U.S. SECURITIES AND EXCHANGE COMMISSION
                               WASHINGTON DC 20549

                                   FORM 10-QSB

                                   (Mark One)

               X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
              ---        SECURITIES EXCHANGE ACT OF 1934
                For the quarterly period ended December 31, 1997

                TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE
             ---         SECURITIES EXCHANGE ACT OF 1934
               For the transition period from _______ to _______ .

                           Commission File No. 0-27780


                                  U-SHIP, INC.
             (Exact name of registrant as specified in its charter)


             Utah                                         87-0355929
---------------------------------              ---------------------------------
(State or Other Jurisdiction                   (IRS Employer Identification No.)
of Incorporation or Organization)


                     5583 West 78th Street, Edina, MN 55439
               (Address of Principal Executive Offices) (Zip Code)


       Registrant's Telephone Number, Including Area Code: (612) 941-4080

Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.

                                 YES (X) NO ( )

As of December 31, 1997 the issuer had outstanding 4,979,717 shares of Common
Stock, $.004 par value.

<PAGE>


                                  U-SHIP, INC.

                                   FORM 10-QSB

                     FOR THE QUARTER ENDED DECEMBER 31, 1997

                                      INDEX

                                                                            Page
                                                                            ----
PART 1.           FINANCIAL INFORMATION                                       3

ITEM 1.

         a)       Condensed Consolidated Financial Statements

         b)       Condensed Consolidated Balance Sheets -
                  December 31, 1997 and June 30, 1997                         3

         c)       Condensed Consolidated Statements of
                  Operations - Three and Six months ended
                  December 31, 1997 and 1996                                  4

         d)       Condensed Consolidated Statements of
                  Cash Flows - Six months ended
                  December 31, 1997 and 1996                                  5

         e)       Notes to Condensed Consolidated Financial
                  Statements                                                  6

ITEM 2.

         a)       Management's Discussion and Analysis of
                  Financial Condition and Results of Operations               8


PART II.          OTHER INFORMATION                                          18

ITEM 6.           Exhibits                                                   19

         27       Financial Data Schedule

                  SIGNATURES                                                 20

<PAGE>


PART I. - FINANCIAL INFORMATION

ITEM 1. - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                          U-SHIP, INC. AND SUBSIDIARIES
                           Consolidated Balance Sheets
                                      As of

<TABLE>
<CAPTION>
                                                                      December 31,        June 30,
                                                                         1997               1997
                                                                     -------------     -------------
                          ASSETS                                      (UNAUDITED)
<S>                                                                  <C>               <C>          
CURRENT ASSETS:
  Cash and cash equivalents                                          $     121,653     $     724,260
  Short-term investments                                                      --       $     250,000
  Accounts receivable                                                      111,508           138,683
  Prepaid expenses                                                          16,300            32,723
  Inventories                                                              636,585           753,917
                                                                     -------------     -------------

             Total current assets                                          886,046         1,899,583
                                                                     -------------     -------------

PROPERTY AND EQUIPMENT:
  Shipping centers                                                       1,517,185         1,290,952
  Furniture, fixtures and equipment                                        559,900           558,233
  Less-Accumulated depreciation                                           (753,064)         (496,500)
                                                                     -------------     -------------

             Total property and equipment,net                            1,324,021         1,352,685
                                                                     -------------     -------------

Other assets, net                                                          181,786           186,871
                                                                     -------------     -------------


                                                                     $   2,391,853     $   3,439,139
                                                                     =============     =============

           LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
  Current maturities of long-term debt and notes payable             $      63,486     $      72,925
  Deferred Revenue                                                          35,514            53,289
  Accounts payable                                                         268,615           157,041
  Accrued liabilities                                                      189,326           391,265
                                                                     -------------     -------------

                          Total current liabilities                        556,941           674,520
                                                                     -------------     -------------

Long-term debt, net of current maturities                                   90,069           104,386
                                                                     -------------     -------------

SHAREHOLDERS' EQUITY:
  Preferred stock, $.004 par value; 25,000,000 shares authorized;
    none issued and outstanding                                               --                --
  Common stock, $.004 par value; 75,000,000 shares authorized;
    4,979,717 and 4,967,669 issued and outstanding                          19,919            19,871
  Additional paid-in capital                                            10,512,810        10,492,075
  Warrants                                                                  19,500            19,500
  Accumulated deficit                                                   (8,807,386)       (7,871,213)
                                                                     -------------     -------------

                          Shareholders' equity                           1,744,843         2,660,233
                                                                     -------------     -------------

                                                                     $   2,391,853     $   3,439,139
                                                                     =============     =============
</TABLE>

    The accompanying notes are an integral part of the financial statements.

<PAGE>


                          U-SHIP, INC. AND SUBSIDIARIES
                      Consolidated Statements of Operations
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                              THREE MONTHS ENDED DECEMBER 31,   SIX MONTHS ENDED DECEMBER 31,
                              ------------------------------    -----------------------------
                                   1997            1996             1997             1996
                              ------------     ------------     ------------     ------------
<S>                           <C>              <C>              <C>              <C>         
Revenue
  Package shipping revenue    $    255,290     $    191,196     $    418,396     $    321,560
  Machine sales revenue             28,737           51,085           81,844          112,632
  Other revenue                      5,174           13,528           52,374           18,403
                              ------------     ------------     ------------     ------------
      Net sales                    289,201          255,809          552,614          452,595

Cost of goods sold                (255,413)        (204,543)        (435,822)        (375,068)
                              ------------     ------------     ------------     ------------

Gross profit                        33,788           51,266          116,792           77,527

General and administrative         400,918          424,214          888,502          688,388
Marketing and sales                 30,106          110,628           67,467          263,098
Research and development            37,733           73,589           98,721          137,999
                              ------------     ------------     ------------     ------------
Loss from operations              (434,969)        (557,165)        (937,898)      (1,011,958)

Interest income                     (8,262)         (21,219)         (14,904)         (66,669)
Interest expense                     5,854            3,097           13,179            5,836
                              ------------     ------------     ------------     ------------

Net loss                      $   (432,561)    $   (539,043)    $   (936,173)    $   (951,125)
                              ============     ============     ============     ============

Basic & diluted
  net loss per share          $      (0.09)    $      (0.13)    $      (0.19)    $      (0.24)
                              ------------     ------------     ------------     ------------

Basic & diluted weighted
  average number of common
  shares outstanding             4,979,718        4,016,573        4,975,271        4,015,486
                              ============     ============     ============     ============

</TABLE>

    The accompanying notes are an integral part of the financial statements.

