Edgar Filing: USA TECHNOLOGIES INC

REGISTRATION NO. 333-

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

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

Pennsylvania
(State or other jurisdiction of incorporation or organization)

7359
(Primary Standard Industrial Classification Code Number)

23-2679963
(I.R.S. Employer Identification Number)

100 Deerfield Lane, Suite 140
Malvern, Pennsylvania 19355
(610) 989-0340
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)

George R. Jensen, Jr.
Chief Executive Officer
USA Technologies, Inc.
100 Deerfield Lane, Suite 140
Malvern, Pennsylvania 19355
(610) 989-0340
(Name, address, including zip code, and telephone number,
including area code, of agent for service)

Copies to:
Douglas M. Lurio, Esquire
Lurio & Associates, P. C.
One Commerce Square
2005 Market Street, Suite 2340
Philadelphia, PA 19103-7015
(215) 665-9300

(Approximate date of proposed sale to the public)
From time to time after this Registration Statement becomes effective.

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 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, 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 this Form is a post-effective amendment filed pursuant to Rule 462(d) 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. [ ]

CALCULATION OF REGISTRATION FEE

Title of each Proposed Maximum Proposed Maximum
class of Securities Amount to Offering Price Per Aggregate Amount of
to be Registered be Registered Unit (2) Offering Price Registration Fee
-------------------- ------------- ------------------ ----------------- ----------------

Common Stock, no par
value 1,000,000 shares (1) $11.13 $11,130,000 $1,190.91
---------------- ------ ----------- ---------
TOTAL 1,000,000 shares $11,130,000 $1,190.91

(1) Represents shares issuable by us to Steve Illes under the Common Stock
Purchase Agreement between Mr. Illes and us dated February 17, 2006.
(2) Pursuant to Rule 457c, the registration fee has been calculated at the
average of the bid and ask price within 5 days prior to the date of the
filing of the registration statement.

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

The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission ("SEC") is effective. This prospectus is not
an offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.

PROSPECTUS

USA TECHNOLOGIES, INC.

1,000,000 shares of Common Stock

THE OFFERING

The resale of up to 1,000,000 shares of common stock in the over-the-counter
market at the prevailing market price or in negotiated transactions. We will
receive proceeds from the sale of shares issuable upon the sale of shares to
Steve Illes under the Common Stock Purchase Agreement dated February 17, 2006.
Because the selling shareholder will offer and sell the shares at various times,
we have not included in this prospectus information about the price to the
public of the shares or the proceeds to the selling shareholder.

Steve Illes is an "underwriter" within the meaning of the Act in connection with
the sale of shares purchased from us under his agreement with us. Mr. Illes will
receive a ten percent discount from us in connection with his purchase of shares
from us. See "Other Events".

Our common stock is included for quotation on the over-the-counter bulletin
board under the symbol "USAT." The closing bid price for the common stock on
February 17, 2006, was $13.60 per share.

THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD PURCHASE SHARES ONLY
IF YOU CAN AFFORD A COMPLETE LOSS. Please refer to Risk Factors beginning on
Page 7.

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

The date of this prospectus is February 23, 2006.

TABLE OF CONTENTS

CONTENTS PAGE
--------------------------------------------------------------------------------

Prospectus Summary ......................................................... 5
Risk Factors ............................................................... 7
Use of Proceeds ............................................................ 12
Selected Financial Data .................................................... 13
Quarterly Financial Data ................................................... 14
Quantitative and Qualitative Disclosures About Market Risk ................. 15
Management's Discussion And Analysis of Financial Condition
And Results of Operations .................................................. 15
Other Events ............................................................... 29
Business ................................................................... 30
Management ................................................................. 46
Principal Shareholders ..................................................... 53
Certain Transactions ....................................................... 57
Selling Shareholder ........................................................ 58
Market for Common Stock .................................................... 59
Plan of Distribution ....................................................... 61
Description of Securities .................................................. 62
Legal Matters .............................................................. 68
Experts .................................................................... 68
Where You Can Find Additional Information .................................. 68
Financial Statements ....................................................... F-1

PROSPECTUS SUMMARY

OUR COMPANY

USA Technologies, Inc. (the "Company", "We" and "Our") was incorporated in the
Commonwealth of Pennsylvania in January 1992. The Company offers a suite of
networked devices and associated wireless non-cash payment, control/access
management, remote monitoring and data reporting services. As a result of the
acquisition of the assets of Bayview Technology Group, LLC ("Bayview") in July
2003, our Company also manufactures and sells energy management products which
reduce the power consumption of various equipment, such as refrigerated vending
machines and glass front coolers, thus reducing the energy costs associated with
operating this equipment.

OUR BUSINESS

Our networked devices and associated services enable the owners and operators of
everyday, stand-alone, distributed assets, such as vending machines, personal
computers, copiers, faxes, kiosks and laundry equipment, the ability to remotely
monitor, control and report on the results of these distributed assets, as well
as the ability to offer their customers alternative cashless payment options.

OUR MARKET

Our customers fall into the following categories; vending machine owners and/or
operators, business center operators which include hotels and audio visual
companies, commercial laundry operators servicing colleges and universities,
brand marketers wishing to provide their products or services via kiosks or
vending machines and equipment manufacturers such as consumer electronics,
appliances, building control systems, factory equipment and computer peripherals
that would like to incorporate the technological features of our networked
devices (i.e. remote monitoring, reporting and control as well as cashless
payments) into their products. Customers for our energy management products also
include energy utility companies and operators of glass front coolers.

RESEARCH AND DEVELOPMENT COSTS

Research and development expenses, which are included in general and
administrative and compensation expense in the Consolidated Statements of
Operations, were approximately $1,364,000, $688,000, and $1,505,000 for the
years ended June 30, 2005, 2004 and 2003, respectively, and $373,000 for the six
months ended December 31, 2005.

ABOUT OUR OFFERING

Our selling shareholder is Steve Illes.

Mr. Illes has agreed to purchase up to 1,000,000 shares under the Common Stock
Purchase Agreement dated February 17, 2006.

Based upon the shares outstanding as of January 9, 2006 of 5,001,620, if Mr.
Illes purchases all of the shares covered by this prospectus, we would have
6,001,620 shares outstanding.

The shares covered by this prospectus would be offered by our selling
shareholder at the market price at the time of resale. Our selling shareholder
may also sell his shares to other investors in a transaction not on the open
market. There is no requirement that our selling shareholder sell his shares
pursuant to this prospectus.

We will not receive any of the proceeds raised by the offering. We would receive
proceeds from the purchase by Mr. Illes of the shares referred to above.

On February 17, 2006, the Company effectuated a 1-for-100 reverse stock split of
all of its issued and outstanding Common Stock. Pursuant thereto, on the
effective date of the Reverse Split, (i) each 100 shares of outstanding Common
Stock was reduced to one share of Common Stock; (ii) the number of shares of
Common Stock into which each outstanding warrant, or option is exercisable was
proportionately reduced on a 100-to-1 basis; (iii) the exercise price of each
outstanding warrant or option was proportionately increased on a 1-to-100 basis;
(iv) the number of shares of Common Stock into which each share of Series A
Preferred Stock is convertible was reduced from 1 share to one-hundredth of a
share, and each share was entitled to one-hundredth of a vote rather than one
vote per share as previously provided; (v) the conversion rate of the accrued
and unpaid dividends on the Series A Preferred Stock was increased from $10.00
to $1,000.00 per share of Common Stock; (vi) the conversion price of each
convertible senior note was proportionately increased on a 1-to-100 basis, and
the number of shares into which each convertible senior note was convertible was
decreased on a 100-to-1 basis; (vii) the number of shares issuable under the
2004-B Stock Compensation Plan was reduced from 38,693 to 386 shares; and (viii)
the number of shares issuable to Steve Illes under our April 2005 Common Stock
Purchase Agreement was reduced to 360,000 shares from 36,000,000 shares. All of
the share numbers, share prices, exercise prices, and all other similar items
contained in this prospectus have been properly adjusted, on a retroactive
basis, to reflect the foregoing.

RISK FACTORS

An investment in our common stock is very risky. You should be aware that you
could lose the entire amount of your investment. Prior to making an investment
decision, you should carefully consider the following risk factors and the other
information contained in this prospectus.

1. We have a history of losses since inception and if we continue to incur
losses the price of our shares can be expected to fall.

We have experienced losses since inception. We expect to continue to incur
losses for the foreseeable future as we expend substantial resources on sales,
marketing, and research and development of our products. From our inception
through December 31, 2005, our cumulative losses are approximately $119 million.
For our fiscal years ended June 30, 2003, 2004 and 2005, and the six-month
period ended December 31, 2005, we have incurred net losses of $21,965,499,
$21,426,178, $15,499,190, and $6,060,963, respectively. If we continue to incur
losses, the price of our common stock can be expected to fall.

2. Our existence is dependent on our ability to raise capital that may not be
available.

There is currently limited experience upon which to assume that our business
will prove financially profitable or generate more than nominal revenues. From
inception, we have generated funds primarily through the sale of securities.
There can be no assurances that we will be able to continue to sell additional
securities. We expect to raise funds in the future through sales of our debt or
equity securities until such time, if ever, as we are able to operate
profitably. There can be no assurance given that we will be able to obtain funds
in such manner or on terms that are beneficial to us. During the year ended June
30, 2005, cash used in operating activities was approximately $992,000 per
month. During the first half of fiscal year 2006, the Company continued to make
efforts to improve its working capital management. For the three months ended
December 31, 2005, cash used in operating activities was approximately $802,000
per month. Using the actual cash requirements for the first six months of the
fiscal year and the last three months to estimate the remaining six months of
the fiscal year as a basis for estimating cash requirements for the entire year
ending June 30, 2006 (which assumes a static level of revenues), cash
requirements for fiscal year 2006, including requirements for capital
expenditures and repayments of long-term debt, would be approximately
$11,900,000. Our inability to obtain needed funding can be expected to have a
material adverse effect on our operations and our ability to achieve
profitability. If we fail to generate increased revenues or fail to sell
additional securities you may lose all or a substantial portion of your
investment.

3. We received an opinion from our auditor which raises substantial doubt about
our ability to continue as a going concern.

Our auditors, Goldstein Golub Kessler LLP, have included an explanatory
paragraph in their report on our June 30, 2005 consolidated financial statements
indicating that as of June 30, 2005, there is substantial doubt about our
ability to continue as a going concern. We will require additional funds in the
future, and there can be no assurance that any independent auditors` report on
our future financial statements will not include a similar explanatory paragraph
if we are unable to raise sufficient funds or generate sufficient cash from
operations to cover the cost of our operations. The existence of the explanatory
paragraph may adversely affect our relationship with prospective customers,
suppliers and potential investors, and therefore could have a material adverse
effect on our business, financial condition and results of operations.

4. We depend on our key personnel and if they would leave us, our business could
be adversely affected.

We are dependent on key management personnel, particularly the Chairman and
Chief Executive Officer, George R. Jensen, Jr. The loss of services of Mr.
Jensen or other executive officers would dramatically affect our business
prospects. Certain of our employees are particularly valuable to us because:

o they have specialized knowledge about our company and operations;

o they have specialized skills that are important to our operations; or

o they would be particularly difficult to replace.

We have entered into an employment agreement with Mr. Jensen that expires in
June 30, 2007. We have also entered into employment agreements with other
executive officers, each of which contain non-compete agreements. We have
obtained a key man life insurance policy in the amount of $2,000,000 on Mr.
Jensen, a key man life insurance policy in the amount of $1,000,000 on our
President, Stephen P. Herbert, and a key man life insurance policy in the amount
of $1,000,000 on our Vice-President-Research and Development, Haven Brock Kolls,
Jr.

We do not have and do not intend to obtain key man life insurance coverage on
any of our other executive officers. As a result, we are exposed to the costs
associated with the death of these key employees.

5. USA's dependence on proprietary technology and limited ability to protect our
intellectual property may adversely affect our ability to compete.

A successful challenge to our ownership of our technology could materially
damage our business prospects. Our technology may infringe upon the proprietary
rights of others. Our success is dependent in part on our ability to obtain
patent protection for our proprietary products, maintain trade secret protection
and operate without infringing the proprietary rights of others.

Through January 9, 2006, we have 25 pending patent applications, and intend to
file applications for additional patents covering our future products, although
there can be no assurance that we will do so. In addition, there can be no
assurance that we will maintain or prosecute these applications. The United
States Government and other countries have granted us 61 patents as of January
9, 2006. There can be no assurance that:

o any of the remaining patent applications will be granted to us;

o we will develop additional products that are patentable or do not infringe the
patents of others;

o any patents issued to us will provide us with any competitive advantages or
adequate protection for our products;

o any patents issued to us will not be challenged, invalidated or circumvented
by others; or

o any of our products would not infringe the patents of others.

If any of the products are found to have infringed any patent, there can be no
assurance that we will be able to obtain licenses to continue to manufacture and
license such product or that we will not have to pay damages as a result of such
infringement. Even if a patent application is granted for any of our products,
there can be no assurance that the patented technology will be a commercial
success or result in any profits to us.

6. Competition from others with greater resources could prevent USA from
increasing revenue and achieving profitability.

Competition from other companies that are well established and have
substantially greater resources may reduce our profitability. Many of our
competitors have established reputations for success in the development, sale
and service of high quality products. We face competition from the following
groups:

o companies offering automated, credit card activated control systems in
connection with facsimile machines, personal computers, debit card
purchase/revalue stations, and use of the Internet and e-mail which directly
compete with our products;

o companies which have developed unattended, credit card activated control
systems currently used in connection with public telephones, prepaid telephone
cards, gasoline dispensing machines, or vending machines and are capable of
developing control systems in direct competition with USA; and

o businesses which provide access to the Internet and personal computers to
hotel guests. Although these services are not credit card activated, such
services would compete with USA's Business Express(R).

Competition may result in lower profit margins on our products or may reduce
potential profits or result in a loss of some or all of our customer base. To
the extent that our competitors are able to offer more attractive technology,
our ability to compete could be adversely affected.

7. The termination of any of our relationships with third parties upon whom we
rely for supplies and services that are critical to our products could adversely
affect our business and delay achievement of our business plan.

We depend on arrangements with third parties for a variety of component parts
used in our products. We have contracted with Masterwork Electronics to assist
us to develop and manufacture our e-Port(R) products and with various sources to
manufacture our energy miser products. For other components, we do not have
supply contracts with any of our third-party suppliers and we purchase
components as needed from time to time. See "Business-Procurement". We have
contracted with IBM to host our network in a secure, 24/7 environment to ensure
reliability of our network services. If these business relationships are
terminated, the implementation of our business plan may be delayed until an
alternative supplier or service provider can be retained. If we are unable to
find another source or one that is comparable, the content and quality of our
products could suffer and our business, operating results and financial
condition could be harmed.

8. We do not expect to pay cash dividends in the foreseeable future and
therefore investors should not anticipate cash dividends on their investment.

The holders of our common stock and series A preferred stock are entitled to
receive dividends when, and if, declared by our board of directors. Our board of
directors does not intend to pay cash dividends in the foreseeable future, but
instead intends to retain any and all earnings to finance the growth of the
business. To date, we have not paid any cash dividends on the common stock or
series A preferred stock and there can be no assurance that cash dividends will
ever be paid on the common stock.

In addition, our articles of incorporation prohibit the declaration of any
dividends on the Common Stock unless and until all unpaid and accumulated
dividends on the Series A preferred stock have been declared and paid. Through
January 9, 2006, the unpaid and cumulative dividends on the series A preferred
stock equal $7,836,030. The unpaid and cumulative dividends on the series A
preferred stock are convertible into shares of common stock at the rate of $1000
per share at the option of the shareholder. Through January 9, 2006, $2,701,764
of unpaid and cumulative dividends on the Series A Preferred Stock were
converted into 2,902 shares of common stock. See "Description of
Securities-Series A Convertible Preferred Stock."

9. We may fail to gain widespread market acceptance of our products and not
generate sufficient revenues or profit margins to become successful.

There can be no assurance that demand for our products will be sufficient to
enable us to become profitable. Likewise, no assurance can be given that we will
be able to install the TransActs and e-Ports at enough locations or sell
equipment utilizing our network or our energy management products to enough
locations to achieve significant revenues or that our operations can be
conducted profitably. Alternatively, the locations which would utilize the
network may not be successful locations and our revenues would be adversely
affected. We may in the future lose locations utilizing our products to
competitors, or may not be able to install our products at competitor's
locations. In addition, there can be no assurance that our products could evolve
or be improved to meet the future needs of the market place.

10. The lack of an established trading market may make it difficult to transfer
our stock and you may not be able to sell your shares on our trading market.

Our Common Stock is traded on the OTC Bulletin Board. Although there is limited
trading in the Common Stock, there is no established trading market. Until there
is an established trading market, holders of the common stock may find it
difficult to dispose of, or to obtain accurate quotations for the price of the
common stock. See "Description of Securities - Shares Eligible For Future Sale"
and "Market For Common Stock."

11. The substantial market overhang of our shares and registered resales under
this prospectus will tend to depress the market price of our shares.

The substantial number of our shares currently eligible for sale in the open
market will tend to depress the market price of our shares. See "Description of
Securities-Shares Eligible for Future Sale" and "Market for Securities". As of
January 9, 2006, these shares consisted of the following:

- 5,001,620 shares of Common Stock

- 521,642 shares of Preferred Stock

- 7,836 shares issuable upon conversion of the accrued and unpaid dividends on
the Series A Preferred Stock

- 239,581 shares underlying Common Stock options and warrants

- 800,535 shares underlying our Convertible Senior Notes

- 360,000 shares issuable under the 2005 Common Stock Agreement with Steve
Illes; and

- 386 shares issuable under our 2004-B Stock Compensation Plan.

12. Sales of shares eligible for future sale from exercise of warrants and
options could depress the market price of our common stock.

As of January 9, 2006, we had issued and outstanding options to purchase 20,099
shares of our common stock and warrants to purchase 219,481 shares. The shares
underlying all of these options and warrants have been registered and may be
freely sold upon issuance. Market sales of large amounts of our common stock, or
the potential for those sales even if they do not actually occur, may have the
effect of depressing the market price of our common stock. In addition, if our
future financing needs require us to issue additional shares of common stock or
securities convertible into common stock, the supply of common stock available
for resale could be increased which could stimulate trading activity and cause
the market price of our common stock to drop, even if our business is doing
well.

13. We are obligated to make substantial principal and interest payments to the
holders of the Senior Notes for which funds may not be available or would use
our available working capital.

As of January 9, 2006, we had $320,000 of unsecured senior notes due on June 30,
2006, $1,683,500 of unsecured senior notes due on December 31, 2006, $1,078,827
of unsecured senior notes due on June 30, 2007, $2,975,016 of unsecured senior
notes due on December 31, 2007, $2,465,596 of unsecured senior notes due on
December 31, 2008, $1,520,000 of unsecured senior notes due on December 31,
2009, and $2,012,000 of unsecured senior notes due on December 31, 2010. These
notes accrue cash interest at the rate of twelve percent (12%) per year with the
exception of the notes due June 30, 2007, December 31, 2010 and $544,945 of the
December 31, 2008 notes, which accrue cash interest at the rate of ten percent
(10%) per year. We are required to make quarterly interest payments totaling
approximately $344,000 or $1,376,000 each year.

Until the Senior Notes have been paid by us, they will be reflected as a
liability on our financial statements, net of the related unamortized discount
and other issuance costs.

Our ability to satisfy the debt obligations is dependent on our future
performance, the success of our product lines and on our ability to raise
capital. Our performance is also subject to financial, business and market
factors affecting our business and operations.

We anticipate that the Senior Notes will either be converted into Common Stock
or be paid from cash generated from operations, as well as proceeds from
securities offerings. However, there can be no assurance that we will meet our
obligations to pay quarterly interest on or the principal amount of the senior
notes at maturity. The payment of the interest and principal on these notes
would utilize our available working capital which would not be available for
other purposes.

USE OF PROCEEDS

We will not receive any of the proceeds from the sales of our Common Stock by
the selling shareholder. The selling shareholder entitled to receive the net
proceeds from any sales of our common stock begins on page 58 of this
prospectus. We will, however, receive proceeds from the purchase by Mr. Illes of
shares under the Common Stock Purchase Agreement dated February 17, 2006.

Based upon the price of our shares as of February 17, 2006, we would receive
$12,240,000 of proceeds from the purchase by Steve Illes of all 1,000,000 shares
issuable to him under his agreement with us at $12.24 per share. The maximum
amount of purchases by Mr. Illes under his agreement with us is $15,000,000.
Therefore, if our share price would be in excess of $33.00 per share when
purchases were made by Mr. Illes we would receive $15,000,000 of proceeds from
the purchase by Mr. Illes of 500,000 shares issuable to him at $30.00 per share.

SELECTED FINANCIAL DATA

The following selected financial data for the five years ended June 30, 2005 are
derived from the audited consolidated financial statements of USA Technologies,
Inc. The financial data for the six months ended December 31, 2005 and 2004 are
derived from unaudited consolidated financial statements. The unaudited
consolidated financial statements include all adjustments, consisting of normal
recurring accruals, which USA Technologies, Inc. considers necessary for a fair
presentation of the financial position and the results of operations for these
periods. Operating results for the six months ended December 31, 2005 are not
necessarily indicative of the results that may be expected for the entire year
ending June 30, 2006. The data should be read in conjunction with the
consolidated financial statements, related notes, and other financial
information.

Year ended June 30

2005 2004 2003 2002 2001
--------------------------------------------------------------------------------

OPERATIONS DATA

Revenues $ 4,677,989 $ 5,632,815 $ 2,853,068 $ 1,682,701 $ 1,451,002

Loss before cumulative effect of
accounting change $(15,499,190) $(21,426,178) $(21,965,499) $(17,314,807) $(10,135,244)

Cumulative effect of accounting change -- -- -- -- (821,000)
--------------------------------------------------------------------------------
Net loss (15,499,190) (21,426,178) (21,965,499) (17,314,807) (10,956,244)

Cumulative preferred dividends (784,113) (786,513) (793,586) (822,561) (836,541)
--------------------------------------------------------------------------------
Loss applicable to common shares $(16,283,303) $(22,212,691) $(22,759,085) $(18,137,368) $(11,792,785)
================================================================================

Loss per common share (basic and diluted)
Loss before cumulative effect of
accounting change $ (4.18) $ (7.70) $ (20.36) $ (50.39) $ (65.58)

Cumulative effect of accounting
change -- -- -- -- (4.91)
--------------------------------------------------------------------------------
Net loss $ (4.18) $ (7.70) $ (20.36) $ (50.39) $ (70.49)
================================================================================

Cash dividends per common share $ -- $ -- $ -- $ -- $ --

BALANCE SHEET DATA
Total assets $ 23,391,765 $ 25,880,577 $ 17,892,681 $ 17,056,773 $ 6,180,061
Convertible Senior Notes and other
long-term debt $ 9,337,300 $ 7,273,056 $ 9,213,699 $ 7,968,097 $ 4,572,008

Shareholders' equity (deficiency) $ 9,309,185 $ 14,108,662 $ 3,692,083 $ 3,395,892 $ (2,400,897)

Six months ended
December 31
2005 2004
-----------------------------

OPERATIONS DATA

Revenues $ 3,321,639 $ 2,168,026
Loss before cumulative effect of
accounting change $ (6,060,963) $ (7,445,641)
Cumulative effect of accounting change -- --
-----------------------------
Net loss (6,060,963) (7,445,641)
Cumulative preferred dividends (392,057) (392,057)
-----------------------------
Loss applicable to common shares $ (6,453,020) $ (7,837,698)
=============================
Loss per common share (basic and diluted)
Loss before cumulative effect of
accounting change $ (1.42) $ (2.14)
Cumulative effect of accounting
change -- --
-----------------------------
Net loss $ (1.42) $ (2.14)
=============================
Cash dividends per common share
$ -- $ --
BALANCE SHEET DATA
Total assets $ 25,129,732 $ 23,466,108
Convertible Senior Notes and other
long-term debt $ 10,762,337 $ 8,519,069

Shareholders' equity $ 25,129,732 $ 10,894,069

(a) The cumulative effect of an accounting change in fiscal year 2001 reflects a
catch up adjustment as required by EITF Issue 00-27, Application of EITF Issue
98-5, "Accounting for Convertible Securities with Beneficial Conversion Features
or Contingently Adjustable Conversion Ratios to Certain Convertible Instruments"
in connection with $4.6 million of Convertible Senior Notes issued by the
Company in 1999.

(b) During fiscal year 2001 the Company recorded an $863,000 loss on a exchange
of debt which was originally reported as an extraordinary loss. In accordance
with the provisions of SFAS No. 145, "Recission of FASB Statements No. 4, 44 and
62, Amendment of SFAS No. 13, and Technical Corrections," such loss was
reclassified to a loss from continuing operations.

(c) In May 2002 the Company acquired Stitch Networks Corporation. In July 2003
the Company acquired substantially all the assets of Bayview Technology Group,
LLC. Both acquisitions have been accounted for using the purchase method and,
accordingly, are included in the Company's results of operations from their
respective dates of acquisition.

QUARTERLY FINANCIAL DATA

Unaudited quarterly results of operations for the years ended June 30, 2005 and
2004 and the six months ended December 31, 2005 follow and should be read in
conjunction with the consolidated financial statements, related notes and other
financial information and the Company's quarterly reports on Form 10-QSB for the
fiscal years 2004 and Form 10-Q for fiscal years 2005 and 2006.

First Second Third Fourth
Quarter Quarter Quarter Quarter Year
--------------------------------------------------------------------------------

YEAR ENDED JUNE 30, 2005

Revenues $ 1,032,578 $ 1,135,449 $ 1,122,330 $ 1,387,632 $ 4,677,989

Gross profit $ 130,534 $ 342,705 $ 566,720 $ 159,357 $ 1,199,316

Net loss $ (3,640,637) $ (3,805,004) $ (3,702,049) $ (4,351,500) $(15,499,190)

Cumulative preferred dividends $ (392,057) $ -- $ (392,057) $ -- $ (784,113)

Loss applicable to common shares $ (4,032,694) $ (3,805,004) $ (4,094,106) $ (4,351,500) $(16,283,303)

Loss per common share (basic and diluted) $ (1.14) $ (1.01) $ (1.02) $ (1.12) $ (4.18)

YEAR ENDED JUNE 30, 2004

Revenues $ 1,680,608 $ 1,914,586 $ 1,352,689 $ 684,932 $ 5,632,815

Gross profit $ 598,445 $ 831,167 $ 281,747 $ (408,236) $ 1,303,123

Net loss $ (9,303,084) $ (3,737,624) $ (3,383,570) $ (5,001,900) $(21,426,178)

Cumulative preferred dividends $ (393,369) $ -- $ (393,144) $ -- $ (786,513)

Loss applicable to common shares $ (9,696,453) $ (3,737,624) $ (3,776,714) $ (5,001,900) $(22,212,691)

Loss per common share (basic and diluted) $ (3.88) $ (1.32) $ (1.29) $ (1.74) $ (7.70)

SIX MONTHS ENDED DECEMBER 31, 2005

Revenues $ 1,363,886 $ 1,957,753

Gross profit $ 314,927 $ 787,882

Net loss $ (3,196,872) $ (2,864,091)

Cumulative preferred dividends $ (392,057) $ --

Loss applicable to common shares $ (3,588,929) $ (2,864,091)

Loss per common share (basic and diluted) $ (0.90) $ (0.61)

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's exposure to market risks for interest rate changes is not
significant. Interest rates on its Senior Notes and long-term debt are generally
fixed and its investments in cash equivalents and other securities are not
significant. Market risks related to fluctuations of foreign currencies are not
significant and the Company has no derivative instruments.

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

CRITICAL ACCOUNTING POLICIES

GENERAL

The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and the accompanying notes. Actual results could differ
from those estimates. We believe the policies and estimates related to revenue
recognition, software development costs, impairment of long-lived assets,
goodwill and intangible assets, and investments represent our critical
accounting policies and estimates. Future results may differ from our estimates
under different assumptions or conditions.

REVENUE RECOGNITION

Revenue from the sale of equipment is recognized on the terms of
freight-on-board shipping point, or upon installation and acceptance of the
equipment if installation services are purchased for the related equipment.
Transaction processing revenue is recognized upon the usage of the Company's
cashless payment and control network. License fees for access to the Company's
devices and network services are recognized on a monthly basis. Product revenues
are recognized for the sale of products from Company owned vending machines when
there is purchase and acceptance of product by the vending customer. The Company
estimates an allowance for product returns at the date of sale.

SOFTWARE DEVELOPMENT COSTS

The Company capitalizes software development costs pursuant to Statement of
Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed", after technological
feasibility of the software is established and through the product's
availability for general release to the Company's customers. All costs incurred
in the research and development of new software and costs incurred prior to the
establishment of technological feasibility are expensed as incurred.
Amortization of software development costs commences when the product becomes
available for general release to customers. Amortization of software development
costs is calculated as the greater of the amount computed using (i) the ratio
that current gross revenues for a product bear to the total of current and
anticipated future gross revenues of that product or (ii) the straight-line
method over the remaining estimated economic life of the product. The Company
reviews the unamortized software development costs at each balance sheet date
and, if necessary, will write down the balance to net realizable value if the
unamortized costs exceed the net realizable value of the asset.

During May 2000, the Company reached technological feasibility for the
development of the multi-media e-Port(TM) product, a previous generation of our
product with vending machine advertising capabilities, and related internal
network and, accordingly, the Company commenced capitalization of software
development costs related to this product and network. Costs capitalized through
2002 were $5.3 million, which included capitalized interest of approximately
$493,000 pursuant to SFAS No. 34, "Capitalization of Interest Costs".

During the fourth quarter of fiscal year 2002, the multi-media e-Port(TM) client
product and enhanced network became available for general release to the
Company's customers. During this quarter, management performed an evaluation of
the commercial success and preliminary market acceptance of the multi-media
e-Port(TM) and enhanced network and as a result of this evaluation the Company
determined that the estimated future revenues less costs to complete and dispose
of the multi-media e-Port client product was zero. Therefore, the Company wrote
down $2,663,000 of software development costs related to the multi-media e-Port
client product. The unamortized balance of the software development costs after
the impairment charge was amortized over an estimated useful life of two years
and was fully amortized during the year ended June 30, 2004. Accumulated
amortization was $5,326,186 at June 30, 2005 and June 30, 2004 and $4,327,526 at
June 30, 2003. Amortization expense was approximately $999,000 and $1,331,000
during the year ended June 30, 2004 and 2003, respectively. Such amortization is
reflected in cost of sales in the accompanying consolidated statements of
operations.

IMPAIRMENT OF LONG LIVED ASSETS

In accordance with Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-lived Assets" ("FAS 144"),
the Company reviews its long-lived assets whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be
recoverable. If the carrying amount of an asset or group of assets exceeds its
net realizable value, the asset will be written down to its fair value. In the
period when the plan of sale criteria of FAS 144 are met, long-lived assets are
reported as held for sale, depreciation and amortization cease, and the assets
are reported at the lower of carrying value or fair value less costs to sell.
During the fourth quarter of fiscal year 2003, the Company reviewed certain
long-lived assets (vending machines) and determined that such assets were
impaired. These vending machines were used and intended for use in connection
with the Company's program with Kodak to sell disposable cameras and film
pursuant to the Kodak Vending Placement Agreement. Management determined that it
was more likely than not that these vending machines would be disposed of before
the end of their previously estimated useful lives. The estimated undiscounted
cash flows for this group of assets was less than the carrying value of the
related assets. As a result, the Company recorded a charge of approximately
$321,000 representing the difference between the fair value as determined from a
quoted market price and the carrying value of the group of assets. Such amount
is reflected in depreciation expense in the 2003 Consolidated Statement of
Operations.

Effective December 31, 2003, the Kodak agreement was terminated (Note 14). As a
result, the carrying value of the vending machines were further impaired and a
charge of approximately $367,000 was recorded as a component of the gain on
contract settlement in the June 30, 2004 Consolidated Statement of Operations to
reflect these assets at their realizable value. The remaining value of these
vending machines was then recorded as assets held for sale in the Consolidated
Balance Sheets as of June 30, 2004. During the year ended June 30, 2005, the
Company wrote off the remaining value of the vending machines that had not been
sold during the year as a loss on contract settlement.

GOODWILL AND INTANGIBLE ASSETS

Goodwill represents the excess of cost over fair value of the net assets
purchased in acquisitions. The Company accounts for goodwill in accordance with
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("FAS 142"). Under FAS 142, goodwill is not amortized to
earnings, but instead is subject to periodic testing for impairment. The Company
tests goodwill for impairment using a two-step process. The first step screens
for potential impairment, while the second step measures the amount of
impairment. The Company uses a discounted cash flow analysis to complete the
first step in this process. Testing for impairment is to be done at least
annually and at other times if events or circumstances arise that indicate that
impairment may have occurred. The Company has selected April 1 as its annual
test date. The Company has concluded there has been no impairment of goodwill as
a result of its testing on April 1, 2003, April 2004 and April 1, 2005.

Intangible assets include patents, trademarks and non-compete arrangements
purchased in acquisitions. Amortization expense related to these intangible
assets was $1,236,600, $1,208,668 and $292,000 during the years ended June 30,
2005, 2004, and 2003, respectively, and $618,300 during the six months ended
December 31, 2005.

INVESTMENTS

The Company's accounts for investments in accordance with Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("FAS 115"). Management determines the appropriate
classifications of securities at the time of purchase and reevaluates such
designation as of each balance sheet date. Available for sale securities are
carried at fair value, with the unrealized gains and losses reported as a
separate component of stockholders' equity in other comprehensive income (loss).
A judgmental aspect of accounting for investments involves determining whether
an other-than-temporary decline in value of the investment has been sustained.
If it has been determined that an investment has sustained an
other-than-temporary decline in its value, the investment is written down to its
fair value, by a charge to earnings. Such evaluation is dependent on the
specific facts and circumstances. Factors that are considered by the Company
each quarter in determining whether an other-than-temporary decline in value has
occurred include: the market value of the security in relation to its cost
basis; the financial condition of the investee; and the intent and ability to
retain the investment for a sufficient period of time to allow for recovery in
the market value of the investment. In evaluating the factors above for
available-for-sale securities, management presumes a decline in value to be
other-than-temporary if the quoted market price of the security is below the
investment's cost basis for a period of six months or more. However, the
presumption of an other-than-temporary decline in these instances may be
overcome if there is persuasive evidence indicating that the decline is
temporary in nature (e.g., strong operating performance of investee, historical
volatility of investee, etc.).

During the year ended June 30, 2003, the Company issued 150,000 shares of its
Common Stock ($2,850,000) for an investment in 1,870,091 shares in the Jubilee
Investment Trust, PLC ("Jubilee"), a United Kingdom Investment Trust whose
shares trade on the London Stock Exchange. The Company agreed not to sell the
Jubilee shares for a period of 90 days from January 24, 2003 and to sell a
maximum of 10% of the Jubilee shares during each month thereafter. Jubilee
agreed not to sell the Company's shares of Common Stock for a period of two
years from the date of issuance unless agreed to by the Company. As this
investment declined in value below its cost basis for a period of six months or
more as of June 30, 2003, the Company determined that the decline in the market
value of this available for sale investment was "other than temporary" and,
accordingly, the Company wrote down the investment to its fair value, realizing
an impairment loss of $1,945,951 during fiscal year 2003.

During fiscal year 2004, the Company sold 1,669,091 of the Jubilee shares for
net proceeds of $1,471,140 and realized a gain of $603,480, with the cost of the
securities calculated by the specific identification method. An unrealized gain
of $3,080, and $32,249 on the remaining shares held by the Company is reflected
in shareholders' equity as accumulated other comprehensive income at June 30,
2005, and 2004, respectively. An unrealized loss of $12,167 on the remaining
shares held by the Company is reflected in shareholders' equity as accumulated
other comprehensive income at December 31, 2005. The 70,000 remaining shares are
recorded at their fair value of $39,467, $68,636 and $24,220 at June 30, 2005
and 2004 and December 31, 2005, respectively.

FORWARD LOOKING STATEMENTS

This prospectus contains certain forward looking statements regarding, among
other things, the anticipated financial and operating results of the Company.
For this purpose, forward looking statements are any statements contained herein
that are not statements of historical fact and include, but are not limited to,
those preceded by or that include the words, "believes," "expects,"
"anticipates," or similar expressions. Those statements are subject to known and
unknown risks, uncertainties and other factors that could cause the actual
results to differ materially from those contemplated by the statements. The
forward looking information is based on various factors and was derived using
numerous assumptions. Important factors that could cause the Company's actual
results to differ materially from those projected, include, for example (i) the
ability of the Company to generate sufficient sales to generate operating
profits, or to sell products at a profit, (ii) the ability of the Company to
raise funds in the future through sales of securities, (iii) whether the Company
is able to enter into binding agreements with third parties to assist in product
or network development, (iv) the ability of the Company to commercialize its
developmental products, or if actually commercialized, to obtain commercial
acceptance thereof, (v) the ability of the Company to compete with its
competitors to obtain market share, (vi) the ability of the Company to obtain
sufficient funds through operations or otherwise to repay its debt obligations
including but not limited to Senior Notes, or to fund development and marketing
of its products; (vii) the ability of the Company to obtain approval of its
pending patent applications, (viii) the ability of the Company to satisfy its
trade obligations included in accounts payable and accrued liabilities, and (ix)
the ability of the Company to predict or estimate its future quarterly or annual
revenues given the developing and unpredictable market for its products and the
lack of established revenues. Although the Company believes that the forward
looking statements contained herein are reasonable, it can give no assurance
that the Company's expectations will be met.

