

During February 1996, the Company sold 50,000 shares of its Series A Convertible
Preferred Stock for $200,000 to a private investment company pursuant to
Regulation S under the Securities Act of 1933.

During June 1995, the Company's Board of Directors authorized a $1,500,000
private placement offering of 150 units at a unit price of $10,000 and each unit
included 30,000 1995 Common Stock purchase warrants and 1,000 shares of Series A
Convertible Preferred Stock. As of June 30, 1995, 24.9 units were sold
generating net proceeds of $206,382. During July 1995, the Company obtained
approval to extend the private placement offering to $1,700,000 and 170 units.
This private placement offering closed on July 31, 1995 and a total of 170 units

F-17

USA Technologies, Inc.

(A Development Stage Corporation)

Notes to Financial Statements (continued)

9. Stock Transactions (continued)

were sold generating net proceeds of $1,647,567 ($1,700,000 less offering costs
of $52,433). The subscriptions receivable at June 30, 1995 recorded in
connection with this offering were received during July 1995. The 1995 Common
Stock purchase warrants are exercisable at any time on or before January 31,
2001, unless such date is extended by the Company. Each warrant entitles the
holder to purchase one share of Common Stock for $.50. The exercise price of the
1995 warrants may be reduced by the Company at any time, or from time to time.

During the period February 1996 through April 1996, 271,000 of the 1995 Common
Stock purchase warrants were exercised at a reduced amount of $.40 per warrant
generating gross proceeds of $108,400. Subsequent to April 30, 1996, the
exercise price of the 1995 warrants was further reduced to $.30 until June 30,
1996. Such further reduction was made retroactive to those holders who had
already exercised the 1995 warrants at $.40. Accordingly, the Company returned
$27,100 to such holders. Subsequent to April 30, 1996 and through June 30, 1996,
2,814,000 of the 1995 warrants had been exercised at $.30. Through June 30,
1996, a total of 3,686,000 1995 warrants had been exercised for a total gross
proceeds to the Company of $1,105,800. Of this amount, $106,350 was not received
as of June 30, 1996 and is accordingly reflected as a subscription receivable
(Note 12). At June 30, 1996, the Company had 1,414,000 of 1995 Common Stock
purchase warrants outstanding.

During May 1995, the Company's shareholders approved the payment of a stock
dividend of 3 shares of Common Stock, for each outstanding share of Series A
Convertible Preferred Stock at the close of business on August 1, 1995. The
effects of this stock dividend have been reflected in shareholders' equity in
the accompanying financial statements as if the stock dividend had occurred on
June 30, 1995 for the 636,200 Series A Convertible shares issued and outstanding
on June 30, 1995.

During May 1995, the Company filed a registration statement on Form S-8,
pursuant to which 250,000 (subsequently amended to 280,000) shares of Common
Stock will be issued to a consultant in consideration for services rendered for
the period April 1, 1995 through August 31, 1995. During the years ended June
30, 1996 and 1995, the Company issued 150,000 and 130,000, respectively, shares
under this agreement. Professional fees of $64,205 and $99,750, respectively,
were charged to operations during the years ended June 30, 1996 and 1995
representing the estimated fair value of the shares issued.

F-18

USA Technologies, Inc.

(A Development Stage Corporation)

Notes to Financial Statements (continued)

9. Stock Transactions (continued)

During December 1993, the Company commenced an offering of public securities in
an effort to raise, before offering costs, a minimum of $500,000 and a maximum
of $3,000,000. The offering permitted a minimum of 50,000 units or a maximum of
300,000 units at $10.00 per unit. Each unit consisted of 1 share of Series A
Convertible Preferred Stock and 7 shares of Common Stock. The offering
terminated on February 28, 1995 and, a total of 300,000 units were sold
generating net proceeds of $ 2,345,104 ($3,000,000 less offering costs of
$654,896).

During October 1992, the Company's Board of Directors authorized private
offering of $2,000,000 for up to 200 units at a unit price of $10,000 which
includes 30,000 shares of Common Stock and 1,000 shares of Series A Convertible
Preferred Stock. The Company allocated $9.97 per share to the Series A
Convertible Preferred Stock due to the Preferred Stock's senior position. The
private offering closed on June 30, 1993 from which the Company issued 142.2
units and raised $1,270,254 of net proceeds ($1,422,000 less offering costs of
$151,746).