<PAGE>


                          U-SHIP, INC. AND SUBSIDIARIES
                      Consolidated Statement of Cash Flows
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                     Six Months Ended December 31,
                                                                     -----------------------------
                                                                         1997             1996
                                                                     ------------     ------------
<S>                                                                  <C>              <C>          
OPERATING ACTIVITIES:
     Net Loss                                                        $   (936,173)    $   (951,125)
     Adjustments to reconcile net loss to net cash flows used for
         operating activities-
            Depreciation and amortization                                 271,727          121,700
            (Gain)/Loss on retirement of equipment                           --              4,312
     Change in current operating items:
            Checks held, not yet presented for payment                       --         (1,851,365)
            Accounts receivable                                            27,175          (78,758)
            Inventories                                                   117,332          (82,225)
            Prepaid expenses and other                                     16,423          (73,056)
            Accounts payable                                              111,574          146,616
            Accrued liabilities and deferred revenue                     (219,714)        (272,736)
                                                                     ------------     ------------

                    Cash used for operating activities                   (611,656)      (3,036,637)
                                                                     ------------     ------------

INVESTING ACTIVITIES:
     Purchases of property and equipment                                 (237,978)        (645,618)
     Sale of short-term investments                                       250,000             --
                                                                     ------------     ------------

                    Cash used for investing activities                     12,022         (645,618)
                                                                     ------------     ------------

FINANCING ACTIVITIES:
     Proceeds from notes payable and long-term debt                          --             77,048
     Payments on notes payable and long-term debt                         (23,756)         (24,521)
     Sale of common stock                                                  20,783          300,588
                                                                     ------------     ------------

                Cash provided by financing activities                      (2,973)         353,115
                                                                     ------------     ------------

Net decrease in cash and cash equivalents                                (602,607)      (3,329,140)

Cash and cash equivalents, beginning of period                            724,260        4,822,785
                                                                     ------------     ------------

Cash and cash equivalents, end of period                             $    121,653     $  1,493,645
                                                                     ============     ============
</TABLE>

    The accompanying notes are an integral part of the financial statements.

<PAGE>


                          U-SHIP, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The condensed consolidated financial statements included herein have been
prepared by U-Ship, Inc. which, together with its wholly-owned subsidiaries,
shall be referred to herein as the "Company", without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. The Company's
business is seasonal and, accordingly, interim results are not indicative of
results for a full year. In the opinion of the Company, all adjustments
consisting only of normal recurring adjustments, necessary to present fairly the
financial position of the Company as of December 31, 1997, and the results of
its operations for the six months ended December 31, 1997 and 1996, have been
included. Certain information in footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information presented not misleading. It is suggested that these
consolidated financial statements be read in conjunction with the financial
statements for the year ended June 30, 1997, and the footnotes thereto, included
in the Company's Report on Form 10-KSB, filed with the Securities and Exchange
Commission on September 26, 1997.

1.   Basis of Presentation:

Principles of consolidation - The consolidated financial statements include the
accounts of U-Ship, Inc. and its wholly owned subsidiaries. All inter-Company
balances and transactions have been eliminated in the consolidation.

2. Basic and Diluted Net Loss Per Share:

In the second quarter of fiscal 1998, the Company adopted SFAS No. 128,
"Earnings per Share" which is effective for interim periods ending after
December 15, 1997. As a result, all prior period earnings per share data has
been restated. The adoption of SFAS No. 128 did not have a significant impact on
previously reported earnings per share. Basic earnings per common share was
computed by dividing net income by the weighted average number of shares of
common stock outstanding during the period. Dilutive earnings per common share
was computed similar to the computation of basic earnings per share, except that
the denominator is increased for the assumed exercise of dilutive options and
other dilutive securities using the treasury stock method. No options or other
dilutive securities were included in diluted earnings per share as they would be
antidilutive. Total options and warrants outstanding for the periods ended
December 31, 1997 and 1996 were 1,509,446 and 1,237,446, respectively.

3.   Inventories:

Inventories are stated at the lower of first-in, first-out (FIFO) cost or
market. Inventories consist of shipping systems in various stages of completion,
including component parts. The components of inventory are:

                                                 December 31,      June 30,
                                                    1997             1997
                                                    ----             ----

         Raw materials and work components       $ 618,585        $ 718,217
         Finished goods                             18,000           35,700
                                                 ---------        ---------

                                                 $ 636,585        $ 753,917
                                                 =========        =========

4.   Revenue Recognition:

The Company has historically generated revenue from two primary sources: The
per-package shipping revenue generated from ongoing shipping volume and the sale
of automated shipping centers. Revenues are also derived, to a lesser extent,
from the sale of shipping supplies and maintenance contracts.

Package shipping revenue is recognized when the package is shipped. Revenue from
maintenance contracts is deferred and recognized over the period of the related
agreement.

The Company generally recognizes revenue from sales of shipping systems upon
delivery and installation. Certain sales agreements allow the customer to return
the shipping system under certain circumstances within the first 12 months. Such
revenue and related costs are deferred until the return rights lapse and certain
other conditions are met.

<PAGE>


Historically, ASCs were placed in service by the Company have been leased by
retailers from third party leasing companies. The Company placed in service
approximately one-sixth of its ASCs through such arrangements. During 1996 and
1997, however, the Company's deployment strategy has been to emphasize the
placement of Company-owned and operated ASCs in retail locations. The lessor has
certain recourse to the Company in case of customer default or return of the
automated shipping center, primarily to re-market the automated shipping center
on a best effort basis. The Company has reserved the estimated cost of
fulfilling such recourse arrangements.

6.   Use of Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. The
ultimate outcomes could differ from those estimates.