RESULTS OF OPERATIONS

SIX MONTHS ENDED DECEMBER 31, 2005

Revenues for the six months ended December 31, 2005 were $3,321,639 compared to
$2,168,026 for the corresponding six-month period in the previous fiscal year.
This $1,153,613 or 53% increase was primarily due to an increase in equipment
sales of approximately $1,091,000 and license and transaction fees of
approximately $63,000. The increase in equipment sales was due to an increase in
sales of approximately $407,000 of energy conservation equipment, approximately
$512,000 in e-Port vending equipment sales, and approximately $178,000 in
laundry equipment, offset by a decrease of approximately $6,000 in business
center and other equipment sales.

Cost of sales for the period consisted of equipment costs of approximately
$1,772,000 and network and transaction related costs of $447,000. The increase
in cost of sales of $524,043 or 31% over the prior year period was due to an
increase in equipment costs of approximately $700,000, offset by a decrease of
approximately $176,000 of network and transaction related costs. The increase in
equipment costs relates to the increase in equipment sales. The decrease in
network and transaction related costs is due to a decrease from the prior year
period related to the one-time cost of switching our e-Port vending customers to
the Cingular wireless network and the processing of customer credit card
transactions in the prior period.

Gross profit for the six months ended December 31, 2005 was $1,102,809, compared
to gross profit of $473,239 for the corresponding six-month period in the
previous fiscal year. This 133% increase is due to the 53% increase in revenues
with only a 31% increase in equipment and transaction costs as described above.

General and administrative expense of $2,239,773 decreased by $932,127 or 29%
primarily due to a reduction in consulting fees of approximately $793,000 and a
reduction in public relations fees of approximately $190,000, offset by a
$60,000 increase in telecommunications costs.

Compensation expense of $2,793,364 increased by $113,993 or 4% primarily due to
an increase in salaries and benefits expense of approximately $169,000 due to an
increase in the number of employees, offset by a decrease in bonus expense of
approximately $8,000 and a decrease of $47,000 in commissions. The decrease in
commissions is due to changes made to the commission program in the current
fiscal year.

The six-month period ended December 31, 2005 resulted in a net loss of
$6,060,963 (approximately $1.5 million of non-cash charges) compared to a net
loss of $7,445,641 (approximately $1.6 million of non-cash charges) for the
six-month period ended December 31, 2004.

FISCAL YEAR ENDED JUNE 30, 2005

Revenues for the fiscal year ended June 30, 2005 were $4,677,989, a decrease of
$954,826 or 17% from the fiscal year ended June 30, 2004. This decrease was
primarily attributed to a decrease in sales of our energy management products.
Revenues are discussed in more detail as follows:

Equipment sales: Revenues from equipment sales decreased to $3,535,064 from
$4,349,566 in the prior fiscal year, a decrease of $814,502 or 19%. This
decrease was primarily attributed to a decrease in sales of our energy
management products of approximately $1 million. This was a result of
approximately $686,000 in sales from three large customer orders in the current
fiscal year as compared to approximately $1,691,000 in sales from five large
customer orders during fiscal year 2004.

License and transaction fees: Revenues from license and transaction fees
increased $165,274 or 17% from $977,651 to $1,142,925 for the fiscal years ended
June 30, 2004 and 2005, respectively. This increase was primarily due to an
increase in license and transaction fees from our Intelligent Vending products,
which was offset by the decrease in revenues from the termination of the Kodak
Vending Placement Agreement in the prior fiscal year.

Product sales and other: Revenues from product sales and other decreased to $0
from $305,598 in the prior fiscal year. This decrease was due to a decrease in
camera and film sales from Company owned vending machines of approximately
$105,000 as a result of the termination of the Kodak Vending Placement Agreement
and a decrease of $200,000 relating to a one-time payment in the prior fiscal
year related to the agreement with Unilever.

Cost of sales consisted of equipment, product and labor costs of approximately
$2,431,000 and $2,503,000 for the fiscal years ended June 31, 2005 and 2004,
respectively, a decrease of $72,000; software development amortization of
approximately $0 and $999,000 for the fiscal years ended June 30, 2005 and 2004,
respectively; and network and transaction related costs of $1,048,000 and
$828,000 for the years ended June 30, 2005 and 2004, respectively, an increase
of $220,000. The total decrease of $851,019 or 20% in cost of sales from
$4,329,692 to $3,478,673 for the years ended June 30, 2004 and 2005,
respectively, was principally attributable to the decrease in equipment sales
and the lack of software development costs.

Gross profit for the fiscal year ended June 30, 2005 was $1,119,316, compared to
$1,303,123 for fiscal year ended June 30, 2004. The decrease of $183,807 was due
to a reduction in sales of our higher margin energy management products.

Total operating expenses for the fiscal year ended June 30, 2005 was
$13,589,523, a decrease of $5,180,899 or 28% over the prior fiscal year. The
components of operating expenses (General and administrative, Compensation,
Depreciation and amortization and Loss on debt modification) and the causes of
this decrease are explained in further detail, below:

General and administrative expenses decreased from $6,747,824 for the fiscal
year ended June 30, 2004 to $6,429,458 for the fiscal year ended June 30, 2005,
a decrease of $318,366 or 5%. The decrease is due to decrease in bad debt
expense and consulting fees, which is partially offset by increases in public
relations expenses.

Compensation expense decreased from $10,071,354 to $5,559,945 for the fiscal
year ended June 30, 2004 and 2005, respectively, a $4,511,409 or 45% decrease
over the prior fiscal year. This decrease is primarily due to the one-time
issuance of 10,500,000 shares of Common Stock, valued at $4,620,000, to the
Company's Chief Executive Officer in connection with the amendment of his
employment agreement in the prior fiscal year. Additionally compensation expense
increased by approximately $108,000 related to an increase in medical insurance
costs.

Depreciation and amortization expense for the fiscal year ended June 30, 2005
was $1,600,120, compared to $1,632,330 for the prior fiscal year, a $32,210 or
2% decrease. This decrease was attributable to assets becoming fully depreciated
during the fiscal year ended June 30, 2005.

During the prior fiscal year, the Company incurred a charge of $318,915 related
to the modification of debt terms for certain 2003 and 2004 Senior Notes. This
charge represents the unamortized debt discount that remained on the Senior
Notes that were scheduled to mature in December 2003 and 2004, and whose terms
were substantially modified when the note holders agreed to extend the maturity
date of their notes in exchange for a reduction in the conversion rate on the
note. There was no such comparable charge in the fiscal year ended June 30,
2005.

During the fiscal year ended June 30, 2004, a gain of $429,204 was recorded
relating to the termination of the Kodak Vending Placement Agreement. This gain
is comprised of the payment from Kodak of approximately $675,000 plus the
cancellation of Stitch's obligation to the supplier of the vending machines of
approximately $124,000 less a write down of the carrying value of vending
machines of approximately $367,000 and a net write-off of amounts due to and
from Kodak of $3,000. During the year ended June 30, 2005, the Company wrote off
the remaining value of the vending machines that had not been sold during the
year as a loss on contract settlement totaling $42,300.

Total interest expense decreased from $5,032,351 to $3,127,751 for the fiscal
year ended June 30, 2004 and 2005, respectively, a decrease of $1,904,600 or
38%. The decrease is a result of a reduction in the number of conversions of the
Senior Notes into shares of the Company's Common Stock by Senior Note Holders.
In the prior fiscal year, these conversions resulted in additional interest
expense due to the accelerated amortization of debt discount charged to interest
expense at the time of the conversion of the Senior Notes.

The fiscal year ended June 30, 2005 resulted in a net loss of $15,499,190
(approximately $3.6 million of non-cash charges) compared to a net loss of
$21,426,178 (approximately $10.9 million of non-cash charges) for the prior
fiscal year.

FISCAL YEAR ENDED JUNE 30, 2004

Revenues for the fiscal year ended June 30, 2004 were $5,632,815, an increase of
$2,779,747 or 97% from the fiscal year ended June 30, 2003. This increase was
primarily attributed to sales of the Company's energy management equipment
during the fiscal year ended June 30, 2004. Such revenues did not exist in
fiscal year ended June 30, 2003 since the acquisition of Bayview occurred in
July 2003. The increase was also due to increases in the sale of our networked
devices and related services. Revenues are discussed in more detail as follows:

Equipment sales: Revenues from equipment sales increased to $4,349,566 from
$1,034,427 in the prior fiscal year, an increase of $3,315,139 or 320%. This
increase is mainly due to sales of approximately $3,025,000 of the Company's
energy management equipment for the fiscal year ended June 30, 2004. As noted
above, such revenues did not exist in the prior fiscal year. In addition, sales
of the Company's cashless technology equipment, which includes e-Port, e-Suds
and Kiosk systems, increased to $736,000, approximately $349,000 or 90% over the
prior fiscal year. The increases in sales were offset by a decrease in Business
Center equipment sales of approximately $59,000.

License and transaction fees: Revenues from license and transaction fees
decreased $395,922 or 29% from $1,373,573 to $977,651 for the fiscal years ended
June 30, 2003 and 2004, respectively. This decrease was primarily due to a
decrease in fees earned from the Kodak Vending Placement Agreement of
approximately $387,000, which resulted from the termination of the contract on
December 31, 2003.

Product sales and other: Revenues from product sales and other decreased to
$305,598 from $445,068, a decrease of $139,470 or 31% from the prior fiscal
year. This decrease was due to a decrease in camera and film sales from Company
owned vending machines of approximately $340,000 as a result of the termination
of the Kodak Vending Placement Agreement. This decrease was offset by $200,000
of revenue relating to the Strategic Alliance Agreement executed in October 2003
between the Company and Conopco, Inc dba Unilever Home & Personal Care North
America.

Cost of sales consisted of equipment, product and labor costs of approximately
$2,503,000 and $1,085,000 for the fiscal years ended June 31, 2004 and 2003,
respectively, an increase of $1,418,000; software development amortization of
approximately $999,000 and $1,331,000 for the fiscal years ended June 30, 2004
and 2003, respectively, a decrease of $332,000; and network and transaction
related costs of $828,000 and $555,000 for the years ended June 30, 2004 and
2003, respectively, an increase of $273,000. The total increase of $1,358,249 or
46% in cost of sales from $2,971,443 to $4,329,692 for the years ended June 30,
2003 and 2004, respectively, was principally attributable to the increase in
equipment sales.

Gross profit for the fiscal year ended June 30, 2004 was $1,303,123, compared to
a gross loss of $118,375 for fiscal year ended June 30, 2003. The increase of
$1,421,498 was due to increases in hardware sales, particularly the addition of
energy management equipment sales, which yield a higher profit margin and were
not present in the prior fiscal year, as well as a decrease of approximately
$332,000 related to the amortization of software development costs, which were
fully amortized as of March 31, 2004.

Total operating expenses for the fiscal year ended June 30, 2004 was
$18,770,423, an increase of $3,829,159 or 26% over the prior fiscal year. The
components of operating expenses (General and administrative, Compensation,
Depreciation and amortization and Loss on debt modification) and the causes of
this increase are explained in further detail, below:

General and administrative expenses decreased from $7,194,684 for the fiscal
year ended June 30, 2003 to $6,747,824 for the fiscal year ended June 30, 2004,
a decrease of $446,860 or 6%. The decrease is due to decreases of $1,717,000 of
professional fees, primarily related to business consulting, promotion and
public relations and decreases of $134,000 in IT consulting fees, offset by
increases in overall general and administrative expenses of approximately
$1,184,000 related to the acquired energy management operations, as such
expenses did not exist in the prior fiscal year, an increase of $118,000 in
expenses related to the recruitment of executive personnel, and an increase of
$164,000 in bad debt expense related to an increase in the allowance for
uncollectible accounts as a result of the increase in sales and accounts
receivable.

Compensation expense increased to $10,071,354 for the fiscal year ended June 30,
2004, a $5,098,144 or 103% increase over the prior fiscal year. This increase is
primarily due to the one-time issuance of 105,000 shares of Common Stock, valued
at $4,620,000, to the Company's Chief Executive Officer in connection with the
amendment of his employment agreement. Additionally, approximately $845,000 and
$376,000 of this increase relates to additional compensation, including
salaries, employee benefits and sales commissions, from the Bayview acquisition
in July 2003 and existing operations, respectively. These increases were offset
by a $742,000 reduction in compensation expense due to a reduction in bonuses
awarded during the fiscal year ended June 30, 2004 as compared to the prior
year.

Depreciation and amortization expense for the fiscal year ended June 30, 2004
was $1,632,330, compared to $1,251,716 for the prior fiscal year, a $380,614 or
30% increase. This increase was attributable to amortization of intangible
assets of $917,000 and depreciation of property and equipment of $122,000
acquired from Bayview in July 2003, offset by a decrease in depreciation of
approximately $337,000 related to existing assets that have reached the end of
their estimated useful life. Additionally there was an impairment charge of
$321,476 recorded on a group of vending machines during fiscal year 2003. The
Company incurred charges during the fiscal year ended June 30, 2004 and 2003
relating to the modification of debt terms for certain of the Senior Notes in
the amount of $318,915 and $1,521,654, respectively. This charge reflects the
write-off of the unamortized debt discount remaining for Senior Notes scheduled
to mature in December 2003 and December 2004, for which the conversion and
maturity terms were modified. The Company offered these note modifications to
manage short-term cash flows, which resulted in a non-cash charge.

During the fiscal year ended June 30, 2004, the Company sold 1,669,091 shares of
its investment in the Jubilee Investment Trust for net proceeds of $1,471,140,
resulting in a gain of $603,480. During the fiscal year ended June 30, 2003, the
Company determined that the decline in the market value of the investment in the
Jubilee Investment Trust was "other than temporary." Accordingly, the Company
recorded a loss of $1,945,951 on the investment during fiscal year 2003.

Total interest expense increased from $4,978,600 to $5,032,351 for the fiscal
year ended June 30, 2003 and 2004, respectively, an increase of $53,751 or 1%.
Although the average principal balances were lower on the Company's 12% Senior
Notes during fiscal year ended June 30, 2004 versus 2003, as the result of
conversions of the Senior Notes into shares of the Company's Common Stock by
Senior Note Holders, interest expense increased due to the accelerated
amortization of debt discount charged to interest expense at the time of the
conversion of the Senior Notes.

The fiscal year ended June 30, 2004 resulted in a net loss of $21,426,178
(approximately $10.9 million of non-cash charges) compared to a net loss of
$21,965,499 (approximately $12.6 million of non-cash charges) for the prior
fiscal year.

FISCAL YEAR ENDED JUNE 30, 2003

Revenues for the fiscal year ended June 30, 2003 were $2,853,068, an increase of
$1,170,367 or 70% from the fiscal year ended June 30, 2002. This increase in
revenues is primarily due to the inclusion of a full year of product revenues
and service and transaction fees relating to Stitch Networks Corporation, which
accounted for approximately $1,136,000 of the revenue increase. The remaining
increase was due to increased equipment sales of e-Port. Revenues are discussed
in more detail as follows:

Equipment sales: Revenues from equipment sales increased to $1,034,427 from
$795,938 in the prior fiscal year, an increase of $238,489 or 30%. This increase
was directly due to the increase in sales of the Company's e-Port equipment.

License and transaction fees: Revenues from license and transaction fees
increased $594,667 or 76% from $778,906 to $1,373,573 for the fiscal year ended
June 30, 2002 and 2003, respectively. This increase was due to the inclusion of
a full year of service fees earned on Company owned vending machines during
fiscal year ended June 30, 2003, as the acquisition of Stitch occurred in May
2002, the fourth quarter of fiscal year ended June 30, 2002.

Product sales and other: Revenues from product sales and other increased to
$445,068 from $107,857, an increase of $337,211 or 313% from the prior fiscal
year. This increase was due to the inclusion of a full year sales of camera and
film from Company owned vending machines during fiscal year ended June 30, 2003,
as the acquisition of Stitch occurred in May 2002, the fourth quarter of fiscal
year ended June 30, 2002.

Cost of sales consisted of equipment, product and labor costs of approximately
$1,085,000 and $695,000 for the fiscal years ended June 30, 2003 and 2002,
respectively, an increase of $390,000; software development amortization of
approximately $1,331,000 and $2,996,000 for the fiscal years ended June 30, 2003
and 2002, respectively, a decrease of $1,665,000; and network and transaction
related costs of $555,000 and $372,000 for the years ended June 30, 2003 and
2002, respectively, an increase of $183,000. The total decrease of $1,091,458 or
27% in cost of sales from $4,062,901 to $2,971,443 for the years ended June 30,
2002 and 2003, respectively, was principally attributable to the decrease in
software development amortization, offset by a full year of product costs
related to the Kodak Vending Placement Agreement acquired with Stitch.

Total operating expenses for the fiscal year ended June 30, 2003 was $14,941,264
(approximately $11.6 million of non-cash charges), an increase of $1,978,300 or
15% over the prior fiscal year. The components of operating expenses (General
and administrative, Compensation, Depreciation and amortization and Loss on debt
modification) and the causes of this increase are explained in further detail,
below:

General and administrative expenses decreased from $7,868,064 for the fiscal
year ended June 30, 2002 to $7,194,684 for the fiscal year ended June 30, 2003,
a decrease of $673,380 or 9%. This decrease is due to changes in the following
expenses: consulting, advertising, public relations and promotion expense
decrease of $1,368,022 for reduced corporate and investor relations services
offset by increases in product development and outside services of $926,395 for
work on the network.

Compensation expense increased to $4,973,210 for the fiscal year ended June 30,
2003, a $318,548 or 7% increase over the prior fiscal year. This increase is due
to the inclusion of salaries of $136,000 related to the Stitch operations as
well as an increase of approximately $200,000 in bonus expense during the fiscal
year ended June 30, 2003 compared to the fiscal year ended June 30, 2002.

Depreciation and amortization expense for the fiscal year ended June 30, 2003
was $1,251,716, compared to $440,238 for the prior fiscal year, an $811,478 or
184% increase. This increase was attributable to increased depreciation expense
resulting from assets acquired in the Stitch acquisition, as well as the
impairment loss of $321,476 recorded on a group of vending machines during the
fiscal year in accordance with SFAS No. 144.

The Company incurred charges during the fiscal year ended June 30, 2003 relating
to the modification of debt terms for certain of the Senior Notes in the amount
of $1,521,654. There was no such comparable charge in the prior year. This
charge was for the write-off of the unamortized debt discount remaining for
Senior Notes scheduled to mature in December 2003 and December 2004 whose
conversion and maturity terms were modified. The Company offered these note
modifications to the Note holders, and recognized the related non-cash charge to
operations in order to manage short-term cash flows.

In June 2003, the Company determined that the decline in the market value of the
investment in the Jubilee Investment Trust was "other than temporary."
Accordingly, the Company recorded a loss of $1,945,951, which is reflected as a
loss on investment. No such comparable loss was recorded in the previous year.

Total interest expense increased by $2,991,166, due to the greater debt carried
by the Company to finance its operations. A significant portion of interest
expense is the amortization of non-cash debt discount.

The fiscal year ended June 30, 2003 resulted in a net loss of $21,965,499
(approximately $12.6 million of non-cash charges) compared to a net loss of
$17,314,807 (approximately $11.0 million of non-cash charges) for the prior
fiscal year.

LIQUIDITY AND CAPITAL RESOURCES

For the year ended June 30, 2005, net cash of $11,900,521 was used by operating
activities, primarily due to the net loss of $15,499,190 offset by non-cash
charges totaling $3,620,842 for transactions involving the issuance of Common
Stock (for services), depreciation and amortization of assets, amortization of
debt discount, and a loss on contract settlement. In addition to these non-cash
charges, the Company's net operating assets increased by $22,173 (primarily an
increase in finance receivables and other assets as well as accrued expense
reductions, which were offset by an increase in accounts payable).

For the year ended June 30, 2005, net cash used in investing activities was
$224,343, comprised of purchases of property and equipment, offset by sales of
assets held for sale related to the termination of the Kodak Vending Placement
Agreement.

Proceeds from financing activities for the year ended June 30, 2005 provided
$11,203,531 of funds, which were necessary to support cash used in operating
activities. Net proceeds of $8,004,436 were realized from the issuance of Common
Stock to an accredited investor, a private placement offering of Common Stock,
the exercise of Common Stock Warrants and the collection of Common Stock
subscriptions receivable. Net proceeds of $3,305,790 were realized from the
issuance of Senior Notes. These proceeds were reduced by payments of long-term
debt and capital leases totaling $262,808 and by the repayment of Senior Notes
totaling $143,887.

For the six months ended December 31, 2005, net cash of $5,305,533 was used by
operating activities, primarily due to the net loss of $6,060,963 offset by
non-cash charges totaling $1,480,256 for transactions involving the issuance of
Common Stock for services, stock option compensation charges, depreciation and
amortization of assets, and amortization of debt discount. In addition to these
non-cash charges, the Company's net operating assets increased by $724,846
primarily due to an increase in accounts receivable and a decrease in accounts
payable.

Proceeds from financing activities for the six months ended December 31, 2005
provided $7,738,919 of funds, which were necessary to support cash used in
operating and investing activities. These proceeds were realized from the
issuance of Common Stock and exercise of Common Stock Warrants ($6,420,340), the
collection of Common Stock subscriptions receivable ($35,723), offset by cash
used to repay long-term debt ($14,945).

The Company has incurred losses since inception. Cumulative losses through
December 31, 2005 amounted to approximately $119,000,000. The Company has
continued to raise capital through equity and debt offerings to fund operations.

During the year ended June 30, 2005, cash used in operating activities was
approximately $992,000 per month. During the first half of fiscal year 2006, the
Company continued to make efforts to improve its working capital management. For
the three months ended December 31, 2005, cash used in operating activities was
approximately $802,000 per month. Using the actual cash requirements for the
first six months of the fiscal year and the last three months to estimate the
remaining six months of the fiscal year as a basis for estimating cash
requirements for the entire year ending June 30, 2006 (which assumes a static
level of revenues), cash requirements for fiscal year 2006, including
requirements for capital expenditures and repayments of long-term debt, would be
approximately $11,900,000.

As of December 31, 2005, the Company had approximately $4,082,000 of cash and
cash equivalents on hand.

On April 4, 2005, the Company and Mr. Illes entered into a Common Stock Purchase
Agreement (the "2005 Common Stock Agreement") that terminates August 11, 2007,
as more fully described in Note 12 to the accompanying Consolidated Financial
Statements. From April 2005 through December 31, 2005, we received $2,472,690
from Mr. Illes under the agreement, leaving $7,527,310 of future potential sales
to him by us thereunder. The Company filed a registration statement covering
360,000 additional common shares under the 2005 Common Stock Agreementthat was
declared effective on February 14, 2006. These additional shares would provide
$3,600,000 of funds under this agreement based on a purchase price of $10 per
share.

On February 17, 2006, the Company entered into a new agreement (the "2006 Common
Stock Agreement") with Mr. Illes providing for purchases of up to $15,000,000 of
shares by Mr. Illes from us. See "Other Events." We have registered 1,000,000
shares for resale by Mr. Illes pursuant to this prospectus, and these shares
would provide $12,240,000 of funds to us based on a purchase price per share of
$12.24.

On January 9, 2006, the Company entered into a Stock Purchase Agreement with
Rationalwave Onshore Equity Fund, LP ("Rationalwave"). Under this agreement, the
Company sold to Rationalwave 40,000 shares of Common Stock for $10 per share for
an aggregate of $400,000.

Funding sources in place to meet the Company's cash requirements for the year
ending June 30, 2006 are primarily comprised of approximately $4,082,000 in cash
and cash equivalents on hand as of December 31, 2005, the $400,000 proceeds
received from Rationalwave, the proceeds that are available under the 2005
Common Stock Purchase Agreement, the funds that will become available under the
2006 Common Stock Agreement, and future exercises of warrants that are "in the
money" (approximately $500,000). The Company believes these sources should
provide sufficient funds through June 30, 2006.

If the capital resources described above do not materialize, or if the Company
is unsuccessful in meeting its forecasted operating plans, the Company has the
alternative of significantly reducing its expenses and operations to remain in
business.

COMMITMENTS

The Company conducts its operations from various facilities under operating
leases. In March 2003, the Company entered into a lease for 12,864 square feet
of space located in Malvern, Pennsylvania for its principal executive office and
used for general administrative functions, sales activities, and product
development. The lease term extends through December 31, 2008 and provides for
escalating rent payments and a period of free rent prior to the commencement of
the monthly lease payment in January 2004 of approximately $25,000 per month.
During April 2005, the Company entered into an amendment to the lease covering
4,385 additional square feet that is contiguous to its existing space. The lease
term was extended to December 31, 2010, and the amendment provides for a period
of free rent for the additional space with rent of approximately $31,000 per
month commencing in September 2005 with escalating rental payments thereafter.

The Company also leases 9,084 square feet of space, located in Malvern,
Pennsylvania, on a month-to-month basis for a monthly payment of approximately
$8,000. During prior years, the facility was solely used to warehouse product.
All product warehousing, shipping and customer support was transferred to this
location from the executive office location during the first quarter of fiscal
year 2005.

In December 2004, the Company entered into a lease for 2,837 square feet of
space located in Denver, Colorado to be used for administrative functions, sales
activities and product warehousing associated with our energy management
products. The lease term extends through May 31, 2009 and provides for five
months of free rent followed by rent payments of $1,200 per month and escalating
payments beginning on June 1, 2006. The lease provides for additional rent for a
prorated share of operating costs for the entire facility.

As of June 30 and December 31, 2005, the Company had committed to purchase
approximately $529,000 of inventory from a third party contract manufacturer
through December 31, 2005. As of December 31, 2005, the Company had purchased
approximately $482,000 of this inventory and expects to receive the remainder of
the units from the contract manufacturer upon completion of manufacturing during
the third quarter of fiscal year 2006.

OTHER EVENTS

Pursuant to the 2006 Common Stock Agreement dated February 17, 2006 between Mr.
Illes and the Company, Mr. Illes agreed to purchase shares of the Company's
Common Stock with an aggregate purchase price not to exceed $15,000,000. As of
the date of this prospectus, Mr. Illes has not purchased any shares under the
2006 Common Stock Agreement. We have registered 1,000,000 shares to be purchased
by Mr. Illes under the 2006 Common Stock Agreement, and those shares are covered
by this prospectus. Under the 2006 Common Stock Agreement, the Company has the
right at any time to require Mr. Illes to purchase Common Stock from the Company
at the lower of: (i) $30.00 per share; or (ii) 90% of the closing bid price per
share on the date prior to the date of the delivery by the Company to Mr. Illes
of notice of his obligation to purchase. The Company can require Mr. Illes to
purchase shares only if the shares have been registered by the Company for
resale under the Act. During any calendar month, Mr. Illes cannot be required by
the Company to purchase Common Stock for an aggregate purchase price in excess
of $800,000. The Company has the right in the future, if necessary, to register
additional shares in order to ensure that a sufficient number of shares are
available for purchase by Mr. Illes. The 2006 Common Stock Agreement terminates
June 30, 2009. The securities were offered and sold to Mr. Illes under the
exemption from registration set forth under Rule 506 promulgated under the Act.
Mr. Illes is an existing shareholder and an accredited investor, made
appropriate investment representations, was afforded access to all public
filings and all other information that the Company could reasonably obtain.
There was no general solicitation or advertising. We have agreed to register for
resale the shares issuable to Mr. Illes under the 2006 Common Stock Agreement,
and to keep the registration statement current and effective for two years from
the date of the prospectus.

Prior to entering into the 2006 Common Stock Agreement, Mr. Illes has been an
investor in our Company. During April 2003, we issued to Mr. Illes 10,000 shares
at $10 per share and a warrant to purchase up to 40,000 shares at $10 per share.
Mr. Illes exercised the warrant for 35,000 shares for an aggregate of $350,000
and did not exercise the remaining warrants. During August 2004, we entered into
a stock purchase agreement with Mr. Illes pursuant to which he purchased from us
an aggregate of 349,504 shares for $3,560,620 from August 2004 through February
2005. In April 2005, we entered into another stock purchase agreement with Mr.
Illes which replaced the August 2004 agreement. Pursuant to this agreement, from
April 2005 through the date of this prospectus Mr. Illes purchased from us an
aggregate of 228,998 shares for $2,762,690. The 2006 Common Stock Purchase
Agreement limited the additional shares to be purchased by Illes under the 2005
Common Stock Purchase Agreement to no more than the 360,000 shares covered by
the registration statement that was declared effective on February 14, 2006.
During March 2005, Mr. Illes purchased $750,000 principal amount of our 2005-C
convertible senior notes due December 31, 2010. In June 2005, Mr. Illes
converted $50,000 of this note into 5,000 shares of Common Stock at $10 per
share.

As of the date of this prospectus, Mr. Illes owns 80,067 shares of Common Stock
(5,000 from the conversion of the senior note referred to above and the balance
from the purchase of shares under the April 2005 Common Stock Agreement prior to
the date hereof), a $275,000 principal amount 12% convertible senior note
purchased from us in 2001 due December 31, 2007 and convertible into 13,750
shares, a $700,000 principal amount 2005-C convertible senior note convertible
into 70,000 shares, and a $25,000 convertible senior note purchased from us in
2002 due December 31, 2008 and convertible into 1,250 shares of Common Stock.

The proceeds from the sales of our Common Stock under the 2005 Common Stock
Agreement or the 2006 Common Stock Agreement will not be used for the
cancellation or offset of the 2005-C Senior Note referred to above or any other
current or future debt instrument held by Mr. Illes.

BUSINESS

THE TECHNOLOGY

The Company offers an end-to-end solution for control/access management, remote
monitoring, turnkey cashless payment processing and data reporting for
distributed assets such as vending machines, office equipment and laundry
equipment. This solution consists of a device (thin-client hardware or firmware)
that controls the distributed asset, a connectivity medium, and our network that
includes server-based software applications for remote monitoring and cashless
transaction processing and a central database for web-based reporting of sales,
inventory, machine diagnostic and other supply chain data.

THE CLIENT DEVICES

As part of its end-to-end solution, the Company offers its customers several
different client devices. These client devices range from software, or dynamic
link libraries ("DLLs"), to hardware devices consisting of control boards,
magnetic strip card readers, barcode and RFID readers, LCD screen and/or receipt
printers. The client device can be embedded inside the host equipment, such as
software residing in the central processing unit of a Kiosk; it can be
integrated as part of the host equipment, such as our e-Port(R) hardware that
can be attached to the door of a vending machine; or it can be a peripheral,
stand-alone terminal, such as our TransAct(TM) terminal for Business Express(R).

e-Port(R) is the Company's core client device, which is currently being utilized
in vending and commercial laundry applications. Our e-Port(R) product
facilitates cashless payments by capturing the payment media and transmitting
the information to our network for authorization with the payment authority
(e.g. credit card processors). Additional capabilities of our e-Port(R) consist
of control/access management by authorized users, collection of audit
information (e.g. product or service sold, date and time of sale and sales
amount), diagnostic information of the host equipment, and transmission of this
data back to our network for web-based reporting.

TransAct(R) is the Company's original cashless, transaction-enabling device
developed for self-service business center equipment such as PC's, fax machines
and copiers. Similar to e-Port(R), the TransAct(R) capabilities include
control/access management, collection of sales data (e.g. date and time of sale,
sales amount and product or service purchased), and transmission back to our
network for reporting to customers.

THE NETWORK

USALive(R) is the network component of our end-to-end solution to which the
Company's devices transmit their cashless payment information for processing as
well as the valuable sales and diagnostic data for storage and reporting to our
customers. Also, the network, through server-based software applications,
provides remote management information and enables control of the networked
device's functionality.

USALive(R) is the enabler of turnkey cashless payment processing for our
customers. The network is certified with several cashless payment authorities,
such as credit card processors and property management systems, facilitating the
authorization and settlement of credit cards, debit cards, hotel room keys and
student ids. The network can also act as its own payment processing authority
for other cashless payment media, such as on-line stored value or employee
payroll deduction. The network authorizes transactions, occurring at the host
equipment, with the appropriate payment authority and sends approval or decline
responses back to the networked device to allow or terminate the transaction for
the purchase of the product or service. The network consolidates successfully
approved transactions from multiple devices, batches, and then transmits these
batched transactions to the payment authority for settlement. By bundling and
batching transactions from multiple networked devices and connecting to the
appropriate payment authorities through one central dedicated processing medium,
it reduces the fees charged by the payment authority.

USALive On-line(TM) is the web based reporting system that customers use to gain
access to the valuable business information collected from the networked
devices. The website's functionality includes: management of the distributed
assets deployed in the field, such as new activations and location
redeployments; user-defined reporting for miscellaneous payment types (e.g.
cash, credit, etc), date and time product sold, and sales amount; and detailed
bank account deposit information, by device, for easier bank reconciliation.

THE CONNECTIVITY MEDIUMS

Connectivity of our client devices (e-Port(R) and TransAct(R)) to the USALive(R)
network is another component of the Company's end-to-end solution. The reliable,
cost effective transfer of customer's business critical data is paramount to the
services we deliver. Due to the importance of connectivity, and realizing that
every customer's connectivity needs may be different (e.g. access, or lack
thereof, to phone lines, local area networks ("LANs"), wide area networks
("WANs") and wireless data networks), the Company offers multiple connectivity
solutions - phone line, Ethernet and wireless.

Increasing wireless connectivity options, coverage and reliability and
decreasing costs, over the past few years have allowed us to service a greater
number of customer locations, since many of our customer's host equipment,
particularly within the vending industry, do not have access to any other
communication medium. Additionally, we make it easy for our customers to deploy
wireless solutions by being a single point of contact. By aggregating different
wireless networks, we ensure our customers have reliable, cost effective
nationwide coverage without the hassles of certification and administration of
multiple wireless suppliers.

ENERGY MANAGEMENT PRODUCTS

With the acquisition of Bayview in July 2003, our Company offers energy
conservation products ("Misers") that reduce the electrical power consumption of
various types of existing equipment, such as vending machines, glass front
coolers and other "always-on" appliances by allowing the equipment to
selectively operate in a power saving mode when the full power mode is not
necessary. Each of the Company's Miser products utilizes occupancy sensing
technology to determine when the surrounding area is vacant or occupied. The
Miser then utilizes occupancy data, room and product temperatures, and an energy
saving algorithm to selectively control certain high-energy components (e.g.
compressor and fan) to realize electrical power savings over the long-term use
of the equipment. Customers of our VendingMiser(R) product benefit from reduced
energy consumption and costs of up to 46% per machine, depending on regional
energy costs, machine type, and utilization of the machine. Our Misers also
reduce the overall stress loads on the equipment, helping to reduce associated
maintenance costs.

THE OPPORTUNITY

Everyday devices from vending machines and logistics equipment to refrigerators,
security systems, and countless other devices can be better managed by embedding
thin-client computing technology with network connectivity into each unit. Using
wired and/or wireless networks and centralized, server-based software
applications, managers can remotely monitor, control, and optimize a network of
devices regardless of where they are located, resulting in a host of benefits
including lower maintenance costs, improved inventory and transaction
management, and increased operating efficiency.

This market opportunity is known by several different names, including
Machine-to-Machine ("M2M") networking, Device Relationship Management ("DRM"),
the Pervasive Internet and Device Networking. This industry is the convergence
of computer-enabled devices and embedded systems, the Internet or other
networking mediums, and centralized enterprise data-management tools. By
connecting stand-alone devices into large-scale networks, new opportunities
emerge between brand marketers, service providers, and their customers.
Networked devices enable remote monitoring, cashless transactions, sales
analysis, and optimized machine maintenance - all yielding higher return on
investment for operators while increasing consumer satisfaction with improved
and expanded services.

Brand marketers will be able to provide their products and services to customers
wherever and whenever the need arises. They will no longer be limited to
existing distribution channels and outlets. Just as beverage vending machines
bring bottlers' products beyond the supermarket to the location where and when
the customer wants them, a vast range of products and branding opportunities can
be made available to customers at the point-of-need. In laundry, makers of
detergent and fabric softener can have their products injected directly into a
consumer's laundry, again putting their products at the point-of-need.

