Summary of USA TECHNOLOGIES INC

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

This Form 10-Q 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, "estimate," "could," "should," "would," "likely," "may," "will," "plan," "intend," "believes," "expects," "anticipates," "projected," 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:

? general economic, market or business conditions;

? the ability of the Company to generate sufficient sales to generate operating profits, or to sell products at a profit;

? the ability of the Company to raise funds in the future through sales of securities;

? whether the Company is able to enter into binding agreements with third parties to assist in product or network development;

? the ability of the Company to commercialize its developmental products, or if actually commercialized, to obtain commercial acceptance thereof;

? the ability of the Company to compete with its competitors to obtain market share;

? the ability of the Company to obtain sufficient funds through operations or otherwise to repay its debt obligations, or to fund development and marketing of its products;

? the ability of the Company to obtain approval of its pending patent applications;

? the ability of the Company to satisfy its trade obligations included in accounts payable and accrued liabilities;

? the ability of the Company to predict or estimate its future quarterly or annual revenues and expenses given the developing and unpredictable market for its products and the lack of established revenues;

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? the ability of the Company to retain key customers from whom a significant portion of its revenues is derived;

? the ability of a key customer to reduce or delay purchasing products from the Company; and

? as a result of the slowdown in the economy and/or the tightening of the capital and credit markets, our customers may modify, delay or cancel plans to purchase our products or services, and suppliers may increase their prices, reduce their output or change their terms of sale.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Actual results or business conditions may differ materially from those projected or suggested in forward-looking statements as a result of various factors including, but not limited to, those described above. We cannot assure you that we have identified all the factors that create uncertainties. Moreover, new risks emerge from time to time and it is not possible for our management to predict all risks, nor can we assess the impact of all risks on our business or the extent to which any risk, or combination of risks, may cause actual results to differ from those contained in any forward-looking statements. Readers should not place undue reliance on forward-looking statements.

Any forward-looking statement made by us in this Form 10-Q speaks only as of the date of this Form 10-Q. Unless required by law, we undertake no obligation to publicly revise any forward-looking statement to reflect circumstances or events after the date of this Form 10-Q or to reflect the occurrence of unanticipated events.

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Results of Operations

Three months ended September 30, 2009

Revenues for the three months ended September 30, 2009 were $3,827,636 compared to $3,394,879 for the corresponding three-month period in the previous fiscal year. This $432,757 or 13% increase was due to an increase in license and transaction fees of $534,265, offset by a decrease in equipment sales of $101,508. The decrease in equipment sales was due to a decrease in sales of approximately $96,000 in business center equipment and approximately $77,000 in e-Suds equipment offset by an increase of approximately $71,000 in e-Port vending equipment. Sales under the new Quick Start Program made up approximately $710,000, approximately 52%, of the $1,346,134 in e-Port equipment sales. The increase in license and transaction fees was primarily due to the increase in the number of units on our USALive® network.

In regards to license fees, as of September 30, 2009, the Company had approximately 57,000 devices connected to our USALive® network as compared to approximately 42,000 devices as of September 30, 2008. In addition, our customer base increased with approximately 75 new e-Port customers added since June 30, 2009, totaling approximately 600 customers at September 30, 2009.

In regards to transaction fees, during the quarter ended September 30, 2009, the Company processed approximately 7.4 million transactions totaling over $14.6 million as compared to approximately 4.7 million transactions totaling over $11.6 million during the quarter ended September 30, 2008, an increase of 57% in transaction volume and 26% in dollars processed.

Cost of sales for the period consisted of equipment costs of $1,309,356 and network and transaction services related costs of $1,488,157. The increase in total cost of sales of $306,043 or 12% over the same period in the prior year was due to a decrease in equipment costs of $124,488, offset by an increase in network and transaction services related costs (transaction supplier charges) of $430,531.

Gross profit for the three months ended September 30, 2009 was $1,030,123, compared to a gross profit of $903,409 for the corresponding three-month period in the previous fiscal year. $22,779 of the increase in gross profit related to equipment sales and $126,714 of the increased gross profit related to license and transaction fee revenue. During the same periods, percentage based gross profit increased to 26.9% from 26.6%. Percentage based gross profit on equipment sales increased from 30% to 32% primarily due to an increase in the profit margin of e-Port vending equipment sales as a result of lower production costs primarily due to offshore production. Percentage based gross profit on license and transaction fees decreased from 22% to 21% as a result of increased transaction supplier charges.

Selling, general and administrative expense of $3,565,778 decreased by $873,755 or 20% primarily due to decreases in compensation and benefit expenses of approximately $830,000, and travel and entertainment expenses of approximately $59,000. These reductions were offset by a net total increase in other expenses of approximately $15,000. The overall decrease was due to cost reduction measures taken by the Company during the third and fourth quarters of fiscal year 2008 and during the third quarter of fiscal 2009.

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Compensation expense decreased by approximately $830,000 primarily due to decreases of approximately $641,000 in salary expenses, approximately $120,000 in long term incentive program expenses, and approximately $69,000 in employee benefit expenses.

The quarter ended September 30, 2009 resulted in a net loss of $2,926,199 (including approximately $0.5 million of non-cash charges) compared to a net loss of $3,853,895 (including approximately $1.1 million of non-cash charges) for the quarter ended September 30, 2008.

Liquidity and Capital Resources

For the three months ended September 30, 2009, net cash of $2,826,614 was used by operating activities, primarily due to the net loss of $2,926,199 offset by non-cash charges totaling $545,934 for transactions involving the vesting and issuance of common stock for employee and officer compensation, bad debt expense and the depreciation and amortization of assets. In addition, the Company's net operating assets increased by $446,349 primarily due to an increase in finance receivables, of which $689,388 of net cash was utilized during the quarter to lease e-Ports to customers under the Quick Start Program. This increase was offset by a net decrease of $243,039 in the Company's other operating assets.

The Company received cash of $12,792,836 in financing activities during the three months ended September 30, 2009 due to net cash proceeds from the issuance of common stock under the subscription rights offering of $13,041,332 offset by debt repayments of $194,834 and the purchase in the open market of $48,272 of Preferred Stock which was subsequently canceled and retired, and the cancellation and retirement of $5,390 of Common Stock which had been held by an executive officer in order to satisfy payroll withholding tax obligations of the executive officer in connection with shares of Common Stock which vested during January 2009.

The Company has incurred losses since inception. Our accumulated deficit through September 30, 2009 is composed of cumulative losses amounting to approximately $179,000,000 and preferred dividends converted to common stock of approximately $2,700,000. The Company has continued to raise capital through equity offerings to fund operations.

As of September 30, 2009 the Company had $16,690,469 of cash and cash equivalents on hand.

Our cash-based selling, general and administrative expenses during the quarter ended September 30, 2009 were approximately $3,432,000. Assuming that the Company's operating assets and liabilities remain constant and its average monthly gross profit of $345,000 earned during the previous three months ended September 30, 2009 would continue, the Company's average monthly cash used in operating activities would be approximately $800,000. Based on the foregoing, the Company's existing cash and cash equivalents as of September 30, 2009 should provide sufficient funds to meet the Company's cash requirements, including capital expenditures and repayment of long-term debt, through at least July 1, 2010.

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