During July 1993, the Company granted 157,300 Common Stock purchase rights at
$1.00 per share to certain consultants and to a broker dealer in connection with
this private placement offering. These rights were immediately vested and are
exercisable for a period of five years.

During July 1992, the Company's Board of Directors authorized a $1,500,000
private placement offering of 150 units of Common and Preferred Stock. The
offering was canceled effective September 1992. Approximately $50,000 of costs
incurred in connection with the canceled offering were charged to operations
during the year ended June 30, 1993.

10. Stock Options

Except as noted below, the Company's Board of Directors has granted options to
employees and consultants to purchase common shares at or above fair market
value. During June 1995, the Company issued 10,000 options at $.25 per share
which was below fair market value and, accordingly, recorded a $2,600 charge to
compensation expense in conjunction with the issuance.

F-19

USA Technologies, Inc.

(A Development Stage Corporation)

Notes to Financial Statements (continued)

10. Stock Options (continued)

The following table summarizes all stock option activity:

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

Balance at June 30, 1993 - $ -
Granted 875,000 $ .25
-----------------------
Balance at June 30, 1994 875,000
Canceled (100,000) $ .25
Granted 2,290,000 $ .05 - .25
-----------------------
Balance at June 30, 1995 3,065,000
Granted 550,000 $ .65
Exercised (280,000) $ .05
-----------------------
Balance at June 30, 1996 3,335,000 $ .05 - .65
Granted (unaudited) 200,000 $ .45
Granted (unaudited) 60,000 $ .50
Granted (unaudited) 50,000 $ .65
Canceled (unaudited) (29,000) $ .65
-----------------------
Balance at December 31, 1996
(unaudited) 3,616,000 $ .05 - .65
=======================

At June 30, 1996 and 1995 and December 31, 1996, respectively, 2,785,000,
2,890,000 and 3,266,000, respectively, of these options were exercisable.

11. Escrow and Cancellation Arrangements

At the request of the Pennsylvania Securities Commission, all of the executive
officers and directors of the Company serving at the commencement of the initial
public offering of the Company agreed to place in escrow 10,700,000 shares of
Common Stock (subsequently amended to 8,603,675 by the cancellation of 2,305,000
shares by the President of the Company during June 1995 and February 1996 and
the addition of 208,675 shares by officers and directors in August 1995,
February 1996, and May 1996) beneficially owned by them until January 5, 1997.
Under certain circumstances as outlined by the Pennsylvania Securities
Commission, the President's shares may be held in escrow for an additional
period of time, but not later than June 30, 1998. Any additional shares of
Common Stock acquired by the executive officers and directors will also be held
in escrow. The executive officers and directors have agreed not to sell, pledge,
or transfer, directly or indirectly, any of the Common Stock held in escrow or

F-20

USA Technologies, Inc.

(A Development Stage Corporation)

Notes to Financial Statements (continued)

11. Escrow and Cancellation Arrangements (continued)

any options to acquire stock they may own. Additionally, the President of the
Company has agreed that 4,365,000 shares of his escrowed Common shares would be
canceled by the Company and would no longer be issued and outstanding unless
certain performance measures as specified by the Commission are achieved. If the
performance measures are achieved, the common shares released from escrow will
result in a compensatory charge to the Company's operations. The charge will be
based on the fair value of the Company's common shares on the date the shares
are released from escrow. During the three months ended September 30, 1996,
there was no such charge to operations. The 4,365,000 shares are not considered
outstanding for purposes of calculating the loss per common share for all
periods presented.

12. Subsequent Events

During July 1996, the Company granted options to an employee to purchase up to
100,000 shares of Common Stock at $.65 per share. These options vest at the rate
of 12,500 every three months over a two-year period. The Board of Directors
determined the options price to be granted at or above the fair market value of
the underlying common shares on the date of grant.

In August, 1996, the Company authorized the issuance of 265,000 shares of Common
Stock to two consultants. The Company issued and registered these shares in
October, 1996 under the Act and such shares are freely tradeable thereunder.

During August 1996, the Company granted fully vested options to a consultant to
purchase 50,000 shares of Common Stock at $.50 per share. The Board of Directors
determined the option price of the underlying shares to be at or above the fair
market value on the date of grant.

During August 1996, the Company's Board of Directors authorized the issuance of
265,000 shares of Common Stock to two consultants.

On September 10, 1996, the Company received $106,350 of subscriptions receivable
relating to the 1995 Common Stock Purchase warrants exercised as described in
Note 9.