The market for networked device solutions is projected to be large and growing
rapidly and includes a wide variety of segments such as the security and alarm,
automated meter reading, fleet and asset management, and consumer telemetry
markets. Networked devices will include personal devices (e.g. cell phones,
PDAs), vehicles, containers, supply chain assets, medical devices, HVAC units,
industrial machinery, home appliances, energy, accelerometers, pressure gauges,
flow control indicators, biosensors, and countless other applications. According
to an article, "Pervasive Internet", in M2M Magazine (Fall 2003), a minimum of
1.5 billion devices will be connected to the Internet worldwide by 2010. This
represents a $700 billion total opportunity including device enabling,
monitoring, and providing value-added services made available by the M2M
network, according to M2M Magazine.

We believe that an opportunity exists to combine our technology with world-class
partners in order to deliver a best-in-class solution and emerge as a leader in
the Device Networking industry. Our Company has begun addressing this
opportunity by working in several initial verticals, which include vending,
commercial laundry, self-service business centers and self-service kiosks. These
services share several key attributes, specifically, they are all self-service,
cash-based businesses that are distributed across broad geographic areas. We
address the extremely broad range of Device Networking opportunities by
licensing our technologies to equipment makers throughout a variety of market
segments. Equipment makers will be able to merge our technology with their
in-depth market expertise.

THE INDUSTRY

Our current customers are primarily in the vending, commercial laundry, business
center and kiosk industry sectors. While these industry sectors represent only a
small fraction of the total Device Networking market, these are the areas where
we have gained the most traction. In addition to being our primary markets,
these sectors serve as a proof-of-concept for other Device Networking industry
applications.

VENDING

Annual worldwide sales in the vending industry sector are estimated to be
approximately $143.5 billion, according to Vending Times Census of the Industry
2002. According to this Census, there are an estimated 8 million vending
locations in the United States, and 30 million locations worldwide. The market
segment that can be addressed by our end-to-end solution consists primarily of
vended products retailing for $1 or greater, which represents a Company
estimated vended volume of approximately $28 billion. Per census statistics, the
overall market growth is 5% to 6% annually, while the addressable market segment
for our end-to-end solution is growing more rapidly at 9% annually. Our
VendingMiser(R) energy conservation product can serve the entire vending market.

COMMERCIAL LAUNDRY

The domestic commercial laundry industry is estimated to be $5 billion in annual
sales and 3.5 million commercial laundry machines in operation, according to
Coin Laundry Association, October 2000 edition. The average annual growth rate
for the commercial laundry sector is estimated to be between 10% and 12%. The
Company believes the inline sale of additives (i.e. push-button selections for
detergent and softener) may lead to a significant increase in this figure due to
larger net margins over traditional industry standards. The addressable market
is primarily the seven largest laundry operators, as well as several other small
operators. These operators own and manage the equipment that is installed in
multi-housing and college and university locations. The addressable market
excludes those who own single laundromats.

BUSINESS CENTERS

There are currently 52,000 hotels in the United States and 300,000 worldwide,
per American Hotel & Lodging Association's website, www.ahma.com. There is
demand for business center availability in hotels, with ever-greater percentages
of travelers needing and expecting use of computers, printers, fax machines,
copiers, and other business services. We believe that there are 5,900 hotels in
the primary addressable market - business oriented hotels with over 150 rooms -
and 13,900 in the secondary market, hotels with 75 to 150 rooms. The growth rate
for the overall market is 5% annually, with the addressable market gaining 8%
annually.

KIOSK

According to a report by Frost and Sullivan Consulting, Kiosks represent a $500
million market. Kiosks are becoming increasingly popular as self-service
"specialty" shops within larger retail environments. Value-added services, such
as photo enlargement and custom imaging are a prominent example, located within
many major retailers. Since pricing on these products is generally higher than
$1 or $2, cashless payment options are essential.

OUR SUITE OF PRODUCTS AND SERVICES

INTELLIGENT VENDING(R)

Developed for the vending industry, Intelligent Vending(R) is our end-to-end
vending solution. This system bundles e-Port(R), USALive(R), and its web-based
remote monitoring, management, reporting and turnkey payment processing. Our
latest improvement to Intelligent Vending(R) is the introduction of our
e-Port(R) G-5. This device is smaller due to its one-piece design and costs less
to manufacture, as compared to our e-Port(R) G-4 device. These features make it
more affordable and easier to install, improving our customers' rate of return.

Vending operators purchasing our Intelligent Vending(R) products and services
will have the capability: to conduct cashless transactions via credit cards,
debit cards and other payment mediums such as employee/student ids and hotel
room keys; to offer improved and expanded customer services by utilizing
'real-time', web-based reporting to keep machine inventory at a desirable level
and consumer access to our 1-800 help-desk center for customer purchasing
inquiries, both providing the end-user a more consistent user experience; to
reduce operational costs through utilization of our remote monitoring
technology, thereby maximizing the scheduling of service visits and limiting
'out-of-stock' machines; and to reduce theft and vandalism by providing 100%
accountability of all sales transactions and reducing the cash reserves inside
the machine.

E-SUDS(TM)

eSuds(TM) is our end-to-end solution developed for the commercial laundry
industry. The eSuds(TM) system bundles e-Port(R) and USALive(R) to offer a
cash-free payment option, web-based remote monitoring and management, an e-mail
alert system to notify users regarding machine availability, cycle completion,
and other events. The Company is also in the process of developing an injectable
detergent and fabric softener system which will allow users to inject and pay
for detergent and softener directly into their wash cycle, as well as allow
laundry operators to benefit from additional revenue through the sale of
detergent automatically added to the wash cycle. eSuds(TM) also supports a
variety of value-added services such as custom advertising or subscription-based
payments.

Laundry operators purchasing our eSuds(TM) system will have the capability: to
conduct cashless transactions via credit cards, debit cards and other payment
mediums such as student ids; to reduce operational costs through utilization of
our remote monitoring technology, thereby maximizing the scheduling of service
visits and increasing machine up-time. The system can also increase customer
satisfaction through improved maintenance, higher machine availability,
specialized services (i.e. email alerts to indicate that laundry cycle is
finished) and value-added services such as pay-injection laundry detergent and
fabric softener, and the convenience of non-cash transactions. Installations
have been completed at Carnegie Mellon University, Cedarville College, and
Bluffton College. We are working with distributors to install eSuds(TM) at other
colleges and universities based on the positive results of these installations.

TRANSACT(R) AND BUSINESS EXPRESS(R)

TransAct(R), our original payment technology system developed for self-service
business center devices, such as PCs, fax machines, and copiers, is a cashless
transaction-enabling terminal that permits customers to use office equipment
quickly and simply with the swipe of a major credit card. The TransAct(R) device
can be sold as a stand-alone unit for customers wishing to integrate it with
their own office equipment.

Business Express(R) is a bundled solution comprised of the TransAct(R) payment
terminal and a suite of office equipment (i.e. PC, fax and copier). Business
Express(R) enables hoteliers and others to offer unmanned business services
24/7/365. In addition, the Company offers the Public PC(TM), the Public Fax(TM)
and the Public Copier(TM) to customers wishing to purchase a specific
self-service product versus a complete bundled Business Center(R). The Company
also provides additional value-added service and revenue generating
opportunities with BEXPrint(TM), our proprietary technology that allows users,
without access to a printer, to send a document to a secure web-site for
storage, and then password retrieval of the document for printing at our
Business Center locations, and our Kinko's relationship, which gives our
Business Center users access to the nearest, convenient Kinko's center for their
more advanced business center needs.

Although larger hotels are expected to provide business centers to its guests,
operation of the center can be costly. In addition to the cost of operating a
supervised business center, operating hours usually are limited due to staff
availability. Business Express(R) provides a cost-effective solution.

KIOSK

We provide an end-to-end solution that utilizes e-Port(R) and USALive(R) to
offer a cash-free payment option and web-based remote monitoring and management
for all kiosk types. Kiosks permit a host of new services to become available at
the point-of-demand, such as Sony's self-service, PictureStation kiosks, where
consumers can produce prints from their own digital media. Our solution also
enables Kiosks to sell a variety of more expensive items.

Sony's PictureStation kiosks, which use our e-Port(R) software solution, have
been installed in approximately 60 locations across the United States.

ENERGY MANAGEMENT PRODUCTS

The Miser family of energy-control devices, include:

VendingMiser(R) - installs in a cold drink vending machine and can reduce the
electrical power consumption of the vending machine by an average of up to 46%.

CoolerMiser(TM) - reduces the electrical energy used by sliding glass or pull
open glass-front coolers that contain non-perishable goods.

SnackMiser(TM) - reduces the amount of electricity used by non-refrigerated
snack vending machines.

PlugMiser(TM) - reduces the amount of electricity used by all types of plug
loads including those found in personal or modular offices (printers, personal
heaters, and radios), video arcade games, and more.

VM2IQ(TM) and CM2IQ(TM) - The second generation of the VendingMiser(TM) and
CoolerMiser(TM) devices that is installed directly inside the machine and has
the capability to control the cooling system and the advertising lights
separately.

SALES AND MARKETING

The Company's sales strategy includes both direct sales and channel development,
depending on the particular dynamics of each of our markets. Our marketing
strategy is diversified and includes media relations, direct mail, conferences
and client referrals. As of June 30, 2005, the Company was marketing and selling
its products through its full time staff consisting of thirteen people.

DIRECT SALES

We sell directly to the major operators in each of our target markets. Each of
our target markets is dominated by a handful of large companies, and these
companies comprise our primary customer base. In the vending sector,
approximately ten large operators dominate the sector; in the commercial laundry
sector, seven operators currently control the majority of the market. We also
work directly with hoteliers for our TransAct(TM) and Business Express(R)
products.

Within the vending industry, our customers include soft drink bottlers and
independent vending operators throughout the United States. On the soft drink
bottler side, heavy effort is being put into securing initial distribution
agreements. Three of the premier national independent vending operators, the
Compass Group (Canteen, Flik, Eurest, Restaurant Associates and other
affiliates), ARAMARK and Sodexho, have installed approximately 130 e-Port(R)
devices.

CHANNEL SALES

We currently engage in channel sales for our TransAct(TM) and Business
Express(R) products. We also work with audio-visual companies that service major
hotels.

MARKETING

Our marketing strategy consists of building our brand by creating a company and
product presence at industry conferences and events, in order to raise
visibility within our industry, create opportunity to conduct product
demonstrations and consult with potential customers one-on-one; sponsoring of
education workshops with trade associations such as National Automated
Merchandiser Association ("NAMA"), to educate the industry on the importance and
benefits of our solution and establish our position as the industry leader;
develop several one-sheet case studies to illustrate the value of our products;
the use of direct mail campaigns; advertising in vertically-oriented trade
publications such as Vending Times, Automatic Merchandiser and Energy User News;
and cultivate a network of State governments and utility companies to provide
incentives or underwriting for our energy management products.

STRATEGIC RELATIONSHIPS

IBM CORPORATION

We are an official "preferred" hardware, software, and services solution
provider for IBM Corporation. We market combined information technology
solutions to customers in the intelligent vending markets. The proposed combined
product offerings include the e-Port(R) terminal and related network, and IBM's
products and services, including but not limited to managed network services,
systems integration and logistics support and delivery services.

ZILOG, INC.

In October 2002, we signed a strategic alliance with ZiLOG, a leader in the
8-bit microprocessor market to co-develop an e-Port(R) enabled chip, which the
Company currently uses in its eSuds(TM) and Intelligent Vending(R) solutions,
and to co-market a joint product that combines ZiLOG's Web-enabled
microprocessor, the eZ80(R) Webserver, with the benefits of our wireless device
networking, cashless transactions processing, and remote control and monitoring
capabilities.

During August 2004, the Company and ZiLOG(R) announced the completion of the
combination of ZiLOG's ezAcclaim!(TM) Family of Flash microcontrollers and
e-Port(R). Although the Company has recognized the benefit of this development
effort by incorporating the new microcontroller in our eSuds(TM) solution,, the
Company has not yet earned revenues from this agreement as of February 2006.

MARS ELECTRONICS INC. (MEI)

In September 2004, MEI and the Company signed a technology licensing and sales
agreement to bring a turnkey cash and credit card payment system to the vending
market. Under the agreement, MEI licensed our intellectual property so operators
can connect to USALive(R), our network for services and credit card transaction
capability. As of February 2006, the Company has not earned material revenues
from these agreements.

CINGULAR WIRELESS (FORMERLY AT&T WIRELESS)

In July 2004, we signed an agreement to use AT&T Wireless' digital wireless wide
area network for transport of data, including credit card transactions and
inventory management data. AT&T Wireless (now Cingular Wireless) is a provider
of advanced wireless voice and data services for consumers and businesses,
operating one of the largest digital wireless networks in North America and the
fastest nationwide wireless data network in the United States.

MANUFACTURING

The Company utilizes independent third party companies for the manufacturing of
its products. The Company purchases other components of its business center
(computers, printers, fax and copy machines) through various manufacturers and
resellers. Our manufacturing process mainly consists of quality assurance of
materials and testing of finished goods received from our contract
manufacturers. We have not entered into a long-term contract with our contract
manufacturers, nor have we agreed to commit to purchase certain quantities of
materials or finished goods beyond those submitted under routine purchase
orders, typically covering short-term forecasts.

COMPETITION

The cashless vending, remote business service and energy conservation industries
are each highly competitive markets. While the Company offers unique products
and services within smaller niche markets of these industries, a number of
competitors in the broader market may offer products and services within our
niche market in the future. In the cashless vending market, we are aware of one
direct competitor, Transaction Network Services, Inc. In the cashless laundry
market, we are aware of one direct competitor, Mac-Gray Corporation. In the
automated business center market, we are aware of three direct competitors. In
the energy management market, we are not aware of any direct competitors for our
Miser products.

The businesses which have developed unattended, credit card activated control
systems currently in use in non-vending machine applications (e.g., gasoline
dispensing, public telephones, prepaid telephone cards and ticket dispensing
machines), might be capable of developing products or utilizing their existing
products in direct competition with our e-port control systems targeted to the
vending industry. The Company is also aware of several businesses that make
available use of the Internet and use of personal computers to hotel guests in
their hotel rooms. Such services might compete with the Company's Business
Express, and the locations may not order the Business Express, or if ordered,
the hotel guest may not use it. Finally, the production of highly efficient
vending machines and glass front coolers or alternative energy conservation
products may reduce or replace the need for our energy management products.

The Company's key competitive factors include our unique products, our
integrated services, product performance and price. Our competitors 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. Any increase in competition in the future may result in
reduced sales and/or lower percentages of gross revenues being retained by the
Company in connection with its licensing arrangements, or otherwise may reduce
potential profits or result in a loss of some or all of its customer base.

CUSTOMER CONCENTRATIONS

Approximately 36% and 39% of the Company's accounts and finance receivables at
June 30, 2005 and 2004, respectively, were concentrated with two customers and
45% (unaudited) as of December 31, 2005 was concentrated with two customers.
Approximately 11% and 13% of the Company's revenues for the year ended June 30,
2005 and 2004, respectively, were concentrated with one customer and 35% was
concentrated with two customers (12% with one customer and 23% with another
customer) for the year ended June 30, 2003. Approximately 40% (unaudited) of the
Company's revenues for the six months ended December 31, 2005 were concentrated
with two customers (10% with one customer and 30% with another customer). The
Company's customers are principally located in the United States.

TRADEMARKS, PROPRIETARY INFORMATION AND PATENTS

The Company received federal registration approval of the following trademarks:
Business Express, Express Solutions, C3X, TransAct, Public PC, PC Express, Copy
Express, Credit Card Copy Express, Credit Card Computer Express, Credit Card
Printer Express, Credit Card Microfiche Express, Credit Card Debit Express, The
Office That Never Sleeps, Intelligent Vending, e-Port, Dial-A-Vend,
Dial-A-Snack, Dial-A-Vend.com, USALive and e-Port The Next Generation in
Vending. The Company has two trademarks pending registration, VM2IQ and CM2IQ.
Through its wholly owned subsidiary, Stitch Networks, the Company has secured
three registered trademarks, including eVend.net, eSuds.net, and Stitch
Networks, and one trademark, E-ppliance, which is pending registration. In
addition, due to the July 2003 acquisition of Bayview, the Company has secured
the VendingMiser trademark and the trademark SnackMiser is pending federal
registration.

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, that they will be recognized as
trade secrets by a court of law, or that others will not capitalize on certain
aspects of the Company's technology.

Through January 9, 2006, 57 United States patents and 4 Foreign patents have
been issued to the Company (including 7 patents acquired in July 2003 from
Bayview), 18 United States patents and 7 Foreign patents are pending (including
5 acquired from Bayview) and 3 patents have received notices of allowance.

The list of issued patents is as follows:

o U.S. Patent No. 5,619,024 entitled "Credit Card and Bank Issued Debit Card
Operating System and Method for Controlling and Monitoring Access of Computer
and Copy Equipment";

o U.S. Patent No. 5,637,845 entitled "Credit and Bank Issued Debit Card
Operating System and Method for Controlling a Prepaid Card Encoding/Dispensing
Machine";

o U.S. Patent No. D423,474 entitled "Dataport";

o U.S. Patent No. D415,742 entitled "Laptop Dataport Enclosure";

o U.S. Patent No. D418,878 entitled "Sign Holder";

o U.S. Patent No. 6,056,194 entitled "System and Method for Networking and
Controlling Vending Machines";

o U.S. Patent No. D428,047 entitled "Electronic Commerce Terminal Enclosure";

o U.S. Patent No. D428,444 entitled "Electronic Commerce Terminal Enclosure for
a Vending Machine";

o U.S. Patent No. 6,119,934 entitled "Credit Card, Smart Card and Bank Issued
Debit Card Operated System and Method for Processing Electronic Transactions";

o U.S. Patent No. 6,152,365 entitled "Credit and Bank Issued Debit Card Operated
System and Method for Controlling a Vending Machine";

o U.S. Patent No. D437,890 entitled "Electronic Commerce Terminal Enclosure with
a Hooked Fastening Edge for a Vending Machine";

o U.S. Patent No. D441,401 entitled "Electronic Commerce Terminal Enclosure with
Brackets";

o U.S. Patent No. 6,321,985 entitled "System and Method for Networking and
Controlling Vending Machines";

o U.S. Patent No. 6,505,095 entitled "System for Providing Remote Audit,
Cashless Payment, and Interactive Transaction Capabilities in a Vending Machine"
(Stitch);

o U.S. Patent No. 6,389,337 entitled "Transacting e-commerce and Conducting
e-business Related to Identifying and Procuring Automotive Service and Vehicle
Replacement Parts" (Stitch);

o U.S. Patent No. 6,021,626 entitled "Forming, Packaging, Storing, Displaying
and Selling Clothing Articles"; and

o U.S. Patent No. 6,152,845 entitled "Credit and Bank Issued Debit Card Operated
System and Method for Controlling a Prepaid Card Encoding/Dispensing Machine";

o U.S Patent No. 6,622,124 entitled "Method of transacting an electronic mail,
an electronic commerce, and an electronic business transaction by an electronic
commerce terminal operated on a transportation vehicle";

o U.S. Patent No. 6,615,186 entitled "Communicating interactive digital content
between vehicles and internet based data processing resources for the purpose of
transacting e-commerce or conducting e-business";

o U.S. Patent No. 6,615,183 entitled "Method of warehousing user data entered at
an electronic commerce terminal";

o U.S. Patent No. 6,611,810 entitled "Store display window connected to an
electronic commerce terminal";

o U.S. Patent No. 6,609,103 entitled "Electronic commerce terminal for
facilitating incentive-based purchasing on transportation vehicles";

o U.S. Patent No. 6,609,102 entitled "Universal interactive advertising and
payment system for public access electronic commerce and business related
products and services";

o U.S. Patent No. D478,577 entitled "Transceiver base unit";

o U.S. Patent No. 6,606,605 entitled "Method to obtain customer specific data
for public access electronic commerce services";

o U.S. Patent No. 6,606,602 entitled "Vending machine control system having
access to the internet for the purposes of transacting e-mail, e-commerce, and
e-business, and for conducting vending transactions";

o U.S. Patent No. 6,604,087 entitled "Vending access to the internet, business
application software, e-commerce, and e-business in a hotel room";

o U.S. Patent No. 6,604,086 entitled "Electronic commerce terminal connected to
a vending machine operable as a telephone";

o U.S. Patent No. 6,604,085 entitled "Universal interactive advertising and
payment system network for public access electronic commerce and business
related products and services";

o U.S. Patent No. 6,601,040 entitled "Electronic commerce terminal for
wirelessly communicating to a plurality of communication devices";

o U.S. Patent No. 6,601,039 entitled "Gas pump control system having access to
the Internet for the purposes of transacting e-mail, e-commerce, and e-business,
and for conducting vending transactions";

o U.S. Patent No. 6,601,038 entitled "Delivery of goods and services resultant
from an electronic commerce transaction by way of a pack and ship type company";

o U.S. Patent No. 6,601,037 entitled "System and method of processing credit
card, e-commerce, and e-business transactions without the merchant incurring
transaction processing fees or charges worldwide";

o U.S. Patent No. D477,030 entitled "Vending machine cashless payment terminal";

o U.S. Patent No. D476,037 entitled "User interface bracket for a point of sale
terminal";

o U.S. Patent No. D476,036 entitled "Printer bracket for point of sale
terminal";

o U.S. Patent No. D475,751 entitled "User interface bracket for a point of sale
terminal";

o U.S. Patent No. D475,750 entitled "Paper guide for a point of sale terminal";

o U.S. Patent No. D475,414 entitled "Printer bracket for point of sale
terminal";

o U.S. Patent No. 5,844,808 entitled "Apparatus and methods for monitoring and
communicating with a plurality of networked vending machines";

o U.S. Patent No. 6,581,396 entitled "Refrigerated vending machine exploiting
expanded temperature variance during power-conservation mode";

o U.S. Patent No. 6,389,822 entitled "Refrigerated vending machine exploiting
expanded temperature variance during power-conservation mode";

o U.S. Patent No. 6,243,626 entitled "External power management device with
current monitoring precluding shutdown during high current"; and

o U.S. Patent No. 5,477,476 entitled "Power conservation system for computer
peripherals";

o U.S. Patent No. 6,629,080 entitled "Transaction processing method of
fulfilling an electronic commerce transaction by an electronic commerce terminal
system";

o U.S. Patent No. D480,948 entitled "Mounting bracket for mounting a cashless
payment terminal to a vending machine";

o U.S. Patent No. 6,643,623 entitled "A method of transacting an electronic
mail, an electronic commerce, and an electronic business transaction by an
electronic commerce terminal using a gas pump";

o U.S. Patent No. 6,684,197 entitled "Method of revaluing a private label card
using an electronic commerce terminal (as amended)";

o U.S. Patent No. 6,763,336 entitled "Method of transacting an e-mail, an
e-commerce, and an e-business transaction by an electronic commerce terminal
using a wirelessly networked plurality of portable devices";

o U.S. Patent No. 6,801,836 entitled "Power-conservation based on indoor/outdoor
and ambient-light determinations";

o U.S. Patent No. 6,807,532 entitled "Method of soliciting a user to input
survey data at an electronic commerce terminal";

o U.S. Patent No. 6,853,894 entitled "Global network based vehicle safety and
security telematics";

o U.S. Patent No. 6,856,820 entitled "An in-vehicle device for wirelessly
connecting a vehicle to the internet and for transacting e-commerce and
e-business";

o U.S. Patent No. 6,895,310 entitled "Vehicle related wireless scientific
instrumentation telematics";

o U.S. Patent No. 6,931,869 entitled "Refrigerated vending machine exploiting
expanded temperature variance during power-conservation mode";

o U.S. Patent No. 6,975,926 entitled "Method and apparatus for power management
control of a compressor-based appliance that reduces electrical power
consumption on an appliance";

o Canadian Patent No. D199-1014 entitled "Sign holder";

o Canadian Patent No. D199-1038 entitled "Laptop data port enclosure";

o Canadian Patent No. 2,291,015 entitled "Universal interactive advertising and
payment system for public access electronic commerce and business related
products and services"; and

o Australian Patent No. 2001263356 entitled "Refrigerated vending machine
exploiting expanded temperature variance during power-conservation mode".

The Company believes that the U.S. patent No. 6,505,095 entitled "System for
providing remote audit, cashless payment, and interactive transaction
capabilities in a vending machine" is important in protecting its intellectual
property used in its e-Port(R) control system targeted to the vending industry.
The patent expires in July 2021.

RESEARCH AND DEVELOPMENT

EMPLOYEES

On December 31, 2005, the Company had 52 employees, all of whom were full-time.

PROPERTY

In December 2004, the Company entered into a lease for 2,837 square feet of
space located in Denver, Colorado, to be used for administrative functions,
sales activities and product warehousing associated with our energy management
products. The lease term extends through May 31, 2009 and provides for five
months of free rent followed by rent payments of $1,200 per month and escalating
payments beginning on June 1, 2006. The lease provides for additional rent for a
prorated share of operating costs for the entire facility.

LEGAL PROCEEDINGS

In February 2005, a Complaint was filed against the Company in the State Court
of Fulton County, Georgia, captioned Swartz Private Equity, L.L.C. vs. USA
Technologies, Inc. (File No. 2005 VS 0777772D). The Complaint alleges that the
Company breached various agreements entered into with Swartz Private Equity, LLC
in August and September 2000 in connection with the so-called equity line of
credit provided by Swartz to the Company. The Complaint requests monetary
damages of $4,350,381 representing the alleged value of the warrants currently
held by, or claimed to be due to, Swartz, monetary damages of $196,953
representing a termination fee allegedly due in connection with the termination
of an agreement, and unspecified monetary damages relating to the alleged breach
of certain rights of first refusal.

In June 2005, the Company filed an Answer, Affirmative Defenses and
Counterclaims in response to the Swartz Complaint. The Company's response denied
any liability to Swartz and sought unspecified money damages and other
affirmative relief against Swartz. The Company's filing alleged, among other
things, that Swartz should be prohibited from enforcing the various agreements
entered into by the parties because Swartz had failed to register as a
broker-dealer under applicable Federal and state securities laws as required in
order for Swartz to be engaged in the business of providing equity line
products. The Company's filing also alleged that Swartz fraudulently induced the
Company to enter into the transaction by misrepresenting to the Company that
Swartz was a deep pocket investor with significant financial resources, and
Swartz would make significant investments in the Company. In September 2005, the
Company served various discovery requests upon Swartz that have been partially
responded to as of the date of this prospectus.

The Company intends to vigorously defend this action and to prosecute its
counterclaims. In particular, the Company believes it has a substantial defense
to the complaint because Swartz was not registered as a broker-dealer, and
intends to vigorously pursue this defense. At the present time, the Company is
unable to estimate the possible range of damages that the Company might incur
should this action be resolved against the Company.

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

Our Directors and executive officers, on the date of this prospectus, together
with their ages and business backgrounds were as follows:

Name Age Position(s) Held
---- --- ----------------
George R. Jensen, Jr. 56 Chief Executive Officer, Chairman of
the Board of Directors

Stephen P. Herbert 42 Chief Operating Officer and President,
Director

Haven Brock Kolls, Jr. 40 Senior Vice President - Research and
Development

David M. DeMedio 34 Chief Financial Officer

William W. Sellers (1)(2) 84 Director

William L. Van Alen, Jr. (1)(2) 72 Director

Steven Katz (1) 57 Director

Douglas M. Lurio (2) 49 Director

(1) Member of Compensation Committee
(2) Member of Audit Committee

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

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

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

David M. DeMedio joined USA Technologies on a full-time basis in March 1999 as
Controller. In the Summer of 2001, Mr. DeMedio was promoted to Director of
Financial Services where he was responsible for the sales and financial data
reporting to customers, the Company's turnkey banking services and maintaining
and developing relationships with credit card processors and card associations.
In July 2003, Mr. DeMedio served as interim Chief Financial Officer through
April, 2004. From April, 2004 until April 12, 2005, Mr. DeMedio served as Vice
President - Financial & Data Services. On April 12, 2005, he was appointed as
the Company's Chief Financial Officer. From 1996 to March 1999, prior to joining
the Company, Mr. DeMedio had been employed by Elko, Fischer, Cunnane and
Associates, LLC as a supervisor in its' accounting and auditing and consulting
practice. Prior thereto, Mr. DeMedio held various accounting positions with
Intelligent Electronics, Inc., a multi-billion reseller of computer hardware and
configuration services. Mr. DeMedio graduated with a Bachelor of Science in
Business Administration from Shippensburg University and is a Certified Public
Accountant.

William W. Sellers joined the Board of Directors of USA 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.

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

Steven Katz joined the Board of Directors in May 1999. He is President of Steven
Katz & Associates, Inc., a management consulting firm specializing in strategic
planning and corporate development for technology and service-based companies in
the health care, environmental, telecommunications and Internet markets. Mr.
Katz's prior experience includes five years with PriceWaterhouse & Co. in audit,
tax and management advisory services; two years of corporate planning with
Revlon, Inc.; five years with National Patent Development Corporation (NPDC) in
strategic planning, merger and acquisition, technology in-licensing and
out-licensing, and corporate turnaround experience as President of three NPDC
subsidiaries; and two years as a Vice President and General Manager of a
non-banking division of Citicorp, N.A. Mr. Katz is also a Director of Health
Systems Solutions Inc., Vivid Learning Systems Inc., Nanoscience Technologies
Inc. and Biophan Technologies Inc., all publicly traded companies.

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

The following table sets forth certain information with respect to compensation
paid or accrued by the Company during the fiscal years ended June 30, 2003, June
30, 2004 and June 30, 2005 to each of the executive officers and employee of the
Company named below:

SUMMARY COMPENSATION TABLE

Annual Compensation Long Term Compensation
------------------- ----------------------
Securities
Name and Principal Fiscal Other Annual Restricted Underlying
Position Year Salary Bonus (1) Compensation(2) Stock Awards($) Options (#)
------------------- ------ -------- ---------- --------------- --------------- -----------

George R. Jensen, Jr. 2005 $250,000 -- $ 17,875 -- --
ChiefExecutive Officer 2004 $217,500 $4,870,000(3) $ 17,875 -- --
& Chairmanof the Board 2003 $189,038 $ 250,000 $223,211 -- --

Stephen P. Herbert 2005 $231,923 -- $ 17,875 -- --
ChiefOperating Officer 2004 $192,692 $ 225,000 $ 17,875 -- --
President 2003 $183,854 $ 225,000 $185,317 -- --

H. Brock Kolls 2005 $165,000 $ 110,000 $ 11,917 -- --
Senior Vice-President, 2004 $156,923 $ 60,000 $ 63,205 -- --
Research & Development 2003 $150,000 $ 25,000 $ 64,493 -- --

Adele H. Hepburn 2005 $130,000 -- -- -- --
Director of Investor 2004 $130,000 $ 167,075 -- -- --
Relations 2003 $ 91,000 $ 282,382 -- -- --

David M. DeMedio 2005 $131,689 $ 11,000 $ 7,800 -- 300,000
Chief Financial Officer (4)

(1) Fiscal year 2005, includes: a $110,000 cash bonus for Mr. Kolls and cash
bonuses totaling $11,000 for Mr. DeMedio. Fiscal year 2004 includes:
105,000 shares valued at $44 per share, in connection with the amendment
of his employment agreement, and a $250,000 cash bonus for Mr. Jensen; a
$225,000 cash bonus for Mr. Herbert; a $60,000 cash bonus for Mr. Kolls;
and a cashless exercise of 4,707 warrants into 4,707 shares valued at
$10 per share and a $120,000 cash bonus for Ms. Hepburn. For fiscal year
2003 includes: a $100,000 Senior Note due 2005, including 20,000 shares
valued at $20, and $150,000 cash bonus for Mr. Jensen; a $100,000 Senior
Note due 2005, 2,000 shares valued at $20 and a $125,000 cash bonus for
Mr. Herbert; a $25,000 cash bonus for Mr. Kolls; and a $100,000 Senior
Note due 2005, including 2,000 shares valued at $20 a share, $41,095
Senior Note due 2004, and a $100,000 cash bonus for Ms. Hepburn.

(2) Represents cash payments authorized to reimburse certain executive
officers for tax payments incurred from the award of a previous bonus as
well as car allowance payments.

(3) Prior to July 2003, Mr. Jensen's employment agreement provided that upon
the occurrence of a USA Transaction he would receive that number of
shares equal to seven percent of all of the then issued and outstanding
shares on a fully converted basis. During July 2003, the Company and Mr.
Jensen agreed to amend Mr. Jensen's employment agreement so that upon
the occurrence of a USA Transaction he would receive only 140,000
shares. Under the new amended agreement, the 140,000 shares became
subject to dilution (i.e., did not increase in order to reflect
subsequent issuances by the Company of its shares). Under the prior
agreement, the number of shares to be issued to Mr. Jensen was not
subject to dilution (i.e., would be increased in order to reflect
subsequent issuances by the Company of its shares) and was based upon
the actual total number of shares outstanding at the time of a USA
Transaction.

For example, if a USA Transaction occurred while there were 4,750,000
shares then outstanding on a fully converted basis, Mr. Jensen would
have received 332,500 shares under his prior agreement rather than the
fixed number of 140,000 shares under his new amended agreement.

During July 2003, the Company issued to Mr. Jensen an aggregate of
105,000 shares of restricted Common Stock, 25,000 shares of which were
issued as compensation to Mr. Jensen, and 80,000 shares of which were
issued to Mr. Jensen in connection with the employment agreement
amendment described above. In accordance with generally accepted
accounting principles, the Company was required to value all of these
shares at $44 per share or an aggregate of $4,620,000.

(4) Employment as Chief Financial Officer commenced on April 12, 2005.

OPTION GRANTS IN LAST FISCAL YEAR
(Individual Grants)

Number of securities Percent of total options
underlying options granted to employees in Exercise base Expiration
Name granted(#) fiscal year price ($/share) date
---- -------------------- ------------------------ --------------- ----------

David M. DeMedio 3,000 (1) 100% $20 (2)

----------
(1) Conditioned upon Mr. DeMedio's employment, the options vest at a rate of
375 per three-month period commencing on July 31, 2005 for an aggregate of
3,000 options on April 30, 2007.

(2) The options expire two years from the date of vesting.

TOTAL OPTIONS EXERCISED IN FISCAL YEAR ENDED JUNE 30, 2005 AND YEAR END VALUES

The following table gives information for options exercised by an executive
officer and an employee in fiscal year 2005, and the number of options held by
the executive officer and the employee at fiscal year end:

Unexercised
In-the-Money
Securities Underlying Options at FY-End
Shares Acquired Value Unexercised Options at ($) Exercisable/
Name On Exercise(#) Realized ($) FY-End (#) Unexercisable
---- --------------- ------------ ---------------------- -----------------

Adele H. Hepburn 0 0 770/0 0

David M. DeMedio 0 0 0/3,000 0

EXECUTIVE EMPLOYMENT AGREEMENTS

The Company has entered into an employment agreement with Mr. Jensen that
expires June 30, 2007 and is automatically renewed from year to year thereafter,
unless canceled by Mr. Jensen or the Company. The agreement provides for an
annual base salary of $250,000 effective January 1, 2004. 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 agreement also grants to Mr. Jensen in the event a "USA Transaction" (as
defined below) occurs after the date thereof an aggregate of 140,000 shares of
Common Stock subject to adjustment for stock splits or combinations ("Jensen
Shares"). The Jensen Shares have not been reserved for issuance by the Company
and are not reflected or included in the number of issued and outstanding shares
of the Company on a fully diluted basis in this prospectus. Mr. Jensen is not
required to pay any additional consideration for the Jensen Shares. At the time
of any USA Transaction, all of the Jensen Shares are automatically deemed to be
issued and outstanding immediately prior to any USA Transaction, and are
entitled to be treated as any other issued and outstanding shares of Common
Stock in connection with such USA Transaction.

The term USA Transaction is defined as (i) the acquisition of fifty-one percent
or more of the then outstanding voting securities entitled to vote generally in
the election of Directors of the Company by any person, entity or group, or (ii)
the approval by the shareholders of the Company of a reorganization, merger,
consolidation, liquidation, or dissolution of the Company, or the sale,
transfer, lease or other disposition of all or substantially all of the assets
of the Company. The Jensen Shares are irrevocable and fully vested, have no
expiration date, and will not be affected by the termination of Mr. Jensen`s
employment with the Company for any reason whatsoever. If a USA Transaction
shall occur at a time when there are not a sufficient number of authorized but
unissued shares of Common Stock, then the Company shall as a condition of such
USA Transaction promptly take any and all appropriate action to make available a
sufficient number of shares of Common Stock. In the alternative, the Company may
structure the USA Transaction so that Mr. Jensen would receive the same amount
and type of consideration in connection with the USA Transaction as any other
holder of Common Stock.

The Company has entered into an employment agreement with Mr. Herbert that
expires on June 30, 2007 and 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 $230,000 per year effective January 1,
2004. 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. In the event that a USA Transaction (as defined in Mr. Jensen's
employment agreement) shall occur, then Mr. Herbert has the right to terminate
his agreement upon 30 days notice to USA.