<PAGE>


ITEM 2 - MANAGEMENTS DISCUSSION AND ANALYSIS

                          U-SHIP, INC. AND SUBSIDIARIES

         THE FOLLOWING DISCUSSION CONTAINS VARIOUS FORWARD-LOOKING STATEMENTS AS
DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, WHICH MAY BE
IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY," "EXPECT,"
"ANTICIPATE," "ESTIMATE," "GOAL," "CONTINUE," OR OTHER COMPARABLE TERMINOLOGY.
SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES RELATING TO THE
COMPANY'S FUTURE PERFORMANCE. ACTUAL RESULTS OR EVENTS MAY MATERIALLY DIFFER
FROM THOSE INDICATED IN SUCH FORWARD-LOOKING STATEMENTS. IN EVALUATING SUCH
STATEMENTS, SHAREHOLDERS AND PROSPECTIVE INVESTORS ARE CAUTIONED NOT TO PLACE
UNDUE RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS AND ARE SPECIFICALLY DIRECTED
TO REVIEW THE VARIOUS FACTORS IDENTIFIED UNDER THE CAPTION "CAUTIONARY FACTORS"
WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED IN
SUCH FORWARD-LOOKING STATEMENTS.

GENERAL

         U-Ship, Inc. (the "Company" or "U-Ship") manufactures, markets and
operates self-service, automated shipping systems for use by consumers and small
business shippers who ship packages and priority letters through major carriers
in the air express and package delivery market. In November 1994, the Company
began deployment of its network of electronic, customer-operated, self-service
shipping centers. The Company's Automated Shipping Center ("ASC"), which is
being placed in retail locations in the United States and Canada, provides a
feeder system to United Parcel Service of America, Inc. ("UPS"), currently the
only carrier with which the Company has a contract for the shipment of packages
through Company or customer-operated ASCs. The Company can provide similar
services to other carriers in the multi-billion dollar air express and package
shipping market. As of December 31, 1997, the Company had 319 ASCs in operation
in 41 states, 243 of which are owned and operated by the Company, and 76 of
which have been sold and are operated by customers. ASCs are generally placed in
retail locations such as office services/copy centers such as Kinko's and
OfficeMax and in retail locations such as grocery and general merchandise
stores. As of December 31, 1997, there were eleven ASCs leased or sold to third
parties with recourse to the Company. The Company's manufacturing operations of
ASCs consists of assembling components purchased from third parties and
installation of the Company proprietary software. The Company derives revenue
primarily from package shipping transactions and, to a lesser extent, from the
sale of ASCs. The Company holds eight patents related to hardware and software
utilized in its ASCs and is not aware of other comparable self-service,
automated shipping systems currently marketed or available to consumers and
small business package shippers. The Company believes that its ASC technology is
among the most advanced self-service, automated, air express and package
shipping system available for consumers and small businesses.

         HISTORICAL BUSINESS STRATEGY. The Company's strategy is to make
shipping services available to consumers through the installation of its ASC
systems in major office supply and instant printing outlets, business centers
and office parks. Historically, ASCs were placed in service by the Company have
been leased by retailers from third party leasing companies. The Company placed
in service approximately one-sixth of its ASCs through such arrangements. During
1996 and 1997, however, the Company's deployment strategy has been to emphasize
the placement of Company-owned and operated ASCs in retail locations. The
Company is, however, currently reevaluating these deployment methods in light of
lower than anticipated package shipping volumes and lack of anticipated revenue
per site. In light of lower than anticipated revenues from ASC shipping
transactions, the Company has, since June 30, 1997, reduced the number of
additional ASC placements. The Company is exploring to increase usage of ASCs
currently in place, and to focus on the creation of strategic relationships with
carriers. Methods and strategies to increase ASC usage include consumer
incentives (e.g., coupons), point of sale advertising, in-store customer
awareness programs and changes in its price structure so as to become more
competitive in the air express and package shipping market. The Company's cost
of placing an ASC in a customer's site is approximately $6,000 per unit. The
source of funds for these placements has been capital raised by the Company
through equity offerings. Currently, ASCs manufactured for placement by the
Company are from existing inventories of finished ASCs and components. There can
be no assurance, however, that these or other efforts currently being considered
by the Company will serve to increase the volume of ASC transactions or market
acceptance of the Company's ASCs. In addition to retail placements, the Company
has been seeking to market its ASC technology to private carriers. The Company
believes that air express and package shipping carriers may, in the future,
utilize some form of self-service technology to

<PAGE>


increase accessibility to their services in the market, although there can be no
assurance that carriers will decide to use the Company's technology.

         The Company served customers in 19,668 transactions during the three
month period ended December 31, 1997 through its various retail locations which
include OfficeMax stores and Kinko's Copy Centers. The Company enters into
agreements with retailers to provide service and maintenance support related to
the operation of the ASC at retail locations. The services provided by the
Company under these agreements include data processing of credit card
transactions, reconciliation and payment of weekly UPS bills for service
contracted by the Company, customer service support related to package tracking
and damage and loss claims for consumers who have used the system. These
agreements also provide for maintenance of the hardware and licensing of the
software related to the operation of the ASC. The Company generates revenue from
package shipping transactions and compensates retailers based upon the number
and types of shipping transactions processed. Each location in the Company's
network of ASCs is centrally controlled and serviced through an electronic
connection to the Company's computer network system located at its headquarters.
The Company accepts cash and major credit cards for payment of package shipping
charges. The Company also issues U-Ship private labeled "Preferred Business
Shipper" credit cards to small businesses for which it bills and collects
monthly. The Company also derives revenue, to a lesser extent, from the sale of
shipping supplies such as boxes, packing material and tape to retailers for
consumer sales.

         In September 1996, the Company entered into an Installation and
Marketing Agreement (the "Kinko's Agreement") with Kinko's, Inc. ("Kinko's").
The Kinko's Agreement provides that Kinko's will use its best efforts to provide
the Company the opportunity to install up to 250 ASCs in Kinko's Copy Centers by
December 1997. Under the terms of the Kinko's Agreement, each ASC shall remain
in service for 36 months following the date of its installation, subject to
certain contingencies. Also, the Kinko's Agreement provides that the Company
will retain ownership of the ASCs installed at Kinko's sites, and package
shipping revenue generated at each site will be shared between the Company and
Kinko's. As of December 31, 1997, the Company had installed 88 ASCs in Kinko's
Copy Center locations. The Company is currently conducting discussions with
Kinko's concerning the placement of additional ASCs in Kinko's locations under
existing contracts and methods of promoting the increased usage of ASCs in
Kinko's stores. In October 1996, the Company entered into a 36-month
Installation and Marketing Agreement (the "OfficeMax" Agreement") with
OfficeMax, Inc. ("OfficeMax"). The terms of the OfficeMax Agreement, as amended,
allow the Company to install 140 ASCs into various CopyMax locations by the end
of December 1997. Under the terms of the OfficeMax Agreement, each ASC shall
remain in service for 36 months following the date of its installation. As of
September 30, 1997, the Company had installed 113 ASCs in various CopyMax
stores. The Company intends to continue working with these customers to increase
usage of these ASCs in Kinko's and CopyMax stores.