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

During September 1996, the Company granted to an employee options to purchase up
to 50,000 shares of Common Stock at $.45 per share. In November 1996, the
Company granted to an employee options to purchase up to 50,000 shares of Common
Stock at $.65 per share, to a consultant options to purchase up to 50,000 shares
of Common Stock at $.50 per share, and to an employee options to purchase up to
10,000 shares of Common Stock at $.50 per share. During November 1996, the
Company authorized the issuance of 160,000 shares of Common Stock to a
consultant as compensation for services to be rendered to the Company. Such
shares of Common Stock shall be issued to the consultant at the rate of 40,000
shares per month, commencing December 1996, and continuing each month
thereafter. The Company plans to register such shares under the Act pursuant to
a Form S-8 to be filed with the Securities and Exchange Commission. During
February 1997, the Company granted to an employee 200,000 options to purchase
Common Stock at $.45 per share. All of the above options were granted at an
exercise price determined by the Board of Directors to be equal to or greater
than the fair market value of the underlying shares on the date of grant. All of
the options are exercisable at anytime within five years from the date of
vesting.

During November 1996, the Company reduced from $.65 to $.45 the exercise price
of options to purchase up to 500,000 shares of Common Stock issued to officers
of the Company in March 1996, April 1996 and May 1996. The new exercise price of
these options was equal to or greater than the fair market value of the Common
Stock on the date of such reduction.

During November 1996, the Company authorized a reduction of the exercise price
of the 1996 Warrants from $.40 to $.20 during the period November 1, 1996
through February 28, 1997, after which the exercise price will increase to $.50.
From November 1, 1996 through December 31, 1996, 2,345,000 1996 Warrants have
been exercised resulting in gross proceeds to the Company of $469,000.

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
includes 1,000 shares of Series A Convertible Preferred Stock and 30,000 1996-B
Common Stock purchase warrants. Each warrant is exercisable into one share of
Common Stock through June 30, 1997 at $.20 and thereafter at $.30 for five years
after the termination of the offering. As of February 28, 1997, 10 units have
been sold, generating gross proceeds of $100,000.

F-21

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 . . . . . . . . . . . . . . . . . . 4

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

Use of Proceeds. . . . . . . . . . . . . . . . . . . . . 10

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

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

Management . . . . . . . . . . . . . . . . . . . . . . . 24

Principal Shareholders . . . . . . . . . . . . . . . . . 31

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

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

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

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

Plan of Distribution . . . . . . . . . . . . . . . . . . 50

Legal Matters . . . . . . . . . . . . . . . . . . . . . 51

Experts. . . . . . . . . . . . . . . . . . . . . . . . . 51

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

PART II

INFORMATION NOT REQUIRED IN THE PROSPECTUS

Item 24. Indemnification of Officers and Directors.

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

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

Item 25. Other Expenses of Issuance and Distribution.

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

Securities and Exchange Commission - Registration Fee . $ 896.56
Blue Sky fees and expenses. . . . . . . . . . . . . . . $ 5,000.00
Printing and Engraving Expenses . . . . . . . . . . . . $11,000.00
Accounting Fees and Expenses. . . . . . . . . . . . . . $18,000.00
Legal Fees and Expenses . . . . . . . . . . . . . . . . $18,000.00
Miscellaneous . . . . . . . . . . . . . . . . . . . . . $ 2,103.44
----------

Total . . . . . . . . . . . . . . . . . . $55,000.00
----------

Item 26. Recent Sales of Unregistered Securities.

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

II-1

I. Private Placements.

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

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

During January and February 1997, the Company sold 10 units at
$10,000 each pursuant to a private placement under Rule 506 of Regulation D
promulgated under the Act. Each unit consisted of 1,000 shares of Preferred
Stock and 30,000 1996-B Common Stock Purchase Warrants. An aggregate of 10,000
shares of Preferred Stock and 300,000 1996-B Common Stock Purchase Warrants were
sold to 19 accredited investors.

II. Stock Options

II-2

In August, 1994, the Company approved the issuance to Megan N. Cherney
options to purchase an aggregate of 100,000 shares of Common stock for $.25 per
share.

In August, 1994, the Company issued to Haven Brock Kolls, Jr., options
to purchase an aggregate of 50,000 shares of Common Stock for $.25 per share.

In August, 1994, the Company issued to Barry Slawter options to purchase
an aggregate of 200,000 shares of Common Stock for $.25 per share.