Mr. Kolls has entered into an employment agreement with the Company that expires
on June 30, 2006 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 $165,000 per year effective January 1, 2004. Mr. Kolls is
entitled to a payment of $5,000 upon each of the following: (i) filing of a new
patent application by USA for which he is listed as the inventor; (ii) granting
of any such patent application; and (iii) issuance of a patent for any patent
application that had been filed prior to April 20, 2004. Mr. Kolls is also
entitled to receive such bonus or bonuses, as may be awarded to him by the Board
of Directors. The Agreement requires Mr. Kolls to devote his full time and
attention to the business and affairs of the Company, and obligates him not to
engage in any investments or activities which would compete with the Company
during the term of his agreement and for a period of one year thereafter. In the
event that a USA Transaction (as defined in Mr. Jensen's employment agreement)
shall occur, then Mr. Kolls has the right to terminate his agreement upon 30
days notice to USA. During December 2004, Mr. Kolls agreed to extend the
expiration date of his employment agreement from June 30, 2005 to June 30, 2006,
and in accordance with his employment agreement received an incentive cash
payment from USA of $70,000.

Ms. Hepburn has entered into an employment agreement with the Company that
expires on June 30, 2006 and is automatically renewed from year to year
thereafter unless canceled by Ms. Hepburn or the Company. The agreement provides
for an annual base salary of $130,000 per year effective January 1, 2004. Ms.
Hepburn is also entitled to receive such bonus or bonuses as the Board of
Directors may award to her. The Agreement requires Ms. Hepburn to devote her
full time and attention to the business and affairs of the Company, and
obligates her 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. DeMedio has entered into an employment agreement with the Company, which
expires on April 30, 2006, and is automatically renewed from year to year
thereafter unless cancelled by Mr. DeMedio or the Company. The agreement
provides for a base annual salary of $155,000 and discretionary bonuses. Mr.
DeMedio was also granted options to purchase up to 3,000 shares of Common Stock
of the Company at $20 per share. The options vest ratably over a two-year period
and are exercisable at any time during the two-year period following vesting.
The agreement requires Mr. DeMedio 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 that would compete with the Company during the term of
his agreement and for a period of one year thereafter.

Effective April 8, 2005, Mary West Young resigned as Senior Vice President and
Chief Financial Officer of the Company. Effective April 12, 2005, the Company
appointed David M. DeMedio as Chief Financial Officer.

COMPENSATION OF DIRECTORS

Members of the Board of Directors receive cash and equity compensation for
serving on the Board of Directors, as determined from time to time by the
Compensation Committee with subsequent approval thereof by the Board of
Directors.

During fiscal year 2005, we paid each of our four outside Directors $20,000 each
for serving as a Director during the fiscal year and $10,000 each for serving on
Board Committees.

PRINCIPAL SHAREHOLDERS

COMMON STOCK

The following table sets forth, as of January 9, 2006, the beneficial
ownership of the Common Stock of each of the Company's directors, executive
officers and other employee named below, 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 of
Name and Address Common Stock Percent of
Beneficial Owner Beneficially Owned (1) Class(2)
---------------------------- ---------------------- ----------

George R. Jensen, Jr. 108,210 shares(3) 1.79%
100 Deerfield Lane, Suite 140
Malvern, Pennsylvania 19355

Stephen P. Herbert 27,360 shares(4) *
100 Deerfield Lane, Suite 140
Malvern, Pennsylvania 19355

Haven Brock Kolls, Jr. 7,073 shares(5) *
100 Deerfield Lane, Suite 140
Malvern, Pennsylvania 19355

Adele H. Hepburn 33,827 shares(6) *
100 Deerfield Lane, Suite 140
Malvern, Pennsylvania 19355

Douglas M. Lurio 9,214 shares(7) *
2005 Market Street, Suite 2340
Philadelphia, Pennsylvania 19103

William W. Sellers 28,124 shares(8) *
701 Eagle Road
Wayne, Pennsylvania 19087

Steven Katz 5,350 shares *
440 South Main Street
Milltown, New Jersey 08850

William L. Van Alen, Jr. 48,916 shares(9) *
P.O. Box 727
Edgemont, Pennsylvania 19028

David M. DeMedio 3,576 shares(10) *
100 Deerfield Lane, Suite 140
Malvern, Pennsylvania 19355

Wellington Management Company, LLP 710,000(11) 11.73%
75 State Street
Boston, MA 02109

All Directors and Executive Officers
As a Group (8 persons) 237,789 shares(12) 3.93%

----------
* 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, shares issuable upon
the conversion of Convertible Senior Notes, or shares of Common Stock
issuable upon exercise of warrants and options currently exercisable, or
exercisable within 60 days of January 9, 2006, are deemed to be
beneficially owned for purposes hereof.

(2) On January 9, 2006 there were 5,001,620 shares of Common Stock and
521,642 shares of Series A Preferred Stock issued and outstanding. For
purposes of computing the percentages under this table, it is assumed
that all shares of issued and outstanding Series A Preferred Stock have
been converted into 5,216 shares of Common Stock, that all of the
options to acquire Common Stock which have been issued and are fully
vested as of January 9, 2006 (or within 60-days of January 9, 2006) have
been converted into 18,224 shares of Common Stock. For purposes of
computing such percentages it has also been assumed that all of the
remaining Common Stock Warrants have been exercised for 219,481 shares
of Common Stock; that all of the Convertible Senior Notes have been
converted into 800,535 shares of Common Stock; and that all of the
accrued and unpaid dividends on the Series A Preferred Stock as of
January 9, 2006 have been converted into 7,836 shares of Common Stock.
Therefore, 6,052,912 shares of Common Stock were treated as issued and
outstanding for purposes of computing the percentages under this table.
Does not reflect or include the shares issuable to Mr. Jensen upon a
"USA Transaction."

(3) Includes 5,110 shares of Common Stock beneficially owned by his spouse.
Does not include the right granted to Mr. Jensen under his Employment
Agreement to receive Common Stock upon the occurrence of a USA
Transaction (as defined therein). Includes 60,000 shares owned by George
R. Jensen, Jr. Grantor Retained Unitrust dated July 14, 2003 over which
Mr. Jensen retains beneficial ownership.

(4) Includes 10 shares of Common Stock beneficially owned by his child,
6,000 shares of Common Stock beneficially owned by his spouse and 2,500
shares issuable to Mr. Herbert upon the exercise of warrants.

(5) Includes 120 shares of Common Stock owned by Mr. Kolls' spouse, 1,500
shares issuable to his spouse upon conversion of her Senior Note.

(6) Includes 4,730 shares of Common Stock owned by her spouse, 78 shares
underlying Series A Preferred Stock held by her and her spouse, 25,569
shares issuable upon the conversion of her Senior Notes, 584 shares
issuable upon the conversion of Senior Notes beneficially owned by her
spouse, 2,120 shares issuable upon the exercise of her warrants.

(7) Includes 2,250 shares issuable upon conversion of Senior Notes and 135
shares issuable upon exercise of warrants.

(8) Includes 178 shares of Common Stock owned by the Sellers Pension Plan of
which Mr. Sellers is a trustee, 49 shares of Common Stock owned by
Sellers Process Equipment Company of which he is a Director, 104 shares
of Common Stock owned by Mr. Seller's wife, 5,517 shares issuable upon
conversion of his Senior Notes and 1,000 shares issuable upon the
exercise of warrants.

(9) Includes 12,007 shares of Common Stock issuable to Mr. Van Alen upon
conversion of his Senior Notes, 10,458 shares issuable upon the exercise
of warrants and 40 shares of Common Stock beneficially owned by his
spouse.

(10) Includes 815 shares of Common Stock issuable to Mr. DeMedio upon
conversion of his Senior Notes and 750 shares of Common Stock issuable
to Mr.DeMedio upon the exercise of his Common Stock Options.

(11) Wellington Management Company, LLP ("Wellington Management"), in its
capacity as an investment adviser, may be deemed to have beneficial
ownership of 710,000 shares of common stock that are owned by numerous
investment advisory clients, none of which is known to have such
interest with respect to more than five percent of the class of shares.
Wellington Management has shared voting authority over 456,000 shares
and shared dispositive power over 710,000 shares. Wellington Management
is a registered investment adviser under the Investment Advisers Act of
1940, as amended.

(12) Includes all shares of Common Stock described in footnotes (3) through
(5) and (7) through (10) above.

PREFERRED STOCK

The following table sets forth, as of January 9, 2006 the beneficial
ownership of the Series A Preferred Stock by the Company's directors and
executive officers, the other employee named below, as well as by the Company's
directors and executive officers as a group. The Company is not aware of any
beneficial owner of more than five percent of the Series A Preferred Stock.
Except as otherwise indicated, the Company believes that the beneficial owners
of the Series A 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 of
Name and Address Series A Preferred Percent of
Beneficial Owner Stock Beneficially Owned Class (1)
----------------------- ------------------------ ----------
Adele H. Hepburn 5,150 shares (2) *
100 Deerfield Lane, Suite 140
Malvern, Pennsylvania 19355

All Directors and 0 shares *
Executive Officers
As a Group (8 persons)

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

(1) There were 521,642 shares of Series A Preferred Stock issued and
outstanding as of January 9, 2006.

(2) Ms. Hepburn is an employee of the Company.

CERTAIN TRANSACTIONS

During the fiscal year ended June 30, 2005, the Company incurred charges to
Lurio & Associates, P.C., of which Mr. Lurio is President and a shareholder, for
professional fees of approximately $284,000 for legal services rendered to the
Company by such law firm. Mr. Lurio is a Director of the Company. As of June 30,
2005, the Company had accrued approximately $25,000 for these services. During
fiscal year 2005, Mr. Lurio extended $15,000 and $30,000 of his 2005 and 2006
Senior Notes, respectively, into the 2008 and 2009 Senior Notes, respectively.

During the fiscal year ended June 30, 2005, the Company incurred charges of
approximately $72,600 in connection with consulting services provided by Steven
Katz, a Director of the Company. As of June 30, 2005, the Company had accrued
approximately $72,600 for these services.

During fiscal year 2005, William Van Alen, Jr., a Director, purchased 3,333
shares of Common Stock at $15 per share, or $50,000, as part of the 2005-D
Private Placement. Mr. Van Alen also received warrants to purchase 3,333 shares
of Common Stock at $15 per share exercisable at any time prior to December 31,
2005, pursuant to his investment in this offering. No value was assigned to
these warrants. Mr. Van Alen also purchased senior notes in the principal amount
of $103,405 as part of the 2004-B Senior Note offering and extended $30,000 of
his 2006 Senior Notes to 2009 Senior Notes.

During fiscal year 2005, William Sellers, a Director, invested $14,337 as part
of the 2004-B Senior Note offering and extended $50,000 of his 2006 Senior Notes
to 2009 Senior Notes.

During fiscal year 2005, David DeMedio, Chief Financial Officer, invested $1,900
as part of the 2004-B Senior Note offering.

During November 2005, Mr. Van Alen invested $33,333 as part of the 2005-G Senior
Note Offering and $20,000 as part of the bridge note offering that matured on
January 6, 2006. At maturity, the bridge notes were automatically exchanged for
2006-A Convertible Senior Notes and purchase rights.

Our Code of Business Conduct and Ethics prohibits us from entering into any
related party transaction with an officer or director where such transaction
would interfere with the exercise of the independent judgment of such officer or
director or materially impair the performance of the responsibilities of any
such officer or director.

SELLING SHAREHOLDER

The selling shareholder listed below is, as of the date hereof, the holder of
our common stock or has the right to acquire the number of shares of common
stock set forth opposite such selling shareholder's name. The issuance of the
common stock to the selling shareholder upon purchase under the Common Stock
Purchase Agreement dated February 17, 2006 will be a transaction exempt from the
registration requirements of the Act and various state securities laws.

We have agreed, at our expense, to register all of the common stock for resale
by the selling shareholder under the Act. We expect to incur expenses of
approximately $35,000 in connection with the registration statement of which
this prospectus is a part.

The number of shares that may be actually sold by the selling shareholder will
be determined by the selling shareholder. The selling shareholder is under no
obligation to sell all or any portion of the shares offered, nor is the selling
shareholder obligated to sell such shares immediately under this Prospectus. The
selling shareholder may not have a preset intention of selling his shares and
may offer less than the number of shares indicated. Because the selling
shareholder may sell all, some or none of the shares of common stock that the
selling shareholder holds, no estimate can be given as to the number of shares
of our common stock that will be held by the selling shareholder upon
termination of the offering. Shares of common stock may be sold from time to
time by the selling shareholder or by pledgees, donees, transferees or other
successors in interest.

The following table sets forth information with respect to the selling
shareholder and the amounts of common stock that may be offered pursuant to this
prospectus. The selling shareholder has not, or within the past three years has
not had, any position, office or other material relationship with us, except as
noted below.

Beneficial Ownership
Before Offering After Offering
Selling Common Stock
Shareholder Offered Hereby Number Number Percent
----------- -------------- ------ ------ -------
Steve Illes 1,000,000 (1) 1,165,067 165,067 2.72%

----------
(1) Represents shares that Mr. Illes may purchase from us under his Common
Stock Purchase Agreement dated February 17, 2006 with the Company
through June 30, 2009. USA has the right to require Mr. Illes to
purchase Common Stock at the lower of: (i) $30.00; or (ii) 90% of the
closing bid price per share on the applicable date. We have agreed to
register these shares for resale by Mr. Illes at our cost and expense
for two years following the date of this prospectus. As of the date of
this prospectus, Mr. Illes has not purchased from any shares under the
2006 Agreement. See "Other Events". The number of shares reflected in
the above table as being owned by Mr. Illes before and after the
offering does not include the 360,000 shares that Mr. Illes may be
required to purchase from us under the 2005 Common Stock Agreement.

MARKET FOR COMMON STOCK

The Common Stock of the Company is currently traded on the OTC Electronic
Bulletin Board under the symbol USAT.

The high and low bid prices on the OTC Electronic Bulletin Board for the Common
Stock were as follows. These quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not represent actual
transactions.

Year ended June 30, 2006 High Low
---------------------------- ------- -------
First Quarter (through September 30, 2005) $ 16.80 $ 12.00
Second Quarter (through December 31, 2005) $ 13.10 $ 8.50

Year ended June 30, 2005
----------------------------

First Quarter (through September 30, 2004) $ 18.10 $ 11.70
Second Quarter (through December 31, 2004) $ 16.40 $ 9.50
Third Quarter (through March 31, 2005) $ 28.00 $ 10.80
Fourth Quarter (through June 30, 2005) $ 20.00 $ 13.30

Year ended June 30, 2004
----------------------------
First Quarter (through September 30, 2003) $ 54.00 $ 34.00
Second Quarter (through December 31, 2003) $ 42.00 $ 12.00
Third Quarter (through March 31, 2004) $ 29.00 $ 15.00
Fourth Quarter (through June 30, 2004) $ 34.00 $ 17.00

On January 9, 2006, there were 1,389 record holders of the Common Stock and 529
record holders of the Preferred Stock.

The holders of the Common Stock are entitled to receive such dividends as the
Board of Directors of the Company may from time to time declare out of funds
legally available for payment of dividends. Through the date hereof, no cash
dividends have been declared on the Company's Common Stock or Preferred Stock.
No dividend may be paid on the Common Stock until all accumulated and unpaid
dividends on the Preferred Stock have been paid. As of January 9, 2006, such
accumulated unpaid dividends amounted to $7,836,040.

As of June 30, 2005, equity securities authorized for issuance by the Registrant
with respect to compensation plans were as follows:

Number of securities to be
issued upon exercises of Weighted average exercise Number of securities
outstanding options and price of outstanding remaining available for
Plan Category warrants options and warrants future issuance
------------- -------------------------- ------------------------- -----------------------

Equity compensation
plans approved by None Not applicable None
security holders

Equity compensation
plans not approved
by security holders 20,099(1) $25 141,086(2)

(1) Represents stock options outstanding as of June 30, 2005 for the
purchase of shares of Common Stock of the Company expiring at various
times from February 2006 through April 2009. Of such options, 5,441 were
granted to employees of the Company and 14,658 to former option holders
of Stitch Networks Corporation. Exercise prices for all the options
outstanding were at prices that were either equal to or greater than the
market price of the Company's Common Stock on the dates the options were
granted.

(2) Represents 140,000 shares of Common Stock issuable to the Company's
Chief Executive Officer under the terms of his employment agreement plus
1,086 shares of Common Stock issuable under the Company's 2004-B Stock
Compensation Plan.

In July 2003 the Company and the Company's Chief Executive Officer (CEO) amended
the terms of his employment agreement (expiring June 2007). Under the terms of
the previous Executive Employment Agreement, the CEO would have been granted
seven percent (non-dilutive) of all the then issued and outstanding shares of
the Company's Common Stock in the event a "USA Transaction" (as defined) occurs,
which among other events includes a change in control of the Company. The
amended terms of the Executive Employment Agreement, eliminated the seven
percent (non-dilutive) right to receive Common Stock upon a "USA Transaction",
and granted the CEO an aggregate of 140,000 shares of Common Stock in the event
a "USA Transaction" occurs. In exchange for the amendment of these terms, the
Company issued an aggregate of 105,000 shares of its Common Stock to the CEO. In
connection with this amendment, the CEO also entered into a lock-up agreement
pursuant to which he shall not sell 25,000 of these shares for a one-year period
and 80,000 of these shares for a two-year period. The CEO will not be required
to pay any additional consideration for these shares of Common Stock. At the
time of a "USA Transaction", all of the 140,000 shares to be issued to the CEO
in connection with this amendment are automatically deemed to be issued and
outstanding, and will be entitled to be treated as any other issued and
outstanding shares of Common Stock. The right to receive the shares is
irrevocable and fully vested, and the rights have no expiration date and will
not be affected by the termination of the CEO's employment with the Company for
any reason whatsoever. The shares issuable to Mr. Jensen have not been reserved
for issuance by the Company and are not reflected or included in the number of
issued and outstanding shares of the Company on a fully diluted basis in this
prospectus.

The Company's Board of Directors established and authorized the 2004-B Stock
Compensation Plan in October 2004 for use in compensating employees, directors
and consultants through the issuance of shares of Common Stock of the Company.
There were 5,000 shares authorized under the Plan. The underlying shares for the
Plan have been registered with the Securities and Exchange Commission as an
employee benefit plan under Form S-8. As of January 9, 2006 there were 386
shares available for future issuance under the Plan.

As of January 9, 2006, shares of Common Stock reserved for future issuance were
as follows:

20,099 shares issuable upon the exercise of stock options at exercise
prices ranging from $16.50 to $200 per share

219,481 shares issuable upon the exercise of common stock warrants at
exercise prices ranging from $7.00 to $125 per share

5,216 shares issuable upon the conversion of outstanding Preferred Stock

800,535 shares issuable upon the conversion of Senior Notes having an
aggregate face value of $12,054,939

360,000 shares issuable under our 2005 Common Stock Agreement with Steve
Illes

386 shares issuable the 2004-B Stock Compensation Plan

PLAN OF DISTRIBUTION

The selling shareholder is free to offer and sell the common shares at such
times, in such manner and at such prices as the selling shareholder may
determine. The types of transactions in which the common shares are sold may
include transactions in the over-the-counter market (including block
transactions), negotiated transactions, the settlement of short sales of common
shares, or a combination of such methods of sale. The sales will be at market
prices prevailing at the time of sale or at negotiated prices. Such transactions
may or may not involve brokers or dealers.

The selling shareholder may effect such transactions by selling common stock
directly to purchasers or through broker-dealers, which may act as agents or
principals. Such broker-dealers may receive compensation in the form of
discounts, concessions, or commissions from the selling shareholder. They may
also receive compensation from the purchasers of common shares for whom such
broker-dealers may act as agents or to whom they sell as principal, or both
(which compensation as to a particular broker-dealer might be in excess of
customary commissions).

Steve Illes is an "underwriter" within the meaning of the Act in connection with
the sale of shares purchased from us under his agreement with us. The
ten-percent discount received by him in connection with his purchase of shares
from us will be an underwriting discount.

The selling shareholder also may resell all or a portion of the common shares in
open market transactions in reliance upon Rule 144 under the Act, provided he
meets the criteria and conform to the requirements of such Rule. We have 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 some
circumstances, we have agreed to indemnify the selling shareholder against
certain losses and liabilities, including liabilities under the Act.

We have advised the selling shareholder that while he is engaged in a
distribution of the shares included in this prospectus he is required to comply
with Regulation M promulgated under the Securities Exchange Act of 1934, as
amended. With certain exceptions, Regulation M precludes the selling
shareholder, any affiliated purchasers, and any broker-dealer or other person
who participates in such distribution from bidding for or purchasing, or
attempting to induce any person to bid for or purchase any security which is the
subject of the distribution until the entire distribution is complete.

DESCRIPTION OF SECURITIES

GENERAL

We are authorized to issue up to 640,000,000 shares of common stock, no par
value, and 1,800,000 shares of undesignated preferred stock. As of the date
hereof, 900,000 preferred shares have been designated as series A convertible
preferred stock, no par value. As of January 9, 2006, there were 5,001,620
shares of common stock issued and outstanding and 521,642 shares of series A
preferred stock issued and outstanding which are convertible into 5216 shares of
common stock. Through January 9, 2006, a total of 589,508 shares of preferred
stock have been converted into 6,659 shares of Common Stock and $2,701,764 of
accrued and unpaid dividends thereon have been converted into 2,902 shares of
Common Stock.

COMMON STOCK

The holder of each share of common stock:

o is entitled to one vote on all matters submitted to a vote of the shareholders
of USA, including the election of directors. There is no cumulative voting for
directors;

o does not have any preemptive rights to subscribe for or purchase shares,
obligations, warrants, or other securities of USA; and

o is 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 series A preferred stock have been paid. Upon any liquidation,
dissolution or winding up of USA, holders of shares of common stock are entitled
to receive pro rata all of the assets of USA available for distribution, subject
to the liquidation preference of the series A preferred stock of $10.00 per
share and any unpaid and accumulated dividends on the series A preferred stock.

SERIES A CONVERTIBLE PREFERRED STOCK

The holders of shares of Series A preferred stock:

o 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., one share of series A
preferred stock equals one-hundredth of a vote);

o are entitled to vote on all matters submitted to the vote of the shareholders
of USA, including the election of directors; and

o are entitled to an annual cumulative cash dividend of $1.50 per annum, payable
when, as and if declared by the Board of Directors.

The record dates for payment of dividends on the Series A Preferred Stock are
February 1 ($0.75) and August 1 ($0.75) of each year. Any and all accumulated
and unpaid cash dividends on the Series A Preferred Stock must be declared and
paid prior to the declaration and payment of any dividends on the Common Stock.
Any unpaid and accumulated dividends will not bear interest. As of January 9,
2006 the accumulated and unpaid dividends were $7,836,030.

Each share of Series A Preferred Stock is convertible at any time into 1 share
of fully issued and non-assessable Common Stock. Accrued and unpaid dividends
earned on shares of Series A Preferred Stock being converted into Common Stock
are also convertible into Common Stock at the rate $1000 per share of Common
Stock at the time of conversion and whether or not such dividends have then been
declared by USA. As of January 9, 2006 a total of 589,508 shares of series A
Preferred Stock have been converted into common stock and accrued and unpaid
dividends thereon have been converted into 2,902 shares of Common Stock. The
conversion rate of the Series A Preferred Stock (and any accrued and unpaid
dividends thereon) will be equitably adjusted for stock splits, stock
combinations, recapitalizations, and in connection with certain other issuances
of common stock by USA. Upon any liquidation, dissolution, or winding-up of USA,
the holders of Series A Preferred Stock are entitled to receive a distribution
in preference to the Common Stock in the amount of $10.00 per share plus any
accumulated and unpaid dividends.

We have the right, at any time, to redeem all or any part of the issued and
outstanding series A preferred stock for the sum of $11.00 per share plus any
and all unpaid and accumulated dividends thereon. Upon notice by USA of such
call, the holders of the series A preferred stock so called will have the
opportunity to convert their shares and any unpaid and accumulated dividends
thereon into shares of common stock. The $11.00 per share figure was the
redemption price approved by the Directors and shareholders of USA at the time
the series A preferred stock was created and first issued. We currently have no
plans to redeem the preferred stock.

SENIOR NOTES

As of January 9, 2006, we had $320,000 of unsecured senior notes due on June 30,
2006, $1,683,500 of unsecured senior notes due on December 31, 2006, $1,078,827
of unsecured senior notes due on June 30, 2007, $2,975,016 of unsecured senior
notes due on December 31, 2007, $2,465,596 of unsecured senior notes due on
December 31, 2008, $1,520,000 of unsecured senior notes due one December 31,
2009, and $2,012,000 of unsecured senior notes due on December 31, 2010. The
principal amount of each senior note which is not voluntarily converted shall be
payable on the maturity date thereof, at which time any unpaid and accrued
interest shall also become due. Interest shall accrue at the rate of 12% per
annum from and after the date of issuance and shall be payable quarterly in
arrears on December 31, March 31, June 30, and September 30 of each year until
maturity, with the exception of the Senior Notes due June 30, 2007 and December
31, 2010 and $544,945 of the December 31, 2008 notes, which accrue interest at
the rate of 10% per annum. The senior notes are senior to all existing equity
securities of USA, including the series A preferred stock.

The principal amount of each Senior Note due June 30, 2006 is convertible at any
time into shares of Common Stock at the rate of $10 per share. The principal
amount of each Senior Note due December 31, 2006 is convertible at any time into
shares of Common Stock at the rate of $20 per share. The principal amount of
each Senior Note due June 30, 2007 is convertible at any time at into shares of
Common Stock at the rate of $10 per share. The principal amount of each Senior
Note due December 31, 2007 is convertible at any time into shares of Common
Stock at the rate of $20 per share. $544,945 of the Senior Notes due December
31, 2008 are convertible at anytime into shares of Common Stock at a rate of $10
per share and the remaining $1,920,651 principal amount of each Senior Note due
December 31, 2008 is convertible at anytime into shares of Common Stock at the
rate of $20 per share. The principal amount of each Senior Note due December 31,
2009 is convertible at anytime into shares of Common Stock at the rate of $20
per share. The principal amount of each Senior Note due December 31, 2010 is
convertible at anytime into shares of Common Stock at the rate of $10 per share.

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

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

Notwithstanding anything herein to the contrary, Senior Indebtedness does not
include:

o unsecured accounts payable to trade creditors of USA incurred in the ordinary
course of business;

o any debt owed by USA to any officer, director or stockholder of USA;

o any obligation of Borrower issued or contracted for as payment in
consideration of the purchase by USA of the capital stock or substantially all
of the assets of another person or in consideration for the merger or
consolidation with respect to which USA was a party;

o any operating lease obligations of USA;

o any other indebtedness which by its terms is subordinated to the senior note;
or

o any "other indebtedness" which is subordinated to all indebtedness to which
the senior note is subordinated in substantially like terms as the senior note;
which such "other indebtedness" shall be treated as equal with the indebtedness
evidenced by the senior note.

COMMON STOCK PURCHASE WARRANTS

As of January 9, 2006, there were outstanding warrants to purchase 71,428 shares
at $7 per share, warrants to purchase 12,000 shares at $91 per share, warrants
to purchase 3,779 shares at $100 per share, warrants to purchase 29 shares at
$103 per share, warrants to purchase 750 shares at $125 per share, and warrants
to purchase up to 131,494 shares at $20 per share.

The exercise price of the warrants and the number of shares of Common Stock
issuable upon exercise of the 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 USA, or other similar
transaction, the warrant holders shall, at the option of USA, be required to
exercise the warrants immediately prior to the closing of the transaction, or
such warrants shall automatically expire. Upon such exercise, the warrant
holders shall participate on the same basis as the holders of common stock in
connection with the transaction.

The warrants do not confer upon the holder any voting or any other rights of a
shareholder of USA. Upon notice to the warrant holders, USA has the right, at
any time and from time to time, to reduce the exercise price or to extend the
warrant termination date.

SHARES ELIGIBLE FOR FUTURE SALE

Of the 5,001,620 shares of common stock issued and outstanding on January 9,
2006, all are freely transferable without further registration under the Act
(other than shares held by "affiliates" of the Company). As of January 9, 2006,
there were 521,642 shares of preferred stock issued and outstanding, all of
which are freely transferable without further registration under the Act (other
than shares held by "affiliates" of USA).

The shares of preferred stock issued and outstanding as of January 9, 2006 are
convertible into 5,216 shares of common stock all of which would be fully
transferable without further registration under the Act (other than shares held
by "affiliates" of USA).

Shares of our common stock which are not freely tradeable under the Act are
known as "restricted securities" and cannot be resold without registration under
the Act or pursuant to Rule 144 promulgated thereunder.

In general, under Rule 144 as currently in effect, a person (or persons whose
shares are required to be aggregated), including any affiliate of USA, who
beneficially owns "restricted securities" for a period of at least one year is
entitled to sell within any three-month period, shares equal in number to the
greater of (i) 1% of the then outstanding shares of the same class of shares, or
(ii) the average weekly trading volume of the same class of shares during the
four calendar weeks preceding the filing of the required notice of sale with the
SEC. 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 USA.
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
USA, and who has beneficially owned restricted shares for at least two years,
can sell such shares under Rule 144 without regard to the notice, manner of
sale, public information or the volume limitations described above.

LIMITATION OF LIABILITY; INDEMNIFICATION

As permitted by the Pennsylvania Business Corporation Law of 1988 ("BCL"), our
By-laws provide that Directors 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 our 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
USA pursuant to the foregoing provisions, or otherwise, we have been advised
that in the opinion of the SEC 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 our stock is American Stock Transfer &
Trust Company, 40 Wall Street, New York, New York 10005.

LEGAL MATTERS

The validity of the common stock has been passed upon for us by Lurio &
Associates, P.C., Philadelphia, Pennsylvania 19103.

EXPERTS

The consolidated financial statements and schedule of USA Technologies, Inc. at
June 30, 2005, and for the year ended June 30, 2005 appearing in this Prospectus
and Registration Statement have been audited by Goldstein Golub Kessler LLP,
independent registered public accounting firm, as set forth in their report
thereon (which contains an explanatory paragraph describing conditions that
raise substantial doubt about the Company's ability to continue as a going
concern as described in Note 2 to the consolidated financial statements)
appearing elsewhere herein, and are included in reliance upon such report given
on the authority of such firm as experts in accounting and auditing.

The consolidated financial statements and schedule of USA Technologies, Inc. at
June 30, 2004, and for each of the two years in the period ended June 30, 2004
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent registered public accounting firm, as set forth
in their report thereon (which contains an explanatory paragraph describing
conditions that raise substantial doubt about the Company's ability to continue
as a going concern as described in Note 2 to the consolidated financial
statements) appearing elsewhere herein, and are included in reliance upon such
report given on the authority of such firm as experts in accounting and
auditing.

WHERE YOU CAN FIND ADDITIONAL INFORMATION

We file annual, quarterly and other reports, proxy statements and other
information with the Securities and Exchange Commission. Anyone may inspect a
copy of the registration statement or any other reports we file, without charge
at the public reference facility maintained by the Securities and Exchange
Commission in Room 1024, 450 Fifth Street, NW, Washington, DC 20549. Copies of
all or any part of the registration statement may be obtained from that facility
upon payment of the prescribed fees. The public may obtain information on the
operation of the public reference room by calling the Securities and Exchange
Commission at 1-800-SEC-0330. The Securities and Exchange Commission maintains a
website at http://www.sec.gov that contains reports, proxy and information
statements, and other information regarding registrants that file electronically
with the Securities and Exchange Commission.

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

You can find additional information concerning us on our website
http://www.usatech.com. Information on our website is not and should not be
considered a part of this prospectus.

FINANCIAL STATEMENTS

USA TECHNOLOGIES, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Financial Statements:

Reports of Independent Registered Public Accounting Firms...................F-1
Consolidated Balance Sheets.................................................F-3
Consolidated Statements of Operations.......................................F-4
Consolidated Statements of Shareholders' Equity.............................F-5
Consolidated Statements of Cash Flows.......................................F-9
Notes to Consolidated Financial Statements.................................F-11

REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS

Board of Directors and Shareholders of
USA Technologies, Inc.

We have audited the accompanying consolidated balance sheet of USA Technologies,
Inc. as of June 30, 2005 and the related consolidated statement of operations,
shareholders' equity, and cash flows for the year then ended. Our audit also
included the June 30, 2005 balances in the financial statement schedule listed
in Item 16(b). These consolidated financial statements and schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audit.

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 audit provides a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of USA Technologies,
Inc. at June 30, 2005 and the consolidated results of its operations and its
cash flows for the year then ended, in conformity with U.S. generally accepted
accounting principles. Also, in our opinion, the related June 30, 2005 balances
in the consolidated financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
and has a working capital deficiency that raise substantial doubt about its
ability to continue as a going concern. Management's plan in regard to these
matters is also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

/s/ Goldstein Golub Kessler LLP

New York, NY
September 2, 2005, except for the first paragraph
of note 2, as to which the date is February 17, 2006

F-1

Board of Directors and Shareholders of
USA Technologies, Inc.

We have audited the accompanying consolidated balance sheet of USA Technologies,
Inc. as of June 30, 2004 and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the two years in the period
ended June 30, 2004. Our audits also included the June 30, 2004 and 2003
balances in the financial statement schedule listed in Item 16(b). These
consolidated financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 consolidated financial position of USA Technologies,
Inc. at June 30, 2004 and the consolidated results of its operations and its
cash flows for each of the two years in the period ended June 30, 2004, in
conformity with U.S. generally accepted accounting principles. Also, in our
opinion, the June 30, 2004 and 2003 balances in the related consolidated
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.

The accompanying financial statements have been prepared assuming that USA
Technologies, Inc. will continue as a going concern. As more fully described in
Note 2 to the financial statements, the Company has an accumulated deficit and
has incurred recurring operating losses. These conditions 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
September 10, 2004

F-2

USA Technologies, Inc.

Consolidated Balance Sheets

June 30
-------------------------------- December 31,
2005 2004 2005
------------- ------------- -------------
Assets (Unaudited)

Current assets:
Cash and cash equivalents $ 2,097,881 $ 3,019,214 $ 4,081,716
Accounts receivable, less allowance for
uncollectible accounts of $196,000,
$240,000, and $91,000 (unaudited) as of
June 30, 2005 and 2004 and December 31,
2005, respectively 744,041 771,722 1,422,457
Finance receivables 255,595 162,874 255,430
Inventory 1,697,236 1,707,684 1,347,916
Prepaid expenses and other current assets 240,324 234,448 127,888
Subscriptions receivable 35,723 300,000 --
Investment 39,467 68,636 24,220
Assets held for sale - 46,200 --
------------- ------------- -------------
Total current assets 5,110,267 6,310,778 7,271,627

Finance receivables, less current portion 269,722 141,262 228,573
Property and equipment, net 684,927 602,953 920,983
Intangibles, net 9,595,232 10,831,832 8,976,932
Goodwill 7,663,208 7,985,208 7,663,208
Other assets 68,409 8,544 68,409
------------- ------------- -------------
Total assets $ 23,391,765 $ 25,880,577 $ 25,129,732
============= ============= =============

Liabilities and shareholders' equity Current liabilities:
Accounts payable $ 3,265,928 $ 2,929,491 $ 2,766,961
Accrued expenses 1,479,352 1,569,368 1,440,818
Current obligations under long-term debt 100,646 240,764 105,810
Convertible Senior Notes 1,252,161 401,887 2,718,793
------------- ------------- -------------
Total current liabilities 6,098,087 5,141,510 7,032,082

Convertible Senior Notes, less current portion 7,897,314 6,617,987 7,870,665
Long-term debt, less current portion 87,179 12,418 67,069
------------- ------------- -------------
Total liabilities 14,082,580 11,771,915 14,970,116

Commitments and contingencies (Note 16)

Shareholders' equity:
Preferred Stock, no par value:
Authorized shares- 1,800,000
Series A Convertible Preferred-
Authorized shares- 900,000
Issued and outstanding shares- 522,742
as of June 30, 2005 and 2004 and 521,642
(unaudited) as of December 31, 2005
(liquidation preference of $12,688,713,
$11,904,600 and $13,052,450 as of 2005 and
2004 and December 31, 2005, respectively) 3,702,856 3,702,856 3,695,068
Common Stock, no par value:
Authorized shares- 640,000,000 as of
December 31, 2005, 560,000,000 as of June 30, 2005,
and 475,000,000 as of June 30, 2004
Issued and outstanding shares- 4,335,679,
3,516,541, and 4,946,030 (unaudited) as of
June 30, 2005 and 2004 and December 31,
2005, respectively 121,598,475 110,635,743 128,316,374
Subscriptions receivable (233,850) -- --
Accumulated other comprehensive income (loss) 3,080 32,249 (12,167)
Accumulated deficit (115,761,376) (100,262,186) (121,839,659)
------------- ------------- -------------
Total shareholders' equity 9,309,185 14,108,662 10,159,616
------------- ------------- -------------
Total liabilities and shareholders' equity $ 23,391,765 $ 25,880,577 $ 25,129,732
============= ============= =============

See accompanying notes.