         In September 1997, the Company engaged Manchester Financial Group, Inc.
("Manchester") to provide certain advisory and consulting services, including,
but not limited to, a strategic review and analysis of the Company's business,
market, management, development plans and financing. The engagement, which is
for a term of one year, provides for monthly payments to Manchester in the
amount of $15,000 and the issuance to Manchester of a five-year warrant for the
purchase of 200,000 shares of the Company's Common stock. The Company has also
agreed to pay certain additional fees to Manchester in the event an
acquisition-related transaction is consummated with a party to which the Company
is introduced to by Manchester.

         CURRENT BUSINESS STRATEGY. In a press release on December 11, 1997, the
Company announced a major strategy shift and expense reduction plan aimed to
improve shareholder value. The Company has ceased deployment of Company owned
ASCs. Unless the Company can secure a partnership with a major express package
carrier, which it is aggressively seeking, it does not have the financial
resources to continue to place Company owned ASCs in the marketplace.

         The Company is also examining alternative strategies for leveraging its
existing shipping technologies, patents and information management solutions. In
addition, the Company is seeking to identify opportunities for an acquisition or
merger. The Company's current operational strategy is to continue to services
existing ASCs in accordance with its contractual obligations, and will
contemplate the sale or re-deploy its existing ASC and related technology at the
expiration of existing contracts. The Company is taking steps to reduce its
general expenses through the reduction of personnel and other general operating
expenses.

<PAGE>


RESULTS OF OPERATIONS

         Package shipping revenue for the three months ended December 31, 1997,
increased $64,094 or 34% to $255,290, from $191,196 for the same period in 1996.
Net sales for the three months ended December 31, 1997, increased $33,392 or 13%
to $289,201 from $255,809 for the same period in 1996. The increase in package
shipping revenue is the result of the higher number of ASC locations. New ASC
units take a number of months to reach their expected on-going volume. As a
result, the increase in package volume does not reflect the expected full impact
of the increase in number of ASC locations from 196 active units as of December
31, 1996 to 319 active units at the end of December 31, 1997. The Company's
expectations of package volume at new ASC locations have not been met to date.
The company has installed Company-owned ASCs in anticipation of seasoned units
(in operation 12 months or longer) generating package volume of 100 or more per
month. As of December 1997, the Company had 108 seasoned ASCs in service which,
as of December 1997, had average monthly shipping volumes of 29 packages per
unit. There can be no assurance that the Company will be successful in
increasing package-shipping volumes substantially at its existing ASC locations.

         Package shipping revenue for the six month period ended December 31,
1997, increased $96,836 or 30% to $418,396 from $321,560 for the same period in
1996. Net sales for the six month period ended December 31, 1997, increased
$100,019 or 22% to $552,614 from $452,595 for the same period in 1996. These
increases are due primarily to the Company's increasing number of locations and
building recurring revenue through increased package shipping revenue.

         Gross margins decreased by $17,478 or 34% to $33,788 for the three
month period ended December 31, 1997, from $51,266 for the same period in 1996.
For the six month period ended December 31, 1997, gross margins increased by
$39,265 or 51% to $116,792 from $77,527 for the corresponding six month period
from the prior year. Gross margins as a percent of sales have decreased from 32%
in the first quarter of 1997 to 12% in the second quarter. The decrease in
margin is attributed to an increasing fixed cost related to UPS pickup fees that
were not offset by an increase in shipping volume at the new sites installed.
The Company anticipates that new installations at Kinko's and CopyMax stores
take a minimum of 12 months to ramp up to expected volumes. Historically, new
CopyMax and Kinko's sites have not performed to these expectations. Provided per
site volumes increase, the Company expects gross margins to increase as fixed
costs related to UPS pickup fees are covered through an increase in package
shipping volume.

         General and administrative expenses for the three months ended December
31, 1997, decreased $16,704 or 5% to $400,918 from $424,214. Personnel expenses
decreased by $70,083, offset partially by an increase of $60,256 for ASC
depreciation expense. For the six month period ended December 31, 1997 general
and administrative expenses increased $200,114 or 29% to $888,502 from $688,388
for the same period in 1996. Personnel expenses decreased by $25,971, partially
offset by and increase ASC depreciation expense of $150,026, and an increase in
consulting expense of $57,859. General and administrative expenses associated
with being a publicly held company accounted for the remaining increase.

         Marketing and sales expenses for the three months ended December 31,
1997 decreased $80,522 or 73% to $30,106 from $110,628. Personnel expenses
represented $77,039 of the decrease reflecting the decrease in marketing and
sales activities related to the placement of ASC units. Marketing and sales
expenses for the six months ended December 31, 1997 decreased $195,631 or 74% to
$67,467 from $263,098 for the same period in the prior year. Personnel expenses
represented $109,156 of the decrease between the two periods.

         Research and development expenses for the three months ended December
31, 1997, decreased $35,856 or 49% to $37,733 from $73,589 for the corresponding
period in the prior fiscal period. For the six month period ended December 31,
1997, research and development expenses decreased by $39,278 or 28% to $98,721
compared to $137,999 for the corresponding period in the prior fiscal period.
The reduction in research and development expenses is primarily related to the
Company's plan to reduce general and administrative expense through a reduction
in staff. The Company expects these costs to stay relatively stable for the
balance of the fiscal year.

         Interest income decreased to $8,262 for the three months ended December
31, 1997 as the Company's short-term investments have been used to fund losses.
Interest expense increased from $3,097 for the three month period ended December
31, 1995 to $5,854 for the same period in 1997, attributed to an increase in
long term lease financing. For the six month period ended December 31, 1997,
interest

<PAGE>


income decreased by $51,765 to $14,904 as the Company's short term investments
have been used to fund losses. For the six month period ended December 31, 1997,
interest expense increased by $7,343 to $13,179, attributed to an increase in
long term lease financing.