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

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

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

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

II-3

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

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

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

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

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

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

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

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

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

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

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

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

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

III. Common Stock-For Cash.

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

In February 1996, options to purchase 100,000 shares of Common Stock at
$.05 per share were exercised by the holders thereof. All of such shares were
issued by the Company in reliance on Section 4(2) of the Act.

IV. Stock Dividend.

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

II-4

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

Item 27. Exhibits.

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

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

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

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

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

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

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

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

II-5

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

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

4.2 Form of 1996 Warrant Certificate

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

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

5.1 Opinion of Lurio & Associates

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

10.1.2 First Amendment to Amended and Restated Employment and
Non-Competition Agreement between the Company and George
R. Jensen, Jr., dated as of April 29, 1996

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

10.2.1 First Amendment to Employment and Non-
Competition Agreement between the Company and
Keith L. Sterling dated as of April 29, 1996

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

10.3.1 First Amendment to Employment and Non-
Competition Agreement between the Company
and Edward J. Sullivan dated as of April 29, 1996

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

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

II-6

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

10.6.1 Edward J. Sullivan Common Stock Options dated
as of April 29, 1996

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

10.7.1 Keith L. Sterling Common Stock Options dated
as of April 29, 1996

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

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

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

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

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

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

II-7

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

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

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

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

10.14.2 Joinder to Escrow Agreement dated as of
February 14, 1996 by each of Haven Brock Kolls,
Barry Slawter, and Henry B. duPont Smith

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

10.15.1 First Amendment to Employment and Non-
Competition Agreement between the Company
and H. Brock Kolls dated as of March 20, 1996

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

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

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

II-8

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

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

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

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

10.21 Employment Agreement dated June 30, 1994 between
the Company and Megan N. Cherney (Incorporated
by reference to Exhibit 10.45 to Form SB-2
Registration Statement No. 33-70992)

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

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

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

10.25 First Amendment to Employment And Non-
Competition Agreement between the Company
and Barry Slawter dated September 28, 1995 (Incorporated by
reference to Exhibit 10.25 to Form SB-2 Registration
Statement No. 33-98808)

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

II-9

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

10.27 Letter Agreement between the Company and
Diversified Corporate Consulting Group, L.P.,
dated February 7, 1996 (Incorporated by
reference to Exhibit 28.2 to Form S-8
Registration Statement No. 333-2614)

10.28 Employment And Non-Competition Agreement
between the Company and Michael Lawlor dated June 7, 1996

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

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

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

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

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

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

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

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

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

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

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

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

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

23.2 Consent of Lurio & Associates (included
in Exhibit 5.1)

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

II-10

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-11

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-12

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing this Post Effective Amendment No. 2 to Form
SB-2 and has duly caused this Registration Statement on Form SB-2 to be signed
on its behalf by the undersigned, thereunto duly authorized, in Wayne,
Pennsylvania, on March 6, 1997.

USA TECHNOLOGIES, INC.

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

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

Signatures Title Date
---------- ----- ----

/s/ George R. Jensen, Jr. Chairman of the Board, March 6, 1997
- --------------------------- President and Chief
George R. Jensen, Jr. Executive Officer
(Principal and Chief
Executive Officer)

/s/ Leland P. Maxwell Vice President, Chief March 6, 1997
- --------------------------- Financial Officer
Leland P. Maxwell Treasurer (Principal
Accounting Officer)

/s/ Stephen P. Herbert Vice President, March 6, 1997
- --------------------------- Director
Stephen P. Herbert

/s/ Keith L. Sterling Vice President, March 6, 1997
- --------------------------- Director
Keith L. Sterling

/s/ William W. Sellers Director March 6, 1997
- ---------------------------
William W. Sellers

/s/ Peter G. Kapourelos Director March 6, 1997
- ---------------------------
Peter G. Kapourelos

Director March , 1997
- ---------------------------
Henry B. duPont Smith

Director March , 1997
- ---------------------------
William L. Van Alen, Jr.

II-13

EXHIBIT INDEX

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

23.1 Consent of Ernst & Young LLP, Independent
Auditors

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

II-14





                                                                    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 9, 1996, except for Note 12 as to which
the date is September 10, 1996, in the Post-Effective Amendment No. 2 to the
Registration Statement (Form SB-2 No. 333-09465) and related Prospectus of USA
Technologies, Inc. dated March 6, 1997, for the registration of 5,200,000
shares of its common stock.




                                               /s/ Ernst & Young LLP

Philadelphia, Pennsylvania
March 6, 1997