F-3

USA Technologies, Inc.

Consolidated Statements of Operations

Six months ended
Year ended June 30 December 31
--------------------------------------------------- --------------------------------
2005 2004 2003 2005 2004
------------- ------------- ------------- ------------- -------------
(unaudited)

Revenues:
Equipment sales $ 3,535,064 $ 4,349,566 $ 1,034,427 $ 2,739,045 $ 1,648,076
License and transaction fees 1,142,925 977,651 1,373,573 582,594 519,950
Product sales and other - 305,598 445,068 -- --
------------- ------------- ------------- ------------- -------------
Total revenues 4,677,989 5,632,815 2,853,068 3,321,639 2,168,026
Cost of sales (including
amortization of software
development costs Note 2) 3,478,673 4,329,692 2,971,443 2,218,830 1,694,787
------------- ------------- ------------- ------------- -------------
Gross profit (loss) 1,199,316 1,303,123 (118,375) 1,102,809 473,239

Operating expenses:
General and administrative 6,429,458 6,747,824 7,194,684 2,239,773 3,171,900
Compensation 5,559,945 10,071,354 4,973,210 2,793,364 2,679,371
Depreciation and amortization 1,600,120 1,632,330 1,251,716 831,774 788,535
Loss on debt modification - 318,915 1,521,654 -- --
------------- ------------- ------------- ------------- -------------
Total operating expenses 13,589,523 18,770,423 14,941,264 5,864,911 6,639,806
------------- ------------- ------------- ------------- -------------
Operating loss (12,390,207) (17,467,300) (15,059,639) (4,762,102) (6,166,567)

Other income (expense):
Interest income 61,068 40,789 18,691 36,781 20,091
Gain (loss) on investment -- 603,480 (1,945,951) -- --
Gain (loss) on contract
settlement (42,300) 429,204 -- -- --
Interest expense:
Coupon or stated rate (1,256,999) (1,179,322) (1,163,192) (703,462) (594,673)
Non-cash interest and
amortization of debt
discount (1,870,752) (3,853,029) (3,815,408) (632,180) (704,492)
------------- ------------- ------------- ------------- -------------
Total interest expense (3,127,751) (5,032,351) (4,978,600) (1,335,642) (1,299,165)
Total other income (expense) (3,108,983) (3,958,878) (6,905,860) (1,298,861) (1,279,074)
------------- ------------- ------------- ------------- -------------
Net loss (15,499,190) (21,426,178) (21,965,499) (6,060,963) (7,445,641)
Cumulative preferred
dividends (784,113) (786,513) (793,586) (392,057) (392,057)
------------- ------------- ------------- ------------- -------------
Loss applicable to common
shares $ (16,283,303) $ (22,212,691) $ (22,759,085) $ (6,453,020) $ (7,837,698)
============= ============= ============= ============= =============
Loss per common share (basic
and diluted) $ (4.18) $ (7.70) $ (20.36) $ (1.42) $ (2.14)
============= ============= ============= ============= =============
Weighted average number of
common shares outstanding
(basic and diluted) 3,894,204 2,884,761 1,117,903 4,559,167 3,663,267
============= ============= ============= ============= =============

See accompanying notes.

F-4

USA Technologies, Inc.

Consolidated Statements of Shareholders' Equity

SERIES A
CONVERTIBLE COMMON SUBSCRIPTIONS ACCUMULATED
PREFERRED STOCK STOCK RECEIVABLE DEFICIT TOTAL
------------------------------------------------------------------------------

Balance, June 30, 2002 $ 3,749,158 $ 56,588,503 $ (149,750) $(56,792,019) $ 3,395,892

Conversion of 4,790 shares of
Preferred Stock to 48
shares of Common Stock $ (33,912) $ 33,912 $ -- $ -- $ --
Conversion of $56,050 of
cumulative preferred dividends
into 56 shares of Common
Stock at $1000 per share -- 56,050 -- (56,050) --
Issuance of 57,494 shares of
Common Stock for professional
services -- 1,245,631 149,750 -- 1,395,381
Exercise of 176,864 Common
Stock Warrants at $10 per share -- 1,768,650 -- -- 1,768,650
Issuance of 57,273 shares of
Common Stock from the conversion
of 12% Senior Notes -- 1,145,442 -- -- 1,145,442
Issuance of 24,672 shares of
Common Stock from the conversion of
$243,000 of 9-3/4% debentures
and the related exercise of
Common Stock Warrants at
varying prices per share to
purchase 72,068 shares of
Common Stock, net of offering costs -- 873,000 -- -- 873,000
Issuance of 892,075 shares of Common
Stock in connection with various
Private Placement Offering at
varying prices per share -- 8,750,058 -- -- 8,750,058
Issuance of 23,150 shares of
Common Stock in lieu of cash
payments for interest on the
convertible Senior Notes and
the issuance of 23,150
Common Stock Warrants -- 860,250 -- -- 860,250
Debt Discount relating to beneficial
conversion feature on the various
12% Senior Notes -- 2,947,130 -- -- 2,947,130
Issuance of 80,315 shares of
Common Stock in connection with
the issuance of 12% Senior Notes -- 1,664,819 -- -- 1,664,819
Issuance of 150,000 shares of
Common Stock for the
investment in Jubilee -- 2,850,000 -- -- 2,850,000
Other -- 6,960 -- -- 6,960
Net loss and total comprehensive loss -- -- -- (21,965,499) (21,965,499)
------------------------------------------------------------------------------
Balance, June 30, 2003 $ 3,715,246 $ 78,790,405 $ -- $(78,813,568) $ 3,692,083
------------------------------------------------------------------------------

See accompanying notes.

F-5

USA Technologies, Inc.

Consolidated Statements of Shareholders' Equity (Continued)

ACCUMULATED
SERIES A OTHER
CONVERTIBLE COMMON COMPREHENSIVE ACCUMULATED
PREFERRED STOCK STOCK INCOME DEFICIT TOTAL
--------------------------------------------------------------------------------

Issuance of 17 shares of Common Stock
from the conversion of 1,750 shares
of Preferred Stock $ (12,390) $ 12,390 $ -- $ -- $ --
Conversion of cumulative preferred
dividends into 22 shares of Common
Stock at $1000 per share -- 22,440 -- (22,440) --
Exercise of 321,793 Common Stock
Warrants and Options -- 2,800,472 -- -- 2,800,472
Issuance of 142,048 shares of Common
Stock from the conversion of 12%
Senior Notes -- 2,840,978 -- -- 2,840,978
Issuance of 16,157 shares of Common
Stock in exchange for salaries and
professional services -- 422,092 -- -- 422,092
Issuance of 105,000 shares of Common
Stock to executive in connection with
employment agreement -- 4,620,000 -- -- 4,620,000
Issuance of 531,778 shares of Common
Stock from various private placement
offerings at varying prices per
share, less issuance costs of $253,071 -- 9,389,263 -- -- 9,389,263
Issuance of 10,612 shares of Common
Stock and related common Stock
Warrants in lieu of cash payment for
interest on the 12% senior Notes -- 478,496 -- -- 478,496
Debt discount relating to beneficial
conversion feature on 12% Senior Notes -- 1,981,007 -- -- 1,981,007
Issuance of 201,700 shares of Common
Stock in connection with the Bayview
acquisition -- 9,278,200 -- -- 9,278,200
Comprehensive Loss:
Net loss -- -- -- (21,426,178) (21,426,178)
Unrealized gain on investment -- -- 32,249 -- 32,249
-------------
Total comprehensive loss (21,393,929)
--------------------------------------------------------------------------------
Balance, June 30, 2004 $ 3,702,856 $ 110,635,743 $ 32,249 $(100,262,186) $ 14,108,662
--------------------------------------------------------------------------------

See accompanying notes.

F-6

USA Technologies, Inc.

Consolidated Statements of Shareholders' Equity (Continued)

SERIES A ACCUMULATED
CONVERTIBLE OTHER
PREFERRED COMMON SUBSCRIPTIONS COMPREHENSIVE ACCUMULATED
STOCK STOCK RECEIVABLE INCOME DEFICIT TOTAL
---------------------------------------------------------------------------------

Exercise of 109,942 Common Stock
Warrants at $10 per share, net $ -- $ 1,094,658 $ -- $ -- $ -- $ 1,094,658
Issuance of 90,351 shares of Common
Stock from the conversion of 12%
Senior Notes -- 931,208 -- -- -- 931,208
Issuance of 8,005 shares of Common
Stock for employee compensation -- 107,670 -- -- -- 107,670
Issuance of 384,504 shares of Common
Stock to an accredited investor at
varying prices per share, less
issuance costs of $291,166 -- 3,779,454 -- -- -- 3,779,454
Issuance of 233,333 shares of Common
Stock from a private placement at
varying prices per share, less
issuance costs of $73,103 -- 3,426,897 (233,850) -- -- 3,193,047
Cancellation of 7,000 shares of Common
Stock in connection with the Bayview
acquisition -- (322,000) -- -- -- (322,000)
Debt discount related to the beneficial
conversion feature on various Senior
Notes issued -- 1,944,845 -- -- -- 1,944,845
Comprehensive loss:
Net loss -- -- -- -- (15,499,190) (15,499,190)
Unrealized loss on investment -- -- -- (29,169) -- (29,169)
------------
Total comprehensive loss (15,528,359)
---------------------------------------------------------------------------------
Balance, June 30, 2005 $ 3,702,856 $121,598,475 $(233,850) $ 3,080 $(115,761,376) $ 9,309,185
---------------------------------------------------------------------------------

See accompanying notes.

F-7

USA Technologies, Inc.

Consolidated Statements of Shareholders' Equity (Continued)
(Unaudited)

Issuance of 569,998 shares of Common
Stock to an accredited investor at
varying prices per share $ -- $ 6,052,340 $ -- $ -- $ -- $ 6,052,340
Exercise of 36,800 2005-D Common Stock
Warrants at $10 per share -- 368,000 -- -- -- --
Cancellation of 15,590 shares of Common
Stock issued as part of the 2005-D
private placement -- (233,850) 233,850 -- -- --
Conversion of 1,100 shares of Preferred
Stock to 11 shares of Common Stock (7,788) 7,788 -- -- -- --
Conversion of $17,320 of cumulative
preferred dividends into 17 shares
of Common Stock at $1000 per share -- 17,320 -- -- (17,320) --
Issuance of 18,413 shares of Common
Stock from the conversion of
Senior Notes -- 259,135 -- -- -- 259,135
Debt discount related to the beneficial
conversion feature on Senior Notes -- 46,322 -- -- -- 46,322
Issuance of special purchase rights in
conjunction with the 2008-C Senior
Notes -- 184,542 -- -- -- 184,542
Issuance of 700 shares of Common
Stock for employee compensation -- 9,280 -- -- -- 9,280
Stock option compensation charges -- 7,022 -- -- -- 7,022
Comprehensive loss:
Net loss -- -- -- -- (6,060,963) (6,060,963)
Unrealized loss on investment -- -- -- (15,247) -- (15,247)
-----------
Total comprehensive loss (6,076,210)
---------------------------------------------------------------------------------
Balance, December 31, 2005 $ 3,695,068 $128,316,374 $ -- $(12,167) $(121,839,659) $10,159,616
=================================================================================

See accompanying notes.

F-8

USA Technologies, Inc.

Consolidated Statements of Cash Flows

Six months ended
Year ended June 30 December 31
-------------------------------------------- ----------------------------
2005 2004 2003 2005 2004
------------ ------------ ------------ ------------ ------------
(unaudited)

OPERATING ACTIVITIES:
Net loss $(15,499,190) $(21,426,178) $(21,965,499) $ (6,060,963) $ (7,445,641)
Adjustment to reconcile net loss
to net cash used in operating
activities:
Charges incurred in
connection with the
issuance of Common Stock,
Common Stock Warrants and
Senior Notes 107,670 5,042,092 2,573,301 9,280 59,570
Charges incurred in connection
with stock option compensation 7,022 --
Interest expense on the
Senior Notes paid through
the issuance of Common Stock -- 478,496 860,250 -- --
Interest amortization related
to Senior Notes and
Convertible Debentures 1,870,752 3,374,533 2,955,158 632,180 704,492
Depreciation 363,520 469,418 1,119,536 213,474 170,234
Amortization 1,236,600 2,207,329 1,623,547 618,300 618,301
Loss (gain) on sale of
investment -- (603,478) 1,945,951 -- --
Loss (gain) on contract settlement 42,300 (429,204) -- -- --
Loss on debt modification -- 318,915 1,521,654 -- --

Changes in operating assets
and liabilities:
Accounts receivable 27,680 (711,848) 116,948 (690,416) (48,121)
Finance receivables (221,181) (73,353) (191,451) 41,314 (90,194)
Inventory 10,448 (1,249,784) 419,914 349,320 135,307
Prepaid expenses, deposits
and other assets (85,541) (1,732) (38,325) 112,437 3,346
Accounts payable 336,437 843,680 (759,337) (498,967) (90,210)
Accrued expenses (90,016) (796,342) 589,454 (38,534) (355,679)
------------ ------------ ------------ ------------ ------------
Net cash used in operating
activities (11,900,521) (12,557,456) (9,228,899) (5,305,553) (6,338,595)

INVESTING ACTIVITIES
Purchase of property and
equipment (248,043) (358,033) (186,895) (449,531) (119,784)
Cash paid in connection with
Bayview acquisition -- (727,970) -- -- --
Cash received from the sale of
investment -- 1,471,140 -- -- --
Cash received from contract
settlement -- 674,649 -- -- --
Cash received from the sale of
assets held for sale 23,700 41,400 -- -- 23,700
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
investing activities (224,343) 1,101,186 (186,895) (449,531) (96,084)

See accompanying notes.

F-9

USA Technologies, Inc.

Consolidated Statements of Cash Flows (Continued)

FINANCING ACTIVITIES:
Net proceeds from the issuance
of Common Stock and the
exercise of Common Stock
Purchase Warrants and Options $ 8,004,436 $ 11,889,735 $ 9,930,879 $ 6,420,340 $ 4,145,954
Collection of subscriptions
receivable 300,000 1,013,400 35,000 35,723 300,000
Net proceeds from the issuance
of Senior Notes 3,305,790 -- 1,833,841 1,297,801 1,108,803
Repayment of long-term debt and
Senior Notes (406,695) (812,106) (557,441) (14,945) (203,370)
------------ ------------ ------------ ------------ ------------
Net cash provided by financing
activities 11,203,531 12,091,029 11,242,279 7,738,919 5,351,387
------------ ------------ ------------ ------------ ------------
Net increase (decrease) in cash
and cash equivalents (921,333) 634,759 1,826,485 1,983,835 (1,083,292)
Cash and cash equivalents at
beginning of year 3,019,214 2,384,455 557,970 2,097,881 3,019,214
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at end
of year $ 2,097,881 $ 3,019,214 $ 2,384,455 $ 4,081,716 $ 1,935,922
============ ============ ============ ============ ============

Supplemental disclosures of
cash flow information:

Cash paid for interest $ 1,187,833 $ 1,098,727 $ 1,479,984 $ 697,714 $ 648,123
============ ============ ============ ============ ============
Purchases of equipment with
long-term debt $ 197,450 $ -- $ -- $ -- $ --
============ ============ ============ ============ ============
Conversion of Convertible
Preferred Stock to Common Stock $ -- $ 12,390 $ 33,912 $ 7,788 $ --
============ ============ ============ ============ ============
Conversion of Cumulative
Preferred Dividends to Common
Stock $ -- $ 22,440 $ 56,050 $ 17,320 $ --
============ ============ ============ ============ ============

Subscriptions receivable $ 35,723 $ 300,000 $ 1,013,400 $ -- $ --
============ ============ ============ ============ ============
Conversion of Senior Notes and
Debenture to Common Stock $ 931,208 $ 2,840,978 $ 1,388,442 $ 259,135 $ 47,292
============ ============ ============ ============ ============
Issuance (cancellation) of
Common Stock in connection
with Bayview acquisition $ (322,000) $ 9,278,200 $ -- $ -- $ (322,000)
============ ============ ============ ============ ============
Beneficial conversion feature
related to Senior Notes $ 1,944,845 $ 1,981,007 $ 2,947,130 $ 46,322 $ 316,620
============ ============ ============ ============ ============
Purchase of investment through
the issuance of Common Stock $ -- $ -- $ 2,850,000 $ -- $ --
============ ============ ============ ============ ============
Issuance of Common Stock in
connection with Senior Note
Conversions $ -- $ -- $ 1,664,819 $ -- $ --
============ ============ ============ ============ ============

See accompanying notes.

F-10

USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BUSINESS

USA Technologies, Inc. (the "Company") was incorporated in the Commonwealth of
Pennsylvania in January 1992. The Company offers a suite of networked devices
and associated wireless non-cash payment, control/access management, remote
monitoring and data reporting services, as well as energy management products.
Our networked devices and associated services enable the owners and operators of
everyday, stand-alone, distributed assets, such as vending machines, personal
computers, copiers, faxes, kiosks and laundry equipment, the ability to remotely
monitor, control and report on the results of these distributed assets, as well
as the ability to offer their customers alternative cashless payment options. As
a result of the acquisition of the assets of Bayview Technology Group, LLC
("Bayview") in July 2003 (Note 4), our Company also manufactures and sells
energy management products which reduce the electrical power consumption of
various existing equipment, such as refrigerated vending machines and glass
front coolers, thus reducing the electrical energy costs associated with
operating this equipment.

2. ACCOUNTING POLICIES

REVERSE STOCK SPLIT

On February 7, 2006, our shareholders approved a 1-for-100 reverse stock split
of our Common Stock. The effective date of the reverse stock split was February
17, 2006. On the effective date of the reverse stock split, (i) each 100 shares
of outstanding Common Stock was reduced to one share of Common Stock; (ii) the
number of shares of Common Stock into which each outstanding warrant, or option
is exercisable was proportionately reduced on a 100-to-1 basis; (iii) the
exercise price of each outstanding warrant, or option was proportionately
increased on a 1-to-100 basis; (iv) the number of shares of Common Stock into
which each share of Series A Preferred Stock is convertible was reduced from 1
share to one-hundredth of a share, and each share is entitled to one-hundredth
of a vote rather than one vote per share as previously provided; (v) the
conversion rate of the accrued and unpaid dividends on the Series A Preferred
Stock was increased from $10.00 to $1,000.00 per share of Common Stock; (vi) and
the conversion price of each convertible senior note proportionately increased
on a 1-to-100 basis, and the number of shares into which each convertible senior
note would be convertible was decreased on a 100-to-1 basis. The number of our
authorized shares of Common Stock remains unchanged at 640,000,000. All of the
share numbers, share prices, exercise prices, and conversion prices have been
adjusted, on a retroactive basis, to reflect this 1-for-100 reverse stock split.

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 to recorded
asset values that might be necessary should the Company be unable to continue in
existence. The Company has incurred recurring operating losses of $15.5 million,
$21.4 million and $22.0 million during the fiscal years ended June 30, 2005,
2004 and 2003, respectively and a loss of $6.1 million (unaudited) during the
six months ended December 31, 2005. Cumulative losses from its inception through
June 30, 2005 amounted to approximately $112.9 million. Cumulative losses
through December 31, 2005 amounted to approximately $119.1 million (unaudited).
Losses have continued through February 2006 and are expected to continue during
fiscal year 2006. The Company's ability to meet its future obligations is
dependent upon the success of its products and services in the marketplace.
Until the Company's products and services can generate sufficient operating
revenues, the Company will be required to raise capital to meet its cash flow
requirements. These factors raise substantial doubt about the Company's ability
to continue as a going concern. Management believes that actions presently being
taken will allow for the Company to continue as a going concern. Such actions
include the generation of revenues from operations, the issuance of Common Stock
(Note 12), the exercise of outstanding Common Stock warrants (Note 13), the
issuance of debt (Note 10) and raising funds in the capital markets, as needed.

F-11

USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. ACCOUNTING POLICIES (CONTINUED)

INTERIM FINANCIAL INFORMATION

The consolidated financial statements and disclosures included herein for the
six months ended December 31, 2005 and 2004 are unaudited. These financial
statements and disclosures have been prepared by the Company in accordance with
U.S. generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by U.S. generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the six-month period ended December 31, 2005 are
not necessarily indicative of the results that may be expected for the fiscal
year ending June 30, 2006.

CONSOLIDATION

The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, Stitch Networks Corporation ("Stitch").
All significant intercompany accounts and transactions have been eliminated in
consolidation.

RECLASSIFICATION

Certain amounts in the prior year financial statements have been reclassified to
conform to the current year presentation.

USE OF ESTIMATES

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

CASH EQUIVALENTS

Cash equivalents represent all highly liquid investments with original
maturities of three months or less. Cash equivalents are comprised of
certificates of deposit and a money market fund. The Company maintains its cash
in bank deposit accounts, which may exceed federally insured limits at times.

FINANCE RECEIVABLES

The Company offers extended payment terms to certain customers for equipment
sales. Finance receivables are reported net of an allowance for credit losses.
The Company does not require collateral or other security to support credit
sales, but provides an allowance for credit losses and discontinues the accrual
of interest, if necessary, based on historical experience and specifically
identified risks. Finance receivables are carried at fair value and charged off
against the allowance for credit losses when management determines that recovery
is unlikely and the Company ceases collection efforts. The Company recognizes a
portion of the loan payments as interest income based on the effective interest
rate method in the accompanying Consolidated Statement of Operations.

INVENTORY

Inventory consists of finished goods and packaging materials. Through November
30, 2005, inventory was stated at the lower of cost (first-in, first-out basis)
or market. Due to the implementation of a new accounting system on December 1,
2005, the Company's inventory is stated at the lower of cost (average cost
basis) or market. The Company determined that the change in accounting principle
was not material and therefore have excluded the current and cumulative effect
of the change and pro forma disclosures.

F-12

USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. ACCOUNTING POLICIES (CONTINUED)

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost. Property and equipment are
depreciated on the straight-line basis over the estimated useful lives of the
related assets. Leasehold improvements are amortized on the straight-line basis
over the lesser of the estimated useful life of the asset or the respective
lease term.

GOODWILL AND INTANGIBLE ASSETS

Patents, trademarks and the non-compete agreement are carried at cost less
accumulated amortization, which is calculated on a straight-line basis over
their estimated economic life. The Company reviews intangible for impairment
whenever events or changes in circumstances indicate that they carrying amount
may not be recoverable. An asset is considered to be impaired when the sum of
the undiscounted future net cash flows expected to result from the use of the
asset and its eventual disposition is less than its carrying amount. The amount
of the impairment loss, if any, is measured as the difference between the net
book value of the asset and its estimated fair value.

SOFTWARE DEVELOPMENT COSTS

During May 2000, the Company reached technological feasibility for the
development of the multi-media e-Port(TM) product and related internal network
and, accordingly, the Company commenced capitalization of software development
costs related to this product and network. Costs capitalized through 2002 were
$5.3 million, which included capitalized interest of approximately $493,000
pursuant to SFAS No. 34, "Capitalization of Interest Costs".

F-13

USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. ACCOUNTING POLICIES (CONTINUED)

SOFTWARE DEVELOPMENT COSTS (CONTINUED)

During the fourth quarter of fiscal year 2002, the multi-media e-Port(TM) client
product and enhanced network became available for general release to the
Company's customers. During this quarter, management performed an evaluation of
the commercial success and preliminary market acceptance of the multi-media
e-Port(TM) and enhanced network and as a result of this evaluation the Company
determined that the estimated future revenues less costs to complete and dispose
of the multi-media e-Port client product was zero. Therefore, the Company wrote
down $2,663,000 of software development costs related to the multi-media e-Port
client product. The unamortized balance of the software development costs after
the impairment charge was amortized over an estimated useful life of two years
and was fully amortized during the year ended June 30, 2004. Accumulated
amortization was $5,326,186 at December 31 and June 30, 2005 and June 30, 2004
and $4,327,526 at June 30, 2003. Amortization expense was approximately $999,000
and $1,331,000 during the year ended June 30, 2004 and 2003, respectively. Such
amortization is reflected in cost of sales in the accompanying consolidated
statements of operations.

INVESTMENT

The Company accounts for investments in accordance with Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities". Management determines the appropriate classifications of
securities at the time of purchase and reevaluates such designation as of each
balance sheet date. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses reported as a separate component of
shareholders' equity in accumulated other comprehensive income (loss). If the
investment sustains an other-than-temporary decline in fair value, the
investment is written down to its fair value by a charge to earnings.

IMPAIRMENT OF LONG LIVED ASSETS

F-14

USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. ACCOUNTING POLICIES (CONTINUED)

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying value of cash and cash equivalents, accounts receivable, finance
receivables-current portion, other current assets, accounts payable and accrued
expenses reported in the consolidated balance sheets equal or approximate fair
value due to their short maturities. The fair value of the Company's long-term
Finance Receivables and Long-Term Debt approximates book value as such
instruments are at market rates currently available to the Company. The fair
value of the Senior Notes approximates the principal amount as such instruments
are at market rates currently available to the Company.

CONCENTRATION OF CREDIT RISK

Financial instruments that subject the Company to a concentration of credit risk
consist principally of cash and cash equivalents and accounts and finance
receivables. The Company maintains cash and cash equivalents with various
financial institutions. The Company performs periodic evaluations of the
relative credit standing of those financial institutions, and the Company's
policy is designed to limit exposure to any one institution. The Company's
accounts and finance receivables are net of an allowance for uncollectible
accounts. The Company does not require collateral or other security to support
credit sales, but provides an allowance for uncollectible accounts based on
historical experience and specifically identified risks. Accounts and finance
receivables are carried at fair value and charged off against the allowance for
uncollectible accounts when management determines that recovery is unlikely and
the Company ceases collection efforts. Approximately 36% and 39% of the
Company's accounts and finance receivables at June 30, 2005 and 2004,
respectively, were concentrated with two customers and 45% (unaudited) as of
December 31, 2005 was concentrated with two customers. Approximately 11% and 13%
of the Company's revenues for the year ended June 30, 2005 and 2004,
respectively, were concentrated with one customer and 35% was concentrated with
two customers (12% with one customer and 23% with another customer) for the year
ended June 30, 2003. Approximately 40% (unaudited) of the Company's revenues for
the six months ended December 31, 2005 were concentrated with two customers (10%
with one customer and 30% with another customer). The Company's customers are
principally located in the United States.

REVENUE RECOGNITION

Revenue from the sale of equipment is recognized on the terms of
freight-on-board shipping point, or upon installation and acceptance of the
equipment if installation services are purchased for the related equipment.
Transaction processing revenue is recognized upon the usage of the Company's
cashless payment and control network. License fees for access to the Company's
devices and network services are recognized on a monthly basis. Product revenues
are recognized for the sale of products from Company owned vending machines when
there is purchase and acceptance of product by the vending customer. In all
cases, revenue is only recognized when persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, the price is fixed
and determinable, and collection of the resulting receivable is reasonably
assured. The Company estimates an allowance for product returns at the date of
sale.

WARRANTY COSTS

The Company generally warrants its products for one to three years. Warranty
costs are estimated and recorded at the time of sale based on historical
warranty experience, if available.

SHIPPING AND HANDLING

Shipping and handling fees billed to our customers in connection with sales are
recorded as revenue. The costs incurred for shipping and handling of our product
are recorded as cost of sales.

F-15

USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. ACCOUNTING POLICIES (CONTINUED)

RESEARCH AND DEVELOPMENT EXPENSES

Research and development expenses are expensed as incurred. Research and
development expenses, which are included in general and administrative and
compensation expense in the consolidated statements of operations, were
approximately $1,364,000, $688,000, and $1,505,000 for the years ended June 30,
2005, 2004 and 2003, respectively, and $373,000 (unaudited) and $272,000
(unaudited) for the six months ended December 31, 2005 and 2004, respectively.

ACCOUNTING FOR STOCK OPTIONS

In December 2004, the FASB issued Statement of Financial Accounting Standards
No. 123(R), "Share-Based Payment" ("FAS 123(R)"), which establishes standards
for transactions in which an entity exchanges its equity instruments for goods
or services. This standard requires a public entity to measure the cost of
employee services received in exchange for an award of equity instruments based
on the grant-date fair value of the award.

On July 1, 2006, the Company adopted FAS123(R) using the Modified Prospective
Application method. For outstanding nonvested share-based awards as of July 1,
2006, compensation expense for the portion of the award for which the requisite
services have not been rendered will be recognized in the Statement of
Operations as the services are rendered. Compensation expense will be recognized
based on the grant-date fair value of the share-based award as previously
calculated under FAS 123 at the time of the grant, however, the Company is
required to adjust the compensation expense for expected forfeitures. Awards
granted subsequent to July 1, 2005 will be based on the guidance provided by FAS
123(R).

Due to the adoption of FAS 123(R), the Company has recognized $7,022 (unaudited)
of compensation expense related to a single grant of 3,000 common stock options
during the prior fiscal year for which were not fully vested as of the date of
adoption. The remainder of the outstanding common stock options were fully
vested as of the date of adoption. The effect of the adoption on the Company's
operating loss and net loss for the six months ended December 31, 2005 was
$7,022 (unaudited). There was no impact on cash flows or basic and diluted
earnings per share.

There were no stock options granted during the six months ended December 31,
2005 and 2004. The pro-forma disclosures required by FAS 123 have not been
included as the pro-forma compensation expense related to the vesting of options
during the six months ended December 31, 2004 was not considered to be material.

The pro-forma disclosures required by FAS 123 have not been included for the
years ended June 30, 2005 and 2004 as the fair value of the options granted were
not considered to be material.

As there were no stock options granted during the year ended June 30, 2003 and
all options granted through June 30, 2002 were vested as of that date, pro-forma
net loss and pro-forma net loss per common share under FAS 123 for the year
ended June 30, 2003 would be the same as reported by the Company under APB 25.

LOSS PER COMMON SHARE

Basic earnings per share is calculated by dividing income (loss) applicable to
common shares by the weighted average common shares outstanding for the period.
Diluted earnings per share is calculated by dividing income (loss) applicable to
common shares by the weighted average common shares outstanding for the period
plus the dilutive effect (unless such effect is anti-dilutive) of potential
common shares (approximately 1,250,000 shares as of June 30, 2005). No exercise
of stock options, purchase rights, stock purchase warrants, or the conversion of
senior notes, debentures, preferred stock, or cumulative preferred dividends was
assumed during the three fiscal years ended June 30, 2005 or the six months
ended December 31, 2005 and 2004 because the assumed exercise of these
securities would be anti-dilutive.

F-16

USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. ACCOUNTING POLICIES (CONTINUED)

RECENT ACCOUNTING PRONOUCEMENTS

In May 2005, the FASB issued Statement of Financial Accounting Standards No.
154, "Accounting Changes and Error Corrections-a replacement of APB No.20 and
FAS No.3" ("FAS 154"). FAS 154 changes the requirements for the accounting for
and reporting of a change in accounting principle and applies to all voluntary
changes in accounting principle. The standard also applies to changes required
by an accounting pronouncement in the unusual instance that the pronouncement
does not include specific transition provisions. FAS 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. The Company believes that implementing FAS 154 should
not have a material impact on its financial position and results of operations.

3. INVESTMENT IN JUBILEE INVESTMENT TRUST, PLC

During fiscal year 2004, the Company sold 1,669,091 of the Jubilee shares for
net proceeds of $1,471,140 and realized a gain of $603,480, with the cost of the
securities calculated by the specific identification method. An unrealized gain
of $3,080, $32,249 and $15,861 (unaudited) on the remaining shares held by the
Company is reflected in shareholders' equity as accumulated other comprehensive
income at June 30, 2005 and 2004 and December 31, 2004, respectively. An
unrealized loss of $12,167 (unaudited) on the remaining shares held by the
Company is reflected in shareholders' equity as accumulated other comprehensive
income at December 31, 2005. The 70,000 remaining shares are recorded at their
fair value of $39,467, $68,636 and $24,220 (unaudited) at June 30, 2005 and 2004
and December 31, 2005, respectively.

4. ACQUISITIONS

BAYVIEW TECHNOLOGY GROUP, LLC

On July 11, 2003, the Company acquired substantially all of the assets of
Bayview. Under the terms of the asset purchase agreement, the Company issued to
Bayview 200,000 shares of its restricted Common Stock and cash of $631,247 to
settle an obligation of Bayview. The definitive agreement also provided for the
Company to assume certain obligations under a royalty agreement expiring May 31,
2006. Approximately $112,000 and $169,000 of royalty expense was recorded during
the year ended June 30, 2005 and 2004, respectively, in connection with this
agreement. In connection with this transaction, the Company also agreed to issue
1,700 shares of its restricted Common Stock to a consultant who provided certain
services to the Company in connection with this acquisition.

The acquisition allows the Company to offer energy conservation products that
reduce the power consumption of various types of equipment, such as vending
machines, glass front coolers and other "always-on" appliances by allowing the
equipment to operate in power saving mode when the full power mode is not
necessary.

The acquisition cost of Bayview was $10,030,894, which principally was comprised
of the issuance of 200,000 shares of restricted Common Stock valued at
$9,200,000 and a cash payment of $631,247. The value of the 200,000 shares of
Common Stock was determined based on the average market price of the Company's
Common Stock over the two-day period before and after the definitive agreement
date of July 11, 2003. The purchase price also included acquisition related
costs of $199,647.

F-17

USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4. ACQUISITIONS (CONTINUED)

BAYVIEW TECHNOLOGY GROUP, LLC (CONTINUED)

The following table summarizes the final purchase price allocation to reflect
the fair values of the assets acquired and liabilities assumed at the date of
acquisition.

Current assets $ 7,628
Property and equipment 244,704
Intangible assets 9,449,000
Goodwill 329,562
------------
Total assets acquired $ 10,030,894
============

Of the $9,449,000 of Bayview acquired intangible assets, $7,424,000 was assigned
to patents that are subject to amortization over a 10-year period, $1,011,000
was assigned to a non-compete agreement that is subject to amortization over a
5-year period and $1,014,000 was assigned to trademarks and trade names that are
not subject to amortization.

Of the 200,000 shares issued to Bayview, 7,000 shares were placed into an escrow
account to be issued to one owner of Bayview if certain Bayview stock options
were exercised. This agreement called for these shares to be returned to the
Company if the Bayview stock options were not exercised. During the three months
ended September 30, 2004, the Company determined that the Bayview stock options
would not be exercised and the shares previously issued into escrow would be
cancelled. Therefore, the Company decreased the purchase price by $322,000 due
to the return and cancellation of the 7,000 shares held in escrow. The decrease
in the purchase price resulted in a reduction of goodwill and shareholders'
equity of $322,000 in the three months ended September 30, 2004.

The acquisition was accounted for using the purchase method and, accordingly,
the results of operations of Bayview have been included in the accompanying
consolidated statements of operations since the date of acquisition. Results of
operations of the Company for year ended June 30, 2004 would not have been
significantly different than reported had the acquisition taken place July 1,
2003 as the acquisition occurred on July 11, 2003. Pro-forma combined results
for the year ended June 30, 2003 would have been as follows had the acquisition
taken place July 1, 2002 - revenues of $8,487,190; net loss of $22,478,740; loss
applicable to common shares of $23,272,326; loss per common share (basic and
diluted) of $17.66.

STITCH NETWORKS CORPORATION

On May 14, 2002, USA Acquisition Corp., a wholly owned subsidiary of the Company
acquired Stitch pursuant to an Agreement and Plan of Merger by and among the
Company, USA Acquisition Corp., Stitch and the stockholders of Stitch.
Additionally, on May 14, 2002, the Company's shareholders voted to increase the
number of authorized shares of Common Stock to 150,000,000. The Company acquired
Stitch to strengthen its position as a leading provider of wireless remote
monitoring and cashless and mobile commerce solutions and to increase the
Company's revenue base. These revenues would include product revenues and
monthly service and transaction fees. Additionally, the acquisition of the
Stitch technology enhanced the Company's existing technology and complemented
the revenue and transaction processing revenue of the Company's existing
products. Certain Stitch personnel were believed to possess some key strengths
in several disciplines that the Company believed to be of great value in its
plans for growth.