         Net loss for the three months ended December 31, 1997, decreased
$106,482 to $432,561 from $539,043 for the same period in the prior fiscal year.
Net loss for the six months ended December 31, 1997 decreased $14,952 to
$936,173 from $951,125 for the comparable period in the prior year. The Company
expects to incur additional losses until it has a critical mass of ASCs
generating sufficient volume to offset its investment and operating expenses.

LIQUIDITY AND CAPITAL RESOURCES

         The Company completed a public offering in May 1996, which raised
approximately $5.1 million. During the first quarter of the current fiscal year,
the Company received an additional $0.3 million as a result of the exercise by
the underwriter of its over allotment option. The Company used approximately
$1.9 million of the proceeds to repay bridge notes and bank debt, leaving net
proceeds of approximately $3.5 million to finance growth and working capital.

         The Company's loss for the six-month period ended December 31, 1997 was
$936,173. As noted above, the Company expects revenue levels to continue
increasing as its existing network of ASCs mature. However, the Company expects
to incur losses for the foreseeable future as its present installation base of
319 ASCs do not generate sufficient income to support its present level of
general and administrative expense.

         During September 1996, the Company entered into an agreement with
Kinko's to install up to 250 ASCs in Kinko's Copy Centers by December 1997. In
October 1996, the Company entered into a similar agreement to install 73 ASCs in
OfficeMax locations by the end of January 1997. The total cost of installing
these units will be approximately $1.6 million. Through December 31, 1997, the
Company has installed 190 units at an approximate cost of $837,500. To date, the
Company has utilized funds generated from its May 1997 public offering to fund
the contract obligation to install these units. The Company has ceased the
installations of Company-owned ASCs as of December 1997, the expiration of the
Kinko's and CopyMax contracts.

         Inventory levels decreased by approximately $117,300 as of December 31,
1997, compared to June 30, 1997, reflecting the overall decrease in purchases
made to fulfill the Kinko's and OfficeMax agreements. Accounts receivable
decreased by approximately $27,200 from June 30, 1997 to December 31, 1997 due
to concentrated collection efforts. Accounts payable increased by approximately
$111,574 over the same period due to an increase in trade debt to UPS due to
higher shipping volumes. Accrued liabilities and deferred revenue decreased due
to reductions in the Company's liability associated with the possible exercise
of return rights of ASCs.

         Based on current commitments and on-going working capital needs, the
Company believes that it will require additional debt or equity funds within the
next 120 days to continue to fund its on-going operations. There can be no
assurance that such financing will be available to the Company on terms
satisfactory to it.

<PAGE>


CAUTIONARY FACTORS. THE COMPANY WISHES TO CAUTION SHAREHOLDERS AND PROSPECTIVE
INVESTORS THAT THE FOLLOWING IMPORTANT FACTORS, AMONG OTHERS, COULD IN THE
FUTURE AFFECT THE COMPANY'S ACTUAL OPERATING RESULTS, AND THAT SUCH RESULTS
COULD DIFFER MATERIALLY FROM THOSE EXPRESSED IN ANY FORWARD-LOOKING STATEMENTS
MADE BY THE COMPANY. THE STATEMENTS UNDER THIS CAPTION ARE INTENDED TO SERVE AS
CAUTIONARY STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995. THE FOLLOWING INFORMATION IS NOT INTENDED TO LIMIT IN ANY
WAY THE CHARACTERIZATION OF OTHER STATEMENTS OR INFORMATION UNDER OTHER CAPTIONS
AS CAUTIONARY STATEMENTS FOR SUCH PURPOSE. THE ORDER IN WHICH SUCH FACTORS
APPEAR BELOW SHOULD NOT BE CONSTRUED TO INDICATE THEIR RELATIVE IMPORTANCE OR
PRIORITY.

LIMITED OPERATING HISTORY; LOSSES FROM OPERATIONS; GOING CONCERN UNCERTAINTY.
The Company entered its current business in 1992 and has a limited operating
history. The Company's proposed operations are subject to all the risks inherent
in the establishment of a new business. The Company has never generated net
income, continues to sustain substantial operating losses and expects to
continue to operate at a loss for the foreseeable future. For the fiscal year
ended June 30, 1997, the Company incurred a net loss of $2,527,918. June 30,
1997, the Company had an accumulated deficit of $7,871,213 and had working
capital of $1,225,000. For the six months ended December 31, 1997 the Company
incurred a net loss of $936,173 and had working capital of $329,105. Because of
continuing operating losses, the Company's working capital has decreased since
that date and it is estimated there will be a working capital deficit at March
31, 1998. The Company will continue to incur these losses until ASCs in service
generate sufficient revenues to offset operating costs. As of December 31, 1997,
319 ASCs were in operation in 41 states. In fiscal years 1996 and 1997, 156 and
300 ASCs were placed in service by the Company, respectively.

         The reports of the Company's independent public accountants concerning
the Company's financial statements as of June 30, 1996 and 1997 contain
explanatory paragraphs relating to the Company's ability to continue as a going
concern. There can be no assurance that the Company will achieve profitable
operations. The Company expects that it will require additional debt or equity
financing during the next six to eight months to continue its business. The
Company has not made arrangements for additional financing and no assurance can
be given that it will be able to secure such financing when needed. A failure on
the part of the Company to obtain financing when required would result in the
reduction or cessation of the Company's business.

SIGNIFICANT G&A, MARKETING AND SALES EXPENSES. During the six month period
ending December 31, 1997, the Company's general and administrative expenses were
$888,502, or approximately 161% of net sales.

SIGNIFICANT ADDITIONAL FINANCING NEEDED; ADDITIONAL DILUTION EXPECTED. The
Company expects to require significant additional financing to continue
operations in 1998. The Company has made no arrangements for such financing and
no assurance can be given that the additional financing will be available when
required or, if available, that the same would be on terms acceptable to the
Company. It is likely that any additional financing will involve the issuance of
the Company's equity securities, resulting in significant dilution to existing
shareholders.