F-18

USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4. ACQUISITIONS (CONTINUED)

STITCH NETWORKS CORPORATION (CONTINUED)

The acquisition was accounted for using the purchase method and, accordingly,
the results of the operations of Stitch have been included in the accompanying
consolidated statements of operations since the acquisition date. The purchase
price consisted of the issuance of 227,623 shares of the Company's Common Stock
in exchange for the outstanding shares of Stitch, and the issuance of warrants
to purchase up to 75,874 shares of the Company's Common Stock at $40 per share
at any time through June 30, 2002. The purchase price also included the
assumption of outstanding Stitch stock options that were converted into options
to purchase an aggregate of 24,753 shares of the Company's Common Stock at
$16.50 per share at any time prior to May 14, 2007, warrants to purchase up to
4,125 shares of the Company's Common Stock at $40 per share at any time through
June 30, 2002 and other acquisition related expenses. None of the warrants
issued in connection with the acquisition were exercised. A total of 48,000
shares of the Common Stock issued to the former stockholders of Stitch were held
in escrow to secure the former stockholder's indemnification obligations under
the Agreement and Plan of Merger. Such shares are subject to cancellation if
there is a breach of the indemnification (as defined). The value of the
marketable equity securities issued in connection with this acquisition was
determined based on the average market price of the Company's Common Stock over
a two-day period before and after April 10, 2002, the date the definitive
agreement to acquire Stitch was entered into. Such valuation was in accordance
with EITF 99-12: "Determination of the Measurement Date for the Market Price of
Acquirer Securities Issued in a Purchase Business Combination".

The following table summarizes the final purchase price allocation of the fair
value of the assets and liabilities assumed at the date of acquisition:

Current assets $ 2,710,000
Property and equipment 1,700,000
Goodwill 7,946,000
Intangibles 2,920,000
Current liabilities (1,554,000)
Long-term debt (Note 9) (3,976,000)
-----------
$ 9,746,000
===========

In connection with the acquisition, the Company determined that it would vacate
office space previously occupied by Stitch. Accordingly, in connection with this
acquisition, the Company accrued the remaining lease exit costs relating to the
lease in the amount of approximately $354,000 as part of the cost of purchasing
Stitch. In November 2003, Stitch and the lessor of the office space reached an
agreement that required Stitch to pay the lessor $55,000 as consideration to
release Stitch from any further obligations under the lease. In addition, a
security deposit of approximately $9,000 was retained by the lessor.
Accordingly, the difference between estimated lease exit costs recorded in
conjunction with the acquisition and actual consideration paid was recorded as a
reduction of goodwill in the amount of $290,000 during the year ended June 30,
2004.

F-19

USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4. ACQUISITIONS (CONTINUED)

INTANGIBLE ASSETS

Amortization expense relating to all acquired intangible assets was $1,236,600,
$1,208,668, and $292,000 during the years ended June 30, 2005, 2004 and 2003,
respectively, and $618,300 (unaudited) and $618,301 (unaudited) for the six
months ended December 31, 2005 and 2004, respectively. The intangible asset
balance and related accumulated amortization consisted of the following:

DECEMBER 31, 2005
(UNAUDITED)
-----------------------------------------------
GROSS CARRYING ACCUMULATED NET CARRYING
AMOUNT AMORTIZATION VALUE
-----------------------------------------------
Intangible assets:
Trademarks $ 2,064,000 $ (380,625) $ 1,683,375
Patents 9,294,000 (2,511,922) 6,782,078
Non-Compete agreement 1,011,000 (499,521) 511,479
-----------------------------------------------
Total $12,369,000 $(3,392,068) $ 8,976,932
===============================================

JUNE 30, 2005
-----------------------------------------------
GROSS CARRYING ACCUMULATED NET CARRYING
AMOUNT AMORTIZATION VALUE
-----------------------------------------------
Intangible assets:
Trademarks $ 2,064,000 $ (328,125) $ 1,735,875
Patents 9,294,000 (2,047,222) 7,246,778
Non-Compete agreement 1,011,000 (398,421) 612,579
-----------------------------------------------
Total $12,369,000 $(2,773,768) $ 9,595,232
===============================================

JUNE 30, 2004
-----------------------------------------------
GROSS CARRYING ACCUMULATED NET CARRYING
AMOUNT AMORTIZATION VALUE
-----------------------------------------------
Intangible assets:
Trademarks $ 2,064,000 $ (223,125) $ 1,840,875
Patents 9,294,000 (1,117,822) 8,176,178
Non-Compete agreement 1,011,000 (196,221) 814,779
-----------------------------------------------
Total $12,369,000 $(1,537,168) $10,831,832
===============================================

At December 31 and June 30, 2005 and June 30, 2004, the expected amortization of
the intangible assets is as follows: $1,200,000 per year in fiscal year 2006
through fiscal year 2008, $1,000,000 per year in fiscal year 2009 through fiscal
year 2012, $740,000 in fiscal year 2013 and $22,000 in fiscal year 2014. The
weighted average useful life of these intangible assets is 9.55 years at
December 31 and June 30, 2005 and June 30, 2004.

F-20

USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5. PROPERTY AND EQUIPMENT

Property and equipment, at cost, consist of the following:

DECEMBER 31
USEFUL 2005 JUNE 30
LIVES (UNAUDITED) 2005 2004
-----------------------------------------------
Computer equipment and
purchased software 3 years $2,636,931 $2,536,990 $2,206,759
Vending machines and
related components 7 years 4,427 4,427 4,427
Control systems 3 years 79,567 479,530 479,530
Furniture and equipment 5-7 years 731,129 816,537 745,341
Leasehold improvements Lease term 112,472 74,576 59,575
Vehicles 5 years 29,066 29,066 --
-----------------------------------
3,593,592 3,941,126 3,495,632
Less accumulated depreciation (2,672,609) (3,256,199) (2,892,679)
-----------------------------------
$ 920,983 $ 684,927 $ 602,953
===================================

Assets under capital lease totaled approximately $6,000, $113,000, and $180,000
as of June 30, 2005, 2004 and 2003, respectively and $6,000 (unaudited) and
$113000 (unaudited) as of December 31, 2005 and 2004. Capital lease amortization
of approximately $2,000, $20,000, $46,000, $3,000 (unaudited) and $3,000
(unaudited) included in depreciation expense for the years ended June 30, 2005,
2004 and 2003, and for the six months ended December 30, 2005 and 2004,
respectively.

6. ACCRUED EXPENSES

Accrued expenses consist of the following:

DECEMBER 31
2005 JUNE 30
(UNAUDITED) 2005 2004
----------- -----------------------
Accrued compensation and related
sales commissions $ 387,111 $ 404,485 $ 444,302
Accrued interest 451,243 445,495 376,350
Accrued professional fees 103,051 151,220 192,633
Accrued taxes and filing fees 96,122 97,860 108,362
Accrued consulting fees 10,000 122,500 104,438
Accrued rent -- -- 66,662
Advanced customer billings 100,342 65,385 58,811
Accrued other 292,949 192,407 217,810
----------- -----------------------
$ 1,440,818 $1,479,352 $1,569,368
=========== =======================

F-21

USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. RELATED PARTY TRANSACTIONS

During the years ended June 30, 2005, 2004, and 2003 and the six months ended
December 31, 2005 and 2004, the Company incurred approximately $284,000,
$391,000, $305,000, $123,000 (unaudited), and $132,000 (unaudited),
respectively, in connection with legal services provided by a member of the
Company's Board of Directors. At June 30, 2005 and 2004 and December 31, 2005,
approximately $25,000, $32,000, and $21,000 (unaudited), respectively, of the
Company's accounts payable and accrued expenses were due to this Board member.
During the year ended June 30, 2005, the Company incurred approximately $72,600
in connection with consulting services provided by another member of the
Company's Board of Directors. At December 31 and June 30, 2005, approximately
$13,000 (unaudited) and $73,000 of the Company's accrued expenses were due to
this Board member. During the years ended June 30, 2005, 2004 and 2003 and the
six months ended December 31, 2005, certain Board members and executives
participated in various debt or equity offerings of the Company for total
investments of approximately $244,642, $266,250, $661,500, and $53,333
(unaudited), respectively. There was no participation by Board members in debt
or equity offerings during the six months ended December 31, 2004.

8. LONG-TERM DEBT

Long-term debt consists of the following:

DECEMBER 31
2005 JUNE 30
(UNAUDITED) 2005 2004
----------- -----------------------
Bank facility $ -- $ -- $ 170,987
Working capital loans -- -- 46,765
Software licensing and other 172,879 186,768 28,881
Capital lease obligations -- 1,057 6,549
----------- -----------------------
172,880 187,825 253,182
Less current portion 105,810 100,646 240,764
----------- -----------------------
$ 67,069 $ 87,179 $ 12,418
=========== =======================

The bank facility (the "Facility") was assumed as part of the fiscal year 2002
acquisition of Stitch and was used to fund the purchase of vending machines
placed at locations where Kodak film products were sold. Borrowings were made
from time to time under the Facility, with repayment schedules set at the time
of each borrowing, including equal monthly payments over 36 months and an
interest rate based upon 495 basis points over the three year U.S. Treasury
Notes. The Company granted the bank a security interest in the vending machines.
Repayment of principal was insured by a Surety Bond issued by a third-party
insurer in exchange for an initial fee paid by the Company. The Facility matures
during the year ending June 30, 2005, due to the termination of the vending
placement agreement and the sale of the vending machines (Note 14).

The Company also assumed working capital loans in connection with of the Stitch
acquisition. These loans were collaterized by certain assets of Stitch and had
an interest rate of 6.75% per annum. The working capital loans were payable on
July 8, 2002, however, during fiscal year 2003, the bank extended the due date
on these loans on several occasions under forbearance agreements. On November 6,
2003, the Company reached an agreement with the bank to repay these loans in
monthly installments through October 2004. The Company repaid these loans during
fiscal year 2005.

During fiscal year 2005, the Company entered into a loan agreement in connection
with software licensing for approximately $170,000, due in eight equal quarterly
payments of $21,229 through March 2007 at an interest rate of 5.32%.

F-22

USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9. INCOME TAXES

At June 30, 2005 and 2004, the Company had net operating loss carryforwards of
approximately $98,428,000 and $84,097,000, respectively, to offset future
taxable income expiring through approximately 2025. In addition, the Company had
a capital loss carryforward of approximately $1,264,000 as of June 30, 2005 and
2004 that expires in 2009. At June 30, 2005 and 2004, the Company recorded a net
deferred tax asset of approximately $39,143,000 and $34,365,000, respectively,
which was reduced by a valuation allowance of the same amount as the realization
of the deferred tax asset is not likely, principally due to the lack of earnings
history.

The timing and extent to which the Company can utilize future tax deductions in
any year may be limited by provisions of the Internal Revenue Code regarding
changes in ownership of corporations. Stitch had net operating loss
carryforwards of approximately $11,800,000 at the acquisition date. Such net
operating loss carryforwards are limited under the same provisions as to the
amount available to offset future taxable income and to the extent used in any
given year, will result in decreases to goodwill as opposed to income tax
expense.

The deferred tax assets arose primarily from the use of different accounting
methods for financial statement and income tax reporting purposes as follows:

JUNE 30
2005 2004
------------------------------
Deferred tax assets:
Net operating loss and capital loss
carryforwards $ 37,508,000 $ 32,447,000
Deferred research and development costs 373,000 548,000
Software development costs 1,297,000 1,513,000
Other 780,000 790,000
------------------------------
39,958,000 35,298,000
Deferred tax liabilities:
Intangibles (815,000) (933,000)
------------------------------
39,143,000 34,365,000
Valuation allowance (39,143,000) (34,365,000)
------------------------------
Deferred tax assets, net $ -- $ --
==============================

F-23

USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10. SENIOR NOTES

The Company has issued six series of Senior Notes each with an annual interest
rate of 12% and are convertible into shares of the Company's Common Stock for
which there were outstanding obligations as of December 31, 2005, June 30, 2005
or June 30, 2004. These Senior Notes were scheduled to mature on December 31,
2004 ("2004 Senior Notes"), December 31, 2005 ("2005 Senior Notes"), December
31, 2006 ("2006 Senior Notes"), December 31, 2007 ("2007 Senior Notes"),
December 31, 2008 ("2008 Senior Notes"), and December 31, 2009 ("2009 Senior
Notes"). The Company has also issued three series of Senior Notes each with an
annual interest rate of 10% and are convertible into shares of the Company's
Common Stock for which there were outstanding obligations as of December 31,
2005 or June 30, 2005. These Senior Notes were scheduled to mature on June 30,
2007 ("2007-B Senior Notes"), December 31, 2008 ("2008-C Senior Notes"), and
December 31, 2010 ("2010 Senior Notes").

The 2004 Senior Notes were issued pursuant to a private placement offering
authorized during the year ended June 30, 2002. The 2004 Senior Notes were
convertible into shares of Common Stock at $40 per share at any time through
December 31, 2004. Certain shareholders of the Company who held warrants to
purchase shares of Common Stock exercisable at $50 per share were offered the
opportunity to cancel those warrants and receive an equivalent number of new
warrants exercisable at $10 per share if they invested in the 2004 Senior Note
offering. The fair value of the new warrants issued and the intrinsic value of
the beneficial conversion feature associated with the 2004 Senior Notes created
debt discount that was allocated to equity and was amortized to interest expense
through December 31, 2004. During January 2005, the Company repaid $131,152 of
these Senior Notes and agreed with the holders of the remaining $320,000 of
these notes to extend the maturity date to March 31, 2005. In exchange for
extending the maturity date, the Company authorized a reduction of the
conversion price to $10 resulting in the recording of $32,000 as debt discount
related to the intrinsic value of this beneficial conversion feature, which was
amortized through March 31, 2005. The maturity date was further extended to June
30, 2006 in April 2005, with no other terms being modified.

The 2005 Senior Notes were issued pursuant to a private placement offering
authorized during the year ended June 30, 2002 that included the issuance of 200
shares of Common Stock for each $10,000 of face amount of notes issued. The 2005
Senior Notes were convertible into shares of Common Stock at $20 per share at
any time through December 31, 2005. The fair value of the Common Stock issued
and the intrinsic value of beneficial conversion feature associated with the
2005 Senior Notes created debt discount that was allocated to equity and was
amortized to interest expense through December 31, 2005. During the years ended
June 30, 2005, 2004 and 2003 and six months ended December 31, 2005, $21,000,
$514,359, $489,608, and $130,000 (unaudited), respectively, of the 2005 Senior
Notes were converted into 1,050, 25,717, 24,482 and 6,500 (unaudited) shares of
Common Stock, respectively.

In March 2003, the Company granted to the holders of Senior Notes due December
31, 2003 ("2003 Senior Notes") and the 2004 Senior Notes the right to extend the
maturity date of these Senior Notes to December 31, 2006 and December 31, 2007,
respectively, in exchange for reducing the conversion rates from $125 to $20 per
share for the 2003 Senior Notes and from $40 to $20 per share for the 2004
Senior Notes. This offer expired on December 31, 2003. During the years ended
June 30, 2004 and 2003, Senior Note holders agreed to exchange an aggregate of
$2,303,953 and $6,911,397, respectively, of 2003 Senior Notes and 2004 Senior
Notes for new notes maturing in 2006 and 2007. The exchange of the 2003 Senior
Notes and 2004 Senior Notes to the 2006 Senior Notes and 2007 Senior Notes was
deemed a significant modification of the terms of the Senior Notes and,
accordingly, the exchanged 2003 Senior Notes and 2004 Senior Notes have been
extinguished. The unamortized debt discount and other issuance costs remaining
on the 2003 Senior Notes and 2004 Senior Notes exchanged and extinguished were
expensed ($318,915 and $1,521,654 for the years ended June 30, 2004 and 2003,
respectively) and have been reported as a loss on debt modification in the
Consolidated Statements of Operations. Included in the loss on debt modification
for the year ended June 30, 2004 is $277,279 that occurred during the three
months ended September 30, 2003. During fiscal year 2003 and 2004, the Company's
share price was often greater than the conversion price at times when Senior
Note holders exchanged their 2003 and 2004 Senior Notes for 2006 and 2007 Senior
Notes. The intrinsic value of this beneficial conversion feature created debt
discount that was allocated to equity and is being amortized to interest expense
through December 31, 2006 and 2007, respectively.

F-24

USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10. SENIOR NOTES (CONTINUED)

During the year ended June 30, 2004 and the six months ended December 31, 2005,
$1,478,000 and $10,000 (unaudited), respectively, of the 2006 Senior Notes were
converted into 73,900 and 500 (unaudited) shares of Common Stock, respectively.
During the years ended June 30, 2005 and 2004 and the six month period ended
December 31, 2005, $34,381, $848,619 and $10,000 (unaudited), respectively, of
the 2007 Senior Notes were converted into 1,719, 42,430 and 500 (unaudited)
shares of Common Stock, respectively.

On November 3, 2004, the Company authorized the issuance of up to $2,500,000 of
the 2007-B Senior Notes convertible into shares of Common Stock at $10 per share
and maturing on June 30, 2007. Interest is payable quarterly at a rate of 10%
per annum. Participation in the Senior Note offering was offered to the holders
of certain warrants issued in conjunction with the payment of interest on Senior
Notes (see "Additional Interest Warrants" in Note 13), holders of the warrants
issued in conjunction with the 2004-A Private Placement Offering, and to an
accredited investor and current warrant holder. Due to the limited number of
authorized shares available for issuance, the terms of the offering provided
that all of such warrant holder's warrants would be cancelled if they
participated in the offering. Through the last day of the offering, the Company
received $1,550,789 in gross proceeds from sales of the 2007-B Senior Notes and
56,370 shares underlying the warrants were cancelled. As the Company's share
price on the day of issuance of each of these Senior Notes was greater than the
conversion price of $10, the Company recorded the intrinsic value of this
beneficial conversion feature totaling $518,645 as additional debt discount,
which is being amortized to interest expense through the maturity date of these
Senior Notes. During the year ended June 30, 2005 and the six month period ended
December 31, 2005, $460,827 and $11,135 (unaudited), respectively, of the 2007-B
Senior Notes were converted into 46,082 and 1,113 (unaudited), respectively,
shares of Common Stock.

On February 23, 2005, the Company authorized the issuance of up to $1,755,000 of
Senior Notes, due April 30, 2005 to accredited investors (the "2005-B Senior
Notes") with interest payable at a rate of 10% per annum. In connection with
this offering, the Company paid a due diligence fee of $27,000 to an accredited
investor. The Company received $1,755,000 in gross proceeds from the 2005-B
Senior Note offering. On March 22, 2005, the Company authorized an offer whereby
the holders of the 2005-B Senior Notes had the right through April 30, 2005 to
exchange their 2005-B Senior Notes for 2010 Senior Notes convertible into shares
of Common Stock at $10 per share maturing on December 31, 2010. Interest on the
2010 Senior Notes is payable quarterly at 10% per annum. During March 2005, all
of the 2005-B Senior Notes were exchanged for 2010 Senior Notes. As the
Company's share price on the day of issuance of each of these Senior Notes was
greater than the conversion price of $10, the Company recorded the intrinsic
value of this beneficial conversion feature totaling $1,394,200 as additional
debt discount, which is being amortized to interest expense through the maturity
date of these Senior Notes. During the year ended June 30, 2005 and the six
month period ended December 31, 2005, $415,000 and $98,000 (unaudited),
respectively, of the 2010 Senior Notes were converted into 41,500 and 9,800
(unaudited) shares, respectively, of Common Stock.

On March 22, 2005, the Company authorized an offer to the holders of the Senior
Notes whereby those holders may elect to extend the maturity date of their
Senior Notes (the "Senior Note Extension Offer"). Holders of 2005 Senior Notes
may extend their maturity to December 31, 2008 and holders of 2006 Senior Notes
may elect to extend their maturity to December 31, 2009. Principal on these
Senior Notes extended will not be prepaid prior to April 1, 2006. During the
year ended June 30, 2005, these Senior Note holders agreed to exchange an
aggregate of $1,920,651 and $1,520,000, respectively, of 2005 Senior Notes and
2006 Senior Notes for new notes maturing in 2008 and 2009. The exchange of the
2005 Senior Notes and 2006 Senior Notes to the 2008 Senior Notes and 2009 Senior
Notes was not deemed a significant modification of the terms of the Senior Notes
and, accordingly, the unamortized debt discount and other issuance costs
remaining on the 2005 Senior Notes and 2006 Senior Notes exchanged will be
amortized to interest expense through the maturity date of the new notes.

F-25

USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10. SENIOR NOTES (CONTINUED)

During October 2005, the Company approved a non-dilutive private placement
offering of up to $2,333,333 of principal amount 10% Convertible Senior Notes
due December 31, 2008 (the "2008-C Senior Notes") to the holders of the 2005-D
Common Stock Warrants, which were received in connection with an offering that
commenced on March 22, 2005 and ended on April 15, 2005 ("2005-D Private
Placement Offering") in which accredited investors purchased Common Stock at $15
per share. The 2008-C Senior Note offering terminated on November 30, 2005. The
holders of the 2005-D Common Stock Warrants had the right to purchase the
principal amount of the 2008-C Senior Notes equal to the number of 2005-D Common
Stock Warrants multiplied by $10. Upon the investment in the offering, the
corresponding 2005-D Common Stock Warrants were cancelled, resulting in a
non-dilutive offering. Interest on the 2008-C Senior Notes shall be paid on a
quarterly basis in arrears at the rate of 10% per annum with the outstanding
principal amount of the 2008-C Senior Notes together with all accrued and unpaid
interest thereon to be paid in full no later than December 31, 2008. The 2008-C
Senior Notes are convertible at any time into Common Stock at the rate of $10
per share. For each $10,000 investment in the 2008-C Senior Notes, the
subscriber received a special purchase right to purchase up to 1,000 shares of
Common Stock at $20 per share at any time on or before December 31, 2008. The
Company issued $544,944 of the 2008-C Senior Notes during the six months ended
December 31, 2005 and issued special purchase rights to acquire up to 54,494
shares of Common Stock at $20 per share. During January 2006, the holder of each
special purchase right agreed to exchange the purchase rights for warrants to
purchase shares of Common Stock at $20 at anytime prior to December 31, 2008.
The fair value of the purchase rights issued in conjunction with the 2008-C
Senior Notes created debt discount totaling $184,542, which is being amortized
to interest expense through the maturity date of these Senior Notes.

During October 2005, the Company approved a non-dilutive private placement
offering of up to $1,000,000 of Notes ("Bridge Notes") due January 6, 2006 with
interest payable on the due date at a rate of 10% per annum. The offering
terminated on November 30, 2005. The Company issued $770,000 of the Bridge
Notes. As all of the aforementioned 2008-C Senior Notes were not subscribed on
the due date of the Bridge Notes, the Bridge Notes were automatically exchanged
on January 6, 2006, in accordance with the original terms of Bridge Notes, for a
like principal amount of new Convertible Senior Notes due December 31, 2010
("2010-B Senior Notes"). Interest on the 2010-B Senior Notes is payable
quarterly at 10% per annum and is convertible into Common Shares at $10 per
share. In addition, for each $10,000 of 2010-B Senior Notes issued in exchange
for the Bridge Notes, the Company also issued special purchase rights that
enable the holder to purchase up to 1,000 shares of Common Stock at $20 per
share through December 31, 2008. The Company issued $770,000 of the 2010-B
Senior Notes and issued special purchase rights to acquire up to 77,000 shares
of Common Stock at $20 per share. During January 2006, the holder of each
special purchase right agreed to exchange the purchase rights for warrants to
purchase shares of Common Stock at $20 at anytime prior to December 31, 2008.

During the year ended June 30, 2003 and through December 31, 2003, the holders
of the Senior Notes had the right to purchase shares of the Company's Common
Stock at $20 per share using quarterly interest payments that were due in lieu
of a cash payment of the interest. Additionally, for each share purchased, the
note holder was entitled to receive a warrant to purchase one share of the
Company's Common Stock at $20 per share exercisable at any time through June 30,
2004 (extended to August 30, 2004). For the years ended June 30, 2004, and 2003,
10,612 and 23,150 shares of Common Stock, respectively, were issued for payment
of interest due of $212,238 and $448,647, respectively. The fair value of the
warrants issued and the beneficial conversion feature related to the $20 per
share rate used to convert the interest to shares of Common Stock totaled
$266,258 and $411,603 for the years ended June 30, 2004 and 2003, respectively,
and have been recorded as additional interest expense. There were no shares of
Common Stock issued for payment of interest on the Senior Notes during the year
ended June 30, 2005.

F-26

USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10. SENIOR NOTES (CONTINUED)

The Company executed a Securities Purchase Agreement, during the year ended June
30, 2002, with an investment company for the purchase of $325,000 (as amended)
of a 9.75% Convertible Debenture (the Debenture) due August 2004. Interest on
the Debenture was payable monthly in arrears and the Debenture was convertible,
in whole or in part, at a price equal to the lesser of $100 or 72% (80% prior to
June 18, 2002) of the lowest closing bid price of the Company's Common Stock
during the 20 day period prior to the conversion. At the various times of
conversion, the Company issued to the Debenture holder warrants to purchase an
amount of Common Stock equal to ten times the number of shares issued upon the
conversion of the Debenture. The warrants were exercisable at the same
conversion price as the Debenture. Due to the significance of the beneficial
conversion features associated with this instrument, the entire $325,000 of
proceeds was allocated to the warrants and was allocated to equity. During the
year ended June 30, 2003, the investment company converted $243,000 of the
Debenture, resulting in the issuance of 24,672 shares of Common Stock. The
investment company also exercised warrants resulting in the issuance of 174,654
and 72,068 shares of Common Stock and generating net cash proceeds of $1,591,296
and $630,000 during the years ended June 30, 2004 and 2003.

A summary of the activity for the Senior Notes for the years ended June 30, 2005
and 2004 and the six months ended December 31, 2005 follows:

Senior Notes Maturing December 31,
----------------------------------------------------------
2003 2004 2005 2006
(2003 Senior (2004 Senior (2005 Senior (2006 Senior
Notes) Notes) Notes) Notes)
----------------------------------------------------------

Face amount of Senior Notes
Balance, June 30, 2003 $ 1,486,000 $ 1,279,105 $ 3,526,150 $ 3,215,500
Repayment (10,000) -- -- --
2003 and 2004 Senior Notes
exchanged for 2006 and 2007
Senior Notes (1,476,000) (827,953) -- 1,476,000
Conversions to Common Stock -- -- (514,359) (1,478,000)
----------------------------------------------------------
Balance, June 30, 2004 -- 451,152 3,011,791 3,213,500

Issued for cash -- -- -- --
Repayment -- (131,152) (12,735) --
2004 Senior Notes exchanged
for June 30, 2006 Senior
Notes -- (320,000) -- --
2005 and 2006 Senior Notes
exchanged for 2008 and 2009
Senior Notes -- -- (1,920,651) (1,520,000)
2005-B Senior Notes issued
for cash and subsequently
exchanged for 2010 Senior
Notes -- -- -- --
Conversions to Common Stock -- -- (21,000) --
----------------------------------------------------------
Balance, June 30, 2005 $ -- $ -- $ 1,057,405 $ 1,693,500

2008-C Issued for cash -- -- -- --
Bridge Notes converted into
2010-B Senior Notes -- -- -- --
Repayment -- -- (17,143) --
Conversions to Common Stock -- -- (130,000) (10,000)
----------------------------------------------------------
Balance, December 31, 2005
(Unaudited) $ -- $ -- $ 910,262 $ 1,683,500
==========================================================

Senior Notes Maturing December 31,
------------------------------------------------------
2007 2008 2009 2010
(2007 Senior (2008 & 2008-C (2009 Senior (2010 Senior
Notes) Senior Notes) Notes) Notes)
------------------------------------------------------

Face amount of Senior Notes
Balance, June 30, 2003 $ 3,040,063 $ -- $ -- $ --
Repayment -- -- -- --
2003 and 2004 Senior Notes
exchanged for 2006 and 2007
Senior Notes 827,953 -- -- --
Conversions to Common Stock (848,619) -- -- --
------------------------------------------------------
Balance, June 30, 2004 3,019,397 -- -- --

Issued for cash -- -- -- --
Repayment -- -- -- --
2004 Senior Notes exchanged
for June 30, 2006 Senior
Notes -- -- -- --
2005 and 2006 Senior Notes
exchanged for 2008 and 2009
Senior Notes -- 1,920,651 1,520,000 --
2005-B Senior Notes issued
for cash and subsequently
exchanged for 2010 Senior
Notes -- -- -- 1,755,000
Conversions to Common Stock (34,381) -- -- (415,000)
------------------------------------------------------
Balance, June 30, 2005 $ 2,985,016 $ 1,920,651 $ 1,520,000 $ 1,340,000

2008-C Issued for cash -- 544,944 -- --
Bridge Notes converted into
2010-B Senior Notes -- -- -- 770,000
Repayment -- -- -- --
Conversions to Common Stock (10,000) -- -- (98,000)
------------------------------------------------------
Balance, December 31, 2005
(Unaudited) $ 2,975,016 $ 2,465,595 $ 1,520,000 $ 2,012,000
======================================================

Senior Notes Maturing
June 30,
---------------------------
2006 2007
(2007-B Senior
Notes)
---------------------------

Face amount of Senior Notes
Balance, June 30, 2004 $ -- $ --

Issued for cash -- 1,550,790
2004 Senior Notes exchanged
for June 30, 2006 Senior
Notes 320,000 --
Conversions to Common Stock -- (460,827)
---------------------------
Balance, June 30, 2005 $ 320,000 $ 1,089,962

Conversions to Common Stock -- (11,135)
---------------------------
Balance, December 31, 2005
(Unaudited) $ 320,000 $ 1,078,827
==========================

F-27

USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10. SENIOR NOTES (CONTINUED)

Senior Notes Maturing December 31,
---------------------------------------------------------
2003 2004 2005 2006
(2003 Senior (2004 Senior (2005 Senior (2006 Senior
Notes) Notes) Notes) Notes)
---------------------------------------------------------

Debt discount and other
issuance costs
Unamortized costs at
June 30, 2002 $ (750,295) $(2,928,567) $ (323,988) $ --
Debt discount (created) reduced
for (issuances) rescissions (2) 169,365 (2,933,392) (1,287,749)
Amortization and write-off
of unamortized costs upon
conversions to Common Stock 448,934 1,004,748 1,104,157 183,580
Loss on modification for
exchanges Of 2003 and 2004
Senior Notes for 2006 and 2007
Senior Notes 221,130 1,300,524 -- --
---------------------------------------------------------
Unamortized costs at
June 30, 2003 (80,233) (453,930) (2,153,223) (1,104,169)
Debt discount from issuances -- -- -- (1,155,475)
Amortization and write-off of
unamortized costs upon
conversions to Common Stock 32,803 133,180 1,052,231 1,329,255
Loss on modification for
exchanges of 2003 and 2004
Senior Notes for 2006 and
2007 Senior Notes 47,430 271,485 -- --
---------------------------------------------------------
Unamortized costs at
June 30, 2004 -- (49,265) (1,100,992) (930,389)

Debt discount from issuance -- -- 358,659 308,052
Amortization and write off
of unamortized costs upon
conversions to Common
Stock -- 49,265 617,089 328,148
---------------------------------------------------------
Unamortized costs at
June 30, 2005 $ -- $ -- $ (125,244) $ (294,189)

Debt discount from issuance -- -- -- --
Amortization and write off
of unamortized costs upon
conversions to Common
Stock -- -- 125,244 99,220
---------------------------------------------------------
Unamortized costs at
December 31, 2005 $ -- $ -- $ -- $ (194,969)
=========================================================
Senior Notes reflected in the
Consolidated Balance Sheet:
June 30, 2004
Face amount $ -- $ 451,152 $ 3,011,791 $ 3,213,500
Unamortized costs -- (49,265) (1,100,992) (930,389)
---------------------------------------------------------
$ -- $ 401,887 $ 1,910,799 $ 2,283,111
=========================================================
June 30, 2005
Face amount $ -- $ -- $ 1,057,405 $ 1,693,500
Unamortized costs -- -- (125,244) (294,189)
---------------------------------------------------------
$ -- $ -- $ 932,161 $ 1,399,311
=========================================================
December 31, 2005 (Unaudited)
Face amount $ -- $ -- $ 910,262 $ 1,683,500
Unamortized costs -- -- -- (194,969)
---------------------------------------------------------
$ -- $ -- $ 910,262 $ 1,488,531
=========================================================

Senior Notes Maturing December 31,
-------------------------------------------------------
2007 2008 2009 2010
(2007 Senior (2008 & 2008-C (2009 Senior (2010 Senior
Notes) Senior Notes) Notes) Notes)
-------------------------------------------------------

Debt discount and other
issuance costs
Unamortized costs at
June 30, 2002 $ -- $ -- $ -- $ --
Debt discount (created) reduced
for (issuances) rescissions (621,459) -- -- --
Amortization and write-off
of unamortized costs upon
conversions to Common Stock 24,607 -- -- --
Loss on modification for
exchanges Of 2003 and 2004
Senior Notes for 2006 and 2007
Senior Notes -- -- -- --
-------------------------------------------------------
Unamortized costs at
June 30, 2003 (596,852) -- -- --
Debt discount from issuances (825,532) -- -- --
Amortization and write-off of
unamortized costs upon
conversions to Common Stock 827,064 -- -- --
Loss on modification for
exchanges of 2003 and 2004
Senior Notes for 2006 and
2007 Senior Notes -- -- -- --
-------------------------------------------------------
Unamortized costs at
June 30, 2004 (595,320) -- -- --

Debt discount from issuance -- (358,659) (308,052) (1,394,200)
Amortization and write off
of unamortized costs upon
conversions to Common
Stock 174,933 23,911 16,213 376,778
-------------------------------------------------------
Unamortized costs at
June 30, 2005 $ (420,387) $ (334,748) $ (291,839) $(1,017,422)

Debt discount from issuance -- (230,864) -- --
Amortization and write off
of unamortized costs upon
conversions to Common
Stock 85,204 54,368 32,427 160,167
-------------------------------------------------------
Unamortized costs at
December 31, 2005 $ (335,183) $ (511,244) $ (259,412) $ (857,255)
=======================================================
Senior Notes reflected in the
Consolidated Balance Sheet:
June 30, 2004
Face amount $ 3,019,397 $ -- $ -- $ --
Unamortized costs (595,320) -- -- --
-------------------------------------------------------
$ 2,424,077 $ -- $ -- $ --
=======================================================
June 30, 2005
Face amount $ 2,985,016 $ 1,920,651 $ 1,520,000 $ 1,340,000
Unamortized costs (420,387) (334,748) (291,839) (1,017,422)
-------------------------------------------------------
$ 2,564,629 $ 1,585,903 $ 1,228,161 $ 322,578
=======================================================
December 31, 2005 (Unaudited)
Face amount $ 2,975,016 $ 2,465,595 $ 1,520,000 $ 2,012,000
Unamortized costs (335,183) (511,244) (259,412) (857,255)
-------------------------------------------------------
$ 2,639,833 $ 1,954,351 $ 1,260,588 $ 1,154,745
=======================================================

F-28

USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10. SENIOR NOTES (CONTINUED)

Senior Notes Maturing
June 30,
------------------------
2006 2007
(2007-B Senior
Notes)
------------------------
Debt discount and other
issuance costs
Unamortized costs at
June 30, 2004 $ -- $ --
Debt discount from issuance -- (518,645)
Amortization and write off
of unamortized costs upon
conversions to Common
Stock -- 225,415
------------------------
Unamortized costs at
June 30, 2005 $ -- $ (293,230)
Debt discount from issuance -- --
Amortization and write off
of unamortized costs upon
conversions to Common
Stock -- 75,551
------------------------
Unamortized costs at
December 31, 2005 (Unaudited) $ -- $ (217,679)
========================

Senior Notes reflected in the
Consolidated Balance Sheet:
June 30, 2005
Face amount $ 320,000 $ 1,089,962
Unamortized costs -- $ (293,230)
-------------------------
$ 320,000 $ 796,732
=========================
Senior Notes reflected in the
Consolidated Balance Sheet:
December 31, 2005
Face amount $ 320,000 $ 1,078,827
Unamortized costs -- $ (217,679)
-------------------------
$ 320,000 $ 861,148
=========================

F-29

USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10. SENIOR NOTES (CONTINUED)

Aggregate maturities of Senior Notes as of June 30, 2005 are as follows:

2006 $ 1,377,405
2007 2,783,462
2008 2,985,016
2009 1,920,651
2010 1,520,000
2011 1,340,000
-----------
$11,926,534
Less discount 2,777,059
-----------
$ 9,149,475
===========

Aggregate maturities of Senior Notes as of December 31, 2005 are as follows:

2006 $ 2,913,762
2007 4,053,843
2008 2,465,595
2009 1,520,000
2010 2,012,000
-----------
$12,965,200
Less discount 2,375,742
-----------
$10,589,458
===========

11. PREFERRED STOCK

The authorized Preferred Stock 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 one-hundredth of a vote and is convertible at any time into
one-hundredth of a share of Common Stock. Each share of Common Stock entitles
the holder to one voting right. Series A Preferred Stock provides for an annual
cumulative dividend of $1.50 per share payable to the shareholders of record in
equal parts on February 1 and August 1 of each year.

Cumulative unpaid dividends at June 30, 2005 and 2004 and December 31, 2005,
amounted to $7,461,293, $6,677,180, and $7,836,030 (unaudited), respectively.
Cumulative unpaid dividends are convertible into common shares at $1000 per
common share at the option of the shareholder. During the years ended June 30,
2004 and 2003 and the six months ended December 31, 2005, certain holders of the
Preferred Stock converted 1,750, 4,790, and 1,100 (unaudited) shares,
respectively, into 17, 47, and 11 (unaudited) shares of Common Stock,
respectively. Certain of these shareholders also converted cumulative preferred
dividends of $22,440, $56,050, and $17,320 (unaudited), respectively, into 22,
56, and 17 (unaudited) shares of Common Stock during the years ended June 30,
2004 and 2003 and the six months ended December 31, 2005, respectively. There
were no conversions of preferred stock or cumulative preferred dividends during
the year ended June 30, 2005. The Series A Preferred Stock may be called for
redemption at the option of the Board of Directors at any time on and after
January 1, 1998 for a price of $11.00 per share plus payment of all accrued and
unpaid dividends. No such redemption has occurred as of June 30, 2004 or 2005 or
December 31, 2005. 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-30

USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12. COMMON STOCK

The Company's Board of Directors has authorized various Common Stock private
placement offerings. Activity for these offerings during the years ended June
30, 2005, 2004 and 2003 and the six months ended December 31, 2005 is as
follows:

o On December 13, 2005, the Company entered into a Stock Purchase Agreement with
Wellington Management Company, LLP, a large Boston-based institutional investor,
on behalf of certain of its clients ("Wellington"). Under this agreement, the
Company sold to Wellington 400,000 shares of Common Stock for $10 per share for
an aggregate of $4,000,000.

o On March 22, 2005, the Company authorized the issuance of up to 233,333 shares
of Common Stock at $15 per share to accredited investors through April 15, 2005
(the "2005-D Private Placement Offering"). For shares purchased under the
offering, the investors also received warrants to purchase an equal number of
shares of Common Stock exercisable at $15 per share at any time prior to
December 31, 2005. The Company issued 233,333 shares of Common Stock and 233,333
Common Stock warrants under the 2005-D Private Placement Offering, for total
gross proceeds of $3,500,000. Included in this amount are subscriptions
receivable of $35,723 and $233,850 at June 30, 2005, of which $35,723 was
received in July 2005. The Company incurred $73,103 of stock issuance costs in
connection with the 2005-D Private Placement Offering.

o A Common Stock purchase agreement with an accredited investor was initially
executed in June 2004 and then replaced in August 2004 with a new agreement (the
"Common Stock Agreement"). Pursuant to the Common Stock Agreement, the investor
agreed to purchase shares of the Company's Common Stock, provided that the
aggregate purchase price did not exceed $7,500,000. Under the Common Stock
Agreement, the Company had the right at any time to require the investor to
purchase Common Stock from the Company at the lower of: (i) $30 per share; or
(ii) 90% of the closing bid price per share on the date prior to the date of the
delivery by the Company to the investor of notice of his obligation to purchase.
The Company could require the investor to purchase shares under the Common Stock
Agreement only if the shares had been registered by the Company for resale under
the Act. Additionally, the shares were only available for purchase for a period
of one year from the date the shares were registered under the Act. During any
calendar month, the investor could not be required by the Company to purchase
Common Stock for an aggregate purchase price in excess of $700,000. The Company
registered 350,000 shares that were effective August 13, 2004. The Company
agreed to pay the investor a due diligence fee of $45,000 in connection with
this transaction. During the year ended June 30, 2005, the Company issued
349,504 shares of Common Stock under the Common Stock Agreement for total gross
proceeds of $3,560,620. In addition to the due diligence fee, the Company
incurred $152,624 of other stock issuance costs in connection with the Common
Stock Agreement during the year ended June 30, 2005.

On April 4, 2005, the Company and the same investor entered into a new Common
Stock Purchase Agreement ("2005 Common Stock Agreement") that terminates August
11, 2007. Pursuant to the 2005 Common Stock Agreement, the investor agreed to
purchase shares of the Company's Common Stock, provided that the aggregate
purchase price does not exceed $10,000,000. Under the 2005 Common Stock
Agreement, the Company has the right at any time to require the investor to
purchase Common Stock from the Company at the lower of: (i) $30 per share; or
(ii) 90% of the closing bid price per share on the date prior to the date of the
delivery by the Company to the investor of notice of his obligation to purchase.
During any calendar month, the investor cannot be required by the Company to
purchase Common Stock for an aggregate purchase price in excess of $800,000. The
Company can require the investor to purchase shares under the Common Stock
Agreement only if the shares have been registered by the Company for resale
under the Act. Although the Company filed a registration statement related to
this agreement that included 205,000 shares of Common Stock and was effective
May 13, 2005 and a registration statement that included 360,000 shares of Common
Stock and was effective February 14, 2006, the Company has the right in the
future, if necessary, to register additional shares in order to ensure that a
sufficient number of shares are available for purchase by the investor. The
Company issued 5,000 shares of Common Stock ($90,000) to the investor as a due
diligence/commitment fee in connection with this agreement. In addition to the
due diligence fee, the Company incurred $48,542 of other stock issuance costs in
connection with the 2005 Common Stock Agreement during the year ended June 30,
2005. During the year ended June 30, 2005, the Company issued 30,000 shares of
Common Stock under the 2005 Common Stock Agreement for total gross proceeds of
$420,000. During the six months ended December 31, 2005, the Company issued
169,998 shares of Common Stock under the 2005 Common Stock Agreement for total
gross proceeds of $2,052,690.

F-31

USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12. COMMON STOCK (CONTINUED)

o The 2004-A Private Placement Offering was authorized during fiscal year 2004
for the issuance of common stock at $15 per share. During the year ended June
30, 2004, there were 282,908 shares issued generating net proceeds of
$4,207,080. Included in this amount are subscriptions receivable of $300,000 at
June 30, 2004, which were collected by the Company during July 2004.
Participants in the offering were granted one warrant to purchase shares of
Common Stock for every two shares of Common Stock purchased and were exercisable
at $20 per share through December 31, 2004.

o The 2003-A Private Placement Offering was authorized during fiscal year 2003
for the issuance of common stock at $10 per share. During the years ended June
30, 2004 and 2003, there were 43,770 and 786,360 shares, respectively, issued
generating net proceeds of $432,754 and $7,792,133, respectively. The Company
also issued 6,950 and 18,543 shares under this offering during the years ended
June 30, 2004 and 2003, respectively, for services rendered by consultants
amounting to $185,000 and $397,889, respectively.

o During the year ended June 30, 2004, 200,100 shares of Common Stock were
issued to accredited investors at $25 per share in four private placement
offerings generating net proceeds of $5,002,500.

o During the year ended June 30, 2003, 105,714 shares of Common Stock were
issued to accredited investors at per share prices ranging from $7 to $12 in
five private placement offerings generating net proceeds of $957,925. These
investors were also granted warrants in connection with these private placement
offerings to purchase 188,928 shares of Common Stock at per share prices ranging
from $7 to $15 and expiring from May 2003 to October 2007.

On March 17, 2005, the Company's shareholders approved an increase in the number
of authorized shares of Common Stock from 475,000,000 to 560,000,000. On
December 13, 2005, the Company's shareholders approved an increase in the number
of authorized shares of Common Stock from 560,000,000 to 640,000,000.

During the six months ended December 31, 2005, warrants were exercised to
purchase 36,800 shares of Common Stock at a share price of $10, generating
proceeds of $368,000. During the year ended June 30, 2005, warrants were
exercised to purchase 109,942 shares of Common Stock at a share price of $10,
generating net proceeds of $1,094,658. During the year ended June 30, 2004,
warrants and stock options were exercised to purchase 321,793 shares of Common
Stock at share prices ranging from $7 to $20, generating proceeds of $2,800,472.
During the year ended June 30, 2003, warrants were exercised to purchase 176,864
shares of Common Stock at $10 per share, generating proceeds of $1,768,651.

In July 2003, the Company and the Company's Chief Executive Officer ("CEO")
amended the terms of his Executive Employment Agreement (expiring June 2005).
Under the terms of the previous Executive Employment Agreement, the CEO would
have been granted seven percent (non-dilutive) of all the then issued and
outstanding shares of the Company's Common Stock in the event a "USA
Transaction" (as defined) occurs, which among other events includes a change in
control of the Company. The amended terms of the Executive Employment Agreement,
eliminates the seven percent (non-dilutive) right to receive Common Stock upon a
"USA Transaction" and granted the CEO an aggregate of 140,000 shares of Common
Stock (subject to adjustment for stock splits or combinations) in the event a
"USA Transaction" occurs. In exchange for the amendment of these terms, the
Company issued the CEO 105,000 shares of its Common Stock valued at $4,620,000
or $44 per share representing the quoted market price of the Company's Common
Stock on the date the amendment was entered into and the shares were granted. In
connection with this amendment, the CEO also entered into a lock-up agreement
pursuant to which he cannot sell 25,000 of these shares for a one-year period
and 80,000 of these shares for a two-year period. The CEO is not required to pay
any additional consideration for these shares of Common Stock. At the time of a
"USA Transaction", all of the 140,000 shares are automatically deemed to be
issued and outstanding, and will be entitled to be treated as any other issued
and outstanding shares of Common Stock. These shares are irrevocable and fully
vested, have no expiration date, and are not affected by the termination of the
CEO for any reason whatsoever.

F-32

USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12. COMMON STOCK (CONTINUED)

In addition to the shares issued to the CEO, there were 8,005, 9,207, and 38,950
shares of Common Stock issued to certain employees and officers for services and
for professional services during the years ended June 30, 2005, 2004, and 2003,
respectively. The value of these shares was based upon the fair value of the
Company's Common Stock on the dates the shares were granted and totaled
$107,670, $237,040, and $847,742 for the years ended June 30, 2005, 2004, and
2003 respectively. The value of these warrants and options was based upon their
fair value on dates they were granted and totaled $181,000.

During the year ended June 30, 2004, 5,000 shares of Common Stock were issued to
an accredited investor as settlement resulting from a non-registration event as
defined under the subscription agreement dated November 4, 2002.

As of June 30, 2005, the Company had reserved shares of Common Stock for future
issuance for the following:

Exercise of Common Stock Options 20,099
Exercise of Common Stock Warrants 321,320
Conversions of Preferred Stock and cumulative
Preferred Stock dividends 12,688
Conversions of Senior Notes 733,824
Issuance under 2005 Common Stock Agreement 165,000
Issuance under 2004-B Stock Compensation Plan 1,086
---------
Total shares reserved for future issuance 1,254,017
=========

As of December 31, 2005 (unaudited), the Company had reserved shares of Common
Stock for future issuance for the following:

Exercise of Common Stock Options 20,099
Exercise of Common Stock Warrants 214,436
Conversions of Preferred Stock and cumulative
Preferred Stock dividends 13,052
Conversions of Senior Notes 751,093
Issuance under 2005 Common Stock Agreement 1
Issuance under 2004-B Stock Compensation Plan 386
---------
Total shares reserved for future issuance 999,067
=========

F-33

USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13. COMMON STOCK WARRANTS AND OPTIONS

Common Stock Warrant activity for the years ended June 30, 2005, 2004 and 2003
and the six months ended December 31, 2005 was as follows:

WARRANTS
--------
Outstanding at June 30, 2002 68,398
Issued 762,861
Exercised (188,942)
Cancelled (21,040)
--------
Outstanding at June 30, 2003 621,277
Issued 188,739
Exercised (320,604)
Cancelled (154,840)
--------
Outstanding at June 30, 2004 334,571
Issued 233,333
Exercised (109,942)
Cancelled (136,642)
--------
Outstanding at June 30, 2005 321,320
Exercised (36,800)
Cancelled (70,084)
--------
December 31, 2005 (unaudited) 214,436
========

All Common Stock warrants outstanding as of December 31 and June 30, 2005 were
exercisable. The following table shows exercise prices and expiration dates for
warrants outstanding as of December 31, 2005 (unaudited):

WARRANTS EXERCISE PRICE
OUTSTANDING PER SHARE EXPIRATION DATE
------------------------------------------------------------------
126,449 $15 December 31, 2005
750 $12.50 June 30, 2006
71,429 $7 October 26, 2007
12,000 $91 August 29, 2010
3,779 $100 April 24, 2011
29 $103 April 30, 2011
-------
214,436
=======

The following table shows exercise prices and expiration dates for warrants
outstanding as of June 30, 2005:

WARRANTS EXERCISE PRICE
OUTSTANDING PER SHARE EXPIRATION DATE
------------------------------------------------------------------
233,333 $15 December 31, 2005
750 $12.50 June 30, 2006
71,429 $7 October 26, 2007
12,000 $91 August 29, 2010
3,779 $100 April 24, 2011
29 $103 April 30, 2011
-------
321,320
=======

F-34

USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13. COMMON STOCK WARRANTS AND OPTIONS (CONTINUED)

In conjunction with the 2005-D Private Placement Offering (Note 12), the Company
issued warrants to purchase 233,333 shares of Common Stock and are exercisable
at $15 per share at any time prior to December 31, 2005. During October 2005,
the Company approved a temporary reduction in the exercise price of the 2005-D
Common Stock Warrants from $15 to $10 per share through November 30, 2005. The
Company received $368,000 and issued 36,800 shares of Common Stock as a result
of the exercise of the 2005-D Common Stock Warrants at $10 per share.

Prior to June 30, 2004, the Company issued warrants to purchase approximately
37,000 shares of Common Stock to holders of the Senior Notes who elected to
receive quarterly interest on their Notes in shares of Common Stock, in lieu of
a cash payment of interest ("Original Interest Warrants"). These warrants were
exercisable at $20 per share through August 30, 2004. In June 2004, the Company
issued additional warrants to the Senior Note holders who elected to receive
interest in shares of Common Stock ("Additional Interest Warrants"). One
additional warrant was issued for each warrant previously issued with an
exercise price of $20 per share through December 31, 2004.

The Company reduced the exercise price of the Original Interest Warrants to $15
per share and extended their expiration through October 29, 2004. In addition,
for each Original Interest Warrant exercised through October 4, 2004, the
expiration date of one Additional Interest Warrant was extended to June 30, 2005
from December 31, 2004, and the exercise price was reduced to $15 per share
through June 30, 2005. The Company also reduced the exercise price of the
Additional Interest Warrants to $15 per share through November 30, 2004 and then
retroactively to $10 per share through December 31, 2004. Investors who had
previously exercised Original Interest Warrants and Additional Interest Warrants
at $15 per share were refunded the equivalent of $5 per share in recognition of
the reduction of the exercise price to $10 per share that occurred after the
warrants were exercised. Such refunds amounted to $40,971. During the year ended
June 30, 2005, Original Interest Warrants and Additional Interest Warrants were
exercised to purchase 8,074 shares of Common Stock. Such exercises generated net
proceeds of approximately $75,000, after considering the above-mentioned refund.

As of October 25, 2004, the Company reduced the exercise price of the Common
Stock warrants issued as part of the 2004-A Private Placement Offering to $10
per share, from $20 per share, through November 30, 2004. On December 13, 2004,
the exercise price of $10 per share was retroactively extended to December 31,
2004. During the year ended June 30, 2005, the Company received $765,833 upon
the exercise of 76,583 of these warrants at an exercise price of $10 per share.

During the year ended June 30, 2003, the Company's Board of Directors granted
warrants to purchase shares of Common Stock to the holders of all Senior Notes
at the time of grant. The grant equaled 75% of the face amount of the Senior
Notes and totaled 103,060 warrants exercisable at $10 per share through October
31, 2003. An additional warrant was granted for each of the initial warrants
exercised on the same terms and as a result, an additional 79,433 warrants to
purchase Common Stock were granted.

The Company's Board of Directors has granted options to employees and Board
members to purchase shares of Common Stock at prices that were at or above fair
market value on the dates the options were granted. The option term and vesting
schedule were established by the contracts under which the options were granted.

In April 2004, the Company's Board of Directors established and authorized the
2004-A Stock Compensation Plan for use in compensating employees, directors and
consultants through the issuance of shares of Common Stock of the Company. There
were 5,000 shares authorized under the 2004-A Plan. As of June 30, 2005 and
2004, there were 5,000 and 5,000 shares, respectively, issued under the 2004-A
Plan. On October 29, 2004, the Board of Directors approved the 2004-B Stock
Compensation Plan to allow up to 5,000 shares of Common Stock to be available
for issuance to future or current employees, directors or consultants of the
Company. As of December 31 and June 30, 2005, there were 4,613 and 3,913
(unaudited) shares, respectively, issued under the 2004-B Plan.

F-35

USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13. COMMON STOCK WARRANTS AND OPTIONS (CONTINUED)

Common Stock Option activity during the years ended June 30, 2005, 2004 and 2003
was as follows. No activity occurred during the six months ended December 31,
2005.

OPTIONS EXERCISE PRICE
OUTSTANDING PER SHARE
------------------------------
Outstanding at June 30, 2002 52,905 $16.50-$500
Cancelled or expired (23,830) $40-$500
-----------------------------
Outstanding at June 30, 2003 29,075 $16.50-$250
Granted 3,000 $30
Exercised (2,239) $16.50
Cancelled or expired (10,861) $16.50-$250
-----------------------------
Outstanding at June 30, 2004 18,975 $16.50-$200
Granted 3,000 $20
Cancelled or expired (1,876) $30
-----------------------------
Outstanding at June 30, 2005 and
December 31, 2005 (unaudited) 20,099 $16.50-$200
=============================

The following table shows exercise prices and the weighted average remaining
contractual life for options outstanding as of June 30, 2005. All Common Stock
Options outstanding as of June 30, 2005 were exercisable except for the options
granted at an exercise price of $20 per share, none of which were exercisable as
of June 30, 2005.

OPTIONS EXERCISE PRICE WEIGHTED AVERAGE REMAINING
OUTSTANDING PER SHARE CONTRACTUAL LIFE (YEARS)
-----------------------------------------------------------------------------
14,658 $ 16.50 1.87
3,000 $ 20 2.95
1,125 $ 30 1.31
1,250 $100 0.85
66 $200 0.96
-------
20,099
=======

The following table shows exercise prices and the weighted average remaining
contractual life for options outstanding as of December 31, 2005. All Common
Stock Options outstanding as of December 31, 2005 were exercisable except for
the options granted at an exercise price of $20 per share, 375 of which were
exercisable as of December 31, 2005.

OPTIONS EXERCISE PRICE WEIGHTED AVERAGE REMAINING
OUTSTANDING PER SHARE CONTRACTUAL LIFE (YEARS)
-----------------------------------------------------------------------------
14,658 $ 16.50 1.36
3,000 $ 20 2.45
1,125 $ 30 0.81
1,250 $100 0.35
66 $200 0.45
-------
20,099
=======

F-36

USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13. COMMON STOCK WARRANTS AND OPTIONS (CONTINUED)

During the year ended June 30, 2005, stock options were granted to one
individual to purchase 3,000 shares of Common Stock of the Company at $20 per
share. The fair value of the stock options granted, $9.00, was estimated on the
date of the grant using the Black-Scholes option-pricing model with the
following assumptions.

Dividend yield 0%
Expected stock price volatility 0.922
Risk-free interest rate 4.0%
Expected life, in years 2

During the year ended June 30, 2004, stock options were granted to one
individual to purchase 3,000 shares of Common Stock of the Company at $30 per
share. The fair value of the stock options granted, $16, was estimated on the
date of the grant using the Black-Scholes option-pricing model with the
following assumptions.

Dividend yield 0%
Expected stock price volatility 0.971
Risk-free interest rate 4.0%
Expected life, in years 3

14. TERMINATION OF KODAK VENDING PLACEMENT AGREEMENT

The Company's wholly owned subsidiary, Stitch, entered into a vending placement
agreement whereby Stitch agreed to purchase film and cameras directly from
Eastman Kodak Company and vending machines from a supplier. Stitch placed the
vending machines at numerous locations throughout the United States under
agreements negotiated with the location owners and derived revenues amounting to
$0, $358,484, $1,092,167, $0 (unaudited), and $0 (unaudited), for the years
ended June 30, 2005, 2004 and 2003 and the six months ended December 31, 2005
and 2004, respectively.

During 2003, Stitch alleged that the supplier and another party to the vending
agreement breached the vending agreement and the supplier and the other party to
the vending agreement alleged that Stitch had breached the vending agreement.
Effective December 31, 2003, the parties finalized a settlement of this matter
which resulted in the termination of the vending agreement. Under the settlement
agreement, the Company received a payment from Kodak of approximately $675,000.
The agreement also provides for the Company to receive payments of $300 per
vending machine from the supplier of the vending machines, as the machines are
pulled from service at the supplier's sole cost and expense. Upon receipt of the
$300 per machine, title to the vending machine transfers from Stitch to the
supplier. Through December 30, 2004, the Company had received $65,100 for these
machines. The agreement also provided that the supplier cancel a $124,000
obligation of Stitch for the purchase of vending machines.

This termination agreement resulted in a gain of $429,204 during the year ended
June 30, 2004 and is reflected as Other income in the June 30, 2004 Consolidated
Statement of Operations. This gain is comprised of the payment from Kodak of
approximately $675,000 plus the cancellation of Stitch's obligation to the
supplier of the vending machines of approximately $124,000 less a write-down of
the carrying value of vending machines of approximately $367,000 and a net
write-off of amounts due to and from Kodak of $3,000. The remaining vending
machines are reported as assets held for sale in the June 30, 2004, as it was
determined that the plan of sale criteria in FAS 144 was met in the termination
agreement, at which time depreciation of these assets ceased. During the year
ended June 30, 2005, the Company wrote off the remaining value of the vending
machines that had not been sold during the year as a loss on contract settlement
totaling $42,300.

F-37

USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15. RETIREMENT PLAN

The Company's Savings and Retirement Plan (the "Plan") allows employees who have
attained the age of 21 and have completed six months of service to make
voluntary contributions up to a maximum of 15% of their annual compensation, as
defined in the Plan. Through June 30, 2000, the Plan did not provide for any
matching contribution by the Company, however, starting at the beginning of
fiscal year 2001, the Company amended the Plan to include a Company matching
contribution up to 10% of an employee's compensation. Effective January 1, 2003,
the matching contribution changed to a dollar-for-dollar matching contribution
on salary deferrals up to 3% of the employee's compensation then a fifty-cents
on the dollar matching contribution on salary deferrals from 3% to 5%. The
Company's contribution for the years ended June 30, 2005, 2004 and 2003 and the
three months ended December 30, 2005 and 2004, was approximately $96,000,
$78,000, $67,000, $53,000 (unaudited), and $55,000 (unaudited), respectively.

16. COMMITMENTS AND CONTINGENCIES

In connection with the acquisition of the energy conservation product line in
July 2003 from Bayview Technology Group, LLC, the Company assumed leases for
6,384 square feet of space located in Denver, Colorado used for administrative
functions, sales activities and product warehousing associated with our energy
management products. The lease terms extended through June 30, 2005 and provided
for escalating rent payments ending at $8,200 per month. The lease provided for
additional rent for a prorated share of operating costs for the entire facility.

In December 2004, the Company entered into a lease for 2,837 square feet of
space located in Denver, Colorado to replace the above-mentioned lease used for
administrative functions, sales activities and product warehousing associated
with our energy management products. The lease terms extend through May 31, 2009
and provide for five months of free rent followed by rent payments of $1,200 per
month and escalating payments beginning on June 1, 2006. The lease provides for
additional rent for a prorated share of operating costs for the entire facility.

F-38

USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

16. COMMITMENTS AND CONTINGENCIES (CONTINUED)

Rent expense under operating leases was approximately $447,000, $450,000, and
$292,000 during the years ended June 30, 2005, 2004 and 2003, respectively, and
$256,000 (unaudited) and $222,000 (unaudited) for the six months ended December
31, 2005 and 2004, respectively. Future minimum lease payments subsequent to
June 30, 2005 under capital and noncancellable operating leases are as follows:

CAPITAL OPERATING
LEASES LEASES
--------------------------

2006 $ 1,060 $ 432,000
2007 -- 438,000
2008 -- 447,000
2009 -- 452,000
2010 -- 220,000
--------------------------
Total minimum lease payments $ 1,060 $1,989,000
==========================
Less amount representing interest 3
--------
Present value of net minimum lease payments 1,057
Less current obligations under capital leases 1,057
--------
Obligations under capital leases, less
current portion $ 0
========

The agreement also grants to Mr. Jensen in the event a "USA Transaction" (as
defined below) occurs after the date thereof an aggregate of 140,000 shares of
Common Stock subject to adjustment for stock splits or combinations ("Jensen
Shares"). The Jensen Shares have not been reserved for issuance by the Company
and are not reflected or included in the number of issued and outstanding shares
of the Company on a fully diluted basis in this Form S-1. Mr. Jensen is not
required to pay any additional consideration for the Jensen Shares. At the time
of any USA Transaction, all of the Jensen Shares are automatically deemed to be
issued and outstanding immediately prior to any USA Transaction, and are
entitled to be treated as any other issued and outstanding shares of Common
Stock in connection with such USA Transaction.

The term USA Transaction is defined as (i) the acquisition of fifty-one percent
or more of the then outstanding voting securities entitled to vote generally in
the election of Directors of the Company by any person, entity or group, or (ii)
the approval by the shareholders of the Company of a reorganization, merger,
consolidation, liquidation, or dissolution of the Company, or the sale,
transfer, lease or other disposition of all or substantially all of the assets
of the Company. The Jensen Shares are irrevocable and fully vested, have no
expiration date, and will not be affected by the termination of Mr. Jensen's
employment with the Company for any reason whatsoever. If a USA Transaction
shall occur at a time when there are not a sufficient number of authorized but
unissued shares of Common Stock, then the Company shall as a condition of such
USA Transaction promptly take any and all appropriate action to make available a
sufficient number of shares of Common Stock. In the alternative, the Company may
structure the USA Transaction so that Mr. Jensen would receive the same amount
and type of consideration in connection with the USA Transaction as any other
holder of Common Stock.

F-39

USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

16. COMMITMENTS AND CONTINGENCIES (CONTINUED)

Various legal actions and claims occurring in the normal course of business are
pending or may be instituted or asserted in the future against the Company. The
Company does not believe that the resolution of these matters will have a
material effect on the financial position or results of operations of the
Company.

In February 2005, a Complaint was filed against the Company by Swartz Private
Equity, LLC ("Swartz") alleging that the Company breached various agreements
entered into with Swartz in August and September 2000 in connection with the
so-called equity line of credit provided by Swartz to the Company. The Complaint
requests money damages of $4,350,381 representing the alleged value of the
warrants currently held by or claimed to be due to Swartz, money damages of
$196,953 representing a termination fee allegedly due in connection with the
termination of the agreements, and unspecified money damages relating to the
alleged breach of the rights of first refusal.

The Company's response to the Complaint denied any liability to Swartz and
asserted various counterclaims against Swartz that seek money damages and other
affirmative relief against Swartz. The Company's response, among other things,
states that the entire transaction is void and unenforceable because Swartz had
failed to register as a broker-dealer under applicable Federal and state
securities laws as required in order for Swartz to be engaged in the business of
providing equity line products. In September 2005, the Company served various
discovery requests upon Swartz that has been partially responded to by Swartz as
of the date hereof.

The Company intends to vigorously defend this action and to prosecute its
counterclaims. In particular, the Company believes it has a substantial defense
to the Complaint because Swartz was not registered as a broker-dealer, and
intends to vigorously pursue this defense. At the present time, the Company is
unable to estimate the possible range of damages that the Company might incur
should this action be resolved against the Company.

F-40

USA TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

17. SUBSEQUENT EVENTS (UNAUDITED)

On January 1, 2006, the Company repaid all of the Senior Notes that matured on
December 31, 2005 for a total repayment of $910,262.

On January 6, 2006, the Company automatically exchanged $770,000 of Bridge Notes
for a like amount of 2010-B Senior Notes, as more fully described in Note 10.

On February 17, 2006, the Company entered into a Common Stock Purchase Agreement
(the "2006 Common Stock Agreement") with Mr. Illes, an accredited investor. Mr.
Illes agreed to purchase shares of the Company's Common Stock with an aggregate
purchase price not to exceed $15,000,000. Under the 2006 Common Stock Agreement,
the Company has the right at any time to require Mr. Illes to purchase Common
Stock from the Company at the lower of: (i) $30.00 per share; or (ii) 90% of the
closing bid price per share on the date prior to the date of the delivery by the
Company to Mr. Illes of notice of his obligation to purchase. The Company can
require Mr. Illes to purchase shares only if the shares have been registered by
the Company for resale under the Act. The agreement also states that no
additional shares shall be registered under the 2005 Common Stock Agreement.
During any calendar month, Mr. Illes cannot be required by the Company to
purchase Common Stock for an aggregate purchase price in excess of $800,000. The
Company has the right in the future, if necessary, to register additional shares
in order to ensure that a sufficient number of shares are available for purchase
by Mr. Illes. The 2006 Common Stock Agreement terminates June 30, 2009. On
February 23, 2006, the Company filed a registration statement for 1,000,000
shares of Common Stock under the 2006 Common Stock Agreement. No shares have
been issued under this Agreement.

F-41

PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS

ITEM 13. 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 $ 1,190.91
Printing and Engraving Expenses $ 3,809.09
Accounting Fees and Expenses $15,000.00
Legal Fees and Expenses $15,000.00
------- ----------
Total $35,000.00

ITEM 14. 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. Our By-laws substantively
provide that we will indemnify our 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. Our By-laws eliminate the
personal liability of the directors to the fullest extent permitted by Section
1713 of the BCL.

ITEM 15. 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 USA without
registration under the Securities Act of 1933, as amended ("Act"):

PRIVATE PLACEMENTS

During the 2003 fiscal year and through August 7, 2003, the Company issued an
aggregate of 856,011 shares to 398 accredited investors at $10 per share for an
aggregate of $8,560,113. Of the $8,560,130, $8,345,674 were for cash proceeds
and $214,439 were for services rendered or to be rendered. The offer and sales
of the shares was exempt from registration under Rule 506 promulgated under
Section 4(2) of the Act. All of the investors were either pre-existing security
holders or business associates. The offer and sale thereof did not involve any
general advertising or solicitation and the securities contained appropriate
restrictive legends under the Act. In connection with the offering, we paid
$64,000 to Sloan Securities, Inc., a broker-dealer, in connection with the
80,000 shares sold by Sloan on our behalf. We have agreed to use our best
efforts to register all of these shares for resale under the Act for a period of
one year.

In March 2003, we issued a warrant to La Jolla Cove Investors, Inc. to purchase
up to 90,000 shares at $10 per share. The warrants expire as follows: 30,000 on
the three month anniversary of the date of the initial prospectus; 30,000 on the
6 month anniversary of the date of the initial prospectus; and 30,000 on the 9
month anniversary of the date of the initial prospectus. The warrants may not be
exercised without our consent on any date on which the closing price of our
shares is less than $40. We have agreed to register the shares underlying the
warrants for resale under the Act for a period of one year. The warrants were
offered and sold to La Jolla pursuant to the exemption from registration set
forth in Section 4(2) of the Act. During October 2003, these warrants were
rescinded and cancelled by agreement of USA and La Jolla.

In April 2003, we issued 5,308 shares and warrants to purchase up to 5,308
shares to the holders of our senior notes who elected to receive these
securities in lieu of the cash interest payment due for the quarter ended March
31, 2003. The shares were purchased at the rate of $20 per share and the
warrants are exercisable at $20 per share at any time through June 30, 2004. We
have agreed to register the shares and the shares underlying the warrants under
the Act for resale for a period of 2 years. The securities were offered and sold
under the exemption from registration set forth in Rule 506 promulgated under
the Act. All of the noteholders are accredited investors and existing security
holders of USA and there was no general solicitation or advertising.

During April 2003, we agreed to issue to Steve Illes, an existing shareholder,
an aggregate of 10,000 shares for $10 per share and agreed to issue to him
warrants to purchase up to 40,000 shares at $10 per share at any time through
August 31, 2003. The offer and sale of the shares and warrants was exempt from
registration under Section 4(2) of the Act. Mr. Illes is an accredited investor,
made appropriate investment representations, was afforded access to all public
filings and all other information that USA could reasonably obtain, and the
securities contained appropriate restrictive legends under the Act. We have
agreed to register the shares and the shares underlying the warrants for resale
under the Act for a period of one year.

During May 2003, we issued to Providence Investment Management, an accredited
investor, an aggregate of 25,000 shares for $10 per share. The offer and sale of
the shares was exempt from registration under Section 4(2) of the Act.
Providence Investment Management is an accredited investor, made appropriate
investment representations, was afforded access to all public filings and all
other information that USA could reasonably obtain, and the securities contained
appropriate restrictive legends under the Act. Providence approached us about
the investment and we did not solicit Providence. We have agreed to register the
shares for resale under the Act for a period of one year.

During July 2003, we issued an aggregate of 105,000 shares to George R. Jensen,
Jr., our Chairman and Chief Executive Officer, as part of the amendment to his
employment agreement. The offer and sale of the shares was exempt from
registration under Section 4(2) of the Act. Mr. Jensen is an accredited
investor, made appropriate investment representations, was afforded access to
all public filings and all other information that USA could reasonably obtain,
and the securities contained appropriate restrictive legends under the Act. Mr.
Jensen has entered into a lock up agreement pursuant to which he shall not sell
25,000 of the shares for a one year period and 80,000 of the shares for a two
year period.

In July 2003, we issued 6,612 shares and warrants to purchase up to 6,612 shares
to the holders of our senior notes who elected to receive these securities in
lieu of the cash interest payment due for the quarter ended June 30, 2003. The
shares were purchased at the rate of $20 per share and the warrants are
exercisable at $20 per share at any time through June 30, 2004. We have agreed
to register the shares and the shares underlying the warrants under the Act for
resale for a period of 2 years. The securities were offered and sold under the
exemption from registration set forth in Rule 506 promulgated under the Act. All
of the noteholders are accredited investors and existing security holders of
USA, and there was no general solicitation or advertising.

On July 11, 2003, we issued 200,000 shares to Bayview, as part of our purchase
of substantially all of the assets of Bayview. The securities were offered and
sold under the exemption from registration set forth in Rule 506 promulgated
under the Act. Bayview was introduced to us through our consultant Robert
McGarrah, and there was no general solicitation or advertising. Bayview has
agreed not to sell any of the shares until July 11, 2004, at which time Bayview
shall be permitted to sell during each calendar month thereafter (on a
non-cumulative basis) the greater of (i) 2,500 shares of the Stock, or (ii) that
number of shares of the Stock equal to five percent (5%) of the immediately
prior calendar month's trading volume of the shares of Common Stock of USA. USA
has agreed to use its best efforts to register all of the shares for resale by
Bayview under the Securities Act of 1933, as amended, for a period of one year
(from July 11, 2004 through July 11, 2005).

During September 2003, we issued to Wellington Management Company, LLP, on
behalf of several of its clients, an aggregate of 180,000 shares for $25 per
share. The offer and sale of the shares was exempt from registration under
Section 4(2) of the Act. All of these clients are accredited investors. This
investor approached us regarding this investment and we did not solicit this
investor. We have agreed to register the shares for resale under the Act for a
period of one year.

During September 2003, we issued to George O'Connell, an accredited investor and
existing shareholder, an aggregate of 10,000 shares for $25 per share. The offer
and sale of the shares was exempt from registration under Section 4(2) of the
Act. We have agreed to register the shares for resale under the Act for a period
of one year.

During September 2003, we issued to Prophecy Asset Management, an accredited
investor, an aggregate of 7,500 shares for $25 per share. The offer and sale of
the shares was exempt from registration under Section 4(2) of the Act. This
investor approached us regarding this investment and we did not solicit this
investor. We have agreed to register the shares for resale under the Act for a
period of one year.

During September 2003, we issued to Fulcrum Global Partners, LLC, an accredited
investor, an aggregate of 2,600 shares for $25 per share. The offer and sale of
the shares was exempt from registration under Section 4(2) of the Act. This
investor approached us regarding this investment and we did not solicit this
investor. We have agreed to register the shares for resale under the Act for a
period of one year.

In October 2003, we issued 5,774 shares and 5,774 warrants to purchase up to
shares to the holders of our senior notes who elected to receive these
securities in lieu of the cash interest payment due for the quarter ended
September 30, 2003. The shares were purchased at the rate of $20 per share and
the warrants are exercisable at $20 per share at any time through June 30, 2004.
We have agreed to register the shares and the shares underlying the warrants
under the Act for resale for a period of 2 years. The securities were offered
and sold under the exemption from registration set forth in Rule 506 promulgated
under the Act. All of the noteholders are accredited investors and existing
security holders, and there was no general solicitation or advertising.