MARKET ACCEPTANCE OF PRODUCTS. A prerequisite to the Company's success will be
the development of demand for self-service, automated shipping services and wide
placement of ASCs at retail and other business locations. This is an undeveloped
market and there can be no assurance that such demand or market acceptance will
develop. To date, the Company has had only limited success in creating a demand
for automated shipping services. The number of shipping transactions which
currently utilize the Company's ASCs are lower than expected. While the Company
is undertaking efforts to address these problems and to create a demand for the
Company's ASCs, the marketing and other costs of doing so may be beyond the
Company's funding capabilities. These efforts include joint promotional programs
with Kinko's, OfficeMax and other Company sponsored programs. Such programs
consist of in store point-of-sale signs, holiday promotional signs and discount
coupons. A failure on the part of the Company to address these and other issues
and to create a market demand for its products could result in the reduction or
cessation of the Company's business.

         The Company has placed ASCs in locations in 41 states from Alaska to
New York. The commercial (non-U.S. Postal Service) package shipping market is
dominated by a relatively small number of carriers, and carriers affiliated with
direct air carriers, including UPS, Federal Express Corporation ("Federal
Express), DHL Worldwide Services ("DHL") and Airborne Express ("Airborne").
These established carriers, together with the U.S. Postal Service, process the
vast majority of consumer and small business package shipping transactions.
There can be no assurance that any of such dominant commercial package shippers
or the public will adopt a self-service shipping center concept or that they
will select the Company's ASCs in preference to the shipping services offered

<PAGE>


by its competitors or potential competitors. The failure to achieve market
acceptance would have a material adverse effect on the Company's business. In
addition, there can be no assurance that the Company will have the resources or
the capacity to meet the demand, if any, for its product.

         In March 1996, the Company entered into a Master Agreement for
Automated Shipping Center Software License and Related Software-Based Services
with UPS Canada (the "Canada Agreement"), pursuant to which the Company licenses
its proprietary software to UPS Canada for use with the Company's ASCs which
will be placed in up to ten retail counter applications in three cities in
Canada. Under the Canada Agreement, the Company will be paid a fee by UPS Canada
upon placement of the respective ASC at each Canadian location, together with a
per-package fee on each package shipped using the Company's ASC. The term of the
Canada Agreement is three years. The ASCs subject to this agreement will be
maintained under a separate maintenance agreement. As of December 31, 1997, the
Company has deployed six of the ten Canadian ASCs. Beginning December 1997, the
Company anticipates to begin receiving its per package fees from UPS Canada.
While the multi-lingual capabilities of the ASC offers advantages in the
international marketplace, the Company's initial focus will remain on the United
States and Canadian markets and, for the foreseeable future, it will pursue
other markets only on an opportunistic basis, primarily through economic
partnership relationships. There can be no assurance that the Company's efforts
to expand the use of its ASCs internationally will be successful.

DEPENDENCE UPON CARRIERS. The Company is substantially dependent upon UPS to
pick up and transport packages processed via the Company's ASCs. Any
interruption in, or increase in price of, such service, or the failure of the
Company to continue to maintain arrangements with UPS or to develop
relationships with other package carriers, would cause an interruption of
service to the Company's customers and would have a material adverse effect upon
its business. The Company has no control over the nature, cost or availability
of services provided by any carrier, including UPS, and has no long-term
contracts with such carriers.

         On August 4, 1997, the Teamsters Union went on strike against UPS. As a
result, a significant number of UPS' 185,000 employees, who are also Teamster
Union members, joined the strike. In addition, most of the 2,000 pilots
belonging to the Independent Pilots Association honored the strike, further
hampering UPS' shipping capabilities. This strike halted the shipment of the
vast majority of packages intended to be shipped via UPS, including those
intended to be so shipped and which utilized the Company's ASCs. While the
strike ended on August 18, 1997, the Company estimates that its revenues
decreased by approximately $75,000. During the strike, the Company was not able
to effect reductions in its expenses to offset such loss of revenue.

         For each ASC location, the Company enters into a Commercial Counter
Agreement with UPS which provides the basic terms of service, advertising
restrictions and certain related matters. The Company has also entered into an
Automated Shipping System Letter Agreement with UPS regarding the Company's
arrangements for use of UPS' Parcel Register, Computer Manifest and other
systems for identifying and recording packages turned over to UPS for delivery.
This agreement is generally terminable at will, although the Company has enjoyed
a shipper-carrier relationship with UPS since 1992. Further, UPS is a regulated
carrier which, under applicable laws and regulations, is obligated, upon
reasonable request, to provide safe and adequate service, equipment and
facilities for the surface transportation of property in interstate commerce.
This duty to furnish continuous and adequate service obligates UPS to furnish
ground transportation services without discrimination at its established rates
and to the limit of its capacity. However, UPS is not regulated with respect to
shipments tendered which involve prior or subsequent movement by air.
Accordingly, there can be no assurance that the Company can continue its
relationship with UPS or establish new relationships with any other carrier.

SUBSTANTIAL INVESTMENT IN EQUIPMENT. As a part of its business strategy, the
Company seeks to sell ASCs to locations that it believes have the potential to
generate high package volume and with businesses that it believes have multiple
strategic locations, such as business centers and other service provider chains.
Although the Company has previously been able to sell ASCs with financing from
third party lessors, no assurance can be given that such financing will be
available in the future.

RELIANCE UPON THIRD PARTIES FOR FINANCING. Historically, the Company has relied
extensively upon third parties to provide lease financing for ASCs sold or
leased to retailers. While the Company's focus has shifted away from the
placement of ASCs in reliance on such financing, it may seek third party
financing for sales to customers in the future. The Company has no commitments
from third parties to provide financing to it or its customers, and there can be
no

<PAGE>


assurance that such financing will be available to the Company on terms
acceptable or favorable to it or its customers. In the event the Company
determines to make third party leases or financing arrangements a part of its
marketing strategy, and is unable to maintain relationships with third parties
to provide such financing, its business could be adversely affected.

ABILITY TO FORM STRATEGIC RELATIONSHIPS. The Company's strategy includes the
formation of strategic relationships with major carriers and retailers. To date,
the Company has had limited success in creating such relationships. The Company
believes that relationships with carriers and other strategic partners will
enable it to deploy its proprietary technology in the market by leveraging a
partner's established service and distribution channels. In the past the Company
has received revenue from two international carriers for the development of
customized ASCs. The Company has entered into relationships with Kinko's and
OfficeMax pursuant to which the Company has installed a limited number of ASCs
in Kinko's Copy Centers and CopyMax stores. These agreements have, however, not
generated expected levels of package shipping transactions and the Company has
curtailed installation of ASCs under the terms of both agreements. The Company
requires substantial additional financing in order to continue its business. The
Company believes that, at least in part, such financing can be obtained from the
partners with whom it is able to create significant strategic relationships. The
Company has not been successful in creating relationships with potential
partners other than Kinko's and OfficeMax. The Company anticipates that it will
require $900,000 of additional funds to continue operations for the next 12
months. To the extent that the Company is not able to enter into additional
strategic relationships with carriers or other business partners, it may be
required to reduce or cease its business operations.

DEPENDENCE ON PROPRIETARY RIGHTS. The Company's success depends, in part, upon
its ability to protect its proprietary technology, for which it relies on a
combination of patent, copyright, trademark and trade secret laws. Although the
Company has received patents for its ASC, there can be no assurance that current
intellectual property laws will afford the Company significant protection
against competitors or that other technology will not be developed to
functionally compete with the Company's product. The Company believes that one
or more major carriers, all of which have greater financial, technical and
marketing resources than the Company, have attempted to develop or purchase
products or technologies competitive with the Company's ASCs. The Company is
aware that Federal Express and UPS test marketed PC-based automated self-service
shipping terminals between 1992 and 1994, but believes that substantially all of
these systems have been removed from the test market. The Company also is aware
of the fact that the U.S. Postal Service is in the process of developing a
self-service, automated Postal Transaction Machine ("PTM"), which, the Company
believes, will enable consumers to ship letters and packages via the United
States mail. The Company is unaware of whether the PTM, or parts thereof,
infringe upon any of the Company's proprietary technology. Should the Company
determine that its patents are being infringed, it could incur substantial legal
costs in any action to enforce its patents or other intellectual property
rights, and there can be no assurance that it would be successful in any such
action.

FRANCHISE REGULATION. The Federal Trade Commission regulates the offer and sale
of franchises under its "Franchise Rule," a regulation which sets forth
standards mandating disclosure of information before the sale of a franchise or
business opportunity. Additionally, several states, including Minnesota, have
laws and rules that regulate various aspects of franchising and the sale of
business opportunities. The Company believes that its programs for the sale,
lease or placement of ASCs do not constitute franchises or business
opportunities within the meaning of the Franchise Rule or such state laws. If
the Company should be required to comply with such laws or rules it would incur
substantial costs, delays and other burdens associated with franchise
registration and disclosure compliance obligations. In addition, there can be no
assurance that other governmental regulations will not hinder the Company's
plans. A finding that the Company has violated state franchise laws or
regulations or the Franchise Rule could result in administrative, civil or
criminal actions against the Company and would materially and adversely affect
its business. In addition, if the Company is found to have violated franchise
laws, certain persons entitled to the benefit of such laws may have the right to
rescind their purchases or leases of the Company's ASCs, in addition to
recovering damages, interest and attorneys' fees. The Company does not believe,
however, that it has operated in violation of any franchise laws.

COMPETITION. The commercial (non-U.S. Postal Service) package shipping market is
dominated by a relatively small number of companies which have more experience
in the industry and have greater financial and technical resources than the
Company. Both Federal Express and UPS have test marketed automated self-service
shipping terminals, but have, to the best of the Company's knowledge,
discontinued such tests, and neither of them currently operates competing
machines in the market that are comparable to the form and function of the
Company's ASC. The Company is aware, however, that the U.S. Postal Service is in
the process of developing the PTM. Because the Company's ASC

<PAGE>


does not currently permit consumers to ship packages through the United States
Mail, to the extent that the PTM will, it may discourage people from using the
Company's ASCs. The Company also competes with major air express carriers, such
as UPS, Federal Express, Airborne, DHL and the U.S. Postal Service, all of which
deploy large numbers of "drop boxes" which compete with the Company's ASCs.
According to industry sources, these carriers are deploying additional drop
boxes on an ongoing basis. Many of such boxes have or will be installed in
business centers, office parks and shopping malls, which could be potential
sites for the Company's ASCs. There can be no assurance that such dominant
commercial package shippers or the public will adopt a self-service shipping
center concept or that they will select the Company's products and services in
preference to their current methods of package collection, or to those of the
Company's competitors or potential competitors. The Company also faces intense
competition from the related service industry providing package collection
services, such as mail and packaging stores. In addition, the Company's
competitors and the dominant package shippers, all which have greater resources
than the Company, could develop products competitive with the Company's ASCs.

TECHNOLOGICAL RISKS. The Company anticipates that any market which develops for
automated shipping services will be characterized by rapidly changing technology
and user preferences. Such market will likely be heavily influenced by the
preferences and acceptance of such technology by major package and parcel
carriers. There can be no assurance that future product or technology developed
by others will not render obsolete the Company's technology. Failure on the part
of the Company to develop new technology to meet competitive challenges may
adversely affect the Company's prospects.

         The Company is currently focusing its product development efforts on
ASCs designed specifically for certain carriers. These systems are being
developed to assist in nurturing strategic relationships with domestic and
international carriers. These products have not yet been scheduled for release
and remain subject to further development and market research. The Company is
also developing software that will allow the ASC to perform additional retail
functions to enhance the revenue per site. These software developments will
allow the Company to sell advertising services on the ASC to major manufactures
and services companies who wish to promote their products and services through
the use of the Company's technology. The Company spent $247,053 on research and
development in fiscal year 1996 and $237,892 in fiscal year 1997. As of December
31, 1997, there were three employees engaged in research and development
activities.

UNINSURED OBLIGATIONS TO SHIPPING CUSTOMERS. The Company or a retailer with whom
a package is deposited may have exposure to a customer to the maximum extent of
the declared value of the package in the event of its damage or destruction
while in the possession of the Company or a retailer. The Company limits its
liability to the customer to the amount of the declared value pursuant to the
shipping transaction documentation. The Company, however, has no insurance that
would protect it against such losses.

DEPENDENCE ON KEY PERSONNEL. The Company's future success will depend in large
part upon the continued service of its key technical and management personnel,
as well as on its ability to continue to attract independent contractors. The
Company is also dependent on its ability to identify, hire, train and motivate
qualified personnel necessary to enable it to continue ongoing product
development and to market its products and services. The Company has a
$1,000,000 key person life insurance policy on Bruce Senske. Substantially all
of the Company's employees are subject to confidentiality agreements. The
Company has no collective bargaining or employment agreements with any of its
employees. There are currently three employees working in technical positions,
two in marketing positions and four in management positions. The departure of
key employees could have a material adverse effect on the Company's business. No
assurance can be given that the Company's current employees will continue to
provide services to the Company, or that the Company will be able to obtain the
services of additional personnel necessary for the Company's operations.