In October 2003, we issued to Alpha Capital Atkiengesellschaft, an aggregate of
5,000 shares due to Alpha as a result of the occurrence of a Non-Registration
Event as defined under our agreement with Alpha because we failed to register
within 120 days of issuance the securities issued to Alpha in November 2002. The
securities were sold to an accredited investor and the offer and sale thereof
did not involve any general advertising or solicitation and the offer and sale
was therefore exempt from registration under Section 4(2) under the Act.

During the quarter ended June 30, 2003, the Company issued an aggregate of
84,978 shares to 464 holders of warrants at $10 per share for an aggregate of
$849,783. The offer and sales of the shares was exempt from the registration
requirements of the Act under Rule 506 promulgated thereunder. In this regard,
the offer and sale thereof did not involve any general advertising or
solicitation and the securities contained appropriate restrictive legends under
the Act. The Company agreed to use its best efforts to register the shares for
resale under the Act.

During the quarter ended June 30, 2003, the Company issued an aggregate of
44,629 shares to 13 holders of its Convertible Senior Notes at the rate of $20
per share for aggregate conversions of $892,584. The offer and sales of the
shares was exempt from the registration requirements of the Act under Rule 506
promulgated thereunder. In this regard, the offer and sale thereof was to
existing security holders and did not involve any general advertising or
solicitation and the securities contained appropriate restrictive legends under
the Act.

During the quarter ended June 30, 2003, 50 holders of $2,196,000 principal
amount of the Senior Notes maturing in December 2003 elected to extend these
notes until December 31, 2006 and to have the conversion rate reduced from $125
per share to $20 per share. The note exchange was exempt from the registration
requirements of the Act pursuant to Section 3(a)(9) thereof.

During the quarter ended June 30, 2003, 56 holders of $1,296,397 principal
amount of the Senior Notes maturing in December 2004 elected to extend these
notes until December 31, 2007 and to have the conversion rate reduced from $40
per share to $20 per share. The shares were issued solely in exchange for our
securities and we paid no commissions in connection with the transaction. The
note exchange was exempt from the registration requirements of the Act pursuant
to Section 3(a)(9) thereof.

During the quarter ended June 30, 2003, the Company issued 33 shares of Common
Stock upon the conversion of 3,340 shares of Series A Preferred Stock and issued
40 shares of Common Stock upon the conversion of $40,080 of cumulative dividends
accrued and unpaid on these shares of Preferred Stock. The shares were issued
solely in exchange for our securities and we paid no commissions in connection
with the transaction. The shares of Common Stock were issued pursuant to the
exemption from registration set forth in Section 3(a)(9) of the Act.

During the quarter ended September 30, 2003, the Company issued an aggregate of
5,352 shares of Common Stock to 7 holders of warrants at $10 per share for an
aggregate of $53,526. The Company issued 1,050 shares for consulting services
rendered or to be rendered to the Company, to the following warrants holders
upon exercise of their warrants: Rachel Glicksman- 720 shares; Charlotte
Given-300 shares; and Gary Nash- 30 shares. These warrants were exercised at $10
per share and no cash payment was required in connection with their exercise.
The shares issued for services were recorded at the market price on the date of
grant. The offer and sales of the shares was exempt from the registration
requirements of the Act under Rule 506 promulgated thereunder. In this regard,
the offer and sale thereof was to existing security holders and did not involve
any general advertising or solicitation and the securities contained appropriate
restrictive legends under the Act. The Company agreed to use its best efforts to
register the shares for resale under the Act.

During the quarter ended September 30, 2003, the Company issued an aggregate of
75,008 shares of Common Stock to 31 holders of its Convertible Senior Notes upon
their conversion at the rate of $20 per share for an aggregate of $1,500,167.
The offer and sales of the shares was exempt from the registration requirements
of the Act under Rule 506 promulgated thereunder. In this regard, the offer and
sale thereof was to existing security holders and did not involve any general
advertising or solicitation and the securities contained appropriate restrictive
legends under the Act.

During the quarter ended September 30, 2003, 54 holders of $1,116,000 principal
amount of the Senior Notes maturing in December 2003 elected to extend these
notes until December 31, 2006 and to have the conversion rate reduced from $125
per share to $20 per share. The note exchange was exempt from the registration
requirements of the Act pursuant to Section 3(a)(9) thereof.

During the quarter ended September 30, 2003, 23 holders of $708,096 principal
amount of the Senior Notes maturing in December 2004 elected to extend these
notes until December 31, 2007 and to have the conversion rate reduced from $40
per share to $20 per share. The note exchange was exempt form the registration
requirements of the Act pursuant to Section 3(a)(9) thereof.

From February through June 2004, the Company sold 282,908 shares of Common Stock
to 34 accredited investors at $15 per share for an aggregate of $4,243,625.
During June 2004, the Company granted to each investor in the offering a warrant
to purchase one-half of a share for each share subscribed for by such investor
in the offering. The Company issued warrants to purchase a total of 141,454
shares. The warrants were originally exercisable at $20 per share at any time
through December 31, 2004. The exercise price was subsequently reduced to $10
per share. We have agreed to register the shares and the shares underlying the
warrants under the Act for resale for a period of two years. The offer and sales
of the shares was exempt from registration under Rule 506 promulgated under
Section 4(2) of the Act. All of the investors were either pre-existing security
holders or business associates. The offer and sale thereof did not involve any
general advertising or solicitation and the securities contained appropriate
restrictive legends under the Act.

In January 2004, we issued 5,425 shares and 5,425 warrants to purchase up to
shares to the holders of our senior notes who elected to receive these
securities in lieu of the cash interest payment due for the quarter ended
December 31, 2003. The shares were purchased at the rate of $20 per share and
the warrants are exercisable at $20 per share at any time through June 30, 2004.
We have agreed to register the shares and the shares underlying the warrants
under the Act for resale for a period of 2 years. The securities were offered
and sold under the exemption from registration set forth in Rule 506 promulgated
under the Act. All of the noteholders are accredited investors and existing
security holders, and there was no general solicitation or advertising.

In June 2004, we issued warrants to purchase up to 37,164 shares of Common Stock
to the holders of our senior notes who elected to receive warrants in lieu of
the cash interest payment due for the quarters ended June 30, 2002, September
30, 2002, December 31, 2002, March 31, 2003, June 30, 2003, September 30, 2003
and December 31, 2003. The warrants are exercisable at $20 per share at any time
through December 31, 2004 and were later reduced in price to $10 per share. We
have agreed to register the shares underlying the warrants under the Act for
resale for a period of 2 years. The securities were offered and sold under the
exemption from registration set forth in Rule 506 promulgated under the Act. All
of the noteholders are accredited investors and existing security holders of
USA, and there was no general solicitation or advertising.

In January 2004, we issued to CEOCAST, Inc. a total of 1,500 shares for services
to be rendered to the Company. The offer and sale of the shares were exempt from
registration under Section 4(2) of the Act. The Company agreed to use its best
efforts to register the shares for resale under the Act.

On June 18, 2004, we entered into a Common Stock Purchase Agreement with Steve
Illes. During the one year period following the effectiveness of a registration
statement covering the shares, Mr. Illes has agreed to purchase from USA shares
of Common Stock, provided that the aggregate purchase price can not exceed
$7,500,000. Under the Agreement, Mr. Illes is permitted to purchase Common Stock
from USA at any time at the price per share of $30. In addition, USA has the
right at any time to require Mr. Illes to purchase Common Stock from USA at the
lower of: (i) $30; or (ii) 90% of the closing bid price per share on the date
prior to the date of the delivery by USA to Mr. Illes of notice of his
obligation to purchase. USA can require Mr. Illes to purchase shares under the
Agreement only if the shares have been registered by the Company for resale by
Mr. Illes under the Act. During any calendar month, Mr. Illes is not permitted
to purchase and can not be required by USA to purchase Common Stock for an
aggregate purchase price in excess of $700,000. We have agreed to register for
resale the shares purchased by Mr. Illes under the Agreement for a period of one
year from the date of the effectiveness of the initial registration statement
covering the shares to be purchased by Mr. Illes. We have agreed to pay to Mr.
Illes a due diligence fee of $45,000. The securities were offered and sold to
Mr. Illes under the exemption from registration set forth under Rule 506
promulgated under the Act. Mr. Illes is an existing shareholder and an
accredited investor, and there was no general solicitation or advertising.

In July 2004, the Staff of the Securities and Exchange Commission indicated that
because of the discretion given to Mr. Illes under the Agreement to purchase the
shares at any time for $30 per share, it was not appropriate to register the
shares unless this discretion was eliminated. On August 6, 2004 the Company and
Mr. Illes entered into a subsequent agreement which superceded the prior
agreement and gave the Company the right to require Mr. Illes to purchase the
shares but did not give Mr. Illes any discretion to purchase shares. During the
one year period following the date of effectiveness of a registration statement
covering the shares, Mr. Illes has agreed to purchase from USA shares of Common
Stock, provided that the aggregate purchase price can not exceed $7,500,000.
Under the Agreement, USA has the right at any time to require Mr. Illes to
purchase Common Stock from USA at the lower of: (i) $30; or (ii) 90% of the
closing bid price per share on the date prior to the date of the delivery by USA
to Mr. Illes of notice of his obligation to purchase. USA can require Mr. Illes
to purchase shares under the Agreement only if the shares have been registered
by the Company for resale by Mr. Illes under the Act. During any calendar month,
Mr. Illes is not permitted to purchase and can not be required by USA to
purchase Common Stock for an aggregate purchase price in excess of $700,000.

From November 3, 2004 through February 14, 2005, the Company sold $1,550,789 of
senior notes convertible into Common Shares at $10 per share and maturing on
June 30, 2007. Interest is payable quarterly at a rate of 10% per annum. The
securities were offered and sold under the exemption from registration set forth
in Rule 506 promulgated under Section 4(2) of the Act. All of the purchasers of
the notes were accredited investors, were either pre-existing security holders
or business associates and there was no general solicitation or advertising. We
have agreed to use our best efforts to have the shares underlying the senior
notes registered for resale under the Act through June 30, 2007.

In March 2005, the Company exchanged $1,755,000 of principal amount 2005-B 10%
Senior Notes for a like principal amount of 2005-C 10% Convertible Senior Notes
("2010 Senior Notes"). The 2010 Senior Notes are convertible into Common Shares
at $10 per share and due December 31, 2010. There are an aggregate of 175,500
shares underlying these senior notes. Interest is payable quarterly at a rate of
10% per annum. We have agreed to register the shares underlying the 2010 Senior
Notes under the Act for resale through April 30, 2006. The exchange of the
shares was exempt from registration under Section 3(a)(9) of the Act. All of the
investors receiving 2010 Senior Notes are existing security holders. No
commission or remuneration was paid or given directly or indirectly for
soliciting the exchange.

During March and April 2005, the Company sold 233,333 shares of Common Stock at
$15 per share for an aggregate of $3,500,000 ("2005-D Private Placement
Offering"). For each share purchased, the Company granted a warrant to purchase
one share of Common Stock exercisable at $15 per share at anytime prior to
December 31, 2005. The Company issued warrants to purchase a total of 233,333
shares. We have agreed to register the shares and the shares underlying the
warrants under the Act for resale through December 31, 2006. The offer and sales
of the shares was exempt from registration under Rule 506 promulgated under
Section 4(2) of the Act. All of the investors were accredited investors and
either pre-existing security holders or business associates. The offer and sale
thereof did not involve any general advertising or solicitation and the
securities contained appropriate restrictive legends under the Act.

On April 4, 2005, the Company and Steve Illes entered into a new Common Stock
Purchase Agreement ("2005 Commmon Stock Ageement"). Pursuant to the 2005 Common
Stock Agreement, Mr. Illes agreed to purchase shares of the Company's Common
Stock, provided that the aggregate purchase price does not exceed $10,000,000.
Under the 2005 Common Stock Agreement, the Company has the right at any time to
require Mr. Illes to purchase Common Stock from the Company at the lower of: (i)
$30 per share; or (ii) 90% of the closing bid price per share on the date prior
to the date of the delivery by the Company to Mr. Illes of notice of his
obligation to purchase. The Company can require Mr. Illes to purchase shares
under the Common Stock Agreement only if the shares have been registered by the
Company for resale under the Act. During any calendar month, Mr. Illes cannot be
required by the Company to purchase Common Stock for an aggregate purchase price
in excess of $800,000. The Company issued 5,000 shares of Common Stock to Mr.
Illes as a due diligence/commitment fee in connection with the 2005 Common Stock
Agreement. The 2005 Common Stock Agreement terminates August 11, 2007. We have
agreed to register for resale the shares purchased by Mr. Illes under the
agreement until May 13, 2007. The securities offered and to be sold to Mr. Illes
are exempt from registration as set forth under Rule 506 promulgated under the
Act. Mr. Illes is an existing shareholder and an accredited investor, and there
was no general solicitation or advertising.

During October and November 2005, the Company sold $544,945 principal amount of
2005-G Convertible Senior Notes due December 31, 2008 to six investors. These
notes earn interest at 10% per annum, payable quarterly, and are convertible
into Common Shares at $10 per share at any time prior to maturity. The offering
was made to the holders of the 2005-D Common Stock Warrants. The 2005-D Warrants
were exercisable at $10 per share through November 30, 2005, and at $15 through
December 31, 2005. Each holder of the 2005-D Common Stock Warrants was entitled
to purchase the principal amount of the 2005-G Senior Notes equal to the number
of 2005-D Warrants held multiplied by $10. Upon any investment in the offering,
the corresponding number of 2005-D Warrants were cancelled. There are 54,494
shares underlying these 2005-G senior notes. For each $10,000 of senior notes
purchased, the investor also received a purchase right to purchase up to 1,000
shares at $20 per share at anytime prior to December 31, 2008. The purchase
rights could only be exercised if the shares issuable upon the exercise of the
purchase rights are made available through the prepayment by the Company of
outstanding convertible senior notes that are convertible at $20 per share. The
Company issued purchase rights to acquire 54,494 shares. During January 2006,
the holder of each purchase right agreed to exchange the purchase rights for
warrants to purchase shares at $20 at anytime prior to December 31, 2008.
Pursuant thereto, warrants were issued for an aggregate of 54,494 shares. We
have agreed to register the shares underlying the 2005-G Senior Notes and the
shares underlying the warrants under the Act for resale, and to keep the
registration statement current and effective through November 30, 2006. The
offer and sale of the 2005-G Senior Notes and purchase rights was exempt from
registration under Rule 506 promulgated under Section 4(2) of the Act. All of
the investors were accredited investors. The offer and sale thereof did not
involve any general advertising or solicitation and the securities contained
appropriate restrictive legends under the Act. The issuance by us of the
warrants was exempt from registration under Section 3(a)(9) of the Act. All of
the investors were existing holders of the purchase rights. No commission or
remuneration was paid or given directly or indirectly for soliciting the
exchange.

On December 13, 2005, the Company entered into a Stock Purchase Agreement with
Wellington Management Company, LLP, a large Boston-based institutional investor,
on behalf of certain of its clients ("Wellington"). Pursuant thereto, the
Company sold to Wellington 400,000 shares of Common Stock for $10 per share for
an aggregate of $4,000,000. The offer and sale of the shares was exempt from
registration under Rule 506 promulgated under Section 4(2) of the Act. As
investment manager, Wellington has shared dispositive and shared voting power
over the shares. All of these clients are accredited investors. We have agreed
to register the shares for resale under the Act for a period of one year. The
Stock Purchase Agreement provides that if the registration statement is not
declared effective by the SEC within 60 days from the date of the Stock Purchase
Agreement, then the Company will pay to Wellington as liquidated damages two
percent of the purchase price for the shares for each month beyond 60 days that
the registration statement is not effective. As a condition of its investment,
Wellington required the Company to approve and call a special meeting of its
shareholders to consider approval of a 1-to-100 reverse stock split of its
Common Stock.

In October and November, 2005, the Company offered for sale up to $1,000,000 of
principal amount of 10% Bridge Notes due January 6, 2006. Interest accrued on
the Bridge Notes at the rate of 10% per annum from and after the date of
issuance with all accrued and unpaid interest paid on January 6, 2006. The
Company sold $770,000 Bridge Notes to 8 investors. On January 6, 2006, the
Bridge Notes were automatically exchanged for a like principal amount of new
2006-A Convertible Senior Notes due December 31, 2010. The 2006-A Notes bear
interest at 10% and are convertible at any time prior to maturity at $10 per
share. For each $10,000 of 2006-A Convertible Senior Notes received in exchange
for the Bridge Notes, the Company also issued purchase rights enabling the
holder to purchase up to 1,000 shares of Common Stock at $20 per share at
anytime prior to December 31, 2008. The purchase rights could only be exercised
if the shares issuable upon the exercise of the purchase rights are made
available through the prepayment by the Company of outstanding convertible
senior notes that are convertible at $20 per share. The Company issued purchase
rights to acquire 77,000 shares. During January 2006, the holder of each
purchase right agreed to exchange the purchase right for a warrant to purchase
one share at $20 at anytime prior to December 31, 2008. Pursuant thereto,
warrants were issued for an aggregate of 77,000 shares. The offer and sale of
the Bridge Notes was exempt from registration under Rule 506 promulgated under
Section 4(2) of the Act. All of the investors were accredited investors. The
offer and sale thereof did not involve any general advertising or solicitation
and the securities contained appropriate restrictive legends under the Act. The
issuance by us of the 2006-A Senor Notes and purchase rights in exchange for the
Bridge Notes, and the warrants in exchange for the purchase rights was exempt
from registration under Section 3(a)(9) of the Act. All investors were existing
security holders of the Company. No commission or remuneration was paid or given
directly or indirectly for soliciting the exchange. We have agreed to register
the shares underlying the 2006-A Senior Notes and the shares underlying the
warrants under the Act for resale, and to keep the registration statement
current and effective through November 30, 2006.

On January 9, 2006, the Company entered into a Stock Purchase Agreement with
Rationalwave On Shore Equity Fund, L.P. ("Rationalwave"), an accredited
investor. Pursuant thereto, the Company sold to Rationalwave 40,000 shares of
Common Stock for $10 per share for an aggregate of $400,000. The offer and sale
of the shares was exempt from registration under Rule 506 promulgated under
Section 4(2) of the Act. We have agreed to register the shares for resale under
the Act through January 9, 2007.

On February 17, 2006, the Company and Steve Illes entered into the 2006 Common
Stock Agreement. Pursuant to the 2006 Common Stock Agreement, Mr. Illes agreed
to purchase shares of the Company's Common Stock, provided that the aggregate
purchase price does not exceed $15,000,000. Under the 2006 Common Stock
Agreement, the Company has the right at any time to require Mr. Illes to
purchase Common Stock from the Company at the lower of: (i) $30.00 per share; or
(ii) 90% of the closing bid price per share on the date prior to the date of the
delivery by the Company to Mr. Illes of notice of his obligation to purchase.
The Company can require Mr. Illes to purchase shares under the Common Stock
Agreement only if the shares have been registered by the Company for resale
under the Act. During any calendar month, Mr. Illes cannot be required by the
Company to purchase Common Stock for an aggregate purchase price in excess of
$800,000. The 2006 Common Stock Agreement terminates June 30, 2009. We have
agreed to register for resale the shares purchased by Mr. Illes under the
agreement for a two year period. The securities offered and to be sold to Mr.
Illes are exempt from registration as set forth under Rule 506 promulgated under
the Act. Mr. Illes is an existing shareholder and an accredited investor, and
there was no general solicitation or advertising.

STOCK OPTIONS

On April 28, 2004 the Company issued to Mary West Young options to purchase
3,000 shares of Common Stock for $30 per share which vest ratably over a two
year period.

On April 12, 2005 the Company issued to David DeMedio options to purchase 3,000
shares of Common Stock for $20 per share which vest ratably over a two year
period.

The issuance of all of the foregoing options was made in reliance upon the
exemption provided by Section 4(2) of the Act as all of the options were issued
to officers, directors, employees or consultants of USA, each of such issuances
were separate transactions not part of any plan, and none of the issuances
involved any general solicitation or advertising.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

EXHIBITS

Exhibit
Number Description
--------------------------------------------------------------------------------
2.1 Asset Purchase Agreement dated July 11, 2003 by and between USA and
Bayview Technology Group LLC (Incorporated by reference to Exhibit 2.1 to
Form 8-K filed July 14, 2003)

3.1 Amended and Restated Articles of Incorporation of USA filed January 26,
2004 (Incorporated by reference to Exhibit 3.1.19 to Form 10-QSB filed on
February 12, 2004).

3.1.1 First Amendment to Amended and Restated Articles of Incorporation of USA
filed on March 17, 2005 (Incorporated by reference to Exhibit 3.1.1 to
Form S-1 Registration Statement No. 333-124078).

3.1.2 Second Amendment to Amended and Restated Articles of Incorporation of USA
filed on December 13, 2005 (Incorporated by reference to Exhibit 3.1.2 to
Form S-1 Registration Statement No. 333-130992).

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

4.1 Form of 12% Senior Note (Incorporated by reference to Exhibit 4.6 to Form
SB-2 Registration Statement No. 333-81591).

4.2 Stock Purchase Agreement dated October 26, 2002 by and between the
Company and Kazi Management VI, Inc. (Incorporated by reference to
Exhibit 4.17 to Form SB-2 Registration Statement No. 333-101032).

4.3 Warrant Certificate (no. 189) dated October 26, 2002 in favor of Kazi
Management VI, Inc. (Incorporated by reference to Exhibit 4.18 to Form
SB-2 Registration Statement No. 333-101032).

4.4 Registration Rights Agreement dated October 26, 2002 by and between the
Company and Kazi Management VI, Inc. (Incorporated by reference to
Exhibit 4.19 to Form SB-2 Registration Statement No. 333-101032).

4.5 Warrant Certificate (no. 190) dated October 26, 2002 in favor of Kazi
Management VI, Inc. (Incorporated by reference to Exhibit 4.20 to Form
SB-2 Registration Statement No. 333-101032).

4.6 Form of 2004 Senior Note (Incorporated by reference to Exhibit 4.24 to
Form SB-2 Registration Statement No. 333-101032).

4.7 Form of 2005 Senior Note (Incorporated by reference to Exhibit 4.25 to
Form SB-2 Registration Statement No. 333-101032).

4.8 Addendum to 2006 Senior Note. (Incorporated by reference to Exhibit 4.30
to Form 10-KSB filed on September 28, 2004).

4.9 Addendum to 2007 Senior Note. (Incorporated by reference to Exhibit 4.30
to Form 10-KSB filed on September 28, 2003).

4.10 Form of Subscription Agreement for 2004-A Offering. (Incorporated by
reference to Exhibit 4.3 to Form 10-QSB filed on May 17, 2004).

4.11 Form of 2004-A Warrant Certificate. (Incorporated by reference to Exhibit
4.34 to Form SB-2 Registration Statement No. 333-116977).

4.12 Common Stock Purchase Agreement between the Company and Steve Illes dated
April 4, 2005 (Incorporated by reference to Exhibit 4.13.1 to Form S-1
Registration Statement No. 333-124078).

4.13 Form of 2004-B Note (Incorporated by reference to Exhibit 4.28 to Form
S-1 Registration Statement No. 333-119951).

4.14 Form of 2005-C Note (Incorporated by reference to Exhibit 4.15 to Form
S-1 Registration Statement No. 333-124078).

4.15 Form of Subscription Agreement for 2005-D Offering (Incorporated by
reference to Exhibit 4.16 to Form S-1Registration Statement No. 333-
124078).

4.16 Subscription Agreement between the Company and Ashford Capital
Management, Inc. dated March 28, 2005 (Incorporated by reference to
Exhibit 4.17 to Form S-1 Registration Statement No. 333-124078).

4.17 Subscription Agreement between the Company and Anvil Investment
Associates, LP dated March 28, 2005(Incorporated by reference to Exhibit
4.18 to Form S-1 Registration Statement No. 333-124078).

4.18 Stock Purchase Agreement dated December 13, 2005 by and between the
Company and certain clients of Wellington Management Company, LLC
(Incorporated by reference to Exhibit __ to Form 8-K filed December 19,
2005).

4.19 Stock Purchase Agreement dated January 9, 2006, by and between the
Company and Rationalwave On Shore Equity Fund, L.P. (Incorporated by
reference to Exhibit 4.19 to Form S-1 Registration Statement No.
333-130992).

4.20 Form of 2006-A 10% Convertible Senior Note due December 31, 2010
(Incorporated by reference to Exhibit 4.20 to Form S-1 Registration
Statement No. 333-130992).

4.21 Form of 2006-A Warrant(Incorporated by reference to Exhibit 4.21 to Form
S-1 Registration Statement No. 333-130992).

4.22 Form of 2005-G Warrant (Incorporated by reference to Exhibit 4.22 to Form
S-1 Registration Statement No. 333-130992).

**4.23 Common Stock Purchase Agreement between the Company and Steve Illes dated
February 17, 2006

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

10.1 Employment and Non-Competition Agreement between USA 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).

10.1.1 First Amendment to Employment and Non-Competition Agreement between USA
and Adele Hepburn dated as of February 4, 2004. (Incorporated by
reference to Exhibit 10.1.1 to Form 10-QSB filed on February 12, 2004).

10.2 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).

10.3 Employment and Non-Competition Agreement between USA 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).

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

10.3.2 Third Amendment to Employment and Non-Competition Agreement between USA
and H. Brock Kolls dated February 22, 2000 (Incorporated by reference to
Exhibit 10.3 to Form S-8 Registration Statement No. 333-341006).

10.3.3 Fourth Amendment to Employment and Non-Competition Agreement between USA
and H. Brock Kolls dated April 15, 2002. (Incorporated by reference to
Exhibit 10.4.3 to Form 10-QSB filed on February 12, 2004).

10.3.4 Fifth Amendment to Employment and Non-Competition Agreement between USA
and H. Brock Kolls dated April 20, 2004 (Incorporated by reference to
Exhibit 10.4 to Form SB-2 Registration Statement No. 333-116977).

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

10.4.1 First Amendment to Employment and Non-Competition Agreement between USA
and Stephen P. Herbert dated February 22, 2000 (Incorporated by reference
to Exhibit 10.2 to Form S-8 Registration Statement No. 333-34106).

10.4.2 Second Amendment to Employment and Non-Competition Agreement between
Stephen P. Herbert and the Company dated April 15, 2002 (Incorporated by
reference to Exhibit 10.9.2 to Form SB-2 Registration Statement No.
333-101032).

10.4.3 Third Amendment to Employment and Non-Competition Agreement between
Stephen P. Herbert and USA dated July 25, 2003 (Incorporated by reference
to Exhibit 10.9.3 to Form SB-2 Registration Statement No. 333-101032).

10.4.4 Fourth Amendment to Employment and Non-Competition Agreement between USA
and Stephen P. Herbert dated February 4, 2004. (Incorporated by reference
to Exhibit 10.9.4 to Form 10-QSB filed on February 12, 2004).

10.4.5 Fifth Amendment to Employment and Non-Competition Agreement between USA
and Stephen P. Herbert dated February 28, 2005 (Incorporated by reference
to Exhibit 10.4 5 to Form S-1 Registration Statement No. 333-124078).

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

10.5.1 First Amendment to Employment and Non-Competition Agreement between USA
and George R. Jensen, Jr., dated as of June 17, 1999. (Incorporated by
reference to Exhibit 4.21.1 to Form SB-2 Registration Statement No.
333-94917)

10.5.2 Second Amendment to Employment and Non-Competition Agreement between USA
and George R. Jensen, Jr. dated February 22, 2000 (Incorporated by
reference to Exhibit 10.1 to Form S-8 Registration Statement No.
333-34106).

10.5.3 Third Amendment to Employment and Non-Competition Agreement between USA
and George R. Jensen, Jr. dated January 16, 2002 (Incorporated by
reference to Exhibit 10.21.3 to Form SB-2 Registration Statement No.
333-101032).

10.5.4 Fourth Amendment to Employment and Non-Competition Agreement between USA
and George R. Jensen, Jr., dated April 15, 2002 (Incorporated by
reference to Exhibit 10.21.4 to Form SB-2 Registration Statement No.
333-101032).

10.5.5 Fifth Amendment to Employment and Non-Competition Agreement between USA
and George R. Jensen, Jr., dated July 16, 2003 (Incorporated by reference
to Exhibit 10.21.5 to Form SB-2 Registration Statement No. 333-101032).

10.5.6 Sixth Amendment to Employment and Non-Competition Agreement between USA
and George R. Jensen, Jr. dated February 4, 2004. (Incorporated by
reference to Exhibit 10.21.6 to Form 10-QSB filed on February 12, 2004).

10.5.7 Letter agreement between USA and George R. Jensen, Jr. dated July 16,
2003 (Incorporated by reference to Exhibit 10.21.7 to Form 10-QSB filed
on November 19, 2003).

10.5.8 Lock-Up Agreement dated July 16, 2003 by George R. Jensen, Jr. in favor
of USA (Incorporated by reference to Exhibit 10.21.6 to Form SB-2
Registration Statement No. 333-101032).

10.5.9 Seventh Amendment to Employment and Non-Competition Agreement between USA
and George R. Jensen, Jr. dated February 28, 2005 (Incorporated by
reference to Exhibit 10.5.9 to Form S-1 Registration Statement No.
333-124078).

10.6 Investment Agreement between USA and Swartz Private Equity, LLC dated
September 15, 2000 (incorporated by reference to Exhibit 10.1 to Form 8-K
dated September 21, 2000).

10.7 Commitment Warrant issued to Swartz Private Equity LLC dated August 23,
2000 (incorporated by reference to Exhibit 10.2 to Form 8-K dated
September 21, 2000).

10.8 Warrant Anti-Dilution Agreement between USA and Swartz Private Equity,
LLC dated September 15, 2000 (incorporated by reference to Exhibit 10.3
to Form 8-K dated September 21, 2000).

10.9 Registration Rights Agreement between USA and Swartz Private Equity dated
September 15, 2000 (incorporated by reference to Exhibit 10.4 to Form 8-K
dated September 21, 2000).

10.10 Agreement and Plan of Merger dated April 10, 2002, by and among the
Company, USA Acquisition, Inc., Stitch Networks Corporation, David H.
Goodman, Pennsylvania Early Stage Partners, L.P., and Maytag Holdings,
Inc. (Incorporated by reference to Exhibit 2.1 to Form 10-QSB for the
quarter ended March 31, 2002).

10.11 Strategic Alliance Agreement between USA and ZiLOG Corporation dated
October 15, 2002 (Incorporated by reference to Exhibit 10.39 to Form SB-2
Registration Statement No. 333-101032).

10.12 Vending Placement, Supply and Distribution Agreement between Stitch
Networks Corporation, Eastman Kodak Company, Maytag Corporation and
Dixie-Narco, Inc. dated D-ecember 2000 (Incorporated by reference to
Exhibit 10.40 to Form SB-2 Registration Statement No. 333-101032).

10.13 Design and Manufacturing Agreement between USA and RadiSys dated June 27,
2000 (Incorporated by reference to Exhibit 10.41 to Form SB-2
Registration Statement No. 333-101032).

10.14 Loan Agreement between Stitch Networks Corporation and US Bancorp dated
May 22, 2001 (Incorporated by reference to Exhibit 10.42 to Form SB-2
Registration Statement No. 333-101032).

10.15 Termination Agreement dated December 31, 2003 by and between Eastman
Kodak Company, Maytag Corporation, Dixie-Narco, Inc. and Stitch Networks
Corporation. (Incorporated by reference to Exhibit 10.6 to Form 10-QSB
filed on February 12, 2004).

10.16 Option Certificate (No. 198) dated April 28, 2004 in favor of Mary West
Young. (Incorporated by reference to Exhibit 10.45 to Form SB-2
Registration Statement No. 333-116977)

10.17 Agreement of Lease between Pennswood Spring Mill Associates, as landlord,
and the Company, as tenant, dated September 2002, and the Rider thereto
(Incorporated by reference to Exhibit 10.21 to Form 10-KSB filed on
September 28, 2004).

10.18 Agreement of Lease between Deerfield Corporate Center 1 Associates LP, as
landlord, and the Company, as tenant, dated March 2003 (Incorporated by
reference to Exhibit 10.22 to Form 10-KSB filed on September 28, 2004).

10.19 Amendment to Office Space Lease dated as of April 1, 2005 by and between
the Company and Deerfield Corporate Center Associates, LP. (Incorporated
by reference to Exhibit 10.19.1 to Form S-1 Registration Statement No.
333-124078)

10.20 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).

10.21 Co-Marketing Agreement between Honeywell D.M.C. Services, LLC and the
Company dated July 13, 2004 (Incorporated by reference to Exhibit 99.1 to
Form 8-K filed on September 29, 2004).

10.22 Employment and Non-Competition Agreement between USA and David M. DeMedio
dated April 12, 2005 (Incorporated by reference to Exhibit 10.22 to Form
S-1 Registration Statement No. 333-124078).

10.23 Option Certificate (No. 200) dated April 12, 2005 in favor of David M.
DeMedio (Incorporated by reference to Exhibit 10.23 to Form S-1
Registration Statement No. 333-124078).

10.24 Agreement dated December 28, 2004 between USA Technologies and PepsiCo,
Inc. (Incorporated by reference to Exhibit 10.01 of Form 8-K filed July
27, 2005)

14.1 Code of Business Conduct and Ethics. (Incorporated by reference to
Exhibit 14.1 to Form 10-KSB filed on September 28, 2004).

**23.1 Consent of Ernst & Young LLP, Independent Registered Public Accounting
Firm.

**23.2 Consent of Goldstein Golub Kessler LLP, Independent Registered Public
Accounting Firm.

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

ITEM 16(B). FINANCIAL STATEMENT SCHEDULES

SCHEDULE II

USA TECHNOLOGIES, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 2005, 2004 AND 2003

--------------------------------------------------------------------------------
ACCOUNTS RECEIVABLE Additions uncollectible Deductions
Balance at (reductions) receivables Balance
beginning of charged to written off, net at end
period earnings of recoveries of period
--------------------------------------------------------------------------------
June 30, 2005 $240,000 (23,000) 20,000 $196,000
--------------------------------------------------------------------------------
June 30, 2004 $ 65,000 194,000 19,000 $240,000
--------------------------------------------------------------------------------
June 30, 2003 $ 37,000 30,000 2,000 $ 65,000
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
INVENTORY Balance at Additions Deductions Balance
beginning of charged to shrinkage and at end
period earnings obsolescence of period
--------------------------------------------------------------------------------
June 30, 2005 $229,000 286,000 194,000 $321,000
--------------------------------------------------------------------------------
June 30, 2004 $ 63,000 190,000 24,000 $229,000
--------------------------------------------------------------------------------
June 30, 2003 $244,000 76,000 257,000 $ 63,000
--------------------------------------------------------------------------------

ITEM 17. 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.

(4) That, for purposes of determining liability under the Securities Act of 1933
to any purchaser, each prospectus filed pursuant to Rule 424(b) as part of a
registration statement relating to an offering, other than registration
statements relying on Rule 430B or other than prospectuses filed in reliance on
Rule 430A, shall be deemed to be part of and included in the registration
statement as of the date it is first used after effectiveness. Provided,
however, that no statement made in a registration statement or prospectus that
is part of the registration statement or made in a document incorporated or
deemed incorporated by reference into the registration statement or prospectus
that is part of the registration statement will, as to a purchaser with a time
of contract of sale prior to such effective date, supersede or modify any
statement that was made in the registration statement or prospectus that was
part of the registration statement or made in any such document immediately
prior to such date of first use.

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 the opinion of the SEC 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.

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing this Form S-1 and has duly caused this
Registration Statement on Form S-1 to be signed on its behalf by the
undersigned, thereunto duly authorized, in Malvern, Pennsylvania, on February
23, 2006.

USA TECHNOLOGIES, INC.

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

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

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

SIGNATURES TITLE DATE
----------- ----- ----

/s/ George R. Jensen, Jr. Chairman of the Board of Directors, February 23, 2006
-------------------------- Chief Executive Officer
George R. Jensen, Jr. (Principal Executive Officer)

/s/ David M. DeMedio Chief Financial Officer (Principal February 23, 2006
-------------------------- Accounting Officer)
David M. DeMedio

/s/ William W. Sellers Director February 23, 2006
--------------------------
William W. Sellers

/s/ Stephen P. Herbert Director February 23, 2006
--------------------------
Stephen P. Herbert

/s/ William L. Van Alen, Jr. Director February 23, 2006
----------------------------
William L. Van Alen, Jr.

/s/ Douglas M. Lurio Director February 23, 2006
--------------------------
Douglas M. Lurio

/s/ Steven Katz Director February 23, 2006
--------------------------
Steven Katz

EXHIBIT INDEX

Exhibit
Number Description
--------------------------------------------------------------------------------
4.23 Common Stock Purchase Agreement between the Company and Steve Illes
dated February 17, 2006

5.1 Opinion of Lurio & Associates, P.C.

23.1 Consent of Ernst & Young LLP

23.2 Consent of Goldstein Golub Kessler LLP