IMPACT OF SALE OF SECURITIES; SECURITIES ELIGIBLE FOR FUTURE SALE; POSSIBLE
DILUTIVE EFFECT OF OUTSTANDING OPTIONS AND WARRANTS. There were approximately
4,979,717 shares of Common Stock outstanding as of December 31, 1997. In
addition, there were warrants and options outstanding as of such date to
purchase 1,435,696 additional shares of Common Stock which are exercisable at
prices ranging from $1.25 to $5.20 per share. The Company has filed a
registration statement covering a secondary offering of 1,538,474 shares of
Common Stock. The sale of such shares offered pursuant to such offering, and the
sale of additional shares of Common Stock which may become eligible for sale in
the public market from time to time upon the exercise of warrants and options
could have the effect of depressing the market prices for the Common Stock.

<PAGE>


LIMITATIONS ON BROKER-DEALER SALES OF COMPANY COMMON STOCK; APPLICABILITY OF
"PENNY STOCK" RULES; NO ASSURANCE OF CONTINUED QUOTATION ON THE NASDAQ STOCK
MARKET. Federal regulations promulgated under the Exchange Act regulate the
trading of so-called "penny stocks" (the "Penny Stock Rules"), which are
generally defined as any security not listed on a national securities exchange
or The NASDAQ Stock Market ("NASDAQ"), priced at less than $5.00 per share and
offered by an issuer with limited net tangible assets and revenues. In addition,
equity securities listed on NASDAQ which are priced at less than $5.00 per share
are deemed penny stocks for the limited purpose of Section 15(b)(6) of the
Exchange Act. Therefore, if, during the time in which the Common Stock is quoted
on the NASDAQ SmallCap Market, the Common Stock is priced below $5.00 per share,
trading of the Common Stock will be subject to the provisions of Section
15(b)(6) of the Exchange Act, which make it unlawful for any broker-dealer to
participate in a distribution of any penny stock without the consent of the
Commission if, in the exercise of reasonable care, the broker-dealer is aware of
or should have been aware of the participation of a previously sanctioned
person. In such event, it may be more difficult for broker-dealers to sell the
Common Stock and purchasers of shares of Common Stock may experience difficulty
in selling such shares in the future in secondary trading markets.

         The Company's Common Stock is currently listed on the NASDAQ SmallCap
Market. On August 22, 1997, the SEC approved a number of proposed changes to the
NASDAQ listing requirements to be effective February 22, 1998. Common and
preferred stock must have a minimum bid price of $1. All companies listed on the
NASDAQ SmallCap Market must meet specific corporate governance requirements,
distribute an annual and interim reports, have a minimum of two independent
directors, have an annual shareholder meeting, meet the quorum requirement, make
a solicitation of proxies, review conflicts of interest, have shareholder
approval for certain corporate actions and have voting rights. A company listed
on the NASDAQ SmallCap Market must also have either net tangible assets of over
$2 million, a market capitalization of $35 million or net income of $500,000, a
public float of 500,000 shares, and the market value of such public float must
be over $4 million. The Company must have a minimum of 300 shareholders. There
must be at least two market makers. The Company must also have in place
corporate governance. Since October 28, 1997, the Company's common stock has had
a closing bid price below $1. As of December 31, 1997, the Company's net
tangible assets are below $2 million. The Company has received notification from
NASDAQ of it non-compliance to the listing requirements and will need to correct
its non-compliance or file plan acceptable to NASDAQ for moving back into
compliance with regard to the net bid price and net tangible assets requirements
by March 22, 1998. Failure on the Company's part to be in compliance or to file
a plan acceptable to NASDAQ for moving back into compliance the Company will be
in danger of losing its NASDAQ SmallCap listing. Should the Common Stock be
suspended from trading privileges on such market as a result of the Company's
failure to comply with any of the above, or other applicable requirements, the
Company, prior to re-inclusion, must comply with the respective requirements
prior to continued listing. However, should the Common Stock be terminated from
trading privileges on the NASDAQ SmallCap Market, the Company, prior to
re-inclusion, must comply with the applicable requirements for initial inclusion
on the NASDAQ SmallCap Market which are more stringent than the requirements for
continued listing. There can be no assurance that the Common Stock will continue
to be listed on the NASDAQ SmallCap Market.

         In the event that the Common Stock is delisted from the NASDAQ SmallCap
Market and the Company fails other relevant criteria, trading, if any, in shares
of Common Stock would be subject to the full range of the Penny Stock Rules.
Under Exchange Act Rule 15g-8, broker-dealers must take certain steps prior to
selling a penny stock, which steps include: (i) obtaining financial and
investment information from the investor; (ii) obtaining a written suitability
questionnaire and purchase agreement signed by the investor; (iii) providing the
investor a written identification of the shares being offered and in what
quantity; and (iv) deliver to the investor a written statement setting forth the
basis on which the broker or dealer approved the investor's account for the
transaction. If the Penny Stock Rules are not followed by a broker-dealer, the
investor has no obligation to purchase the shares. Accordingly, delisting from
the NASDAQ SmallCap Market and the application of the comprehensive Penny Stock
Rules may make it more difficult for broker-dealers to sell the Common Stock,
purchasers of shares of Common Stock may have difficulty in selling such shares
in the future in secondary trading markets and the per share price of such stock
would likely be greatly reduced.

<PAGE>


PART II - OTHER INFORMATION

ITEM 6 - Exhibits and Reports on Form 8-K

         a.    Exhibits

         b.   Current Reports on Form 8-K
              On December 12, 1997, the registrant filed a Current Report on
              Form 8-K (file No. 0-28452), relating to the Company's major
              strategy shifts and expense reductions.

<PAGE>


                                   SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized, in they City of Minneapolis, State of Minnesota on February 13,
1998.

                                         U-SHIP, INC.



                                         By: /s/ Bruce H. Senske
                                             -------------------
                                         Bruce H. Senske
                                         President and Chief Financial Officer

<PAGE>


                                  EXHIBIT INDEX


EXHIBIT NUMBER                      DESCRIPTION
--------------                      -----------

Exhibit 27                          Financial Data Schedule